Armacel v Weyerhaeuser

[2009] NSWSC 628

CITATION:	Armacel v Weyerhaeuser [2009] NSWSC 628
HEARING DATE(S):	12 June 2009
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	McDougall J at 1
EX TEMPORE JUDGMENT DATE:	12 June 2009
DECISION:	See paragraphs [44] to [48] of the judgment.
CATCHWORDS:	CONTRACTS - breach of contract - whether contract validly terminated - whether appropriate to make a declaration that contract was validly terminated. - COSTS - 'reasonable legal costs and expenses' - whether appropriate to assess reasonableness of costs incurred on an interlocutory basis prior to final determination of the matter.
LEGISLATION CITED:	Trade Practices Act 1974 (Commonwealth) Uniform Civil Procedure Rules
CATEGORY:	Procedural and other rulings
PARTIES:	Armacel Pty Limited (Plaintiff) Weyerhaeuser Company (Defendant)
FILE NUMBER(S):	SC 50219/08
COUNSEL:	T A Alexis SC / A C Norrie (Plaintiff) D R Sibtain / S A Sirtes (Defendant)
SOLICITORS:	Access Business Lawyers (Plaintiff) Phillips Ormonde Fitzpatrick Lawyers (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

12 June 2009 (ex tempore - revised 12 June 2009)

50219/08 ARMACEL PTY LIMITED v WEYERHAEUSER COMPANY

JUDGMENT

1 HIS HONOUR: On 27 February 2006 the plaintiff (Armacel) and the defendant (Weyerhaeuser) entered into a licence agreement. By that licence agreement, Armacel in effect licensed Weyerhaeuser to use certain "Equipment" to manufacture certain "Licensed Products", "Approved Products" and "Endorsed Products".

2 The licence agreement has come to an end. For reasons that I shall explain, it is appropriate to conclude that Armacel has validly terminated the licence agreement by reason of Weyerhaeuser's breach.

3 By clause 3 of the agreement, Weyerhaeuser agreed to pay a royalty. Reference to item 9 of the schedule indicates that the royalty was fixed as a percentage of the net sale price of licensed products. Reference to item 12 of the schedule indicates that there were minimum annual royalties of $75,000 (although with a "ratcheting" that is of no present relevance).

4 Clause 9 of the agreement required Weyerhaeuser to use commercially reasonable endeavours to commercialise and exploit the licensed technology and to manufacture, market and sell the licensed products. Clause 9 was cross-referenced to the "minimum performance criteria" in clause 10.

5 Clause 10 required Weyerhaeuser to sell sufficient licensed product to generate the royalty of $75,000 per year, to which I have referred. A failure to do so was a breach of the agreement, entitling Armacel to terminate the agreement in accordance with clause 16.

6 Clause 16 of the agreement dealt with termination. By clause 16.1.2, Armacel was entitled to terminate the agreement if Weyerhaeuser made default in payment of royalties or licence fees or other amounts, and did not remedy that default within fourteen days of notice.

7 The consequences of termination included that, by clause 17.1.3, Weyerhaeuser was liable to pay immediately to Armacel "all moneys due and payable including all unpaid Licence Fees up to the end of the Term".

8 Clause 22.3.3 of the agreement provided that, if a party was found by a court to be in breach, that party must pay to the other, on demand, "the amount of any reasonable legal costs and expenses incurred by the non-breaching party for the enforcement of its rights under this agreement".

9 It seems that, in about August 2008, Weyerhaeuser ceased to carry on the business, for the purposes of which it had entered into the licence agreement.

10 On 23 September 2008, Armacel gave written notice to Weyerhaeuser alleging breaches of three clauses of the agreement - clauses 9.1, 9.2 (which dealt with business plans) and 10.1. It required each of those breaches to be remedied.

11 The breaches were not remedied (it is unnecessary, for present purposes, to explore how some of those breaches could have been remedied). Accordingly, on 22 October 2008, Armacel gave Weyerhaeuser a notice of termination.

12 These proceedings are concerned with the consequences of the matters that I have briefly outlined. Armacel claims judgment for an amount in excess of US$1 million, which it says is the amount due to it under clause 17.1.3 of the licence agreement. It seeks damages in the alternative. Further, it seeks performance of confidentiality obligations, and related relief, and delivery up of intellectual property and other matters.

13 Armacel's statement of contentions contains allegations referring to the making of the licence agreement, its applicable law, and clauses 9, 10 and schedule 12 (and other clauses that are of no present relevance). It then alleges, by paragraph 8, service of the notice of breach to which I have referred. By paragraph 9 it alleges failure to remedy.

14 Against that background, paragraph 10 of the contentions reads as follows:

“On 22 October 2008 and pursuant to article 16 of the licence agreement, the Plaintiff served a Notice of termination of the licence agreement and thereby terminated the licence agreement.”

15 The amended list response replies, in various ways, to the allegations leading up to paragraph 10. Specifically, although it admits service of the breach notice, it does not admit the breaches or the failure to remedy them.

16 It replies, by paragraph 9, to paragraph 10 of the contentions:

“The defendant admits the allegations in paragraph C10 of the Plaintiff's Amended Statement.”

17 By notice of motion filed on 18 March 2009, Armacel seeks in substance:

(1) a declaration that Weyerhaeuser was, on and from 23 September 2008, in breach of the licence agreement;

(2) an order pursuant to clause 22.3.3 of the licence agreement that Weyerhaeuser pay Armacel, on demand, the reasonable legal costs and expenses incurred by Armacel for the enforcement of its rights under the agreement;

(3) costs on an indemnity basis of the notice of motion.

18 There was an introductory skirmish as to whether there was an admission on the pleadings (or otherwise) sufficient to enliven the Court's powers under UCPR rule 17.7. That was one of the rules on which Armacel moved; the other being rule 13.1.

19 In my view, it is clear, on the pleadings, that Weyerhaeuser admits the matters alleged in paragraph 10 of Armacel's contentions. As I have said, paragraph 10 alleges the service of a notice of termination pursuant to clause 16 of the licence agreement, which act - service - "thereby terminated the licence agreement".

20 The admission that has been made is that the notice of termination was effective to, and did, bring the licence agreement to an end. It is necessarily implicit in the admission that the notice of termination was valid. If it were not, it could not have terminated the licence agreement. In this context, I note that Weyerhaeuser has made no allegation that the notice was a repudiation. Even if it were, that would be of little relevance because unaccepted repudiation, a thing writ on water, does not of itself bring a contract to an end.

21 It follows, in my view, that the Court's power under rule 17.7 is enlivened. There is other evidence of admissions and, if it were necessary to do so, I would conclude that they too were capable of enlivening the power.

22 The power that is enlivened is a discretion to "give any judgment or make any order to which the other party is entitled on the admissions". As subrule (2) makes clear, that power may be exercised "even if the other questions in the proceedings have not been determined".

23 Mr Sibtain of counsel, who appeared with Ms S A Sirtes of counsel, for Weyerhaeuser, submitted that the making of a declaration lacked utility. Further, and perhaps more fundamentally, he submitted that there was a consistent chain of authority cautioning against making declarations on an interlocutory basis, or pursuant to a notice of motion.

24 The latter point can be dealt with first. The authorities to which Mr Sibtain referred are clear and persuasive. But, in my view, they have little application where what is sought is a final order on admissions pursuant to rule 17.7. The notice of motion is the vehicle by which the "application" of which the rule speaks is made. But the relief that is granted pursuant to rule 17.7 is not interlocutory relief. It is in no way analogous to the interlocutory relief, or relief granted on notice of motion, that is spoken of in the cases to which Mr Sibtain referred.

25 That then leaves the question of utility. It is at this point that the parties' approaches diverge substantially. Mr Alexis of Senior Counsel, who appeared with Mr Norrie of counsel for Armacel, submitted that the declaration would have utility because it would be a finding for the purposes of clause 22.3.3 of the agreement. In other words, Mr Alexis sought to rely upon the declaration as a springboard for the payment of costs pursuant to that clause.

26 I have grave doubts that clause 22.3.3 should be applied in the sense that Mr Alexis seeks. That is the subject of prayer 2 of the notice of motion, which seeks, in effect, an order for specific performance of an obligation to pay money. I am not sure that this, of itself, is a sufficient reason for making the declaration.

27 However, in my view, there are other reasons why the power to make the declaration should be exercised. The primary purpose is to ensure that, as the proceedings move forward, they do so on a defined basis. That defined basis, which is relevant both to the balance of Armacel's claim and to the cross-claim by Weyerhaeuser, is that matters can proceed (and in my view should proceed) on the basis that there has been a breach and that the contract has been validly terminated.

28 Mr Sibtain submitted that the making of a declaration might, in some way, interfere with the prosecution of his client's cross-claim. That cross-claim seeks relief, among other things, under sections 82 and 87 of the Trade Practices Act 1974 (Commonwealth). The relief sought under section 87 is specified to be a variation of the contract to relieve Weyerhaeuser of its obligation to make the future payments for the recovery of which Armacel sues. It is unnecessary to go into the reasons why that relief is claimed.

29 I do not agree that the making of the declaration would have any impediment on the prosecution of the cross-claim.

30 Accordingly, as I have said, I think that it is appropriate to grant declaratory relief on, but limited to, the admission that has been made.

31 That leaves the question of clause 22.3.3. There are a number of difficulties lying in the way of the interlocutory enforcement of that clause. Mr Alexis submitted that the parties clearly intended that Armacel should be able to recover its enforcement costs from time to time, and should not have to wait until the end of any proceedings to do so. He submitted that to deny it that right would be to cut across the bargain that the parties had made.

32 It has to be said that Mr Alexis' submissions on this point tended to take the phrase "any reasonable legal costs and expenses incurred" out of context. The obligation is to pay reasonable legal costs and expenses incurred by Armacel for the enforcement of its rights under the agreement. In my view, it will be very difficult, at any given stage prior to a final hearing and judgment, to say whether costs had been reasonably incurred for that purpose. For example: the claim might be completely recast. Could it be said, in those circumstances, that costs incurred before the claim was recast were reasonably incurred?

33 Again, and as Mr Sibtain submitted, there might, at some stage, be an offer of compromise. It might prove to be the case, when the proceedings were resolved by final orders, that the offer of compromise was extremely favourable to Armacel, and that it was extremely foolish of Armacel not to accept it but to proceed. Could it be said that Armacel's costs incurred after service of the offer of compromise were reasonably incurred?

34 In my view, quite apart from the normal problem attending the making of orders for specific performance of purely monetary obligations, there are real practical problems, of the kind that I have outlined, in granting what is, in effect, interlocutory specific performance of an obligation such as clause 22.3.3.

35 There is another and more specific problem with the clause. What I have said so far proceeds on the basis that the costs and expenses must be reasonably incurred for the enforcement of rights. But the word "reasonable" has, I think, a wider connotation. The costs themselves must be reasonable in amount. How is that to be determined at any given point? Presumably, if the parties cannot agree, by some form of assessment or reference out. The prospect of repeated demands and repeated assessments or references is not at all palatable.

36 In this case, the particular demand for costs is contained in an invoice dated 22 January 2009. That contains two items. The first is:

“To Legal Expenses incurred to October 27, 2008, for the enforcement of the Licence Agreement...$12,739.85.”

37 The second item is:

“To Management Expenses incurred for the enforcement of our rights under the Licence Agreement...$3,000.”

38 There is absolutely no material that would enable me to form any assessment of whether those amounts (to the extent that they are caught by clause 22.3.3) are reasonable. Nor, going back to the wider point, do I feel at all confident in saying, at this stage, that they were reasonably incurred for the purpose of enforcing rights.

39 It will be noted that the demand included a demand for an amount of management expenses. Mr Alexis submitted that the word "expenses" in clause 22.3.3 referred to management expenses. Mr Sibtain submitted that it referred to what are often called disbursements incurred by lawyers in the prosecution or defence of proceedings.

40 In my view, Mr Sibtain's construction is to be preferred. When one looks at the phrase "reasonable legal costs and expenses", it is my view that the two adjectives - "reasonable" and "legal" - qualify both the nouns that follow - "costs" and "expenses". So reading the clause corresponds to the well-known phrase "legal costs and disbursements", which one sees on countless occasions.

41 It is an apt use of language to refer to legal costs and disbursements as being incurred by a client. It is, in my view, an inapt use of language to refer to the incurring of management expenses, in a situation where (so far as I know) those expenses would have been incurred, in the sense that the employees in question would have been paid, in any event.

42 In my view, the word "expenses" does not extend to some allocation of management time. Whether or not it is capable of extending to (for example) casual or contract staff taken on for the sole purposes of the litigation is something that was not argued, and something that I do not, by what I have said, intend to decide.

43 Thus, it seems to me there is no present basis for making the order sought by prayer 2 of the notice of motion.

44 Pursuant to UCPR rule 17.7, I declare that the plaintiff, by notice of termination dated 22 October 2008, validly terminated the licence agreement made between the plaintiff and the defendant dated 27 February 2006.

45 I order that the balance of the plaintiff's notice of motion filed on 18 March 2008 be dismissed.

46 I will hear the parties on costs.

47 Having regard to the lateness of the hour, the measure of success and failure, and the fact that, to the extent that the plaintiff succeeded, it did not get the declaration it sought but a different declaration, I think the appropriate order is that each party pays its own costs, and I so order.

48 I stand the proceedings over to the directions list on Friday next, 19 June 2009.

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