Bridgestone Australia Ltd and Industry Research and Development B Oard
[2003] AATA 772
•8 August 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 772
ADMINISTRATIVE APPEALS TRIBUNAL )
) No S2001/296
GENERAL ADMINISTRATIVE DIVISION ) Re
BRIDGESTONE AUSTRALIA LTD.
Applicant
And
INDUSTRY RESEARCH AND DEVELOPMENT BOARD
Respondent
DECISION
Tribunal Justice Downes, President
Mr S. Webb, MemberDate8 August 2003
PlaceSydney
Decision The decision under review is set aside and, in substitution therefor, the Tribunal decides that the results of the research and development activities undertaken by Bridgestone Australia Pty Ltd during the substituted accounting periods ending on 31 December 1989, 1990 and 1991 have not been exploited otherwise than on normal commercial terms nor otherwise than in a manner that is for the benefit of the Australian economy and that no certificate should be given under s 39M of the Industry Research and Development Act 1986. ......................(sgd).......................
President
CATCHWORDS
TAXATION – Income Tax Assessment Act 1936 (Cth) subs 73B(14) – tax incentives for research and development activities – Industry Research and Development Act 1986 (Cth) s 39M – applicant conducted research and development activities relating to the manufacture of rubber products – results of the activities were exploited through the sale of tyres and the transfer and licensing of technology to the applicant’s Japanese parent company – exploitation was not otherwise than in a manner that is for the benefit of the Australian economy – exploitation was not otherwise than on normal commercial terms – Industry Research and Development Act 1986 (Cth) s 39C – licensing agreement relating to the exploitation could reasonably have been entered into and contained terms that could reasonably have been contained if the agreement had been entered into by persons dealing with each other at arm’s length and from positions of comparable bargaining power
Income Tax Assessment Act 1936 (Cth) subs 73B(33), 73B(14)
Industry Research and Development Act 1986 (Cth) ss 39C, 39M
Industry Research & Development v Bridgestone Australia Ltd (2001) 109 FCR 504 followed
McPherson v Moiler (1920) 20 SR (NSW) 535
REASONS FOR DECISION
Conclusion
1.In these reasons for decision we have concluded that Bridgestone Australia Ltd. ("BSAL") did not exploit the results of research and development activities otherwise than on normal commercial terms notwithstanding the provisions of a technical assistance and licence agreement entered into with its Japanese holding company.
Summary
2.BSAL claims income tax deductions for substituted accounting periods ending 31 December 1989, 1990 and 1991. It claims the deductions pursuant to subs 73B(14) of the Income Tax Assessment Act 1936 (Cth) (“the Tax Act”). At the relevant time the subsection provided for deductions of 150 percent for research and development expenditure. However subs 73B(33) provided that a deduction under subs 73B(14) would be disallowed if the Industry Research and Development Board (“the Board”) gave the Commissioner of Taxation a certificate under s 39M of the Industry Research and Development Act 1986 (Cth) (“the Act”). That section authorises the giving of a certificate where “any of the results of [the] research and development ... have been exploited otherwise than ... on normal commercial terms". By s 39C "exploitation of [research and development] activity shall be taken .... to be ... otherwise ... than on normal commercial terms if, in the opinion of the Board, any contract or transaction relating to that exploitation would not have been entered into, or contained terms that would not have been contained or would have been different, if the contract or transaction had been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power."
3.During the relevant substituted accounting periods BSAL designed, manufactured, and sold tyres for motor vehicles. It was a listed public company. The Bridgestone Corporation of Japan (“BSJ”) held a majority of its shares. The bulk of the results of the research and development were exploited by the manufacture and sale of tyres in Australia. However, on 21 August 1981 BSAL, then known as Bridgestone Australia Pty. Ltd., had made a Technical Assistance and Licence Agreement ("the TALA") with BSJ, then known as Bridgestone Co, Ltd.. At all material times BSJ was beneficially entitled to approximately 60 percent of the share capital of BSAL.
4.By the TALA BSJ agreed to provide BSAL with technical information and to permit its representatives to visit BSJ’s premises to receive technical assistance. BSJ agreed to train employees of BSAL. BSAL agreed to furnish BSJ with technical information it acquired and granted BSJ “a non-exclusive, irrevocable, worldwide royalty-free licence ... with the right to grant sub-licences thereunder except, in Australia, New Zealand and Papua New Guinea ...". The TALA permitted BSJ to give notice of its termination should it cease to own more than 50 percent of the shares in Bridgestone Holdings Ltd. which, at the time the TALA was made, was the holding company of BSAL. By the time of the relevant substituted accounting periods BSJ no longer held 60 percent of BSAL through a holding company but held that interest directly. The TALA could not be assigned by BSAL without consent.. Disputes were to be settled by arbitration in Tokyo. The applicable law was the law of Japan.
5.The parties accept that the TALA was a contract relating to the exploitation of the results of the research and development claimed to be deductable. Since the TALA was made nearly a decade before the first tax year of exploitation and since the exploitation was largely by the manufacture and sale of tyres in Australia this conclusion contains elements of the tail wagging the dog. However, the parties originally agreed, probably correctly, that the legislation compels this conclusion. Any submission to the contrary before us was only faintly pressed.
6.In this review, standing in the place of the Board, we must determine whether the TALA, as a contract relating to the exploitation of the research and development, would not have been entered into or would have been different, if entered into by persons dealing at arm’s length and with comparable bargaining power.
7.To determine this matter we need to address both factual issues and legal issues. The legal issues require us to isolate the precise test to be applied. The factual issues require us to find the facts which match the legal issues. As to the former we have the guidance of the decision of the Full Federal Court in an appeal from a prior decision in this matter (Industry Research and Development Board v Bridgestone Australia Ltd (2001) 109 FCR 564). As will become apparent, we consider our task to be, in the light of that decision, to postulate agreements on the same subject matter as the TALA and to enquire whether parties dealing with each other at arm’s length and from positions of comparable bargaining power might make an agreement to the same effect as the TALA.
8.We consider that we should enquire whether such parties might make such an agreement rather than whether they would only make such an agreement and no other because the words of s 39C are calculated to identify agreements which are to be excluded ("would not have been") and not to provide a test of inclusion. A test which leads to only one form of complying agreement would ignore commercial reality in the face of a section which appears to embrace it and which also appears to provide a benchmark which would largely be satisfied by actual contracts between entities dealing at arm’s length and with comparable bargaining power.
9.We are satisfied from our own examination of the matter, and from the expert evidence before us, particularly the evidence of the applicant’s experts, which we prefer to the Board's experts, that the TALA is not an agreement which would not be entered into, or would not contain some of its terms, or would have been different, if it had been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power.
The Applicant
10.In 1980 “Uniroyal Inc.” held an approximate 60 percent interest in a publicly listed holding company then called “Uniroyal Holdings Limited”. The business now carried on by BSAL was carried on by a subsidiary of Uniroyal Holdings Ltd then called “Uniroyal Pty. Ltd”. Indeed, BSAL is the same corporate entity as Uniroyal Pty. Ltd although it has undergone changes of name and share structure and holding. Uniroyal Inc. sold its 60 percent interest in Uniroyal Holdings Limited to Bridgestone Tire Co, Ltd., a Japanese rubber products company in December 1980. Uniroyal Pty. Ltd changed its name to “Bridgestone Australia Pty. Ltd.” and Uniroyal Holdings Limited changed its name to “Bridgestone Holdings Ltd.”. On 1 March 1982 Bridgestone Australia Pty. Ltd. converted to a public company named “Bridgestone Australia Ltd.” (BSAL) and on 7 April 1982 Special Resolutions were passed by the shareholders of Bridgestone Holdings Ltd. that it would be wound up voluntarily and that shareholders would accept in lieu of their shares in the holding company an identical number of shares in BSAL. The shares in BSAL were distributed in specie to the shareholders of Bridgestone Holdings Ltd. on a one-for-one basis. In or about 1984 Bridgestone Tire Co, Ltd. changed its name to “Bridgestone Corporation” (BSJ). BSJ retained an approximate 60 percent interest in BSAL.
The Agreement
11.On 21 August 1981 BSAL, then known as Bridgestone Australia Pty. Ltd., entered into the Technical Assistance and Licence Agreement (“the TALA”) with its ultimate holding company BSJ. The TALA is a contract whereby BSJ undertook to provide BSAL with know-how and other technical information relevant to the production of defined "Rubber Products”, including automotive tyres and tubes listed in the schedule to the agreement.
12.As its name suggests the TALA is an agreement for the provision by BSJ to BSAL of technical information and assistance for use in connection with its business of manufacturing automotive tyres and tubes. In return BSAL was to pay royalties. The agreement also provided for technical information to be furnished by BSAL to BSJ. In both cases the agreement conferred licenses for the use of the technical information.
13.The agreement begins with the following recitals:
"WHEREAS the licensor owns approximately 60.4 percent of the shares of BRIDGESTONE HOLDINGS LIMITED (hereinafter called the "Holdings"), which owns all of the shares of the Licensee;
WHEREAS the Licensee desires to be provided by the Licensor with the technical assistance for the manufacture of automotive tires and tubes; and
WHEREAS the Licensor is willing to provide such technical assistance to the Licensee as long as it holds more than fifty (50) percent of the issued voting shares of the Holdings and also as long as the Holdings holds not less than seventy-five (75) percent of the issued voting shares of the Licensee."
14.The following definitions appear in Article 1:
"ARTICLE-1: DEFINITIONS:
1-1:“Rubber Products" as used in this Agreement shall mean automotive tires and tubes which are listed in Schedule-A attached hereto and made a part thereof.
…
1-3:“Technical Information" as used in this Agreement shall mean know-how and other technical information owned and used by the Licensor in its commercial production of the Rubber Products, with respect to equipment, general estimate of utility requirement and layout, operating technique, the Specifications, test procedure and test data. However, the Technical Information shall not include any information, data or records as to the Licensor's costs, prices, finances, or contractual or business relationships, or any information or assistance relating to the manufacture of products other than the Rubber Products."
15.Article 2 contains the substantive provisions relating to the obligation of BSJ to supply BSAL with the technical information and assistance. The article contains seven sub-clauses dealing with detail. We can content ourselves by setting out three of the sub clauses:
"ARTICLE-2: TECHNICAL ASSISTANCE:
2-1:To the extent of its right legally to do so, the Licensor will provide the Licensee during the effective period of this Agreement with such Technical Information as will enable the Licensee to manufacture the Rubber Products to the then current Specifications used by the Licensor from time to time in its commercial production of the Rubber Products. The technical assistance under this Article-2 shall be provided, not at one time, but on a continuing basis as the Licensee actually requires it and is ready to commence commercial production of the particular type of the Rubber Products for which the technical assistance is necessary. When and how such technical assistance is provided to the Licensee shall be determined by agreement of the parties hereto from time to time.
…
2-4:The Licensor shall, upon the Licensee’s request, permit representatives of the Licensee who are acceptable to the Licensor to visit the Licensor’s plants engaged in the manufacture of the Rubber Products at the expense of the Licensee for the purpose of receiving the technical assistance under this Article-2. When and how such plant visits take place shall be determined by agreement of the parties hereto from time to time.
…
2-7:The furnishing of and the granting the right to use the Technical Information and the licensing of the Patents under this Agreement are made without any representation or warranty by the Licensor as to patentability, exclusiveness, freedom from infringement of patents or proprietary rights, or freedom from risk of damage or harm. However, the Licensor shall give the Licensee such assistance and information in its possession as may be useful in determining the Australian patent implications of the Facility, design, and operation, for the purpose of minimizing the use of designs and processes patented by third parties."
16.Article 3 confers the license on BSAL. Again, we need not set out all the detail in the clause:
“ARTICLE-3: LICENSES:
3-1:The Licensor hereby grants to the Licensee a non-transferable license, without the right to grant sub-licences, to use the Technical Information and Patents in the manufacture of Rubber Products in Australia and the sale of such rubber products anywhere in the world in accordance with Article-9 hereof.
Limited to the use of the Technical Information by Licensee, the License granted hereunder shall, except to the extent the same is inconsistent with any licenses licensor may have granted to third parties as of the date hereof, be exclusive to manufacture Rubber Products in Australia and to sell in Australia Rubber Products so manufactured by the Licensee, but shall otherwise be non-exclusive.
3-2:The Licensee agrees not to enter into any agreement relating to the Rubber Products with a third party similar to this Agreement without the prior written approval of the Licensor.”
17.Article 4 concerns language and units of measurement. Article 5 provides for special technical services to be provided by BSJ to BSAL at BSAL’s cost.. Article 6 provides for an annual payment of royalties by BSAL to BSJ "on the basis of the "Net Sales Value” of the Rubber Products (Uniroyal brand and Bridgestone and other brands respectively) manufactured and sold” by BSAL. "Net Sales Value" is defined in Article 6-2. The royalty rates are set out in Article 6-1 and range between 0.5 percent and 2.25 percent. The royalty rate for the Uniroyal brand is 0.75 percentage points lower than the rates applying to the Bridgestone brand and any other brand.
18.Article 7 of the TALA is of particular relevance in the current proceedings. It provides for the transfer of technical information from BSAL to BSJ; grants licenses from BSAL to BSJ; and sets out conditions for the granting of sub-licenses and the seeking of patents by BSAL with respect to Rubber Products or their manufacture. We will set out the clause in full:
“ARTICLE-7: TECHNICAL INFORMATION TO BE SUPPLIED BY THE LICENSEE:
7-1:During the term of this agreement the Licensee shall furnish to the Licensor any technical information which it has or may acquire during the term of this Agreement with respect to the Rubber Products or its manufacture, except to the extent that the same may be contractually prohibited. The Licensee hereby grants to the Licensor a non-exclusive, irrevocable, worldwide royalty free license (except to the extent the same may be contractually prohibited) with the right to grant sub-licenses thereunder except, in Australia, New Zealand and Papua New Guinea to use and cause to be used any information supplied under this Article-7.
7-2:During the term of this Agreement the Licensor shall have the right to send, at its own expense, a reasonable number of representatives to the plant or plants of the Licensee [engaged] in the manufacture of the Rubber Products for a reasonable period and at mutually convenient times who shall have access to all premises, goods, and documents of the Licensee relevant to the manufacture of the Rubber Products.
7-3:The Licensee shall have the right to seek patent or other industrial property rights of its original inventions, with respect to the Rubber Products or its manufacture, as long as the Licensee shall not breach its obligation of secrecy under Article-8 herein below.
7-4:The Licensee also grants to the Licensor a non-exclusive, worldwide royalty free license except to the extent that the same may be contractually prohibited with the right to grant sub-licenses except in Australia, New Zealand, and Papua New Guinea, under any patents or industrial property rights relating to the Rubber Products or its manufacture which the Licensee may own, acquire or apply for during the term of this Agreement."
19.Article 8 is a confidentiality clause concerning “all manuals, data, diagrams, the Specifications, the Technical Information, and all other technical information and advice”.. Article 9 concerns the sale of rubber products by BSAL in foreign markets in which BSJ has a marketing organisation, requiring, with limited exceptions, the sale of such products through that organisation.
20.Article 10 is headed “Default: Force Majeure: Etc.:”.. It contains the provision, anticipated in the recitals, permitting termination by BSJ if it ceased to hold 50 percent of Bridgestone Holdings Ltd.. We will set out part of the Article:
"10-1:In addition to any other rights or remedies it may have, either party may cancel and terminate this Agreement if the other party shall default in the performance of any obligation hereunder on its part to be performed and such default shall not have been remedied within sixty(60) days after notice specifying particulars of the default and of the remedy required. Upon cancellation or termination pursuant to this Paragraph, Paragraph 10-4 or otherwise, the Licensee shall immediately cease to use the Technical Information furnished to it hereunder and the Patents and shall return to the Licensor all information furnished by the Licensor;
provided however that if the cancellation or termination is the result of a voluntary sale by Licensor of shares it holds in Holdings, then Licensee may continue to use such Technical Information and Patents on the terms and conditions which shall be mutually agreed, but failing such agreement within 30 days of the date of such cancellation or termination, then for a period of three(3) years, at a royalty rate which shall be decided by arbitration and shall be no greater than that provided herein and no less than half of that provided herein, and otherwise on the terms and conditions provided herein.
…
10-4:Notwithstanding the provisions of Paragraph 15-1, this Agreement may be, at the discretion of the Licensor, terminate [sic] by notice to the Licensee, when the Licensor, by itself or together with one or more other companies which are associated with proprietor within the meaning of Section 6-a) of the Companies Act 1962-1980 of the State of South Australia, ceases to hold more than fifty (50) percent of the then issued voting shares in the Holdings, or when the Holdings ceases to hold at least seventy-five (75) percent of the then issued voting shares in the Licensee, and further in the event that the Holdings, and/or the Licensee shall be nationalized or in any other manner controlled, either directly or indirectly, by any government or agency thereof."
21.Article 10.1 contains two sentences. The first sentence gives either party a right to “cancel and terminate” the agreement for failure by the other party to “remedy” a “default in the performance of any obligation hereunder” within 60 days after notice. The second sentence applies whenever the agreement is cancelled or terminated. The first part of the sentence essentially requires BSAL to cease using and return BSJ’s information. The second part of the sentence contains an exception to that requirement, or a proviso, that effectively will only apply to termination under Article 10.4, in particular where termination is the result of “a voluntary sale by [BSJ] of shares it holds in [Bridgestone Holdings Ltd.]”. The proviso allows, in the absence of a different arrangement, for BSAL to continue using BSJ’s information for three years at a royalty rate no greater than the rate provided for by the TALA and no less than half of that rate, the actual rate to be decided by arbitration.
22.Article 11 is an indemnity clause in favour of BSJ. Article 12 provides that BSAL may not assign the Agreement without the written consent of BSJ. Article 15 provides that the agreement has a term of 10 years which will automatically be renewed from year to year unless terminated on 2 years notice by one of the parties. Article 16 provides that the agreement was to be effective from 27 April 1981. There is no suggestion that the agreement was not in force at any time relevant to these proceedings.
23.Article 17 is an arbitration clause, which provides for the settlement of any dispute between the parties by arbitration in Tokyo. Article 19 provides that the applicable law is the law of Japan.
The Research and Development and the Application for Registration for Income Tax Concessions
24.BSAL applied for registration for the tax concession for research and development under s 73B of the Tax Act. The applications contained details of the research and development activities relied upon in compliance with s 39J of the Act.
25.On 22 July 1993 the Commissioner of Taxation requested certification from the Board with regard to BSAL’s claimed deductions for research and development expenditure for three substituted accounting periods commencing on 1 January 1989 and ending on 31 December 1991 pursuant to subs 73B(34) of the Tax Act (Exhibit E, p. 65). The Deputy Commissioner wrote:
“We request certification under Sub-section 73B(34) of the Income Tax Assessment Act for the projects claimed in those periods. Because of the circumstances of this company’s overseas ownership we ask that particular consideration be given to the exploitation of Research & Development results as set out [in] Sections 39C-39E of the Indstrial [sic] Research and Development Act 1986 as to whether or not there is the required Australian ownership/benefit relationship.”
26.On 8 October 1996 the Board wrote to BSAL forewarning of its intention to issue a certificate pursuant to section 39M of the Act and providing BSAL with a period of 90 days in which to make written submissions (Exhibit E, pp. 228 and 229). The Board wrote:
“The Board hereby issues written notice to Bridgestone Australia Pty Ltd of its intention to issue a certificate under Section 39M of the Act, after 90 days from the date of this letter, to the Commissioner of Taxation that the results of the activities claimed under the following projects have not been exploited: a) on normal commercial terms; or b) in a manner that is for the benefit of the Australian economy.
T9002 Polyester development
T8005 TBR tread development
T7001 229/3 19/359v re development
E9013 Nibbling machine
T1001 75 series
T9006 R185/285 Trailer tyre
T8003 339V development
E9004 Steel Bias Table
This determination is based on the Board’s opinion that the technical agreement covering the activities undertaken under these projects, between Bridgestone Australia Pty Ltd and its major share holder Bridgestone Japan does not appear to have been agreed on normal commercial terms because the agreement offers vastly superior benefits to Bridgestone Japan.”
27.In response, on 23 December 1996, BSAL submitted (Exhibit E, pp. 244-254):
“For the most part, the R&D activities relate to the development of a select number of tyres to meet primarily the requirements of Australian based Original Equipment users in the motor vehicle industry and the replacement tyre market. The goal of each of these projects is to develop a saleable product in the form of a tyre which will be fitted by a major car maker … in Australia. Alternatively the product will be a tyre which is purchased by individual end users …
… The by product of the R&D activities is improved technical know how by our inhouse BSAL staff which helps to facilitate further development. Technical know how is neither an intended nor perceived commercially exploitable result of the R&D activities undertaken.
…
In 1981 BSAL and BSJ signed a Technical Assistance and License Agreement. This contractual agreement indicates that BSJ will provide … technical services to BSAL …
In return for this Technical advice, BSAL are required to make royalty payments to BSJ. Furthermore, BSAL is required to send any brand qualification information to BSJ so as to preserve the Bridgestone name globally. This is the extent of information required by BSJ relating to the Australian operation.
…
In fact, since our association in 1981, there are no known instances of BSJ using the BSAL developed specifications …”
The Decision on the Application
28.On 13 March 1997, the Tax Concession Committee, acting under delegation from the Board, decided to issue a section 39M certificate to the Commissioner of Taxation as foreshadowed, minuting (Exhibit E, p. 337):
“The Committee discussed the technology and licensing agreements with the parent company. There was considerable discussion by the Committee of the extent of Bridgestone’s activities in Australia, including its contribution to the economy through employment. However, given the clear-cut nature of the Guidelines on this matter, the Committee agreed it had no option but to issue a S39M certificate to the Commissioner of Taxation as recommended by the Assessor, for activities claimed under 1.2 of the decision sheet. The Committee also agreed that the Branch should advise companies in the Information Bulletin that a license agreement which would otherwise give rise to concern by the IR&D Board under s 39M should be terminated or suitably amended to conform to IR&D Board Guidelines, if they wish to continue in the future to make claims under the concession.”
29.On 2 April 1997, the Board issued the Commissioner of Taxation with a certificate pursuant to section 39M of the Act and informed BSAL (Exhibit E, pp. 339-342). The certificate contained the following paragraph:
“The Board determined that the results of R&D activities claimed under the following project headings and covered by the Technical Agreement between the claimant and Bridgestone Tyre Co Ltd of Japan have not been exploited: a) on normal commercial terms; or b) in a manner that is for the benefit of the Australian economy.”
The Application for Review
30.BSAL applied to the Administrative Appeals Tribunal pursuant to s 39T of the Act for review of the Board’s decision. That section, relevantly, confers jurisdiction to review a decision under s 39M of the Act.
The Legislation
31.Section 39M of the Act relevantly provides:
“39M. (1) Where:
(a) expenditure has been incurred by a company registered under section 39J or 39P:
(i) on particular research and development activities; …
(ii) … and
(b) the Board is of the opinion that:
(i) any of the results of those research and development activities have been exploited otherwise than:
(A) on normal commercial terms; or
(B)in a manner that is for the benefit of the Australian economy …
the Board may, subject to subsection 39E (4), give a certificate in writing to the Commissioner:
(c) stating that it is of that opinion;
(d)specifying the research and development activities concerned; and
(e) giving the reasons for its opinion.
(2) The Board shall not give a certificate under this section in relation to a company unless the Board has:
(a)given notice in writing to the company stating that it is considering giving the certificate, specifying the activities to which the certificate would relate and informing the company of the reasons why it is considering giving the certificate;
(b)invited the company to make a written submission to the Board in relation to the matter within 90 days; and
(c)if such a submission is made within that period, had regard to the matters raised in the submission.”
32.The Board had formed the opinion that the results of the research and development activities carried out by the Applicant during the period of claim had neither been exploited on normal commercial terms nor been exploited in a manner that was for the benefit of the Australian economy. Subsequently, however, the latter ground was abandoned, narrowing the ground of review to whether or not the results of the research and development activities had been exploited on normal commercial terms.
33.The Act provides guidance in the interpretation of the phrase “exploitation otherwise than on normal commercial terms” in s 39C:
"39C. The exploitation of a particular result of any activity shall be taken for the purposes of this Part to be an exploitation otherwise than on normal commercial terms if, in the opinion of the Board, any contract or transaction relating to that exploitation would not have been entered into, or contained terms that would not have been contained or would have been different, if the contract or transaction had been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power.”
The Appeals
34.BSAL was successful in its application to the Administrative Appeals Tribunal where Senior Member Kiosoglous determined that BSAL’s research and development activities had been exploited on normal commercial terms (Re Confidential and Industry Research and Development Board [1999] AATA 480).The Board appealed to the Federal Court of Australia. O'Loughlin J dismissed the appeal (Industry Research and Development Board v Bridgestone Australia Ltd 2000 ATC 4834). The Board further appealed to a Full Court (Branson, Lindgren and Mansfield JJ) which allowed the appeal and remitted the matter to the Tribunal for further hearing (Industry Research and Development Board v Bridgestone Australia Ltd (2001) 109 FCR 564).
35.Senior Member Kiosoglous had found as a fact that "the negotiations [leading to the TALA] were conducted at arm’s length" (at par [75]) and that BSJ and BSAL "dealt with each other from positions of comparable bargaining power" (at par [124]). As part of his reasoning he concluded (at par [109]) that:
“…the ordinary usage of the word, “comparable” cannot be said to mean “equivalent” or “commensurate”. It simply means, “able to be compared” or “capable of comparison”…”
The Full Court held that SM Kiosoglous had erred in both of these matters.
The Construction of the Legislation
36.The Full Court held that Senior Member Kiosoglous had applied the wrong test. The test did not permit a determination of whether the agreement was properly characterised as having been negotiated in fact at arm’s length and from positions of comparable bargaining power. It required the agreement under consideration to be compared with a hypothetical agreement which possessed those characteristics. The Court also held that Senior Member Kiosoglous had misconstrued "comparable bargaining power" holding that "comparable” meant "similar", "like" or "roughly equivalent" ((2001) 109 FCR 564 at 582, par [75]; cf 567, par [9]).
37.Mansfield J agreed with both Branson and Lindgren JJ. Two passages each from the judgments of Branson J and Lindgren J set out their Honours’ opinions on the way in which the comparison called for by s 39C must be made:
"... [T]he opinion of which the section speaks is, in effect, an opinion as to whether any contract or transaction relating to the exploitation of a result of an activity is consistent with the contractual or transactional outcome to be expected from hypothetical negotiations between persons dealing with each other at arm's length and from positions of comparable bargaining power. It is not an opinion as to whether the taxpayer engaged in arm's length negotiations with another person in which negotiations the taxpayer and the other person held positions of comparable bargaining power.” (At 566, par [4], per Branson J.)
“In my view, what s 39C requires the Board to hypothesise is the result of negotiations between persons dealing with each other in circumstances which may rarely exist outside of economic theory, namely circumstances in which the result of their negotiations will be dictated purely by commercial or market considerations and not by their relationship one to the other or by appreciable disparities of power between them.” (At 568, par [10], per Branson J.)
“Prima facie the hypothesis invoked is only one of a hypothetical person who has the actual result of the actual research and development activity in question available for exploitation, and who, apparently, is a not unwilling but not anxious exploiter: cf Spencer v Commonwealth (1907) 5 CLR 418.” (At 582, par [78], per Lindgren J.)
“... [I]t is hypothetical persons, not actual ones, dealing with each other at arm's length and from positions of comparable bargaining power, to whom the section refers." (At 583, par [81], per Lindgren J.)
38.The Full Court’s findings relating to the meaning of “comparable” are found in two passages. Lindgren J concluded at 582, par [75]:
“In my opinion, what is required if a taxpayer is to have the benefit of the concessionally enlarged deduction for expenditure upon particular research and development activities is that any actual contract or transaction that was entered into relating to the exploitation of the results of those activities must have been of the kind to be expected of hypothetical persons dealing with each other at arm’s length and from positions of “similar” or “like” or “roughly equivalent” bargaining power.”
Branson J supported this conclusion at 567, par [9]:
“I also agree with his Honour that "comparable" in the above phrase means "similar", "like" or "generally equivalent". To the reasons advanced by his Honour I add that, in my view, a careful analysis of s 39C indicates that the exercise of comparison which it requires the Board to undertake would prove in practice to be impossible if the meaning of "comparable" for which Bridgestone contended were adopted. It is implicit in the terms of the section that it is possible to infer whether or not a particular contract or transaction would have been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power, and that it is possible to infer whether or not particular terms of a contract or transaction would have been contained in, or would have been different in, a contract or transaction entered into by persons so dealing with each other. Inferences of this kind are only able to be drawn where the contract or transaction outcomes to be expected from hypothetical persons "dealing with each other at arm's length and from persons [sic] of comparable bargaining power" are reasonably predictable. They will not be reasonably predictable where what is required to be hypothesised is persons dealing with each other, albeit at arm's length, with respective bargaining powers that may differ significantly and differ in ways that are not defined."
39.Consistent with the decision of the Full Court, the relevant elements of s 39M and s 39C of the Act require the following questions to be answered:
1.Has "expenditure … been incurred … on particular research and development activities" (s 39M)?
2.Has a "contract" been made "relating to" "[t]he exploitation of a particular result" of the research and development activities (s 39C)?
3.Would the "contract"
a) "not have been entered into" "by persons dealing with each other"
i)"at arm's length"; "and"
ii)"from positions of comparable bargaining power"; or
b)not have contained one or more of its terms (lit. "contained terms that would not have been contained"); or
c)"have been different"
in both cases (b) and (c) if it "had been entered into by persons dealing with each other":
i) "at arm's length"; "and"
ii) "from positions of comparable bargaining power" (s 39C)?
It is necessary to treat (b) and (c) slightly differently from (a) because of the potential "absurdity", referred to by Branson J (at 567, par [5]) and Lindgren J (at 582, par [78]), which would otherwise occur.
The Research and Development Activities
40.The research and development activities in the present case are identified in the Board's letter dated 8 October 1996 (set out above at par [26]). It is not in dispute that BSAL incurred expenditure on these specified activities and we so find.
41.The results of specific project activities are reported as follows (Exhibit E, p. 253):
“The results of projects T9002, E9013, E9004 are incorporated throughout the range of products represented by local sales. Projects T8005, T7001, T1001, T9006, T8003 have all resulted in successful products with BSAL’s current range.”
42.There is nothing before the Tribunal to suggest that the Board disputed that the results of the research and development activities were as reported by BSAL on 23 December 1996 (Exhibit E, p. 246), which we accept, as follows:
“…The results of BSAL’s R&D in the years under review are high quality, cost competitive tyres which have been sold on normal negotiated commercial arrangements with Original Equipment Users or via BSAL’s established distributors and franchisee network to after market end users…
Our research & development in the tyre industry has created the following results:
· Specialist Machines
· Specialist Tyres
· Tyres specifically made for the Australian market because of road conditions
· Increased sales to Original Equipment Manufacturers in Australia
· Tyres for export
· Information Technology and Know How (this has not flowed to Japan)”
43.The way in which the results of the research and development were exploited is partly set out in BSAL's letter of 23 December 1996 (set out above at par [27]). This material was supported by evidence before Senior Member Kiosoglous, which was also evidence before us, in a statement by Andrew Moffatt, the Executive Director - Finance of BSAL (Exhibit E, pp. 380 and 381):
"18. The results of BSAL's R&D activities have been exploited solely in Australia and solely in the production by BSAL in Australia of high quality, cost competitive tyres which have been sold on commercial terms to OE [original equipment] manufacturers and established distributors and franchisees "
The exploitation of the results was discussed by BSAL in the 23 December 1996 report as follows (Exhibit E, p. 246):
“… [T]he focus of BSAL R&D is on end user products not technical know how. The results of BSAL’s R&D in the years under review are high quality, cost competitive tyres which have all been sold on normal negotiated commercial arrangements with Original Equipment Users or via BSAL’s established distributors and franchisee network to after market end users. Formal written contracts for the commercialisation of the results of R&D are drawn up with each O.E. User. The issues of pricing are highly confidential and vary from contract to contract. Should the Board wish to review such contracts arrangements could be made on a first person basis.”
44.We are in no doubt that BSAL exploited the results of its research and development activities primarily through the sale of locally manufactured tyres in domestic and export markets for which BSAL paid royalties to BSJ on the basis of the net value of annual sales in accordance with Article 6.1 of the TALA. It is noteworthy that the Board accepted the payment of royalties to BSJ, stating (Exhibit E, p. 229):
“The Board is of the opinion that the annual royalties ranging between 0.5-2.25% of the net sales revenue is reasonable and adequate consideration for expertise in rubber products development and other special technical services licensed to Bridgestone Australia Ltd by Bridgestone Japan. The Board determined that the provision under sections 7.1 and 7.2 of the Agreement for Bridgestone Japan to obtain irrevocable, world-wide, royalty free license on any technology generated by Bridgestone Australia Ltd under the 150% tax concession is contrary to exploitation under normal commercial terms and is not to the benefit of the Australian economy.”
45.It is clear that the most significant exploitation that is in issue is that concerning the transfer and licensing of technical information and know how that is the result of BSAL’s research and development activities.
46.We find the Board’s expressed position concerning BSAL’s irrevocable, world-wide, royalty-free license on technology to BSJ pursuant to Article 7 of the TALA is consistent with the guideline the Board issued on this subject. In its guideline the Board said (Exhibit E, p. 16):
“The Board … takes the view that the existence of “umbrella technology agreements” between Australian companies and their overseas parent companies or other technology provider which require the Australian company to pay for technology acquired from overseas but which provide the overseas company with the right to free access to technology developed in Australia, as being evidence of exploitation not to the benefit of Australia. The situation where there is free exchange of technology within a company group on a world wide basis will, provided that the requirements for market access and manufacturing capability outlined in Case Study 1 are satisfied, in most instances be acceptable.”
47.We note that while the guideline, which has no legal force, illuminates matters such as “umbrella technology agreements”, that are considered not to the benefit of the Australian economy, it does not otherwise provide guidance as to what is exploitation otherwise than on normal commercial terms, other than repeating the explanation set out at s 39C of the Act. The two concepts are clearly separate criteria against which any relevant exploitation must be measured. It is apparent from the Board’s guideline that the Board “place[s] a high priority on the retention in Australia of control over the technology and its ongoing development” (Exhibit E, p. 16) and considers any agreement between an Australian and a foreign company, whereby the importation of technology is subject to a royalty payment and the exportation of technology resulting from concessional research and development activity is royalty free, would not be “to the benefit of Australia”.
48.Curiously, in the matter at hand, the Board has resiled from its decision that the exploitation in question was otherwise than to the benefit of the Australian economy, seeking only to defend its finding that the exploitation was otherwise than on normal commercial terms. The Board placed its entire reliance, therefore, on the proposition that the TALA is a contract for the exploitation of the research and development activities in question and, as such, is a contract that would not have been entered into, or contained clauses that would not have been contained in or would have been different, had it been entered into by hypothetical persons dealing with each other at arm’s length and from positions of comparable bargaining power.
The Contract
49.We think it must be accepted, at any event in the administration of the present statutory scheme, that, by definition, holding and subsidiary companies cannot deal with one another from positions of comparable bargaining power. They might try to deal with one another as if their relationship was different but they cannot displace their essential connection. Indeed, in most cases, whether or not such parties attempt to deal with one another as if they were dealing at arm’s length with comparable bargaining power will ultimately be determined by the holding company. The very root of any subsequent agreement will accordingly be found in the inequality.
50.Section 39C is not concerned with the actual relationship between the parties to an agreement for the exploitation of research and development, but rather whether the results of the research and development have been exploited otherwise than on normal commercial terms. Section 39C contemplates circumstances where the results of research and development may be exploited on normal commercial terms by parties not dealing with each other at arm’s length or from positions of comparable bargaining power. It is for this reason that the section requires the Board, and in its shoes the Tribunal, to determine whether the actual contract, in the words of Lindgren J “is of the kind to be expected of hypothetical persons dealing with each other at arm’s length and from positions of comparable bargaining power.”
51.In the circumstances a question must arise as to whether an agreement between a holding and subsidiary company can ever satisfy the requirements of s 39C, particularly if the purpose of the agreement is to regulate relations between the holding and subsidiary companies. There must be agreements which could never satisfy s 39C because they are almost exclusively concerned with regulating the relationship of holding and subsidiary companies and would, therefore, contain terms that would never be contained in agreements negotiated by arm’s length parties with comparable bargaining power.
52.The TALA is probably an agreement which contains elements prompted by the relationship between the parties. However, it does not have the purpose of regulating the relationship. It may be that it is the relationship which brought the parties together. It may be that the TALA regulates dealings between them which they may never have engaged in were it not for the relationship. However, the TALA does not deal with the relationship itself. It does not, for example, regulate how the holding company will exercise the rights attached to its controlling shareholding. The agreement is essentially a licence and royalty agreement. Such agreements are very common in industry. They are frequently entered into between parties with no relationship.
53.In our opinion the TALA is the very type of agreement with which s 39C is concerned: an agreement of a kind which is found generally in industry, often entered into between parties negotiating at arm’s length and from positions of comparable bargaining power, but where the latter elements are not present in the instant transaction. Although not expressly so providing s 39C must only operate upon agreements which are in fact entered into by parties not dealing with each other at arm’s length or not dealing from positions of comparable bargaining power.
54.We accordingly conclude that the TALA is an agreement appropriate to be examined under s 39C and one which is capable of satisfying its requirements. Indeed, we do not understand a contrary submission to have been put to us. The task for us is, accepting that the TALA is potentially capable of satisfying the requirements of s 39C, to see whether the agreement as a whole would not have been entered into, or whether it contains terms which would not have been included in, or would have been different, if the negotiating parties had been dealing at arm’s length and from positions of comparable bargaining power.
55.A particular matter which has exercised our minds is whether in any particular case only one form of agreement will satisfy s 39C or whether a range of agreements might satisfy the section. We are driven to the conclusion that a range of agreements may, in the ordinary course, satisfy s 39C. This is because the thrust of the relevant words of s 39C is to exclude agreements which would not be entered into by arm’s length parties with comparable bargaining power and not to find some theoretical ideal which is the only form of such an agreement.
56.It was put to us on behalf of the Board that the words of s 39C effectively required us to find the theoretical ideal. The words of Branson and Lindgren JJ in Bridgestone which are set out at par [37] above (at 568, par [10], per Branson J and at 583, par [81], per Lindgren J) were particularly relied upon to support this argument.
57.We do not think these words suggest that there is only one form of any agreement which will satisfy s 39C. The hypothetical parties may not often exist in the sense that comparable bargaining power may rarely be found. However, that is a long way from saying that parties with similar, like or roughly equivalent bargaining power will always enter into the same agreement on the same subject matter. Comparability of bargaining power does not imply that a negotiator will not react to subjective considerations. What must be comparable is the bargaining power, not the interests.
58.In any event the concluding lines of s 39C postulate hypothetical contracts that may be entered into by persons with certain characteristics. This does not require the construction of a hypothetical ideal contract. The phrase "if the contract had been entered into" shows that the legislature is concerned with real contracts which might possibly be entered into and not some singular ideal.
59.The test to be applied is whether hypothetical persons dealing with each other at arm’s length and from positions of comparable bargaining power would not enter into the actual contract in question.
60.Perhaps most testing on this issue are the words of s 39C themselves which expressly exclude only contracts that "would not have been entered into", that "would not have" contained one or more of its terms, that would not have been the same. We have used some licence in the above paraphrases but they do not change the sense of the section at all. "Contained terms that would not have been contained" is the same as "would not have contained one or more of its terms". "Would have been different" is the same as "would not have been the same”..
61.The important point is that these tests do not leave one with a single ideal model. They merely exclude contracts or terms which would not have been entered into, leaving one or more, perhaps many more, which might have been entered into. The ultimate proposition is that the test is one which identifies contracts to be excluded but does not lay down any test for inclusion.
62.It was put to us that if any clause would be acceptable, provided it could be found or could be postulated in an actual agreement between arm’s length parties with comparable bargaining power, then virtually any contract would satisfy s 39C. This argument, almost reductio ad absurdum, has two flaws. First, not every such clause is acceptable. Determining whether a clause passes the hypothetical test requires reference to parties who are acting reasonably. Secondly, there is an overriding test required by the section as to whether the agreement as a whole is one which would be entered into by arm’s length parties of comparable bargaining power. That part of the test will exclude contracts with extreme clauses which unbalance the contract as a whole.
The Expert Evidence
63.We have been assisted in our task by expert evidence which has been given before us. This was partly evidence as to practice, namely the practice of parties dealing at arm’s length and from positions of similar bargaining power when entering into royalty agreements, and partly evidence of hypotheses drawn from experience of such practice.
64.Although expert evidence can be extremely helpful in assisting tribunals of fact to correctly determine questions of contract practice, the importance of such evidence addressing the issues precisely cannot be overemphasised. We have isolated above, by reference to the words of the sections themselves, understood in the light of the decision of the Full Federal Court in Bridgestone, precisely what the tests are.
65.Bridgestone adduced evidence from three experts. Each of the experts was asked the following questions as to the TALA (Exhibit E, p. 695):
"1.Is the attached agreement … an agreement which would not/would have been entered into by persons dealing with each other at arms length and from positions of comparable bargaining power? and
2.Is the attached agreement … an agreement which contains terms which would not/would have been contained in, or which would/would not have been different from the terms contained in, a contract entered into by persons dealing with each other at arms length and from positions of comparable bargaining power?"
66.The questions seem to us to accord with the requirements of s 39C. Although phrased slightly differently they are identical to the issues we have isolated above. We note, however, that they invite answers to the questions posed both in the positive (“would") as well as the negative ("would not"). Posing the question in this way begs the question of construction which we have dealt with.
67.Bridgestone’s experts were Peter Marsh, a technology commercialisation consultant and patent attorney, Rodger Bouette, a technology commercialisation consultant and investor in technology based ventures and Wayne McMaster, a solicitor and patent attorney. Each of these witnesses answered both questions asked of them in the affirmative. They did not have access to the full version of the TALA when preparing their written opinions. They were shown a version which, although containing all relevant provisions, did not disclose the names or relationship between the parties. They were, however, exposed to the full document and became aware of the relationship between the parties prior to cross examination. We note that Mr McMaster must have been aware of the relationship because he gave evidence at the first hearing before the Tribunal.
68.Mr Marsh answered question 1: "[T]he Agreement is one which falls squarely within the range of agreements which might be entered into as between arms length parties of "comparable bargaining power"”.. His answer to question 2 was as follows (Exhibit E, p. 649):
"I am of the opinion in connection with Question 2 that the Agreement contains only terms of a type and form which fall within the range of terms that could have been entered into as between two parties dealing with each other at arms length and from positions of comparable bargaining power. I say "could" rather than "would" because I am of the view that as between any two parties negotiating at arms length and with comparable bargaining power there are a wide range of agreements which could be entered into. The exact agreement that is agreed will be influenced by a whole spectrum of influences. In this case the Agreement is clearly within the range of agreements that might be expected in the circumstances."
69.The use by Mr Marsh of the word "might" in his answer to question 1 and his use of, and explanation for using, "could" rather than "would" accord with our opinion as to the requirements of the section. Accordingly, Mr Marsh addressed the correct issues.
70.Mr Bouette answered the questions favourably to Bridgestone by using the word "would" without elucidation. Mr McMaster gave the following answers (Exhibit E, pp. 743):
"Question 1
In my opinion, the agreement … is one which could have been entered into by persons dealing with each other at arms length and from positions of comparable bargaining power.
Question 2
In my opinion, the agreement … is one which contains terms which could have been contained in a contract entered into by persons dealing with each other at arms length and from positions of comparable bargaining power."
71.The Board’s experts were Rodney De Boos, a solicitor with considerable experience in industrial and intellectual property law and licensing, and John Stonier, an expert in intellectual property licensing with degrees in law and accounting. Both these experts had access to the full version of the TALA and were aware of the relationship between the parties when preparing their written opinions. They were asked very similar questions to Bridgestone's experts (Exhibit E, p. 813-814):
"Question 1
Whether the TALA is an agreement which would or would not have been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power.
Question 2
Whether the TALA is an agreement which contains terms which would or would not have been contained in, or which would have been different from the terms contained in, an Agreement entered into by persons dealing with each other at arm’s length and from positions of comparable bargaining power."
72.Mr De Boos answered that the TALA "would not have been entered into by persons dealing with each other at arms length and from positions of comparable bargaining power and that it contains terms which would not have been contained in or which would have been different from the terms contained in an agreement entered into by such persons." He did not discuss the "would" or "could" or "might" issues. However, he did raise these in his oral evidence:
"I think that the words of the section by using the word, "would" mandate a narrower range of possibilities than, say, Mr Marsh or Mr McMaster would contemplate when they use the word "could" ... so I am concentrating very much on the word, "would", which to me is a narrower or higher degree of certainty required in the answer that’s [given]; whereas "could" is of less certain capacity if you like." (Transcript of hearing on 4 December 2002, p. 71).
Mr De Boos appears to be espousing the argument that there can be only one model or at best a limited range.
73.In his further evidence a day later, after he had had an opportunity to reflect, he returned to this theme:
“...[T]he section, section 39C, requires the question or the hypothesis to be answered as to what would be the result were the parties dealing at arm's length and from positions of comparable bargaining power. So on that basis, it seems to me, that you have to give a certain answer to the question and as I think I may have mentioned yesterday, my view is that if the section used the word "could" or used the word "might" then the subjective influences that might impact on parties’ decisions as to whether on not they accepted a particular clause would be valid considerations to take into account.” (Transcript, 5 December 2002, p. 74).
74.This approach by Mr De Boos amounts to a misunderstanding of the requirements of s 39C for reasons we have already explained. More importantly, it appears that, notwithstanding that it is not expressly referred to in his report, it was an understanding which affected his reasoning.
75.Mr De Boos’ hypothesis was that "the analysis is to be dictated purely by commercial or market considerations [so that] there is no room to allow into the analysis, the private considerations of one or other of the parties" (Exhibit E, p. 752). He explains at least part of the basis for this approach by reference to his belief that the research is for the contract that "would" be entered into: the ideal contract.
76.Not only is Mr De Boos wrong in his understanding of the effect of "would" in s 39C, but he also misunderstands the fundamental requirement of the section. Section 39C does not require the identification of a hypothetical contract framed by reference solely to commercial or market considerations without reference to what actual parties might do. Rather, it requires the identification of hypothetical contracts which represent the contracts that real parties who are dealing with each other at arm’s length and from positions of comparable bargaining power might enter into. It is contracts that "persons" might enter into and not artificial constructs with which the section is concerned. Such contracts will inevitably involve subjective elements. "Persons dealing with each other at arms length and from positions of comparable bargaining power" will always be affected by subjective considerations. Yet Mr De Boos entirely rejected "what has or has not happened in "real life" situations" (Exhibit E, p. 752, par [8]). He postulated parties who would not be "influenced otherwise than by market or commercial considerations" (Exhibit E, p. 753, par [9]). Whether or not particular clauses in the TALA, or clauses to similar effect, had appeared in other agreements was, to him, an irrelevant consideration. This is not the approach required by the words of s 39C. The section simply and directly requires the hypothesis to address contracts that might actually be made by parties in fact dealing at arm's length and from positions of comparable bargaining power. That is what the words of the section say.
77.What is to be hypothesised are the persons with the required characteristics and, by comparative reference to the actual contract in question, the contractual terms upon which such persons might reasonably agree.
78.As we have said (par [56]), the Board seeks to support the approach of Mr De Boos by reference to passages in Bridgestone and particularly in the decision of Branson J (at 568, par [10]).
79.We do not think that this passage supports Mr De Boos method of determining "commercial or market considerations" or his exclusion of "private considerations" or clauses in actual agreements. Branson J begins by stating that the section requires "the Board to hypothesise ... the result of negotiations between persons". She identifies "commercial or market considerations" as the underlying basis for the result, but it is the result which is the object of the enquiry not an academic search for "commercial or market considerations". Branson J then contrasts "commercial or market considerations" with the circumstances identified in the section, namely, the relationships between parties and disparities in power. It is the latter which are the matters referred to in the section. When Branson J refers to "circumstances which may rarely exist outside of economic theory" she is referring to the fact that negotiating parties rarely will have comparable bargaining power.
80.Where Mr De Boos has erred is in concluding that parties negotiating at arm’s length and from positions of comparable bargaining power will only be motivated by commercial or market considerations of the narrow kind to which he has confined himself. Branson J does not say this. Section 39C does not say this. Persons dealing at arm’s length and from positions of comparable bargaining power may be motivated by many considerations. They will negotiate on a give and take basis. What they will end up with is a fair and reasonable result overall. Such agreements will be within the hypothesis. If, overall, parties dealing at arm’s length with comparable bargaining power would not make such an agreement, it will be caught by the section. If one or more of the terms would not appear, or would be different, in such an agreement, after give and take and similar considerations are taken into account, then the agreement will also be caught by the section. However, terms resulting from give and take situations will not be caught by the section if the agreement as a whole might result, with all its individual clauses, from negotiations between parties acting from a myriad of commercial and market driven considerations. The only requirement of the section is that the result must not be influenced, nor the considerations influenced, by some relationship between the parties or by disparity of bargaining power.
81.It follows that we are unable to agree with Mr De Boos' approach of excluding what real parties have done or might do, nor do we agree with his search for the agreement that "would" be made rather then the agreement that "might" or "could" be made.
82.John Stonier adopts the same approach relating to the “would”, “could” or “might” issue as Mr De Boos. His report is accordingly subject to some of the comments we have made above.
Assessment of the TALA
83.To this point we have dealt with the way in which the experts have approached their task. That is an important matter, but it is not the only consideration. We must also examine their actual assessments.
84.The parties have chosen to place emphasis on particular clauses in the TALA in looking at the issues. We will refer to these below.
Recitals
85.The issue in contention concerning the recitals to the TALA, in which BSAL is shown to be a subsidiary of BSJ, is whether such recitals would not be found in an agreement between parties dealing with each other at arm’s length and from positions of comparable bargaining power, as submitted by the Board.
86.Mr Marsh observed:
“…I don’t hold that the recital is a term of the agreement, the recital is a statement of fact…” (Transcript, 4 December 2002, p. 37).
We agree with Mr Marsh and find that the recitals to the TALA are statements of fact. We note, however, that matters contained in the recitals are given effect by the terms of Article 10 of the TALA and will be duly considered in that context.
87.The question remains whether an agreement containing recitals such as those contained in the TALA would not have been entered into by parties dealing with each other at arm’s length and from positions of comparable bargaining power. In the Board’s submission such parties would not enter into an agreement containing the recitals in the TALA, even though Mr De Boos and Mr Stonier stated that such recitals are reasonably common in licensing agreements between related parties.
88.We note that it would have been a simple matter for the legislature to exclude Australian subsidiaries of foreign companies from research and development tax concessions if that had been the intention of the legislation. The legislation does not exclude such entities on the basis of their foreign ownership. Instead, such entities are excluded only if the results of the claimed research and development are not exploited to the benefit of the Australian economy or on normal commercial terms. The substantive test to be applied pursuant to s 39C is concerned with the terms of any agreement between the parties relating to the exploitation of the results of research and development and not the factual circumstances of the actual relationship between the parties that may be reflected in recitals. We are satisfied that the legislation contemplates the possibility that licensing agreements between related parties may be able to satisfy the requirements of s 39C. Indeed, contracts must either not be at arm’s length or not be between parties of comparable bargaining power before they can fall for consideration under the section. It follows that recitals setting out factual information concerning the shareholding of a foreign parent and an Australian subsidiary will not, alone, cause the agreement to fail the test in the section.
89.The pertinent issue that arises, however, is whether, where the content of the recitals to the TALA is reflected in its terms, such terms would not have been entered into or would have been different or the agreement would not have been entered into between parties dealing with each other at arm’s length and from positions of comparable bargaining power. In particular, it will be necessary to consider the recital relating to termination in the event of a change in the relationship between the parties in conjunction with Article 10.
“Rubber Products” and “Technical Information” – Article 1
90.The “Technical Information” to be provided relates to “Rubber Products”. By Article 1 “Rubber products” means “automotive tires and tubes which are listed in Schedule-A”. Schedule-A is as follows:
“Rubber Products set forth in this AGREEMENT shall mean the following:
AUTOMOTIVE TIRES & TUBES
OF
THE FOLLOWING TYPES
(1) Steel Belted Radial Tires for PASSENGER-CARS:
(2) Steel Belted Radial Tires for TRUCKS AND BUSES:
(3) Steel Belted Radial Tires for LIGHT TRUCKS:
(4) Conventional Tires for TRUCKS AND BUSES:
which are more particularly specified in the categories set forth in the brochure entitled “BRIDGESTONE PATTERN DIGEST” attached hereto.”
91.The Bridgestone Pattern Digest sets out specification data for a range of tyres, tubes, valves and flaps. The cover page contains the title “Pattern Digest” and the name and logo of Bridgestone. Although the Pattern Digest does not contain repetitions of the name Bridgestone throughout its pages it does not contain references to any other tyre manufacturer.
92.The phrase “Rubber Products” appears many times in the TALA. It is always, or nearly always, written with upper case “R” and “P”. That suggests that the phrase incorporates the definition in Article 1 wherever it appears. However, as appears above, where it appears in Article 6-1 it is followed by “(Uniroyal brand and Bridgestone and other brands respectively)”.. Article 6-1 specifically provides for royalties for Uniroyal brand tyres as well as Bridgestone brand tyres. As we have said the royalty rate for Uniroyal brand tyres is less than the rate for Bridgestone brand tyres.
93.The precise meaning of “Rubber Products” in the various Articles in which it appears in the TALA was the subject of submissions by the parties. It is fair to say, however, that the parties never came fully to grips with the construction issue. Rather they made oblique references to it whenever an issue relating to its meaning might have been thought to arise. The reason for this is no doubt that the meaning of the phrase is unlikely to determine the outcome of this matter. We agree with that. Indeed, a definitive determination of the meaning of the phrase would probably require further evidence and submissions. However, our present opinion is as follows. Because the Bridgestone Pattern Digest contains no reference to any brand of tyres other than Bridgestone and because Schedule A refers to the Digest by its full name, including “Bridgestone”, the phrase “Rubber Products” in the definition refers only to Bridgestone tyres and tubes. The words in parenthesis in Article 6-1 extend the meaning of Rubber Products for the purposes of that Article. The fact that such an extension appeared necessary to the drafter of the clause supports the proposition that “Rubber Products” was otherwise confined to Bridgestone. It is to be noted that the subject of that Article is the payment of royalties. It is obvious that the parties intended that royalties would be paid on tyres bearing both the Bridgestone brand and the Uniroyal brand. The most likely meaning of the extended phrase in Article 6-1 is, therefore, that it relates to products within the definition of “Rubber Products”, including the limitation of that definition to Bridgestone tyres, but extends to Bridgestone tyres which are branded Uniroyal as well as Bridgestone. That is the construction of the words at which we arrive having regard to the material and submissions before us.
94.There is little evidence before us, at any event to which we were referred by the parties, on the topic of how Bridgestone went about its business during the relevant years and the circumstances in which it sold tyres with the Uniroyal brand. Such evidence as there is requires inference and even speculation before any useful conclusions can be drawn. Detailed evidence on this topic might be helpful in arriving at a definitive meaning of the phrase “Rubber Products” as it appears in Article 6-1. This lack of evidence did not merely concern us but created problems for the experts. Mr Marsh said, for example:
“I think as a matter of construction of the agreement as a whole one must take the view that those Uniroyal branded products are rubber products within the terms of the agreement. But the thing I find most fascinating is that there’s nothing in this agreement that tells you whether the Uniroyal branded product[s] are made using the technology of Bridgestone… So it’s in my view well within the bounds of the hypothesis, and I don’t have any facts, that royalties are being paid in respect of products that are made using Bridgestone technology but are branded Uniroyal. There’s another possibility and that is that parts of the Bridgestone technology, for instance factory layout information, might have made the business of making Uniroyal brand tyres with Uniroyal technology or some other technology more profitable, and that therefore it was worth paying a royalty. Or a third possibility is that merely increasing by having the Bridgestone brand and increasing the size of the Australian business by reasons of the economies of scale makes the Uniroyal business more profitable, and so even if the term “rubber products” meant products that had derived, or were sold under the Uniroyal brand and made using Uniroyal technology, it might still be within the position of the licensee to have entered into this agreement and to consider it a very good agreement.” (Transcript 4. 4 December 2002, p. 26).
Technical Assistance – Article 2
95.Article 2 concerns the provision of technical information and assistance to BSAL by BSJ. Two particular arguments are made by the Board. First, it is said that royalty payments begin immediately under Article 6 although there is no strict time provision relating to the furnishing of technical assistance under Article 2. This argument also places emphasis on the fact that the royalties extend to Uniroyal branded products. Secondly, it is pointed out that there is no provision for any representation and no warranty made relating to “… patentability, exclusiveness, freedom from infringement of patents or proprietary rights, or freedom from risk of damage or harm…” in respect of any information provided pursuant to the technical assistance provisions.
96.Mr De Boos noted that royalties are payable by BSAL to BSJ under Article 6-1 of the TALA irrespective of whether BSJ has provided anything, or anything of value, to BSAL pursuant to Articles 2-1, 2-4 and 2-5 and extends to Uniroyal branded tyres. This, he suggests, “causes a great imbalance in the TALA in favour of BSJ” (Exhibit E, p. 755, par [12.3]) to which an arm’s length party with comparable bargaining power would not agree. The imbalance that Mr De Boos infers arises from BSAL’s lack of control of the timing of the transfer of technical information and the possible circumstance that BSJ fails to provide BSAL with technical information or assistance that is valuable and relevant to the manufacture of rubber products. Mention was made of the fact that the licence fee was payable on all products sold after the agreement commenced and it was pointed out that some of those products would be likely to have been manufactured prior to the commencement of the agreement and, accordingly, manufactured without regard to any technical assistance supplied pursuant to the agreement. Mr De Boos did, however, agree that there was a positive obligation on BSJ to provide BSAL with the relevant technology under the TALA (Transcript, 5 December 2002, p. 78).
97.Mr Marsh did not agree with Mr De Boos’ conclusion. In his evidence he referred to the positive obligation imposed on BSJ pursuant to Article 2-1 to provide BSAL with the technical information. He referred to the right of BSAL to send representatives to BSJ’s plants (Article 2-4) as a particularly positive provision and said of this:
“It’s a concession, it’s a normal concession but it’s not totally required. The fact that it’s here is clearly a benefit to the licensee.” (Transcript, 4 December 2002, p. 30).
98.As we read the provisions in Article 2 requiring BSJ to supply technical assistance to BSAL, they impose an immediate obligation upon BSJ. We see no scope for BSJ to delay or prevaricate in providing the technical assistance. We note that to the extent to which BSJ could delay or prevaricate so could BSAL withhold royalty payments. In any event, agreements being tested against the provisions of s 39C of the Act should be read as a whole and in their context, taking into consideration what was the probable intention of the parties as to the way they were to be performed (cf. McPherson v Moiler (1920) 20 SR (NSW) 535 at 541). To the extent to which it is said that some products might have been sold subject to royalty by BSAL before they had received any technical assistance this seems to us to be an extremely technical argument. One can well understand arm’s length business people regarding slippage of that kind as of little consequence and swept up within the overall negotiations of the contract. In any event, that must have been what Mr Marsh thought.
99.We affirm that s 39C does not require the positing of a hypothetical singularity. The simple fact is that the TALA is a commercial licensing agreement for the manufacture of rubber products, as defined, by BSAL under license from BSJ and for the exchange of related technical information between the parties. We are satisfied that the payment of royalties from the sale of rubber products by BSAL, irrespective of whether, in the first instance, those rubber products were manufactured using BSJ’s licensed technology, and the transfer of technical information for that purpose by BSJ, in this case on a continuing basis as BSAL requires it, are terms within a spectrum that might reasonably be entered into by parties dealing with each other at arm’s length and from positions of comparable bargaining power.
100.The balance which Mr De Boos pursues in each individual article of the TALA, for the purpose of his hypothetical model, is, particularly in this instance, a phantom of abstraction that we cannot accept. It flies in the face of commercial reality and frustrates the practical though hypothetical exercise required by s 39C of the Act. Our conclusion is reinforced by the simple fact that BSJ is obligated to supply BSAL with technical information pursuant to Article 2-1 as “the licensee actually requires it” and BSAL could terminate the agreement under Article 10-1 in the event that BSJ defaulted in its performance of this obligation.
121.We are persuaded by the evidence of Mr Marsh, Mr Bouette and Mr McMaster that the concerns raised by Mr De Boos and Mr Stonier concerning the scope and irrevocable nature of the grant-back licence to the Licensor are ameliorated by the protection of the Licensee’s interest in its territory of operation, being Australia, New Zealand and Papua New Guinea.
122.We prefer the evidence of Messers Marsh, Bouette and McMaster and note Mr Marsh’s comments concerning Article 7 in cross examination:
“[Mr Williams:] You need to know more significance – more factual information to assess the significance of the clause? - - - Well, I can certainly say to you that looking at this clause you cannot – in my view you cannot look at it and say, “This isn’t a clause that arm’s length parties would have entered into”, because it’s just a stock standard clause.
Is it stock standard for a company manufacturing existing products when it acquires new technology, know-how and patents, to license back to the licensor all of the information that it already has about the manufacture of similar products? - - - Well, in this case I don’t know that they were making steel belted radial tyres. That’s the first point. The second point is that if they know that their technology is largely superseded and then really the emphasis would be on things that they develop in the future which relate to the new technology rather than things that are in the past, and I would take the view that this clause is entirely conventional in the sense that it lies within that spectrum of agreements that might well be entered into by arm’s length parties of comparable bargaining power.” (Transcript, 4 December 2002, pp. 28 and 29).
123.The concession by a licensee to grant the licensor a non-exclusive, irrevocable, royalty-free licence in all territories, other than territories of primary commercial interest to the licensee, does not lead us to conclude that arm’s length parties with comparable bargaining power would not enter into an agreement containing such terms. The fact that certain tyres manufactured by BSAL are sold in foreign markets does not disturb our conclusion.
124.We are satisfied that Article 7 is in terms that parties dealing with each other at arm’s length and from positions of comparable bargaining power might reasonably agree to. We are satisfied that Article 7 is not within the terms of s.39C.
Termination – Article 10
125.The Recitals and Article 10 of the TALA, when read together, provide a discretion in BSJ to terminate the TALA in the event that BSJ’s interest in Bridgestone Holdings Ltd ceases to be a controlling interest, or when Bridgestone Holdings ceases to hold 75 percent of the shares in BSAL. This, the respondent submits, is inimical to the kind of agreement that would be reached between parties dealing at arm’s length and from positions of comparable bargaining power. It is perhaps unsurprising that Mr De Boos found these circumstances to fall outside the terms of his hypothetical model:
“The term of use of the technology is always a primary consideration; particularly where the introduction of the technology involves significant capital expenditure. This is because the recoupment of capital expenditure is usually made over time and, in part, through depreciation allowances. For the Licensor to have the unfettered discretion to terminate in that situation is, in my opinion, a provision which would not be contained in an agreement negotiated between arms length parties of comparable bargaining power in the hypothesis referred to above.” (Exhibit E, p. 760, par [12.17]).
126.In his written statement, following review of the full TALA, dated 3 December 2002 Mr Marsh stated: “My review of the unedited version … does not cause me to resile from a negative answer to either of the questions …” (Exhibit E, p. 745.3, par [4]). Those questions were:
“Question 1: Whether the TALA is an agreement which would not have been entered into by persons dealing with each other at arm’s length and from positions of comparable bargaining power.
Question 2: Whether the TALA is an agreement which contains terms which would not have been contained in, or which would have been different from the terms contained in, an agreement entered into by persons dealing with each other at arm’s length and from positions of comparable power.” (Exhibit E, p. 745.2, par [1]).
127.In cross examination Mr Marsh concluded that Article 10-4 is “a termination provision of a type that could well be entered into between arm’s length parties of comparable bargaining power”, was “moderately common” and at least “not unknown but pretty unusual” :
“[Mr Marsh]: ”[I]t’s a termination provision of a type that could well be entered into between arm’s length parties of comparable bargaining power, for instance, holding that if the licensee failed to maintain some particular market share that the agreement would be terminated.
“[Mr Williams]: “That, of course, is a quite different clause to this one isn’t it? - - - It’s different in terms but its similar in nature and I mean this is a fact situation.
[A] clause that permits termination upon market share falling to a certain level is [really quite different to one] that permits termination upon a controlling interest ceasing …, Mr Marsh? - - - They are different in the sense that there’s a different fact situation but the right to terminate on some changed factual situation is certainly not unknown and I would venture to suggest moderately common.
It is not, however, common for arm’s length comparable bargaining power licensing agreement to be terminable in the general discretion of the licens[or]? - - - That would be most unusual. If you mean general discretion in an unfettered way that would be not unknown but pretty unusual.
And certainly not an agreement that parties dealing at arm’s length and from provisions of comparable bargaining power would enter into? - - - I have certainly been a party to agreements that have allowed one party to terminate at discretion after they had invested sufficient money into the project that they knew they had a lot of skin in the game and that if they walked away from it.” (Transcript, 4 December 2002, p. 38).
128.Mr McMaster expressed similar views to Mr Marsh in the following cross examination:
“[Mr Williams:] Could I take you to clause 10.4 please. Are you familiar with that clause? A clause predicated on control of the majority shareholding in the other party is one that you would not expect to find in an agreement reached between parties dealing with each other at arm’s length and from positions of comparable bargaining power, that’s correct isn’t it? - - - I am sorry, I’ve got to give you a yes and a no on that ... I have seen such provisions where you have a holding company or a parent and a subsidiary. So I’ve seen that. It is also extremely common for that and the triggers to allow termination to be put in a more generic form and that is where you are transferring technology to a third party and a change in the shareholding of that third party will trigger a terminating event. The reason being that you do not want your technical information through a company buy out or share buy out necessarily becoming accessible to your competitors. So, when I look at 10.4 I see it in that general light. It is a mere restatement because of the parent subsidiary relationship but it is equivalent to the generic aim in these agreements, especially where it is mainly technical information and know how that you do not want to give access to your competitors.
No, but you wouldn’t suggest, I take it, that…a licensing agreement between a controlling shareholder as licensor and the licensee being party controllers as it were, is an agreement that reflects positions of comparable bargaining power? - - - To the extent that the aim is exactly the same and that is to safeguard what happens when there is a change of shareholding the answer is I have to disagree with your proposition.” (Transcript, 4 December 2002, p. 46).
In this passage we understand the references to third parties to be references to licensees not related to the licensors.
129.Even the Board’s witnesses accepted in cross-examination that this kind of clause was not unusual. We note Mr De Boos’ response to the following questions:
“[Mr Edmonds:] I would suggest to you that a clause which gives a licensor the right, putting aside one moment [sic] that the licensor in this particular case is the holder of those shares, but a clause which gives a licensor the right to terminate the licence arrangements if there’s a change in the shareholding of the licensee such that control passes to a party other than the party who controlled the company at the time the agreement was entered into is not an unusual clause at all? - - - It’s not unusual, I think that in my experience those types of clauses in licence agreements are generally qualified to the extent that it’s the passage of control to a competitor of licensor.
But a provision such as that, trigger mechanisms such as that are done for that very reason so that if the company licensee was to pass into, well the control of that company was to pass into the hands of a competitor the licence arrangement could be terminated? - - - Yes, I mean those trigger mechanisms are not unusual but the difference here is that the ability to trigger the mechanism is in the hands of the licensor and not the licensee.” (Transcript, 5 December 2002, pp. 86-87).
130.Mr Stonier said that he was not saying that a provision such as Article 10-4 would not be found in an agreement entered into by parties dealing with each other at arm’s length and from provisions of comparable bargaining power:
“[Mr Edmonds: … A]re you saying that a provisions such as article 10.4 would not be a term which one would find in an agreement entered into by parties dealing with each other at arm’s length and from positions of comparable bargaining power? - - - No, I wasn’t saying that by itself, I was saying that is a fact. I was not saying that you would not see 10.4 necessarily” (Transcript, 5 December 2002, p. 92).
131.In his written statement Mr Stonier noted that Articles 10-1 and 10-4 should be considered in relation to Articles 15-1 and 3-2 and suggested that arbitration may be required pursuant to Article 17. Pursuing this theme, the Board submitted that these provisions are explicable only by the controlling shareholding of the licensor.
132.The difficulties to which Mr Stonier alludes in his comments (Exhibit E, p. 804, par [4.3]) do not place the TALA within the terms of s 39C of the Act. It is not unusual for there to be found ambiguities or tensions within the terms of an agreement that may, if applied, lead to disputation and the need for arbitration between the parties to the agreement. This does not lead us to conclude that parties would not enter into such an agreement if they were at arm’s length and with comparable bargaining power.
133.There is no doubt in our minds that the terms of Article 10 reflect the intellectual property interests of the licensor, BSJ. However, the interests of BSAL are also reflected. The process of bargaining, it should be noted, is one in which parties seek expression and satisfaction of their interests in the various terms of agreement. By its nature, the process of negotiation and agreement is one in which “give and take” forms an essential part, leading to a balanced outcome overall. It is reasonable, therefore, to expect to find terms in an agreement negotiated by arm’s length parties with comparable bargaining power that give expression to and reflect their various interests, insofar as such terms are acceptable to both parties within the overall context of the agreement.
134.We have noted previously that the tests to be applied do not require the sterilisation of options for the purpose of conformity with one ideal model of agreement. We are persuaded by the evidence of Messrs Marsh, McMaster and Bouette and there is no doubt in our minds that a licensor, that is unrelated to its licensee, may seek to protect its intellectual property from access by a competitor in consequence of a change in the ownership of the licensee. We find that parties dealing with each other at arm’s length and from positions of comparable bargaining power might reasonably enter into an agreement containing terms designed to protect the intellectual property of the licensor in respect of a change in the ownership of the licensee. The fact that the licensee is a majority owned subsidiary of the licensor, as in the present case, does not disturb this finding.
135.We are persuaded by the evidence of Messrs, Marsh, McMaster and Bouette that the provisions for termination of the TALA at Article 10 are not outside the range of such provisions that may reasonably be entered into by parties dealing with each other at arm’s length and from positions of comparable bargaining power. We find that Article 10 of the TALA is not a term that would not have been contained or would have been different had it been entered into by parties dealing with each other at arm’s length and from positions of comparable bargaining power.
Assignment – Article 12
136.Article 12 sets out the terms for assignment of the TALA. The Board submitted that arm’s length parties with comparable bargaining power would not enter into such an article, whereby the TALA is not assignable by BSAL without the written consent of BSJ. Mr Stonier considered Article 12 to confer “an arbitrary and unfettered right” on BSJ (Exhibit E, p. 804, par [4.4]) Mr Stonier concluded that:
“An agreement entered into by parties dealing with each other at arm’s length and from positions of comparable bargaining power would be more likely to provide that consent would only be withheld on reasonable grounds. It is also more likely that [BSAL] would have similar and reciprocal rights to consent to an assignment by BSJ.” (Exhibit E, p. 804, par [4.4]).
137.Mr McMaster did not agree, stating:
“Term 12 is usual in that it seeks, in part, to control to whom access and use of the Technical Information can be given. The identity of the assignee would be important to a Licensor from a number of perspectives namely, capacity to actually maximise the use of the Technical Information, ability to properly safeguard the Technical Information and ability to pay the royalties which will be due under the agreement.” (Exhibit E, p. 744, par [d]).
Mr Marsh expanded on this theme, stating:
“In my experience it is common for there to be clauses limiting the right of one or both parties to a licence agreement to assign the agreement. In some cases neither party can assign without the authority of the other, which authority may or may not be specified as not to be unreasonably withheld. In other cases only one party has a right of veto of the assignment of the agreement. In this case the licensor would have a reasonable concern that its know how did not end up in the hands of a competitor.. The limitation on the licensee’s conduct is therefore understandable from the licensors perspective and is not unreasonable. From the licensee’s perspective the limitation may have been seen as mere ‘boilerplate’ without any real substance because the licensee did not conceive any need to assign.” (Exhibit E, p. 656, par [5.27]).
Mr Bouette considered Article 12 “to be a perfectly reasonable and normal clause which I would expect to see in any license agreement between parties at arms length and positions of comparable bargaining power” (Exhibit E, p. 708, par [I]).
138.Articles 10 and 12 may be seen as addressing different aspects of the same problem which all licensors face, namely the prospect of a licensee imparting confidential information to a competitor of the licensor by sale of its shares (Article 10) or by assignment (Article 12).
139.Considering the expert evidence, we prefer the conclusions of Mr McMaster, Mr Marsh and Mr Bouette. Article 12 could reasonably be included in an agreement satisfying the hypothesis. We find that Article 12 is not in terms that would not have been contained in, or would have been different in, an agreement between parties dealing with each other at arm’s length and from positions of comparable bargaining power.
Arbitration – Article 17 and Applicable Law – Article 19
140.Article 17 provides for disputes under the TALA to be settled in Tokyo, Japan and Article 19 provides that the law of Japan is the applicable law. Mr Stonier said:
“An agreement entered into by parties dealing with [each] other at arm’s length and from positions of comparable bargaining power … would be more likely to provide for arbitration in a neutral jurisdiction, or alternatively in Tokyo if the reference to arbitration was initiated by [BSAL], and in Adelaide if initiated by BSJ…
An agreement entered into by parties dealing with [each] other at arm’s length and from positions of comparable bargaining power would be more likely to provide that the applicable law is that where the subject matter of the contract or agreement (ie the manufacture of tyres) would be mainly performed, in this case South Australia.” (Exhibit E, p. 804, paras [4.5] and [4.6]).
141.The applicant submitted that these articles relate to matters that are colloquially referred to as “boilerplate” and are not outside the range of terms that parties at arm’s length and with comparable bargaining power might enter into (Outline of submissions on behalf of the Applicant, par [46]). We note that neither Messrs De Boos, McMaster, Bouette nor Marsh comment on articles 17 and 19. However, the absence of opinion does not lead us to any particular conclusion. The claim based on Articles 17 and 19 was not at the forefront of the Board’s case. It was not referred to in Mr De Boos’ report.
142.Mr Stonier’s opinion was framed on the basis of greater likelihood, where an article “would be more likely to” make certain provisions. The test to be applied for present purposes, however, is not a test of greater likelihood, where minds may differ as to whether one provision is more likely to be included than another. The questions to be answered are whether persons dealing with each other at arm’s length and from positions of comparable bargaining power would not enter into an agreement containing such terms and whether such terms would not have been contained or would have been different in such an agreement.
143.There is no doubt that an agreement between persons dealing with each other at arm’s length and from positions of comparable bargaining power might contain articles dealing with disputes, or arbitration, and applicable law. We are not persuaded by Mr Stonier’s discussion concerning the likelihood that Articles 17 and 19 of the TALA would be different from terms in an agreement between arm’s length parties with comparable bargaining power. It may be that Mr Stonier is right and it is “more likely” that articles concerning arbitration and applicable law would be constructed in accordance with his opinion. This does not mean, however, that parties dealing with each other at arm’s length and from positions of comparable bargaining power would not reasonably agree to terms as they occur in Articles 17 and 19 of the TALA. We think they might. We are persuaded by the submissions for the applicant on this point and are not satisfied that Articles 17 and 19 of the TALA would not be contained or would be different in an agreement entered into by such parties.
Conclusion
144.Considering all the evidence, the opinions of the experts and the submissions of the parties we conclude that the TALA is an agreement as a whole that persons dealing with each other at arm’s length and from positions of comparable bargaining power might reasonably have entered into. It does not contain clauses that fall outside the range of clauses that could have been contained, nor does it contain clauses that would have been different, in an agreement entered into by such persons.
145.In our above reasons we have referred specifically to most of the articles relied upon and many of the detailed submissions which have been put to us. However, it is not practically possible, in the process of administrative decision-making in which we are engaged, to refer in these reasons to every detail covered in the hearing. This is particularly so in the present case. The issues raised by the notices of facts and contentions are different in their emphasis and detail from the issues that can be gleaned from the experts’ reports and they, in turn, can be seen to be different from the issues which appeared to emerge from oral evidence. The written submissions of both parties are discursive and relatively brief. They do not attempt to address in a tight, logical or structured way the particular clauses that are relied upon and what conclusions should be reached relating to them. This has not assisted our task in seeking to produce a structured and logical set of reasons addressing all the matters of concern to the parties. However, our conclusions, both as to the agreement overall and as to its individual articles, are in no doubt.
146.We have been greatly assisted by the evidence of all the experts but particularly by the applicant’s experts. However, we have ultimately brought our own reasoning to the matter. We would add that, even setting aside what we consider to be the misconceived approach of the respondent’s experts, we found the evidence of the applicant’s experts to be preferable. The applicant’s experts, and particularly Mr Marsh, impressed us with their knowledge and expertise and with the thoroughness of their research and preparation.
147.If we had had to, we would have been content to base our findings on the general conclusions drawn by each of the applicant’s experts (see paras [67] to [70]) without the need to explore in detail, as we have, the bulk of the particular matters depending on analysis of articles and parts of articles.
148.We note that the experts were asked to comment upon specific agreements, other than the TALA, that were said to be agreements between parties dealing with each other at arm’s length and from positions of comparable bargaining power. However, there is insufficient evidence before us demonstrating that they were agreements between arm’s length parties with comparable bargaining power, to permit any finding. In any event, we did not consider it necessary to refer to these agreements to determine the matter.
149.We find that the TALA is not an agreement that would not have been entered into by persons dealing with each other at arm’s length and from positions of comparable bargaining power, nor does it contain terms that would not have been contained or would have been different had it been negotiated by such persons.
150.This being the case, we are satisfied that the TALA does not fall within the terms of s 39C and the results of the research and development activities conducted by BSAL during the relevant periods were exploited on normal commercial terms for the purpose of s39M of the Act.
151.The Board abandoned its original proposition that the results of the research and development claimed by BSAL in the relevant accounting periods were not exploited in a manner that is for the benefit of the Australian economy pursuant to s 39M(1)(b)(i)(B) of the Act and did not agitate related issues in these proceedings. This being the case, and in the absence of evidence to the contrary, we find that the results of the research and development activities claimed by BSAL during the substituted accounting periods ending on 31 December 1989, 1990 and 1991 were not exploited otherwise than in a manner that is for the benefit of the Australian economy.
152.It is inappropriate for a certificate to be given under s 39M.
Decision
153.The decision of the Board under review must be set aside.
154.In substitution therefor the Tribunal decides, for the purposes of s 39M(1)(b)(i) of the Act, that the results of the research and development activities undertaken by BSAL during the relevant periods have not been exploited otherwise than on normal commercial terms nor otherwise than in a manner for the benefit of the Australian economy. No certificate should be given under s 39M of the Industry Research and Development Act 1986.
I certify that the one hundred and fifty-four (154) preceding paragraphs are a true copy of the reasons for the decision herein of:
Justice Garry Downes, PresidentMr S. Webb, Member
Signed: .......................................(sgd)..............................................
AssociateDates of Hearing 4 and 5 December 2002 and
19 and 20 February 2003
Date of Decision 7 August 2003
Counsel for Applicant R F Edmonds SC and E A Collins
Solicitors for Applicant Piper Alderman
Counsel for Respondent N Williams SC and J Stephenson
Solicitor for Respondent Australian Government Solicitor
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