ROHALO PHARMACEUTICAL PTY LID v R_P SCHERER SpA

Federal Court of Australia|1994-11-22|Before: Lindgren J

ROHALO PHARMACEUTICAL PTY LTD ACN 010 983 874 Applicant

R P SCHERER HOLDINGS PTY LTD ACN 007 219 990 Third Respondent

In proceedings No NG 3258 of 1994 ("the statutory demand proceedings"), Rohalo Pharmaceutical Pty Ltd ("Rohalo" and "the applicant"), a company incorporated under the laws of New South Wales, applies under s 459G of the Corporations Law ("the Law") for an order setting aside a "statutory demand" dated 6 May 1994 for US $550,731.47 under s 459E of the Law served on it by R P Scherer SpA, an Italian corporation ("R P Scherer SpA" and "the respondent").

In proceedings commenced earlier, No NG 893 of 1993 ("the damages proceedings"), Rohalo applies for orders for damages against Pharmagel SpA (as first respondent) which was, prior to its merger into R P Scherer SpA in circumstances later recounted, an Italian corporation and "the predecessor" of R P Scherer SpA, R P Scherer Corporation (as second respondent), a corporation incorporated in Delaware having its principal Place of business at 2075 West Big Beaver Road, Troy, Michigan, USA, the ultimate holding company of the world wide Scherer group of pharmaceutical companies, and R P Scherer Holdings Pty Ltd (as third respondent), a company incorporated in Victoria of which R P Scherer Corporation is the ultimate holding company.

I will refer to Pharmagel SpA as "Pharmagel" and to R P Scherer Holdings Pty Ltd as "Scherer Australia". Apparently the share capital of both R P Scherer SpA and Scherer Australia was held immediately by a company named R P Scherer International Corporation. This company seems to have been the instrument by which R P Scherer Corporation owned and controlled subsidiaries outside the United States of America and to have no other significance in the case. It will be

convenient for me to refer to the ultimate holding company, R P Scherer Corporation, simply as "Scherer", but such a reference includes, unless the context otherwise indicates, a reference to R P Scherer Corporation acting through any of the companies of which it was the ultimate holding company.

In the damages proceedings, Rohalo, by notice of motion filed on 20 September 1994, seeks an order under Order 13 Rule 2 (4) that the name of the first respondent "Pharmagel SpA" be altered to "R P Scherer SpA" and that service on R P Scherer SpA and on Scherer be effected by the posting of documents to Messrs Tanya Cirkovic & Associates, Barristers and Solicitors, Level 22, 101 Collins Street Melbourne, Victoria 3000. In those proceedings, a Notice of Appearance was filed by that firm for Scherer Australia. As well, that firm has appeared for R P Scherer SpA as respondent in the statutory demand proceedings.

The hearing of Rohalo's motion in the damages proceedings and of its substantive application in the statutory demand proceedings took place before me on 30 September 1994 and 12 October 1994. The evidence on the motion was concluded on the former date. I reserved my decision on the motion and proceeded to hear the evidence in the statutory demand proceedings on that date and on 12 October 1994.

Mr P H Greenwood of counsel appeared for Rohalo, and Mr A W Street of counsel appeared by leave for Messrs Tanya Cirkovic & Associates on the motion for substituted service in the damages proceedings. He also appeared, instructed by that firm, for R P Scherer SpA as respondent on the hearing of the statutory demand proceedings.

BASSI, Doctor Maurizio ("Dr Bassi"): technical officer of Pharmagel.

CASHMAN, John Patrick ("Cashman"): chairman of directors of Scherer.

HERNON, John ("Hernon"): of Douglas Pharmaceuticals Limited of New Zealand ("Douglas").

KUROSKI, William ("Kuroski"): one time employee of Rohalo, who opened up the Asian market for Rohalo's business following the making in early 1993 between Rohalo and Pharmagel of the arrangement the subject of the litigation.

PEVIANI, Guido ("Peviani"): managing director, and prior to the takeover of Pharmagel by Scherer in July 1993, principal shareholder, of Pharmagel.

SHADDICK, Gill (""Shaddick"): co-director with Sonntag of Rohalo.

SONNTAG, Lionel Russell (""Sonntag"): managing director of Rohalo.

WEBB, Barrie Paul ("Webb"): an executive officer (perhaps manager) of Scherer Australia.

At all material times Rohalo carried on business in the market of the wholesale distribution in Australia of soft gelatin

capsules containing vitamins and cosmetics ("the Market"). It acquired the contents from manufacturers and had _ them encapsulated in soft gelatin by others. Pharmagel carried on, at its plant at Lodi, Italy, a business which was or included such soft gelatin encapsulation.

The relationship between Rohalo and Pharmagel began in January 1993. Rohalo contends that, by a letter from Peviani on Pharmagel's letterhead dated 10 March 1993, it secured for itself the position of "exclusive distributor" of Pharmagel's "products in Soft Shell Gelatin Capsules" in Australia, New Zealand, "Pacific rim countries" and 17 Asian countries named in the letter. It alleges that, as Sonntag had foreshadowed to Peviani, Rohalo proceeded to expend effort and money in opening up the market for "Pharmagel's product" in some of the Asian countries. As well, and as a separate matter, it alleges that in June 1993, relying on certain specific assurances given to it by Pharmagel, it entered into a contract with Douglas for a period of five years, by which it undertook to have a certain product of Douglas's encapsulated by Pharmagel, and (apparently) Douglas contracted to place orders with Rohalo.

Rohalo placed orders for encapsulation with Pharmagel commencing on 18 February 1993 and extending down to 3 September 1993. Pharmagel shipped product in response to the orders and invoiced Rohalo. The orders stated prices in US dollars as did the invoices, although the amounts of the orders and invoices did not coincide, no doubt due to factors such as freight and perhaps other charges.

On 1 July 1993, Pharmagel was ""taken over" by Scherer. Scherer's business included the activity of manufacturing and encapsulating pharmaceuticals. The takeover opened up the possibility of a conflict between the obligations of Pharmagel to Rohalo and the interests of Scherer.

The takeover was effected by the acquisition by R P Scherer SpA which had been constituted as long ago as 23 May 1958, from Peviani and those associated with him, of the whole of the issued share capital of Pharmagel. Peviani continued as managing director. He told Sonntag in July 1993 that Pharmagel's business had been sold to Scherer. Relations between Rohalo and Pharmagel became strained, although Rohalo continued to place orders with Pharmagel. According to its case, Rohalo wished to be able to continue to sell Pharmagel- manufactured product into the markets which it had spent time and money in building up. It claimed to have registered with the drug authorities in Asian countries, product as manufactured by "Pharmagel" at its plant at Lodi, Italy, and insisted that Pharmagel must continue to supply it with such product. According to Sonntag, for some time he was told that Scherer had not decided whether to keep Pharmagel as a separate entity manufacturing at Lodi under its own name; various other ways of supplying Rohalo were proposed to him by Pharmagel and by Scherer Australia which were not acceptable to Rohalo; Webb asserted that Scherer Australia was the entity in the Scherer group with responsibility for the Australian and Asian markets and that Rohalo must accept that its business in pharmaceuticals was finished although it could continue to be supplied with "bath oils" and "paint balls"; and Douglas purportedly terminated its contract with Rohalo when it learned that the supplier of capsules for its product was, in effect, to be Scherer.

Beginning on 29 July 1993, and extending to the end of their commercial relationship at the end of October 1993, Rohalo

complained to Pharmagel about defects in goods received from it.

On 17 September 1993, in proceedings not otherwise presently relevant, Scherer Australia executed an Anton Piller order at the premises of Rohalo, inspecting, according to Sonntag,

documents which would be of value to Scherer as a competitor

of Rohalo's. Sonntag protested to Peviani (with whom he seems

to have remained on reasonably friendly terms). Peviani assured Sonntag that Cashman had told him that Scherer Australia would apologise. Apparently no apology was

forthcoming from Webb (with whom Sonntag does not seem to have been on friendly terms).

On 10 October 1993 Rohalo made its last payment to Pharmagel. On 10 November 1993 Rohalo filed application No NG 893/1993 against Pharmagel, Scherer and Scherer Australia seeking damages for "misuse of market power" in contravention of s 46 of the Trade Practices Act 1974 (Cth), for breach of the exclusive distributorship agreement and for breach of an agreement to encapsulate "royal jelly" (see later).

On 30 November 1993 the goods last ordered by Rohalo were received by it from Pharmagel.

On 17 May 1994 R P Scherer SpA, the "successor" (in

circumstances recounted below) to Pharmagel, served a statutory demand on Rohalo for US$550,731.47 representing the balance outstanding on the invoices. On 1 June 1994 Rohalo

filed its application against R P Scherer SpA for an order setting aside that statutory demand.

Although Pharmagel continued in existence immediately following the purchase of its share capital by R P Scherer SpA in July 1993, subsequently by a public deed dated 29 December 1993 it was "merged into" R P Scherer SpA. There was unchallenged expert evidence that in these circumstances R P Scherer SpA stepped into the shoes of, and took over all of the rights and obligations of, Pharmagel (the Civil Law concept of "universal succession"), "the consequence of which is that all substantive and procedural activity to be taken by a third party against [Pharmagel}] must be directed to [R P

Scherer SpA] [which] becomes solely and directly liable for all the obligations of [Pharmagel] which has ceased to exist" (affidavit of Andrew Garnett Paton sworn 1 September 1994, paras 5, 6, 7). The expert evidence was that as of 30 December 1993 Pharmagel ceased to exist as a separate legal entity. This is the background to Rohalo's motion in so far as it seeks an order amending the name of the first respondent in the damages proceedings, from "Pharmagel SpA", to "R P Scherer SpA".

Relevant to Rohalo's motion in the damages proceedings are Order 13 sub-r. 2 (1),(4) and (5) of the Federal Court Rules which provide as follows:

"2 (1) Subject to the following provisions of this rule, the Court may, at any stage of any proceeding, on application by any party or of its own motion, order that any document in the proceeding be amended, or that any party have leave to amend any document in the proceeding, in either case in such manner as the Court thinks fit.

(4) Where there has been a mistake in the name or identity of a party, an amendment to correct the name of the party may be made notwithstanding that the effect of the amendment is to substitute another person as a party.

(5) Where an order to correct a mistake in the name of a party has the effect of substituting another

person as a party, the proceeding shall be taken to have commenced with respect to that person on

"9 (1) Where for any reason it is impractical to serve a document in the manner set out in the Rules, the

Court may on an application made ex parte order that, instead of service, such steps be taken as are specified in the order for the purpose of bringing the document to the notice of the person to be served.

(2) Where the Court makes an order under sub-rule (1), the Court may order that the document be taken to have been served on the happening of any specified event, or on the expiry of any specified time."

Relevant to the statutory demand proceedings are certain provisions of the Law. Section 459A empowers the Court to order that an insolvent company be wound up in insolvency. Sub-section 459C (2) provides for a mandatory presumption that a company is insolvent where it fails to comply with a "statutory demand" served on it. Section 459E provides for the service of statutory demands and s 459F for the meaning of the notion of "failure to comply" with a statutory demand. Section 459G provides that a company may apply to the Court for an order setting aside a statutory demand served on it. Sections 459H and 4593 provide for the grounds on which the Court must or may set aside a statutory demand. Of present relevance is sub-section 459H (1) which is as follows:

"459H (1) This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:

(a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;

The section requires the Court to "calculate the substantiated amount of the demand" as the "admitted total" minus the "offsetting total". In summary, and relevantly, the "admitted total" is the amount of a debt to which the statutory demand

relates as to which there is no genuine dispute, and the "offsetting claim" is a genuine claim which the company has against the creditor by way of counter claim, set-off or cross-demand.

Section 459H has featured frequently in the Courts. In Re

Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 (Qld/Thomas J) at 605, Thomas J said this:

"There is little doubt that Div 3 is intended to be a complete code which prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court's examination are the ascertainment of whether there is a 'genuine dispute' or whether there is a 'genuine claim'.

It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a ion of genui ck of i e has_no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is

The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it)

and i enui e (not the likely result of it)." (emphasis supplied)

This passage has been referred to in this Court with approval:

Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 12 ACSR 341 (FCA/Beazley J) at 356; nda Meat W Pty Ltd v Reg Russel] & Sons Pty Ltd (1994) 13 ACSR 525

(FCA/Hill J) at 526-527; and see Chadwick Industries (South

Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 (FCA/Lockhart J), ("Chadwick") and Hamilhall Pty Ltd v AT Phillips Pty Ltd, unreported, FCA/Branson J, 2 November 1994

at 14. See too Mibor Investments Pty Ltd v Commonwealth Bank

of Australia (1993) 11 ACSR 362 (Vic/Hayne J) at 366-367.

Lockhart J observed in Chadwick (supra, at 39) that the standard of satisfaction which the notions of "genuine

dispute" and "genuine claim" require the Court to have is not a high one, and said:

"Certainly the court will not examine the merits of the dispute other than to see if there is in fact a genuine dispute. The notion of a 'genuine dispute' in this context suggests ... that the court must be satisfied that there is a dispute that is not plainly vexatious or frivolous. It must be satisfied that there is a claim that may have some substance. On the other hand the court must be careful, because if all an applicant has to do is to assert both a claim and some basis for it, without more, it would mean in almost every case that the court would set aside statutory demands where application is made to that effect. Plainly that is not what the legislature intended by introducing this new regime."

Paragraph (a) of subsection 459H (1) and the definition of "admitted amount" in subsection 459H (5) both refer to the existence of a "genuine dispute", and the definition of "offsetting claim" in subsection 459H (5) refers to the existence of a "genuine claim". Plainly, the intention is to refer to something more than the mere "raising" of a dispute and the mere "making" of a claim. The provisions assume that the dispute and offsetting claim have an "objective" existence the genuineness of which is capable of being assessed. The word "genuine" is included to sound a note of warning that the

propounding of spurious disputes and claims is to be expected but must be excluded from consideration.

Some definitions of "genuine" are noteworthy. The Macquarie Dictionary (2nd revised edition), gives relevantly,

"lL. being truly such; real; authentic: genpine - xegret, genuine worth. 2 properly so called: genuine le eprosy"

and the New Shorter Oxford English Dictionary (1993) gives

"2. Having the character claimed for it; real, true, not counterfeit ... ¢ Properly so called".

The Australian Law Reform Commission's General Insolvency Inguiry (ALRC 45), para 150, adopting the language of para 114 of its Discussion Paper (DP 32), referred relevantly to the court's being "satisfied that

. there is a substantial dispute as to whether the debt is owing [or]

° the company appears to have a counter-claim which may exceed the amount of the debt."

Since the word "genuine", in the present context, is directed to a dispute or claim which, if sustained, would militate against the existence of the debt in the amount stated in the statutory demand, the approach which would be taken by a court on an application by the creditor for summary judgment for that amount suggests itself as a useful analogy. The creditor would not be entitled to summary judgment if the company raised a defence or cross-claim deserving of a trial, and, concomitantly, a defence or cross-claim would not be struck out or dismissed if it raised an issue deserving of a trial.

The meanings of "triable issue" and "absence of triable issue" (according to the perspective) in the summary disposal context have been expressed in various terms in the cases, of which

the leading ones in the High Court are Dey v Victorian Railway Commissioners (1949) 78 CLR 62 at 91 (Dixon J); General Stee]

Industries Inc v _Commissioner for Railways (1964) 112 CLR 125

(Barwick CJ) at 128-130; Theseus Exploration N.L. v Foyster (1972) 126 CLR 507 at 514 (Barwick CJ), 514-515 (Gibbs J), 523

(Stephen J); Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87 at 99; Webster v Lampard (1993) 177 CLR 598. The summary extra-curial "remedy" of "presumption of insolvency" is no less draconian than the summary curial remedy of judgment for debt. The task confronting a company applying to set aside a statutory demand of establishing the "genuineness" of a dispute or claim is, in my opinion, no more onerous than that which would confront it if it were seeking to meet an application by the creditor for summary judgment.

In the present case it is not disputed that Rohalo ordered from Pharmagel, and Pharmagel supplied to Rohalo, the goods the subject of the invoices and there is no dispute as to the amounts of the invoices. It was not common ground whether Rohalo's allegations gave rise in part to a dispute as to the amount of the debt referred to in the statutory demand or exclusively to an offsetting claim, but nothing was made of this in submissions.

Apart from a not very controversial affidavit annexing documents, R P Scherer SpA, as respondent to the statutory demand proceedings led no evidence. Therefore, in giving an account of the facts, I rely chiefly on the affidavit evidence of Sonntag supplemented by his cross-examination. My references to factual matters are to be understood only as references to the facts alleged by Rohalo of which there was evidence appropriate to be taken into account for the limited purpose of the issue of "genuineness" referred to earlier.

It is convenient to set out the facts in chronological order.

January 1993 Sonntag and Kuroski met with Peviani at Pharmagel's plant in

Lodi, Italy several times over a period of a few days when Sonntag requested that Pharmagel agree to supply capsules to enable Rohalo to sell in bulk into named Asian countries. Sonntag emphasised the necessity that Rohalo have an exclusive supply agreement, that Rohalo had employed Kuroski to develop the Asian market, that Rohalo planned to build plants, initially in Australia and later in Asia, to manufacture the soft gelatin, and that Rohalo would need to have particulars of Pharmagel's existing Asian customers. Peviani agreed to grant the exclusive licence and to supply those particulars.

18 February 1993 Date of Rohalo's Order No 1 (US$4,400.00).

25 February 1993 Date of Rohalo's Order No 2 (USS38,095.00).

Kuroski travelled throughout Asia for some two weeks taking orders from customers. Sonntag arranged for registration of the various pharmaceutical and vitamin products in six Asian countries and in Australia.

By letter of this date Pharmagel advised Rohalo of its intention to give to Rohalo "an Exclusive Distribution" of Pharmagel's products in soft-shell gelatin capsules in Australia, New Zealand, and "Pacific Rim Countries" and 17 specified Asian countries. A copy of the letter is Annexure "A" to these Reasons. By the letter Pharmagel noted that it had informed Rohalo of the identity of its existing customers in those countries and that Rohalo would, from the date of the letter, contact those customers directly. According to the letter, the agreement would be "in force until 31.12.94" and was to be "automatically renewed every year unless a 6 months

advance notice is recived [sic] and which both parties can apply to." The letter requested return of an enclosed copy signed by Rohalo.

Sonntag said that he faxed and posted back a copy signed by him and made a photocopy of the copy signed by him but had been unable to find the photocopy.

Neither party has ever given a "notice of non~renewal" as provided for in the letter. It is therefore arguable that whatever rights were signified by the expression "Exclusive Distribution of our products in Soft Shell Gelatine Capsules" in the letter subsist until 31 December 1995.

12 March 1993 Date of Rohalo's Order No 3 (US$5,594.00).

(a) Pharmagel supplied to Rohalo particulars of Pharmagel's Asian customers.

(b) Kuroski made a further trip to Asia and took orders for Rohalo.

(c) Rohalo negotiated with Douglas for Rohalo to procure encapsulation of a product which it was developing known as "Isotretinoin" which had a similar function to a pharmaceutical product known as "Roaccutane" manufactured by Scherer. Sonntag discussed the proposed encapsulation with Peviani who agreed that Pharmagel would undertake the work, "on an exclusive basis covering Asia, Australia and New Zealand, with a possibility of distribution into

-.. Canada" (Sonntag's affidavit sworn 16 September 1994, para 28).

Date of Rohalo's Orders Nos 4, 5, 6 and 7 (US$132,700.00).

April 1993 (a) Rohalo appointed an agent in Singapore to handle sales into Singapore, Indonesia, Malaysia and Thailand.

(b) Rohalo entered into a "confidentiality agreement" with Douglas relating to the terms of the contractual arrangement being negotiated between them.

4 May 1993 Date of Rohalo's Order No 8 (US$7,320.00).

18 May 1993 Date of Rohalo's Order No 9 (amended) (US$9,360.00).

Sonntag had several telephone conversations with Peviani in which Peviani said that because of "the summer close-down in August" Pharmagel would wish to manufacture and dispatch Rohalo's requirements for August and September early, and requested that Sonntag fax particulars of Rohalo's requirements for those months. Sonntag agreed provided Rohalo could have 90 days from receipt of the goods in which to pay and Peviani agreed to this condition.

Date of Rohalo's Orders Nos 11, 12, 13, 14, 15, 16, 17 and 18 (US$119,950.00).

Date of Rohalo's Orders Nos 10 (amended) and 20 (US$76,950.00).

(a) There were meetings between Sonntag, Hernon and Peviani

at Pharmagel's plant in Italy over a period of one anda half days, in which the encapsulation by Pharmagel of "Isotretinoin" for Douglas through Rohalo was discussed. As well, Sonntag and Hernon discussed the matter with Pharmagel's scientists.

As well on the occasion of this visit, Peviani agreed to allow 90 days for payment of the pre-shutdown shipments adding that after those shipments, "we will revert to the 60 days terms" to which Sonntag agreed (Sonntag's affidavit sworn 16 September 1994, para 33). Rohalo entered into a five-year contract with Douglas "for the development and supply of Isotretinoin in soft

gelatine capsules" (Sonntag's affidavit sworn 16 September 1994, para 30).

Rohalo arranged with Pharmagel that Rohalo would ship royal jelly valued at US8$23,000 to be delivered to Pharmagel's plant for encapsulation by Pharmagel during July. Rohalo had arranged for the filled capsules, to be sold by Rohalo for approximately A$153,000, giving Rohalo a gross profit of approximately A$77,000.

Sonntag raised with Peviani a rumour which he had heard that the Pharmagel business was being sold but Peviani told Sonntag that the business was "not for sale".

of Rohalo's Orders Nos 25, 26, 27, 28, 29, 30, 31, and 32

First faxed complaint from Rohalo (Shaddick) to Pharmagel (Dr Bassi). This concerned vitamin E Synthetic, 5001u recently received by Rohalo (Batch 30656 and Batch 30655). The complaint related to variation in size and taper slightly towards one end. The faxed letter said:

"As you will be aware, we have further orders in place for these capsules and need to know what we should expect for future shipments."

Rohalo returned samples of the allegedly defective capsules by air mail and sought Dr Bassi's "technical comment".

The making of this complaint prior to the takeover of Pharmagel by Scherer shows at least that it was not fabricated as a response to the latter, but does not exclude the possibility that it was, as R P Scherer SpA submitted, a false excuse for non-payment of invoices.

Peviani informed Sonntag that he had sold Pharmagel's business to Scherer but that a clause in the contract provided for Scherer to honour the agreement between Pharmagel and Rohalo and to permit Rohalo to perform the agreement between it and Douglas. Peviani told Sonntag that Cashman had assured him that Scherer wished Pharmagel to continue as an alternative

supplier to Europe and Asia rather than be incorporated into Scherer.

Sonntag said that if Pharmagel were to be incorporated into Scherer, Rohalo would not be able to continue its business and that the products being shipped to it by Pharmagel would be of

no value to it because it would be selling in competition with Scherer.

Peviani assured Sonntag that there would be no change in the Pharmagel plant, that he (Peviani) would continue as general manager, and that Scherer was willing "to continue to supply the products under the Pharmagel name in support of our agreement" (Sonntag's affidavit sworn 16 September 1994, para 43).

By agreement of this date, the issued share capital of Pharmagel was sold by Peviani and those associated with him to R P Scherer SpA.

Webb telephoned Sonntag (in Singapore at the time) to discuss the takeover of Pharmagel by Scherer. He explained that he was in charge of the Australian and Asian operations of Scherer, and was responsible for all sales in Australia or Asia of Scherer product regardless of what plant it was bought from, and that it would be necessary for Sonntag, upon returning to Australia, to speak to him.

Sonntag and Webb met. At the first meeting, Sonntag explained that Rohalo's business comprised the sale of bulk encapsulated vitamins and pharmaceuticals into Asian countries as well as bath oils and paint balls in Australia. Webb said that he had no difficulty with continuing to sell bath oils and paint balls to Rohalo. Sonntag said that Rohalo's interests would not be served by encapsulation at Scherer Australia's plant in Melbourne as Rohalo had registered products with Asian countries as coming from Pharmagel's plant in Italy. Webb said that he was not sure as to what was happening with Pharmagel's plant.

At the second meeting (which Shaddick also attended) Webb said that unless Rohalo entered into an agreement with Scherer,

Rohalo would be squeezed out of the market. Webb said that Scherer would not supply to Rohalo unless Rohalo ceased buying any product from its USA competitor, "Pharmacaps". Webb said:

"I don't believe you will have a é business' in pharmaceuticals any more, but I can help you by supplying bath oils and paint balls at good prices. You can build up a good little business with those products."

Webb said that he did not know what was to happen with the Pharmagel plant in Italy, and that this would not be known

Shaddick faxed Dr Bassi referring to a complaint received from one of Rohalo's Vitamin E Synthetic customers regarding packaging, and advising that apparently the capsules were being caught in the sealing of the bag and bursting, with the result that the oil was coating other capsules in the bag. Rohalo's letter concluded:

"We would appreciate your comment as soon as possible. I wish to go back to my customer and let him know that the problem has been resolved for future runs."

Dr Bassi faxed Shaddick advising that there was difficulty in understanding how it was possible that some capsules had been caught in the sealing of the bag, but that Pharmagel was verifying the position and would, if necessary, modify the length of the bag so as to avoid any possible contact with the capsules.

3 August 1993 Shaddick faxed Dr Bassi advising that Rohalo had received two

further complaints from customers that "the capsules tended to be oily on the outside although they could not see evidence of any broken capsules caught in the seal", and requesting Pharmagel's comments.

10 August 1993 Date of Rohalo's Order No 36 (US$37,860.00).

Rohalo (Cory Groen) faxed "Enrica" of Pharmagel complaining about shipments of amino acid capsules received on invoice number 529 as containing a lot of oily and leaking capsules, and requesting that the matter be referred to Pharmagel's "technical people".

3 September 1993 Date of Rohalo''s Order No 40 (last order placed) (US$9,900.00).

Shaddick faxed Dr Bassi referring to his complaint dated 29 July and Dr Bassi's reply of the same date, and claimed that Rohalo had had further problems with "this shipment". The letter said that Rohalo now realised that "the capsule shell

is brittle and breaks or cracks easily", and continued:

"In addition to the breakages caused by the brittle shell, our customers have had complaints from end users

that the capsules are exceptionally hard. We have examined our retained samples and found this to be the case."

13 September 1993 Dr Bassi faxed Shaddick, advising that Pharmagel's batch

records has been checked and had not revealed any leaking or broken capsules. Dr Bassi queried whether something might not have happened during transport.

17 September 1993 Scherer Australia "executed" an "Anton Piller order" at the premises of Rohalo in other proceedings.

21 September 1993 Shaddick faxed Dr Bassi about the brittleness of Vitamin E Batches 30918/30919/30920.

(a) Sonntag protested to Peviani that the only way in which Rohalo could now get supply was to enter into a contract with Scherer Australia on Webb's terms, including terms that Rohalo would sell only to customers permitted by Webb and at prices permitted by Webb. He complained that Scherer Australia was trying to put Rohalo out of business.

(b) Peviani faxed Sonntag advising that he had spoken to Cashman who had confirmed his wish that Rohalo be supplied "always in line with a good understanding between you [Sonntag] and Mr Barrie Webb". The letter said that Cashman had indicated that Scherer Australia

would apologise for the Anton Piller order. The letter also contained this complaint:

». you should be more in line with your payment. If 30 days is too short for you, we can accept 60 days, but at present we are receiving money over 90 days, and this is too much."

It is useful to note here that Sonntag gave evidence that the period for payment had always been 60 days (transcript, p. 21.30) and was extended to 90 days in

anticipation of the shut-down of Pharmagel's plant in Italy for the European summer vacation.

(c) Dr Bassi faxed Shaddick in response to the latter's fax dated 21 September about the brittleness of capsules, advising that Pharmagel had had experience in the past of brittleness of capsules due to coldness.

Peviani requested Sonntag to supply to him a forecast of Rohalo's sales for 1994, but Sonntag declined on the basis that Peviani would be likely to supply the information to Scherer Australia. On Peviani's assurance that he would not reveal it to anyone outside the Italian plant, and in particular that he would not reveal it to any Scherer personnel, Sonntag agreed to supply the forecast to Peviani.

Rohalo received a large shipment of gelatin capsules from Pharmagel at invoice prices totalling US$182,082.60 for which it had paid freight amounting to $12,519.19. It complained that the goods were defective and unsaleable in consequence of which the freight had been wasted and it had missed out on a gross profit of $67,400.

Sonntag arranged for the royal jelly which had been delivered to Pharmagel in June 1993 but which had still not been encapsulated, to be collected from Pharmagel's plant.

Shaddick faxed "Enrica" of Pharmagel complaining about a recent shipment, in particular, about Lecithin 1200 mg Batch 30871, the capsules of which were ""cloudy", and about Pharmaton Batches 30873 and 30874, a percentage of the capsules in which were "deformed and misshapen".

Shaddick faxed to "Enrica" of Pharmagel the "confidential" forecast referred to earlier of Rohalo's requirements (product line by product line) for December 1993 and January, February, March and April 1994. It included a reference to ""Testomin", a rare product which was purchased by only some three purchasers in Asia.

Sonntag faxed Peviani. After giving an account of the relationship between the parties from the beginning and, in particular, referring to various assurances which Peviani had given to him, Sonntag said that it would be foolish for Rohalo to promote Pharmagel product in circumstances in which Webb had access to Rohalo's forecast of its sales, and in which there was no contractual arrangement under which Rohalo was assured of supply at competitive prices. He concluded that unless Rohalo had "these assurances" it would return the stock which Pharmagel had produced for it, and pay Pharmagel "for the difference less [Rohalo's] costs and invest [its, Rohalo's] time, expertise and money in a supplier who [would] support [it] in the market."

Sonntag had a telephone call from one of Rohalo's customers to which Rohalo had been selling "Testomin" and subsequently that customer ordered no more Testomin from Rohalo.

10 November 1993 Rohalo filed its application in the damages proceedings.

By a "notarized deed of merger" of this date, Pharmagel SpA was "merged into" R P Scherer SpA. The legal effect of the merger under Italian law was described earlier.

17 May 1994 "R P Scherer SpA" served its statutory demand on Rohalo for

1 June 1994 Rohalo filed its application against R P Scherer SpA in the

Rohalo's claim for damages in its capacity as buyer for breach of Pharmagel's undertaking as to quality in respect of goods sold and delivered;

Rohalo's claim for damages in respect of: (a) Rohalo's loss of profit arising from Pharmagel's wrongful repudiation of the exclusive distributorship

(b) Rohalo's loss of profit on the loss of its contract with Douglas;

Rohalo's loss arising from the "misuse of market power" the subject of the damages proceedings.

Rohalo's claim for damages in its capacity as buyer for breach of Pharmagel's undertaking as to quality in

The classes of goods which were alleged by Sonntag to be defective and the invoices which included them are set out below.

29 July 1993 for US$110,867.96 namely uS$5,754.00. (Sonntag's affidavit referred to USS5,745.00 but in fact the relevant entry on the invoice was for US$5,754.00)

(bd) Multi vitamin and mineral capsules: (i) Part of invoice number 546 dated 10 June 1993 for US$43, 308.80 US$24,537.60

(ii) Whole of invoice number 694 dated 19 July 1993 for US$39,232.80

(iiz) Part of invoice number 728 dated 29 July 1993 for

(i) Part of invoice number 546 dated 10 June 1993 for US$43,308.80 namely US$18,771.20 (ii) Part of invoice number 795 dated 15 September 1993 for US$91,800.52 namely US$25,836.80 0US$44,608.00

(2) Part of invoice number 728 dated 29 July 1993 for US$110,867.96 namely US$22,936.80 (ii) Part of invoice number 827 dated 27 September 1993 for USs32,685.60 namely USS$22,537.80 _USS45,474.60

According to Sonntag, the applicant paid freight for all these capsules in a sum of $12,519.19, and he deposed that if all of them had been of good quality and had been sold by the applicant, they would have given the applicant a gross profit of US$67,400.00.

The evidence satisfies me that there is a genuine claim by Rohalo that some of the goods sold and delivered were defective. On the occasion of the first complaint on 28 June 1993, Rohalo returned samples of the allegedly defective capsules. There was no protest by Pharmagel that the samples were not defective at all. Dr Bassi later queried whether defects had arisen during transport from Pharmagel's plant.

I do not accept that the allegations of defects were raised as a spurious excuse for Rohalo's non-payment or tardiness in payment, and I do accept that there was and is a genuine dispute as to the period of time for payment allowed by the contractual arrangement between the companies.

In terms of s 459H of the Law, a question arises as to the amount to be attributed to Rohalo's claim in respect of defective quality. I find the approach taken by counsel for the respondent to the quantification of Rohalo's claim for damages in respect of the defects in quality, useful. The starting point of the respondent's submission was that the applicant had resold at a profit a substantial quantity of the goods for which it had been invoiced US$550,731.47. It submitted that Sonntag gave two versions of the "on-sales". One version led to a conclusion that the applicant had on-sold goods representing USS300,000.00. The other was that the applicant had oon-sold such goods to the extent of US$450,000.00. Thus, the submission was that as a starting point the applicant should be treated as being, on its own evidence, indebted in a sum of US$300,000.00 or US$450,000.00 as the case may be.

The submission accepted that, from the sum of US$300,000.00, for the purpose of the limited issue of "genuineness" before me, there would have to be deducted the amount of USS$12,519.19 paid for freight and the amount of US$67,400.00 representing foregone profit, totalling US$79,919.19 (say US$80,000.00) leaving, according to the submission, a "substantiated amount" of some US$220,000.00 owed by the applicant to the respondent.

If the correct commencing figure was US$450,000.00 rather than US$300,000.00, the figures for freight and foregone profit to be deducted would be somewhat less. According to the respondent, it was appropriate to reduce these amounts by approximately one third, down to US$8,000.00 and US$50,000.00 respectively, making a total of US$58,000.00 to be deducted from the debt of US$450,000.00, leaving, according to the submission, a "substantiated amount" of US$392,000.00.

In the result, according to the respondent, the "substantiated amount" for the purposes of s 459H of the Law of Rohalo's claim was US$220,000.00 or US$392,000.00 - in either case an amount substantially in excess of the "statutory minimum" referred to in s 459H, namely AUD2,000.00 (see definition of "statutory minimum" in s 9 of the Law).

In my opinion, the claim by Rohalo that of the outstanding invoice balance of US$550,731.47, it on-sold stock which had invoice values of only US$300,000.00 rather than US$450,000.00 is a genuine one. The freight of US$12,519.00 and foregone profit of US$67,400.00 must be deducted from this amount and there would be left a balance of US$220,000.00 in round figures owing by Rohalo to Pharmagel, and so to the respondent. The inquiry then becomes: Does Rohalo have genuine offsetting claims in amounts which exceed US$220,000.00? [The parties seemed to accept that it was convenient to use an exchange rate of AUD] = US$0.7385, and on

that basis the figure US$220,000.00 was equal to AUD297,901.15.]. The respondent contended that the other claims advanced by Rohalo were not genuine and so counted for nothing.

"2. Rohalo's claim for damages in respect of: (a) Rohalo's loss of profit arising from Pharmagel's wrongful repudiation of the exclusive distributorship agreement."

There is a genuine claim that Rohalo accepted the offer contained in Pharmagel's letter dated 10 March 1993.

It was not suggested that Pharmagel had given a notice of termination of the "Exclusive Distributorship" which came into existence upon that acceptance. Accordingly, currently the exclusive distributorship, if it exists, has, according to its terms, until 31 December 1995 to run. The submissions did not address the question of when Rohalo accepted the wrongful repudiation. It is arguable that Rohalo has denied the benefit of the contract for the approximate period 1 November 1993 to 31 December 1995.

There is no precision in the evidence as to what profits Rohalo could reasonably expect to have made during that period by its exercise of the rights given by the exclusive distributorship agreement. According to paragraphs 30-34 of Sonntag's affidavit sworn 30 September 1994, during the period 1 July 1993 to 30 November 1993 (5S months) the applicant sold product for AUD1,265,461.00 the "majority" of which was represented by sales of Pharmagel product. He extrapolated a figure for 12 months of AUD3,000,000.00 and "calculated" that the gross margin on sales of about AUD3,000,000.00 would have been about AUD850,000.00. He deposed that the applicant's overheads to achieve such sales would have been about AUD650,000.00 per annum, leaving a profit of about

AUD200,000.00 per annum. According to this approach, if the exclusive distributorship agreement had been allowed by both parties to run for five years, Rohalo would have made a profit of AUD1,000,000.00 over the five years.

But Rohalo was assured of a period down to 31 December 1995 at most. In my opinion Rohalo has a genuine claim for damages for loss of profit of AUD200,000.00 per year. For the period of two years and two months from 1 November 1993 to 31 December 1995, this would give an amount of AUD433,333.00. On the basis of an exchange rate of 73.85 cents to the US dollar, this is a claim for US$319,770.50 (rounded at US$320,016.00). This amount alone would exceed the figure of US$220,000.00 mentioned previously.

If, on the other hand, the correct period to be used for assessment of the amount of the claim for loss of profits was 1 November 1993 to 31 December 1994 (one year and two months) the amount becomes AUD233,333.00 or US$172,316.00 which alone would not exceed the figure of US$220,000.00 mentioned previously.

"2. Rohalo's claim for damages in respect of: ¢_) eee emer ere c cere were weet ee erence renee (b) Rohalo's loss of profit from loss of its contract with Douglas".

Rohalo's case seems to be that by reason of assurances given by Peviani on behalf of Pharmagel, in June 1993 it entered into a written contract with Douglas to cause "Isotretinoin" to be encapsulated by Pharmagel for Douglas. Sonntag gave evidence that because of the "Confidentiality agreement" which had been entered into in April 1993 between Rohalo and Douglas, he had not put the contract into evidence. Its absence from the corpus of evidence before me coupled with the

vagueness of Sonntag's evidence about it, and some uncertainty as to the juristic nature of Rohalo's claim against Pharmagel in respect of the loss of the contract with Douglas, combine to make it difficult to assess the genuineness of this part of Rohalo's claim.

The only attempt by Rohalo to quantify its alleged loss in respect of the Douglas contract is found in paragraph 29 of Sonntag's affidavit sworn 30 September 1994 which was as follows:

"29. I have calculated that, based on reasonable projections supplied by Douglas, Douglas would have ordered from Pharmagel a total of about 14,600,000 isotretinoin capsules over a five year period. I have calculated that, from that number of capsules, the applicant would have received about AS1,932,500.00 in gross profit."

Beyond this, there was no evidence of the "reasonable projections supplied by Douglas".

Apparently Rohalo did in fact perform its contract with Douglas to some extent, since Sonntag's evidence (at transcript 24.34-24.37) was that supply by Rohalo to Douglas ""cease[d] ... soon after the takeover by R P Scherer of the Pharmagel plant". Moreover, the evidence of the visit by Sonntag and Hernon to Pharmagel's plant in Italy and of the discussions which they had there with Peviani and Pharmagel's scientists supports a case that Pharmagel was agreeing to undertake the work of encapsulation, although, of course, it

is not evidence of the contractual terms pursuant to which this was to be done.

I do not regard Rohalo's claim that it had an entitlement to recover some damages from Pharmagel and that it now has a right to recover those damages from R P Scherer SpA arising

At a glance

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Judgment (239 paragraphs)

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Legislation Cited (1)

Cases Cited (5)

Cited By (1)