Favaro, G.E. v Laconic P/L

[1993] FCA 668

6 6 8   (93

JUDGMENT NO. ..... . . . . a. . u.esaaaa.

CATCHWORDS

Contract - handwritten heads of agreement purporting to record licence agreement for a patented invention - whether agreement void for uncertainty - whether definitions contained in another document incorporated into agreement - whether orders in the nature of specific performance should be made.

Matter No. DG 17 of 1992

GIN0 ERNESTO FAVARO h JAG-FAVARO PTY LTD v LACONIC PTY LTD,

TERRENCE ROBERT DAY h GARY JOHN UZKURAITIS

VON DOUSSA J.

REGISTRY

DARWIN	PTrFIVED
2 3 SEP 1993
3 SEPTEMBER 1993	FEDERAL COURT OF

AUSTRALIA PRINCIPAL

IN THE FEDERAL COURT OF AUSTRALIA	)
)
NORTHERN TERRITORY DISTRICT	)
) NO. DG 17 of 1992
REGISTRY	1
GENERAL DIVISION
BETWEEN :
GIN0 ERNESTO FAVARO and JAG-FAVARO PTY LTD

Applicants

- and -

LACONIC PTY LTD,

TERRENCE ROBERT DAY and

GARY JOHN UZKURAITIS

Respondents

MINUTES OF ORDER

JUDGE MAKING ORDER	VON DOUSSA J.
WHERE MADE	DARWIN
DATE OF ORDER	3 SEPTEMBER 1993
THE COURT ORDERS THAT:

1.    There will be judgment for the applicant, Jag-Favaro Pty Ltd, on paragraphs 1 to 3 of the application.

2.    Direct Jag-Favaro Pty Ltd to bring into Court minutes of

order reflecting the reasons for judgment herein.

3. The applicants' claims against the second and third

, respondents, Messrs Day and Uzkuraitis, for damages or

compensation are dismissed.

4.   The first respondent, Laconic Pty Ltd will pay the applicants' costs of the proceedings.

5.   There will be no other order as to costs.

Note: Settlement and entry of orders is dealt with in Order 36

of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )

1

NORTHERN TERRITORY DISTRICT	1
) No. DG 17 of 1992
REGISTRY	1 1
GENERAL DIVISION	1
BETWEEN:
GIN0 ERNESTO FAVARO and JAG-FAVARO PTY LTD

Applicants

- and -

LACONIC PTY LTD,

TERRENCE ROBERT DAY and

GARY JOHN UZKURAITIS

Respondents

EX TEMPORE REASONS FOR JUDGMENT

Coram: von Doussa J.
Date : 3 September 1993

In these proceedings the applicants claim a declaration that there exists between the second applicant Jag-Favaro Pty Ltd ("Jag-Favaro") and the first respondent Laconic Pty Ltd

( "Laconic " ) a valid and enforceable agreement for world

exclusive rights with respect to a patent numbered PCT AU90 00193 which covers an invention described as an annular body

aircraft, and improvements thereon. A further declaration is

sought that the agreement is in accordance with a handwritten

document dated 6 November 1991, together with certain definitional clauses contained in an unsigned draft patent licence agreement which was prepared on or about 4 November 1991 ("the first draft licence agreement"). In particular, a declaration is sought that the definitional clauses are included which define the word "royalty", an expression used in the document dated 6 November 1991. A mandatory injunction

is sought requiring the respondents, and in particular Laconic, to perform all acts and do all things required of them for the due performance of the agreement.

The primary ground of defence mounted by the respondents is that the document dated 6 November 1991, by the expressions and sentences used in it, is so uncertain and meaningless as to be incapable of constituting a binding and enforceable agreement at law. To cover the contingency that that defence is made out, in the alternative the applicants seek a range of remedies based on negligent mis-statement, s.52 of the Trade

Practices Act 1974, fiduciary obligations, estoppel, and quasi

contract to recover damages or compensation for losses which include a payment made by way of a purported licence fee by the first applicant, Mr Favaro, on behalf of Jag-Favaro to Laconic on 6 November 1991.

The second respondent Mr Day is, amongst other things, an

inventor. Over several years leading up to November 1991 he

was issued by the Australian Patent Office on 7 December 1992	had developed the annular body aircraft. A standard patent	for that invention. The priority date runs from 11 May 1990. Provisional patent cover existed in November 1991.
The annular body aircraft is a small hovercraft. The prototypes developed so far are less than two feet across and have been powered by model aircraft engines. The prototypes are still experimental and whilst lift-offs have been achieved, it cannot be said that the aircraft is up and flying in any practical sense. However, the parties all have great optimism for the future and anticipate a ready market for the product, initially as a toy and with model aircraft enthusiasts.
The third respondent, M r Uzkuraitis, is a friend of Mr Day who from about 1989 has provided substantial funding for the research and development of the hovercraft. Mr Day and his father and Mr Uzkuraitis and his father-in-law are the shareholders in Laconic which has become the beneficial owner of the hovercraft patents, and also of another invention made by Mr Day which is not material to the present dispute. Each of these men are directors of Laconic and each of them have invested in the company. It is not clear whether they have done so by way of equity shareholdings, or by loans, but nevertheless they have put money into the company.
By October 1991, Laconic and Mr Day had been advised by patent registration fees in each of the countries where their patent attorney that funds had to be found to cover
protection was required. Laconic and its shareholders could cover the costs of some countries, but not all the countries where it was thought that protection was desirable.
Mr Favaro had become known to Mr Day through the Northern Territory branch of the Inventors Association. Mr Favaro became aware of the hovercraft invention and of the need by Laconic and Mr Day for further funds. Mr Favaro indicated to
Mr Day his interest in becoming involved in the hovercraft
project. There were meetings between Mr Day and Mr Favaro at the end of October 1991 and in early November 1991 when possible ways in which Mr Favaro might contribute money were discussed.
On 1 November 1991 Mr Favaro, who had by that time developed an interest in promoting inventions, gave a copy of a patent licence agreement he had with a Mr Keough to Mr Day, and told Mr Day that he would be interested in entering into a similar agreement in respect of the hovercraft. Mr Favaro says that he informed Mr Day that he would not be interested in taking a minority equity shareholding in Laconic but would want world exclusive rights under a licence agreement similar to the Keough agreement if he were to invest money.
In their discussions, probably in the first few days of November 1991, Mr Favaro said that he would want a contract.
Mr Day said Mr Favaro would have to pay for a contract if he wanted one. Mr Favaro had his solicitors prepare the first
draft licence agreement, which was collected from the solicitors on 4 November 1991. A copy was given to Mr Day. The parties named in that proposed agreement were Laconic as the licensor of the invention and Mr Favaro as the proposed licensee, but it is common ground that Mr Favaro made it clear about this time that he was acting on behalf of his company, Jag-Favaro, which would be the contracting party if their

negotiations led to agreement. On 6 November 1991 a formal meeting was arranged and held between Mr Favaro, acting for Jag-Favaro, and Messrs Day, Uzkuraitis and Freckleton. Mr Freckleton was Mr Uzkuraitis' father-in-law. At the meeting it is common ground that Mr Favaro indicated that he was prepared to advance money to cover patent fees whlch had to be found that day to the extent of some $15-20,000, but that he would not become involved as an equity shareholder in Laconic. He repeated his requirement that he be granted world exclusive rights to market and distribute the hovercraft.

At first the parties discussed the possibility of Jag- Favaro having exclusive rights in countries where it paid the patent registration fees and a fifty-fifty split of receipts from those countries, together with a more limited right to sell into other countries on an 80/20 split of receipts from those countries in favour of Laconic. That proposal was rejected as too complicated. A scheme was then discussed and tentatively agreed upon whereby Jag-Favaro would get world

exclusive rights and receipts would be split fifty-fifty up to	$1 million and thereafter on a 75/25 basis in favour of
Laconic.
That scheme was seen to be more simple. In exchange Mr Favaro, on behalf of Jag-Favaro, would advance $20,000 that day. There was extreme urgency. Laconic and its directors were, to an extent, over a barrel if they wanted to get patent cover in Europe, that being one of the areas where they could not afford to pay the fees.
Mr Favaro told the meeting that he wanted something in writing - a firm contract, against which he would then advance the $20,000. It is common ground that he then wrote the document of 6 November 1991 paragraph by paragraph. After writing each paragraph he read it out. In some cases there was discussion about the paragraph; in others not. Those present then indicated their agreement to that paragraph and
Mr Favaro moved on to write the next paragraph. At the end,
each person present signed the document and at M r Favarofs request each party read each page and initialled it.
It is plain by looking at the document that it was written in haste. There was, as I have said, a very real urgency. The patent attorney was standing by in Queensland wanting the money to put steps in train that day to get the patent cover before the time limits ran out. There are in the document some obvious grammatical mistakes and some other errors in the writing of it. The document as written is as follows :

[First Page]

"WORLD EXCLUSIVE RIGHT

1. World Exclusive Right

to (a) manufacture

(b) market

(c) distribute

(d) from any funds received from any connection with the W.E. right.

3.    for any consecutive 24 mth period of non performance an amount of $10,000.00 AUD per year will need to be paid in order to keep the W.E. Right by FAVARO.

2.   once a working prototype is available, licensor allows 36 mths for licensee to "sign up" a manufacturer in order for future royalties.

4.   LACONIC P/L to be consulted and agree on Royalty % percentage per contract.

5.    $20,000 to be paid for World Exclusive Right for the full term of the Patent/s on the following Patent NO.

P.C.T/AU90/00193
for royalties thereof

"ANNULAR BODY AIRCRAFT"

[Second Page]

(THE INTENT TO MAKE LEGAL THIS CONTRACT). 6.11.91

50% of the first $1,000,000 dollars AUD TO EACH PARTY and thereafter on a 75% - 25% BASES 75% for the licensor and 25% for the licensee for any country in the World throughout the term of patents.

If FAVARO BREACHES the condition of this contract that lost of World Exclus rights will come about as described in this contract

LACONIC HAS AUDITING RIGHTS AT THEIR EXPENSE TO FAVARO'S

BOOKS for ROYALTY PURPOSES

ROYALTIES TO BE PAID TO A MUTUALLY AGREED LEGAL or

Accounting Firm THEN DISTRIBUTED TO EACH PARTY

ANY EXPENSES incured in licence FOR MARKET, DIST, ETC. is

borne by FAVARO

other expenses of a combined nature to be split 50/50

LICENSOR/LICENSEE

[Third Page]

THIS CONTRACT SUBJECT TO SIGNING A LEGAL CONTRACT OF THE

SAME SPIRIT AND NATURE

SIGNED ON BEHALF OF LACONIC P/L

BY (Sgd) Gary Uzkuraitis

(Sgd) Terry Day

(Sgd) F.E. Freckleton

WITNESSED BY (Sgd) Lauris Sloan

DATED 6.11.91 SIGNED ON BEHALF OF JAG-FAVARO P/L

BY (Sgd) GIN0 E. FAVARO

WITNESSED BY (sgd) Lauris Sl0an

DATED 6.11.91"

Mr Favaro says that before the document was prepared the shareholders and directors of Laconic present at the meeting represented that Laconic was the beneficial owner of the hovercraft invention. That ownership is admitted in the pleadings by the respondents and there are documents in the evidence which substantiate that fact. The beneficial ownership of Laconic was not recorded in the document as it was then, as it is now, common ground.

Mr Favaro says that when those present had completed discussing clauses 2 and 3, discussion of which led to him numbering them in the order in which the numbers now appear in the document, the discussion moved on to the topic of royalties. That discussion, he says, took place against the

Mr Day had already received the first draft licence agreement. background of the following matters which are common ground: The topic of royalties is addressed in that draft, and the expression "royalty" is defined in it. To fully understand that definition it is necessary to have regard to a number of other definitions in the document. Those definitions will be set out later in this judgment, but at this stage I set out the definition of "royalty" in the first draft licence agreement:

"'Royalty' means an agreed percentage of the net sales price of this products (sic) and failing agreement, the 8 per cent of the net sale price of the product".

Mr Day and Mr Favaro had discussed that clause prior to the meeting on 6 November and had also discussed the fact that 5 per cent of net sale price was a common royalty in the market place. It was also common ground that it was not envisaged that Jag-Favaro, or Laconic for that matter, would be manufacturers of the hovercraft. Rather, Jag-Favaro would act as an agent to find manufacturers and arrange distribution. The return to be received from the exploitation of the invention by both parties to the agreement would be payments received from those manufacturers and distributors for the right to use the invention in the form of royalties, licence fees, up-front fees, distribution rights and perhaps other promotional payments.

That is the background. Mr Favaro, in his evidence,

described the conversations about royalties in the following

way: 

"What did you do then?---Then Mr Day said, 'Well, we need to talk about - we need to sort of talk about royalties'. And I said, 'Well, yes, you and I have had discussions about royalties and we have agreed that the industry average for this type of product is about 5 percent, and we had agreed that 8 per cent would be what would be in the contract'. And at that stage, Mr Day just lifted up the Phillip Mitaros contract, just briefly, and put it down on his table as an indication that the 8 per cent - as I was talking about the 8 per cent he lifted it up and put it down, and so anything beneath 8 per cent I need to consult them on."

And a little later in his evidence:

"MR REEVES: What were you saying at the time that he

lifted it up?---Well, what I was saying to him was that we had talked about royalties of being an industry average of 5 per cent. But in this occasion if we had 8 per cent in the contract and were able to get 8 per cent, we got a bonus, and if not, I'd get back to you as per discussions that we had previously and consult you on any difference on any offer under 8 per cent.

Well, after he lifted up the document did he say anything about it, the document that he lifted up?---Yes, he said, 'Well, we'll refer to the Phillip and Mitaros -'- 'Well, we'll refer to this agreement as per the conditions' because as - actually after 4, number 4, I particularly wanted to put more conditions then into it to note all the things that we have agreed on."

And a little later in his evidence:

"What then happened? You said before that you wanted to write some more things down?---Yes, I said, 'Well, there's other things that we need to write down so that we've got it clear as to all the conditions as to what we agreed on.' And Mr Day said, 'Well, we haven't got time to write all of those things down here, otherwise there'll be just pages and pages of it. We need to get down to the bank to get this money away for the patent attorneys before the deadline.' And he said, 'Well, we'll base it on the agreement that we now have' and that was believed to be the one on his table - 'We'll base it on these as the basis of this agreement.'"

A question has been raised at trial by the respondents

whether M r Day had the first draft licence agreement in his

way asserted by Mr Favaro. Mr Day is not sure whether he had hand during that meeting, and whether he referred to it in the	it at the meeting but is inclined to suggest that he did not.
The respondents dispute that the conversation about clause 4 was to the effect stated by Mr Favaro. Their case is that whilst 8 per cent was mentioned, and whilst a fall back position was also discussed, in the end it was agreed that the rate of royalty would be separately agreed between Jag-Favaro and Laconic for each manufacturer, each distributor and each other party granted the right to use any aspect of the invention. They contend that clause 4 of the document should be understood as meaning, "Laconic P/L to be consulted and agree on Royalty percentage for each contract."
That disagreement was the most significant of the differences between the parties and the most important one bearing on the question whether the words used by the parties in the document have a degree of meaning and certainty sufficient for the contract to be enforceable at law. I therefore deal with that contest between the parties at this point. Whilst the areas of disagreement on the facts between the witnesses were few, there were, nonetheless, important differences on crucial issues, and their evidence about the background to clause 4 of the document is one of them. It is necessary, therefore, for me to decide between the witnesses and to indicate which of the evidence I prefer.
I think each of the witnesses was doing his best to tell the truth. Insofar as there may have been some suggestion in
the course of the trial that one or other of them was deliberately falsifying his story, I reject that suggestion.
The differences, I think, were due to fading memories, the passage of time and, in the case of Mr Day and Mr Uzkuraitis, naivety at the commercial and legal implications of the transaction in which they were participating. Mr Uzkuraitis was at a further disadvantage in that Mr Day had not shown him the first draft licence agreement after it was delivered on
about 4 November 1991

M r Uzkuraitis was not kept fully informed about all the

discussions that had taken place between Mr Favaro and Mr Day. Mr Day's memory, I am satisfied, is inferior to that of Mr Favaro and I consider that he has unwittingly allowed his memory to be influenced by an exercise in reconstruction. His evidence about exhibit R6, a handwritten document that was produced by him on the last day of the trial, I think, illustrates this. Mr Day produced this document during the course of his evidence-in-chief. He said it comprised three pages of notes made by him during the early part of the discussions between the parties on 6 November 1991. He said that he was jotting down ideas, as was Mr Favaro, and, as those ideas were abandoned, the parties moved on to new ideas.

I have now had the opportunity to read those pages
carefully. It is necessary to look at the original exhibit as

it is in two different coloured pens. When the document is

draft a contract between Favaro Proprietary Limited and	studied, the first page appears to be the first attempt to
Laconic Proprietary Limited. The second page is a re-write of the first incorporating, more tidily, the amendments made in places on the first page. The second page of the exhibit, it will be noted, is headed "l", again indicating that it is intended to be a re-write of the first page.
The second page is primarily in blue ink but it has one amendment in black ink, and that amendment tracks straight into a more expanded version of the amendment on the third page of the exhibit. The three pages of the document indicate that the document is not of the kind suggested by Mr Day in his evidence. Rather, it is a careful attempt to draw part of a contract and the nature of the document is such that it is not what would result from the jottings in the course of a fast moving meeting.
The significance of the document, in my view, is that it shows that Mr Day's evidence about the document, which he claimed to be evidence of recollection of the events on 6 November 1991 was, in fact, reconstruction, and a faulty reconstruction at that.
An intriguing feature of exhibit R6 is that the contractual terms drafted in it, dealing with the royalty percentage, refer to that percentage as being, "as stated in the Agreement between Favaro Pty Ltd and Laconic Pty Ltd".
The applicants rely heavily on this note as indicating that Mr
Day well knew that the royalty was as specified in another
document. As it is not possible to know when and in what circumstances R6 was prepared by Mr Day, I do not feel able to draw that conclusion. I simply do not know what to make of the document, apart from the fact that it indicates, in my view, that Mr Day has unwittingly become involved in reconstruction.
I therefore prefer Mr Favaro's evidence to that of Mr Day and Mr Uzkuraitis where there is any conflict between them about the events and the discussion on 6 November 1991. But apart from that preference based on the way in which the witnesses have given their evidence in the witness box and my reference to R6, the probabilities of the matter also are against the case of the respondents on clause 4.
~t seems to me highly likely that M r Day would have had with him, at the meeting on 6 November 1991, the first draft licence agreement. I think it is inconceivable that someone who had been given a draft of a document required by the other party to the negotiations, would not have that document at a formally arranged meetlng to discuss their future relationship. Further, M r Favaro is a commercially astute man. His stated intention on 6 November 1991 was to have a legally binding contract setting out the essential aspects of the future relationship of the parties. It is common ground that the 8 per cent interest was discussed. If that topic was
per cent being the market average would also have been raised discussed, I think it is probable that Mr Day's view about 5
at that time, as Mr Favaro says. 'It is common ground that a fall back position was discussed. In those circumstances, it is unlikely in the extreme that Mr Favaro would back off the fall back position which had been mentioned in the first draft licence agreement, and it is unlikely that he would then agree to leave royalty rates for future agreement at the time that each manufacturer and each distributor was approached. That, in itself, would be an almost unworkable situation. But the effect of leaving the future royalty percentages open would mean that an important, although perhaps not essential, part of the future relationship was also left open and uncertain.
M r Favaro would not know when making his marketing plans and
the like, precisely what percentages he could allow in budgets and so on.
So I accept Mr Favaro's evidence and his basic case about clause 4. His evidence about the discussion which occurred on 6 November 1991 provides the background against which the language used in clause 4 is now to be construed.
In relation to the remuneration that was to be received by the parties from the exploitation of the patent, there was also debate during the trial whether the document of 6 November 1991 recorded discussion between the parties to the effect that Laconic was to share in all receipts for the use of the patent, such as upfront payments, licence fees,
promotional fees, and so on.
I detected a suggestion from time to time in the respondents' case, that they thought the applicants' interpretation of clause 4 meant that they would not share in those amounts. In my view, that is not so. The wording of the part of the document of 6 November 1991 which deals with the 50/50 split and thereafter the 75/25 split is, in my view, stated in terms which indicate that it is to cover all the income received from the venture. By its terms it merely
speaks of "the first $1 million dollars AUD to each party and thereafter". Those words could not be wider, and in my view, quite clearly pick up the payments of the kind that have been identified.
The respondents also assert that what was discussed was a share of profits; I reject their evidence on that topic. First of all, it seems to me that it is unlikely that they would be discussing profits, simply because of the difficulties which must have been appreciated by all of them in determining what would be the profits of Jag-Favaro arising from the exploitation of the patent. Those profits were likely to be significantly less than the net sale price, however one came at the problem, so that it would clearly be in the interests of the respondents to fix their remuneration on some other basis which left no room for the licensee to reduce receipts by deducting expenses before splitting them with the respondents.
Moreover, when the document of 6 November 1991 is looked at, the word "profit" does not appear at all, yet the word "royalty" appears five times. If the evidence of Mr Favaro is accepted as giving the context in which the words "per contract" in clause 4 came to be used, the effect of those words is to import the definition of "royalty" from the first draft licence agreement. When that is done, a sensible
commercial picture emerges. It is unlikely, in my view, that

the parties would use the word "royalty" repeatedly in the document of 6 November 1991 unless they realised that it had a definite meaning which was clear to each of them. That definite meaning arises if the interpretation clause in the first draft licence agreement is imported.

It is also important to note that when the second draft licence agreement, prepared by Mr Favaro's solicitors on about 27 November 1991, was considered and commented upon by Mr Day in his written notes which comprise exhibit A18, no comment was made about the definition of "royalty". The definition in the second draft licence agreement was identical with that in the first draft licence agreement, yet whilst Mr Day made many comments about other inconsistencies between the document of 6 November 1991 and the second draft licence agreement, he made no comment at all about the definition of "royalty".

In my view, the document of 6 November 1991 is to be

construed having regard to the definition of royalty and other

associated definitions in the first draft licence agreement.	In reaching this conclusion I do not overlook the evidence
that Mr Uzkuraitis and Mr Freckleton had not seen the first draft licence agreement. However that document had been given to Mr Day in his capacity as the relevant agent for Laconic. Notice to Mr Day of the terms of that document, as a matter of law, was notice to Laconic. The company is to be taken to know what Mr Day was doing, and what was in that document. It is, in the end, Laconic that is sought to be held to the transaction, not Mr Uzkuraitis and Mr Freckleton. As a matter of law, the company did have notice of the terms of the first draft licence agreement on 6 November 1991.
Moreover, I think it is clear on the evidence, particularly that of Mr Favaro, that there was sufficient discussion about the definitional aspects of the word "royalty" as set out in the first draft licence agreement at the meeting on 6 November, to put Mr Uzkuraitis and Mr Freckleton clearly on notice that Mr Day and Mr Favaro were incorporating by reference other terms which they had, on earlier occasions, discussed and the meaning of which they appeared to understand.
In my view, the terms from the first draft licence agreement, which are to be imported into the document of 6 November 1991 by the reference to the words "per contract" in clause 4 are as follows: the definitions of licensor's "improvements", "net sale price", "patents", "product",
"royalty", and "trade secrets". Those definitions are:

"'licensor's improvements' means all technical information (including patentable inventions and trade secrets insofar as they originate with or are acquired by the licensor before the licensee knows them) relating to the manufacture and sale of the products developed or acquired by the licensor during the term of this agreement.

'Net sales price' means the arms length net selling price of the licensee's gross invoiced sales of the products less all discounts, allowances, transportation charges, packaging costs, insurance and taxes directly based on sale and/or time of payment.

'patents' means all present and future patents and applications filed (including but not limited to licensor's improvements insofar as patent applications have been made in respect thereto) in any jurisdiction in the Territory insofar as they relate to the products, the equipment to manufacture the products and the process pursuant to which the products are made and all divisions, continuation, continuation in part, supplemental disclosure and reissues thereof and thereto.

'Product' means the Hovercraft and as improved by the licensor as detailed in accordance with the specifications, contained in the Patents together with licensor's improvements.

'Royalty' means an agreed percentage of the net sales price of this products (sic) and failing agreement, the 8 per cent of the net sale price of the product.

'Trade secrets' means all secret processes, formulae and technical information relating to the production or use of the products including information relating to the equipment and processes used in the production of the product now possessed or developed or acquired by the licensor or the licensee prior to or during the term of this agreement."

At the conclusion of the meeting, Mr Day and Mr Uzkuraitis were in no doubt that they had entered into a binding agreement. They expected it to bind not only them, but Jag-Favaro forthwith. They expected Mr Favaro, on behalf of Jag-Favaro, to immediately pay $20,000. Indeed, that

payment was made very shortly afterwards, as soon as Mr Day	and Mr Favaro had arrived at the latter's bank. No one
intended that the legal relationship between the parties would not arise until some formal legal document had been drawn up and signed by them.
The "subject to contract" clause in the document was written by Mr Favaro. He said he wanted a document that was more formal in nature than the hastily and untidily written

2 0

paper that had come into existence that day. In my view, it is clear that the document signed was not one of the third kind of contracts referred to by the High Court in the

decision of Masters & Another v Cameron (1954) 91 CLR 353 at

360. The document of 6 November 1991 was a document, the terms of which were intended there and then to bind the parties, and the evidence indicates that the parties have so conducted themselves ever since.

That document, together with the imported terms, gives rise to a legally binding agreement so long as the terms used by the parties in it are sufficiently clear to indicate agreement on all essential aspects of the transaction. There is, in law, a difference between unclear terms and incomplete terms. The terms may be difficult to ascertain or ambiguous, and in that sense unclear, but nevertheless, if there is agreement on essential terms so that there is a complete contract, the transaction is enforceable.

The approach of the court to a commercial bargain of the kind alleged here is described in the following passage from

The Council o f t h e Upper Hunter County D i s t r i c t v A u s t r a l i a n

C h i l l i n g and	F r e e z i n g	Co.	L imi ted	(1968) 118	CLR	429,	at
pp.436-437:

"But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction: and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it. Lord Tomlin's words in this connexion in Hillas & Co. Ltd v Arcos Ltd (1) ought to be kept in mind. So long as the language employed by the parties, to use Lord Wright's words in Scammell (G) &

Nephew Ltd v Ouston ( 2 ) , is not 'so obscure and so

incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention', the contract cannot be held to be void or uncertain or meaningless. In the search for that intention no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning, as distinct from absence of meaning or of invention, be resolved."

The terms in the document of 6 November 1991 which the respondents contend are uncertain have been identified in particulars, and I refer to those particulars in turn.

The first is that the handwriting is in part illegible. Some of the handwriting is not easy to read, but now with the benefit of Mr Favaro's interpretation it can be read. This is not a ground of uncertainty in the legal sense; it is merely a difficulty in ascertaining what was written down, and this

can be, and has been, cleared up by evidence. The second ground is that no meaningful sense can be made	of the words that are legible. I do not agree with that
submission. When clause 4 is read as referring to the first
draft licence agreement and thereby importing into the handwritten document the definitions in the first draft licence agreement, the major hurdles to understanding the document disappear. It is suggested that the terms of the document do not make provision for Laconic to receive its share of up front payments and the like. I have already referred to that. It is not a submission with which I agree. It may be that some of the clauses on first reading are difficult to understand and are not without ambiguity, but when regard is had to the background context and the setting in which the document was made, I do not think it can be said that the document is meaningless in a legal sense.
Thirdly, it is said that a number of words are not defined. I take them in turn:
(a) "World exclusive rights". Those words probably are meaningful even standing alone, as they are ordinary words that are used not infrequently in the community. However, in the document of 6 November 1991 those words take meaning from the context and one has to have regard to the whole of clause 1. In my view there is no uncertainty in those words.
(b) day in the community. They are not meaningless words, and in the context of this document they mean "any

"Any funds". Again, these are ordinary words used every

moneys".

(c) "Working prototype". Again, these are words of ordinary meaning which should create no uncertainty in the minds of people that hear them. The parties here have used the words repeatedly in their evidence, and apparently had no

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difficulty understanding the meaning that they intended.

(d)	"Royalties". That is an expression defined in the first draft licence agreement, so no difficulty arises.
(e)	"Non performance". This expression was colourfully described in the evidence as meaning M r Favaro sitting on his backside. There may be some room to argue whether clause 3 operates only where in a 2 4 month consecutive period there are no royalties at all received, or whether it operates so as to require Jag-Favaro to make up royalties to A$10,000 per annum if in a 24 consecutive month period the royalties and other receipts fall below that sum. But that is a construction question arising because the clause is ambiguous, it is not one that renders it uncertain or meaningless in the legal sense.
(f)	"Per contract". I have dealt with those words. In my opinion they are a clear reference by which the
definitions in the first draft licence agreement are imported.

Fourthly, the final particular of uncertainty is as follows, and I quote the particular:

"'If Favaro breaches the condition of this contract that cost of World (illegible) right will come about as (illegible) in this contract', is a meaningless phrase.''

In my view it is obvious how the clause should be read and it means this: if Favaro breaches the conditions of this contract, the loss of world exclusive rights as described in this contract will come about. It is a clause clearly inserted for the benefit of the licensors. M r Reeves is correct in his submission, that if it were uncertain it is a clause which could readily be excised altogether and the balance of the document would stand. However, I do not think it is meaningless and it is one of the clauses of the agreement reached.

So, in summary, in my opinion on 6 November 1991 there came into being a concluded and enforceable agreement having immediate binding effect on the companies. The document comprises the handwritten document dated 6 November 1991 and the imported definitional clauses set out above from the first draft licence agreement.

In the events which followed a more formally worded contract embodying the spirit and nature of this agreement was	not entered into. Mr Favaro asked his solicitors to prepare	such a document. In fact they prepared two documents
described as the second draft licence agreement and the first draft royalty deed. These became available on 27 November
1991. They were picked up by Mr Favaro and delivered to M r
Day. Mr Favaro dld not check the documents closely before he delivered them. It is a pity that he did not do so as they contained many errors and a fundamental misunderstanding about

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the split of the royalty to be received. Mr Day unfortunately is not familiar with the kind of terms commonly inserted by lawyers and other commercial people in licensing and royalty agreements of this kind and he took fright and umbrage at the apparent complexity of the documents.

Mr Day's resistance to signing those or later contracts was heightened by the discovery of the many errors in the second draft licence agreement. When Mr Day responded in writing to the second draft licence agreement Mr Favaro realised that there were many errors in it. That made Mr Favaro cross with his solicitors, so he attempted to correct the document himself. That too, perhaps was an unfortunate step, as Mr Day was still unhappy with the result. Although I have not checked every one of Mr Favaro's amendments, some of those that I have looked at leave something to be desired. But even if Mr Favaro had not made these tactical mistakes, I think it is apparent from M r Day's evidence that he would not have signed any legal document of the kind produced. So the

worthy ideal of having a more formal document chan that of the	handwritten paper of 6 November 1991 was doomed to failure
from the outset.
That does not mean that no contract exists; it just means that the parties will have to do their best with the document of 6 November 1991 and the imported definitions set out above.

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Day argues that the failure of Mr Favaro to produce a simple document which Laconic would sign some time before October 1992 when the parties had their final falling out means that the contract reached on 6 November 1991, even though it may have been enforceable initially, is no longer enforceable. At least, that is as I understood M r Day's opening. That contention is unsound. Quite apart from the fact that the evidence discloses that Mr Day's attitude to the length and complexity of the draft document produced by Mr Favaro was itself one of the reasons why no document was ever signed, the failure to sign a second document does not, as a matter of law, render the first one unenforceable.

To complete the story briefly, as I do not consider these later events are of any more than peripheral importance, the parties finally fell out at the end of October 1992. It was at that stage that the respondents realised that Mr Favaro was propounding the interpretation of the contract which the Court has now upheld. That was an interpretation with which they

disagreed because they thought that it did not give them an	adequate share of profits likely to be received from the
exploitation of the patent. These proceedings were then commenced.
Having reached the conclusion that there is still in existence between the parties a binding and enforceable contract concluded on 6 November 1991, the question arises whether the orders sought by the applicant should be made.
The grant of an order in the nature of specific performance is discretionary. Here, the parties obviously fell out in October 1992 and, I infer from their conduct in Court, that they have not patched up their differences yet. The transaction originally contemplated was one most likely to succeed if there were close co-operation in the continuing research and development of the prototype. Moreover, the skeletal nature of the terms of the agreement reached on 6 November 1991 are likely to give rise to disputes over the interpretations of express clauses and over what clauses should be implied. These matters caused me at one stage in the proceedings to wonder whether the orders sought by the applicants should be made even if they succeeded with the balance of their case, or whether damages would be a more sensible remedy so as to sever finally the relationship between the parties.
Whether or not the discretion is exercised in favour of granting relief in the nature of specific performance must
the parties in all the circumstances of the case. As the ultimately be decided in a way which best does justice between evidence unfolded, it became common ground that Laconic is
without the assets, apart from the patent rights, and has no prospect of paying any damages. Furthermore, all the parties, notwithstanding their personal differences, continue to have great enthusiasm for the future of the hovercraft and the respondents concede that, if directed by the Court to perform the agreement of 6 November 1991, they will do so in the hope

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that the venture is a success. I readily accept that Mr Day, who has a great personal commitment to the hovercraft, would be motivated to continue developing a prototype to prove his invention.

As orders in the nature of specific performance are the only way in which Jag-Favaro has any prospect of gaining a return on its investment, I think the discretion should be exercised in favour of making the orders sought by the applicants. As the finding of the Court establishes that a contract came into existence on 6 November 1991, and as it is not disputed that Laconic is the beneficial owner of the hovercraft patent, all the alternative claims must fail, in particular the claim made under s.52 of the Trade Practices Act.

There is one other issue that I should briefly mention.
As I initially read the applicants' pleadings, and as I think

the respondents read them, Jag-Favaro was claiming an

entitlement as licensee to exploit patent rights held by M r Day and Laconic on an angle flow fan. That was a matter of	considerable concern to the respondents for, whilst they
acknowledged that the angle flow fan, when used in the hovercraft, constituted an improvement to the hovercraft, it is an invention that could have application in many other unrelated fields. The respondents are anxious to further exploit that potential. That reading of the pleadings however was disclaimed by the applicants during the trial, and it

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became common ground that Jag-Favaro was entitled to the use of the angle fan invention in its application to the hovercraft but not otherwise. I record that fact. In any event, it seems to me to be the clear meaning of the definitions imported from the flrst draft licence agreement into the document of 6 November 1991 that the right of the licensee to improvements is limited to a right to use them in relation to the hovercraft.

For these reasons there will be judgment for Jag-Favaro with a declaration and injunction as sought. The alternative claims for damages and monetary compensation will be dismissed. The claims against Mr Day and Mr Uzkuraitis personally as parties knowingly involved in the breach of s.52 of the Trade Practices Act will also be dismissed. Laconic will pay the applicants' costs.

I certify that this and the

23 preceding pages are a

true copy of the Reasons for Judament of Mr Justice von ~ougsa

Counsel for the applicants	: Mr J Reeves
Solicitor for the applicants	: Greves Creswick (NT)

The respondents were unrepresented (Mr Day appearing for himself and as agent for Laconic Pty Ltd)

Dates of hearing : 30, 31 August 1993, 1,2

& 3 September 1993