Issues
(i) Was there a binding agreement under which an exclusive and non-revocable licence was granted to Painaway and, if not, is Nature's Remedies estopped from denying such an agreement?
190For Painaway, Mr Svehla (as does Mr Stack for the Nassar/Hyder interests) relies upon a variety of arguments for the contention that Painaway has an exclusive and non-revocable licence in relation to the Painaway products (on the terms of the Licence Agreement that was admittedly signed on 18 April 2005 by all of the Carroll interests other than JAKL). (Mr Svehla accepts that the Licence Agreement and the Shareholders Agreement are interdependent - in the sense that the Licence Agreement is intended to operate upon the incorporation of Painaway; the three individuals (Messrs Hyder, Nassar and Carroll) becoming the three directors of Painaway; and the corporate trustees becoming shareholders in Painaway - but submits that it is not necessary that the Shareholders Agreement itself be held to be binding for Painaway to have the benefit of the licence granted under the Licence Agreement.)
191First, it is said that the signing of the Licence Agreement amounted to an offer, (capable of acceptance on its incorporation by Painaway) and that such an offer was accepted by the parties' conduct post the incorporation of Painaway; secondly, that the contract arises on the basis of the parties' manifestation of mutual assent to the contractual regime for which provision is made in the Licence Agreement; thirdly, the principle of conventional estoppel is invoked to preclude the denial by the Carroll interests of the existence and operation of the Licence Agreement; and, finally, it is said that 18 April Licence Agreement amounts to a pre-incorporation contract subsequently ratified by Painaway by its conduct in relation to the Painaway products.
192To the extent that it is necessary to do so in order to assert rights under the Licence Agreement (and it is not conceded by them that it is), Counsel for Painaway and the Nassar/Hyder interests, respectively, contend that the same reasoning applies in relation to the existence and operation of the Shareholders Agreement.
193Reliance is placed on the same conduct to establish the conventional estoppel claim as is relied upon for the conclusion that the relevant corporate entities (Painaway, in respect of both Agreements; the Corporate shareholders of Painaway, in respect of the Shareholders Agreement) by its (or their) conduct, had affirmed, or impliedly accepted the offer to enter into, the relevant Agreement(s).
194It is accepted that questions as to whether a contract has been formed, and as to the terms of any such contract, are matters to be determined on an objective not subjective basis, though relevant inferences can be drawn from the conduct of the parties ( Pacific Carriers v BNP Paribas (2004) 218 CLR 451 at [ 22]; Toll (FGCT) v Alphapharm (2004) 219 CLR 165 at [40]). In RJ Baker Nominees Pty Ltd v Parsons Management Group Pty Ltd [2010] WASCA 128 Newnes JA in the Court of Appeal in Western Australia noted that the "legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon subjective beliefs or intentions", citing the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 [34]; Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 [25]; Pacific Carriers [22].
195What must be determined is not only that the parties reached a consensus that was capable of forming a binding contract but that they did so with the objective common intent that such consensus should constitute a binding contract ( Air Great Lakes v K S Easter (Holdings) (1985) 2 NSWLR 309).
196Furthermore, whilst it is recognised that contracts generally arise out of an identifiable offer and an acceptance of that offer communicated to the offereror, Mr Svehla relies on the line of authority considered in Branir Pty Ltd & Ors v Owston Nominees [No 2] Pty Ltd & Anor [2001] FCR 1833; (2001) 117 FCR 424 at [369], for the proposition that, even in the absence of an identifiable offer and acceptance in the classic sense, a contract may arise on the basis of a clearly manifested mutual assent to a particular arrangement capable of constituting an enforceable contract.
197In Branir (at p 525), Allsop J (as his Honour then was), with whom Drummond and Mansfield JJ concurred, rejected a submission to the effect that a "springing contract" was not something known to the law, saying:
On the contrary, a number of authorities discuss the need not to constrict one's thinking in the formation of contract to mechanical notions of offer and acceptance. Contracts often, and perhaps generally do, arise in that way. They can also arise when business people speak and act and order their affairs in a way without necessarily stopping for the formalities of dotting "i"s and crossing "t"s or where they think they have done so. ... Sometimes this failure occurs because , having discussed the commercial essentials and having put in place necessary structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentation. In such circumstances, even in the absence of clear offer and acceptance, and even without being able (as one can here) to identify precisely when a contract arose, if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract . Sometimes this is said to be a process of inference or implication. For my part, I would see it as the inferring of a real intention expressed through, or to be found in, a body of conduct, including, sometimes, communications, even if it be the case that the parties did not consciously advert to, or discuss, some aspect of the relationship and say: 'and we hereby agree to be bound' in this or that respect. The essential question in such cases is whether the parties' conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract (his Honour then citing the various authorities from which that proposition had been drawn) (my emphasis).
198In Brambles Holdings v Bathurst City Council (2001) 53 NSWLR 153, Heydon JA (as his Honour then was) had said:
... While the process by which many contracts are arrived at is reducible to an analysis turning on the making of an offer, the rejection of the offer by a counter-offer and so on until the last counter-offer is accepted, that analysis is neither sufficient to explain all cases nor necessary to explain all cases. Offer and acceptance analysis does not work well in various circumstances.
199Thus, the fact that the precise time at which the parties concluded their contract cannot be determined will not necessarily preclude a finding that there is a binding contract (and, in the present case, Mr Svehla submits that nothing turns on the precise time at which this particular contract was concluded).
200Similarly, in Empirnall Holdings v McMahon Paull Partners (1988) 14 NSWLR 523 at 534 to 535 McHugh JA (as his Honour then was) had said that communication of acceptance was not always necessary (giving as examples of when it is not the situation where the offeror has dispensed with the need to communicate the acceptance of an offer and, relevantly in the present case, where the silence of an offeree "in conjunction with other circumstances of the case" may indicate that the offeree has accepted the offer).
201The conduct of the parties must be capable of proving all of the essential elements of an express contract ( Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd ( 1988) 5 BPR 11,110 at p 11,117-11,118 per McHugh JA (as his Honour then was), with whom Hope and Mahoney JJA concurred). His Honour there said:
It is often difficult to fit a commercial arrangement into the common lawyers' analysis of a contractual arrangement. Commercial discussions are often too unrefined to fit easily into the slots of 'offer', 'acceptance', 'consideration' and 'intention to create a legal relationship' which are the benchmarks of the contract of classical theory. In classical theory, the typical contract is a bilateral one and consists of an exchange of promises by means of an offer and its acceptance together with an intention to create a binding legal relationship ...
Moreover, in an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at a particular time in the relationship may by reason of the parties' subsequent conduct become sufficiently specific to give rise to legal rights and duties. In a dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed.
202Mr Svehla also referred to what was said by Macfarlan J in Prints for Pleasure Ltd v Oswald-Sealy (Overseas) Ltd [1968] 3 NSWR 761 at 765-6, namely that:
"...in dealings between business people there cannot always be certainty or predictability about the future course of events arising out of or in the performance of a business relationship which they desire to, and may lawfully, create. The course of business often means that this must be so and it would, as Lord Tomlin said, be a reproach upon the law if parties who intended to agree, and believed they had agreed in this way, should be told that their agreement for legal reasons had never come into existence".
and noted that the fact that parties have embarked on significant elements of their business venture is a matter which has been recognised as something that would influence a court to give effect to the parties' implicit intentions (see Ormiston J in Vroon BV v Fosters Brewing Group Ltd [1994] 2 VR 32 at 87, applied in Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288 by Finkelstein J and referred to by Allsop J in Branir ).
203With the above in mind I turn to the particular bases on which it is contended that there was an enforceable licence agreement concluded between the parties.
Offer & acceptance/mutual assent
204I have had little difficulty in concluding that the circumstances in which both the Licence Agreement and the Shareholders Agreement were signed on 18 April 2005 were such that their execution amounted to the making of an offer by the respective signatories (capable, on incorporation, of acceptance by Painaway and the Painaway shareholders, as the case may be, so as to give rise to a binding agreement on the terms set out therein with the said corporate entities). (I would also have been inclined to find that the signing of the documents constituted an agreement between the signatories that they would cause the relevant corporate entities to be brought into existence and to enter into such an agreement, though this is not necessary given the findings I have made as to the manifestation of mutual assent.)
205The formality with which the respective Agreements were signed and witnessed on 18 April 2005 can only, it seems to me, be seen as signifying that the signatories had agreed to be bound by an agreement in those terms. Otherwise there would have been no purpose in the formal execution of the documents in advance of the incorporation of all of the entities that were (on the face of the documents) intended to be party thereto. Messrs Carroll, Nassar and Hyder had, by this stage, been in discussions over a period of time and had been provided with various draft agreements to consider (not simply drafts of the documents ultimately signed by them but also, for example, the earlier draft prepared by Aubrey Brown Partners) and, before then, had been in discussion as to the manner in which their business venture was to be structured. There is no suggestion that the parties had had a practice of formally signing draft agreements as some kind of record of the stage at which they then were in their negotiations and there would seem no purpose to be served in them having done so simply as a record of discussions on 18 April 2005. (Mr Carroll himself seemed to accept that he had signed the documents on 18 April 2005 on the basis that he was entering into an agreement of some kind on that date.)
206I consider that the inference to be drawn from the signing of the Agreements on 18 April 2005 (after the discussion as to their terms, of which Mr Innis gave evidence including his emphasis as to the exclusive and irrevocable nature of the licence) is that this signified an objective intention of the signatories to commit to enter into and be bound by an agreement in these terms with the yet-to-be incorporated entities (and arguably to take the steps necessary for the yet to be incorporated entities to do so). Thus I find that the signing of the documents in question constituted an offer by the signatories capable (on acceptance by the entities that had not yet signed) of giving rise to a binding contract.
207What is less clear is that there was any specific act signifying the acceptance of the offer by those corporate entities after their incorporation. Rather, the evidence suggests that no real attention was paid to the need for execution of the documents, or communication of acceptance of their terms, by Painaway or the Painaway shareholders. Mr Svehla accepted that the mere fact of incorporation would not be enough to signify such acceptance but relied on overt acts that he submitted were referable to the right of Painaway to manufacture and produce under the licence and with the knowledge of Nature's Remedies the Painaway products and the fact that Nature's Remedies made the decision no longer physically to manufacture the products from about March 2006 (and for all matters to be dealt with through Painaway).
208Weight was placed by Mr Svehla in this context on the authorities which permit acceptance of an offer of contract to be inferred by reference to the parties' conduct, having regard to the circumstances of the commercial relationship between the parties. (In that regard, also, Mr Stack submits that formal communication of acceptance of the respective offers made by the signing of the Licence and Shareholder Agreements was not necessary, since the officers of Painaway included the Carrolls and since the terms of those agreements had been accepted by its controlling minds (and, in the case of the Shareholders Agreement, by the controlling minds of the companies named as shareholders).
209In Brambles , it was said to be relevant, when determining the issue as to whether there is a binding agreement in such cases, to ask the following:
... in all the circumstances can an agreement be inferred? Has mutual assent been manifested? What would a reasonable person in the position of the [plaintiff] and a reasonable person in the position of the defendant think as to whether there was a concluded bargain?
210In answering such questions, regard may be had to both the pre and post contractual conduct of the parties. Nevertheless, the court's conclusion is based on an objective view of those facts, rather than on the subjective beliefs of the parties.
211In relation to the kind of conduct which will establish an "inferred agreement", in Waldorf Apartment Hotel v Owners Corp SP 71623 [2010] NSWCA 226 at [44] , MacFarlan JA (with whom Beazley JA agreed) said:
Accepting that the true position was, as I have decided, that representatives of the parties had in various ways attempted to enter into an agreement in the terms of the Building Management Agreement, but not succeeded in doing so, I would regard the conduct of the parties undertaken in conformity with the terms of that agreement as manifesting an intention to comply with an agreement that they mistakenly believed was in place , rather than an intention to make a contract in those terms that had not already been made. (my emphasis)
212It is hard not to see the present as just such a case - one where the parties mistakenly believed an agreement was in place and acted on the common assumption that they were bound thereby.
213Mr Svehla relies on the conduct pleaded in the Statement of Claim as giving rise to the inferred acceptance/mutual assent - placing particular reliance on: the circumstances in which the shareholding in Painaway was rectified in September 2008 to accord with what had been provided for under the Shareholders Agreement (and to correct the admitted error of Mr Demos in arranging for the issue of 50 shares to each of Angelo's Angels, JAKL and Mickey Rose); the entry by Painaway entered into the Blend Distribution Agreement on 8 December 2005, which was premised upon Painaway having rights in relation to the Painaway Products conformable with the terms of the Licence Agreement; and the entry into other arrangements with third parties based on the existence of such rights. Mr Svehla also points to the fact that (as Mr Carroll deposed in his affidavit) after April 2005, Nature's Remedies did not manufacture any Painaway product (para [24]), which is said to be consistent with the grant to Painaway of an exclusive licence conformable with the Licence Agreement and the obligations of the parties under relevant clauses of the Shareholders Agreement.
214Mr Stack, for his part, emphasises three matters.
215First, that Mr Carroll is the controlling mind of both Nature's Remedies and JAKL (and hence his knowledge as a director of Painaway can be attributed to both). That is significant in circumstances where Mr Carroll, in his capacity as a director of Painaway, entered into transactions and discussions that were premised on the company having valuable rights in relation to the Painaway products (such as the Blend agreements) and must have assumed that the company had more than a licence terminable at will (such as the Parramatta and Hayne sponsorship agreements, under which Painaway undertook obligations that it could not fulfil if its licence in relation to the Painaway products were terminated. Not only was Mr Carroll apparently comfortable in so doing (and one might have thought he would be concerned to exposure as a director if he was committing to obligations without having a reasonable basis to believe that the company would be in a position to comply with those obligations as and when they fell due) but one would have thought that had he considered that this went beyond any licence that had been granted by Nature's Remedies then (as a director of Nature's Remedies) he would have been astute to protect its position.
216Secondly, Mr Stack submits that the conduct of Painaway and the Nassar/Hyder interests over the last 5 years was consistent with the terms of the Licence and Shareholder Agreements and otherwise demonstrated that Painaway considered itself bound by those Agreements. In this regard, Mr Stack points to the operative part of the Licence Agreement and clause 3, which provides that Painaway had exclusive rights to use the relevant intellectual property "in connection with the manufacture, sale distribution and marketing" of the products and notes that, s ince incorporation and up to the time of the present dispute, Painaway has paid all of the expenses associated with the manufacture of the products, including the costs associated with acquiring the raw materials, producing and packaging the products; has paid all expenses associated with marketing the Painaway products; has paid all expenses associated with the transportation and sale of the Painaway products; and has marketed and sold the Painaway products. (In so saying, it must be noted that at least up until March 2007 the payment of moneys on behalf of Painaway came from the respective families but it is clear that the individuals treated such contributions as a loan to the company and ultimately there was a reconciliation done to that effect, consistently with what was contemplated by the Shareholders Agreement.) Mr Stack also refers to the financial contributions and marketing efforts by Messrs Hyder and Nassar consistent with the acknowledgement in the Shareholders Agreement as to what was intended in relation to their role in the venture (clause 17.1).
217Thirdly, reference is made to the lack of any assertion by the Carroll interests (prior to these proceedings) to the effect that the Licence and Shareholder Agreements were not binding (or that the offers contained therein had been withdrawn). Not only is it said that their own conduct has been consistent with the terms of those Agreements and with the Agreements otherwise being operative (including Mr Carroll, as a director of each of Painaway, Nature's Remedies and JAKL, having negotiated and/or executed agreements with third parties, such as Blend and Cat Media which were only consistent with the Agreements being operative) but significance is placed on the fact that the Carrolls have previously asserted and relied upon the terms of the Agreements, in answer to various matters raised by Mr Hyder and Mr Nassar. (I also note that the correspondence issued by Mr Lombardo on the Carrolls' behalf in mid 2010 was predicated on the assumption that the agreements were in existence albeit said not to be valid by reference to alleged 'serious breaches' of those agreements, assertions that run counter to the argument that no such agreements were ever in force.)
218What significance is to be attached to the fact that the Agreements were not executed by the respective corporate entities? Mr Svehla's case is, in effect, that there was at most an inadvertence to the formalities but that the parties proceeded on the basis of and acted upon the arrangements contemplated in those agreements (subject to some variations over time). Mr Ireland, on the other hand, characterises this as a situation where the parties may have settled what are to be the terms of their agreement (if it should be made) but have not yet made that agreement (referring to Barrier Wharfs v W Scott Fell & Co (1908) 5 CLR 647 at 650).
219Mr Ireland, in contrast, places weight on the fact that Mr Innis, who prepared the Shareholders Agreement before Painaway or the shareholders were incorporated, had sent that document out as a 'final' document in July 2005 to be executed by all relevant parties - thus suggesting that there had been no finality in what had earlier been signed - and did not take any steps at all in relation to the Licence Agreement. Mr Ireland contends that even if the Shareholders Agreement signed by Mr & Mrs Carroll on 18 April 2005 could be regarded as an offer capable of acceptance by the other parties, there is no evidence of acceptance by conduct and the Court should not find that there has been a manifestation of mutual assent thereto.
220Emphasis was placed, as to the question of acceptance by conduct, on what Mr Ireland submitted was a disconformity between what was contemplated under the draft Licence Agreement and the draft Shareholders Agreement and what in fact occurred (in two respects - the manufacture of the products and the drawing of profits). Mr Ireland submitted that the documents were drawn to some degree interdependently (the Licence Agreement assuming the existence of the Shareholders Agreement (Recital B) and the Shareholders Agreement purporting to set out terms for the supply of the product to Painaway by Nature's Remedies) and that, having regard to the two agreements, the expectation of the parties must be said to have been that Painaway products would be manufactured by Nature's Remedies using the formulas owned by the Carroll interests and branded with the Painaway trade mark , owned by Nature's Remedies; and that those products would then be sold 'at cost' by Nature's Remedies to Painaway. Mr Ireland submits that none of that occurred; that, rather, what happened was that, following its incorporation, Painaway itself became a manufacturer of the goods (acting as the principal) and Mr Carroll acted as its agent to arrange that manufacture.
221Mr Ireland therefore submitted that the subsequent conduct of the parties, (which he accepts is admissible to discern whether an agreement was formed) is out of line with the terms of the draft Licence Agreement.
222In that regard, the terms of the Licence Agreement are consistent with Painaway having the ability either to utilise the services of Nature's Remedies in the manufacture of the products or not to do so. The complication arises that Nature's Remedies was the licensed entity for the purposes of the Therapeutic Goods Act, so was required to be involved in the process in some part of the process of manufacture in any event.
223Mr Ireland submitted that once the shareholder companies and the discretionary trusts were established in 2005, it was made clear to the parties by Mr Innis that the Agreements needed to be executed. Mr Ireland placed weight on the evidence given by Mr Innis in cross-examination that it was "was up to them" whether or not to do so. (The email from Mr Innis did not in terms advise the parties that it was necessary for them to execute the final form of the Shareholders Agreement for it to be binding on them - indeed the passing reference to "for consideration and execution" (without any detail as to the mode of execution or what was to be done with the document as executed) and the failure to send out the Licence Agreement as a 'final' document for consideration and execution by Painaway suggests that there was no importance attached by Mr Innis as to whether the formalities of execution were attended to by the parties.)
224It is submitted by Mr Ireland that this is an instance where the terms of the documents which were prepared in 2005 (and the commercial relationships and roles which those documents clearly contemplated) were not ultimately followed by the parties and that, instead, after 18 April 2005 the parties continued to negotiate their commercial relationship, culminating in the steps taken in September 2008 to issue additional shares in Painaway. (For the Carroll interests, it is said that it is what occurred in September 2008 which had actual financial consequences for the parties, both as to equity and profit entitlement, rather than the unexcuted agreements in 2005.) Thus the case for the Carroll interests is that the expectations set out in the unexecuted Shareholders Agreement and Licence Agreement were "simply left behind" in the process of ongoing negotiation as to the structure of the parties' relationship.
225In my opinion, the conduct of the parties after 2005 (whether or not one can infer from it an acceptance by Painaway and the Painaway shareholders of the offer that I have found was constituted by the execution of the Shareholders and Licence Agreements) did manifest the mutual assent of the parties to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, so as to lead to the conclusion that there was in existence a binding contract (to adopt the terminology in Branir at [369]).
226Mr Ireland characterised the case propounded by the administrators, and to a greater extent by the Nassar/Hyder interests, as being that certain "core promises" were made (in a legally binding manner from the outset), giving rise to the consequence that irrevocable and assignable rights were created no later than 18 April 2005 in favour of companies not then in existence which did not execute documents that had been prepared. The corollary of this, he says, is that those companies would take the benefit of rights contemplated by the documents but would not be committed to the correlative obligations which the parties had framed in the unsigned documents. (The unfairness of such a result, as I apprehend it, is said to exemplify why the courts are slow to enforce general understandings and expectations of commercial parties in the absence of a concluded agreement). Mr Ireland submitted that those who negotiate in detail and make a determined effort to define their legal relationship in detailed commercial documents prepared under advice should not be bound by such general understandings or expectations.
227In that regard, while I accept that there is an element of attempted reliance by the Nassar/Hyder interests on 'core promises', insofar as their alternative claim to the shareholding in Nature's Remedies based on an agreement in around 2003 (hence some time prior to the 18 April documentation) I did not understand the claim by the administrators to be suggesting that any agreement (inferred or implied or otherwise) for the grant of a licence would not import the correlative obligations under that documentation. Nor did I understand Mr Svehla to be suggesting that there was a binding agreement no later than 18 April 2005 (unless that conclusion was reached by reason of the ratification of a pre-incorporation contract). Rather, the principal way by which he sought to maintain a claim that there is a non-revocable exclusive licence was by conduct, post 18 April 2005, that it was said amounted to an acceptance of the 'offer' constituted by execution of the 18 April document (ie an offer to be bound by its terms once the corporate entities were incorporated and adopted the agreement) or evidenced mutual assent to the contract (or led to the application of the doctrine of estoppel).
Intention to be bound
228Mr Ireland points to the fact that the parties, acting upon legal and accounting advice, adopted quite complex structures involving trusts and companies to define and protect their legal position, yet did not finalise the execution of the legal documentation. (Nor, however, did they continue with discussion in relation to the documentation at that stage and, when discussion resumed as to the profit sharing arrangements in late 2006, Mr Carroll referred back to the terms of the 18 April document as being the relevant document defining the parties' arrangements.)
229As to the question of intent to enter into a binding legal relationship, Mr Ireland submitted that the terms of the documents provide strong indicia that the parties did not intend to be legally bound until the instruments were executed and that commercial certainty as to the obligations undertaken by all parties was required. Thus it is submitted that failure to finalise the execution of the documents leads to the conclusion that they were never in force.
230Mr Ireland suggested that the matter could be tested by asking the question whether any of the non-executing corporate parties could be sued on the agreement and submitted that the answer to this must be 'no'. With respect, it does not seem to me that this would necessarily be the answer to that question. A finding that Painaway has enforceable rights under the agreements must carry with it the conclusion that, had the same evidence been relied upon by, say, Nature's Remedies to enforce the obligations owed by Painaway under the Licence Agreement, a similar conclusion would follow.
231Mr Ireland submitted that if the Masters v Cameron (1954) 91 CLR 353; (1954) 28 AJLR 438 question is posed (namely, whether the parties objectively intended to be legally bound before the legal documents were executed), the answer would be plainly 'no'.
232In R T & Y E Falls Investments Pty Limited v The State of New South Wales & ors [2001] NSWSC 1027, Palmer J (referring among others to Film Bars ; Air Great Lakes Pty Limited v K S Easter (Holdings) Pty Limited (1985) 2 NSWLR 309; Baulkham Hills Private Hospital Pty Limited v G R Securities Pty Limited (1986) 40 NSWLR 622 at 627; and G R Securities v Baulkham Hills Private Hospital Pty Limited (1986) 40 NSWLR 631 at 634) said at [50]) that:
Where, as in this case, an informal contract arising from discussions or negotiations between the parties is alleged, the Court must be satisfied that the parties arrived at a consensus as to the terms of the agreement, that the terms were sufficiently certain to be capable of forming a binding contract and that the parties, by their words and conduct taken in the context of the surrounding circumstances, evinced a common intention that the consensus at which they had arrived should constitute an immediately binding contract.
233The decisive issue, as stated by McHugh JA in G R Securities at 634, is always the intention of the parties, which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances. In other words, the relevant intention is not the individual subjective intentions of the parties, as such, but rather what the law takes to have been their intentions at the relevant time (Mahoney JA in B Seppelt & Son Limited v Commissioner for Main Roads (1975) 1 BPR 9147 at 9151). There, his Honour recognised the possibility that in the process of negotiation the parties might reach an interim consensus which nevertheless did not amount to a binding agreement upon all of the terms of the proposed transaction.
234Mr Ireland submitted that this was an instance of the case where a court would be slow to conclude that the parties had bound themselves to a contract in the absence of a signed agreement. However, Gleeson CJ in Australian Broadcasting Corporation v XIVth Commonwealth Games Limited (1988) 18 NSWLR 540 at 543, recognised that parties who have negotiated about and made an agreement (there concerning price) could be held to have entered at that stage into a formal contract (albeit that such a contract might have been intended later to be overtaken by a further more formal contract containing additional terms and conditions). It is by no means implausible that the parties who appear to have reached agreement as to the licence rights and recorded that in an incomplete agreement, would be found thereby.
235Subsequent communications may be considered when considering whether a binding agreement has been reached. In Film Bars , McLelland J (as his Honour then was) noted that, in determining whether the communications between the parties constituted a contract, the court was not confined to a consideration of the terms or manner in which the communications were made, but could interpret them by reference to the subject matter and surrounding circumstances, (including the nature of and relationship between the parties; previous communications between the parties; and standards of reasonable conduct in the known circumstances); and that it was legitimate to refer to and take into account subsequent communications between the parties.
236His Honour considered that the probative value of subsequent communications must be found in the light they throw on the proper interpretation of the earlier communications alleged to constitute the contract and said that, perhaps more commonly, subsequent communications might be legitimately used against a party as an admission by conduct of the existence or non-existence as the case may be of a subsisting contract, referring to Barrier Wharfs .
237In R T & Y E Falls Investments , Palmer J accepted that, as a general rule, when parties had been negotiating a substantial commercial transaction in the common expectation that at some stage a formal contract would be brought into existence, the court should be reluctant to find a common intention that a binding informal contract should come into existence at any time prior to the execution of the formal document; especially when the terms of the alleged informal contract would have to be pieced together or implied from various conversations and from selective extracts from correspondence. His Honour said (at [53]):
Commonsense has a part to play in the Court's enquiry: it is inherently improbable that commercial people will intend to bind themselves to a substantial transaction in that haphazard and imprudent fashion, so potentially productive of subsequent dispute, when they have already recognised the need for a formal contract to record the terms of the transaction.
238The magnitude, subject matter or complexity of the transaction or dispute may in appropriate cases lead to an inference that the parties' common intention was not to be bound by any agreement until a formal document was executed - see Baulkham Hills Private Hospital Pty Limited v G R Securities and ABC v XIV Commonwealth Games . In the ABC case, Gleeson CJ noted (at 548) that:
... in the ordinary case, as a matter of fact and commonsense, other things being equal, the more numerous and significant the areas in respect of which the parties have failed to reach agreement, the slower a court will be to conclude that they had the requisite contractual intention.
239His Honour considered it would normally be of importance in such a case that the court have an understanding of the commercial context in which the dispute arose:
...[a]nd a most significant feature of that context will relate to the subject which the parties regard, or would ordinarily be expected to regard, as matters to be covered by their contract.
240In that regard, I would accept that it would not have been unreasonable to expect that parties who had instructed lawyers to document their arrangements and who had engaged in discussion as to various drafts would intend that they be bound only by the final signed version of their agreement. Here, however there was a document (not fully executed or complete) signed by those who are the controlling minds of the parties who did not sign. It is significant that none of the individual parties appears to have considered that anything more was necessary after the execution of the agreement on 18 April 2005. (I have noted above the significance I think should be drawn from the fact that the parties then in existence at the 18 April meeting (though obviously not the yet to be formed corporations) thought it necessary (or perhaps important or prudent) to sign, and have formally witnessed, the Licence Agreement and Shareholders Agreement. It might be thought that there was no need to have those documents signed at all on 18 April 2005 if they were to be of no binding effect. It followed a process of negotiation and amendment of the terms of the documents and seems to have been carried out with an emphasis on formality.)
241The inference I have drawn, from the formal witnessing of the signatures of those who were then in existence and able to sign the documents, is that this was intended to be more than simply an acknowledged record of the consensus reached at the conclusion of that meeting. It has the flavour of a commitment that this is the arrangement they would enter into (once the formalities of the companies' incorporation were complete) and the lack of any caveat in the document they signed or in the correspondence at that time as to the agreement not becoming binding unless and until signed by the (missing) parties suggests to me that the existing parties had assumed that all that was necessary was for the incorporation of the companies in order to bring this agreement into effect.
242As to the significance of the fact that thereafter the documentation was not finalised, there seem as at late 2006 to be two possibilities - either an agreement was reached as to the basis of the arrangements in 2005 and the later discussions related to amendments to those arrangements or, as Mr Ireland suggests, there was no initial agreement (simply an understanding that was not implemented in any formal way and not proceeded with, in favour of different arrangements concluded at a later stage).
243To my mind the two matters that tend towards the conclusion for which Mr Svehla and Mr Stack separately contend are, first, the entry into the Blend distribution agreement (and the entry into significant ongoing commitments with other third parties), which I see as inconsistent with the suggestion that there was at most an implied licence terminable at will, and, secondly, the conduct of the Carrolls in seeking to assert and rely upon the arrangements then in place (when calling on Mr Nassar in early 2007 to provide the required marketing plan and when asserting, both to Mr Nassar and later to Mr Demos, a refusal to change the shareholder arrangements).
244It might well be said that (when seeking a greater profit share) in late 2006 the Nassar/Hyder interests had behaved inconsistently with an agreement of the kind for which they now contend (ie having said that the only way that Painaway could progress was by the Carrolls' agreement to other arrangements) but it seems to me this is consistent with them applying some economic pressure to seek to procure a change to the arrangements and does not involve an admission that there was no such arrangement in the first place.
245I have concluded that binding agreements did come into existence at some point after June 2005 (but at the latest by late 2006 when Mr Carroll invoked that agreement to resist the changes Mr Nassar was seeking to the then arrangements) both in terms of the Licence Agreement and the Shareholders Agreement, under which Painaway has the rights referred to in both those agreements (namely a transferrable, non-revocable and exclusive, right and licence to use, in the Territory as defined in Item 7 of Schedule 1 of the Licence Agreement, the Intellectual Property (as defined in the Licence Agreement), encompassing the Painaway trade marks, the Painaway business names and the Painaway Formulas, including those relating to the Painaway products. I consider later in these reasons the assignability of such rights.
Estoppel
246Strictly speaking, in light of the above finding, this question does not arise, but had it done so I would have held that Nature's Remedies was estopped from denying the existence of the Licence and Shareholders Agreements.
247The claim based on estoppel in this context (as opposed to the estoppel claimed in the Nassar/Hyder Cross-Claim) is a conventional estoppel.
248Reference was made to Empirnall Holdings Pty Ltd at 528B for the recognition that an estoppel may lie to preclude one party from denying that a contract exists even though the court cannot find the precise act of acceptance.
249In MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39, Beazley, Hodgson and Ipp JJA noted at [71] that the common law doctrine of conventional estoppel is analogous to, but distinct from, the equitable doctrine of promissory estoppel. The common law doctrine of conventional estoppel precludes either party from denying an assumption which has formed the conventional basis of a relationship between them. Their Honours held (at [71]) that there can be such an estoppel as to rights and not merely as to facts (citing Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175; Heggies Bulkhaul v Global Minerals Australia (2003) 59 NSWLR 312).
250In Roche, their Honours held that evidence of reliance and detriment are essential for the existence of conventional estoppel (at [72]). In Con-Stan Industries Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226, Dixon J makes it clear that the relevant principle is that "the law should not permit an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations" (at [674]), and that this involves both action such that the party relying on the estoppel would suffer a detriment if the other party were afterwards allowed to set up rights inconsistent with the assumption and also that the party against whom the estoppel is asserted "must have played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it" (at [675]) (see also Thompson v Palmer (1933) 49 CLR 507 at [547]). Conventional estoppel requires that the party relying on the estoppel must have "placed himself in a position of significant disadvantage if departure from the assumption be permitted" ( The Commonwealth v Verwayen (1990) 170 CLR 394 at [444]).
251Accordingly, in order to determine the applicability of the common law doctrine of conventional estoppel, it is necessary for there to be findings, first as to whether a particular assumption has formed the conventional basis of the relationship between the parties; secondly as to whether there was significant detriment to the party relying on the estoppel arising from the adoption of the assumption; and thirdly as to whether it would be unfair or unjust to permit a departure from that assumption (following the line of reasoning of Beazley, Hodgson and Ipp JJA in Roche at [74]).
252Mr Ireland concedes that from time to time the Carrolls referred to the Shareholders Agreement, but says that it was never in their possession in signed form. It is submitted that it was an agreement which, to the knowledge of all parties was incomplete, uncertain in its operation and which provided financial formulas (as to drawings) that were never followed. In relation to the Licence Agreement, Mr Ireland points out that the Carrolls did not refer to it nor did they assert any reliance on it.
253As to this, the evidence does suggest that the Carrolls thought there was in existence a signed copy of the Shareholders agreement and appeared to invoke it to their benefit both when calling upon the Nassar/Hyder interests to come up with a marketing plan (in 2007) and when calling for the shareholding in Painaway to be rectified in accordance with the Shareholders Agreement that they refused to change.
254Mr Ireland submits that the pressure from late 2006 from Messrs Nassar and Hyder for the Carrolls to adopt, implement and document financial entitlements which were inconsistent with the terms contained in the shareholders agreement prepared by Mr Innis, is inconsistent with there already being in existence a binding agreement. The alteration of the shareholding in Painaway in September 2008 from 51%/49% to 50%/50% and the creation of a dividend/profit share of l/3 rd are matters said to have constituted fundamental departures from the original discussions. (It is said that as the revised profit entitlement was created in a quite different manner (by the issue of 'E' class shares) to that contemplated by the Shareholders Agreement it cannot be said to constitute a 'variation' of any agreement then in force).
255As indicated earlier, I consider that the response from the Carrolls to the requested amendment to the profit sharing arrangements agreed in 2005 is consistent only with an understanding by them that there was already in place an agreement and that the request was an attempt to vary something already in place. The fact that Messrs Nassar and Hyder sought a variation to those arrangements (and the Carrolls ultimately agreed to this) is not inconsistent with the arrangements having been put in place nor is it inconsistent with Messrs Nassar and Hyder having acted in reliance on a common assumption that at the least (absent any amendment) they would be entitled to a licence on the terms of the 2005 arrangements. It does not seem to me consistent with commercial sense (or with the commitments entered into in 2006) that there was at that stage no arrangement in place for the parties' joint venture.
256I am satisfied that the basis for a conventional estoppel has been established. First, the assumption as from 18 April 2005 (evidenced by the stance taken by Mr Carroll himself, in late 2006 and early 2007, as well as the entry by Painaway into significant obligations with third parties) was that the parties were bound by the arrangements and consensus reached on 18 April 2005. Secondly, the detrimental reliance by the Nassar/Hyder interests seems to me to be obvious. They made significant contributions to the venture that I accept they only did on the expectation that they would share in the profits of that venture on a long term basis. Thirdly, it seems to me unconscionable for the Carroll interests to seek to depart from that common assumption, having taken through Nature's Remedies the benefit of the Nassar/Hyder interests' contribution.
Other matters going to enforceability or existence of agreement
257Mr Ireland maintains that the incomplete state of the documents as signed renders them uncertain. In particular, Mr Ireland refers to Clauses 1.1, 3.1 and the absence of annexures 'A', 'B' and 'C' referred to in Schedule 1 to the Licence Agreement.
258Mr Ireland suggest that the missing reference in clause 3.1 makes the grant of the licence in favour of Painaway entirely conditional upon some other unidentified obligation. On that additional ground, it is said that the purported grant of the licence fails for uncertainty.
259In that regard, Mr Svehla submits that the identified omissions from the Licence Agreement (recorded in paragraph 54 of the Carroll interests' submissions) are of no moment. The relevant limitation to which clause 3.1 is subject must, it is said, mean clause 7.2 (Termination), as it is a limitation on the non-revocable perpetual right and licence. The omission of the logos in Annexures "A" to "C" to Schedule 1 is also said to be of no moment as they were readily identifiable being already in existence.
260The court will strive to give a reasonable meaning to a contract to enable it to stand ( Hillas v Arcos Ltd (1932) 147 LT 503 at 514 being oft quoted in this regard), and will seek to uphold commercial arrangements between parties (see Macfarlan J in Prints for Pleasure ). I do not consider the incomplete details to be so fundamental as to warrant the conclusion that there was no binding agreement.
261Reference is made to clauses 14 and 18 (which deal for example, with amendments to the Licence Agreement only being in writing 'signed by each party') as indicating an intention that the contract could not be formed otherwise than 'in writing signed by each party' . The fact that variations or that alteration or waiver of the terms of the Licence Agreement were required to be in writing signed by each party is submitted by Mr Stack not to mean the Licence Agreement (unsigned by Painaway) did not become operative - I agree.
262Mr Ireland notes that the Licence Agreement is predicated upon Painaway and the other parties 'having entered into Shareholders Agreement' (Recital B) and it was stated that because that agreement had been entered into the Carroll interests wished to grant certain rights in respect of intellectual property and formulas.
263A condition precedent to the obligations of the parties under the Licence Agreement is the satisfaction or waiver of all of the obligations of each of the parties under the Shareholders Agreement (clause 2.1). Mr Ireland thus submitted that if the Shareholders Agreement never came into operation, it follows that the Licence Agreement also never came into operation. That conclusion is logical but in my view both agreements came into existence and therefore the interdependency of the two agreements does not tell against the operation of either.
264There is clearly an interaction or interdependency between the two agreements. However, if both are operative, the only relevance of this lies in whether an assignee could comply with the requirements of the Licence Agreement insofar as they require compliance with the Shareholders Agreement.
265As to the "condition precedent" clause, itself, on ordinary principles of construction the heading would have little relevance in construing the content of the clause but in any event it does not assist in determining to what the condition is precedent. In its terms, the clause requires satisfaction or waiver of all of the obligations of each of the parties under the Shareholders Agreement as a condition for any obligations (and presumably any correlative obligations) arising under the Licence Agreement.
266It does not make sense for this to be a condition precedent to the formation of a contract - since it focuses on performance of ongoing obligations in very broad terms ("all of the obligations of each of the parties"). Therefore, if it were a true condition precedent in that sense, it would be impossible to know when the obligations under the Licence Agreement were to commence.
267It seems to me this cannot be a true condition precedent to the coming into existence of the agreement itself but must at most be a condition precedent to the continuing existence of the contractual obligations from time to time, those obligations having come into existence at an earlier point. I would thus construe this clause as in effect, encapsulating the thrust of the termination provision applicable where there has been default in performance.
268It seems more likely to be a clause operating as a condition precedent for the continuation of obligations (and correlative entitlements), almost as the mirror to the termination clause, - ie, that Nature's Remedies and Painaway will have the obligations under and be entitled to the benefit of the rights under the Licence Agreement only so long as each of the relevant parties complies with its obligations under the Shareholders Agreement.
269How then does such a clause operate if there is an assignment of the licence (or perhaps more precisely, an assignment of the benefits or rights under the Licence Agreement (the agreement itself could not be assigned without the consent of all of the parties thereto)? It seems to me that this is conceptually no different from the situation where a sub-lessee's rights may be affected by a breach by the sub-lessor of obligations in the head lease (though without the statutory overlay in the context of leasehold interests). To test that proposition, if the Painaway shareholders ceased to comply with their obligations under the Shareholders Agreement (to which any 'assignee' is not and would not be a party) in circumstances entitling Nature's Remedies to terminate the Licence Agreement or to argue that the condition precedent clause had the effect that there were no subsisting obligations thereunder, then an 'assignee' might be exposed to the risk that the agreement from which it derived its rights might be terminated. However, I do not accept that this means the assignee could not be the recipient of rights in the first place (it just underscores the care that will need to be exercised in determining how best the Painaway rights should be dealt with in this regard).
270Finally, it is noted that the Licence Agreement is not in the form of a deed and it is said that, until executed by Painaway, fails for want of consideration. In the absence of execution by Painaway it is said that there is no effective consideration for the licence beyond a licence fee (which it is common ground was never paid). However, Painaway did assume obligations under clause 5 (obligations of importance to the maintenance of the trade marks) and it seems to me that this provides sufficient consideration.
Pre-incorporation contracts
271In relation to both the Licence and the Shareholders Agreements, it is further contended that these amount to pre-incorporation contracts that became binding pursuant to section 131(1) of the Corporations Act 2001 when ratified by Painaway and the respective corporate shareholders.
272Section 131 of the Corporations Act provides that contracts entered into by a 'company' before its incorporation are enforceable provided they are ratified within a reasonable time after incorporation.
273In Aztech Science v Atlanta Aerospace (Woy Woy) [2005] NSWCA 319; (2005) 55 ACSR1 , Basten JA (with whom Handley JA agreed) said, as follows, of the elements required to establish ratification. at [81] to [82]:
The primary judge set out the basic principles in the following passage:
"[49] It is generally said that ratification may be express or implied. Express ratification occurs when the alleged [principal] has, by unequivocal language or conduct, acknowledged that the contract is his. Implied ratification may arise in various ways. It often occurs when the alleged principal, although not expressly acknowledging the contract as his own, acts in a way which can only be explained on the basis that he accepts the contract as his own. The essence is, in either case, a manifestation of the principal's intention to be bound.
[50] Determining whether there has been ratification, in the sense relevant to the law of agency, therefore depends on an assessment of the conduct of the alleged principal. The conduct may consist of acts of the alleged principal himself or acts of someone else who clearly acts with the authority of the alleged principal. The reference here to 'acts' extends also to omissions to the extent that, in a particular context, omissions are capable of being of probative value. And it goes without saying that, in a case such as the present, conduct can be relevant only if occurring after the time at which the alleged principal came into existence."
Generally speaking, these propositions may be accepted, subject to two qualifications. The first qualification is one of form, rather than substance. The distinction between language and conduct is a matter of emphasis, in many cases. It is likely that conduct will more usually involve implied ratification, rather than express ratification, to the extent that such a distinction is usefully drawn. The second qualification is of more substance: implicit in some of his Honour's language is an assumption that the act of ratification must necessarily be communicated to the other party. Where ratification is implied from conduct, it may well be conduct directed to the other party (or a third person), in circumstances where the relevant implication may reasonably be drawn by the other party. However, an express act of ratification may be an internal action of a company, such as the signing of a board minute stating that the company ratifies the contract. Given the need to act within a specified time, it may in some cases be important to determine whether the signing of a minute, or other internal act of a company is effective immediately, or only if and when communicated to the other parties to the contract.
274Mr Stack contends that in this case the conduct of the corporate shareholders is consistent with an acknowledgement of the agreements (that conduct also being relied upon for the allegation that there is an implied agreement).
275The difficulty I have with this argument is that there was no execution purportedly in the name of or on behalf of the companies to be formed in either agreement. Rather it seems to have been acknowledged at the time that the document or documents would need to be executed once those contracts came into existence. Therefore, whether or not the conduct of the entities after incorporation would have amounted to an effective ratification of the agreements I am not satisfied that the pre-condition for the operation of s 131 has been established.
276I do not accept therefore that these were pre-incorporation contracts duly ratified by the relevant companies.
(ii) Is the licence granted to Painaway under the Licence Agreement (or are the rights under that Agreement) assignable by it?
277Having found that there was a binding agreement under which Painaway was granted the licence rights (or alternatively that Nature's Rights is estopped from denying such a licence), the question is what follows therefrom - an issue critical to the value which the administrators of Painaway may be able to derive for the benefit of creditors (and which may not be able to be realised if the company is wounds up).
278Mr Svehla notes that the licence granted under the Licence Agreement is in its terms a licence in connection with the manufacture, distribution and marketing of the Painaway Products and one that not only permits Painaway to grant sub-licences (with the written consent of Nature's Remedies not unreasonably to be withheld) but also one that is stated to be transferable by Painaway (clause 17 containing an express acknowledgement and agreement by each of Nature's Remedies and the Carrolls that Painaway may "assignor otherwise deal with this agreement or any right under this agreement" without the prior written consent of any of them, provided that such assignment does not materially affect the integrity of the Intellectual Property or the Painaway Formulas.
279The agreement is terminable in certain events (under clause 7.2), relevantly including if Painaway is wound up by a court order or if Painaway is in breach of the Licence Agreement and fails to remedy that breach within 30 days of notification to do so by Nature's Remedies. (Interestingly, given the description of the licence as perpetual, the agreement was also terminable on 12 months notice by Nature's remedies at any time after the sixth anniversary of the Shareholders Agreement or if the 'Carroll Family Trust' ceased to be a shareholder of the company.)
280As noted earlier, the licence is to an extent interdependent on the Shareholders Agreement. Satisfaction (or waiver) of "all of the obligations of each of the parties under the Shareholders Agreement", discussed earlier, is specified (in the clause headed "conditions precedent) as something on which the obligations or the parties under the Licence Agreement were conditional. Relevantly. in the event that Painaway requires and engages Nature's Remedies to manufacture Painaway products, it has agreed to do so 'at cost'. There are also express obligations of confidentiality in relation to the Painaway Formulas.
281Notwithstanding that the Licence Agreement expressly contemplates the grant of a sub-licence or transfer of the rights in relation to the Painaway Formulas and Intellectual Property, it is submitted on behalf of the Carroll interests first that even if (as I have found) the Licence and Shareholders Agreements became operative there are no rights (or no rights of any commercial value) which are saleable by the administrators. In essence, this is said to be the consequence of the fact that Painaway could not restrain Nature's Remedies, as registered owner of the relevant trade marks from using those marks (hence the exclusivity of the licence is illusory in that sense) and of the fact that there is no property in the confidential information comprising the Painaway Formulas (thus it is said that equity cannot enforce an assignment of the use of the Painaway Formulas, whether or not on an 'exclusive' basis.
282The Licence Agreement defines 'Intellectual Property' by reference to various items. Relevantly, however, the intellectual property in issue is that comprised by the two registered Painaway, the registered owner of which is Nature's Remedies and the Painaway Formulas (not patented in Australia and, in effect, comprising confidential information as to the manner of production of the Painaway products (the ingredients themselves, though perhaps not the composition thereof, apparently already being in the public domain - such as arnica and emu oil). I consider each of these in turn.
Trade marks
283A registered trade mark is personal property (s 21(1) of the Act). Hence it is said that, as a chose in action, an exclusive licence to use the registered trade mark is capable of being assigned at law or in equity.
284Mr Svehla submits that, while the licence subsists, Painaway is as an "authorised user" of the Painaway trade marks under section 8(1) of the Trade Marks Act , in its capacity as a licensee of a registered trade mark and capable of effecting a valid assignment of the licence to use the Painaway trade marks. Section 8 of the Act provides that:
(1) A person is an authorised user of a trade mark if the person uses the trade mark in relation to goods or services under the control of the owner of the trade mark.
(2) The use of a trade mark by an authorised user of the trade mark is an authorised use of the trade mark to the extent only that the user uses the trade mark under the control of the owner of the trade mark.
(3) If the owner of a trade mark exercises quality control over goods or services:
(a) dealt with or provided in the course of trade by another person; and
(b) in relation to which the trade mark is used;
the other person is taken, for the purposes of subsection (1), to use the trade mark in relation to the goods or services under the control of the owner.
(4) If:
(a) a person deals with or provides, in the course of trade, goods or services in relation to which a trade mark is used; and
(b) the owner of the trade mark exercises financial control over the other person's relevant trading activities;
the other person is taken, for the purposes of subsection (1), to use the trade mark in relation to the goods or services under the control of the owner.
(5) Subsections (3) and (4) do not limit the meaning of the expression under the control of in subsections (1) and (2).
285As provided in s 8(2) above, the definition of "authorised user" requires actual use of the trade mark in order for a licensee to be an "authorised user". Here, however, Painaway has made actual use of the trade mark at least since early 2007 when the Painaway products were launched, and it has done so in circumstances where Nature's Remedies, through Mrs Carroll, has exercised quality control over the goods (to which Mrs Carroll has herself deposed and which is evidence in her actions in quarantining the goods after the appointment of the receiver to Painaway).
286(As to the statutory requirement that the registered owner of the trade mark maintain control of the use of the trade marks, Mr Svehla submits that Nature's Remedies has maintained control through the provisions in the Licence Agreement such as the requirement for Painaway to comply with Nature's Remedies directions (clause 5.2 of the Licence Agreement); the obligation on Painaway to provide information to Nature's Remedies in relation to Painaway's use of the Painaway trade marks (clause 5.3 of the Licence Agreement); the obligation of Painaway not to take any action which might disparage or diminish the value of the Painaway trade mark (clause 5.4 of the Licence Agreement); the prohibition on the grant of a sub-licence of the Painaway trade mark without the written consent of Nature's Remedies, which must not be unreasonably withheld (clause 5.5 of the Licence Agreement); and the requirement to advise Nature's Remedies of infringement of the Painaway trade marks (clause 6.3 of the Licence Agreement). It is said that in circumstances where Painaway has had exclusive use of the Painaway trade mark, admitted by the Carroll interests since at least March 2006, these provisions of the Licence Agreement would be implied into that use to give effect to the authorised use by Painaway.
287Thus to the extent that Painaway's use has been under the 'control' of the owner of the Painaway trade marks (as that term is understood in ss 8(3) - (4)), it is an authorised user and would be in a position both to restrain infringement by third parties of the Painaway trade marks (s 26(2) of the Act) and, if permitted to do so under its agreement with Nature's Remedies, to confer rights on third parties in relation to the use of the trade marks.
288However, what Mr Ireland says Painaway cannot restrain is use by Nature's Remedies itself (and hence that Nature's Remedies would be free to compete with Painaway in the market, thus presumably affecting the commercial value of any rights acquired from Painaway by a third party). In other words, it is submitted by Mr Ireland that Painaway's rights (even if construed as those of an exclusive licensee) do not involve a right to sue Nature's Remedies as trade mark owner for infringement by reference to use by the trade mark owner of its own trade mark (since Nature's Remedies has a statutory right so to do pursuant to s 20(1)(a) of the Act).
289I interpose to note that the administrators have not presently formed a view as to the manner in which they would recommend the rights under the Licence Agreement be dealt with and it may, for example, be that rather than assigning any rights in relation to the Intellectual Property, the administrators would instead sub-license or otherwise deal with those rights. However, I consider the issue of assignment as it is in this regard that Mr Ireland submits the Intellectual Property rights are of no commercial value to the administrators.
290The central issue in this submission is whether, if Painaway is an exclusive "authorised user", Nature's Remedies nevertheless has a statutory right to use its trade marks under s 20(1)(a) of the Act and can compete with it in the market place.
291"Trade mark" is defined in s 17 of the Trade Marks Act as a "sign" used or intended to be used to distinguish goods or services from those of other traders. A "sign" includes the following or any combination of the following, namely, any letter, word, name, signature, numeral, device, brand, heading, label, ticket, aspect of packaging, shape, colour, sound or scent (s 6).
292The law of trade marks is an extension of the law of passing off and protects the marketing of goods and services. It is noted that a system of registered marks overcomes what was a major hurdle of passing off litigation, namely the need to prove reputation, as once a mark is registered it is the property of the registered owner (McKeough et al, Intellectual Property: Commentary and Materials (4 th edn) at [14.05]). The nature of "property" in a trade mark was discussed in Attorney-General (NSW) v Brewery Employees Union (NSW) (1908) 6 CLR 469.
293The registered owner of a trade mark may license another person or entity to use the trade mark (though it had historically been thought that the licensing of a trade mark, by the separation of the owner of the trade mark from the origin of the relevant goods or services would deceive the public and thereby jeopardise the owner's rights in the trade mark (see Bowden Wire Co Ltd v Bowden Brake Co Ltd (1914) 31 RPC 385, per Earl Loreburn said [at 392]).
294The present position is that the licensing of a trade mark, whether registered or unregistered, will not undermine the owner's rights in the trade mark, provided that a sufficient trade connection is maintained between the owner and the goods or services in respect of which the trade mark is used by the licensee, and provided that the licensee's use of the trade mark is otherwise not likely to deceive the public ( General Electric Co v General Electric Co Ltd [1972] 1 WLR 729; [1972] 2 All ER 507; Pioneer Kabushiki Kaisha v Registrar of Trade Marks (HCA, unreported, Aickin J, 1 November 2011).
295Use of a trade mark by a licensee is distinguishable from "use" of the trade mark by a contract manufacturer. A contract manufacturer, who makes goods to the specific order of a trade mark owner, applies the relevant trade mark to those goods and then supplies the goods to the owner, does not "use" the trade mark in a legal sense, that is, as a "trade mark" pursuant to the Act. Because the trade mark owner only assumes responsibility for the quality of the goods ( Budget Rent A Car System Pty Ltd v Kay Rent A Car Pty Ltd (1985) 8 FCR 116), a contract manufacturer is not regarded as licensed to use the relevant trade mark. Here, however, it is difficult to see the role performed by Painaway as merely that of contract manufacturer (since the goods were not delivered to Nature's Remedies for supply to the public but were marketed and distributed by Painaway itself).
296Mr Ireland relies on authority for the proposition that use of a registered trade mark by its owner does not amount to infringement even though it may be in breach of an exclusive licence granted by the owner ( Delphic Wholesalers Pty Ltd v Elco Food Co Pty Ltd (1987) 8 IPR 545, thus submitting that Painaway could not bring an action for trade mark infringement against Nature's Remedies if it commenced to manufacture and sell the Painaway Products. However, it was recognised in Delphic that the licensee may have an action for damages against the owner for breach of contract in those circumstances.
297Mr Ireland submits that insofar as Painaway would be restricted to a claim in damages for breach of the Licence Agreement, such a claim is not "property" which is assignable and nor is it realistically something that a purchaser would pay for in circumstances where that purchaser (as an assignee of the so-called "licence rights") could not restrain Nature's Remedies itself from manufacturing and selling goods using the mark.
298In response, Mr Svehla submits that s 20(1) of the Act is not to be construed to mean that the Act precludes a trade mark owner granting an exclusive licence which, during the currency of the licence, fetters or limits the ability of the registered owner of the trade mark from using the mark. Rather, it is submitted that the exclusive right of the trade mark owner to authorise another person to use the trade mark, means that it can be exclusive of use by the registered owner during that period.
299Further, it is said that Painaway would not sue Nature's Remedies for infringing the Painaway trade mark; instead Painaway would sue Nature's Remedies for breach of the exclusive licence and for injunctive relief on that basis (Nature's Remedies, as the registered owner of the Painaway trade mark, having by contract fettered its statutory right to use the trade mark under s 20(1)(a) of the Act).
300I accept that the effect of s 20 is that Painaway could not bring an action against Nature's Remedies for trade mark infringement as such. However, I do not read Delphic as suggesting that Painaway could not enforce its contractual rights against Nature's Remedies (to restrain a breach of the exclusivity of the licence granted to it) and I was not taken to any authority which suggested that an injunction might not in appropriate circumstance lie in that context.
301(Mr Svehla submits that the heart of the exclusive licence is that Painaway will have the exclusive use, and that there will be significant growth in the goodwill attaching to the Painaway trade mark, which will not be owned by Painaway. Therefore it is said that there is a benefit to the registered trade mark owner, Nature's Remedies, to come through these contractual mechanisms and it is logical that Painaway is to have exclusive use to the exclusion of Nature's Remedies.)
302Mr Ireland further submits that insofar as the licence granted under clause 3.1 is a licence 'to use ... the Painaway formulas' qualified by the words "but only in connection with the manufacture, sale, distribution and marketing of the Goods (as defined) and otherwise on the terms of this Agreement.", the obligations under the licence depend directly upon positive obligations on the part of the shareholders arising under the collateral Shareholders Agreement. Even if both documents are operative, then it is submitted that the 'licence' so far as it relates to Intellectual Property is not assignable because an assignee of the licence rights under the Licence Agreement does not and could not ever become a shareholder without a fresh agreement on the part of the Carroll interests. The consequence is said to be that the terms of the licence under clause 3.1 of the Licence Agreement are unclear, uncertain, and inoperative in the way they are expressed. I have considered this argument above.
303I consider that the licence granted by clause 3.1, insofar as it relates to the Painaway trade marks is, therefore, assignable and that it would be open to Painaway as a contractual matter to restrain Nature's Remedies from breaching the exclusivity of the licence so granted to it (and to enforce an implied contractual obligation to cooperate in the matters required to permit the assignment of the licence insofar as the requirements under the Act for maintenance of control by Nature's Remedies are concerned - such as to continue to make available the quality control processes that under the Licence Agreement it was obliged to provide to Painaway).
Painaway Formulas
304The Painaway Formulas are, however, in a different category.
305Mr Ireland submits that insofar as the formulas are capable of protection as confidential information it is by no means clear how equity would enforce an 'assignment' of the use of the formulas in favour of Painaway. Mr Ireland submits that there is nothing assignable and saleable to commercial interests in respect of the formulas, whether or not on an 'exclusive' basis. (In this respect he points again to the tension in the construction of the Licence Agreement which on the one hand acknowledges the Carrolls' ownership of the formulas yet on the other purports to grant a perpetual and exclusive right 'to use' the formulas in Australia for the manufacture and distribution of the Painaway products).
306Mr Ireland submits that the agreement should not be construed so as to deprive the Carrolls, as acknowledged owners of the formulas, from themselves using them to manufacture and sell future Painaway products.
307The issues that arise in respect of this in the submission made as to the formulas are whether confidential information is capable of being assigned in equity; and whether it is possible to grant an exclusive licence to 'use' confidential information.
308Where information is disclosed confidentially to others, with the intention that the information only be used for particular purposes, equity will prevent the unauthorised use of information by recipients in these circumstances and may hold them accountable for any wrongful use. Such claims are generally referred to as actions for 'breach of confidence' (Radan et al, Equity and Trusts (2 nd edn) at [15.1.1]). However, there has been said to be no strict definition possible of the phrase 'confidential information' ( Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 14 FCR 434 per Gummow J at [449-50]); it being viewed as a term that covers information that is subject to an obligation of confidentiality. Obligations of confidentiality may, of course, arise as a matter of contract between the parties or in the imposition of a duty owed in equity.
309The Painaway Formulas would seem likely to fall within the class of "trade secrets" commonly protected by the courts as information that is subject to an obligation of confidentiality (see, for example, Newbery v James (1817) 35 ER 1011, which concerned a secret formula for pills for the treatment of gout and rheumatism). It has been recognised that even where the ingredients or methods used in such formulas may not themselves be viewed by the courts as confidential, the effort in creating and trialling the possible uses to which familiar components can be applied may require a period of market exclusivity in order for the creator to recoup its investment (see, for example, Aquaculture Corp v New Zealand Green Mussel Co Ltd (1985) 5 IPR 353; (1986) 10 IPR 319; (1990) 19 IPR 527, which concerned an arthritis cure made from green mussels, and protected the technique involved in creating the formula as well as the formula itself).
(i) Is confidential information capable of being assigned?
310The basic principle in relation to assignment at law or in equity is that only property, or a right in property, is capable of being assigned. In Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, Windeyer J [at 26] and Dixon CJ [at 16] agreed that:
"[a]ssignment means the immediate transfer of an existing proprietary right, vested or contingent, from the assignor to the assignee. Anything that in the eye of the law can be regarded as an existing subject of ownership, whether it be a chose in possession or a chose in action, can today be assigned, unless it be excepted from the general rule on some ground of public policy or by statute."
311There have been differing views on the nature of confidential information, namely, whether it can be classified as "property" that is capable of being assigned.
It has been generally accepted that confidential information is not, of itself, property ( Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414). The key attribute of intellectual property rights such as patents, registered trade marks and copyright is enforceability against the world without the need to establish any pre-existing relationship between the right owner and the defendant. Confidential information, however, is of a different nature, as the transferee does not have exclusive possession. Thus it is said (Bridge, Personal Property Law (3 rd edn) p 6) that:
The transferor retains the information that was transmitted, which denies one of the features of a property right, namely its exclusivity. A diamond ring cannot support two wearers at the same time.
312Rather than protection as a property right, confidential information is generally protected by equity as an "obligation of conscience" arising from the circumstances in which the information was communicated or obtained ( Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 at [438]). Thus, although confidential information is "not property in any normal sense, ... equity will restrain its transmission to another if in breach of some confidential relationship" ( Boardman v Phipps [1967] 2 AC 46; [1966] 3 All ER 721 per Lord Upjohn). Nevertheless, on the traditional view, confidential information is not, in itself, property capable of being assigned.
313Hence it has been argued that the interest protected in actions of breach of confidence is, in its purest form, a right in personam and therefore not property in either the legal or equitable senses (see, for example, Stuckey 'The Equitable Action for Breach of Confidence: Is Information Ever Property?' (1981) 9 Sydney Law Review 402).
314However, in some cases there has been an attempt to characterise confidential information as an asset or as having some proprietary characteristics. Thus, it has been held that trade secrets can be devised by will ( Morison v Moat (1851) 9 Hare 241; 68 ER 492); may be held on trust as trust property ( Boardman v Phipps per Lord Upjohn); and can be held by a trustee in bankruptcy ( Re Keene [1922] 2 Ch 475). It has been held that the fact that bundles of rights concerning trade secrets can be transferred indicates that they have property characteristics ( DPC Estates Pty Ltd v Grey & Consul Development Pty Ltd [1974] 1 NSWLR 443 per Jacobs P at [460]; Smith Kline & French Laboratories (Aust) Ltd v Secretary, Dept of Community Services and Health (1990) 22 FCR 73 per Gummow J at [121-2]).
315In TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3) [2007] FCA 151 Finkelstein J said [at 75 - 76] that:
Although confidential information is not property and hence is not capable of being assigned, it now seems to be accepted that confidential information can be passed on by one person to another, and the person to whom it has been imparted can take action to protect the information. In O'Mustad & Son v S Allcock & Co Ltd (1928) 1B IPR 773; [1964] 1 WLR 109 the liquidator of a company sold to the appellant the company's business including the benefit of trade secrets. One of the former employees took up employment with a competitor, with the intention of passing on trade secrets to his new employer. The appellants obtained an injunction to restrain the disclosure. In Douglas v Hello! Ltd (No 2) [2006] QB 125; (2005) 65 IPR 449; [2005] 4 All ER 128; [2005] EWCA Civ 595 at [129]-[134] it was observed that the decision in O'Mustad & Son "supports the proposition that a purchaser of confidential information can restrain disclosure of that information in breach of confidence, but again the picture is complicated by the fact that the benefit of [the employee's] contractual obligation not to disclose the information was purchased by Mustad.
That may be a good explanation for the decision of the Law Lords but, even if the employment contract had not been assigned, in my opinion, consistent with principle, a "purchaser" of the confidential information is entitled to the court's protection . In the Spycatcher case ( Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109 at 281) Lord Goff said: "a duty of confidence arises when confidential information comes to the knowledge of a person (the confidant) in circumstances where he has noticed ... that the information is confidential, with the effect that it would be just in all the circumstances that he should be precluded from disclosing the information to others.
316This debate raises the question what exactly is being assigned under a commercial sale agreement that seeks to assign "confidential information", "trade secrets" or "know how" to a purchaser.
317In TS & B Retail Systems Finkelstein J sheds some light on this debate, but there is still uncertainty surrounding the nature of confidential information. TS & B Retail Systems involved an attempted assignment of confidential information pursuant to an agreement, which purported to assign "all intellectual property and proprietary rights...including...drawings, trade secrets, technical data formulae...databases, know-how...and similar industrial or intellectual property rights". Finkelstein J held that the assignee was entitled to "whatever protection a court of equity will give in respect of the confidential information it obtained" [at 77]. He therefore characterised what was being assigned in the commercial agreement as the right to enforce an obligation to keep information confidential, as opposed to the confidential information itself.
318This view was also taken by Campbell J in Mid-City Skin Cancer & Laser Centre v Zahedi-Anarak [2006] NSWSC 844 at [196 - 238], where his Honour held that a skin cancer clinic that had acquired certain assets (including patient details and records) from another clinic had the right to sue a doctor who used those records in another practice.
319Overall, although there is still uncertainty surrounding this area, it is generally accepted that it is not possible for equity to assign confidential information, as confidential information is not "property" capable of being assigned. There is authority, however, for the proposition that it is possible to assign the right to enforce an obligation to keep information confidential.
(ii) Is it possible to grant an exclusive licence to 'use' confidential information?
320The remaining issue for consideration is whether it is possible, in the absence of being able to assign confidential information, to grant an exclusive licence to 'use' confidential information.
321The classic statement of the nature of a licence was propounded by Vaughan CJ in Thomas v Sorrell (1674) Vaughan 330; 124 ER 1098 at [351]:
A dispensation or licence properly passeth no interest, nor alters or transfers property in anything, but only makes an action lawful, which without it had been unlawful.
322Barwick CJ referred to this proposition in Banks v Transport Regulation Board (Vic) (1968) 119 CLR 222 describing it as the repeated notion that a mere licence does not create any estate or interest in the property to which it relates, and that it only makes an act lawful which without it would be unlawful. In that sense, a licence to 'use' the confidential information contained in the Painaway Formulas would be no more than a permission or authorisation to do something that otherwise the party in whom that knowledge reposes may be able to restrain. If so, then there would seem no reason in principle why the acknowledgement and agreement of Nature's Remedies and the Carrolls in clause 17 of the Licence Agreement should not be construed as granting the Painaway the right to authorise others (by way of some form of dealing with the rights under the Licence Agreement) similarly to make use of the Painaway Formulas and I would so construe that clause.
323As to whether that may be done on an exclusive or non-exclusive basis, it has been said that an exclusive licence is a licence to do a thing and a contractual promise by the licensor not to do the same thing or give permission to anybody else to do the same thing ( Heap v Hartley (1889) 42 Ch D 461 (CA); Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1 per McTiernan J at [14 - 15]). Thus, for example, where a landowner grants an exclusive licence to cut timber or to graze cattle upon its land, it implies that the licensor would not exercise the same rights or give similar rights to another person during the currency of the licence ( Reid v Moreland Timber ). Similarly, if Painaway were to authorise a third party exclusively to use the Painaway Formulas (whether it sought to achieve this by way of an assignment of the rights under the Licence Agreement or by some other dealing), then that would carry with it the consequence that Painaway itself could not at the same time use those formulas. (The difficulty for Painaway's administrators in this regard will obviously be that they are dependent on Nature's Remedies continuing to comply with its obligation to make the formulas available for that purpose - but that would be a matter for them to consider when determining what dealings with the Licence Agreement they consider it appropriate to recommend to the creditors.)
324The issue whether an exclusive licence can be granted over the use of confidential information as such has received, so far as I can discern, little judicial attention. I note, however, that in Inline Logistics Ltd v UCI Logistics Ltd [2002] R.P.C 32, the Court of Appeal in the United Kingdom considering a claim for alleged misuse of confidential information contained in a design drawing for a warehouse concluded that, as a matter of business efficacy of a contract for the provision of design and build construction services in relation to the warehousing and handling systems for goods, it was necessary to imply a licence (which the parties conceded existed) for the use of work provided in the context of a purposed tender and that this licence extended "so as to authorise the use of the [confidential] information in [a particular design drawing]), in effect treating the concept of the implied licence as a permission to make use of confidential information in circumstances where that might otherwise be said to be in breach of an obligation of confidence.
325Therefore, while I have difficulty seeing that the confidential information in the Painaway Formulas is property capable of assignment in the strict sense, I consider that what Nature's Remedies and the Carrolls have done is to authorise Painaway to grant to a third party the exclusive or other right to use that information (without Painaway or the third party thereby being in breach of an obligation of confidence owed to Nature's Remedies or the Carrolls by so doing).
326Another way to approach the question of what rights Painaway has in respect of the licence is to consider the application of the implied obligation of cooperation and good faith that may arise as a matter of contract law or the express obligation contained in clause 19 of the Licence Agreement on the part of Nature's Remedies and the Carrolls to do all things necessary or desirable to give full effect to the Licence Agreement.
327In that regard, in Mackay v Dick (1881) 6 App Cas 251, (in a passage applied by the High Court in Ray v Davies (1909) 9 CLR 160; Milne v Sydney MC (1912) 14 CLR 54; Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288; Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596), Lord Blackburn stated:
I think I may safely say, as a general rule, that where in a written contract it appears that both parties have agreed that something will be done, which cannot effectively be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.
328However, as noted in Campbell v Backoffice Investments Pty Ltd (2009) 83 ALJR 903, (by Gummow, Hayne, Heydon and Kiefel JJ) at [168] "care must be exercised in identifying both the content and operation of an implied obligation to cooperate lest it be at odds with the terms upon which the parties have expressly agreed."
329Here the obligation contained in clause 19 of the Licence Agreement is of importance given that the ability of Painaway (and any third party to whom it may seek to assign rights or benefits under the Licence Agreement) to obtain the benefit of the licence granted to it in relation to the Painaway products is necessarily dependent on Nature's Remedies and the Carrolls making available for use in the manufacture of the products the Painaway Formulas and Nature's Remedies (and Mrs Carroll in her capacity as Quality Assurance Manager) properly carrying out its functions as Therapeutic Goods Act licensee.
330In conclusion on this question, I am of the view that the licence in respect of or right to use the Painaway trade marks (as part of the Intellectual Property) is something that is assignable (though the Painaway Formulas themselves are not) and may be made on an exclusive basis (to the extent that Painaway could seek to enforce the contractual fetter on the ability of Nature's Remedies to exercise its statutory right to use the trade marks (though clearly some care would need to be taken in the documentation of any such transfer in order to protect against the possibility of a breach by Nature's Remedies (by competing with the Painaway assignee) of its contractual arrangements with Painaway. As to the Painaway Formulas, while the confidential information comprised therein is not of itself assignable, it seems to me that Painaway could rely on its rights under the Licence Agreement in order to authorise a third party to have use of the Painaway Formulas and then seek to enforce the obligation on the part of Nature's Remedies and the Carrolls to facilitate such use (albeit preserving the confidentiality thereof as between that user and the rest of the world).
(iv) If the only licence Painaway had was no more than an implied licence, was it terminable at will and, if not, how is it able to be terminated?
331Painaway's Defence to the Nature's Remedies' Cross-Claim, at [8], sets out what Painaway contends would have to be the terms of any implied licence (whether that alleged by Nature's Remedies or otherwise found by the Court), including that it be exclusive (including as against Nature's Remedies); that it require Nature's Remedies, as the holder of the Therapeutic Goods Administration Act Licence, to release for supply; that it require Nature Remedies to assist and cooperate with Painaway in the manufacture of Painaway products conformable with Nature's Remedies' rights as Therapeutic Goods Administration Act licensee; that it require Nature's Remedies to grant a sub-licence or transfer of the Therapeutic Goods Administration Act licence to a person or entity nominated by Painaway acceptable to the Therapeutic Goods Act or otherwise approved pursuant to the Therapeutic Goods Administration Act; that it require Nature's Remedies to do all such things necessary on its part to enable Painaway to have the benefit of the implied licence; that it require Nature's Remedies to act in good faith towards Painaway in its dealings in relation to the implied licence; that it require Nature's Remedies to give reasonable notice of its intention to terminate the implied licence; and that it preclude Nature's Remedies from effecting a termination of the implied licence where in breach of the above terms.
332As noted earlier, as an absolute minimum it is said that Painaway must have a licence to advertise, market and sell the approximate 480,000 units of Painaway products located at the Tuggerah leased premises and to manufacture further Painaway products utilising the raw materials, containers and the like which Painaway owns; and that this licence must be exclusive of any rights of Nature's Remedies. (On previous annual turnover, it seems to be estimated that it might take about a year to sell $7m worth of stock, although it may be that an additional period would be required as a result of the fact that the products have now been off the market for some months.)
333Such a licence would, it is said, ensure that Painaway can realise its assets to discharge its liabilities to trade creditors, which debts (including contingent) have been incurred in the business activities of Painaway prior to July 2010 and 9 December 2010 when the implied licence was purported to be terminated.
334In this regard, Mr Svehla points to the economic contributions which the Nassar/Hyder interests had made towards the Painaway business up to the time at which any implied licence must have been granted (the payment of the sum of $100,000 to enable Mr Valentine's company to be removed as a shareholder of Nature's Remedies and Mr Valentine's loan to that company to be discharged; the payment of about $96,200, made towards payment of the large order of arnica, as well as minor amounts up to that point in time as reflected in clause 11.5(i) of the Shareholders Agreement).
335Mr Svehla referred to the acknowledgements in clause 17.1 of the Shareholders Agreement, including that Mr & Mrs Carroll or Nature's Remedies owned the Intellectual Property, and that it was intended that Messrs Hyder and Nassar would greatly contribute to the goodwill attaching to the Intellectual Property of the Painaway product via marketing and sales strategies and plans they will implement in their capacities as directors of Painaway (clause 17.1(a) and (f) of the Shareholders Agreement).
336I note that clause 7 of the Licence Agreement seemed to contemplate that the first occasion when termination other than for breach or winding up would be able to occur was on 12 months' notice after the expiration of six years from the Shareholders Agreement (thus indicating an intention for the arrangements to be in place for at least 7 years. (Mr Svehla raised the question whether clause 7.2 should be regarded as indicating the only circumstances in which any licence could be terminated - ie an exclusive code for termination; noting the apparent contradiction between a perpetual licence and one that is nevertheless terminable on particular events.)
337In Australian Blue Metal Ltd v Hughes and Ors [1962] 3 All ER 335 Lord Devlin said that the implication of reasonable notice is to be determined in light of the circumstances existing when the contract was made and that the reasonable time for the notice is to be determined as at the date of the notice (342); reasonable time not being the time during which one party or the other could reasonably wish for the contract to continue. His Lordship noted that that the implication of reasonable notice is intended to serve only the common purpose of the parties and that the common purpose is frequently derived from the desire of both parties that they be cushioned against sudden change and have time to make alternative arrangements of a similar sort to those being terminated. The notice may also allow them to 'reap where they have sown' ( Winter Garden Theatre (London) Ltd v Millenium Productions Ltd [1947] 2 All ER 331). However, the court must consider whether that was a consideration of the parties at the time when the contract was made (342).
338In Crawford Fittings Co and Ors v Sydney Valve & Fittings Pty Ltd and Anor (1988) 14 NSWLR 438 McHugh JA (as his Honour then was) considered the issue as to the term of notice required for termination of an implied licence. His Honour noted that the chief purpose of notice for a reasonable period is to enable the parties to bring their relationship, which has existed for a reasonable period, to an end in an orderly way so that they will have a reasonable opportunity to enter into alternative arrangements and to wind up matters which arise out of their relationship (448). The reasonableness of the period of notice depends on the circumstances existing when the notice is given (444). Thus his Honour indicated that the period of notice must be sufficiently long to enable the recipient to deploy his labour and equipment in alternative employment, to carry out his commitments, to bring current negotiations to fruition and to wind up the association in a businesslike manner (444). Extraordinary effort and expenditure is relevant to the reasonableness of the notice period even though the agreement has been in existence for more than a reasonable period (446); it being said that the parties should be able to obtain the fruits of any extraordinary expenditure or effort carried out within the scope of the agreement (448).
339His Honour went on to note that reasonable notice cannot be given in a situation where a business arrangement is in its early stages and a person is expending money or effort in developing the business, as a term is implied that the business is to continue for a reasonable period and that it is not to be presumed that the parties intended the agreement could be put to an end before the person incurring the expenditure or effort has had an opportunity to recoup his initial expenditure or effort. His Honour said that this is not confined to arrangements in their initial stages but also should be taken into account when determining reasonableness where a party has engaged in extraordinary expenditure or effort. The weight accorded to those factors will vary depending on the circumstances of each particular case (448).
340Other circumstances, such as that promotional efforts were needed and that the real reward would come in the future ( Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361) and the amount of time necessary to enable the distributor to look for a new source of supply ( Aarn E Levine and Co Inc v Calkraft Paper Co 429 F Supp 1039 (1976)), may also be taken into account.
341As Brereton J observed in Lawfund Australia , at least in some single undertaking joint ventures a term may be implicit to the effect that the relationship continues until the object of the venture is achieved whereupon it comes to an end, though ultimately the terms of the parties' agreement will be decisive.
342Had I been of the opinion that a binding agreement had not come into existence on the terms of the Licence Agreement, then I would have had no hesitation in finding that it was a term of the implied licence conceded by Nature's Remedies that the licence be terminable on reasonable notice (and not at will). The circumstances that I take into account in that regard are the substantial contributions that had been made by the parties to the joint venture in the period up to the time at which it is conceded that an implied licence came into existence (ie from March 2006); the nature of the obligations assumed by Painaway in relation to the manufacture of the Painaway products (involving significant outlay and commitment to a substantial product launch); and the fact that the arrangements discussed and agreed at least as between the three individuals all contemplated a 'perpetual' and 'non-revocable' licence (therefore hardly short term let alone one susceptible of immediate termination at any time). The Nassar/Hyder interests' only ability to obtain a financial benefit from their significant contribution to the joint venture (on the Carroll interests case) was through their family trust companies' shareholding in Painaway. This points to an intention that there be something more than a mere licence terminable at will.
343As to whether the term of the notice in fact given (purporting to terminate the implied licence with immediate effect) was reasonable, I would also have had no hesitation in finding that this was not a reasonable period of notice. Painaway had entered into substantial commitments on the apparent assumption that what it had was a valuable licence to manufacture and sell the Painaway products on a non-revocable (sometimes described as perpetual) and exclusive basis. It had ordered a substantial amount of raw materials from which to amass a stock of product to sell and had put in place a major product launch.
344At the very least, I would have found that a reasonable term would have been one determined by reference to the time necessary to sell the stock (both existing and that manufactured with the existing raw materials) in the ordinary course of business (not at a fire sale) and by reference to the sponsorship commitments it had entered into (so as to enable the company to fulfil those obligations). That would address the needs of creditors and the expectations of the parties to what was on any view of things a substantial joint business venture. Furthermore, given that there had been a considerable investment by the Nassar/Hyder interests in the company, it seems to me to be reasonable for them to be able to reap what had been sown. This was a company whose turnover was built up from nothing to in excess of $8m per year over a period of some 4 years. Further, the termination provisions of clause 7.2 (having the effect that apart from breach or winding up the arrangement would be in place for at least 7 years) and the suggested level of earnings to be utilised as the minimum for a share sale indicate that the parties could reasonably have anticipated a substantial reward from the investment of their time and funds in the venture.
345Mr Ireland pointed out that the parties' financial contributions had been paid (or 'squared off') in 2009 (though there was some discrepancy as between the sums paid to the three individuals - Mr Nassar seemingly having received some $200,000 less than the others). However I do not think I should assume that all the parties expected was to recoup the moneys actually contributed to the company. I consider that the evidence warrants the inference that they anticipated earning substantial profits over a minimum 7 year period (on the assumption that the product and the marketing activities were both successful).
346Mr Svehla submitted that the Carroll interests should not be permitted to 'collapse' the licence to the detriment of the other two shareholders and that any period of reasonable notice would have to take into account not only the shareholders' interests but also those of creditors.
347Against this, Mr Ireland submitted that the salient circumstances to take into account when determining the period of notice that would be reasonable for termination of the implied licence (assuming it was not a licence terminable at will) included the fact that the parties are now at loggerheads; that the administrators have been appointed (something that might I would have thought assist in addressing the loggerhead situation) and that there has been no continuity of sale of the product now for some months.
348When looking at the reasonableness of notice, Mr Ireland contended that if one assumes that Nature's Remedies will eventually get back the exclusivity of use in respect of the trade marks, the question should be how long must it wait for that to happen and he submitted that 6 months would be too long a period. Mr Ireland argued that the Carrolls should not be precluded from utilising the formulas that they developed. However, it seems to me that this is precisely what they were prepared to do in the anticipation that with the marketing and promotional activities of the Nassar/Hyder interests they would be able to realise a significant profit from their formulas.
349When reference is made to the terms of the Licence Agreement to which the Carroll interests other than JAKL were prepared to commit, it can be seen that the minimum period of the Licence Agreement (assuming no breach and no winding up of the company by the court) was to be 7 years from the commencement of the Shareholders Agreement. Assuming such a notice were to have been given on the sixth anniversary of the date that agreement was approved in final form (other than ACN details and the like) that would expire in about July 2012. The sponsorship arrangements go through to the end of 2012. In the circumstances I would have held that the reasonable period for termination of any implied licence that had arisen (assuming that the Licence Agreement itself did not become operative) was a period expiring no earlier than 31 December 2012.
(v) Are Messrs Nassar and Hyder entitled to a shareholding in Nature's Remedies or otherwise to declaratory relief?
350There are various alternative bases upon which Messrs Nassar and Hyder put their cross-claim.
351The primary relief sought (which in submissions Mr Stack said was in addition to the principal relief sought in relation to the Licence Agreement) is a declaration that Messrs Nassar and Hyder:
(a)own or are beneficially entitled to 40% of the Intellectual Property and the Painaway Formulas, as those terms are defined in the Shareholders Agreement, and the goodwill; and
(b)are entitled to 40% of the net proceeds from the sale the Intellectual Property and the Painaway Formulas, as those terms are defined in the Shareholders Agreement, and the goodwill.
352Mr Stack submits that the evidence demonstrates that, from the outset, it had been agreed between the parties that Messrs Nassar and Hyder would have an entitlement to 40% of the value of the intellectual property and the associated goodwill (and this is supported by the initial file notes taken by Mr Innis of his meetings with Mr Carroll and Mr Nassar).
353Mr Stack submits that terms of clause 14.2 of the Shareholders Deed are consistent with that original agreement in that, by virtue of that clause, Messrs Nassar and Hyder owned 40% of the intellectual property and the associated goodwill and were otherwise entitled to 40% of the revenue from the sale of that property and goodwill.
354As set out earlier, clause 14.2 contained an acknowledgement and agreement by the Carrolls and Nature's Remedies that from the date of commencement of the Shareholders Agreement, the "goodwill and the Intellectual Property attributed to the Painaway Formulas from time to time shall belong to John and Linda as to 60% and to Elias and Angelo as to 40%, such that in the event of the sale of the Intellectual Property attributed to the Painaway Formulas John and Linda will together be entitled to 60% of the net proceeds and Elias and Angelo will together be entitled to 40% of the net proceeds of such sale".
355The wording of this clause is somewhat circular in that the Intellectual Property is itself defined as including the Painaway Formulas, so that the words "attributed to the Painaway Formulas" seemingly qualify the broader category of Intellectual Property as defined in the agreement. (Indeed, Mr Ireland submits that no declaratory relief should be granted in circumstances where one could not prejudge whether some future sale would involve Intellectual Property "attributed to" the Painaway Formulas.)
356Further, as a matter of construction the question is as to what work the words commencing "such that in the event of the sale" are intended to
perform. If the "Intellectual Property attributed to the Painaway Formulas" is (as the first part of the clause states) to 'belong' to the individuals in the specified shares then it would surely not be necessary to go on to specify that the net proceeds of sale should also be determined in that proportion. Mr Ireland submitted that there is a difference between a provision that intellectual property belonged to the parties in the stated percentages and a provision that if there were to be a sale of the intellectual property then the parties would receive a certain proportion of the proceeds - and I agree. I would ordinarily have read the words "such that ..." as explaining the consequences of what had been meant by the preceding words (though, for the reasons I set out below, in this instance I think those words must be read as a limitation on the ambit of the foregoing words).
357The Nassar/Hyder interests submit that even if the Shareholders Agreement did not bind the companies who did not execute it, clause 14.2 is still operative because the relevant parties who signed that agreement (the Carrolls, Nature's Remedies, and Messrs Nassar and Mr Hyder) had agreed to those terms and, pursuant to clause 27 of the Shareholders Agreement, had agreed that that invalidity of other provisions would not invalid the operation of other terms. It is submitted that the terms of the agreement provided for in these clauses, and the other related clauses, were independent of the other provisions that related to the incorporation and operation of Painaway. (In that regard, I consider that clause 27 in its terms addresses a different situation, namely the situation where clauses in the agreement might be invalid - not where the whole agreement may not have come into force because of a failure of all the parties to execute it).
358It is only in the alternative to this principal submission (ie in the event that clause 14.2 is not held to be operative to confer on Messrs Nassar and Hyder such an interest) that it is said that they are entitled to 49% of the shares in Nature's Remedies pursuant to the initial agreement they say was reached with Mr Carroll, namely that Messrs Nassar and Hyder would take up the interest which LSJK and Mr Valentine then held in the Painaway business (represented by the 49 shares held by LSJK in Nature's Remedies).
359That alternative claim is put on the basis of either equitable or conventional estoppel, namely that it was on the basis that they had a 49% interest in the Painaway business (which was being conducted through Nature's Remedies), as represented to them by the Carrolls, that during 2004 and 2005 Messrs Nassar and Hyder made additional payments of approximately $225,000 and spent time and effort on developing that business.
360Thus, it is said that Messrs Nassar and Hyder are entitled to the 49 shares in Nature's Remedies which the Carrolls acquired from LSJK with the moneys provided by them or, alternatively, that given the reliance by Messrs Nassar and Hyder on the terms of their agreement with the Carrolls, their payment of the $100,000, their subsequent payments and their efforts to develop the Painaway business, the Carrolls are estopped from denying the entitlement of Messrs Nassar and Hyder to the 49 shares in Nature's Remedies, which the Carrolls acquired from LSJK.
361Further and in the alternative, Messrs Nassar and Hyder assert that between 2003 and 2005, various representations were made to them, by the Carrolls and Nature's Remedies, to the effect that they would have a beneficial interest in 40% of the intellectual property and related goodwill and a 49% interest in the business of Painaway. It is alleged that between 2003 and 2010, the Carrolls and Nature's Remedies, knowing of these representations, allowed and encouraged Messrs Nassar and Hyder to invest in excess of $1.7m into the business of Painaway; to spend significant time and developing the business of Painaway; to cause the annual sales of the Painaway products to grow from nothing as at 30 June 2006 to in excess of $8.7m as at 30 June 2010; and to cause the value of the good will in the Painaway products and the underlying intellectual property to increase significantly.
362The conduct referred to above is said to be conduct in relation to the Painaway business and carried out in "trade and commerce" within the meaning of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW) . As to damages claimed to be suffered by reason of that conduct, it is submitted that if clause 14.2 of the Shareholders Agreement is found to be inoperative, and if Messrs Nassar and Hyder are otherwise not beneficially entitled to 40% of the interest in the intellectual property and the associated goodwill and 49% of the shareholding in Nature's Remedies, then they will suffer significant loss (in that, rather than sharing in the value which they have added to the Intellectual Property, they will receive nothing).
363As to the Nassar/Hyder Cross-Claim, Mr Ireland submits that this issue involves consideration of the evidence of conversations that took place in the discussions with Mr Cullen of Purkiss Cullen in September 2003 at or about the time the initial money was provided. Mr Ireland submits that the documents which Mr Cullen produced are entirely consistent with the position that the moneys provided by Messrs Nassar and Hyder were treated at the time as a loan by them to the Carrolls in order to enable the Carrolls to pay out the Valentine debt and acquire the Valentine shareholding and that the accounts of Nature's Remedies are consistent with that conclusion. The draft loan agreement prepared at the time (although not executed by the parties) is also said to be consistent with that position.
364It is said that a decisive matter against the Nassar/Hyder contentions is that when the parties settled up their financial contributions at the meeting on 1 May 2009, the two sums of $50,000 which Messrs Nassar and Hyder had provided in 2003 were each taken into account and treated as moneys repaid to them out of the available funds of Painaway. The contrary case, advanced by the Nassar/Hyder interests is said by Mr Ireland to be inconsistent with all the documents prepared by the parties and should be rejected.
365Mr Ireland says that the claim that the Nassar/Hyder interests acquired some form of equity in Nature's Remedies in 2003 in consequence of the payment of $100,000 should be rejected for the reasons that Messrs Hyder and Nassar acknowledged in evidence that no agreement had been reached at the time they each paid the sums of around $50,000 to Nature's Remedies in December 2003; the contemporaneous documents, especially those prepared by Mr Cullen, indicate that a loan was intended to be made to the Carrolls until further binding arrangements were concluded; there is no evidence that Messrs Hyder and Nassar ever claimed an interest in Nature's Remedies after they paid their money until December 2010 when the present claim was first articulated; there is an irreconcilable tension between the claim to an equity in Nature's Remedies that Messrs Hyder and Nassar make and the administrators' case which they also support (and it is further submitted that the evidence given by Messrs Hyder and Nassar concerning the circumstances of the payment of $100,000 in 2003 was unconvincing and should not be accepted ).
366In relation to the claim based on estoppel, Mr Ireland contends that, insofar as the essence of an estoppel is that a party acts in reliance upon a representation by the opposite party asserting a particular legal position in future conduct of the mutual affairs, and that here the Nassar/Hyder interests did not rely on the execution of the documents or any assurances given by the Carrolls as to the binding nature of the documents but simply assumed that Mr Innis (who had prepared the documents) had done everything necessary to conclude their legal relations (that not being a representation made by the Carrolls). Mr Ireland places weight on Mr Nassar's evidence in this regard, namely that because he had employed Mr Innis as a solicitor, he expected that Mr Innis had done everything necessary to complete the task.
367As to estoppel, reliance is placd both on an equitable estoppel and conventional estoppel. Mr Stack refers to what was said in The Commonwealth v Verwayen at 409 by Mason CJ , namely that the various forms of the doctrine of estoppel are "intended to serve the same fundamental purpose, namely 'protection against the detriment which would flow from a party's change of position if the assumption (or expectation) that led to it were deserted'."
368Mr Stack points out that while, in a case such as this, equitable estoppel may have the appearance of contract (in that it forces the parties to honour their 'agreements'), it is a contract imposed irrespective of any actual agreement between the parties, referring to what Mason J (as his Honour then was) said in Waltons Stores v Maher (1988) 164 CLR 387 at 425 :
But there are differences between a contract and an equity created by estoppel. A contractual obligation is created by the agreement of the parties; an equity created by estoppel may be imposed irrespective of any agreement by the party bound. A contractual obligation must be supported by consideration; an equity created by estoppel need not be supported by what is, strictly speaking, consideration. The measure of a contractual obligation depends on the terms of the contract and the circumstances to which it applies; the measure of an equity created by estoppel varies according to what is necessary to prevent detriment resulting from unconscionable conduct .
369His Honour there noted the elements ordinarily required for establishing an equitable estoppel:
It is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff s action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant's property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiffs reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.
370To the extent that Mr Stack submits that it was the Nassar/Hyder interests who provided the expertise to market and sell the Painaway products (as evidenced by the growth in sales to in excess of $8.7m), while the Carrolls despite having the knowledge necessary for the manufacture of the Painaway Products had been unable to procure any commercial benefit therefrom, this seems to go to the benefit obtained by the Carrolls out of the venture, not the detrimental reliance by Messrs Nassar and Hyder on any state of affairs under which they would be entitled to a shareholding in Nature's Remedies.
371It is submitted by Mr Stack that the evidence makes it plain that Mr Nassar and Mr Hyder were not prepared to provide their skills and money unless they were given, on a "non-revocable" basis, a share of those sales and in the Intellectual Property and the Painaway Formulas, as those terms were defined in the Shareholders Agreement and that, by signing the respective Agreements, the Carrolls represented to and otherwise induced Messrs Hyder and Nassar to believe that they would be given a share of those sales, the Intellectual Property and the Painaway Formulas, through and on the terms of the Agreements. Certainly, there is evidence that at times Messrs Nassar and Hyder seem not to have been prepared to proceed with the venture unless assured of profits obtained from the venture. That seems unsurprising given their evidence that they had mortgaged their homes and spent less time on their business interests in the expectation of a profit from the launch of the Painaway products.
372However, it seems to me that the only representation made by the Carrolls and the Nature's Remedies interests (by reference to the signing of the Licence and Shareholders Agreements) was that they agreed to the terms and that they would proceed with a venture of that kind once the corporate entities were brought into existence (and any earlier representations as to the acquisition of a share of the business were in effect superseded by the April 2005 arrangements).
373What I consider to be decisive against the alternative claim made for a beneficial interest in the Nature's Remedies shareholding is that Messrs Nassar and Hyder seem to have made an election (as invited to do under the terms of the 23 February 2004 letter) to proceed with arrangements for the incorporation of Painaway and their involvement in the joint venture through Painaway rather than to pursue a shareholding in Nature's Remedies. If so, then whether or not that election proved in hindsight to be the best decision (and whether or not the relevant agreements were properly executed) I cannot conclude that from at least April 2005 Messrs Nassar and Hyder were acting under any belief (encouraged or not discouraged by the Carrolls) that they were to be shareholders in Nature's Remedies. (Significantly, when asked why no claim had been made for the shares over the period after the payment of the $100,000, Mr Nassar's response was that this was all tied to the Licence and Shareholder Agreements with Painaway - T 54.50 - 50.3.)
374In that regard, it seemed to me that the evidence of Messrs Nassar and Hyder reflected the likelihood that their attention at the time was on the commercial aspects of the venture and that they relied on others to document the arrangements - I accept that they understood that in some fashion what they were to share in was the 'business' of the manufacture and sale of the Painaway product. However, I also accept the force of Mr Ireland's submission that there is an irreconcilable tension between the claim to the licence (under arrangements entered into following the presentation of a choice offered to Messrs Nassar and Hyder either to carry out the venture through a new company in which they would have a share or through a shareholding in Nature's Remedies) and a claim to the shareholding in Nature's Remedies. Having elected the Painaway option, it does not seem to me that it follows that if, for whatever reason, that did not achieve the result they sought or had hoped for, then the court should in effect re-make the deal in order to revert to the shareholding arrangement.
375Therefore, while I consider that there was a conventional estoppel in relation to the 2005 arrangements (and in that regard Mr Stack relies on the fact that at no time after the execution of the Agreements did the Carrolls indicate that they did not consider themselves bound by the Agreements or would not otherwise act in accordance with the terms of the Agreements but, rather, had acted in a manner which made it plain that they considered themselves bound by the Agreements and that the Agreements were operative and had called upon Messrs Nassar and Hyder to perform their part under the agreements, those being matters that I have considered above and that have in part led to the conclusion that there was a binding arrangement on the terms of the Licence and Shareholder Agreements), I do not consider that the claim to a shareholding in Nature's Remedies is sustained whether in contract or by application of the principles of estoppel.
376As I have found in favour of the Nassar/Hyder interests on the principal claim as to the operation of the Shareholders Agreement, the alternative issue raised on the Nassar/Hyder Cross-Claim (as to the entitlement to a shareholding in Nature's Remedies) does not strictly arise. Had it arisen I would have found against the Nassar/Hyder interests because I consider that the arrangements proceeded with from April 2005 are inconsistent with any such agreement or understanding. What happened was that an election was made to proceed in a particular way and the fact that the Carrolls may have repudiated that arrangement some time later does not permit the conclusion that there was to be a reversion to the original or alternative arrangement (ie the option that was not pursued at the time the election was made to proceed along the Painaway path),
377As to the beneficial interest claimed in the Intellectual Property attributed to the Painaway Formula, that turns on the construction of the Shareholders Agreement (which I have found binding). Had I not found the Shareholders Agreement binding then I would have been inclined to accept that there was an estoppel precluding the Carroll interests from denying an arrangement pursuant to which the proceeds of sale (if any) of the "Intellectual Property attributed to the Painaway Formulas" were to be distributed as to 40% to the Nassar/Hyder interests on this aspect of their cross-claim because it seems to me that the basis on which they acted in the venture was that they would make a contribution of the kind referred to in the Shareholders Agreement and would have such an entitlement and that they did so with the investment of significant time and effort that could otherwise have been devoted to other activities (even if the financial contribution was ultimately recouped by them).
378In those circumstances, having found for the Nassar/Hyder interests on the existence and operation of the Shareholders Agreement, is it necessary to go further and grant declaratory relief as to the entitlements on a sale of this kind? This gives rise to the issue as to whether there is any utility in the making of such declarations (and Mr Ireland says that there is none).
379The court has a wide discretion to grant declaratory relief ( Hanson v Radcliffe UDC [1922] 2 Ch 490, at 507; Forster v Jododex Australia Pty Ltd [1972] HCA 61; (1972) 127 CLR 421, at 438; Ibeneweka v Egbuna [1964] 1 WLR 219, at 225 ; Re Judiciary and Navigation Acts (Advisory Opinions Case) [1921] HCA 20; (1921) 29 CLR 257; Ainsworth v Criminal Justice Commn (Qld) [1992] HCA 10; (1992) 175 CLR 564, at 581, per Mason CJ, Dawson, Toohey and Gaudron JJ).
380The tests outlined by Lockhart J, (with whom Spender and Cooper JJ agreed) in Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 68 FCR 406; (1996) 139 ALR 663, at 670-671 for the grant of declaratory relief were as follows:
For a party to have sufficient standing to seek and obtain the grant of declaratory relief it must satisfy a number of tests which have been formulated by the courts, some in the alternative and some cumulative. I shall formulate them in summary form as follows:
· The proceeding must involve the determination of a question that is not abstract or hypothetical. There must be a real question involved, and the declaratory relief must be directed to the determination of legal controversies: Re Judiciary Act 1903 and Navigation Act 1912 (1921) 29 CLR 257. The answer to the question must produce some real consequences for the parties.
· The applicant for declaratory relief will not have sufficient status if relief is "claimed in relation to circumstances that [have] not occurred and might never happen": University of New South Wales v Moorhouse (1975) 133 CLR 1 at 10; 6 ALR 193 per Gibbs J; or if the court's declaration will produce no foreseeable consequences for the parties: Gardner v Dairy Industry Authority New South Wales (1977) 18 ALR 55; 52 ALJR 180 per Mason J at 180 and per Aickin J at 189.
· The party seeking declaratory relief must have a real interest to raise it: Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 per Gibbs J at 437 and Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 per Lord Dunedin at 448.
· Generally there must be a proper contradictor: Russian Commercial and Industrial Bank at 448; and Ainsworth per Brennan J at CLR 596.
The relevant principles are laid down by the High Court in Ainsworth, in particular in the joint judgment of Mason CJ, Dawson, Toohey and Gaudron JJ at CLR 581-2. Their Honours made the point that "[i]t is now accepted that superior courts have inherent power to grant declaratory relief", and "[i]t is a discretionary power which `[i]t is neither possible nor desirable to fetter ... by laying down rules as to the manner of its exercise' " (a reference to a passage from the judgment of Gibbs J in Jododex at CLR 437). See also Oil Basins Ltd v Commonwealth (1993) 178 CLR 643 at 649; 117 ALR 338 per Dawson J.
These are the rules that should in general be satisfied before the court's discretion is exercised in favour of granting declaratory relief.
This court has undoubted power to grant declaratory relief whether or not any consequential relief is or could be claimed: s 21 of the Federal Court of Australia Act 1976 (Cth), and Ainsworth per Mason CJ, Dawson, Toohey and Gaudron JJ at CLR 581-2. See also Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 per Barwick CJ at 305; Telstra Corp Ltd v Australian Telecommunications Authority (1995) 133 ALR 417 per Lockhart J at 424-5, and Young on Declaratory Orders , 2nd ed, p 74.
381Is the present dispute (as to the right to share in the net proceeds of sale if and when those rights are sold) hypothetical? It has certainly been the subject of dispute between the parties. That said, its resolution will not affect the value to Painaway of the rights under the Licence Agreement and, insofar as there is no sale presently contemplated, Mr Ireland submits that there is no justiciable issue at this point.
382It might be said that both parties would benefit from know the position in advance of such a sale and so as to quell potential further disputes. In Forster v Jododex it was said that (at 435 - 436):
The jurisdiction to make a declaration is a very wide one. Indeed, it has been said that, "under O. XXV, r. 5, the power of the Court to make a declaration, where it is a question of defining the rights of two parties, is almost unlimited; I might say only limited by its own discretion": Hanson v. Radcliffe Urban District Council ; and see Barnard v. National Dock Labour Board ; and Ibeneweka v. Egbuna.
...
It is neither possible nor desirable to fetter the broad discretion given by s. 10 by laying down rules as to the manner of its exercise. It does, however, seem to me that the Scottish rules summarized by Lord Dunedin in Russian Commercial and Industrial Bank v. British Bank for Foreign Trade Ltd , should in general be satisfied before the discretion is exercised in favour of making a declaration:
"The question must be a real and not a theoretical question; the person raising it must have a real interest to raise it; he must be able to secure a proper contradictor, that is to say, some one presently existing who has a true interest to oppose the declaration sought."
Beyond that, however, little guidance can be given. As Lord Radcliffe said in Ibeneweka v. Egbuna :
After all, it is doubtful if there is more of principle involved than the undoubted truth that the power to grant a declaration should be exercised with a proper sense of responsibility and a full realisation that judicial pronouncements ought not to be issued unless there are circumstances that call for their making. Beyond that there is no legal restriction on the award of a declaration.
383In Forster v Jododex the question was as to whether Jododex held a valid exploration licence, an issue in which Jododex had a real interest in the circumstances of that case. The availability of an alternative remedy, it was said, did not require the court to refuse to make a declaration.
384In Trans Realties Pty Limited v Grbac [1975] 1 NSWLR 170, Glass JA said, at 176:
... the High Court has emphatically laid down that the practice of incomplete adjudication requires reconsideration: Neeta (Epping) Pty Ltd v Phillips . The declaratory jurisdiction now derived from s 75 of the Supreme Court Act, 1970 is subject to the admonition in s 63 that, in the interest of avoiding multiplicity of proceedings, all matters in controversy should be finally determined. Where equitable relief is concerned, in particular, the public interest in finality will generally override the private interest in selective litigation.
385However, as to the possibility of a future sale, declaratory relief is not available for mere future possibilities and it has been said that if the declaratory relief is for the purpose of defining a right or liability in anticipation of future events, then unless those future events are at least likely to occur the relief sought is arguably only in respect of a 'purely hypothetical' question (see the observation of Gibbs J (as his Honour then was) in University of New South Wales v Moorhouse Angus & Robertson (Publishers) Pty Ltd [1975] HCA 26; (1975) 133 CLR 1, at 9 - 10; (1975) 6 ALR 193, as to the existence of many examples of cases in which a declaration has been refused because it was claimed in relation to circumstances that had not occurred and might never happen.)
386In Meagher, Gummow and Lehane's Equity - Doctrines and Remedies (4 th edn), the authors observe that the fact that a declaration might not finally conclude the dispute between the parties can hardly ever be, of itself, a proper ground for not making a declaration. The authors (citing Hope J in Integrated Lighting & Ceilings Pty Limited v Phillips Electrical Pty Limited (1969) 90 WN (Pt 1) (NSW) 693) state that the likelihood of further litigation is something which should affect, but does not determine, the exercise of the court's discretion and go on to say (at [19-130]):
It will be otherwise if the declaration will leave unsettled issues between the parties consequent upon it; for example it is one step to declare that a contract for the sale of land is on foot, but this will be inconclusive if the parties are then clearly in dispute as to whether specific performance or damages is the consequential remedy, and are agreed only that the declaration still leaves matters at issue between them. And it would be inefficacious to declare that specific performance was available without administering that remedy: Lucas and Tait (Investments) Pty Limited v Victoria Securities Limited [1975] 1 NSWLR 170. In such a case the appropriate course is to administer the final remedies in the same proceedings as those in which the declaration is made. Of course, the plaintiff may have sought a declaration and no other relief. In such a case it appears that the court should refuse to make the declaration unless the plaintiff seeks or submits to the final relief.
387After citing a number of cases following Neeta (including Trans Realties ), it is further said that:
However, too rigid an application of the principle would destroy the utility of declaratory relief, at least in vendor purchaser cases . If applied literally and uniformly, it would have the result that no relief by way of declaration could be granted unless consequential relief both could have been, and actually was, sought - a retreat to 1880. This obviously could not be correct, and the judges have accordingly contained the principle of Neeta (Epping) Pty Limited v Phillips. They were fortified in their attitude by the consideration that s 63 of the Supreme Court Act 1970 (NSW) did not, on any view, require all questions between the parties to be determined at the same time. Thus, in vendor and purchaser proceedings, Wootten J in Winchcombe Carson Trustee Pty Limited v Ball-Rand Pty Limited [1974] 1 NSWLR 477 made a declaration as to the validity of a notice to complete and stood over generally the balance of the proceedings, a course which also commended itself to Needham J in Wighams Enterprises Pty Limited v Smith [1975] 1 NSWLR 76. The position was put into its proper perspective by the New South Wales Court of Appeal in Lohar Corp Pty Limited v Dibu Pty Limited ....(my emphasis)
388In Neeta it was held that a party seeking a declaration concerning rescission (where no other relief was sought) should at the same time demonstrate readiness and willingness to perform the contract and hence submit to performance or in the alternative be ready to pursue its damages claim for breach of contract, as to fail to do so would leave open the opportunity to pursue one or such other remedies in future proceedings which would be contrary to s 63 of the Supreme Court Act. Barwick CJ and Jacobs J said at 168:
Unless the parties are agreed on the consequences which flow from a declaration that such a contract has or has not been validly rescinded it is generally undesirable that a court should so declare without any orders for consequential relief. If a party to such a contract claims that a contract has not been validly rescinded such a judicial declaration is proper if that party continues ready and willing at the conclusion of the litigation to perform the contract. A consequence of the declaration should be that the party submit to the performance of the contract on his part and to an order for specific performance of the contract if that is appropriate. If such an order is not or cannot be made, nor an inquiry into damages ordered, then a declaration that on a certain day the contract had not been validly rescinded serves no purpose in the litigation. Before such a declaration is made the party seeking the declaration may already have elected to treat the other party's purported rescission as a repudiation and may have himself rescinded the contract. All that has then been achieved is an issue estoppel if and when the claim for damages for breach of contract is pursued in other proceedings. This was not the intention of the legislation as appears from s 63. Conversely, if a declaration be made that a contract has been validly rescinded but no consequential orders for damages or for return or retention of the deposit are made in those proceedings the purpose of s 63 is not achieved.
In these circumstances we are of the opinion that the matter should be remitted to the Supreme Court of New South Wales for further hearing in the light of these reasons so that as far as possible all matters in controversy between the parties may be completely and finally determined.
389In Lohar Corp Pty Limited v Dibu Pty Limited (1976) 1 BPR 9177 d, Street CJ defended the utility of declarations (there in the context of conveyancing cases) and stated that:
Where a vendor and a purchaser have come to issue in connection with their contract and its fulfilment, and where the Court can see that real utility will attach to resolving that issue on a summary application for a declaration, a court of first instance need not anticipate that an appellate court will fail to recognise the width of the declaratory jurisdiction as established by Foster v Jododex Aust Pty Limited (1972) 127 CLR 421 or that the discretion to exercise that jurisdiction will be too freely reviewed.
390In Commonwealth of Australia v BIS Cleanaway Limited [2007] NSWSC 1075, Brereton J, when considering a submission by the Commonwealth that the proceedings before his Honour afforded an opportunity to decide a discrete question in a cost effective way, said, at [34]-[35]:
This amounts, in effect, to an application to the court to decide a preliminary question, in the absence of any proceeding to which it is preliminary. Accordingly, granting the declarations sought would not completely and finally determine any controversy that may arise between the parties. The present litigation is essentially an anterior step to further litigation, in which further issues will necessarily arise. If the declarations were made, then should the Commonwealth subsequently seek to obtain substantive relief, there would remain a range of factual and legal issues that would not have been addressed during the proceedings for declaratory relief, in respect of which liability would still have to be proved. This would probably necessitate revisiting at least some of the evidence that would be adduced in the proceedings for a declaration. The declarations if granted would therefore not finally resolve the issues between the parties. In the absence of any claim for substantive relief, it is not apparent that there is any utility in deciding the "preliminary question" raised by the claim for declaratory relief.
391His Honour said, at [28]:
... it is generally inappropriate to grant declaratory relief if it will be inconclusive, in the sense that the proposed declaration would leave unresolved issues, with the parties still in dispute as to the consequences so that further litigation would be required to resolve the controversy [ Smart v Allen (1970) 91 WN(NSW) 241; Integrated Lighting & Ceilings Pty Ltd v Phillips Electrical Pty Ltd (1969) 90 WN (Pt 1) (NSW) 693, 702].
392His Honour considered t he case to be practically indistinguishable from Neeta , saying that, at [35]:
Nothing appears which makes it such an exceptional case as to warrant the exercise of the discretionary jurisdiction to grant a declaration, despite Supreme Court Act, s 63: granting the declarations would not resolve a potential future dispute, because they would leave subsequent issues unresolved.
393(I note, however, that in dismissing leave to appeal from his Honour's judgment in BIS ( Commonwealth of Australia v BIS Cleanaway Limited [2008] NSWCA 170), Hodgson JA expressed the view (at [4] - [5]) that there was some force in the contentions that the trial judge had erred (first) in applying s 63 of the Supreme Court Act , because there were no claims that had been brought forward which the court would not be determining and (secondly) in considering that the cases of Neeta and Coles v Wood dictated that the only proper exercise of discretion would be refusal of declaratory relief. Hodgson JA said that he did not wish to be taken as endorsing everything which had been said as to those points. A similar qualification was made by Ipp JA (at [21] - [22]), it would seem as to whether the appropriate test for exercise of discretion was whether other issues would be left unresolved.)
394Brereton J in Cypjayne Pty Ltd v Rodskog [2009] NSWSC 301 again considered the issue of declaratory relief in circumstances where it was said to be hypothetical, and said at [16]:
This is not a case of resolution of only one step in litigation ... there may be a further dispute, but it will involve issues different from those immediately under consideration. Absent intervention, the partners cannot progress their negotiations with the Adelaide Bank. The declaratory relief sought at this stage will, if granted, permit the negotiations with the Adelaide Bank to move forward.
395His Honour there held that even if there might be such a further dispute, the declaration was not hypothetical and would have utility because there was a live controversy and its resolution would have practical consequences, at [59].
396I have set out my findings in relation to the existence and operation of the Shareholders Agreement (and, for that matter, the Licence Agreement). I consider that the proper construction of clause 14.2 is not that Messrs Nassar and Hyder have any beneficial or ownership interest in the "goodwill and Intellectual Property attributed to the Painaway Formulas" but rather that, if and when there is a sale of that goodwill/Intellectual Property (which is at the Carrolls' discretion), Messrs Nassar and Hyder would have a contractual entitlement to 40% of the net proceeds of sale thereof, assuming that the contractual arrangements between the parties by then relevantly remain on foot. However, in circumstances where there is no proposed sale and where it is impossible to know whether any such sale would be of the "Intellectual Property attributed to the Painaway formulas" or as to whether events might arise in the future to preclude reliance by the Nassar/Hyder parties on such an entitlement, I consider it inappropriate to make any formal declarations as to the proper construction of the clause. I accept Mr Ireland's characterisation of the position in this regard: that there is simply a promise to pay money in certain circumstances that have not yet eventuated.
Conclusion
397For the reasons set out above, I find that a binding agreement came into existence on the terms of the Licence Agreement (as did a binding agreement on the terms of the Shareholders Agreement) as executed by the Carroll interests other than JAKL on 18 April 2005 (by mutual assent) and that the Carroll interests are estopped from denying such an agreement. In reaching that conclusion I have placed weight on the conduct of the Carrolls in insisting on adherence to the arrangements agreed with Messrs Nassar and Hyder as documented in the 2005 agreements and Mr Carroll's conduct, as a director of Painaway, in committing it to obligations consistent either with the existence of such a licence (the Blend agreements) or with Painaway having the benefit of licence rights of more than the ephemeral nature suggested by the Carroll interests (such as the NRL sponsorship agreement). It follows that the Nature's Remedies Cross-Claim should be dismissed.
398I find that under that agreement Painaway has the right to assign the exclusive right to use the Painaway trade marks without the consent of the Carroll interests (provided this does not materially affect the integrity of the Intellectual Property or the Painaway Formulas) and that, although the Painaway Formulas are not property assignable as such, Painaway is entitled to authorise the use of those by, or sub-license those to, a third party (again provided this does not materially affect the integrity of the Intellectual Property or the Painaway Formulas). I find that Nature's Remedies and the Carrolls have an implied obligation not to hinder (and a positive obligation to do what is necessary to enable) such dealings with the rights under the Licence Agreement.
399I further find that Nature's Remedies, as a contractual matter, cannot compete with Painaway (or any assignee or sub-licensee) in the manufacture, marketing advertising distribution and sale of the Painaway products while the exclusive licence remains on foot. As the Painaway Cross-Claim was not pressed, I make no orders in relation to that Cross-Claim but will stand it over to a date to be fixed in the event that Painaway's administrators wish to press for any of the relief therein claimed,
400It follows from the above that I find that the Licence Agreement (and Painaway's right to use the Painaway trade marks and Intellectual Property, as defined under the respective agreements) was not validly terminated in December 2010.
401Had there been no more than an implied licence (as contended for by the Carroll interests), I would have held that it was not a licence terminable at will but that there was an obligation to provide reasonable notice of termination and that, in the circumstances, that reasonable notice would be one not expiring before 31 December 2012.
402I find that Messrs Nassar and Hyder are not entitled to a shareholding in Nature's Remedies and that their rights on a sale of the goodwill and Intellectual Property attributed to the Painaway Formulas are as provided for under clause 14.2 of the Shareholders Agreement (as it may be properly construed and apply in the circumstances of any ultimate sale). Given that there is no such sale contemplated by the Carrolls at the present, I do not think it appropriate to grant any declaratory relief in that regard. Accordingly, other than in relation to the claim based on oppression (which was not pressed) the Nassar/Hyder Cross-Claim should be dismissed. The balance should be stood over to a date to be fixed.
403I direct the parties to bring in Short Minutes of Order to reflect these reasons and I will hear any submissions as to the form of those orders and as to costs at a time convenient to Counsel.