Hospital Products Ltd v United States Surgical Corporation

[1984] HCA 64

HIGH COURT OF AUSTRALIA

Gibbs C.J., Mason, Wilson, Deane and Dawson JJ.

HOSPITAL PRODUCTS LTD. v. UNITED STATES SURGICAL CORPORATION, SURGEONS CHOICE

(1984) 156 CLR 41

25 October 1984

Contract—Trusts

Contract—Exclusive distribution agreement—Statements preceding contract—Whether promissory—Statement that distributor would devote best efforts to distribute products—Whether warranty or mere representation—Implied terms—Term implied by statute that distributor would "use best efforts" to promote products—Whether further term implied that distributor not to do anything inimical to market for products—Distributor developing own capacity to manufacture principal's products—Orders for principal's products deferred to be met with distributor's products—Whether breach of best efforts term—Uniform Commercial Code (U.S.), s. 2-306(2). Trusts—Constructive trust—Fiduciary duty—Breach—Distributorship agreement—Whether fiduciary relationship between parties—Importation of fiduciary duties into commercial transactions—Relevance of terms of contract to existence of fiduciary relationship.

Decisions

GIBBS C.J. This is an appeal from a decision of the Court of Appeal of New South Wales, which allowed an appeal from a judgment of McLelland J. given in proceedings brought by United States Surgical Corporation ("U.S.S.C."), one of the present respondents, against the present appellant, Hospital Products Limited ("H.P.L.") and the other respondents, Surgeons Choice Inc. ("S.C.I."), Hospital Products International Pty. Limited (whose name has been changed to Ballabil Holdings Pty. Limited), Alan Richard Blackman and I.R.D. Engineering Services Pty. Limited ("I.R.D."). All of the respondents have cross-appealed.

2. After hearing voluminous evidence, McLelland J. made findings of fact which have not been challenged, although the Court of Appeal has supplemented them with some further findings. For present purposes it is unnecessary to state the facts in the full detail in which they are recounted in the judgments below. The material facts were as follows. U.S.S.C., a corporation incorporated in the United States, carried on the business of manufacturing in the United States, and marketing in the United States and elsewhere, implements for use in surgery, in particular surgical stapling instruments, disposable loading units for use with such instruments and disposable skin staplers. These implements were all made to U.S.S.C.'s own design, which was apparently novel. They were marketed under the name "Auto Suture".

3. The marketing of U.S.S.C.'s products in countries other than the United States was carried out through distributors - independent contractors who purchased the products from U.S.S.C. and resold them to customers. Early in November 1978 Mr Blackman arranged a meeting with the President of U.S.S.C., Mr Leon Hirsch, and the Vice-President in charge of marketing, Ms Turi Josefsen, at which he proposed to them that he should be appointed sole distributor of the company's products in Australia in place of Downs Surgical (Australia) Pty. Limited ("Downs") which had been the Australian distributor since December 1976. Mr Blackman was at the time on good terms with Mr Hirsch and Ms Josefsen, and was known to them as an efficient salesman. He had in 1973 been appointed a dealer for U.S.S.C. in the New York area, and in 1976 a corporation (The Hospital Products Corporation) which he owned and controlled had been appointed to replace him as dealer. It was part of his proposal that this dealership should be phased out. Mr Hirsch and Ms Josefsen indicated that they were favourably disposed to the proposal. After some later discussions and correspondence, U.S.S.C. on 27 December 1978 wrote to Downs, terminating its appointment as from 31 March 1979, and to Mr Blackman, advising him that he would be U.S.S.C.'s exclusive Australian distributor from 1 April 1979. It will be necessary to refer again to these discussions and correspondence for the purpose of determining more precisely the terms of the agreement between U.S.S.C. and Mr Blackman, but that task may for the moment be postponed.

4. In January 1979 Mr Blackman arrived in Australia, and in February of that year he acquired a shelf company whose name he changed to Hospital Products of Australia Pty. Limited. In the same month, by a novation, that company was substituted for Mr Blackman as the distributor under the agreement with U.S.S.C. In November 1979 the name of Hospital Products of Australia Pty. Limited was changed to Hospital Products International Pty. Limited and it will be convenient to refer to that company as "H.P.I.", in respect of the period before November 1979 as well as afterwards. H.P.I. purchased the stock of U.S.S.C.'s products held by Downs and on 1 April 1979 commenced to market U.S.S.C.'s products in Australia. It was successful in bringing about a substantial increase in the use of those products. From about May 1979 H.P.I. began purchasing further stocks direct from U.S.S.C. and until about October 1979 it satisfied the orders which it received from customers from those stocks.

5. During all this time Mr Blackman was putting into effect a dishonest plan which he had formulated before he had put his proposal to U.S.S.C. in November 1978, and for which he had made careful preparations before he had been appointed U.S.S.C.'s Australian distributor. The object of the plan was that ultimately H.P.I. would itself manufacture products which very closely resembled those made by U.S.S.C. and would pass them off as products made under licence from, or by arrangement with, U.S.S.C., and in that way would appropriate for Mr Blackman's own benefit the market in Australia that would otherwise have been available to U.S.S.C. The plan was to be put into effect in a number of stages. In the first stage, Mr Blackman intended to market products which contained some components of his own manufacture together with demonstration cartridges obtained from U.S.S.C. It was the practice for U.S.S.C., in order to assist in the marketing of its products, to supply its distributors and dealers, at comparatively low cost, with disposable loading units and disposable skin staplers for demonstration purposes. The demonstration units were identical with those for clinical use, except that they were not sterilized or packed in sterile containers and that they contained only a single anvil and (in certain cases) a single retaining pin or pusher-knife assembly for use with a number of separate cartridges. In clinical use each component, once used, had to be discarded, and a new anvil and (where applicable, retaining pin or pusher-knife assembly) was needed for each cartridge. In the first stage Mr Blackman's intention was to manufacture anvils, retaining pins and pusher-knife assemblies, to add them to the demonstration cartridges and to sterilize and repack the resulting units and sell them in satisfaction of the orders which H.P.I. obtained for U.S.S.C. products. In the second stage, it was intended to manufacture all of the components of the disposable units, and to assemble, sterilize, pack, label and sell them in competition with or substitution for U.S.S.C.'s products.

6. From about 1977 Mr Blackman had been accumulating large stocks of demonstration products which he was able to obtain in the course of the New York dealership. As early as August 1978 he commenced to make inquiries from his solicitors in Australia about the possibility that he might compete with U.S.S.C., and might register the trade mark "Autosuture", and from experts with regard to the possible manufacture of the components and the sterilization of disposable loading units. In November 1978 Mr Blackman's solicitors lodged an application for registration of the trade mark "Autosuture" in respect of, inter alia, "instruments and apparatus for use in surgery". During the period from December 1978 to February 1979 he arranged for the demonstration products which he had accumulated to be shipped by The Hospital Products Corporation to H.P.I. via Hong Kong. The products were invoiced by The Hospital Products Corporation at a price of US$19,190, and were ultimately received by H.P.I. at invoiced prices of about $500,000. At the beginning of March 1979 Mr Blackman engaged an engineering consultant who set about arranging for the manufacture of the various components and the assembling, packaging and sterilizing of the disposable loading units. Much of the engineering work in both stages of the plan was performed under contract for H.P.I. by I.R.D., a company which on 30 June 1980 came under the control of Mr Blackman. A painstaking process of reverse engineering was carried out; i.e. U.S.S.C.'s components were disassembled, measured and analysed, and tools, moulds and dies were prepared to enable components to be made which were as far as possible identical with those made by U.S.S.C. In July 1979 Mr Blackman, who had known at least from August 1978 that U.S.S.C. had no patent rights in Australia, applied for an Australian patent for a "surgical skin and fascia stapler and disposable staple cartridge for use therewith" and lodged a provisional specification which was largely copied from the specifications of certain United States patents of U.S.S.C.; his purpose was to enable him to use the words "patent pending" on H.P.I.'s labels and thus discourage other potential manufacturers in Australia. By about August 1979, anvils, retaining pins and pusher-knife assemblies were being manufactured for, and supplied to, H.P.I. In about October 1979 H.P.I. began to defer fulfilment of orders being received for Auto Suture products, its intention being to fill those orders with the products assembled by H.P.I.; it then ceased placing its own orders with U.S.S.C. On 25 December 1979 H.P.I. wrote to U.S.S.C., saying that from that day on H.P.I. would no longer be the authorized agent of U.S.S.C.; the reasons given for bringing the distributorship to an end were spurious. On 10 January 1980 U.S.S.C. accepted H.P.I.'s decision to terminate the distributorship. From 25 December 1979 H.P.I. began supplying products, which it had itself assembled and repacked, in fulfilment of orders then outstanding and subsequently received for Auto Suture products. The products which it supplied had labels which included the words "For use with Auto Suture instrument", "Packaged and distributed by H.P.I." and "Patent pending", but which bore no reference to U.S.S.C. On 28 December 1979, and again on 18 February 1980, H.P.I. issued to its customers a circular stating that it was phasing out all goods manufactured in the United States and substituting a product manufactured in Australia. The learned trial judge made the following finding:

"I am satisfied that as from 25 December 1979 H.P.I. began to supply customers in Australia with H.P.I.-labelled products, the H.P.I.-made proportion of the contents of which was increasing with the passage of time, in order that the existing Australian market for U.S.S.C.-made products might change into an equivalent market for H.P.I.-made products, and that this was done in a manner which was intended to, and did in fact, mislead existing customers for U.S.S.C.-made products into believing that the H.P.I.-labelled products were being manufactured in Australia by arrangement with, or under licence from, the manufacturer of United States-made Auto Suture products, namely U.S.S.C."

By June 1980 H.P.I. commenced to supply some disposable instruments completely manufactured by itself, but it experienced some manufacturing difficulties, and found it necessary to obtain supplies of quite large quantities of U.S.S.C. products in order to enable it to satisfy its orders. These products were acquired by subterfuge, so that U.S.S.C. was not aware of the true identity of the purchaser, and were either repackaged under a label which showed that they were packed and distributed by H.P.I., or were used to supply components for the product which H.P.I. assembled.

7. H.P.I. continued to market its products in Australia, until November 1980, when it commenced to market them in the United States and to withdraw from the Australian market. The marketing in the United States was done through S.C.I., which was incorporated in the United States in October 1980 as a wholly owned subsidiary of H.P.I.

8. It is apparent that it was essential to the success of Mr Blackman's scheme that H.P.I. should be appointed exclusive distributor of U.S.S.C. products in Australia and that U.S.S.C. should not know that H.P.I. was using the distributorship for the purpose of obtaining a market for itself. The Court of Appeal concluded (although McLelland J. made no finding on the matter) that H.P.I. would not have been able to raise the finance necessary to enable it to develop its manufacturing capacity had it not been for financial assistance provided by U.S.S.C. itself, and for the fact that the Bank of New Zealand extended credit to it only because it was U.S.S.C.'s distributor. It is unnecessary to consider whether that conclusion is justified by the evidence, because quite apart from the difficulty of obtaining finance, it is most unlikely that H.P.I. could have developed its manufacturing capacity and entered the market as it did if it had not been able to persuade its customers to believe that it was in some way acting for, or with the concurrence of, U.S.S.C. Because it was the exclusive distributor of U.S.S.C.'s products, H.P.I. was able to sell its own goods as soon as they were ready for sale, without having to secure for itself orders in competition with U.S.S.C. It is reasonable to conclude on the balance of probabilities that H.P.I. would not have been able to develop its manufacturing and marketing business if it had not been U.S.S.C.'s exclusive distributor.

9. In February 1980 U.S.S.C. received information which caused it to suspect that Mr Blackman was "up to no good". It commenced investigations, and by April or May 1980 it was aware that H.P.I. was manufacturing or attempting to manufacture copies of its products. In August 1980 U.S.S.C. re-entered the Australian market.

10. In July 1980 U.S.S.C. commenced proceedings against H.P.I. and Mr Blackman in New York alleging, inter alia, conspiracy. Further proceedings, including proceedings for infringement of patent, have since been commenced by U.S.S.C. in Connecticut and Texas. In August 1980 U.S.S.C. commenced proceedings in the Federal Court of Australia against H.P.I. and Mr Blackman and others who are not parties to the present proceedings seeking relief for contraventions of the Trade Practices Act 1974 (Cth), as amended, and for passing off, infringement of copyright, breach of confidence, unfair competition and other alleged wrongs. The defendants brought a challenge in this Court to the jurisdiction of the Federal Court, and it was held that the Federal Court lacked jurisdiction to entertain the whole of those proceedings (see 55 A.L.J.R. 120).

11. By an agreement made on 1 April 1981, H.P.I. and I.R.D. agreed to sell all their assets (including the shares in S.C.I.) to a listed public company, Aquila Investment Corporation Limited ("Aquila"), for a consideration which included an issue of shares representing 60 per cent of the capital in that company. Aquila agreed to change its name to Hospital Products Limited ("H.P.L.") and to indemnify H.P.I. and I.R.D. in respect of existing litigation, and H.P.I. and I.R.D. agreed to hold any amount awarded to them for the benefit of Aquila. Completion was conditional upon the approval of Aquila's shareholders, which was given at a meeting held on 11 May 1981. Completion took place on or about 30 June 1981; thereby H.P.L. acquired all the assets of H.P.I. and I.R.D., and Mr Blackman, through H.P.I., acquired a controlling interest in H.P.L.

12. The present proceedings were commenced on 6 May 1981. By its amended statement of claim, U.S.S.C. claimed a variety of relief, including declarations that the defendants held certain assets on constructive trusts in favour of U.S.S.C., an account of profits made by the defendants as a result of breaches of contract or fiduciary duty, or in the alternative damages for such breaches, damages for conspiracy and extensive ancillary relief. A claim was originally made for damages for fraudulent misrepresentation, but that was abandoned. No claim was made for passing off or infringement of patent. McLelland J. declared that H.P.I. had committed breaches of contract, that Mr Blackman had knowingly participated in the breaches by H.P.I. of its equitable obligations and that U.S.S.C. was entitled, at its election, either (1) as against H.P.I. and Mr Blackman,to an account of profits, secured in the case of H.P.I. by an equitable lien over certain of its assets; or (2) as against H.P.I. and Mr Blackman, to equitable compensation for breach of H.P.I.'s equitable obligations; or (3) as against H.P.I., to damages for breach of contract. U.S.S.C. elected for the first of these remedies and it was ordered accordingly. The proceedings were dismissed as against the other defendants, H.P.L., I.R.D. and S.C.I. An appeal by U.S.S.C. to the Court of Appeal was allowed, and in lieu of the orders made by McLelland J. it was declared that all assets owned by H.P.L. on 1 July 1981 and at any time thereafter, except such as were its assets prior to its acquisition of the assets, goodwill and undertaking of H.P.I. and I.R.D. on or about 29 and 30 June 1981 pursuant to the agreement made on 1 April 1981, are held in trust for U.S.S.C. Orders were made for extensive ancillary relief. Orders were also made against H.P.I., Mr Blackman and H.P.L. for costs.

The Terms of the Contract

13. To determine the rights of U.S.S.C., it is necessary first to consider what were the terms of the contract between that corporation and Mr Blackman, which became the terms of the contract between U.S.S.C. and H.P.I. when the novation took effect. It is therefore necessary to consider in further detail the circumstances in which the contract between U.S.S.C. and Mr Blackman was made. It was found by the learned trial judge that when, at the meeting early in November 1978, Mr Blackman put to Mr Hirsch and Ms Josefsen his proposal that U.S.S.C. appoint him its exclusive Australian distributor, he made statements to the following effect in support of that proposal:

"(a) that there was a great potential market for USSC surgical stapling products in Australia which was not being tapped by the existing distributor,

(b) that with his long experience of, and accumulated knowhow in, marketing such products, and his long association with USSC, he could do an outstanding job for USSC and perform better than anyone else in building up sales of USSC products,

(c) that this would be a great opportunity both for himself and for USSC,

(d) that he would set up a marketing organisation with sales representatives trained in the use and demonstration of USSC products in a manner similar to that used in USSC's training program in the United States,

(e) that after he had got the Auto Suture business built up, 'really rolling', he might take on other non-competing product lines and build up a broad-based surgical distributorship but not so as to interfere with his giving proper attention to USSC's products,

(f) that because establishment of the new business would take some time and would be expensive he would need some financial help in the form of credit and would like to rent instruments from USSC with the option of purchasing them in the future."

14. The learned trial judge further found that at this discussion Mr Blackman laid considerable emphasis on the benefit to be derived by U.S.S.C. from his appointment as its Australian distributor. Mr Hirsch and Ms Josefsen indicated that they were favourably disposed to the proposal. Mr Hirsch said, "Alan we will work it out" and Mr Blackman replied, "You won't regret it". It was arranged that Mr Blackman should later discuss further details of the matter with Ms Josefsen.

15. A further discussion took place, probably in late November 1978, but the details are not important for present purposes. However Ms Josefsen then said that she thought that a written distributorship agreement was necessary; Mr Blackman disagreed but said that he would read anything that she sent him.

16. By arrangement with Ms Josefsen, Mr Blackman discussed with Mr Grimes, another officer of U.S.S.C., the details of the termination of the New York dealership. On 27 November 1978 he wrote to Ms Josefsen a letter in which he set out a "chronology of events", which suggested 1 December 1978 as the date on which Downs' distributorship should be terminated on ninety days notice, and 30 September 1979 as the date on which the dealership would be officially ended. Again, much of the detail in the letter does not matter, but it should be mentioned that Mr Blackman stated that he would purchase from Downs their "inventory", i.e. their stocks, and that the letter went on to state:

"(e) I will be using my inventory of $100-$125,000 wholesale value, to provide an inventory level in Australia.

(f) All additional products ordered from U.S.S.C. will be paid in 30 days.

(g) U.S.S.C. will make instruments available to me on a rental basis.

A transition in this manner will benefit U.S.S.C. by having improved coverage in the Australian market, as well as an orderly change here."

Ms Josefsen replied by letter of 18 December 1978, agreeing in principle to these proposals. She said in the letter that she had asked Mr Fisher (U.S.S.C.'s in-house counsel) to write a distributorship agreement which would be ready when she returned from vacation on 2 January, and said, "At that time I will contact you so that we can review it, 'sign and seal'."

U.S.S.C. again wrote to Mr Blackman on 27 December 1978.

The letter, omitting formal parts, was as follows:

"We take pleasure in confirming the continuance of our relationship. You will become our Australian distributor while phasing out your dealership in accordance with the following procedures.

1. We have this day given notice of termination to our present Australian distributor, Downs Surgical (Australia) Pty. Ltd. effective March 31, 1979. A copy of the notice has been furnished to you. Upon that termination becoming effective and commencing April 1, 1979 you will be our exclusive Australian distributor. Although you have indicated that no formal agreement is necessary, we believe it is desirable and will forward to you a suggested agreement covering the distributorship.

2. During the period through March 31, 1979 you will undertake to purchase the Downs' inventory at prices mutually agreeable to you and them and in any event use your dealership inventory which you estimate will be approximately $100,000 - $125,000, wholesale value, to provide an inventory level in Australia. Additional products purchased by you from us will be paid on a 30 day net basis. In the meantime arrangements should be made to examine your inventory books and records as per your dealership agreement at the earliest convenient date.

3. You expect to rent from us between 20-30 sets of instruments which within 120 days you will convert to purchase from us.

4. You will hire and train your nurse unless she is agreeable to training by us at your expense.

5. Your dealership will continue without change through June 30, 1979. Effective July 1, 1979 your dealership shall be deemed terminated in all respects and your PAR (Primary Area of Responsibility) will be taken over by us for servicing.

6. By July 1, 1979 all accounts owed to us will be paid in full by you. This includes outstanding A/R (Accounts Receivable), inventory, demonstrations, interest, financing charges and other obligations.

If the above is your understanding of our discussions please sign and return the enclosed copy of this letter. We look forward with great pleasure to our new relationship and wish you every success in your new undertaking."

On 28 December, Mr Fisher telephoned Mr Blackman and asked him to come to his office in New York to discuss the letter. Mr Blackman went to Mr Fisher's office on the following day, read over the letter and confirmed that he was satisfied with its contents and then signed it as follows:

"Accepted and Agreed The Hospital Products Corporation

Alan R. Blackman President"

Mr Fisher said that he might forward to Mr Blackman a formal contract. Mr Blackman replied that he did not think that one was necessary but said that he would read whatever Mr Fisher sent. Ms Josefsen and Mr Hirsch decided that they would take no further steps in relation to a formal agreement, having regard to Mr Blackman's disinclination to enter into one, and U.S.S.C. took no further action to send any contract document to Mr Blackman.

17. It was held both at first instance and in the Court of Appeal that the proper law of the contract between U.S.S.C. and H.P.I. was that of either New York or Connecticut, that there was no material difference between the laws of those two States, and that, so far as concerns the principles governing the implication of terms in a contract, there was no material difference between the laws of those States and the law of New South Wales. These conclusions are not challenged. There is however a statutory provision, s.2-306(2) of the Uniform Commercial Code, which is in force in both New York and Connecticut, and which provides:

"A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale."

Neither McLelland J. nor the Court of Appeal thought this provision to be of importance, because they considered that the matter was covered by the express terms of the contract.

18. McLelland J. held, and the Court of Appeal agreed, that the letter of 27 December 1979 did not embody all of the terms of the contract, and that the statements made during the course of the meeting between Mr Blackman and Mr Hirsch and Ms Josefsen early in November 1978 were of a promissory nature and should be regarded as express terms of Mr Blackman's offer, and therefore of the contract which resulted from the acceptance of that offer, and that, as the result of the novation, H.P.I. became bound by the same terms, which were to the following effect:

"(1) That the distributor would establish a marketing organisation for U.S.S.C. surgical stapling products in Australia having one or more sales representatives specifically trained in the use and demonstration of those products,

(2) That the distributor would devote its best efforts to distributing U.S.S.C. surgical stapling products, and building up the market for those products, in Australia, to the common benefit of U.S.S.C. and itself,

(3) That the distributor would not deal (scil. in Australia) in any products competitive with U.S.S.C. surgical stapling products,

(4) That the distributor would not deal (scil. in Australia) in any other products in such a manner as would diminish its efforts in distributing U.S.S.C. surgical stapling products and building up the market for those products, in Australia."

It was held that by necessary implication these obligations were to endure for the duration of the distributorship. It was further held that a term should be implied in the contract that "the distributor would not during the distributorship do anything inimical to the market in Australia for U.S.S.C. surgical stapling products".

19. There can be no doubt that the parties reached a concluded agreement when the letter of 27 December 1978 was signed by Mr Blackman, or that they intended themselves to be bound to performance of that agreement, notwithstanding that they left open the possibility that the terms might be restated in an ampler form (cf. Masters v. Cameron (1954) 91 CLR 353, at p 360). The question however is whether the statements made by Mr Blackman to Mr Hirsch and Ms Josefsen, in the course of the negotiations in November 1978, became terms of the contract which is, in part at least, embodied in that letter. The letter purports to state the effect of the previous discussion between the parties, and the fact that Mr Blackman was asked to, and did, endorse it "Accepted and Agreed" provides an indication that the letter itself was intended to state all the terms of the agreement then made between the parties, although it was envisaged that further terms might be added if the agreement were put into more formal shape. In these circumstances, the rule that oral evidence is not allowed to be given to add to a written contract might have made it difficult to treat the statements made in the course of negotiations as part of the agreement, were it not for the fact that it was admitted on the pleadings that the distributorship agreement reached by the parties in November and December 1978 was partly in writing, partly oral and partly implied: see par.13 of the amended statement of claim and par.8 of the various amended defences. There was, however, no admission that all the representations made by Mr Blackman in November 1978 became part of the distributorship agreement.

20. A representation made in the course of negotiations which result in a binding agreement may be a warranty - i.e. it may have binding contractual force - in one of two ways: it may become a term of the agreement itself, or it may be a separate collateral contract, the consideration for which is the promise to enter into the main agreement. In either case the question whether the representation creates a binding contractual obligation depends on the intention of the parties. In J.J. Savage &Sons Pty. Ltd. v. Blakney (1970) 119 CLR 435, at p 442 and Ross v. Allis-Chalmers Australia Pty. Ltd. (1980) 55 ALJR 8, at pp 10 and 11, it was said that a statement will constitute a collateral warranty only if it was "promissory and not merely representational", and it is equally true that a statement which is "merely representational" - i.e. which is not intended to be a binding promise - will not form part of the main contract. If the parties did not intend that there should be contractual liability in respect of the accuracy of the representation, it will not create contractual obligations. In the present case Mr Blackman, who made his statements fraudulently, had of course no intention that they should amount to contractual undertakings, but he could not rely on his secret thoughts to escape liability, if his representations were reasonably considered by the persons to whom they were made as intended to be contractual promises, and if those persons intended to accept them as such. The intention of the parties is to be ascertained objectively; it "can only be deduced from the totality of the evidence": Heilbut, Symons &Co. v. Buckleton (1913) AC 30, at p 51. In other words, as Lord Denning said in Oscar Chess Ltd. v. Williams (1957) 1 WLR 370, at p 375:

"The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice."

The intelligent bystander must however be in the situation of the parties, for "what must be ascertained is what is to be taken as the intention which reasonable persons would have had if placed in the situation of the parties": Reardon Smith Line v. Hansen-Tangen (1976) 1 WLR 989, at p 996.

21. In the present case I am unable to agree with the conclusion reached by the learned judges in the Supreme Court that the statements made by Mr Blackman in November 1978 were intended by the parties to be warranties. The fact that Mr Blackman intended Mr Hirsch and Ms Josefsen to act on the representations by entering into an agreement, and that they did so, does not mean that the parties intended the representations to be terms of the agreement. The representations were not made at the time when the parties concluded an agreement, but about a month before that time. They were followed up by further discussions and correspondence in which no reference was made to them. The explanation suggested for the fact that the representations were not incorporated into the letter of 27 December 1978 was that the letter dealt largely with the procedures for determining the dealership and commencing the distributorship, but the absence from the letter of any mention of the suggested terms is nevertheless an indication, although not a conclusive one, that the parties did not intend them to be warranties. With one exception, the representations were not promissory in form, but were statements of fact or of belief or of self-commendation. The possible exception was the statement (immaterial for present purposes) that Mr Blackman would set up a marketing organization with sales representatives trained in the use and demonstration of U.S.S.C.'s products in a manner similar to that used in U.S.S.C.'s training program in the United States. The critical terms found by McLelland J. to be warranties were, as was stated in the judgment of the Court of Appeal, "a distillation of the words which Blackman actually employed". Although it might well have been thought that Mr Blackman was making a proposal that would be for the benefit of both parties, he made no promise to act for the common benefit. The suggested term that he would not deal in competitive products is sought to be implied from the statement that after he had got the Auto Suture business "really rolling" he might take on non-competitive product lines - a statement which falls far short of a promise not to deal in competitive products. The form of the representations is not decisive, but is nevertheless relevant in determining the intention, actual or imputed, of the parties. Although the suggested terms now appear to have great significance, it is by no means clear that they were so regarded at the time. When agreements had been made by U.S.S.C. with other distributors, such as Downs, it was not a term of those agreements that the distributor should act for the common benefit of the parties and should not deal in products competitive with those of U.S.S.C. The Australian market seems to have been regarded as of so little significance to U.S.S.C. that that company did not at the time of the agreement bother to protect itself by applying for patents or seeking to register a trade mark, and in the same way it did not require Mr Blackman to enter into a formal agreement containing express warranties of the kind now sought to be based on the representations made in the conversation of November 1978. The proper conclusion to be drawn from the evidence in my opinion is that neither Mr Blackman nor Mr Hirsch and Ms Josefsen intended the statements made in November to be anything more than mere representations.

Implied Terms

22. It then becomes necessary to consider whether any terms should be implied in the agreement. It is clear that, as a matter of law, there is implied a term imposing on the parties the obligations described in s.2-306(2) of the Uniform Commercial Code. The obligation thus imposed on H.P.I. was to "use best efforts" to promote the sale of the goods concerned, i.e. the relevant products of U.S.S.C.

23. In the Supreme Court, little attention seems to have been paid to the question whether the implication of this term, as a matter of law, might render it unnecessary to make any further implication as a matter of fact. McLelland J. thought that in order to effectuate the purpose of the agreement as mutually contemplated by the parties, and to enable U.S.S.C. to have the benefit thereof which was mutually contemplated, it was necessary to imply a term that H.P.I. would not during the distributorship do anything inimical to the market in Australia for U.S.S.C.'s surgical stapling products. The members of the Court of Appeal, who agreed with this conclusion, considered that the express warranties which they held had been given, that Mr Blackman would use his best efforts to build up the Australian market for U.S.S.C.'s products for the common benefit of the parties and would not deal in any products competitive with those of U.S.S.C., removed the agreement from the common run of contracts between supplier or manufacturer and distributor, and that in the circumstances it was necessary to imply a provision that Mr Blackman would do nothing to damage or destroy U.S.S.C.'s market in Australia.

24. The implied obligation to use best efforts to promote the sale of the goods necessarily imported the obligation not to take any deliberate steps to damage the market for those goods in Australia. The meaning of terms of this kind has been considered in a number of cases, but it is trite to say that the meaning of particular words in a contract must be determined in the light of the context provided by the contract as a whole and the circumstances in which it was made, and that decisions on the effect of the same words in a different context must be viewed with caution. On the one hand, an express promise by an agent to use his best endeavours to obtain orders for another and to influence business on his behalf "necessarily includes an obligation not to hinder or prevent the fulfilment of its purpose": Shepherd v. Felt and Textiles of Australia Ltd. (1931) 45 CLR 359, at p 378. On the other hand, an obligation to use "best endeavours" does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more: Sheffield District Railway Co. v. Great Central Railway Co. (1911) 27 TLR 451, at p 452; Terrell v. Mabie Todd &Co. Ltd. (1952) 69 RPC 234, at p 237. In Transfield Pty. Ltd. v. Arlo International Ltd. (1980) 144 CLR 83 the licensee of a patented process for the manufacture and erection of a steel pole for the purpose of electricity transmission lines (the Arlo pole) covenanted "to use its best endeavours in and towards the ... selling" of the pole. The actual decision in the case was that this provision of the contract did not prohibit the licensee from using any pole other than the Arlo pole. Stephen J. said, at p.94:

"An obligation to use best endeavours to sell Arlo poles implies a prohibition upon the offering for sale and selling of competitive poles, at least to the extent that to do so will prejudice the sale of Arlo poles."

Mason J. took a somewhat narrower view of the effect of the words of the relevant clause of the contract. He said, at pp.101, that the licensee's obligation was "to use all its efforts and skills towards (inter alia) the selling of the ARLO pole to the extent that it was reasonable so to do in the circumstances and to energetically promote and develop a market for it" and that he could see "no adequate basis for importing into this positive obligation a negative implication that the appellant will not use or for that matter sell a pole which competes with the ARLO pole, whether that pole be manufactured by the appellant or by another". He added, at p.102, that the licensee might do all that was within its power to comply with the clause yet find that it had no practical alternative but to use or sell a competing pole and that the clause did not prohibit or prevent such use or sale. Wilson J. said, at p.107, that the licensee was obliged to do "all that could reasonably be expected of it having regard to the circumstances of its business operations". An undertaking to use best endeavours or best efforts to promote the sale of one product does not necessarily impose an obligation not to sell a competing product (see Van Valkenburgh, Nooger &Neville, Inc. v. Hayden Publishing Co. (1972) 330 NYS 2d 329, at p 333, and cases there cited) although it may do so in some circumstances, as was held to be the case in Randall v. Peerless Motor Car Co. (1912) 99 NE 221. However, a person who had given such an undertaking could not successfully assert that he had fulfilled it if he prepared a product of his own and promoted the sale of that product with the deliberate intention of appropriating for himself the market which he had in effect promised to do all he reasonably could to secure for the person to whom he had given the undertaking. Clearly it was a breach of the implied obligation for H.P.I. to prepare and sell, as it did, its own products instead of those of U.S.S.C.

25. There is in my opinion no room in the present case for the implication in the agreement of any further term such as that implied by McLelland J. and the Court of Appeal. The principles governing the implication of terms in contracts have recently been stated by the Judicial Committee in B.P. Refinery Pty. Ltd. v. Hastings Shire Council (1977) 52 ALJR 20, at pp 26-27, and by this Court in Secured Income Real Estate (Australia) Ltd. v. St. Martins Investments Pty. Ltd. (1979) 144 CLR 596, at pp 605-606, and Codelfa Constructions Pty. Ltd. v. State Rail Authority of N.S.W. (1982) 149 CLR 337, at pp 345-347 and 403-404. It was said by the majority of the Judicial Committee in the first of those cases, and accepted in this Court in the others, that for a term to be implied the following conditions (which may overlap) must be satisfied:

"(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

26. In the present case the agreement was efficacious without the implication of any further term. In other words, it does not here become necessary to imply any further term, "with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have" (to use the familiar words of The Moorcock (1889) 14 P.D. 64, at p.68) or to make the agreement work or to avoid an unworkable situation, to adopt the words of the dissenting judgment in B.P. Refinery Pty. Ltd. v. Hastings Shire Council, at p 30. The commercial objective that U.S.S.C. sought to achieve by means of the agreement was that as many of its products should be sold in Australia as was reasonably possible and that as a result the market for those products should be expanded in Australia. This objective would be secured if H.P.I. did all that it reasonably could to sell as many of U.S.S.C.'s products as possible in Australia. In other words, the obligation imported by the Uniform Commercial Code was enough to give to the agreement the business efficacy that U.S.S.C. intended it to have. The circumstances that Mr Blackman had been fraudulent and (if it was the case) that U.S.S.C. had placed special trust in him did not justify the implication of any further term of this kind. Moreover a term that H.P.I. would not do anything inimical to U.S.S.C.'s market in the goods in question, or in other words that H.P.I. would do nothing to damage or destroy U.S.S.C.'s market in Australia, if it went beyond the term implied by the Uniform Commercial Code, was not a term which the parties must presumably have intended to be a part of the agreement - a term so obvious that there was no need to express it. On the contrary, if the parties had been asked on 27 December 1978 whether such a term was part of the agreement, instead of replying "of course; that is so clear that we did not bother to say it", they might well have answered that such a term would go too far, since it might require the distributor to refrain from action that was perfectly reasonable although it might in some way damage U.S.S.C.'s market in Australia. For example, a decision by H.P.I. to increase the price of the products, or to reduce the extent to which they were advertised, might have an adverse effect on the market, although it might be reasonable or even necessary from H.P.I.'s point of view. I conclude that the agreement contained no implied term imposing any duty on H.P.I. except that resulting from the operation of s.2-306(2) of the Uniform Commercial Code. The conclusions which I have reached on this aspect of the matter differ in their practical consequences from those reached in the Supreme Court in two main respects. First, although H.P.I. was bound to use its best efforts to promote the sale of U.S.S.C.'s products, and thus to build up the market for them, and it was necessarily contemplated that this would enure to the advantage of both parties, H.P.I. had no contractual obligation to act for the common benefit of U.S.S.C. and itself; it was entitled to put its own interests first, or to disregard its own interests entirely, provided that it did not fail to do all that it reasonably could to promote the sale of U.S.S.C.'s products. Secondly, the term which the Supreme Court held to be implied, against doing anything inimical to the market in Australia for U.S.S.C.'s products, would make it a breach for H.P.I. to do anything whose effect was to damage or destroy U.S.S.C.'s market, whereas in my opinion action by H.P.I. having a damaging effect would amount to a breach only if it amounted to a failure to do all that could reasonably be done to sell U.S.S.C.'s products.

Fiduciary Relationship

27. It is clear that H.P.I. committed serious breaches of its obligation to use its best efforts to promote the sale of U.S.S.C.'s products, and that U.S.S.C. is entitled to recover from H.P.I. damages for these breaches. However U.S.S.C. contends that it was also owed by H.P.I. a fiduciary obligation, the breach of which entitled U.S.S.C. not merely to compensation but to "restitution of property unconscientiously withheld" (Vyse v. Foster (1872) LR 8 Ch App 309, at p 333), and to the equitable remedies of equitable lien and constructive trust. A person who occupies a fiduciary position may not use that position to gain a profit or advantage for himself, nor may he obtain a benefit by entering into a transaction in conflict with his fiduciary duty, without the informed consent of the person to whom he owes the duty. This principle - some would prefer to say "these principles" - has been described as "inflexible" (Birtchnell v. Equity Trustees, Executors and Agency Co. Ltd. (1929) 42 CLR 384, at p 408) and "fundamental" (Phipps v. Boardman (1967) 2 AC 46, at p 123) and its nature and application have been discussed in a number of comparatively recent cases: by this Court in Consul Development Pty. Ltd. v. D.P.C. Estates Pty. Ltd. (1975) 132 CLR 373 and Chan v. Zacharia (1984) 58 ALJR 353; by the Judicial Committee in N.Z. Netherlands Society "Oranje" Incorporated v. Kuys (1973) 1 WLR 1126 and Queensland Mines Ltd. v. Hudson (1978) 52 ALJR 399; by the Court of Appeal of New Zealand in Coleman v. Myers (1977) 2 NZLR 225; and by the Supreme Court of Canada in Canadian Aero Service Ltd. v. O'Malley (1973) 40 DLR (3d) 371. Clearly if H.P.I. was under a fiduciary obligation to U.S.S.C. it failed to fulfil it. The question however is whether any fiduciary relationship did exist between the parties.

28. The authorities contain much guidance as to the duties of one who is in a fiduciary relationship with another, but provide no comprehensive statement of the criteria by reference to which the existence of a fiduciary relationship may be established. The archetype of a fiduciary is of course the trustee, but it is recognized by the decisions of the courts that there are other classes of persons who normally stand in a fiduciary relationship to one another - e.g., partners, principal and agent, director and company, master and servant, solicitor and client, tenant-for-life and remainderman. There is no reason to suppose that these categories are closed. However, the difficulty is to suggest a test by which it may be determined whether a relationship, not within one of the accepted categories, is a fiduciary one.

29. In the present case McLelland J. said that there were two matters of importance in deciding when the court will recognize the existence of the relevant fiduciary duty. First, if one person is obliged, or undertakes, to act in relation to a particular matter in the interests of another and is entrusted with the power to affect those interests in a legal or practical sense, the situation is, in his opinion, analogous to a trust. Secondly, he said that the reason for the principle lies in the special vulnerability of those whose interests are entrusted to the power of another to the abuse of that power. The learned members of the Court of Appeal considered that the first of these statements needed a qualification which McLelland J. had intended to suggest, namely that the undertaking to act in the interests of another meant that the fiduciary undertook not to act in his own interests; they said that the principle is that "a fiduciary relationship exists where the facts of the case in hand establish that in a particular matter a person has undertaken to act in the interests of another and not in his own". They added that it is not inconsistent with this principle that a fiduciary may retain that character although he is entitled to have regard to his own interest in particular matters. Their conclusion was that in matters concerning the development of U.S.S.C.'s market in Australia for its surgical stapling products, and its protection from competition, H.P.I. undertook to act in U.S.S.C.'s interest and not in its own.

30. I doubt if it is fruitful to attempt to make a general statement of the circumstances in which a fiduciary relationship will be found to exist. Fiduciary relations are of different types, carrying different obligations (see In re Coomber. Coomber v. Coomber (1911) 1 Ch 723, at pp 728-729, Jenyns v. Public Curator (Q.) (1953) 90 CLR 113, at pp 132-133 and Phipps v. Boardman, at pp 126-127) and a test which might seem appropriate to determine whether a fiduciary relationship existed for one purpose might be quite inappropriate for another purpose. For example, the relation of physician and patient, and priest and penitent, may be described as fiduciary when the question is whether there is a presumption of undue influence, but may be less likely to be relevant when an alleged conflict between duty and interest is in question. Moreover, different fiduciary relationships may entail different consequences, as is shown by the discussion of the respective positions of a trustee and a partner in relation to the renewal of a lease: see In re Biss. Biss v. Biss (1903) 2 Ch 40, at pp 56-57 and 61-62, Griffith v. Owen (1907) 1 Ch 195, at pp 203-204, and Chan v. Zacharia.

31. In the decided cases, various circumstances have been relied on as indicating the presence of a fiduciary relationship. One such circumstance is the existence of a relation of confidence, which may be abused: Tate v. Williamson (1866) LR 2 Ch App 55, at p 61, Coleman v. Myers, at p 325. However, an actual relation of confidence - the fact that one person subjectively trusted another - is neither necessary for nor conclusive of the existence of a fiduciary relationship; on the one hand a trustee will stand in a fiduciary relationship to a beneficiary notwithstanding that the latter at no time reposed confidence in him, and on the other hand an ordinary transaction for sale and purchase does not give rise to a fiduciary relationship simply because the purchaser trusted the vendor and the latter defrauded him.

32. Another circumstance which it is sometimes suggested indicates the existence of a fiduciary relationship is inequality of bargaining power, but it is clear that such inequality alone is not enough to create a fiduciary relationship in every case and for all purposes. In any case, Mr Blackman was not in a position of dominance or advantage over U.S.S.C. at the time the contract was made. Indeed, if there was any inequality in the situation of the parties, it might well be thought that U.S.S.C. was in the stronger position.

33. On the other hand, the fact that the arrangement between the parties was of a purely commercial kind and that they had dealt at arm's length and on an equal footing has consistently been regarded by this Court as important, if not decisive, in indicating that no fiduciary duty arose: see Jones v. Bouffier (1911) 12 CLR 579, at pp 599-600, 605; Dowsett v. Reid (1912) 15 CLR 695, at p 705; Para Wirra Gold &Bismuth Mining Syndicate No Liability v. Mather (1934) 51 CLR 582, at p 592; Keith Henry &Co. Pty. Ltd. v. Stuart Walker &Co. Pty. Ltd. (1958) 100 CLR 342, at p 351. A similar view was taken in Canada in Jirna Ltd. v. Mister Donut of Canada Ltd. (1971) 22 DLR (3d) 639; affirmed (1973) 40 DLR (3d) 303.

34. In Reading v. The King (1949) 2 KB 232, a case in which a soldier had obtained bribes by abuse of his position, Asquith L.J. said, at p 236:

"A consideration of the authorities suggests that for the present purpose a 'fiduciary relation' exists (a) whenever the plaintiff entrusts to the defendant property, including intangible property as, for instance, confidential information, and relies on the defendant to deal with such property for the benefit of the plaintiff or for purposes authorized by him, and not otherwise ... and (b) whenever the plaintiff entrusts to the defendant a job to be performed, for instance, the negotiation of a contract on his behalf or for his benefit, and relies on the defendant to procure for the plaintiff the best terms available ..."

That decision was approved in the House of Lords ((1951) A.C. 507) although Lord Porter said (at p.516) that the words "fiduciary relationship" in that setting were used in "a wide and loose sense". The first branch of Lord Asquith's statement has no application to the present case. It was submitted on behalf of U.S.S.C. that that company had entrusted to H.P.I. its actual and prospective business connexion and goodwill in Australia and had relied on H.P.I. to protect and increase that goodwill for the benefit of U.S.S.C. I do not need to discuss the question whether product goodwill can be regarded as property capable of assignment by itself, for I find it impossible to accept that H.P.I. became a fiduciary in respect of U.S.S.C.'s goodwill. The contract did not oblige H.P.I. to protect U.S.S.C.'s goodwill nor were representations made that it would be protected. H.P.I.'s relevant obligation was to use its best efforts to promote the sale of U.S.S.C.'s goods. However, apart from the agreement, in cl.2 of the letter of 27 December 1978, to purchase Downs' inventory and use the dealership inventory of approximately $100,000 to $125,000 wholesale value, H.P.I. was not obliged to purchase from U.S.S.C. any particular quantity or value of products for distribution. Failure to make further purchases would only be a breach if it amounted to a failure to do all that could reasonably be expected to promote the sale of the products, and H.P.I.'s business circumstances and financial situation could be considered in deciding what was reasonable. There was no express provision as to the duration of the agreement; it was therefore terminable either at will or on reasonable notice. Although what H.P.I. did would be likely to affect the market for U.S.S.C.'s goods in Australia, it is apparent that H.P.I. had not given an undertaking to develop or protect the market since its obligation to buy the products for distribution was qualified by what was reasonable having regard to its own circumstances, and it was free to terminate the agreement at any time. Nor was U.S.S.C. powerless in this situation; it also was free to terminate the agreement and make other arrangements for the distribution of its goods. The argument that a fiduciary relation was created with regard to the goodwill of the products in my opinion quite deserts the reality of the situation.

35. The second branch of Lord Asquith's statement, if regarded as enunciating a general rule divorced from its context, seems to me, with all respect, to be far too wide; the fact that there is a duty to be performed - a job to do - cannot in every case create a fiduciary obligation. I agree with the statement of Megarry V.-C. in Tito v. Waddell (No. 2) (1977) Ch 106, at pp 229-230, that the imposition of a statutory duty to perform certain functions cannot be said as a general rule to impose fiduciary obligations, and the same is true of contractual duties arising under ordinary commercial contracts.

36. Finally, I would refer to the opinion expressed by Dr Finn in his comprehensive work on Fiduciary Obligations (1977), at p.201, that, for the purposes of the conflict rule, a fiduciary is "simply, someone who undertakes to act for or on behalf of another in some particular matter or matters." Even if it were meant that every agent is a fiduciary, the statement would be open to doubt: see McKenzie v. McDonald (1927) VLR 134, at p 144, Phipps v. Boardman, at p 127, and cases cited in 17 MLR, at pp 31-32. And if the statement is to be understood more widely it cannot be accepted without some qualification. Indeed Dr Finn appeared himself to qualify it when he went on to say, at p.201:

"The finding of such an undertaking is simply a question of fact in each case. So if, for example, all that can be shown is that two people have dealt with each other only as principals neither will be the other's fiduciary."

37. The test suggested by the Court of Appeal in the present case seems to me not inappropriate in the circumstances, although it must be remembered that any test can only be stated in the most general terms and that all the facts and circumstances must be carefully examined to see whether a fiduciary relationship exists (cf. Phipps v. Boardman, at pp 123, 127). However, if the Court of Appeal's test is applied, it is not satisfied, for in my opinion H.P.I. did not undertake, whether by representation or contractual provision, to act solely in the interests of U.S.S.C. and not in its own interests.

38. An examination of all the circumstances confirms in my opinion that the relationship between the parties was not a fudiciary one. It is true that U.S.S.C. relied on H.P.I. to promote the sale of its products and left it to H.P.I. to determine how it should go about doing so, and that H.P.I. had it in its power to affect U.S.S.C.'s interests beneficially or adversely. However, there are two features of the case, in particular, which together constitute an insuperable obstacle to the acceptance of U.S.S.C.'s contention that a fiduciary relationship existed between itself and H.P.I. In the first place, as I have said, the arrangement was a commercial one entered into by parties at arm's length and on an equal footing. It was open to U.S.S.C. to include in its contract whatever terms it thought necessary to protect its position, for U.S.S.C. acted in response to Mr Blackman's request and was under no pressure either to make him a distributor in place of Downs or to accept an agreement on his terms; indeed U.S.S.C. itself prepared the letter of agreement which its in-house counsel asked Mr Blackman to sign. An ordinary commercial contract made in those circumstances, even as a result of fraud, is unlikely to give rise to fiduciary obligations. Secondly, it was of course clear that the whole purpose of the transaction from Mr Blackman's point of view, as U.S.S.C. knew, was that he, and later H.P.I., should make a profit. Further, as I have already explained, in the performance of the contract a conflict between the interests of H.P.I. and U.S.S.C. was likely to arise, and any such conflict was not necessarily to be resolved in favour of U.S.S.C. How, in those circumstances, is it possible to say that H.P.I. was under an obligation not to profit from its position, and not to place itself in a situation in which its duty and its interest might conflict? It is true, as Lord Wilberforce said in New Zealand Netherlands Society "Oranje" Incorporated v. Kuys, at p 1130, that a person "may be in a fiduciary position quoad a part of his activities and not quoad other parts: each transaction, or group of transactions must be looked at." His Lordship referred to Birtchnell v. Equity Trustees, Executors and Agency Co. Ltd. where Dixon J. said, at p 408:

"The subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the partnership exists, and this is to be ascertained, not merely from the express agreement of the parties ... but also from the course of dealing actually pursued by the firm."

Lord Wilberforce said that although these remarks were made in the context of a partnership the principle must be of general application, and it is clear that in the case of every fiduciary relationship it is critical to determine what is the subject of the fiduciary obligation. However, in the present case, there was, in my opinion, no part of the transaction to which a fiduciary obligation might sensibly be limited. H.P.I. was entitled to make a profit from the entire conduct of the distributorship, and possible and actual conflicts between its interest and its duty might arise at any stage in the conduct of that business. It would commit a breach of its contractual obligations only if it acted unreasonably and thereby failed to use its best endeavours to promote the sale of the products. An obligation to act reasonably falls far short of that imposed by the rules of equity on a fiduciary, who can defeat a claim to account for profits acquired by reason of his fiduciary position and by reason of the opportunity resulting from it only on the ground that the profits were made with the knowledge and assent of the person to whom the fiduciary obligation was owed (see Phipps v. Boardman, at p 105); the equitable rules are exceedingly strict, as the decisions in Regal (Hastings) Ltd. v. Gulliver (1942) 1 All ER 378, noted (1967) 2 AC 134, and Phipps v. Boardman plainly illustrate. What is attempted in this case is to visit a fraudulent course of conduct and a gross breach of contract with equitable sanctions. It is not necessary to do so in order to vindicate commercial morality, for the ordinary remedies for damages for fraud and breach of contract were available to U.S.S.C. although it did not choose to pursue the former, but in any case the equitable doctrines sought to be invoked have no application to the present circumstances.

39. For these reasons I conclude that H.P.I. did not stand in a fiduciary relation to U.S.S.C. and that the only relief to which U.S.S.C. was entitled in the circumstances of the case was an award of damages for breach of contract.

40. I have not failed to consider the decisions of the United States courts upon which counsel for U.S.S.C. relied in support of the view that a manufacturer's distributing agent stands in a fiduciary relationship to the manufacturer. Of those cases that which is most in point is Flexitized, Inc. v. National Flexitized Corporation (1964) 335 F 2d 774. In that case the plaintiffs, which manufactured flexible collar stays under the name "Flexitized", appointed the defendants to be their exclusive distributors under an agreement by which the defendants promised to use their best efforts to sell the plaintiffs' product and also promised not to sell a competing product during the life of the contract. The defendants, in breach of their agreement, sold competing collar stays and the plaintiffs recovered damages for that breach. That aspect of the case does not concern us. After the plaintiffs had terminated the agreement, the defendants continued to use the name "Flexitized" while marketing collar stays not made or sold by the plaintiffs. It was held that although the plaintiffs had no valid trade mark, they were entitled to an account of the defendants' profits by reason of their unfair competition. The court said, at p.782:

"Also, the defendants' conduct in continuing to use, without plaintiffs' permission, the name 'Flexitized' after its contract breach was expressly found to have been the result of a deliberate attempt to exploit purchaser familiarity with the name, and, as is clear from our prior discussion of the breach of contract claim in this case, such conduct by defendants was also directly connected with a breach on their part of a fiduciary relationship which had arisen upon their becoming exclusive sales agents for plaintiffs. Under these circumstances we think that defendants were properly chargeable with having misappropriated a valuable property right or commercial benefit under circumstances meriting a finding of unfair competition according to the law of New York ..."

In another case of passing off by a former distributor, Distillerie Fili Ramazzotti, S.P.A. v. Banfi Products Corporation (1966) 276 NYS 2d 413, it was said, at p 422, that "the goods being sold by defendant are the same goods which it sold during the time when it stood in what amounts to a fiduciary relationship to plaintiff, both as distributor and licensee." In Sapery v. Atlantic Plastics, Inc. (1958) 258 F 2d 793, where it was held that a manufacturer was entitled to terminate an agreement with its sales representative when he had set up a competing business, the view also seems to have been taken that the parties stood in a fiduciary relationship: see at p.796. It was not necessary to decide in any of these cases whether the relation between the parties was a fiduciary one in the sense that the distributor or representative owed a duty not to make a profit from his relationship and not to allow his interest to conflict with his duty. In none of the cases was there any discussion of the question why or how the alleged fiduciary relationship arose. In another case to which we were referred, Arnott v. American Oil Co. (1979) 609 F 2d 873, it was held that a fiduciary relationship existed between an oil company and a dealer who had leased a service station from that company and that in consequence the oil company was in breach of its "fiduciary" duty of good faith and fair dealing by terminating the dealer's lease without good cause. Again the court was considering whether there existed what it called a "fiduciary relationship" but which was quite different in kind from that suggested to exist in the present case. In truth those decisions provide no assistance in deciding the questions that now arise. The fact that they are relied on illustrates "the danger of trusting to verbal formulae" of which Fletcher Moulton L.J. spoke in In re Coomber. Coomber v. Coomber, at p 728. If the distributors were properly described as "fiduciaries" for the purposes of the American cases to which I have referred, it does not follow that they were fiduciaries who owed duties of the kind sought to be enforced against H.P.I. The judgments in those cases throw no light on the questions that now fall for decision.

41. The conclusion which I have reached, that there was no breach of fiduciary duty, makes it unnecessary to consider other questions so fully debated at the bar. It means that U.S.S.C.'s claim to have it declared that the assets of H.P.I., I.R.D. and S.C.I., and certain of the assets of H.P.L., are held subject to a constructive trust for U.S.S.C. fails at the outset. A case might have been made out against Mr Blackman for inducing a breach of contract, but the proceedings in the Supreme Court do not appear to have been conducted on that basis. McLelland J. held that Mr Blackman had knowingly participated in the breaches by H.P.I. of its equitable obligations, but made no finding that he had induced a breach of H.P.I.'s contractual obligations. The matter was not pursued on appeal to this Court.

42. I accordingly hold that the only relief to which U.S.S.C. is entitled is to recover from H.P.I. damages for breach of contract.

Damages

43. Clearly, it was a breach by H.P.I. of its contractual obligations to defer fulfilment of orders for U.S.S.C.'s products in anticipation of filling those orders with products which it prepared or manufactured and to fill orders for the products of U.S.S.C. with its own competing products. The question remains whether it was a breach of the contract for H.P.I. secretly to develop a capacity to manufacture copies of U.S.S.C.'s products or components thereof with a view to appropriating for itself at the expense of U.S.S.C. the whole or a part of the Australian market for U.S.S.C.'s products. In my opinion that did amount to a breach of H.P.I.'s duty to use its best endeavours to promote the sale of U.S.S.C.'s products. It was quite incompatible with that obligation to make preparations to sell its own products as those of U.S.S.C. to persons who would otherwise have bought the products of U.S.S.C.: cf. Blyth Chemicals Ltd. v. Bushnell (1933) 49 CLR 66, especially at p 82. It will of course be a question of fact whether any damage flowed from that breach additional to that which flowed from the other breaches mentioned.

Conclusion

44. In my opinion the appeal of the appellant and the cross appeals of the second, third, fourth and fifth respondents should be allowed and the cross appeal of the first respondent should be dismissed. Judgment should be entered for the first respondent against the third respondent for damages and the matter should be remitted to the Supreme Court to assess the damages. Judgment should be entered for the appellant and the second, fourth and fifth respondents.

MASON J.

INTRODUCTION

2. This appeal, which has attracted cross appeals, is from a decision of the New South Wales Court of Appeal allowing an appeal by the first respondent ("USSC"), the plaintiff in an action in the Supreme Court of New South Wales, which, though it succeeded in the action, failed to obtain relief by way of constructive trust at first instance. The case raises interesting questions as between an overseas manufacturer and its exclusive distributor in Australia. These questions concern the existence of a fiduciary relationship, the scope of the distributor's fiduciary duty and the extent of relief for breach of that duty, in particular the availability of relief by way of a constructive trust over the assets of a business commenced by the distributor in competition with that of the overseas manufacturer at a time when the distributorship was still on foot.

3. USSC is a manufacturer in the United States of surgical stapling devices and disposable loading units. In November-December 1978 USSC agreed with the fourth respondent, Alan Richard Blackman, to appoint him as USSC's exclusive Australian distributor as from 1 April 1979. In or about February 1979, by agreement between USSC, Blackman and Hospital Products International Pty. Ltd. ("HPI") (then known as Hospital Products of Australia Pty. Ltd.), HPI was substituted for Blackman as the proposed distributor. HPI acted as the exclusive distributor in Australia of USSC's products from 1 April 1979 until 25 December 1979 when HPI terminated the distributorship. That termination was accepted by USSC by telex on 10 January 1980.

4. On 25 December 1979 HPI began to supply to its existing customers for USSC's products and to market generally products which were for all relevant purposes identical to those of USSC but which were contained in packages identifying them with HPI, not with USSC. Initially the products were of USSC manufacture and were sterilized and repackaged by HPI, in some cases with components manufactured by HPI. Gradually the components manufactured by HPI increased so that ultimately it marketed products entirely of its own manufacture.

5. The development by HPI of its own manufacturing capacity had been proceeding, unknown to USSC, from a time before the commencement of the distributorship, by a process known as "reverse engineering", involving the measurement and analysis of USSC components and the construction of tools, moulds and dies for the production of copies. In connexion with the "reverse engineering", HPI engaged the fifth respondent, I.R.D. Engineering Services Pty. Ltd. ("IRD"), a company which eventually came under the control of Blackman. Later, towards the end of 1980, HPI began to market its products in the United States through the second respondent, Surgeons Choice Inc. ("SCI"), a wholly-owned subsidiary of HPI.

6. In June 1981 the business and assets of HPI and of IRD, including the issued capital of SCI, were acquired by the appellant. Blackman and HPI acquired control of the appellant.

7. I have taken this narration of the basic facts from the judgment of the primary judge, McLelland J. They reflect what was common ground between the parties in the Supreme Court. Before I examine the facts more closely I should refer to the principal conclusions reached and the relief granted by the primary judge and later by the Court of Appeal.

8. McLelland J. made the following declarations:

(1) that HPI by secretly developing a capacity to manufacture copies of products manufactured by USSC or components thereof, by deferring fulfilment of orders for products manufactured by USSC in anticipation of filling those orders with products packaged or manufactured by HPI and by filling those orders with its competing products, with a

view to appropriating for itself at the expense of USSC the whole or a substantial part of the Australian market for products manufactured by USSC, committed breaches of equitable and contractual obligations owed by HPI to USSC;

(2) that Blackman knowingly participated in the breaches by HPI of its equitable obligations; and

(3) that by reason of the breaches and the knowing participation by Blackman, USSC was entitled at its election -

(a) as against HPI and Blackman to payment of an amount equal to the profits made by HPI by selling surgical stapling products, other than products manufactured by USSC and sold in USSC's packages, on the Australian market between 1 December 1979 and 30 November 1980 and such payment to be secured by an equitable lien over the assets held by HPI representing the proceeds of the sale by HPI of its manufacturing business to the appellant or so much of those assets as the court may think sufficient to secure the payment;

(b) as against HPI and Blackman, to payment of equitable compensation in respect of the breaches of equitable obligations; or

(c) as against HPI to damages for breaches of its contractual obligations.

Orders were made in accordance with these declarations, USSC having elected to pursue the first of the alternative remedies.

9. By way of security for the payment of the amount of profits, McLelland J. further declared that USSC was entitled to an equitable lien over all the shares in the capital of the appellant held by HPI and all moneys owing by the appellant to HPI, representing or derived from any part of the consideration on the sale of its manufacturing business to the appellant. His Honour restrained the appellant until payment from (a) disposing of, charging or otherwise dealing with any such shares held by HPI in the capital of the appellant; and (b) demanding, directing or receiving payment of, or assigning, charging or otherwise dealing with any such moneys owing to HPI by the appellant.

10. The Court of Appeal, unlike the primary judge, concluded that USSC was entitled to relief by way of constructive trust over the assets of HPI and that the appellant acquired HPI's assets with notice of USSC's claim to those assets. The Court set aside the declarations and orders of McLelland J. and declared that all assets including the business and goodwill owned by the appellant on 1 July 1981 and at any time thereafter were and had been at all material times since 1 July 1981 held on trust for USSC with the exception of those assets which were assets of the appellant prior to its acquisition of the business and assets of HPI and IRD. The Court ordered the appellant to transfer those assets to USSC. Other orders consequential upon the making of those orders were also made.

11. The arguments presented to this Court by the appellant, HPI, Blackman and IRD challenge the findings that there was a fiduciary duty owed by HPI to USSC, that there was a breach of that duty and that relief by constructive trust was appropriate relief for breach of fiduciary duty. These arguments call for a detailed examination of the facts and of the findings made by the primary judge and by the Court of Appeal.

THE FACTS

(a) Background

12. Since 1967 USSC has manufactured in the United States and marketed there and in other countries, under the name "Auto Suture", surgical stapling devices of its own design, and disposable loading units, also of its own design, for use with those devices. They enable surgeons to carry out surgical procedures, in particular suturing, using stainless steel staples applied mechanically instead of surgical needles and thread. By the end of 1978 USSC had developed and was manufacturing and marketing a range of these devices and disposable loading units for use in various types of surgical procedure. USSC had also developed and was manufacturing and marketing integrated devices and staple cartridges known as disposable skin staplers suitable for use on a single occasion, being made predominantly in plastic.

13. In the years 1972 and 1973 USSC began to appoint "authorized dealers" to market its products and provide instruction to users. Each dealer was allocated a defined geographical area. The relationship between USSC and each dealer was governed by a standard form "Dealership Agreement", supplemented where necessary by a "Dealer Security Agreement" regulating the financial arrangements between USSC and the dealer.

14. The authorized dealer was neither an employee nor an agent of USSC. The dealer was in business on his own account and purchased USSC's products for resale to customers. By 1975 USSC had approximately eighty dealers serving areas within the United States. In that year USSC began to establish its own sales staff to market its products within the United States. Thereafter the sales representatives employed by USSC replaced authorized dealers. By late 1978 there were no more than thirty three dealers and by 1980 or 1981 they had been entirely eliminated.

15. In foreign countries USSC appointed distributors. By the end of 1978 they numbered twenty seven. Generally speaking a foreign distributor was an established business house already engaged in the distribution of other products. The arrangements between USSC and its distributors were more informal than those regulating USSC's relationships with its dealers. There was no standard form distribution agreement, the contractual arrangements consisting of an appointment of the distributor by letter following preliminary discussions or correspondence. Foreign distributors were not agents of USSC; like dealers, they purchased USSC's products for resale to customers.

16. USSC supplied to its dealers and distributors disposable loading units and disposable skin staplers for demonstration purposes at a fraction of the cost charged for the clinical products. They were in general identical to those supplied for clinical use except in two respects, viz., (1) unlike the clinical product, the demonstration product was not sterilized; and (2) unlike the clinical product the demonstration product was supplied in unsterile packs.

(b) Blackman's Association with USSC

17. Blackman first became associated with USSC early in 1973 when he was employed as product manager in relation to the marketing of an intravenous infusion set then manufactured by USSC. In August 1973 he commenced business on his own account as an authorized USSC dealer for a substantial part of the city of New York. In 1976 the dealership was taken over by The Hospital Products Corporation ("HPC"), a corporation formed in New York and owned and controlled by Blackman.

18. Blackman was a competent salesman with a high degree of expertise in USSC's products. He was highly regarded by Mr Leon Hirsch, the President of USSC, and Miss Turi Josefsen, Mr Hirsch's wife and Vice-President of USSC in charge of marketing, with each of whom he maintained a close relationship.

19. Despite this close relationship there had been some friction, arising principally from the substantial reduction in September 1975 of Blackman's New York distributorship area and a complaint made in December 1975 by Blackman about USSC's quality control which Hirsch believed to have been fabricated. The primary judge found that its existence did not cause "any permanent impairment of the cordial relationship" between Blackman and Hirsch and Josefsen.

(c) The Australian Distributorship

20. At or about the beginning of November 1978 at a meeting in a restaurant in Stamford, Connecticut, or in New York, Blackman, after informing Hirsch and Josefsen that he wished to emigrate to Australia, proposed that he be appointed USSC's exclusive Australian distributor in place of Downs Surgical (Australia) Pty. Ltd., ("Downs Surgical"), the then Australian distributor of USSC products, and that his existing New York dealership be phased out. Hirsch and Josefsen indicated that they were favourably disposed to Blackman's proposal. It was arranged that Blackman should later discuss further details of the matter with Josefsen. There was a conflict of evidence between Blackman on the one hand and Hirsch and Josefsen on the other, as to the discussions which they had. The primary judge resolved this conflict in favour of Hirsch and Josefsen, concluding that Blackman was not a credible witness.

21. A later discussion did take place, apparently in the latter half of November 1978 in USSC's office in Stamford. There was discussion about the training of a nurse whom Blackman proposed to employ in Australia and about the size of Downs Surgical's stock inventory and the possibility of its purchase by Blackman. It was arranged that he would consult with Mr Grimes, USSC's regional manager, in order to work out details of the termination of the New York distributorship. Although Josefsen stated that she thought a written distributorship agreement should be prepared, Blackman said that he did not think it was necessary.

22. Subsequently, Blackman discussed with Grimes the phasing out of the New York dealership. There followed an exchange of letters between Blackman and Josefsen beginning with a letter dated 27 November 1978 from Blackman and a reply dated 18 December 1978 from Josefsen in which she agreed in principle to proposals outlined by Blackman in his letter of 27 November for (a) the termination of his dealership; (b) the termination of the Downs Surgical distributorship on 1 December 1978 with 90 days' notice on the footing that Blackman would purchase its inventory and USSC would refrain from shipping to Downs Surgical further supplies; and (c) the terms of supply by USSC to Blackman in Australia. Josefsen stated that she had requested Mr Fisher (USSC's in-house counsel) to prepare a distributorship agreement for execution by USSC and Blackman.

40. The trial judge also found a number of breaches of contract and put USSC to its election as to the acceptance of damages, to be ascertained, against HPI, in place of the equitable relief.

41. So far as Blackman was concerned, the trial judge found that he was liable in equity to account to USSC for any benefit which he received as a result of his participation in HPI's breaches of fiduciary duty and was jointly liable with HPI in respect of any equitable monetary compensation due to USSC as a result of those breaches.

42. On appeal by HPL to the Court of Appeal, that Court also found that HPI was in breach of a fiduciary duty which it owed to USSC. It, however, concluded that the breaches of duty were such that it was appropriate to declare a constructive trust in favour of USSC over all the assets including the goodwill and business of HPI as at 10 January 1980 and until 30 June 1981 and to declare a constructive trust in favour of USSC over all the assets of HPL acquired by it in the reverse take-over. The consequence of these declarations was that on 1 July 1981 and thereafter HPL held in trust for USSC all its assets including its goodwill and business with the exception of those assets which were the assets of HPL before 1 July 1981. It is from the judgment of the Court of Appeal that HPL now appeals to this Court. There are cross appeals by the respondents other than USSC, namely, Ballabil Holdings Pty. Ltd. (which is now the name of HPI), SCI, Blackman and IRD.

43. The real basis of the appellant's case is that neither Blackman nor HPI was under a fiduciary duty to USSC and, of course, if that is so, then USSC would not be entitled to relief by the declaration of a constructive trust or an account of profits or equitable compensation. It was not contested, indeed it was conceded, that HPI was in breach of its distributorship agreement with USSC in deferring the filling of orders for USSC products and, to the extent that it was done during the currency of the distributorship agreement, in the sale of products under the HPI label. That would entitle USSC to damages but that is a remedy which it clearly finds less attractive than equitable relief. Indeed, it appears that USSC has chosen to place heavy reliance upon the remedy of the constructive trust rather than other remedies which may have been open to it. It is appropriate, therefore, to turn to the question of the existence of a fiduciary relationship between USSC and Blackman in the first place and then HPI which is the basis of any entitlement to that relief.

44. In examining that question it is, I think, necessary to have regard first to the definition of the relationship between Blackman and USSC which is provided by the terms of the distributorship agreement. It is convenient to continue to speak of the relationship between Blackman and USSC because that is the origin of any fiduciary obligations, although, of course, after the novation which substituted HPI for Blackman as a party to the distributorship agreement those obligations were imposed upon HPI. The fact of that agreement is no necessary bar to the existence of a fiduciary relationship between the parties to it whether or not the agreement imposed obligations of a fiduciary nature but its terms are obviously of significance in determining what their relationship was. The trial judge found that proper law of the distributorship agreement was either that of New York or Connecticut both before and after the novation. He found it unnecessary to distinguish between the law of New York and Connecticut which was, for the purposes of this case, the same and was, indeed, not significantly different from the law of New South Wales. These findings were not questioned upon this appeal. In order to put the choice of law to one side it is convenient to say at this point that the trial judge found it unnecessary to determine which law should govern the question of the existence of fiduciary obligations and entitlement to equitable relief because he found, upon the evidence, that there is no material difference upon the subject between the law of New York, the law of Connecticut and the law of New South Wales. He found that in this area of jurisprudence decisions of the courts of the United States, as well as those of other jurisdictions, are of assistance in ascertaining the law of New South Wales. This finding was also not questioned upon this appeal.

45. Perhaps, however, express mention should be made of the trial judge's finding that under the law of New York and of Connecticut "every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement": Restatement of the Law: Contracts (2d) s.205. This, he found, meant no more than that neither party to an agreement may do anything to impede performance of the agreement or to injure the right of the other party to receive the proposed benefit and was, in substance, an expression of the same principle enunciated by this Court in Secured Income Real Estate (Australia) Ltd. v. St. Martins Investments Pty.Ltd. (1979) 53 ALJR 745, at p 749, quoting the words of Griffith C.J. in Butt v. M'Donald (1896) 7 QLJ 68, at pp 70-71:

"It is a general rule applicable to every

contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract."

46. The trial judge rejected the contention that the letter dated 27 December 1978 was intended by the parties to constitute the whole agreement between them and found that the conversation in the restaurant early in November 1978 gave rise to express terms of that agreement which were to the following effect:

1. That the distributor would establish a marketing organization for USSC surgical stapling products in Australia having one or more sales representatives specifically trained in the use and demonstration of those products.

2. That the distributor would devote its best efforts to distributing USSC surgical stapling products and building up the market for those products in Australia to the common benefit of USSC and itself.

3. That the distributor would not deal (scil. in Australia) in any products competitive with USSC surgical stapling products.

4. That the distributor would not deal (scil. in Australia) in any other products in such a manner as would diminish its efforts in distributing USSC surgical stapling products and building up the market for those products in Australia.

47. I can see no reason to disagree with the finding that these terms formed part of the distributorship and am content to proceed upon the basis that they did. I should, perhaps, just add that even if there were no express term, as the trial judge found, that the distributor would devote its best efforts to distributing USSC products, s.2-306(2) of the Uniform Commercial Code, which forms part of the law of both New York and Connecticut, would have imposed a term with similar effect. The trial judge went further, however, and, in addition to the express terms which he found, implied a term that the distributor would not during the distributorship do anything inimical to the market in Australia for USSC surgical stapling products. He further held that an act done during the distributorship could for this purpose be considered inimical to that market notwithstanding that it was calculated to lead to actual damage to the market only after termination of the distributorship. The development of a capacity to manufacture copies of USSC products or components of such products, and the manufacture of them, with a view to appropriating the whole or a part of the market for USSC products would, in either case, constitute an act inimical to the market.

48. I must confess that I am unable to see how the application of any of the recognized principles gives rise to the implication of any term such as that implied by the trial judge. Those principles were recently examined by this Court in Codelfa Construction Pty. Ltd. v. State Rail Authority of New South Wales (1982) 56 ALJR 459 and for present purposes it is sufficient to say that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. In my view it is plain that a distributorship agreement containing the express terms found by the judge was capable of an effective operation in a business sense without the implication of a further term, save for a term (which the trial judge found) that the agreement could be brought to an end by reasonable notice on either side. The observance of the best efforts clause may or may not have impeded Blackman during the distributorship from developing a capacity to manufacture and from manufacturing copies of USSC products, but I am unable to see that there was any necessary implication that he should not do so, having regard to his right to market copies at the conclusion of the distributorship. It is certainly not something which went without saying in the agreement. Indeed, USSC's position during the distributorship was protected by the express term found by the trial judge which precluded Blackman from dealing in products competitive with USSC products, a term which obviously included copies of USSC products sold under another name. It also needs to be remarked that USSC had not previously shown itself to be concerned to protect its Australian market and had taken no steps to take out any patents or to register its trade mark. It does not appear that its distributorship agreement with Downs Surgical contained any protection against the use of copies of its products and it is far from a necessary conclusion that USSC regarded the situation differently when it concluded its distributorship agreement with Blackman.

49. Indeed, the implied term as it is expressed by the trial judge has a curious effect. It is limited in its operation to the duration of the distributorship agreement. That, as the trial judge found, could be terminated upon reasonable notice. Such an implied term would do nothing to prevent Blackman from terminating the distributorship and competing upon the Australian market by manufacturing and selling copies of USSC products. Such an implied term would afford no real protection of USSC's Australian market. As the trial judge himself saw it, its effect would be limited to prohibiting activities on the part of Blackman during the currency of the distributorship which were calculated to enable him to capture the market or part of it after the determination of the distributorship. However, the agreement, as it was found, was explicit about what it required from Blackman during the distributorship agreement: it required him to devote his best efforts to distributing USSC surgical stapling products and building up the market for those products in Australia to the common benefit of USSC and himself. The agreement was silent about what was to happen at its conclusion and in those circumstances it seems to me impossible to decide that the distributorship could only have business efficacy if, in addition to the requirement that Blackman use his best efforts on behalf of USSC during the currency of the agreement, there was a requirement that he not do anything which would enable him to damage USSC's market after the distributorship had ended. However much the latter requirement may eventually have appeared to USSC to be desirable for its protection, the distributorship was clearly able to operate effectively without it.

50. No assistance is to be derived from the authorities dealing with contracts which establish what is clearly a confidential (in the sense of fiduciary) relationship - contracts such as contracts of employment or partnership agreements. There the confidential nature of the relationship may require the implication of a term or terms in the absence of express provisions in order to protect the confidence. A distributorship agreement of the kind here does not ordinarily, and certainly does not necessarily, give rise to a confidential relationship and it would be wrong to assume such a relationship in order to read into the agreement a term protecting it. Moreover, the development by Blackman during the currency of the distributorship agreement of a capacity to manufacture copies of USSC products did not involve the use of confidential information and, except to the extent that it resulted in his failure to devote his best efforts to distributing USSC products or building up its market in Australia, involved no breach of any express term of the agreement. Nor did the possibility of such an occurrence call for the implication of a term in addition to the best efforts clause. Cf. Robb v. Green (1895) 2 QB 1; Wessex Dairies Ltd. v. Smith (1935) 2 KB 80; Furs Ltd. v. Tomkies (1936) 54 CLR 583; Hivac Ltd. v. Park Royal Scientific Instruments Ltd. (1946) 1 Ch 169; Feiger v. Iral Jewellery Ltd. (1975) 382 NYS (2d) 216, 221; (1977) 363 NE (2d) 350.

51. Clearly, if it had wished to do so, there were various ways in which USSC could have protected the market which it had in Australia or which it anticipated it would have as a result of Blackman's distributorship. As I have said, it could have patented its products and registered its trade mark or at least have taken some steps to do so. It could have required Blackman to enter into a covenant in restraint of trade to the extent permitted by the law so as to restrict his activities during and after the termination of the distributorship. But to imply a term such as that implied by the learned trial judge would, in my view, be to impute to USSC a concern which had in no way been manifested by it and which, if it had existed, could have been met by appropriate contractual terms. In those circumstances, not only was the term implied by the trial judge unnecessary to give the distributorship agreement business efficacy but its implication would effectively recast that agreement in a form which the parties had chosen not to adopt.

52. It is clear that the term implied by the trial judge and accepted by the Court of Appeal was of fundamental importance in their arrival at the conclusion that Blackman occupied a fiduciary position. There is nothing else in the contract itself which would assist in that regard. It is possible that a fiduciary relationship might arise from the circumstances surrounding the agreement but before embarking upon an examination of those circumstances it is desirable to make some attempt to identify the characteristics of such a relationship, even if that attempt is unlikely to meet with complete success. It has been said more than once that it is not possible to define completely and with precision those matters which give rise to fiduciary obligations notwithstanding that it is possible to discern a fiduciary relationship when it exists. See Lloyds Bank v. Bundy (1975) 1 QB 326, at p 341.

53. To be sure there are relationships which are ordinarily recognized as fiduciary, at least in some of their aspects, and little trouble is experienced with them. They are all relationships which are analogous to that which exists between a trustee and his beneficiary - the clearest of all fiduciary relationships. Without any attempt at classification, obvious examples spring to mind such as the relationship between partners, between employee and employer, between agents and their principals, between solicitors and their clients, between directors and their companies and between wards and their guardians.

54. Notwithstanding the existence of clear examples, no satisfactory, single test has emerged which will serve to identify a relationship which is fiduciary. It is usual - perhaps necessary - that in such a relationship one party should repose substantial confidence in another in acting on his behalf or in his interest in some respect. But it is not in every case where that happens that there is a fiduciary relationship. If it were, whenever there is "a job to be performed" (Tito v. Waddell (No.2) (1977) 1 Ch 106, at p 229) and entrusting the job to someone involves reposing substantial trust and confidence in him, equity would impose fiduciary obligations. Clearly that is not the case. Nor does a fiduciary duty arise because the person to whom a job is entrusted acts in his own interest and thereby fails to perform the job properly, however useful it may appear with hindsight that such protection should have been available. As Megarry V.-C. put it in Tito v. Waddell, at p 230:

"If there is a fiduciary duty, the equitable rules about self-dealing apply: but self-dealing does not impose the duty. Equity bases its rules about self-dealing upon some pre-existing fiduciary duty: it is a disregard of this pre-existing duty that subjects the self-dealer to the consequences of the self-dealing rules. I do not think that one can take a person who is subject to no pre-existing fiduciary duty and then say that because he self-deals he is thereupon subjected to a fiduciary duty."

55. The difficulty in identifying and classifying those qualities in individual relationships which give rise to fiduciary obligations is well recognized. See, e.g., Phipps v. Boardman (1967) 2 AC 46, at p 125 per Lord Upjohn. There is, however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other. See Tate v. Williamson (1866) 2 ChApp 55, at pp 60-61. From that springs the requirement that a person under a fiduciary obligation shall not put himself in a position where his interest and duty conflict or, if conflict is unavoidable, shall resolve it in favour of duty and shall not, except by special arrangement, make a profit out of his position. In terms of general principle I do not think that it is necessary to go further than that in the present case. It is sufficient, in my view, to lead to the conclusion that no fiduciary relationship arose between USSC on the one hand and Blackman or, subsequently, HPI, on the other, having regard to all the circumstances.

56. No doubt it was necessary to look to the contract as part of an inquiry whether the relationship between the parties was of such a kind that equity would impose fiduciary obligations in addition to those imposed by the contract. However, as I have said, I can discern no basis for the implication of a term such as was found to exist and it follows that in my view there is absent from the relationship between the parties any fiduciary character which may have been derived from such a term. Of course, the relationship between the parties to a contract may be defined not only by the contract itself but may also arise from the circumstances in which the contract is made. But, just as the common law does not allow the implication of a term merely to remedy the inadequacy of the parties' contractual arrangements, so too does equity decline to re-adjust the balance of a relationship which does not of its very nature place the parties in an unequal position.

57. I have already explained why in my view there was no implied term such as that found by the trial judge. That goes some distance in explaining why I am unable to accept the further conclusion that the relationship between the parties was sufficiently analogous to that of a trust to classify it as fiduciary. The circumstances which make it inappropriate to imply the term in question form part of those circumstances which, in my view, preclude the formation of any fiduciary relationship. But there is more to it than that.

58. By its very nature a distributorship agreement does not ordinarily give rise to a relationship in which any conflict between duty and interest must be eliminated. It is, if anything, an exception to the adage that a man cannot serve two masters. Whilst the parties have the common aim of exploiting a market and, no doubt, rely upon that coincidence of aim as much as any contractual provision to ensure the success of their arrangement, nevertheless their interests do not always and entirely coincide. Where there is no agreement to the contrary (and there was none here) and the distributor re-sells his supplier's products, he must determine the price at which he will market them. Whilst it may be in the supplier's interest that the products should be sold at a price which is as close as possible to the wholesale price, the distributor's interest may dictate a higher price. Whilst it is in the supplier's interest that the distributor should purchase and sell as many of the supplier's products as the market will absorb, there may be considerations which the distributor must take into account in his own interest which involve a lesser achievement. I have in mind such matters as the distributor's capacity to finance his operations, to give credit and to promote the product. All of these matters and others may require the distributor to make decisions in a situation which of its very nature makes it impossible to eliminate conflict between his interests and those of the supplier.

59. Nor does the existence of a best efforts or best endeavours clause, such as was found to be a term of the contract between USSC and Blackman, impose a duty upon the distributor to disregard his own interests. In speaking of a "best endeavours" clause in a licence agreement, in Transfield Pty. Ltd. v. Arlo International Ltd. (1980) 54 ALJR 323, at p 329, Mason J. said that it went no further than to prescribe "a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract." See also Terrell v. Mabie Todd &Coy Ltd. (1952) RPC 234, at p 237; B. Davis, Ltd. v. Tooth &Co., Ltd. (1937) 4 All ER 118, at p 127; Van Valkenburgh, N.&N., Inc. v. Hayden P Co. (1972) 30 N.Y.2d 34, at p 45. Clearly that leaves room for a balancing of interests and does not require the elimination of any conflict.

60. What is important is that in a distributorship agreement such as that in the present case it is assumed that the distributor will pursue his own economic interests and reliance is placed upon the fact that in doing so he will sufficiently serve the supplier's interests as well as his own, notwithstanding that he may on occasions follow his interests to the exclusion of those of his supplier. Apart from the considerations to which I have already referred, this of itself makes it inappropriate to imply a contractual term purporting to impose absolute obligations upon the distributor. It makes it even less appropriate to impose an equitable obligation upon the distributor in the performance of the contract to have regard to the interests of the supplier in disregard of his own.

61. Moreover, in considering whether any of Blackman's obligations towards USSC were of a fiduciary nature, I find no assistance in the notion that he may have occupied a fiduciary position of a limited kind in relation to the goodwill attaching to USSC products. Product goodwill as a legal concept is virtually unexplored. How and when it may exist, if at all, as something distinct from the goodwill of the business which is the origin of the product is something which has received little attention. See Pinto v. Badman (1891) 8 RPC 181, at pp 194-195; Heublein Inc. v. Continental Liqueurs Pty. Ltd. (1960) 103 CLR 435; Estex Clothing Manufacturers Pty. Ltd. v. Ellis and Goldstein Ltd. (1967) 116 CLR 254; Commissioner of Taxes (Q.) v. Ford Motor Co. of Australia Pty. Ltd. (1942) 66 CLR 261. Perhaps some explanation of this fact is to be found in the position at common law where a trade mark is assignable only in conjunction with the goodwill of the business in which the mark is used. That was also the position for some time with registered trade marks. It is, however, unnecessary to examine in detail in this case any meaning which the term product goodwill may have, because whatever it may be in another context, it can in the context of this case mean no more than the reputation in the market place which USSC products had in this country.

62. It is not possible, to my mind, to say that Blackman had a fiduciary relationship with USSC limited to its product goodwill or the reputation in the market place of USSC products. It is, I think, artificial in the extreme to regard USSC as having entrusted Blackman with the reputation of its products in Australia in the same way as one person might entrust another with property of a tangible kind to deal with it on his behalf. There were no special features of Blackman's distributorship relating to product goodwill. The only sense in which it could be said that USSC entrusted Blackman with the reputation of its products in Australia is in the sense that the reputation of those products might grow or diminish as a consequence of the manner in which he performed his function as a distributor of those products. But the same might be said of any distributor of any supplier's products. Moreover, the nature of the agreement between Blackman and USSC precluded any special obligations relating to product goodwill.

63. The extent of the exertions required of Blackman under the agreement is to be found in the obligation imposed upon him to devote his best efforts to distributing USSC products and building up the market for them. Any effect upon the reputation of USSC products in Australia was necessarily a consequence of Blackman's performance of or failure to perform these functions. However, in observing the requirements of the best efforts clause, Blackman was, as I have noted, not required to have regard to USSC's interests to the exclusion of his own. He was not required to resolve any conflict entirely in favour of USSC and he was, therefore, not placed by the best efforts clause in a fiduciary position. No more was or could be required of Blackman under the agreement in relation to the reputation of USSC products than was required of him by the best efforts clause.

64. If that clause imposed no fiduciary obligation upon Blackman, and I have already indicated that it did not, it follows ineluctably, in my view, that there was no fiduciary obligation in relation to the reputation of USSC products even if some such obligation could in other circumstances arise. It is to my mind quite impossible to say that the efforts which Blackman was required to make under the agreement were not in discharge of any fiduciary duty but that the reputation of USSC products, which could only be affected under the agreement by the way in which he discharged the duties which the agreement imposed, was somehow entrusted to Blackman in a fiduciary way.

65. Nor is the problem to be solved by saying that there was a limited fiduciary relationship with respect to the reputation of USSC products which was of a different kind from that normally encountered in that it recognized the possibility of conflict between the interests of Blackman and those of USSC which was not to be resolved in favour of USSC. That is the antithesis of a fiduciary relationship which demands that in any situation of conflict between duty and interest, duty must come first. See Furs Ltd. v. Tomkies, at pp 590, 592, 600. As Lord Hodson said in Phipps v. Boardman, at p 111:

"Nevertheless, even if the possibility of conflict is present between personal interest and the fiduciary position the rule of equity must be applied."

See also Gillett v. Peppercorne (1840) 3 Beav 78, at pp 83-84 (49 ER 31, at p 33); Bray v. Ford (1896) AC 44, at pp 51-52; Regal (Hastings) Ltd. v. Gulliver (1967) 2 AC 134, at pp 137, 144-145. The whole purpose served by the recognition of a fiduciary relationship would otherwise be thwarted for the court would be required to examine individual transactions in order to determine whether the interests of the person to whom the fiduciary duty was owed had been sacrificed in some impermissible manner as, for example, where the person owing the duty had not acted reasonably in the circumstances. That may well be a task which "no court is equal to" and certainly is a task which has never been undertaken. See Ex parte James (1803) 8 Ves Jun 337, at p 345 (32 ER 385, at p 388).

66. The circumstances in which the contract between USSC and Blackman was made do not suggest any disadvantage or vulnerability on the part of USSC requiring the intervention of equity to protect its interests. Those negotiations were of a commercial nature and were at arm's length. They were conducted by persons on both sides who were experienced in the market place. The recognition by those who represented USSC that a formal, written agreement was desirable was a recognition of the possibility, at least, of a contract providing greater protection of USSC's interest than was in fact provided. Not only does the conscious choice to proceed in the absence of a formal agreement fail to provide any basis for the implication of a term affording the type of protection which the agreement might have provided, but it is also inconsistent with any need for the intervention of equity.

67. It may be conceded that USSC eventually accepted that there was no need for a formal agreement because of the misplaced trust which Hirsch and Josefsen had in Blackman's integrity and ability. But that is not the sort of trust or confidence which equity will protect by the imposition of fiduciary obligations. A fiduciary relationship does not arise where, because one of the parties to a relationship has wrongly assessed the trustworthiness of another, he has reposed confidence in him which he would not have done had he known the true intentions of that other. In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced. That does not make the relationship a fiduciary one. See Lloyds Bank v. Bundy at p 341. A fiduciary relationship exists where one party is in a position of reliance upon the other because of the nature of the relationship and not because of a wrong assessment of character or reliability. That is to say, the relationship must be of a kind which of its nature requires one party to place reliance upon the other; it is not sufficient that he in fact does so in the particular circumstances. Of course, where a relationship is fiduciary in character it will be so whether or not the party in whose favour the fiduciary obligations are imposed actually trusts the party upon whom the obligations are imposed.

68. Moreover, a fiduciary relationship does not arise where one of the parties to a contract has failed to protect himself adequately by accepting terms which are insufficient to safeguard his interests. Where a relationship is such that by appropriate contractual provisions or other legal means the parties could adequately have protected themselves but have failed to do so, there is no basis without more for the imposition of fiduciary obligations in order to overcome the shortcomings in the arrangement between them.

69. In my view, there was no special feature of the distributorship agreement between USSC and Blackman which distinguished it from an ordinary commercial arrangement of its type. Apart from the actual terms of the contract, I do not think that the nature of the relationship which it created or the circumstances in which it was made, required USSC to put its trust and confidence in Blackman in a way which called for the imposition of fiduciary obligations to protect it from a position of vulnerability or disadvantage. That it did put its trust and confidence in Blackman is clear, but it did so of its own choice. If that placed it in an unequal position in relation to Blackman it was not due to anything inherent in the relationship but to the way in which the parties chose to establish and define it.

70. Too much should not, however, be made of any inequality in the position of USSC. The distributorship was, even in the absence of breach, determinable upon reasonable notice and although Blackman's activities took place unnoticed for some time in what USSC appears to have regarded as a remote corner of the globe, that company had at least the means of remedying the situation by ending its relationship with Blackman as soon as those activities could be seen to be harmful to it.

71. It should also be borne in mind that at the time Blackman concluded a distributorship agreement with USSC, the dealership agreement which he had previously made with USSC was in existence and continued in operation for some time thereafter. It is clear, indeed it was conceded, that the position of dealer under the latter agreement carried with it no fiduciary obligations. That agreement, which was contained in a formal document, expressly provided that it should not constitute the dealer the agent of USSC and that the relationship between USSC and Blackman should at all times be that of independent contractors. See Jirna Ltd. v. Mister Donut of Canada Ltd. (1973) 40 DLR (3d) 303. It would have been anomalous that any fundamental change in the relationship between USSC and Blackman should have taken place during the subsistence of the dealership agreement without either party adverting to it merely because Blackman had become a distributor of USSC products in Australia in addition to his, or his company's, being a dealer for USSC in the United States. From a commercial point of view, the distributorship was, and was intended to be, a much looser arrangement than a dealership.

72. In the Court of Appeal considerable emphasis was placed upon Blackman's fraudulent conduct and the importance to him of obtaining the distributorship in order to effectuate his plan of capturing USSC's market for himself with copies of USSC products. For my part, I am unable to see how either of these circumstances, which are clearly established, assists in answering the question whether a fiduciary relationship existed. The law, of course, offers remedies for fraudulent misrepresentation and the fact that USSC has chosen not to pursue them is not to the point in the case which it has eventually made out. The fact that USSC was the victim of Blackman's fraud is no indication that the agreement which it induced gave rise to a relationship which called for the special protection of equity. And if such a relationship had existed, the fact that the conduct of which USSC complains was fraudulent would in the circumstances have been of limited relevance to the availability of the equitable remedies which it seeks; it would have been sufficient that Blackman allowed his duty to conflict with his interest so as to profit from his position of trust.

73. Even less relevant, in my view, is the importance of the distributorship to Blackman. It explains, of course, his motivation in obtaining a distributorship; his whole plan to capture the Australian market was dependent upon it. It emphasizes, perhaps, the lack of judgment and the misplaced confidence on the part of those who were acting for USSC in failing to see and guard against what Blackman was doing or was about to do. But the fact that it was important to Blackman to achieve the relationship which he did with USSC did not determine the nature of that relationship any more than the failure of USSC to recognize that fact.

74. The undesirability of extending fiduciary duties to commercial relationships and the anomaly of imposing those duties where the parties are at arm's length from one another was referred to in Weinberger v. Kendrick (1892) 34 Fed. Rules Serv. 2d 450. And in Barnes v. Addy (1874) 9 Ch App 244, at p 251, Lord Selborne L.C. said:

"It is equally important to maintain the

doctrine of trusts which is established in this court, and not to strain it by unreasonable construction beyond its due and proper limits. There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them."

75. There can be no question that the behaviour of Blackman was calculated and fraudulent. But the law provides remedies for such behaviour which are capable of a precise application. To invoke the equitable remedies sought in this case would, in my view, be to distort the doctrine and weaken the principle upon which those remedies are based. It would be to introduce confusion and uncertainty into the commercial dealings of those who occupy an equal bargaining position in place of the clear obligations which the law now imposes upon them. The remarks of Bramwell L.J. in New Zealand and Australian Land Co. v. Watson (1881) 7 QBD 374, at p 382, have, I think, special application:

"Now I do not desire to find fault with the various intricacies and doctrines connected with trusts, but I should be very sorry to see them introduced into commercial transactions, and an agent in a commercial case turned into a trustee with all the troubles that attend that relation."

76. For these reasons, I would allow the appeal and dismiss the cross appeal of the first respondent. I would also allow the cross appeals of the second, third, fourth and fifth respondents. I would order that the proceedings be remitted to the Supreme Court of New South Wales for an inquiry as to the damages suffered by the first respondent as the result of the breach by the third respondent of its contractual obligations and for entry of judgment in favour of the first respondent against the third respondent in the amount of the damages ascertained by that inquiry.

Orders

Appeal of the appellant allowed, and cross appeal of the first respondent dismissed, with costs against the first respondent.

Cross appeals of the second and fifth respondents allowed, with costs against the first respondent.

Cross appeals of the third and fourth respondents allowed. No order as to costs.

Order of the Court of Appeal of the Supreme Court of New

South Wales set aside, and in lieu thereof order as follows:

(1) Appeal by the appellant to that Court dismissed with costs.

(2) Cross appeal by the first respondent in that Court allowed in part. No order as to costs.

(3) Cross appeal by the second respondent in that Court allowed. No order as to costs.

(4) Cross appeals by the third, fourth and fifth respondents in that Court dismissed with costs.

(5) Order of McLelland J. set aside, and in lieu thereof order:

(a) Judgment for the second defendant in the action. No order as to costs.

(b) Judgment for the third, fourth and fifth defendants in the action with costs.

(c) Judgment for the plaintiff in the action against the first defendant for damages for breach of contract and for costs.

Remit the matter to the Supreme Court of New South Wales to assess damages and to enter judgment in favour of the plaintiff against the first defendant in the amount assessed.

Liberty to apply.