Transfield Pty Ltd v Arlo International Ltd

High Court of Australia|1980-07-01|Before: Wilson JJ, Meares J

High Court of Australia Barwick C.J. Stephen, Mason, Murphy and Wilson JJ. Transfield Pty Ltd v Arlo International Ltd [1980] HCA 15

Arlo International Ltd. (the respondent) is the licensee from Arlo Incorporated, the owners of letters patent to a process for the manufacture and erection of steel poles for use in the construction of electricity transmission lines. By deed dated 27th June 1973, the respondent, then known as Andromeda Co. Ltd., granted to Transfield Pty. Ltd. (the appellant) an exclusive sub-licence for the Commonwealth of Australia, its territories and protectorates, including the Territory of Papua New Guinea, in which to make, use, exercise and vend the patented process for the purpose of electricity transmission lines, poles and any non-loadbearing poles of a like nature. For convenience, the process may be referred to by the name given to its product, namely, the Arlo pole.

Two clauses of the sub-licence agreement need to be set out, for it is for breach of them that the respondent sued the appellant in the Supreme Court of New South Wales:

The Licensee covenants during the period of the Power Transmission Line Licence at all times to use its best endeavours in and towards the design fabrication installation and selling of the Arlo PTL pole throughout the licensed territory and to energetically promote and develop the greatest possible market for the Arlo PTL pole.

Neither the Licensor nor the Licensee shall disclose any of the data supplied hereunder relative to the Arlo PTL pole without the prior consent of the other save and except to the extent necessary for the proper carrying out of the terms and conditions of this Deed.

The sub-licence was for the balance of the period of the patent less seven days or a period of fifteen years less seven days, whichever might be the less. The consideration for the grant of the licence was a licence fee of some $20,000 and a promise to pay royalty at stated rates according to certain described situations. The learned primary judge (Meares J.) in his reasons for judgment has described the Arlo pole and I cannot do better than quote his description: The Arlo pole is basically a structural system consisting of a series of steel tubes which nest one inside the other. The end of the innermost tube (which is the uppermost tube when erected) is capped with a plate having small holes to prevent air entrapment. The largest and outermost tube is anchored to a base tube set in concrete into the ground. When concrete is pumped through a port of entry in the base tube, the interior of the tube nest or bundle becomes filled with concrete and additional pumping forces the nested tube bundle to telescope vertically. When a section has telescoped its design length, it is prevented from extending any further by a system of stop rings. Splines are used below the exterior stop ring to maintain the pole in a stable position as it telescopes.

The number of tubes or sections will vary according to the height and weight bearing capacity of the pole to be erected. The required cross-arms are usually attached to the nest of tubes ex factory. An advantage claimed for the Arlo nest of steel tubes system is that they are more easily transported than a pole in one piece or with only a few sections from the factory and much lighter cranes are needed to lift them from the truck onto the prepared base tube and to erect them than a pole of the lastmentioned type. After the nest of tubes are lifted on to the base tube pumping commences, which results in filling the tubes with concrete and lifting them to the required height. The concrete, of course, adds greatly to the pole's strength.

This pole was an innovation as far as Australia is concerned. It has attained success with use abroad. The first use in Australia was by the appellant in the construction of a transmission line at Kwinana in Western Australia after the grant of the sub-licence. The Arlo pole had attractive advantages in that it was less offensive in the landscape, particularly in urban or suburban areas, than the then customary form of lattice tower with which Australians had become familiar.

Some problems were experienced by the appellant in constructing the line at Kwinana, difficulties which may very well have been due to its own lack of control in the manufacturing process and perhaps also in the installation process. The principal difficulty which the appellant experienced was that the extending elements of the pole jammed during the pumping stage and verticality was not easy to attain with regularity.

In January 1975, the appellant tendered to the Electricity Commission of New South Wales for the construction of Stage 2 of the Wallerawang to Sydney line, a high voltage transmission line between Picnic Point and Minto, a total distance of some 36 kilometres, poles rather than towers to be used in the construction. The appellant's tender did not expressly provide for the use of the Arlo poles, though in point of fact its amount had been worked out on the assumption that such poles would be used. In the course of discussions with officers of the Electricity Commission during the period the tender was under consideration, doubts were expressed by the Commission's officers as to the suitability of the Arlo pole for the purposes of the construction of this transmission line. During these discussions, the appellant decided to overcome the apprehensions of the officers, not by pressing on them the suitability of the Arlo poles and for this purpose accepting the assistance of the respondent's technical officers, but by the use of a pole of its own devising, not cylindrical as is the Arlo pole but conical. Further, this pole was not to be telescopic but to be erected in sections and filled with concrete after it was in situ. It is evident that in devising this pole the appellant drew upon the information it had received from the respondent in connexion with the Arlo pole. It is also evident that the appellant's own pole did satisfy the officers of the Electricity Commission. In the long run, the Commission awarded the contract to the appellant upon the footing that the appellant's pole and not the Arlo pole would be used in the construction.

The respondent claimed in the action that the appellant had not used its best endeavours to promote the Arlo pole as, according to the respondent, the clauses of the sub-licence required. It seems common ground that, as the result of the use of the appellant's pole, the potential market for the Arlo pole in Australia was effectively destroyed.

After a very thorough and careful review of the material before him, the learned primary judge said:

Clause 7 contained a covenant on the defendant's part to use its best endeavours not only towards the design, fabrication, installation and selling of the pole but energetically to promote and develop the greatest possible market for it. In my opinion the defendant owed a duty to use, within the limits of reason, its best and not its second-best endeavours in the light of its capabilities, resources and experience.

As far as the Wallerawang contract was concerned, the defendant, far from using its best endeavours, on the evidence made no real effort to face up to and resolve any of the design or fabrication problems raised by the Commission; its best endeavours, as far as the Wallerawang contract was concerned, were directed not to selling the Arlo pole but to advancing a design of its own and as a result to sell the Transfield pole. In so acting, far from developing the greatest possible market for the Arlo pole, it, on Mr. Belgiorno's admission, totally destroyed it, and I agree with the opinions he expresses on this subject.

As I have already indicated, just as I believe that any troubles in Western Australia were due probably either to improper fabrication, testing and inexpert supervision, or a combination of all three, I am of the opinion that, with careful fabrication in accordance with the tolerances specified and with adequate supervision in the factory and on site, an Arlo test pole of the dimensions required by the Electricity Commission could have been successfully erected, and that the defendant could have satisfied the Commission of the suitability of the Arlo pole not only as a result of this practical test but by evidence from overseas, including large poles erected in Japan, and by discussions between the Commission's engineers and experts able to speak of the Arlo pole.

There was before the judge material to suggest that there had been a lack of good faith on the part of the appellant in its communications to the respondent about the progress of the tender for the Wallerawang contract, but it is unnecessary for the purposes of this appeal to go into that question. The judge thought that there was a 75 per cent chance that the Commission could have been persuaded to accept the Arlo pole for the construction of the Wallerawang transmission line. He also thought there was a 20 per cent chance of the Arlo pole capturing the Australian market had it been used in the Wallerawang contract. He found a verdict for the respondent in the sum of $294,609, which sum included interest from the date of the commencement of the proceedings until judgment at the rate of ten per cent per annum.

The appellant appealed to the Court of Appeal Division of the Supreme Court of New South Wales against the verdict and against the amount of damages and of interest awarded. The attack on the verdict turned upon the construction which the appellant sought to place upon cl. 7 of the sub-licence. The submission was that by the clause the licensee promised only: "(a) to sell and promote the Arlo pole in suitable markets, or (b) to use best endeavours towards selling the Arlo pole to persons who may reasonably be expected to buy it, or (c) to use best endeavours to promote the greatest possible market for the Arlo pole for which it is really suited." This submission had been made to the primary judge who was prepared to assume its validity but, none the less, was of the opinion that the appellant had broken its promise so construed.

The Court of Appeal in a unanimous judgment declined to accept the construction sought to be placed on cl. 7. The Court said:

If cl. 7 does not have one of the meanings for which the appellant contends, the appellant does not argue that it was not in breach of the agreement because from the moment it conceived and developed its own design it could not for one moment be contended that it used its best endeavours towards the installation and selling of the Arlo pole or that it energetically promoted the greatest possible market for that pole. The appellant's pole was used in the Wallerawang line, which has proved successful, and it is common ground that the market in Australia for Arlo poles has been totally destroyed by the successful development and introduction by the appellant of a competitive pole.

In our opinion there is no warrant for the introduction of words of the kind contended for by the appellant to the plain unambiguous words of cl. 7. It would be destructive of the whole purpose of the licensing agreement if the licensee were at liberty to promote some other pole, if it or somebody else formed the opinion that the other pole was more suitable for a projected use. The appeal on the question of liability in this respect fails.

The Court of Appeal examined the assessment by the primary judge of damages. It thought his view that there was a 75 per cent chance that the Commission could have been persuaded to accept the Arlo poles to be well within a legitimate range. However, the Court thought that the assessment of the chance of Arlo poles obtaining no more than 20 per cent of the Australian market had the pole been used in the Wallerawang contract was too low an assessment. The Court felt a 50 per cent chance better reflected the facts. The Court also differed from the primary judge in respect of the award of interest, both as to the amount by which it should be allowed and as to the rate at which it should be allowed. However, on its own re-assessment of damages, the Court of Appeal reached a figure very much in excess of the amount of the verdict. Accordingly, there being no cross-appeal, there was no basis for interfering with the verdict.

The appellant raised before the Court of Appeal, as it had indeed before the primary judge, two other defences. The appellant claimed that s. 112 (1) of the Patents Act 1952 Cth, as amended made cl. 7 unlawful in that it prevented the appellant from using an article or process supplied or owned by some person other than the licensor. The appellant submitted that, in consequence, cl. 7 was void.

The Court of Appeal thought this ground to be without substance.

The other defence submitted by the appellant was founded on s. 45 of the Trade Practices Act 1974 Cth, as amended. That section renders unenforceable as against a corporation a provision of a contract, made before the commencement of the Trade Practices Amendment Act 1977, which has the purpose, or has or is likely to have the effect, of substantially lessening competition.

The only attack made by the appellant in this Court upon the judgment of the Court of Appeal was founded on these two defences. The appellant in this Court accepted the construction placed by the Court of Appeal upon cl. 7 but submitted that the clause so construed confined the appellant to the use of the Arlo pole and thus fell within the invalidating effect of s. 112 (1) of the Patents Act. Counsel for the appellant pressed on the Court the view that to use "best endeavours" to promote the market for the Arlo pole of necessity required the appellant itself not merely to use the Arlo pole but to confine itself to such use.

It is noticeable that cl. 7 does not in terms require the appellant to use the Arlo pole. Whilst it might be true that use of the pole by the appellant might well assist the promotion of the pole, there is no compulsion in the clause to do so. The market for the pole could be fully promoted without any use by the appellant of the pole. Further, in my opinion, the use of some other pole would not necessarily be inconsistent with the exercise by the appellant of its best endeavours to promote the market for the Arlo pole. The effect of a best endeavour clause is not, in my opinion, to prohibit or restrict the promisor from using articles not supplied or owned by the promisee. There is nothing in the terms of cl. 7 which, in my opinion, would produce that effect. Consequently, in my opinion, this submission fails.

So far as the submission based on the Trade Practices Act is concerned, it is enough to say that s. 51 (1) (a) of that Act, by excepting things authorized by the Patents Act, provides an answer. This submission, in my opinion, also fails.

The judgment of the Chief Justice sufficiently describes the facts of this case and the history of its progress through the courts.

On the present appeal Transfield raises two contentions, each rejected in the Courts below and either of which, if accepted, would entitle it to succeed on this appeal. The judgment in favour of Arlo, affirmed in the Court of Appeal, was founded upon Transfield's breach of cl. 7 of a sub-licence agreement, by which agreement Arlo licensed Transfield to make, use, exercise and vend within the Commonwealth a patented civil engineering process for the manufacture and erection of electricity transmission line poles. The relevant part of cl. 7, is as follows:

The Licensee convenants during the period of the P.T.L. Licence at all times to use its best endeavours in and towards the design fabrication installation and selling of the Arlo PTL pole throughout the licensed territory and to energetically promote and develop the greatest possible market for the Arlo PTL pole.

To overcome the finding of the trial judge, affirmed on appeal, that Transfield was in breach of cl. 7, Transfield relied, and still relies in this Court, upon two statutory provisions, each of which it says is enough to set at nought the covenant in cl. 7.

The first such provision is s. 112 (1) (a) of the Patents Act 1952 as amended:

(1) It is not lawful, in a contract in relation to the sale or lease of, or a licence to use or work, a patented article or patented process, to insert a condition the effect of which would be -

(a) to prohibit or restrict the purchaser, lessee or licensee from using an article or class of articles or process, whether patented or not, supplied or owned by a person other than the seller, lessor or licensor, or his nominee; or

For cl. 7 to be rendered void by s. 112 (1) (a), it must be of the nature struck at by the section. Unfortunately neither clause nor section is easy to construe with confidence; the section because of obscurities of drafting, the clause because of doubts about the precise obligation involved in any promise to use best endeavours. In examining the terms of s. 112 (1) (a), I describe the parties to the contract to which it refers as covenantor and covenantee.

The gist of par. (a) is clear enough; it is aimed at contractual prohibitions or restrictions imposed upon the use by the covenantor or articles or processes which are not supplied or owned by the covenantee or his nominee. It makes void a condition having that effect in a contract of the kind described in the opening words of sub-s. (1).

Any more precise analysis of par. (a) presents difficulties. Are "supplied" and "owned" each to be related exclusively to "articles or class of articles" and "processes" respectively, or do both past participles apply alike to both sets of nouns? Again, does "a person other than" the covenantee include the covenantor and, if it does, what meaning then does "supplied" bear - can an article be supplied by the covenantor to himself? What precisely is involved in the concept of an unpatented process being "owned" by someone? And what is the meaning to be attached to "prohibit" and to "restrict"?

Although on some of these questions authority is not lacking and although I suspect that their resolution would produce at least one answer unfavourable to Transfield's present submission, I propose instead to concentrate upon another aspect of the matter, which will, in my view, in any event answer that submission.

Paragraph (a) is concerned with the "using" of articles or processes. So long as a condition does not concern itself with prohibitions or restrictions upon "using" articles or processes, it will not be affected by the sub-section.

Clause 7 of the sub-licence contains no express prohibition or restriction on use. But it would be enough to attract s. 112 (1) if the effect of cl. 7 were to prohibit or restrict use: an express positive obligation may carry with it an implied prohibition or restriction. The opening words of cl. 7 do not, I think, have this effect, they do not give rise to any such implication: to use one's best endeavours in and towards the design or fabrication of an Arlo pole can, it seems to me, involve no implied prohibitions or restraints upon the use of any particular article or process. They simply call upon the covenantor for that high degree of activity and effort in the design and fabrication of the pole which a best endeavours clause demands. The same may, I think, be said in relation to the installation of the pole.

Clause 7 then goes on to refer to the "selling" of Arlo poles. Here one does, I think, enter the area of implied prohibitions and restraints. An obligation to use best endeavours to sell Arlo poles implies a prohibition upon the offering for sale and selling of competitive poles, at least to the extent that to do so will prejudice the sale of Arlo poles. If the prohibitions or restrictions upon "using" which s. 112 (1) (a) forbids were to include prohibitions or restrictions upon selling, it would follow that cl. 7's reference to selling would attract the invalidating effect of s. 112 (1) (a).

There is, however, not only high English authority (to which I shall later refer) for the view that s. 112 (1) (a), when it speaks of a prohibition or restriction upon "using" articles or a process, is not concerned with their sale; but the reasoning of that authority rests in part upon a specific statutory provision which also appears in our legislation, as s. 112 (7) (a). Section 112 (7) (a) reads:

(a) affects a condition in a contract by which a person is prohibited from selling goods other than those of a particular person.

The effect of sub-s. (7) (a) is to exclude from the prohibition in sub-s. (1) a condition which prohibits the covenantor from selling goods other than those of a particular person. Clause 7 is such a condition. By requiring Transfield to use its best endeavours in the selling of Arlo poles it involves an implied prohibition against selling competitive poles. Those competitive poles would be "goods other than those of a particular person", in this instance Arlo. By excluding such a prohibition from what is forbidden by the section, sub-s. (7) (a) leaves Arlo free to impose it.

To complete this survey of cl. 7, the clause goes on to require the energetic promotion and development of the greatest possible market for the Arlo pole. This requirement can advance Transfield's case no further than does the obligation to use best endeavours in the selling of the Arlo pole. The market which Transfield is to promote and develop is that in which it will feature as a seller of Arlo poles, whether it simply sells and supplies poles or installs them as elements of an entire electricity transmission system constructed by it which it then hands over to some electric power authority. Whatever implied prohibition this requirement may give rise to will necessarily be directed to acts prejudicial to the sale of Arlo poles. Accordingly, it will not differ in kind from the implied prohibition arising from the covenant to use best endeavours in selling Arlo poles; what I have said about that implied prohibition will be equally applicable to the present case.

I have so far spoken only of the Arlo poles; s. 112 (1) (a) refers also to prohibitions and restrictions upon using a process. However the covenants in cl. 7 do not appear to me to give rise to any implied prohibition or restriction upon using processes other than the Arlo process. To use a process, of whatever kind, will not in itself conflict with performance of the obligation to use best endeavours which cl. 7 requires.

It follows that it can only be in relation to the sale of poles that relevant implied prohibitions will arise from the terms of cl. 7. Only if using in s. 112 (1) (a) were to include the selling of poles would the section be applicable. If the selling of poles is not included in "using", Transfield cannot rely upon s. 112 (1) (a) to make void the terms of cl. 7.

The authority of which I have earlier spoken and which deals with the meaning of "using" is that of their Lordships in Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. [7] .

One of the matters there in issue was the effect of s. 38 (1) of the Patents and Designs Act, 1907 Imp., which was the source of, and whose provisions are very similar to, s. 112 (1) of the present Commonwealth Act. Although their Lordships differed concerning aspects of the operation of the sub-section, they were at one in regarding its reference to the "using" of articles or a process as not including the act of selling. Viscount Simonds treated the matter as beyond doubt, being concerned rather to explain why the legislation had this operation than to canvass the question of whether this was indeed its operation: his Lordship said [1] :

Some comment was made on the fact that the section does not preclude a condition prohibiting sale by the licensee of goods supplied by outsiders, but I do not see why this omission should lead to a narrow construction of "prohibit" and "restrict" in relation to user. There may be good reason for thinking that a selling agent may fairly be restrained by the licensor from selling the goods of an outsider. This seems to be the motive of sub-section (5) (a). The reference to sub-section (5) (a) is to the equivalent of sub-section 7 (a) of the Commonwealth Act. 1. [1955] 1 W.L.R., at p. 771; [1955] 2 All E.R., at p. 665.

Lord Oaksey, who read as his own an opinion which had been written by Lord Reid, said of sub-s. [2] :

For some reason that is not apparent to me this sub-section does not nullify a condition prohibiting or restricting the licensee from purchasing articles from any person other than the licensor: it only affects conditions the effect of which will be to prohibit or restrict the licensee from using such articles. No doubt the effect would generally be the same because generally the licensee would purchase with a view to using the articles but it is worth noting in connexion with the present case that, if the licensee desired to buy for resale and not for use, a condition might have the effect of restricting his right to buy in the open market and yet be unobjectionable, provided that its effect was not to require him to buy from the licensor. Implicit in this passage is the view that "using" does not include selling. Lord Tucker and Lord Cohen agreed with what Lord Oaksey said concerning the sub-section. 1. [1955] 1 W.L.R., at p. 776; [1955] 2 All E.R., at p. 609.

It was said in argument on this appeal that the Irish case of Thomas Hunter Ltd.'s Patent [3] did not follow the views of Lord Oaksey and instead preferred the dissenting opinion of Viscount Simonds. Even were this so, it would not affect the authority of the Tool Metal Case on the point presently at issue, as to which their Lordships were not in disagreement. However, as I read the Thomas Hunter Case, it was only at first instance that the opinion of Viscount Simonds was preferred; I do not understand the judgment of the Supreme Court on appeal to have taken this view: see at p. 426.

Lord Oaksey [4] explained the operation of the English equivalent of s. 112 (1) as designed to prevent abuse of a patentee's monopoly, as, for example, by the imposition of restraints going beyond the scope of the patent; what Viscount Simonds [5] described as use of the monopoly "to obtain a collateral advantage". Lord Oaksey instanced the case of a licence agreement which required the licensee of a process to purchase all necessary raw materials exclusively from the licensor. Whether a restraint were expressed in this positive way or were the subject of a negative covenant not to use raw materials other than those bought from the licensor, the sub-section would, because of the combined effect of its two paragraphs, be effective, his Lordship said, to invalidate such restraints. His Lordship concluded [6] that

"The purpose and effect of" [the equivalent English section] "is to prevent the licensor from limiting the right of the licensee to trade with others so as in effect to compel the licensee to trade with him." 1. [1955] 1 W.L.R., at p. 776; [1955] 2 All E.R., at p. 669. 2. [1955] 1 W.L.R., at p. 770; [1955] 2 All E.R., at p. 663. 3. [1955] 1 W.L.R., at p. 777; [1955] 2 All E.R., at p. 669.

If this be the intended operation of s. 112 (1), it ceases to be an occasion for surprise that in no reported case, either in the United Kingdom or in Australia, has it ever been suggested that, as Transfield now submits, a covenant by the licensee to use its best endeavours in the working of the patent offends against s. 112 (1) (a). Counsel for Transfield conceded in argument that acceptance of his submission would mean that the common form of best endeavours clauses would fall foul of s. 112 (1). Yet such a covenant must be of everyday occurrence in patent licensing agreements: it appears in the only precedent of such an agreement given in Terrell on the Law of Patents, 11th ed. (1965), p. 636. Section 112 (1) or its equivalent does not ever seem to have been raised as a ground of attack when such covenants have been before the courts, as, for example, in Terrell v. Mabie Todd & Co. Ltd. [7] . The reason for all this is plain if s. 112 (1) has a no more ample operation than was attributed to it in the Tool Metal Case [8] .

(1952) 69 R.P.C. 234. 2. [1955] 1 W.L.R. 761; [1955] 2 All E.R. 657.

There remains the second statutory provision upon which Transfield seeks to rely. It is s. 45 of the Trade Practices Act 1974, as amended. Without setting out its terms it is enough to say that its relevant concern is with contracts which lessen competition. It was argued on this appeal that even if s. 45 might apply to cl. 7 so as to render it unenforceable, the provisions of s. 51 (3) would operate to save it. I find it unnecessary to determine this question being, instead, content to dispose of Transfield's reliance upon s. 45 on the ground that there was in this case no evidence such as would serve to bring s. 45 into operation. There was no evidence that cl. 7 had either the purpose or was likely to have the effect of substantially lessening competition, whether the clause were read in isolation or, as s. 45 (4) (a) permits, in combination with other provisions of the licence agreement. Nor do the deeming provisions of s. 45A affect this conclusion.

It is for these reasons that I would dismiss this appeal.

There are two issues before this Court: whether cl. 7 of the sub-licence agreement dated 27th June 1973 ("the Agreement") between Andromeda Co. Ltd. (the former name of the respondent) and the appellant, Transfield Pty. Ltd., is invalid either by reason of s. 112 of the Patents Act 1952 Cth, as amended, or by reason of s. 45 of the Trade Practices Act 1974 Cth, as amended.

These two questions were argued both at first instance before Meares J. and before the Court of Appeal along with the major and interrelated question of construction of cl. 7. Meares J. did not analyse these arguments in any detail. He held that s. 112 (1) (a) of the Patents Act did not apply to cl. 7 and also that by virtue of s. 51 (3) of the Trade Practices Act s. 45 of that Act did not apply to the Agreement.

In the Court of Appeal, Reynolds J.A., who delivered the judgment of the Court, held that s. 112 did not invalidate cl. 7 for two reasons; first, "the licence agreement does not in terms or in fact prohibit or restrict the licensee from using any article", and secondly, s. 112 only applies to use, not to conditions restricting the licensee selling goods. In relation to s. 45 of the Trade Practices Act, the Full Court merely affirmed the decision of Meares J. without expressing reasons.

In considering whether cl. 7 of the Agreement is invalidated by the two statutory provisions, it is necessary to construe the clause. Indeed, as will appear later, the answer to the suggested application of the two statutory provisions lies in the restricted interpretation which I give to the clause. However, in the first instance it will be convenient to examine s. 112.

Section 112 is in the same terms as s. 38 of the Patents and Designs Act, 1907 Imp. ("the English Act"). The early cases on the section discuss the purpose and scope of the section. In Sarason v. Frenay [9] the owners of a process patent for "increasing the keeping quality of compounds containing unstable oxygen" commenced an action for infringement. As a defence to the action the defendant alleged that a condition the patentee had inserted in certain contracts, that the licensees should purchase all pyrophosphates used in the process from the patentee's agents, was illegal under s. 38 of the English Act. Warrington J. held that s. 38 was breached. The Court of Appeal affirmed the decision [10] . Lord Cozens-Hardy M.R. said [11] :

Section 38 of the Patents Act of 1907 is a new provision obviously intended to deal with matters with which the Courts were very familiar, under which the patentee was in the habit of only supplying the patented article on the terms of the purchaser buying something else from him. 1. (1914) 31 R.P.C. 252. 2. (1914) 31 R.P.C. 330. 3. (1914) 31 R.P.C., at p. 334.

Later [12] , his Lordship stated his view of the meaning of s. 38 in relation to process patents:

Why cannot you say that it means that you must not require the purchaser, as a condition of his using a process Patent, to purchase something else not protected by the Patent? Sarason v. Frenay was applied in Huntoon Co. v. Kolynos (Incorporated) [13] , where a similar intent and scope was accorded to s. 38. 1. (1914) 31 R.P.C., at pp. 334-335. 2. (1930) 47 R.P.C. 403.

In Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. [14] , Viscount Simonds examined the history of s. 38. Although his Lordship dissented from the majority, his view that s. 38 was enacted to end the abuse of monopoly rights was not contradicted by the majority. His Lordship said [15] :

patentees were seeking, by virtue of their patents, to obtain a collateral advantage by imposing conditions on licensees, such as that the patented article should not be used save in conjunction with some other article produced by the patentee, or that the patented article alone should be used, or that the user should purchase his raw materials from the patentee. 1. [1955] 1 W.L.R. 761; [1955] 2 All E.R. 657. 2. [1955] 1 W.L.R., at p. 767; [1955] 2 All E.R., at p. 663.

Lord Oaksey, with whom Lords Tucker and Cohen agreed on this point, thought that the section clearly applied to a condition requiring a licensee to buy raw materials used in the patented process from the patentee [16] . However, his Lordship indicated that the section might be wide enough to cover situations where the requirement or restriction was more indirect.

[1955] 1 W.L.R., at p. 777; [1955] 2 All E.R., at p. 669.

These observations show that s. 112 (like s. 38 of the English Act) was enacted to deal with a limited abuse: where the owner of a lawful monopoly, the patentee, imposed conditions on the licensee or purchaser of the patent in order to obtain advantages which were closely linked to the patent itself but outside the protection of the patent. The overall scope of the section was correctly summarized by Lord Oaksey in the Tool Metal Co. Case [17] :

The purpose and effect of s. 38 is to prevent the licensor from limiting the right of the licensee to trade with others so as, in effect, to compel the licensee to trade with him. 1. [1955] 1 W.L.R., at p. 777; [1955] 2 All E.R., at p. 669.

Within these boundaries the section may cover conditions, inserted to obtain such a collateral advantage, whereby the purchaser, lessee or licensee is restricted or prohibited from using articles or processes supplied by others or developed by itself. By virtue of the words "a condition the effect of which would be", the section covers situations where the result is achieved indirectly. However, although the means may be indirect, the effect of the condition must be to extend the patentee's monopoly to products or processes not covered by the patent.

It will be noted that s. 112 (1) does not in terms nullify a condition which restricts purchase or sale. It only operates in relation to restrictions on use. However, the effect of s. 112 (7) (a) on s. 112 (1) was raised in argument. Section 112 (7) (a) is in the following terms:

(a) affects a condition in a contract by which a person is prohibited from selling goods other than those of a particular person; (emphasis supplied).

The word "condition" refers to a term of a contract, whether it be a condition in the strict sense, a warranty or some other term (Thomas Hunter Ltd.'s Patent [18] ). Section 112 (1) would not in any event render void a term which prohibited the licensee from selling goods other than those of the patentee. Section 112 (7) (a) does not apply to the case in question, for, as will be seen, cl. 7 of the Agreement does not prohibit the appellant from selling goods.

The Licensee covenants during the period of the P.T.L. Licence at all times to use its best endeavours in and towards the design fabrication installation and selling of the Arlo PTL pole throughout the licensed territory and to energetically promote and develop the greatest possible market for the Arlo PTL pole. The clause falls into two distinct parts. In the first part the licensee covenants "to use its best endeavours towards the design fabrication installation and selling of the Arlo PTL pole" and in the second part, the licensee covenants "to energetically promote and develop the greatest possible market for the Arlo PTL pole".

Although the arguments presented to this Court tended to assume that the whole of cl. 7 may be considered to be a "best endeavours" clause, I think that only the first part of the clause is properly so viewed. The second part of the clause seems to be an express covenant to do certain things, viz. to "energetically promote and develop the greatest possible market for the Arlo PTL pole". As I read the clause, it is only the first part which is qualified by the words "best endeavours" and it is those words which connote "the standard of reasonableness" (Terrell v. Mabie Todd & Co. Ltd. [19] , per Sellers J.). The difference between the two parts of the clause is not significant for present purposes because the primary judge found that the appellant was in breach of both parts of the clause.

In B. Davis Ltd. v. Tooth & Co. Ltd. [20] the defendants, who were the agents of the plaintiffs for the sale of Scotch whisky, agreed to devote the principal part of their energies, so far as Scotch whisky was concerned, to "push" the sale of this whisky. Lord Roche, speaking for the Judicial Committee, said [21] : "the obligation was to push, that is to say, vigorously to promote sales of, Watson's whiskies, or in other words, to do the best that the defendant company could do to sell as much as could be sold."

[1937] 4 All E.R. 118. 2. [1937] 4 All E.R., at p. 127.

A bargain for real and active effort to sell Watson's whiskies was the least that might be expected or implied in return, and that is what, in their Lordships' view, was expressly provided. It is, of course, true that the efforts required would have to be conditioned by the potentialities of the defendant company's business, and by the circumstances which might arise to affect it. The obligation was to do what the defendant company itself could reasonably do, in such circumstances. 1. [1937] 4 All E.R., at p. 128.

In Terrell v. Mabie Todd & Co. Ltd. [23] , where the contract included a "best endeavours" clause, Sellers J. applied these observations, holding that the licensees' obligation "was to do what they could reasonably do in the circumstances" (26). A "best endeavours" clause thus prescribes a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract. So understood, cl. 7 of the Agreement required the appellant to use all its efforts and skills towards the design, fabrication, installation and selling of the Arlo pole to the extent that it was reasonable so to do in the circumstances and to energetically promote and develop a market for it.

I can see no adequate basis for importing into this positive obligation a negative implication that the appellant will not use or for that matter sell a pole which competes with the Arlo pole, whether that pole be manufactured by the appellant or by another. It is significant that the Agreement contains no express prohibition against the appellant's use of competing poles or products. However, to conclude that there is no implied prohibition may not be decisive of the question which arises. Section 112 makes the "effect" of the provision the all important consideration (see the Tool Metal Co. Case; cf. Thomas Hunter Ltd.'s Patent). But I do not think that the practical effect of the clause is to prevent use or sale of another pole. There is no necessary inconsistency between the appellant's compliance with its obligations under cl. 7, as I understand them, and its use and sale of a competing pole. The appellant may do all that is within its power to comply with cl. 7 yet find that it has no practical alternative but to use or sell a competing pole. The clause does not prohibit or prevent such use or sale.

As I have shown, cl. 7 is readily susceptible of an interpretation which preserves its validity by not bringing it into conflict with s. 112. This is the interpretation which should be given to it.

The appellant did not contest before this Court that the findings of breach of both parts of cl. 7 had been correctly made, though in making this concession the appellant may have been proceeding on an assumption that the clause imposed an obligation more stringent than I have found it to be. Even so, I have little doubt that the findings of breach were correctly made.

The second issue is whether cl. 7 of the Agreement is rendered unenforceable by s. 45 of the Trade Practices Act. The appellant has not shown that cl. 7, on the construction I have given it, tends to lessen competition so as to come within the terms of s. 45 (1). Likewise, the appellant has failed to show that cl. 7, on that construction, is within s. 45 (2).

In any event, I take the view that s. 51 (3) (a) (i) and s. 51 (3) (a) (iii) of the Trade Practices Act would provide a defence to a case of contravention of s. 45 (2) arising out of the presence of cl. 7 in the Agreement. Section 51 (4) extends this defence to the determination of whether cl. 7 is unenforceable by reason of s. 45 (1). In expressing this view I have assumed, without deciding, in accordance with the submissions of counsel, that the Trade Practices Act as amended in 1977, rather than the 1974 Trade Practices Act, governs the case.

The appellant submitted that cl. 7 of the Agreement does not only relate to "the invention" or to "articles made by the use of that invention" but it goes beyond the terms of s. 51 (3) (a) (iii) and relates to other products, that is, it relates to not using any other poles. This submission in part reflects an interpretation of cl. 7 which I have rejected and in part attributes to the word "relates" a meaning which is too narrow, thereby giving s. 51 (3) an overly restrictive operation.

In bridging the different policies of the Patents Act and the Trade Practices Act, s. 51 (3) recognizes that a patentee is justly entitled to impose conditions on the granting of a licence or assignment of a patent in order to protect the patentee's legal monopoly. Even under American antitrust law, where there is no equivalent exception to s. 51 (3), the patentee is entitled to exercise some measure of control over the licensee consistent with the scope of the patent monopoly, though there has been some controversy as to the scope of permissible control: see Donald and Heydon, Trade Practices Law (1978), vol. 1, pp. 117, 118; Ward S. Bowman, Jr., Patent and Antitrust Law (1973), ch. 7 and ch. 8; P. Areeda, Antitrust Analysis, 2nd ed. (1974), pp. 448 et seq.

Section 51 (3) determines the scope of restrictions the patentee may properly impose on the use of the patent. Conditions which seek to gain advantages collateral to the patent are not covered by s. 51 (3). Section 8 (4) of the Restrictive Trade Practices Act, 1956 U.K. contained a clause in similar terms to s. 51 (3) (a) (iii) (see W. M. C. Gummow, Sydney Law Review, vol. 7 (1976), 339, at p. 357 ).

The Patents Act 1952 Cth, as amended, provides monopoly rights in respect of inventions and allows the monopolist to license others to make the article or use the process invented. In order to confine the monopoly within suitable limits, the Act contains provisions calculated to prevent the obtaining of collateral advantages. Thus, s. 112 provides:

(1) It is not lawful, in a contract in relation to the sale or lease of, or a licence to use or work, a patented article or patented process, to insert a condition the effect of which would be -

(b) to require the purchaser, lessee or licensee to acquire from the seller, lessor or licensor, or his nominee, an article or class of articles not protected by the patent,

(a) affects a condition in a contract by which a person is prohibited from selling goods other than those of a particular person;

Sub-section (7) permits anti-competitive conditions applicable to sale rather than to use, an anomaly for which the majority of the House of Lords, when considering a similar Act of the United Kingdom (the Patents and Designs Act, 1907), could find no apparent reason (see Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. [24] ). I share their view. The qualification permits a degree of restrictive practice which does not fit with modern legislative policies.

The licensing agreement between Arlo (as licensor) and Transfield (as licensee) licensed Transfield for a consideration of $20,000 to use the patented process of making Arlo PTL poles. Clause 7 of the Agreement states:

The licensee covenants during the period of the P.T.L. Licence at all times to use its best endeavours in and towards the design fabrication installation and selling of the Arlo PTL pole throughout the licensed territory and to energetically promote and develop the greatest possible market for the Arlo PTL pole. The relevant part of this clause is the words, "use its best endeavours in and towards the installation of the Arlo PTL pole and to energetically promote and develop the greatest possible market for the Arlo PTL pole". The circumstances out of which the alleged breach occurred was not "selling" but "using" poles. Section 112 forbids conditions which restrict as well as those which prohibit the licensee from using an article supplied or owned by a person other than the licensor. The practical effect of the existence of cl. 7 (if valid) is, if not to prohibit, at least to restrict Transfield from using any pole other than the Arlo pole. Transfield wished to and did use its own pole. It successfully tendered for the use of its own pole for (and did use it) in the installation of poles as part of an electric transmission line at Wallerawang. This means that on the trial judge and Court of Appeal's construction of cl. 7, Transfield was in breach of cl. 7.

The Court of Appeal found that Transfield's use of its own pole significantly reduced and, in fact, destroyed the market for Arlo PTL poles in Australia. It also found that there was a 75 per cent chance that the Electricity Commission could have been persuaded to accept the Arlo pole for the construction of the transmission line and a 20 per cent chance of the Arlo pole capturing the Australian market had it been used in the contract to construct the Wallerawang line. The obligation on Transfield in cl. 7 which was in substance at least to prefer (as the respondent contended in this Court) the use of the Arlo pole to its own, in my opinion, restricted Transfield "from using an article or process supplied or owned by a person other than the licensor" and was void.

In this appeal, it was suggested that Transfield could have complied with cl. 7 by first tendering on the basis of using an Arlo pole, and if that was rejected, then tendering on the basis of using its own. That ignores the fact that generally there is only one opportunity to tender, but in any event, if the clause required this, it would amount to a restriction on the use of Transfield's pole.

Clause 7, on the construction contended for by the respondent and accepted by the Court of Appeal, is a restrictive device, capable of being used, as was sought in this case, to inhibit the use by a licensee of another product which competes with the patented one. This is the very kind of mischief at which s. 112 is aimed. The statement in the Tungsten Case [25] that: " the purpose and effect of s. 38" [the United Kingdom equivalent of s. 112] "is to prevent the licensor from limiting the right of the licensee to trade with others so as, in effect, to compel the licensee to trade with him" did not purport to state the only purpose and effect of the section. If it did, in my opinion, it was wrong.

[1955] 1 W.L.R., at p. 777; [1955] 2 All E.R., at p. 669.

Clause 7 (or at least its relevant conditions) is void for contravention of s. 112. The appeal should therefore be allowed.

The history of this matter has been set out in the reasons for judgment of the Chief Justice, which I have had the advantage of reading. In an appeal to the Court of Appeal of the Supreme Court of New South Wales, based on several grounds, the appellant failed to dislodge a judgment given against it in proceedings for damages for breach of contract. The contract was a deed of licence under which the appellant was granted a sole licence within Australia to make, use, exercise and vend a patented process used in the manufacture of electric power transmission line poles.

Before this Court the appellant advances only two arguments in support of its appeal, both of which focus on cl. 7 of the contract, the material words of which read as follows:

The first argument is that the clause was in contravention of s. 112 (1) (a) of the Patents Act 1952 Cth, and therefore void; the second is that it offended s. 45 (1) of the Trade Practices Act 1974, as amended by Act No. 81 of 1977, and was therefore unenforceable.

(1) It is not lawful, in a contract in relation to the sale or lease of, or a licence to use or work, a patented article or patented process, to insert a condition the effect of which would be -

(b) to require the purchaser, lessee or licensee to acquire from the seller, lessor or licensor, or his nominee, an article or class of articles not protected by the patent,

The appellant argues that the effect of cl. 7 was to prohibit or restrict it in the use of any pole other than the Arlo pole. There are two aspects to the argument: one is the proper construction of the clause; the other is the proper construction of the statutory provision. It is convenient to deal with the latter aspect first.

In Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. [26] the House of Lords had occasion to consider the meaning of s. 38 (1) of the Patents and Designs Act, 1907 Imp. which is identical to s. 112 (1) of the Australian Act. A majority of their Lordships (Lord Oaksey, Lord Tucker and Lord Cohen, Viscount Simonds dissenting) held that the provision only applied to a condition of which it could be said at the outset that its effect would be (not might be) to impose on the licensee a legal obligation to buy or not to use as the case may be. The offering merely of a financial inducement which might or might not be effective is not sufficient. "The purpose and effect of s. 38 is to prevent the licensor from limiting the right of the licensee to trade with others so as, in effect, to compel the licensee to trade with him": Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. [27] per Lord Oaksey. Viscount Simonds expressed the view that economic persuasion could be as effective as legal obligation in influencing the conduct of the licensee and that the section should be construed as encompassing such provisions.

[1955] 1 W.L.R. 761; [1955] 2 All E.R. 657. 2. [1955] 1 W.L.R., at p. 777; [1955] 2 All E.R., at p. 669.

This case was considered by the Supreme Court of the Republic of Ireland in Thomas Hunter Ltd.'s Patent [28] . The primary judge had favoured the broader construction of the provision as expressed by Viscount Simonds, but the appellate Court, after citing a lengthy passage from the speech of Lord Oaksey, was content to hold that the facts of the case before it satisfied the provisions of the statute even on that narrower view.

In my opinion, s. 112 (1) should be construed along the lines adumbrated by Lord Oaksey in the Tool Metal Case. I should add, however, that on either view of that provision, the appellant faces real difficulties. This is because of the conclusion to which I have come on the second aspect of the argument, namely, the proper construction of cl. 7. To that matter I now turn.

The appellant argues that cl. 7 necessarily prohibits or restricts it from using its own pole. In my opinion the clause does nothing of the kind. By it, the appellant covenants during the period of the licence to do two things: (1) to use its best endeavours in and towards the design fabrication installation and selling of the Arlo pole, and (2) to energetically promote and develop the greatest possible market for the Arlo pole. In each case the obligation is expressed in positive terms, and is directed to the sale of the Arlo pole. Whether or not there is a sale is a result which is beyond the control of the appellant. It cannot make that decision.

It is true, of course, that the obligations undertaken by the appellant under these covenants were substantial: cf. Terrell v. Mabie Todd & Co. Ltd. [29] . It was obliged to do all that could reasonably be expected of it having regard to the circumstances of its business operations: B. Davis Ltd. v. Tooth & Co. Ltd. [30] . In the circumstances of this case, the clause required the appellant to do its best honestly to advance to the Electricity Commission of New South Wales the claims of the Arlo pole as a suitable and desirable product for the Wallerawang project. It should not have held back any consideration which might attract a decision in its favour. But it remained free to submit a tender based on the use of its own pole. It was not obliged to deny to the Electricity Commission a choice of poles, nor to keep secret the virtues of its own product. I see no reason why it was not possible for the appellant honestly to use its best endeavours in favour of the Arlo pole while at the same time making it possible for the prospective purchaser to choose its own. The test is whether it has given the Arlo pole every chance consistent with its merits.

(1952) 69 R.P.C. 234. 2. [1937] 4 All E.R. 118, at p. 128.

It follows from this understanding of cl. 7 that on either of the competing views of s. 112 that provision has no application to the clause. It does not operate to prohibit or restrict the appellant from using a pole supplied or owned by a person other than the licensor. This conclusion makes it unnecessary to consider two further arguments advanced by the respondent, which nevertheless should be mentioned. The first was that s. 112 (1) was confined to a condition the effect of which was to restrain the licensee from purchasing from third parties. The second was that if cl. 7 of the licence was to be construed as preventing the appellant from selling any pole other than the Arlo pole, then by reason of s. 112 (7) (a), it would remain unaffected by s. 112 (1).

I turn now to the argument based on the Trade Practices Act. Subject to s. 51 of that Act, s. 45 (1) has the effect of rendering cl. 7 unenforceable if it "has the purpose, or has or is likely to have the effect, of substantially lessening competition".

Having regard to the view that I have expressed as to the proper construction of cl. 7, I am unable to see how it could possibly be maintained that the clause has the purpose of substantially lessening competition. Its purpose must be gleaned from the words used, and its context. That purpose is plain. It is to ensure that the licensee, being given the sole right within Australia to make, use, exercise and vend the invention, will use its best endeavours to exploit it. Such a purpose might be expected to promote competition, given that there are any competitors in the field. In any event, it is in my view impossible to extract from it the proscribed purpose. Nor do I think that it has, or is likely to have, the effect of substantially lessening competition. It would certainly not have that effect so far as any third parties are concerned, for in such a situation competition must be encouraged. So far as concerns the appellant's freedom to promote its own product in competition with the Arlo pole, I do not find that freedom lessened by its obligation to promote also the Arlo pole.

Even if I am wrong in this regard, s. 51 (3) would appear to provide a complete answer to the appellant's argument. So far as material, that sub-section provides that s. 45 shall not be taken to have been contravened by reason of a condition of a licence granted by the owner of a patent to the extent that the condition relates to articles made by the use of the invention to which the patent relates. Clause 7 would seem to fall squarely within that provision.

At a glance

Court

Decision date

Before

Source

Judgment (124 paragraphs)

Parties