McHutchison v Western Research and Development Ltd - [2004] FCA 419 - FCA 2004 case summary — Zoe

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McHutchison v Western Research and Development Ltd

[2004] FCA 419

Federal Court of Australia|2004-04-08|Before: Nicholson J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2004-04-08

Before

Nicholson J

Source

Original judgment source is linked above.

Judgment (13 paragraphs)

[1]

REASONS FOR JUDGMENT 1 The respondent brings a notice of motion seeking to stay the action pursuant to s 53(1) of the Commercial Arbitration Act 1985 (WA) ('the Act') or alternatively pursuant to the inherent jurisdiction of the Court. Section 53 relevantly reads as follows: '(53) (1) If a party to an arbitration agreement commences proceedings in a court against another party to the arbitration agreement in respect of a matter agreed to be referred to arbitration by the agreement, that other party may, subject to subsection (2), apply to that court to stay the proceedings and that court, if satisfied - (a) that there, is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement; and (b) that the applicant was at the time when the proceedings were commenced and still remains ready and willing to do all things necessary for the proper conduct of the arbitration, may make an order staying the proceedings and may further give such directions with respect to the future conduct of the arbitration as it thinks fit. (2) An application under subsection (1) shall not, except with the leave of the court in which the proceedings have been commenced, be made after the applicant has delivered pleadings or taken any other step in the proceedings other than the entry of an appearance. (3) …'

[2]

evidence 2 The case for the respondent relies upon affidavits of Mr CF Sharland, a director and company secretary of the respondent and a person authorised to swear the affidavits on the respondent's behalf. These were sworn on 13 February 2004 and 23 March 2004. Additionally, reliance is placed on affidavits of Mr DA Sims, a director of the respondent and of Eastland Technology Australia Ltd ('ETA') sworn on 4 March 2004 (2 volumes) and 26 March 2004. 3 The applicant's case relies upon an affidavit of the applicant sworn on 2 October 2003. That affidavit is objected to on behalf of the respondent on the grounds that it lacks relevance. The point of relevance remains for determination in connection with the contentions made for the respondent.

[3]

arbitration agreement 4 It is not in dispute that there is an arbitration agreement as defined by s 4(1) of the Act, namely, 'an agreement in writing to refer present or future disputes to arbitration'. That agreement is a consultancy agreement dated 7 September 2001 purporting to be made between ETA 'and its subsidiary companies of the one part and the applicant (described as the consultant) of the other part'. 5 In cl 1 of the consultancy agreement it was provided that ETA engage the consultant for a period of three years commencing on 7 September 2001, with provision for an extension of a term of three years by mutual agreement. By cl 2 ETA appointed the consultant 'its sole external consultant in respect of the design of all its Products which shall be manufactured, constructed, marketed or otherwise dealt in by ETA in the course of its business…'. This provision is to be understood against the first recital which reads: '(1) ETA engages THE CONSULTANT to provide and THE CONSULTANT shall provide the following services:- (a) by close liaison with the ETA to develop concept drawings of the Products selected for development by ETA; (b) in consultation with the ETA and with such other contractors and subcontractors employed by ETA as appropriate, optimise the design of the Products to the requirements of efficient production and market needs; (c) provide consultative services to manufacturers selected by ETA with the aim of optimising production methods and to prepare the tool designs as required by the ETA; (d) prepare engineering design drawings of prototypes and products for small and large scale production in consultation with the engineers and manufacturers as required by the ETA; (e) submit all designs to ETA for approval and where necessary and by a consultative process, modify those designs where jointly deemed appropriate. (f) Assist ETA with the moulding of and assembly of prototype models of the Products. (g) In consultation with ETA undertake all such work as may be requested to ensure the timely and efficient development of the products.' 6 The case for the respondent centres around cl 5 and cl 6 of the agreement which read as follows: '5. The ownership of and sole right to obtain copyright in any design supplied by THE CONSULTANT to ETA upon the instructions of ETA shall be vested in ETA from the date of delivery by THE CONSULTANT to ETA. Any drawings or prototype models thereof and ETA shall thereupon be at liberty to effect and be responsible for the registration and other protection of such design as it sees fit. 6. The ownership of and sole right to obtain patent or other protection in any design or other intellectual concept which may result from work supplied by THE CONSULTANT to ETA upon the instructions of ETA shall be vested in ETA and ETA shall thereupon be at liberty to effect and be responsible for the registration and other protection of such design as it sees fit. ETA at tis discretion may reward THE CONSULTANT for such inventive steps in such manner as it sees fit.' 7 The agreement for reference to arbitration is referred to in cl 12, which reads: '12. If any dispute or difference shall arise between the parties hereto touching on any matter or thing herein contained such dispute or difference shall first be referred to a single arbitrator in case the parties hereto shall mutually agree on one (1) otherwise by two (2) arbitrators one to be appointed by each party hereto and in either case in accordance and subject to the provisions of the Arbitration Act or any statutory modification or re-enactment thereof for the time being in force.' 8 The consultancy agreement was signed by the applicant and signed and sealed by ETA 'in accordance with the resolution of the board'. 9 The relevant resolution is that set out in minutes of a meeting of directors held on the of ETA held on 7 September 2001 in which it is recorded: 'A draft consultancy agreement between the Company and Mr McHutchison was tabled. After discussing the matter in detail and making mutually agreed changes a final agreement was tabled and signed.'

[5]

respondent as subsidiary company 11 First, it is contended for the respondent that as a subsidiary of ETA the respondent is encompassed within the description 'and its subsidiary companies' describing the first party to the agreement. It is apparent from the affidavit of Mr Sharland sworn on 13 February 2004 that the respondent was established as a wholly owned subsidiary of ETA. In my view it is therefore not necessary to consider whether it is permissible to have regard to earlier drafts of the consultancy agreement to determine this point. Furthermore, even if the description of the respondent appearing in the drafts were as a consequence to be read into the consultancy agreement, that would not overcome the matters which follow. 12 Counsel for the respondent could not identify any statutory or regulatory provision or common law principle establishing that a resolution of a holding company per se binds its subsidiaries. I do not consider that s 50AA or ss 124, 125 and 126 of the Corporations Act 2001 (Cth) have such effect. What was submitted was that because there are common directors between the ETA and the respondent, it could be inferred that when the directors of ETA passed the resolution on 7 September 2001 they acted not only as directors of ETA but also as directors of the subsidiary companies and in particular of the respondent. However, nothing in the evidence supports such an inference. The minutes of the meeting of directors of ETA held on that date make no reference to subsidiaries and purport only to address resolutions of ETA itself. The mode of execution of the consultancy agreement does not signify that ETA was purporting to act on behalf of its subsidiaries. No provision is made for covenants to be joint and several. The reference to ETA including subsidiaries is unsupported by any other aspects of the consultancy agreement. 13 Further contentions for the respondent on this issue also refer to the definition of 'party' in s 4(1) of the Act. That word is there defined in the Act and subject to contrary intention to include 'any person claiming through or under a party to the arbitration agreement'. In Tanning Research Laboratories Inc v O'Brien (1950) 169 CLR 332 at 342 Brennan and Dawson JJ said of the same words appearing in s 7(4) of the Arbitration (Foreign Awards and Agreements) Act 1974 (Cth): 'The meaning of the phrase "through or under a party" must be ascertained not by reference to authority but by reference to the text and context of s. 7(4). … Next, the prepositions "through" and "under" convey the notion of a derivative cause of action or ground of defence, that is to say, a cause of action of or ground of defence derived from the party. In other words, an essential element of the cause of action or defence must be or must have been vested in or exercisable by the party before the person claiming through or under the party can rely on the cause of action or ground of defence.' There it was held that a liquidator in the circumstances claimed 'through or under' the company for the purposes of s 7(4) and hence was entitled to a stay under s 7(2). 14 Earlier in their reasons (at 341-342) their Honours said: 'In statutes similar to s. 7 of the Act, the phrase "through or under" or its equivalent has been construed to apply to, inter alios, … a company being a subsidiary of a parent company which is a party to an arbitration agreement (Roussel-Uclaf v Searle [1998] 1 Ll. R. 225; but cf. Mount Cook (Northland) v Swedish Motors [1986] 1 NZLR 720) and a company being a parent of a subsidiary company which is party to an arbitration agreement when claims are brought against both companies based on the same facts: JJ Ryan & Sons v Rhone-Paulenc Textile, SA (1988) 863F. 2d 315.' 15 Reference to the authorities cited by their Honours makes it clear that it is necessary to determine whether the claim of a subsidiary in the particular circumstances is one made 'through or under' the parent company. That is, it is not the fact of the existence of a parent-subsidiary relationship which alone satisfies the condition making the subsidiary a party to an arbitration agreement. 16 The nature of the claim by the applicant and the proposed defences are set out later in these reasons. It is apparent that ETA is not presently a party to the action. ETA cannot at present raise any cross-claims. The defence by the respondent does not in its proposed terms rely on any claim 'through or under' its parent. The presence of two invoices from the applicant to Mr Sharland at ETA among a number of others addressed to him care of the respondent cannot lead to a different conclusion on this point. 17 As a consequence I do not consider that the case for the respondent discharges the onus of establishing that the respondent is 'another party to the arbitration agreement' within the language of s 53(1) of the Act. The preconditions for the application of the power to stay court proceedings are therefore not met in that event.

[6]

third party benefits 18 It is secondly contended for the respondent that reliance may be placed on s 11 of the Property Law Act 1969 (WA). That section provides: '11. (1) A person may take an immediate or other interest in land or other property, or the benefit of any condition, right of entry, covenant or agreement over or respecting land or other property, although he is not named as a party to the conveyance or other instruments that relates to the land or property. (2) Except in the case of a conveyance or other instrument to which subsection (1) applies, where a contract expressly in its terms purports to confer a benefit directly on a person who is not named as a party to the contract, the contract is, subject to subsection (3), enforceable by that person in his own name but - (a) all defences that would have been available to the defendant in an action or proceeding in a court of competent jurisdiction to enforce the contract had the plaintiff in the action or proceeding been named as a party to the contract, shall be so available; (b) each person named as a party to the contract shall be joined as a party to the action or proceeding; and (c) such defendant in the action or proceeding shall be entitled to enforce as against such plaintiff, all the obligations that in the terms of the contract are imposed on the plaintiff for the benefit of the defendant. (3) Unless the contract referred to in subsection (2) otherwise provides, the contract may be cancelled or modified by the mutual consent of the persons named as parties thereto at any time before the person referred to in that subsection has adopted it either expressly or by conduct.' 19 Examination of this section shows that it is operable where a contract expressly in its terms purports to confer a benefit directly on a person 'who is not named as a party to the contract'. It provides for enforceability by that person of the contract. However, it does not make the person seeking to enforce it a party to the contract so as to satisfy the requirement of s 53(1) of the Act. No case has been made that the respondent has adopted the consultancy agreement either expressly or by conduct. The consequence is that even if the respondent is an entity which may rely on s 11 to enforce a benefit arising under the consultancy agreement, that does not make it 'another party to the arbitration agreement'. Consequently, even by reliance upon s 11 of the Property Law Act,the precondition for the application of s 53(1) of the Act cannot be satisfied.

[8]

the present action 21 The application in this proceeding is one brought in reliance on s 15 and s 192 of the Patents Act 1990 (Cth) and s 52 and s 87 of the Trade Practices Act 1977 (Cth) ('the TPA'). The applicant seeks, as against the respondent, an injunction requiring the respondent to forthwith transfer to the applicant all intellectual property comprising 'the Tamper Evident Packaging Inventions' including certain patent applications identified in the application. Alternatively, orders are sought for the return of the intellectual property to the applicant and other relief under s 87 of the TPA. Alternatively, the applicant seeks damages and declarations. 22 The statement of claim recites that in 1994 the applicant conceived the idea of the Tamper Evident Packages and worked on it until January 1999 when it was then in a form capable of being set down in the patent applications. In February and March 2000 it is recited that the applicant had discussions with Mr Sims who invited the applicant to contribute the intellectual property in his invention to a new venture with ETA which was to obtain investment funds from investors in Malaysia to develop inventions in the area of medical devices and related products. In March 2000 Mr Sims is said to have told the applicant that the company to be used for the new venture was the respondent. In June or July 2000 the applicant was requested by Mr Sims to arrange for the lodgement of the provisional patent applications in respect of his invention in the name of the respondent to facilitate the investment by the investors in Malaysia. The applicant did so. In December 2000 the applicant's wife signed an agreement recording the arrangements made and did so on behalf of CM McHutchison Pty Ltd as trustee of a trust for the benefit of the applicant and Mrs McHutchison. In July and August 2001 the respondent lodged international patent co-operation treaty applications and Australian patent applications for the invention. The applicant claims that he was not aware of or was misled as to the effect of the terms of the agreement until shortly prior to such lodgement. 23 The statement of claim continues by pleading that the agreement did not reserve, as the applicant had requested, any control to him or to CM McHutchison Pty Ltd over his invention or the patent applications or contain other statements which he considered should have been included. This is pleaded as being contrary to certain representations which it is now claimed were false, misleading and deceptive and contrary to s 52 of the TPA. 24 The statement of claim also addressed alleged actions of the respondent instructing its patent attorneys to refrain from paying annual maintenance and renewal fees in respect of the patent applications and from accepting payment for the same from the applicant so that the patent applications may lapse. Alternatively, it is pleaded, that the applicant is the assignee of the invention. It is pleaded that he was made bankrupt on his own petition on 10 August 1998 so that all the intellectual property was assigned by operation of law to the Official Trustee in Bankruptcy. On 3 June 2003 by written agreement the Official Trustee sold, transferred and assigned all the property in the applicant's inventions including all rights in respect of the patent applications to the applicant. Notice of this agreement was given to the respondent on 4 June 2003. Additionally, it is pleaded that the applicant is the eligible applicant in respect of the patent applications.

[9]

date of application of arbitration agreement 25 As has been stated, the consultancy agreement came into effect on 7 September 2001. On one view it will therefore only be applicable to any dispute or difference touching on any matter or thing contained in that agreement which arises from that date. It is apparent from the application and the statement of claim that each of the patent applications in issue pre-dates that date and extends back to dates commencing as early as 14 July 2000. It is difficult to see how a cause of action which relates to pre-contractual representations is relevantly encompassed within a arbitration clause or clauses of the type agreed upon in this case: Thomas at [16]. 26 However, for the respondent it is contended that cl 6 of the arbitration agreement has the consequence that if work was supplied by the consultant (the applicant) to ETA upon the instructions of ETA after 7 September 2001, that would carry with it the ownership of and sole right to obtain patent or other protection in any design or other intellectual property which may result from such work and so should be vested in ETA relevantly after the date. The evidence which is said to support the giving of such instructions after 7 September 2001 appears in the affidavit of Mr Sims sworn on 4 March 2004. He deposed that the applicant agreed to a proposal ('the WRD agreement'); the applicant's responsibilities for WRD included performing the design work in relation to Sch 3 Parenteral Technology and the Tamper-Proof Packaging Technology and managing the intellectual property in respect of these inventions; and it was agreed that the applicant would be responsible for all dealings with Watermark Patent & Trademark Attorneys in relation to the preparation and lodgement of the provisional patent applications comprising the latter technology. There are two difficulties with this evidence. First, it is evidence of an alleged agreement rather than of 'work supplied by the consultant to ETA'. Second, it is alleged to have occurred at a time, namely, prior to 11 August 2001, when the applicant had not been discharged from bankruptcy and was unable to enter into any agreement of the type asserted in the evidence. 27 In these circumstances, and absent more extensive exploration as evidence in the action may reveal, there is an aura of uncertainty concerning the fact whether the matters in dispute or difference in the action do in fact arise either in whole or in part within the terms of cl 6 of the consultancy agreement. 'It is by no means clear that the wording of the arbitration clauses … encompasses all of the claims made by the applicant against the respondents': Thomas at [15]. Also, there is considerable uncertainty whether the dispute or difference touches on matters or things contained in the consultancy agreement or rather touches on other matters pre-existing. The expression 'touching on' in the arbitration clause in the consultancy agreement does not appear to include a range of claims outside of, and separate from, the consultancy agreement: Thomas at [17].

[10]

proposed additional pleadings 28 This issue also requires consideration in the context of proposed additional pleadings. Mr Sims has deposed on behalf of the respondent and of ETA on matters which they propose to raise by way of defence and cross-claim. The respondent intends to defend the claim by the applicant in relation to the invention on the basis that: (a) it was conceived by the applicant and Mr Sims as joint inventors acting on behalf of the respondent at a time prior to the consultancy agreement; (b) the alleged misleading and deceptive conduct is denied; and (c) the respondent has sold the invention to a third party for a valuable consideration. 29 The respondent intends to raise cross-claims of the following character: (a) for a declaration that it is entitled to the invention; (b) alternatively, for damages for breach of warranty of title to the invention; (c) alternatively, for equitable compensation for the contribution made by the respondent to the development and patenting of the invention; (d) for orders restraining the disclosure of confidential information; (e) for orders in relation to an alleged breach of duties owed to the respondent, in particular in failing to develop certain other technology on behalf of the respondent; (f) for compensation for losses suffered in the sale of the invention to the third party; (g) for damages for unspecified misleading and deceptive conduct. 30 ETA intends to raise the following cross-claims: (a) for orders to enforce rights under the consultancy agreement if it is not admitted that the respondent was a party to the consultancy agreement; and (b) for orders restraining the applicant in relation to disclosure of confidential information. It is apparent from these proposed claims that property issues extending beyond those touched on in the consultancy agreement will be in issue. Furthermore, it is apparent that ETA proposes to engage in the litigation even if the respondent is properly not a party to the consultancy agreement. Consequently, in the event the present application for stay was made in respect of the respondent that would not operate as a stay in respect of ETA. The possibility exists of a multiplicity of proceedings: Thomas at [10]. 31 In these circumstances it is not necessary to consider whether an estoppel arises if the defences and claims identified by ETA and the respondent are pursued and the applicant claims they could and should have been the subject of previous Supreme Court proceedings. This is because the foregoing matters (arising from the nature of the present pleadings and the proposed pleadings) are sufficient by themselves to establish that there is sufficient reason why the matter should not be referred to arbitration: s 53(1)(a) of the Act.

McHutchison v Western Research and Development Ltd

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