Ingersoll-Rand (Australia) Ltd v Industrial Rollformers P/L
[2000] NSWSC 712
•25 July 2000
CITATION: Ingersoll-Rand (Australia) Ltd v Industrial Rollformers P/L & Anor [2000] NSWSC 712 revised - 31/07/2000 CURRENT JURISDICTION: Equity Division FILE NUMBER(S): SC 4997 of 1999 HEARING DATE(S): 29, 30, 31 May, 1, 2, 5, 6, 7, 8, 9, 13, 15 and 16 June 2000 JUDGMENT DATE: 25 July 2000 PARTIES :
Ingersoll-Rand (Australia) Limited (Plaintiff/Cross Defendant)
Industrial Rollformers Pty Limited (First Defendant/Cross Claimant)
Strata Control Pty Limited (Second Defendant)JUDGMENT OF: Bergin J
COUNSEL : FM Douglas QC/DT Kell (Plaintiff/ Cross Defendant)
DE Grieve QC/MP Sindone (Defendants/Cross Claimant)SOLICITORS: Baker & McKenzie (Plaintiff/Cross Defendant)
John Spence & Associates (Defendants/Cross Claimant)CATCHWORDS: Whether certain of the plaintiff's information provided to the defendants is confidential information - Whether the defendants misused such information in breach of contract and breach of equitable duty of confidence - Whether restraint clauses in the contract are void against public policy - Application pursuant to s 4 of the Restraints of Trade Act 1976. LEGISLATION CITED: Restraints of Trade Act 1976 (NSW)
JD Heydon, "The Restraint of Trade Doctrine" (1999) 2nd Ed., Butterworths, SydneyCASES CITED: Amoco Australia Pty Ltd v Rocca Bros. Motor Engineering Co Pty Ltd (1973) 133 CLR 288
Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd (1967) VR 37
BP Refinery (Westernport) Pty Ltd v Hastings (1977) 180 CLR 266
British American Oil Co Ltd v MacLaren (1927) 33 OWN 239
Byrne v Australian Airlines Ltd (1995) 185 CLR 410
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523
Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269
Faccenda Chicken Ltd v Fowler [1987] Ch 117
ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640
Ingersoll-Rand Company (USA) v Ciavatta 509 A.2d 821 (NJ Super. Ch. (1986))
Ingersoll-Rand Co v Ciavatta (1987) 3 USPQ2d 1120
Ingersoll-Rand Co v Ciavatta (1988) 8 USPQ2d 1537
Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110
Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564
Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
Mouchel v William Cubitt & Co [1907] 24 RPC 194
Orton & Ors v Melham (1981) 1 NSWLR 583
Peters American Delicacy Co Ltd v Champion (1928) 41 CLR 316
GW Plowman & Son v Ashe [1964] 1 WLR 568
Queensland Co-operative Milling Associaion v Pamag Pty Ltd (1973) 133 CLR 260
Saltman Engineering Co Ltd v Campbell Engineering Co [1948] 65 RPC 203 (CA)
Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1988) 44 NSWLR 607
Tavener v Sheridan (2000) FCA 219
Terrapin Ltd v Builders Supply Co (Hayes) Ltd [1967] RPC 375
Thorsten Nordenfelt (Pauper) v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535
Wheatley v Bell (1982) 2 NSWLR 544DECISION: Plaintiff's information confidential; defendants use of plaintiff's confidential information in breach of contract and breach of equitable duty of confidence. Section 4 of the Restraints of Trade Act 1976 applied.
SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISIONBERGIN J
DATE 25 JULY 2000
4997/99 INGERSOLL-RAND (AUSTRALIA) LIMITED v INDUSTRIAL ROLLFORMERS PTY LIMITED & STRATA CONTROL PTY LIMITED
JUDGMENT
Introduction 3
First Defendant wins WMC tender 32
Invention and Development of the Split Set 3
The Plaintiff 6
Split Set in Australia 7
The First Defendant is Incorporated 9
The 1983 Agreement 9
The 1984 Agreement 13
The 1986 Agreement 13
Quality Control 14
Entry of Competitors into the Split Set Market 16
Price Increases Rejected 16
The Second Defendant is incorporated 18
A Proposal for a new Agreement 19
Further Request for Price Increases 23
Competition Intensifies 24
WMC calls for tenders 26
Plaintiff given Notice of the first defendant’s friction bolt 29
Approach to employees 30
The first defendant announces the Strata Bolt 30
The 1984 Agreement is terminated 32
Proceedings are commenced/Interlocutory Restraints 32
Plaintiff’s case against the First Defendant 33
Plaintiff’s case against the Second Defendant 34
Cross Claim 34
Confidential Information 35
The ISIS material 38
Research and Development Information 38
Customer Information 39
Pricing and Orders 39
Marketing Information 39The Steel 41
Manufacturing Information 40
The Plaintiff’s Drawings 42
Information on the Internet 46
Reverse Engineering 48
Other Friction Bolts - Jennmar & ANI 51
Are the Plaintiff’s drawings Confidential Information 52
Were the Strata Bolt Drawings prepared using the
Plaintiff’s Confidential Information? 56The Origins of the Strata Bolt 62
Breach of Clause 12 by the First Defendant - Use of
Confidential Information during the Agreement 64The Second Defendant’s position 65
Breach by the Second Defendant - Use of
Confidential Information during the Agreement 73The Restraint Clause 74
Implied Terms 84
Section 52 Representations 87
Cross Claim for Price Increases 88
Orders 89
Introduction
1 This case arises out of a dispute about the defendants’ entitlements to manufacture and sell a mining roof support known as the Strata Bolt. It is agreed that the Strata Bolt is similar in design to the Split Set, a mining roof support over which the plaintiff claims it has rights.
2 The plaintiff claims an entitlement to an order to restrain the defendants from manufacturing and selling the Strata Bolt and/or damages in respect of such manufacture and sale.
3 The plaintiff claims the defendants agreed they would not make a mining roof support similar in design to the Split Set during the period of an agreement between the plaintiff and the first defendant and an alleged agreement between the plaintiff and the second defendant and for a period of five years following termination of the agreements.4 One of the dangers in underground mining and construction is the potential collapse of the mine or tunnel roof. In about 1973, in the United States of America, James Scott invented the first Split Set Roof Support. In a September 1974 paper entitled “Friction Rock Stabilizers and their Application to Ground Control Problems” Professor Scott announced:
Invention and Development of the Split Set
5 Professor Scott went on to describe the configuration and installation of Split Sets thus:
Friction Rock Stabilizers, trade name Split Set*, is a new support system invented by the author and under development by Ingersoll-Rand and Lee-Norce Company. Split Sets are a substitute for standard bolts or fully grouted resin bolts and have certain advantages which are:
1. Improved safety for the miner
2. A rational design is possible based on rock mechanics principles
3. Supports can be made either to be yieldable or rigid
4. Supports can be used to build a roof beam or to suspend roof material
5. It is cheaper than the resin system and costs about the same as standard bolts
*Pat. pending
6 After describing and discussing the laboratory and field tests of the Split Sets Professor Scott claimed:
Split Sets are formed by rolling thin plate sections in the form of a long, split tube which has one end tapered for insertion and the other upset for containment of a roof plate. The split tube can be pushed into a hole substantially smaller than the diameter of the tube and force fit to this hole to provide sufficient friction to secure the geological material into a more-or-less reinforced mass.
The Split Set system is the simplest interior reinforcement method available to the Rock Mechanics engineer today.
And:
The simplicity of the system, the reproducability of data in both the laboratory and field test program, coupled with the east (sic) of manufacture and economy all would seem to dictate that the mining industry should take a hard look at this system to solve many of its ground control problems.
7 The Split Set was improved and modified by the US parent of the plaintiff, Ingersoll-Rand Company (I-R), with the assistance of its employees, in particular Thomas Joseph Landsberg (Mr Landsberg). Mr Landsberg holds a Bachelor Degree in Mechanical Engineering from Union College, New York, a Masters Degree in Mechanical Engineering from the University of Michigan and a Masters Degree in Business Administration from Fairleigh Dickinson University, New Jersey.
8 Mr Landsberg was employed with the plaintiff from 1979 to 1998 as the Manager of Manufacturing and Engineering of I-R’s Split Set Division. He has been in private practice since 1998 as a consultant with TJL Associates Inc.
9 Between 1979 and 1982 Mr Landsberg worked on projects which involved the supervision and undertaking of engineering and analytical research and development to perfect the design of the Split Set. After 1982 he was involved in the development of a program to aid the computerised design of Split Sets. This program facilitated the evaluation of different steel thicknesses, steel grades, interferences and tolerances.
10 The plaintiff, or I-R, have not at any stage manufactured the Split Set and have always engaged external contractors to manufacture the Split Sets for them for supply to their clients.
11 “Split Set” is a trade mark which was first registered in Australia on 25 September 1979. I-R, a corporation of the State of New Jersey, U.S.A., was entered in the Register of Trade Marks as the proprietor of the trade mark. The trade mark has been renewed to 25 September 2000. The Split Set is the trade name of a friction rock stabilizer. Such mining roof supports are sometimes referred to as friction bolts.
12 Australian Patent no 497,039 entitled “Stabilizing Rock” in the name of James J Scott was filed on 29 January 1974. It appeared to be the “forerunner” of the Split Set in that (i) the tapered end of the Split Set appears to be a refinement to the Stabilizer in specification no 497,039; and (ii) the ring welded to the Split Set for engagement by a support plate appears to be a refinement of the support plate and wedge disclosed in the drawings of the Stabilizer in specification no 497,039.
13 A series of other patents, both in the United States of America and in Australia, dealing with both the invention of the Split Set and the method for insertion are in or are referred to in evidence. The plaintiff was the non-exclusive sub-licensee of I-R to “make, have made, sell distribute and use” the Split Set in Australia. There is no issue that the relevant patents relating to the Split Set have expired and there is also no issue that up until 1990 the plaintiff enjoyed a competition free environment for manufacture, use and sale of the Split Sets in Australia.
14 The Split Set as developed by I-R has two parts - a tube and a bearing plate. The tube is made of high strength steel and has a slot along its length. One end of the tube is tapered and the other has a welded ring flange to hold the bearing plate. Split Sets are used for ground support in all types of underground mines. They are also used in tunnels including railway and road tunnels and open pit mines.
15 With the bearing plate in place, the tube is inserted into a bore hole slightly smaller than the tube’s diameter with the use of a percussion drill. As the tube slides into place, its full length slot narrows and the tube exerts radial pressure against the rock over its full contact loading and provides plate load support. After installation when ground shift occurs the tube automatically grips more tightly and does not need manual tightening.
16 There are currently three models of the Split Set, the Split Set 33 (SS-33), the Split Set 39 (SS-39) and the Split Set 46 (SS-46). The numerals 33, 39 and 46 represent the millimetre measurement of the outer diameter of the Split Set tube. The Split Sets are manufactured in various lengths, 0.9 to 2.4 metres in the SS-33, 0.9 to 3.0 metres in the SS-39 and 0.9 to 3.7 metres in the SS-46.
17 The plaintiff’s brochure contains the following depiction of the Split Set and description of its operation on installation:
The Plaintiff
18 I-R’s first venture outside the U.S.A. was through the plaintiff’s commencement of business in 1897 in the gold fields of Kalgoorlie. The plaintiff’s business today largely involves servicing the mining and construction industry in Australia with the sale of mining and tunnel roof supports as a dominant part of that business.
19 The plaintiff has its corporate offices in Seaford, Victoria, construction and mining group headquarters in Rydalmere, NSW, and distribution locations in Perth, Kalgoorlie, Sydney and Perth.
Split Set in Australia
20 In 1980 the plaintiff approached Portec Australia Pty Limited (Portec) to manufacture the Split Set for it in Australia. A visit was made to Australia in November 1981 by John Irwin, the General Manager of the Split Set Division of I-R, who met with the managing director of Portec at the time, James Vivian Fergusson (J.V. Fergusson). Mr Irwin concluded that I-R could “only get a competitive price by local manufacturing” and therefore intended to “get into the business as soon as possible with locally sourced SS-33 models”.
21 After the initial approach in 1980 and up until July 1982 Portec through J.V. Fergusson:22 On 13 April 1982 the plaintiff and Portec executed an Agreement whereby Portec (referred to as Seller) agreed to manufacture and supply SS-33s to the plaintiff (referred to as Buyer). The preamble to this Agreement provided:
- arranged for the construction of appropriate manufacturing plant and equipment;
- supervised welding tests to overcome welding problems that had been encountered;
- worked with BHP to arrive at a suitable steel for the manufacture of the Split Set in Australia;
- refined the production line for the manufacture of the Split Set;
- prepared a quality procedure for the manufacture by Portec; and
- manufactured samples and sent them to I-R in the United States of America for testing.
WHEREAS Buyer desires to have manufactured and wishes to procure Split Set tubes (hereinafter referred to as “products”), on a nonexclusive basis, and
WHEREAS Seller is willing to manufacture and supply such products to Buyer on such basis.
23 The terms of this Agreement are identical to the terms of the Agreement between the plaintiff and the first defendant executed on 1 July 1983 which is detailed later in this judgment. The 1982 Portec Agreement with the plaintiff was executed by J.V. Fergusson for Portec.
24 From December 1981 I-R commenced developing what came to be known as the SS-46. The prototype drawing was created and the steel was selected in December 1981. The prototypes were produced and tested by April 1982 at I-R’s laboratories and confirm engineering and field trials were also conducted in that month.
25 In April 1982 J.V. Fergusson travelled to the USA where he visited two of I-R’s subcontracted manufacturers’ plants. The plants visited were the Kaiser Steel Plant in California and the Bristol Plant in Pennsylvania. Of this visit it was noted that the management of those plants “excelled in co-operation and free discussion of their facilities and production methods all of which will assist Portec in tool design, production layout, in turn contributing to a more efficient startup”. J.V. Fergusson was provided with an 8 mm movie cassette to show Portec the use of the SS-33.
26 BHP advised Portec in April 1982 that in order to standardise its internal grade nomenclature and certain elements of the supply criterion it had, with Portec’s agreement, amended the steel grade to be supplied to Portec for the SS-33 to AB 4121. BHP advised that the AB 4121 steel would conform to the chemical composition and mechanical property requirements of ASTM A 607 grade 60 which was the American specification for the steel.
27 In November 1982 I-R requested Portec to provide an estimate of costs for manufacturing a new model Split Set which ultimately became the SS-46. Portec, through J.V. Fergusson, was involved in the steel selection for this Split Set and investigated and determined the appropriate welding parameters and provided tooling for its development. The SS-46 was to become the “market leader and flagship” of the plaintiff’s product range.
28 In early 1983 Portec’s overseas parent company made the decision to withdraw from the Australian market and proceeded to close down its operations in this country.
The First Defendant is incorporated
29 In June 1983 Industrial Rollformers Pty Ltd, the first defendant, was incorporated. The shares in the first defendant are held in equal shares by J.V. Fergusson, his wife Lois Everlin Fergusson and their sons, David James Fergusson (D.J. Fergusson) and Jeffrey Robert Fergusson. In 1983 the directors were J.V. Fergusson, Lois Fergusson, Jeffrey Fergusson and D.J. Fergusson.
30 The first defendant acquired the whole of Portec’s Split Set operation including a fully operating plant and all equipment. The plaintiff and the first defendant entered into an agreement on 1 July 1983 for the manufacture of the SS-33 (the 1983 Agreement).
31 The 1983 Agreement was terminated by agreement on 18 April 1984 when the plaintiff and the first defendant entered into a further agreement for the manufacture and supply of SS-33s, SS-39s and SS-46s (the 1984 Agreement). The 1984 Agreement was amended by further agreement on 8 August 1986 to introduce a new pricing structure (the 1986 Agreement).
The 1983 Agreement
32 Once again the Recitals to this Agreement stated that the plaintiff wished to procure the manufacture of the Split Sets on a “nonexclusive” basis and that the first defendant was willing to manufacture and supply the Split Sets on that basis.
33 The first defendant agreed to manufacture and supply SS-33s to the plaintiff in accordance with certain specifications and drawings (par. 3). The plaintiff agreed to pay for the Split Sets in accordance with price schedules until the prices were changed in accordance with the Agreement (par. 5).
34 The first defendant was entitled to adjust the prices at the end of each six month period ending each June 30 and December 31 pursuant to an agreed formula. Any price increases excluded any Split Sets that were in inventory at the time of the increase (par. 6). The first defendant was required to inform the plaintiff of each price rise at least 30 days prior to the effective date of the price increase (par. 6).
35 The plaintiff was entitled to audit the Split Set and steel in inventory and steel on order at the time of any increase (par. 6). The plaintiff and the first defendant agreed to “co-operate in continuously seeking alternate sources for material at lower cost in order to keep the costs of the” Split Sets “as low as reasonably possible” (par. 6(b)).
36 The plaintiff became entitled to a percentage discount in the event that the first defendant’s invoices exceeded 250,000 Split Sets in a calendar year (par. 7). The plaintiff was required to give the first defendant a “forecast” of its requirement each quarter and notify the first defendant promptly if such forecast was found to be incorrect. Based on the forecast the first defendant was required to continuously stock an inventory of Split Sets to meet at least six weeks of the plaintiff’s orders (par. 8). The plaintiff was entitled to reject Split Sets for “non-conformance to specifications or for failure to perform” (par.9).
37 Three paragraphs of this agreement which are in identical terms in the 1984 Agreement which are significant to the issues in this case are set out below. The plaintiff is referred to as Buyer and the first defendant is referred to as Seller:
11 Buyer may mark as “confidential” any data, designs, drawings, specifications or other written information it furnishes to Seller in connection with this Agreement. Buyer shall also disclose to Seller certain other confidential information as the natural result of doing business. Seller shall not make use of any confidential information except for the performance of an order issued by Buyer to Seller, and further shall not disclose such information to others except as authorised in writing by Buyer. However, Seller shall not be subject to the restrictive obligations set forth in this Paragraph as to the use, disclosure or duplication of any such information with respect to information that (1) was already known to Seller prior to Seller obtaining it from Buyer, (2) is or becomes part of the public knowledge or literature without breach of this Agreement by Seller, or (3) otherwise lawfully becomes available to Seller on a nonconfidential basis from a third party who had not received the confidential information directly or indirectly from Buyer. The restrictive obligations set forth in this paragraph shall terminate at the end of five years from the termination of either this Agreement or any extension of this Agreement, whichever occurs last. Upon completion, cancellation or termination of this Agreement, Seller shall return to Buyer, on demand, all data, designs, drawings, specifications and other confidential information including copies made buy Seller. Seller may disclose such confidential information to subcontractors and vendors in order to obtain services and materials provided that such subcontractors and vendors sign a secrecy agreement with Seller containing the written conditions contained in Attachment A. Seller shall provide Buyer with a written list of all subcontractors and vendors and a description of the Products and/or services purchased from each. Buyer shall specify in writing to Seller those requiring the signing of a secrecy Agreement.
12 All purchase orders issued by Buyer are confidential between the Buyer and Seller, including the details of the order in connection with Buyer’s design, the name and address of Buyer’s customer, and Seller’s manufacturing procedures relating to the products or work covered by the order.
14 During the term of this Agreement and for five (5) years following its termination, except as authorised by Buyer, Seller shall not make a mining roof support which is similar in design to the mining roof support covered by this Agreement.
38 Attachment “A” referred to in paragraph 11 in the 1983 Agreement, and in identical terms in paragraph 12 in the 1984 Agreement, is not in evidence. That is so notwithstanding that a number of copies of the 1983 and the 1984 Agreements have been annexed to affidavits (annexures A and B affd. D.J. Fergusson 5 May, 2000; annexure D affd. Roger Moore 9 December, 1999; annexures T and U affd. J.V. Ferguson 19 May, 2000).
39 There is an Attachment to the Agreement between the plaintiff and Portec (annexure N affd. T.J. Landsberg 12 May, 2000; and Ex R). That Attachment is Attachment “B” and is entitled Secrecy Agreement, signed by the plaintiff as Purchaser and Portec as Supplier. In that Agreement there is a paragraph identical to paragraph 11 except that it refers to Attachment “B” whereas the 1983 and 1984 Agreements refer to Attachment “A”.
40 In Attachment “B” to the Portec Agreement signed by the plaintiff and Portec on 18 April 1982 Portec agreed to maintain confidential and not disclose to any third party any information received from the plaintiff relating to the “said subject matter” which appears to be “proprietary ideas and concepts”. Portec agreed that except for the work to be performed for the plaintiff it would not use such information received from the plaintiff.
41 The restrictions were agreed to apply only for “the maximum term of ten (10) years” from the date of Portec signing the Agreement. Such restriction did not apply to information that was known to Portec prior to the date of its receipt from the plaintiff or information generally known to the public prior to the date of its receipt from the plaintiff. Portec was to be relieved of such restrictions if any information became generally known to the public through no fault of Portec.
42 There is a Secrecy Agreement in evidence which was signed by the Quality Assurance subcontractor Inter-State Inspection Services Pty Ltd in July 1991. That agreement is between Simmons-Rand Company and Inter-State Inspection Services Pty Ltd. The parties agreed to keep the information secret and confidential and not to use it, other than for the performance of the tasks under contract, without the written consent of Simmons-Rand. There is no time limit of 10 years in this particular Secrecy Agreement.
43 Although there is no issue between the parties that the first defendant was required to obtain secrecy or confidentiality agreements from third parties pursuant to par. 11 (and later par. 12) I am not aware of the terms of such agreements. In the circumstances I can draw no inferences in favour or against any party in respect of its absence from the evidence.
44 The parties were entitled to terminate the Agreement upon 180 days prior written notice to the other party (par. 15).
45 During 1983 the first defendant, pursuant to the plaintiff’s plan to manufacture the SS-46 in Australia, was involved in the following:46 In early 1984, at the plaintiff’s request, the first defendant manufactured the SS-39 which was being made in the USA, France and South Africa.
- the design and manufacture of new rollforming tooling. The first defendant engaged David Horton of Horton Industries (NZ) Pty Ltd to design tooling and then built a machine to manufacture the SS-46;
- manufacturing numerous test products over several months which were tested by the plaintiff for the purpose of determining whether or not the product met with its requirements;
- finding the appropriate steel grade and specification for the SS-46. This was necessary because of the different physical requirements of the SS-46 compared to the SS-33 including a different alloy component and steel thickness;
- developing new welding parameters. This was necessary because of the different thickness and different grade of steel in the SS-46. The first defendant had to test for the different types of welding wires and the establishment of new welding parameters including voltage, amperages and rotation speed;
- finding a suitable welding machine to weld on to the SS-46 friction bolt due to the increased energy required to satisfactorily develop the process;
- developing new packaging because the SS-46 was to be packaged in bundles of three instead of six as was the requirement for the SS-33. The first defendant developed straight layered packaging to accommodate this requirement.
The 1984 Agreement
47 Under this Agreement the first defendant agreed to manufacture and supply the plaintiff with SS-33s, SS-39s and SS-46s. Once again this was on the basis that the plaintiff wished to procure such manufacture and supply on a non-exclusive basis.
48 Paragraphs 11, 12 and 14 of the 1983 Agreement became respectively paragraphs 12, 13 and 15 of the 1984 Agreement.
49 This Agreement contains similar provisions to the 1983 Agreement with the addition of the recognition that the plaintiff was providing to the first defendant the steel used in the manufacturing of the Split Sets because the first defendant was not able to purchase the steel as advantageously as the plaintiff. The parties agreed that when the first defendant could purchase the steel at the same or lesser price then it would do so and new prices would be established (par. 5.1). The first defendant agreed that it would assume responsibility for supplying steel as soon as possible (par. 6(c)).50 This Agreement, referred to as an “Amendment Agreement”, dealt only with the pricing schedules in which the parties agreed to an increase in prices in the Schedules.
The 1986 Agreement
Quality Control
51 Under each of the Agreements the first defendant was required to comply with the plaintiff’s quality assurance specification SSQ-2, as revised from time to time. In late 1984 the plaintiff prepared quality procedures specific to the operational requirements of the first defendant.
52 From about early 1984 the plaintiff conducted monthly and quarterly audit visits of the first defendant’s plant and prepared reports of the visits which were forwarded to I-R. The first defendant was required to provide Split Set samples to the plaintiff for regular quality testing and auditing.
53 A problem arose in 1986 when analyses of the quality control test data revealed that the first defendant was experiencing failure rates as a result of welding parameters. Tests on samples revealed that the Split Sets manufactured by the first defendant had an abnormally high percentage of fractures in the heat affected zone. This apparently meant that the flange tensile strength of the installed Split Set could be abnormally low which would increase the likelihood that the Split Set could fail. Reports were provided by the plaintiff’s metallurgist/welding specialist to assist with the rectification of the problem.
54 In January 1987 the plaintiff discovered that some of the samples which had been received from the first defendant did not meet the tolerances and dimensions imposed by the plaintiff’s quality controls. This was once again subject to audit by the plaintiff with recommended steps for achieving compliance.
55 In April 1987 the plaintiff employed Interstate Inspection Services Pty Ltd (ISIS) to provide quality assurance service for the plaintiff at the first defendant’s plant at Smithfield. ISIS’ role was to ensure the first defendant (and later the second defendant) manufactured the Split Set in accordance with the plaintiff’s drawings, standards and specifications.
56 A further quality control issue arose in 1989 when Mr D. Bronder, the then international sales manager of the Split Set Division of I-R, visited the first defendant. One of the issues identified was that George Ward Steel Pty Limited (George Ward) was providing the first defendant with BHP steel which was “under gauge”, which is steel that is under the minimum thickness required by the plaintiff.
57 A meeting was arranged between BHP, George Ward, the plaintiff and the first defendant on 5 December 1989. Mr Landsberg attended this meeting which resulted in agreement being reached as to the most economical way of obtaining AB 4121 material to a minimum gauge and steps being put in place to ensure that material that was out of specification did not reach the first defendant.
58 While Mr Landsberg was in Australia he visited the first defendant’s factory and observed that the quality of the product was “very good”. During this visit Mr Landsberg discussed in detail with J.V. Fergusson and D.J. Fergusson a number of aspects of the first defendant’s operation together with providing them with a computer generated statistical analyses of the first defendant’s quality trends during the period 1986 through to 1989.
59 During the period 1983 to 1992 the first defendant was the only manufacturer in Australia manufacturing the Split Sets. Mr Roger Moore, the Sales Director and General Manager of the Construction and Mining Group of the plaintiff described the “process of conducting business” between the plaintiff and the first defendant during those years.
60 The plaintiff would receive an order from a customer and would fax a purchase/requisition form to the first defendant. That form (entitled “shipment request”) specified the name of the customer, delivery address and transport instructions. The first defendant would manufacture the product, package it in accordance with the customer’s instructions and arrange for the nominated transport company to pick up the “shipment” for delivery.
61 During that period Mr Moore also held meetings, which he claimed were on a regular basis, although the defendant claimed they were irregular, with the first defendant’s representatives including J.V. Fergusson and later Mr Martin Crick. Mr Crick has been the managing director of the first defendant since 5 October 1993. Mr Moore gave evidence that those meetings covered various aspects of the manufacture and sale of Split Sets and included:
- potential markets for the sale of Split Sets and mining roof supports;
- long-term forecasting for the industry;
- specific requirements for existing purchasers of Split Sets;
- the financial circumstances of some of the plaintiff’s customers;
- current tenders in the industry and the plaintiff’s approach to the tenders;
- in the event that the plaintiff had lost a tender, information regarding the successful tenderer, the reasons for their success and strategies to improve the plaintiff’s approach to later tenders;
- customer trends relating to their current and future excavation plans and product needs;
Entry of Competitors into the Split Set Market
- general information regarding major customers.
62 In about January 1992 Australian National Industries Ltd (ANI) commenced manufacturing friction bolts in Newcastle, New South Wales. Australian Ground Support Pty Ltd (AGS) also commenced manufacturing friction bolts in Warrnambool, Victoria.
63 In January 1992 J.V. Fergusson and D.J. Fergusson requested a meeting with the plaintiff for the specific purpose of discussing the development of strategies to compete with ANI’s and AGS’s entry into the market.
64 The first defendant also sought advice from R.J. Ellicott QC, which was delivered in writing on 5 February 1992 (Ex 18). It is clear that the first defendant had sought from Ellicott QC advice as to whether clause 15 of the 1984 Agreement was enforceable.
65 The first defendant was advised that it could terminate the Agreement under clause 16 and “provided it did not use confidential information” could thereafter manufacture and sell a mining roof support. Ellicott QC advised that he understood ANI had not had any difficulty in independently designing an “identical” product and presumed that this could also be done by the first defendant.
Price Increases Rejected
66 The requested meeting with the plaintiff took place on 10 February 1992 in Victoria. Present at the meeting were Ken Hall, the Managing Director of the plaintiff, Ken Delahunty, the Financial Director of the plaintiff, Bob Jones the Marketing Managing of the plaintiff, David Starke, the Manager of the Split Set Division of the plaintiff, Reg Young, the Purchasing Manager of the plaintiff and J.V. Fergusson and D.J. Fergusson.
67 D.J. Fergusson gave evidence that at the meeting Mr Delahunty said that he had done some calculations and said “you guys are making too much money”. After this statement Mr Young said, “I have just approved Rollformers’ price increase as per the formula in the contract” to which Mr Delahunty replied, “well you can reverse that back to the 1991 pricing.” J.V. Fergusson said: “We’ve spent a lot money setting up the friction bolt operation. This is just unfair”. At this point the plaintiff’s representatives left the meeting.
68 D.J. Fergusson claimed that there was no discussion at this meeting in relation to developing a strategy to compete with the entry of ANI and AGS into the market. However it seems that D.J. Fergusson is at least mistaken about this having regard to the notes of the meeting annexed to J.V. Fergusson’s affidavit of 12 May 2000 in which there is recorded discussion about the entry into the market place of the competitors and a sample of a Split Set manufactured in China. It is then noted that “after lengthy discussion on market strategy, Ingersoll-Rand said that they would sell on service and quality, plus the large product liability insurance they carried”.
69 Other events which impacted upon the competition in the market place occurred during February/March 1992. Mr Starke resigned from the plaintiff and commenced employment with ANI. Additionally the plaintiff lost to ANI the supply of Split Sets to one of its customers, the Freeport Indonesian Copper Mine.
70 Also in February 1992 Mr Kraj-Krajowski of Western Mining Corporation (WMC) approached J.V. and D.J. Fergusson. Mr Kraj-Krajowski pointed out that there were now three manufacturers in Australia but that they were all in the east. He was of the view that WMC was disadvantaged in having to pay a premium for transporting the products from New South Wales to Western Australia. He asked J.V. and D.J. Fergusson to go to Western Australia to discuss setting up a manufacturing facility in that State.
71 J.V. and D.J. Fergusson flew to Western Australia in March 1992 and met with Mr Kraj-Krajowski. He informed Messrs Fergusson that if they were prepared to set up a manufacturing operation in Western Australia WMC would support them in such a venture. J.V. Fergusson said they were interested in such a project and D.J. Fergusson said they could be “up and running” in four to five months.
The Second Defendant is incorporated
72 D.J. Fergusson was employed by Portec in March 1983 as a tradesman and was employed with the first defendant from its date of incorporation in 1983. He completed a Mechanical Engineering Certificate at Meadowbank TAFE between 1981 and 1985.
73 In April 1992 D.J. Fergusson resigned his employment and directorship with the first defendant. In the same month he and his wife Wendy Mahoney became directors and shareholders of the then incorporated second defendant. The second defendant proceeded to assemble and build rollforming machinery in Sydney. It then transported that machinery to Western Australia.
74 J.V. Fergusson gave evidence that the first defendant “had no direct involvement in the setting up of Strata and it did not make any contribution to same. The costs of Strata were met entirely by its directors and shareholders from their own funds”(affd. 19 May 2000).
75 In June 1992 WMC called for tenders for the provision of friction stabilizing mining roof supports including Split Sets. At about this time the plaintiff approached the first defendant and a conversation took place between Mr Moore and J.V. Fergusson in which Mr Moore said:
Ingersoll wants to win the tender to Western Mining. We don’t stand a chance unless Rollformers sets up operations in Western Australia. Are you interested?
J.V. Fergusson said he would “consider it”.
76 Some days later J.V. Fergusson informed Mr Moore that he was prepared to go ahead and said: “I intend to use a separate business in Perth so that I can reduce payroll tax”. Mr Moore told him that it was “not a problem” and J.V. Fergusson then said: “I also want to enter into a new agreement which would get rid of the five year non-compete clause. The volume rebate should also go. I also want an agreement that the exclusivity goes both ways. I don’t want you contracting with any other manufacturer”.
77 To these requests Mr Moore said: “I can’t accept any changes to the current agreement. It’s not my decision to make. If you want to put up a proposed agreement - send it to me and I will get it to my people”. In another conversation between the two men in August 1992 Mr Moore claims that J.V. Fergusson informed him that the Perth Plant would become “operational” in about a month and that he had “structured it for tax purposes so that the business is run under the name of Strata Control. My son will be heading up to Perth to assist setting up the plant”.
78 Also in August 1992 J.V. Fergusson and Mr Crick introduced John Mercer to Mr Moore and said, “we are interviewing John to manage our Perth operations”. In the same month D.J. Fergusson telephoned Mr Ken Hall of the plaintiff and informed him that he had “set up another company to make friction bolts in Perth”. He informed him that the plaintiff would be “dealing with Strata Control Pty Ltd” and that he would send him the pricings.
79 D.J. Fergusson forwarded the pricing to Mr Hall who telephoned him a few days later and informed him that the plaintiff accepted his pricing for all products except the eight foot SS-46. Mr Hall informed D.J. Fergusson “we need to be competitive with this particular product”. A price was then negotiated and agreed.
80 As a result of these arrangements D.J. Fergusson telephoned Mr Kraj-Krajowski at WMC and said: “We are still coming to set up in Perth but we are going to supply you through Ingersoll because I feel we could better service your needs that way”.
81 J.V. Fergusson gave evidence that he was approached by Mr Hall in August 1992 who put forward a “business proposition which broadly required the involvement of my Company in setting up a manufacturing plant in Western Australia”.
82 In August 1992 the plaintiff was awarded the tender to supply Split Sets to WMC. A condition of this award was that a Split Set manufacturing facility be established in Perth. This enabled WMC to enjoy the elimination of what was referred to as the Nullabor penalty, the extra cost of transporting the products from Sydney to Perth.
A proposal for a new Agreement
83 On 6 November 1992 J.V. Fergusson as Manager of the first defendant wrote to Mr Hall. He advised Mr Hall that he had reviewed the existing Agreement for the purpose of bringing it into line “with market and economic changes” which had occurred during the previous twelve months.
84 J.V. Fergusson enclosed two draft Agreements, one between the plaintiff and the first defendant and a second one between the plaintiff and the second defendant. He made a number of points in his letter including the following:
(1) Having provided a dedicated Plant in Sydney and then provided the capital to establish the dedicated Perth Plant we consider that we have enhanced Ingersoll-Rand’s market image as a reliable supplier in both Eastern and Western regions of Australia and consequently ensured the survival of the Splitset in the Ingersoll-Rand camp. We feel it just and reasonable that we have an “exclusive” supply agreement while the contract is in force. Similarly we will honour the exclusivity of the product provided the exclusivity exists in both directions.
…………
(3) …..Whilst most of Western Mining Company products will come out of Strata Control it is understood that Sydney will continue to supply 33 and 39 tubes plus some 46 tubes and should therefore have a special price list in place.
(4) I cannot continue to support the price discount arrangement and ask that you cancel all outstanding and future liability to you. We have invested some $350,000 into assisting Strata Control to establish the Perth company and in doing so have reduced our sales by 40%. This has in fact reduced our capacity to absorb our overheads and forecasts for Sydney are not encouraging. In addition our selling prices have been reverted to January 1991 after the February 1992 meeting at Dandenong where you requested we cancel the previous prices on the basis that you had calculated that we were earning excessive profits. In an effort to keep both Companies in the market we have gone to our limit and it is now your turn to be fair and reasonable.
(5) The confidentiality clause in paragraph 11 has been modified to delete the obligation imposing a five year restriction on us to manufacture a similar product. We do not have any aspirations to become a marketing force in the mining industry but the technology has become public knowledge and we believe that clause 11 is not enforceable under Australian law. As has happened in USA we could see Ingersoll-Rand sell off the Australian rights to this product with catastrophic results to our company.
85 J.V. Fergusson stated that he believed the new Agreement was sufficient to guard the plaintiff’s interests but “must be made more equitable towards our company” and looked forward to Mr Hall’s comments and acceptance of his proposal.
86 The letter seemed to contain a glaring inconsistency with J.V. Fergusson’s sworn evidence that the first defendant did not make any contribution to the setting up of the second defendant. The letter claimed a rather large investment of $350,000 by the first defendant. Mr Douglas QC explored this with J.V. Fergusson in the following way:
Q. Was that a truthful statement?
A. Not really, not really.
Q. It wasn’t?
A. No. I had talked to David and we were looking for a building and I said that I would make the money available for him from our family assets, external of the factory. And I was - that whole paragraph was trying to say to Ingersoll, and I term, I use the term “we” as, unfortunately as a family sense. And I am saying to him we have invested or we have allowed, I said invested and maybe I took a licence there but we have, we have as a family got you out of trouble in Western Australia by making the, setting up the factory and its reduced our sales over here by 40 per cent. So it makes it very difficult to go on.
Q. But did you, that is did Industrial Rollformers provide $350,000...
A. No one provided. I had...
Q. just listen to the question - into assisting Strata Control to establish the Perth company?
A. No.
Q. Not at all?
A. Not at all, no.
Q. So, that was just an entire fiction, what you set out in that letter?
A. I was trying to impress Ken Hall of how much we had assisted his operation in trying to set up the Western Australia company.
Q. How did you come to seize upon the figure of $350,000?
A. I don’t think any real significance in the figure, I just thought that’s about what it would probably cost but it didn’t cost anything like that and it was also looking at a building.
(tr. 372-373)
87 On 10 November 1992 Mr Hall responded to J.V. Fergusson’s letter acknowledging it with thanks and advising him that the “submitted documents are under review and we will revert to you in the shortest possible time frame”. Notwithstanding this statement no further communication occurred between the plaintiff and the first defendant in respect of the proposed agreements.
88 J.V. Fergusson gave evidence that “the proposal which was put forward by me has never been taken up by Ingersoll. Until the time that the termination of the Agreement takes effect, my Company remains (as it has always been) a non-exclusive manufacturer and supplier to Ingersoll while Ingersoll remains free to appoint such suppliers as it may choose.”
89 He described the relationship between the first and second defendants as follows:
“Initially, after Strata was set up and operational, orders were placed by Ingersoll with Strata to make, supply and deliver quantities of the Split Set product in Western Australia…This procedure has now changed, such that Strata now sub-contracts with my Company.
90 Although in his original evidence no mention was made of any conversation with Mr Hall in October 1992, D.J. Fergusson swore an additional affidavit during the trial (8 June 2000) in which he gave evidence that Mr Hall telephoned and informed him that he was sending him a copy of the contract that the plaintiff had with the first defendant in a form that was between the plaintiff and the second defendant.
91 Mr Hall asked D.J. Fergusson “can you sign it and send it back to me?” D.J. Fergusson responded “no I can’t. Clause 15 in the old contract would be punitive against us” to which Mr Hall responded “that’s OK. How about you draft up your own agreement and we’ll have a look at it”. The draft agreement is that attached to the 6 November 1992 letter from J.V. Fergusson to Mr Hall.
92 In this later evidence D.J. Fergusson also gave evidence that in February 1997 Mr Landsberg visited Australia and attended the premises of Vinidex Pty Ltd at Smithfield with him. That company was a provider of materials relevant to a product that the defendants were manufacturing and selling to the plaintiff at the time.
93 Mr Landsberg and D.J. Fergusson arrived early for their appointment and whilst sitting in D.J. Fergusson’s motor vehicle they had a conversation in which D.J. Fergusson claims Mr Landsberg said “David, a lot of people at Ingersoll have been concerned for some time that Strata is set up in Perth without a contract and it seems to be causing a lot of unrest within the ranks. I would like to try and smooth things out”.
94 D.J. Fergusson gave evidence that he explained to Mr Landsberg what had occurred in 1992 and that he had sent a draft agreement to the plaintiff but had received no response. Mr Landsberg gave evidence that he had no recollection of this conversation (Tr. 315).
95 When the Perth Plant opened in late 1992 Mr Moore arranged an “open day” and organised for a large number of the plaintiff’s customers to visit the Plant. Those customers included WMC, Eltin Underground, Byrnecut Mining and Ausdrill. The expenses for the open day were shared equally between the plaintiff and the first defendant. It is also apparent that during the open day Mr Moore introduced J.V. Fergusson to the clients as the “Chairman of the first defendant” and “owner of Strata Control”. D.J. Fergusson was introduced to the customers as a member of the Fergusson family “who own the manufacturing business”.
96 The first defendant registered the business name Strata Control Systems (SCS) on 12 November 1993 with a commencement date of 26 December 1993. The principal place of business is recorded as 8 Carlingford Place, Smithfield. This is the registered office of the first defendant. SCS has been promoted in publications including Australia’s Mining Monthly, Australian Mining and The Miner as a well-established business, with progressive research and development programs and modern production plants in Sydney and Perth. Those publications also give an address in 3 Dampier Road, Welshpool, Western Australia for SCS and also refer to a Kalgoorlie branch. The Welshpool address is the current registered office of the second defendant.
97 Between 1993 and 1999 discussions were held between the plaintiff and the first defendant in relation to alternative ways of doing business. These included the possible franchising of the Split Set business to the first defendant, removing a burden of two corporate structures and providing the first defendant with rights to use the name Split Set.98 In February 1996 Mr Steven Drumheller, the Business Unit Manager of
Further Request for Price Increases
I-R visited Australia. Mr Crick raised the question of price increases with him and he requested Mr Crick to write to him.
99 On 20 February 1996 Mr Crick wrote to Mr Drumheller advising that prices had been “static” for five years and that a price increase was “essential” to enable the first defendant to provide the product and service to which I-R had become accustomed. Mr Crick requested a price increase of 10% in New South Wales and 7% in Western Australia to be effective from 1 March 1996. He also advised that the first defendant was prepared to hold those prices firm for twelve months.
100 Mr Drumheller responded by letter dated 29 February 1996 advising Mr Crick that as market prices had fallen over the previous five years it was “virtually impossible for Ingersoll-Rand to absorb any additional price at the present time”. He also advised that he would “certainly be open to reviewing the market pricing conditions in Australia on a quarterly basis to determine if price increases should become an option”. He made a commitment to formally review these market conditions during the last month of each quarter of the year. Notwithstanding this commitment it is apparent that the plaintiff did not agree to any further increases in price.
101 In December 1996 the first defendant raised with I-R the problems that were going to be experienced with the new competitive pressures that were being applied by ANI which the first defendant believed was obtaining equity in AGS. The first defendant raised once again the problem of two margins to support two organisations with the usual fixed cost structures having to be supported compared to the single structure of the competitors.
102 The first defendant warned that as ANI became manufacturers as well as marketers in Western Australia they would have a big advantage over the structure which supported the first defendant and the plaintiff. It warned that such a move by ANI would pose a very serious threat to the market share that the plaintiff and the first defendant enjoyed. It suggested that a strategy should be determined to counter that threat as there was enormous pressure on mining companies to reduce costs. The first defendant advocated for the plaintiff to choose it as a distributor in Australia should the plaintiff contemplate such an approach.
103 During the period 1993 to 1999 it is apparent that the first defendant raised its concerns about the competition in the market place with the plaintiff on a number of occasions.
Competition Intensifies
104 In January 1999 another company, Jennmar Pty Ltd (Jennmar) entered the Australian market as a manufacturer and supplier of products competing with the Split Set.
105 As the competition became more fierce, the plaintiff met with the first defendant to discuss the issues that were confronting each of them. One such meeting was on 16 June 1999 between Mr Crick and Mr Moore. During this meeting Mr Moore reported that he had recently met in Tokyo with Mr Geraghty, a senior executive of I-R. Mr Moore informed Mr Crick that Mr Geraghty had made it plain that I-R wanted the plaintiff to achieve an improved margin by reducing its costs by 10%.
106 Mr Moore reported that Mr Geraghty’s attitude was to get 10% out of the costs and if the first defendant would not do so he would be looking for another manufacturer who would manufacture the products more cheaply. Mr Moore also informed Mr Crick that if the first defendant went off to do its own thing it would be taken to Court and “who knows what might happen”.
107 Another meeting took place on 22 June 1999. During that meeting between Mr Moore and Messrs Crick and J.V. Fergusson, Mr Moore requested the first defendant to reduce its manufacturing costs to enable competition to be met. J.V. Fergusson informed Mr Moore that he did not believe that there was any room to move but they would have a look at it.
108 On 23 June 1999 Mr Moore wrote to Mr Crick and claimed that “to remain price competitive in the market we understand that we need to reduce our margin expectation (we need to share the pain)”. He continued:109 Mr Crick responded in writing to this letter on behalf of the first defendant on 30 June 1999. He advised Mr Moore that the first defendant had substantially reduced its margins over the years and accepted “the pain” even before the market experienced the present conditions. He continued, “our last price increase was in 1991 and we have absorbed every cost increase since then. We have discussed this with you many times over the years”. After detailing specific areas of cost reduction Mr Crick advised:
Our continuance in this business is a commitment from corporate and they have insisted that we reach resolution with you before the end of the month. If this is not possible they will pressure us to actively explore all avenues for reducing cost such that we can remain in the business.
Mr Moore concluded that it was his sincere hope that the first defendant could “achieve the cost levels that are necessary” and they could continue in their relationship.
110 In mid 1999 WMC once again called for tenders for the supply of Split Sets and other products. On 23 July 1999 the plaintiff submitted its tender documentation. In that letter, signed by Mr Jim Wright, the then manager of Ground Support division of the plaintiff, the following was stated:
For 16 years we have frequently been described by Ingersoll-Rand as a good quality low cost manufacturer. Holding costs for 8 years and providing excellent technical assistance at no extra cost justifies such a reputation. We cannot continue to provide this service by operating at a loss.
The increasing number of competitors in the market are manufacturers as well as marketers of product. With dwindling margins, it is extremely difficult to compete in a two company approach with two sets of corporate infrastructure etc. to recover.
We have discussed this many, many times in the past. We have always been led to believe that inevitably the Ground Support business will be franchised. We have waited patiently but to no avail. We believe it one of the few options available which would sensibly address the current market difficulties imposed from external conditions. We would be happy to dialogue once more on this issue.
WMC calls for tenders
111 The tender document went on to record that the plaintiff had encouraged factory inspections to observe that the plaintiff is committed to ensuring the safety, quality and reliability of its products and then:
Split Set Stabilizers are individually stamped for full traceability from the coil steel supplied by BHP through the forming and welding process and finally the dispatch details.
In August 1992 Ingersoll-Rand (Aust.) Ltd. were successful in being awarded the first WMC Split Set tender. Conditional upon the award was the opening of a Split Set Stabilizer manufacturing facility in Perth. This plant (Strata Control Pty Ltd) was opened within the month and fully operational by the end of September 1992. It is now the largest Friction Bolt manufacturing facility in Western Australia employing 26 staff.
Both of our major sub contract manufacturers, Industrial Rollformers Pty Ltd and their subsidiary Strata Control Pty Ltd are accredited to ISO 9002.
Industrial Rollformers have been our exclusive manufacturers since June 1983, initially they manufactured the Split Set Stabilizers, today however they produce a comprehensive range of ground support products for Ingersoll-Rand.
The opening of Strata Control in Perth was the catalyst to driving the end user price of Split Set Stabilizers down. …In September 92 the price was dramatically reduced…due to the elimination of the Nullabour penalty and the use of local cheaper galvanising costs. Today, nearly six years later the same product is offered at a further price reduction, demonstrating our commitment to managing cost.112 On 26 July 1999 the first defendant lodged its tender with WMC on the letterhead of SCS. Its description of the company profile was slightly different to that which had been put forward about it by the plaintiff in its tender. This is somewhat ironical because the defendants are seeking to adopt much of the description of the defendants put forward by the plaintiff in its tender to WMC whereas the plaintiff is relying upon the description given by the first defendant.
113 The plaintiff emphasised the absence of any delineation between the defendants in the first defendant’s tender. That description was:
Company Profile
Strata Control Systems (SCS) is a division of Industrial Rollformers Pty Ltd. The company was established in Sydney in 1983 to manufacture the 33 mm Split Set for Ingersoll-Rand (Aust.) Ltd. We have been manufacturing Split Sets supplied to I-R (A) Ltd for Western Mining Corporation since 1983.
In 1984 we developed the 46 mm Split Set to match the drill sizes used on the Jumbo Drill Rigs. This has now become the most commonly used Friction Bolt in Australia. We also commenced manufacturing the 39 mm Split Set at the same time.
In 1991, we were approached by WMC and asked to establish a manufacturing facility in Perth to overcome the impact of ever increasing freight cost. We subsequently established a plant in Perth, manufacturing Split Sets and plates which were sold to WMC through I-R (A) Ltd. Since 1992, we have supplied WMC mine sites through I-R (A) Ltd with more than 1.6 million 46 mm Split Sets from our Perth facilities.
Both the Sydney and Perth factories obtained Quality Assurance in 1995 under ISO 9002: 1994. We have maintained and improved this accreditation ever since. The QA system enables full traceability of Split Sets throughout the entire system back to the Heat No of the steel when manufactured at the Steel Mill.
114 The tender document then described the distribution outlets and the current practice that regular use products such as “Split Sets” are kept in inventory at both Sydney and Perth, at such levels to “enable dispatch within 1-2 days of receipt of order”. The letter advised that since the first defendant had “elected to market all products direct to mines in Australia” it was presently expanding its sales and marketing team with highly experienced specialist sales engineers.
115 In conclusion Mr Crick, the author of the letter, referred back to the commencement of the relationship with WMC in 1983 and stated “as a product developer, engineering and manufacturing supplier, we believe we are in position to continue “adding value to customer relationships. Now we have expanded our marketing and sales activity to include all products produced, the service, delivery and price benefits will reach levels unsurpassed in the industry”.
116 The letter did not make any delineation between the first defendant and the second defendant. Mr Crick agreed that the use of the term “we” was a reference to the first defendant. However when his attention was drawn to the sentence “we subsequently established a plant in Perth” as conveying that the first defendant had established the plant he resisted the suggestion in favour of the ubiquitous “licence” epithet. He said “it is a little bit of licence in a marketing environment” and that it was “poetic”. He explained the meaning of all of that as “if the customer can be encouraged to see our organisation in a substantive way it will be of appeal to that customer” (tr.423).
117 D.J. Fergusson’s explanation was quite similar. He said that it was “somewhat of a marketing person’s aspect” and because it was a “marketing person’s language” he did not object to it (tr.485).
118 In its tender to WMC the first defendant referred to “Split Sets” and provided the dimensions and tolerances of the “Split Set”. There was no mention of the “Strata Bolt”. The explanation that Mr Crick proffered for such a description was that the tender documentation from WMC sought technical information in relation to “Split Sets” and “to avoid confusion on their part in evaluating the tender I used their terminology”.
119 He said that he was not trying to use Split Sets as a name of the first defendant’s product. He said that he had very little time to submit the tender and that he ultimately gave WMC a “product announcement”. (Tr. 426-427). The product announcement to which Mr Crick was referring is the product announcement referred to later in this judgment. That announcement was made in September 1999.
Plaintiff given Notice of the first defendant’s friction bolt
120 In a conversation between Mr Crick and Mr Moore on 4 August 1999, confirmed by fax on 5 August 1999, the first defendant advised the plaintiff that “for the many reasons that we have discussed on various occasions in the past, Industrial Rollformers Pty Ltd has now decided to proceed with the manufacture and marketing of its own friction bolt”.
121 Other parts of the conversation on 4 August of which this fax purported to be confirmation was the subject of dispute. Mr Moore gave evidence that he said to Mr Crick, “You know that this will mean you are testing the agreement and you will find yourselves in a legal battle” to which Mr Crick responded, “Two QCs are working on it and are confident”. Mr Moore then said “Does this mean you will be terminating the agreement” to which Mr Crick responded “No need. It’s worthless”. Mr Crick denied these parts of the conversation.
122 On 19 August 1999 Mr Moore suggested to Mr Crick that the first defendant should make an offer to buy the plaintiff’s business “for say US$1 million”. Mr Moore advised Mr Crick that I-R would not take anything less. Mr Moore suggested that the first defendant could use the plaintiff’s stocks and “only pay as you use them, transfer all the contracts, no one is damaged and the business will not fall into opposition hands. You can pay it over 5 years. I’m pretty sure the US would grab that sort of offer”.
123 As a result of this discussion J.V. Fergusson agreed to put forward such an offer to the plaintiff and did so on 20 August 1999. Three days later Mr Moore informed Mr Crick that the offer was being put to the legal department.
124 It was not until 3 September 1999 that Mr Moore spoke further to Mr Crick about this matter. Mr Crick advised that if there was no response from the United States by 9 am on 6 September 1999 the offer would be withdrawn and they “would go alone”.
125 On 6 September 1999 Mr Moore telephoned Mr Crick and informed him that he had not heard from the US but asked for an extension of time. Mr Crick advised that they could have until noon that day to have a written “in principle” agreement or the deal was off. This did not occur and at 1 pm on 6 September Mr Crick advised that the offer was withdrawn but the first defendant was open to any counter offers that may be proposed.
Approach to employees
126 On 19 August 1999 Mr Moore attended a meeting at the first defendant’s office and had a conversation with J.V. Fergusson and Mr Crick. Mr Crick said to Mr Moore, “I want you to know that we are approaching Jim Wright and Lyndon Mills to join us”. Mr Moore in his affidavit of 9 December 1999 swore that he said in response “What? I don’t think they would want to join you”. In his cross examination Mr Moore agreed that he said “I don’t think Lyndon Mills will come to you, Jim Wright is broke, he needs a deposit on a house, offer him a bonus and a sign on fee.”
127 Mr Wright commenced employment with the plaintiff in about February 1988 after spending eighteen years with Mt Isa Mines as an underground miner. Mr Mills only commenced his employment with the plaintiff in December 1997. He had previously worked as an underground mine foreman for WMC.
128 Mr Wright had a conversation with Mr Moore on 3 September 1999 in which he informed him that he had been offered a position with the first defendant and he was considering resigning. Mr Wright resigned on 6 September 1999 and Mr Mills resigned on 7 September 1999.
129 On 8 September 1999 Mr Moore attended WMC to make the plaintiff’s presentation of its tender to WMC. It is not clear when the plaintiff became aware that the first defendant had tendered for the WMC contract but when Mr Moore attended the WMC offices he noted that Mr Wright had attended and signed the visitor’s book for the first defendant’s presentation which apparently preceded the plaintiff’s presentation. Mr Moore was advised by the purchasing superintendent for WMC that Mr Wright had attended the first defendant’s presentation. This was not denied by Mr Wright.
130 Also in early September 1999 Mr Moore advised Mr Crick that I-R was proposing to send someone to Australia to discuss the possible sale to the first defendant. A condition of such proposal was that the first defendant withdrew the WMC tender bid. The first defendant declined to withdraw the WMC tender bid.131 On 29 September 1999 the first defendant made an announcement. It was in the following terms:
The first defendant announces the Strata Bolt
Dear Customer
Since 1983, Strata Control Systems (SCS) have been manufacturing Split Sets for Ingersoll-Rand (Australia) Ltd. During the 1980’s SCS developed the 46 mm Split Set which is now the most widely used friction bolt in Australia. SCS also manufacture split set drivers, combi plates, strata strap and strata plates. Of more recent years SCS re-engineered the CT bolt for use in mining and are manufacturing the products in Australia.
SCS have now released its own friction bolt, the Strata-Bolt, manufactured to the same rigorous standards and specifications and can offer the benefits of “straight from the manufacturer to you”. Strata-Bolt is available in all diameters, 33mm, 39 mm and 46 mm - both black and galvanised with plates to match.
SCS can also offer you a full range of other bolts, resin bolts, rib bolts, hi-load plates, resins, cable bolts and an array of ancillary products such as barrel & wedge, flat plates, mesh, spanners, pull test kits and many more.
We are pleased to announce that Jim Wright and Lyndon Mills formerly of Ingersoll-Rand have joined SCS as Regional Support Managers. Jim is located in Sydney and is responsible for Strata-bolt and CT bolt technical issues as well as the development of Eastern States markets. Lyndon is located in Kalgoorlie and will service and develop the West Australian market.
The announcement went on to refer to other contacts including D.J. Fergusson and Jeff Fergusson. This announcement was signed by Martin Crick as Managing Director and was issued on SCS letterhead referred to as “a division of Industrial Rollformers Pty Ltd” at 8 Carlingford Place, Smithfield NSW.
132 J.V. Fergusson agreed that an inference available from this announcement is that the Strata Bolt is made in accordance with the same standards and specifications as the plaintiff’s Split Set (tr.399).
133 Mr Crick described the announcement as a “marketing letter”. He agreed that the essence of the message in the announcement is that the Strata Bolt was manufactured to the same rigorous standards and specifications as the plaintiff’s Split Set. (tr. 421).
134 D.J. Fergusson did not agree. He gave evidence that he regarded the reference in the announcement to the “same rigorous standards and specifications” as a reference to “galvanizing specifications, standards such as quality standards, galvanizing standards, things like that” and “material standards and specifications” (tr.487). What he wanted to convey was that it was a product that would do a “similar job” to the plaintiff’s Split Set (tr. 489).135 On 17 November 1999 SCS was advised that it had been successful in its tender bid and was awarded a contract with WMC for the supply of ground support for a period of three years from 1 January 2000.
First defendant wins WMC tender
The 1984 Agreement is terminated
136 On 29 November 1999 the first defendant wrote to the plaintiff and advised that “pursuant to provisions of clause 16” of the 1984 Agreement the first defendant “hereby gives formal notice terminating that Agreement”. The letter noted that by virtue of the notice the Agreement “shall come to an end after the passing of 180 days of the date hereof”. That date was 29 May 2000.
137 Also on 29 November 1999 the first defendant gave notice to the plaintiff that as from 1 January 2000 the prices of the products supplied to the plaintiff were to be adjusted to prices contained in a price list enclosed with the letter. The first defendant also advised the plaintiff that it would be supplying the steel for the manufacture and production of Split Sets as referred in paragraphs 5.1 and 6(c) of the 1984 Agreement.
Proceedings are commenced/Interlocutory Restraints
138 On 10 December 1999 the plaintiff commenced these proceedings by way of Summons. When the matter came before the Court on 16 December 1999, Hodgson CJ in Eq made orders by consent that upon the plaintiff giving the usual undertaking as to damages the first and second defendants were restrained from making a mining roof support similar in design to the mining roof support covered by the 1984 Agreement. Such prohibition on manufacture did not apply to contracts entered into on or prior to Friday 10 December 1999 except in relation to certain options under those Agreements.
139 The first and second defendants gave undertakings to the Court to keep accounts in relation to the manufacture and sale of mining roof supports and were restrained from doing anything to damage or destroy the plaintiff’s ability to sell Split Sets in Australia. The first defendant was also restrained from representing that it had developed the 46 mm Split Set, that it had manufactured its own Strata Bolt to the same standards and specifications of the Split Set sold by the plaintiff or that it had the sponsorship and approval from the plaintiff to manufacture the Strata Bolt.
140 During other interlocutory hearings the parties agreed to further orders including restraining the first and second defendants from soliciting, approaching or enticing away the plaintiff’s employees.
141 The matter was in my Expedition list on 18 February 2000 when by consent I referred the matter to the Duty Judge, Hamilton J, who heard the interlocutory application for injunctive relief on 4, 7, 8 and 9 February 2000 when he reserved his judgment. Hamilton J delivered an ex tempore judgment on 11 February 2000 and stood the matter over to 14 February for short minutes and further consideration on the question of costs.
142 After a further hearing on 14 February 2000, Hamilton J made orders that up until 29 May 2000 or the determination of the proceedings at first instance, whichever first occurred, and upon various undertakings given by both the plaintiff and the defendants, the defendants were restrained from making the relevant mining roof support except as authorised by the plaintiff. On 15 February 2000 Hamilton J delivered an ex tempore judgment in respect of the question of costs and the matter was referred back to my Expedition list.
143 The final hearing of the matter proceeded before me between 29 May and 16 June 2000, excluding 14 June 2000, when Mr F.M. Douglas QC, leading Mr D.T Kell of Counsel, appeared for the plaintiff/cross defendant and Mr D.E. Grieve QC, leading Mr M.P. Sindone of Counsel, appeared for the defendants/ cross claimant. On 29 May 2000 I made further orders in the same form as those made by Hamilton J until further order.144 The plaintiff makes a number of claims against the first defendant:
Plaintiff’s case against the First Defendant
(a) for breach of clause 15 of the 1984 Agreement by reason of its manufacture of a similar mining roof support in the form of the Strata Bolt;
(b) for breaches of clause 12 of the 1984 Agreement through misuse of confidential information by its manufacture, promotion and sale of the Strata Bolt;
(c) for breaches of alleged implied terms of the 1984 Agreement by soliciting and/or enticing away the plaintiff’s employees, James Wright and Lyndon Mills;
(d) for breach of an equitable duty of confidence by using the plaintiff’s confidential information in its manufacture, promotion and sale of its Strata Bolt and in its WMC tender bid;
(e) for breaches of s 52 of the Trade Practices Act 1974 by reason of its alleged misleading and deceptive false representations that:
(i) it had developed the 46 mm Split Set;
(ii) there were no restraints on the first defendant’s ability to supply its Strata Bolt direct to its customers; and
(iii) it had the sponsorship and approval of the plaintiff to manufacture the Strata Bolt or any product similar to the plaintiff’s Split Set.
Plaintiff’s case against the Second Defendant
145 The plaintiff’s case against the second defendant includes the same claims based on a claim that by its conduct the second defendant adopted the terms of the 1984 Agreement. The plaintiff also claims that the second defendant is estopped from denying such adoption. Alternatively the plaintiff claims that at all relevant times the second defendant acted as agent for the first defendant. There is an additional claim that the second defendant induced the first defendant to breach the 1984 Agreement.
146 The plaintiff seeks declarations and final orders restraining each of the defendants for a period of five years from the 29 May 2000 from making a mining roof support which is similar in design to the mining roof support covered by the 1984 Agreement. It also seeks restraining orders on the use or disclosure of any confidential information and damages.147 The first defendant by Cross Claim alleges that the restraint of trade purportedly imposed by clause 15 of the 1984 Agreement is against public policy. It also makes a claim for damages in the sum of $2,676,433 for an alleged breach by the plaintiff of the 1984 Agreement, as amended by the 1986 Agreement, in failing to pay the Cross Claimant’s increases in prices to which it was entitled on and after 1 January 1992 to the termination of the contract on 29 May 2000.
Cross Claim
Confidential Information.
148 The plaintiff’s claims against the defendants place heavy reliance upon, and are in many respects dependent upon, claims that the defendants have had access to and were provided with what the plaintiff claims is confidential information in “the nature of a trade secret” (par. 89 Statement of Claim).
149 The trade secrets or confidential information to which the plaintiff claims the defendants have had access or have been provided with are:
(1) Drawing No. SSD001B02E, being a drawing and specification of the SS-33; Drawing No. SSD001B01E being drawing and specification of the SS-39; and Drawing No. SSD001B09E being drawing and specification of the SS-46 and various revisions. The defendants admit that these drawings were provided to them. ( the Plaintiff’s Drawings)
(2) Quality assurance and inspection reports prepared by Inter-State Inspection Services Pty Ltd (ISIS) relating to the manufacture of the Split Sets by the defendants for the plaintiff. The defendants admitted that some of these reports were made available to them. ( the ISIS material)
(3) Information relating to the research, development, manufacture and use of the Split Sets, including information relating to the results of product testing in other parts of the world and resolution of manufacturing problems. The defendants admitted that some of the information was made available to them. ( Research & Development Information)
(4) The names and addresses of customers and the identity of the customers’ employees who were responsible for purchases from the plaintiff. The defendants admitted they received the names and addresses but did not admit receipt of the employees identities. ( Customers’ details )
(5) The purchasing requirements, business plans, and/or financial circumstances of the plaintiff’s customers. The defendants deny this information was made available to them. ( Customer Information )
(6) Information regarding the marketing of the Split Sets by the plaintiff. The defendants deny this information was made available to them. ( Marketing Information )
(7) The pricing and volume of the orders placed by the plaintiff’s customers. The defendants admitted receiving the detail of the volume of orders but denied they received the pricing. ( Pricing and Orders )
(8) Procedures for manufacturing the Split Sets including methods of improvement of procedures. The defendants deny this was provided to them by the plaintiff. ( Manufacturing Information )
150 The defendants deny the information is confidential and claim that such information is in the public domain. In this regard the defendants relied upon the production by ANI, AGS and Jennmar of what is claimed to be a product “identical” to the Split Set. Additionally the defendants claimed that the identity of the plaintiff’s customers were “well-known” in the mining industry.
151 Gowans J in Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd (1967) VR 37 reviewed a number of English cases in relation to the identification of a “trade secret”. Helmore v Smith [1887], 35 Ch.D. 449; Herbert Morris v Saxelby [1916] 1 AC 688; Amber Size Chemical Co v Menzel [1913] 2 Ch.D 239; B.O. Morris Ltd v Gillman [1943] 60 RPC 20; Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 R.P.C. 203 (CA); Terrapin Ltd v Builders Supply Co (Hayes) Ltd [1960] RPC 128; Mustad & Son v Allcock & Son Ltd and Dosen (1964) 1WLR 109; Commercial Plastics v Vincent (1964) 3 WLR 820; Cranleigh Precision Engineering Ltd v Bryant [1964] 1 WLR 1293; Printers and Finishers Ltd v Holloway [1965] R.P.C. 239. Of that review Gowans J said at p 49:
152 His Honour also helpfully set out the relevant statements in the American Law in the Restatement of the Law of Torts (1st ed.), art. 757 in which the following appears under the heading “Comment”:
There is very little in these English cases to enable one to identify a “trade secret”. But some collation of the characteristics may be attempted, without trying to make it an exhaustive statement. Its subject-matter may not be a process in common use, or something which is public property and public knowledge, but if it is the result of work done by the maker upon materials which may be available for the use of anybody, so as to achieve a result which can only be produced by somebody who goes through the same process, it will be sufficient. All of its separate features may have been published, or capable of being ascertained by actual inspection by any member of the public, but if the whole result has not been achieved, and could not be achieved, except by someone going through the same kind of process as the owner, it will not fail to qualify by reason of the publication. It may derive from the maker in another country without losing its character, if it is used, or entitled to be used, by the owner alone in the country in which the owner operates. There is no suggestion of the need for invention (per Gowans J at 49).
Secrecy . The subject-matter of a trade secret must be secret. Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as his secret. Matters which are completely disclosed by the goods which one markets, cannot be his secret. Substantially, a trade secret is known only in the particular business in which it is used. It is not requisite that only the proprietor of the business know it. He may, without losing his protection, communicate it to employees involved in its use. He may likewise communicate it to others pledged to secrecy. Others may also know of it independently, as, for example, when they have discovered the formula by independent invention and are keeping it secret. Nevertheless, a substantial element of secrecy must exist, so that, except by the use of improper means, there would be difficulty in acquiring the information. An exact definition of a trade secret is not possible. Some factors to be considered in determining whether given information is one’s trade secret are: (1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
Novelty and prior art. A trade secret may be a device or process which is patentable; but it need not be that. It may be a device or process which is clearly anticipated in the prior art or one which is merely a mechanical improvement that a good mechanic can make. Novelty and invention are not requisite for a trade secret as they are for patentability. These requirements are essential to patentability because a patent protects against unlicensed use of the patented device or process even by one who discovers it properly through independent research. The patent monopoly is a reward to the inventor. But such is not the case with a trade secret. Its protection is not based on a policy of rewarding or otherwise encouraging the development of secret processes or devices. The protection is merely against breach of faith and reprehensible means of learning another’s secret. For this limited protection it is not appropriate to require also the kind of novelty and invention which is a requisite of patentability.
The ISIS material
153 This material is contained in Exhibit A Confidential (RM5) and Exhibit B Confidential (RM4 and 5). It consists of a number of reports of inspections carried out by ISIS from the time it was appointed in 1987 up until 1999.
154 Although there are some documents within this material which are in general terms, they deal in the main with certain problems that have arisen and been identified from time to time in the manufacturing of the plaintiff’s Split Sets. The detail contained in the reports include specific reference to the specifications and tolerances of the plaintiff’s Split Sets, including the plaintiff’s requirements for compliance with those tolerances.
Research and Development Information (R and D)
155 The R and D information is contained in Exhibit A Confidential (RM3), Exhibit B Confidential (RM4, 5 and 6), and Exhibit D Confidential. This includes the ISIS material already referred to with additional ISIS reports and a bundle of documents which include internal I-R memoranda, drawings and photographs (Exhibit A Confidential (RM3)).
156 The additional ISIS reports in Exhibit B Confidential (RM6) relate to the provision of the incorrect steel and tests that were conducted on the product produced by the defendants. Such tests have been the subject of evidence from Mr Landsberg and included what is known as pull testing (Affid. T.J. Landsberg 12 May, 2000 par. 27).
157 The documents included in Exhibit A Confidential (RM3) have been the subject of detailed analyses by J.V. Fergusson in his affidavit. He gave evidence that some of the documents had not been received by him from the plaintiff but also described the content as being “general” in their terms and not containing any sensitive information.
158 Although some of these claims may be reasonable, there are drawings within this material particularly at pps. 55 - 57 which detail the plaintiff’s specifications including details of tolerances required for the production of the Split Set. I will deal with this later in the judgment in assessing the respective claims in relation to the plaintiff’s drawings.
Customer Information
159 This is said to be contained in Exhibit A Confidential (RM7) and paragraphs 27 and 28 of Mr Moore’s affidavit of 9 December 1999.
160 The content of paragraph 28 has not been denied by the defendants and I have already referred to the topics Mr Moore claimed he discussed with the defendants at his regular monthly meetings. The content of paragraph 28 is relatively limited, particularly when it is remembered that the parties have been in a commercial relationship for the last 17 years.
Pricing and Orders
161 Exhibit A Confidential (RM6) contains the detail of the volume of product ordered by various clients. This much is admitted by the defendants as having been received by them.
162 The Shipment Requests upon which the volume of orders was identified contained no information as to the pricing structures imposed on the various customers. To this extent it does seem that the defendants’ denial that it received such information, in the circumstance of a lack of any other evidence, has been made good. However if such information has been provided to the defendants I am satisfied that it is confidential to the plaintiff and should not be used by the defendants.163 This particular claim made by the plaintiff was not particularised in the pleading. The conversations between the plaintiff and the defendants referred to in paragraph 28 of Mr Moore’s affidavit of 9 December 1999, may have an element of marketing within them but I am not aware of any evidence that would fit within what the plaintiff claims was the information regarding the marketing of the plaintiff’s product.
Marketing Information
Manufacturing Information
164 This material is contained in part in Ex. A Confidential (RM3) to which reference has already been made. It is clear from that exhibit that J.V. Fergusson travelled to the USA to visit I-R’s manufacturers’ plants in California and Pennsylvania in his role with Portec in 1982. It is also clear that he was provided with information, both in his role with Portec and his role with the first defendant, that included the dimensions, specifications and tolerances of the plaintiff’s Split Set.
165 Although it has been referred to as material relating to the defendants’ procedures for manufacturing products, including methods of improvement of procedures, it is obvious that the first defendant, and its predecessor Portec, liaised with the plaintiff in adjusting the manufacturing process to ensure compliance with the plaintiff’s required dimensions, specifications and tolerances of its Split Sets.
166 J.V. Fergusson agreed that there was an ongoing process whereby quality control procedures were provided together with the drawings and specifications. J.V. Fergusson described it as a two-way street over many years (Tr. 346; 353).
167 Much of the material within the plaintiff’s confidentiality claim, the ISIS Material, the R & D Information and the Plaintiff’s Drawings, have been carefully guarded by the plaintiff. Evidence of this includes:
· the plaintiff marking certain of its documents “confidential”;
· the plaintiff’s requirement for all employees, at the commencement of their employment with the plaintiff, to sign a Code of Conduct entitled “Our Code of conduct - A Guide to Legal and Ethical Standards for All Employees”. This Code contained a section, “Confidential Information”, examples of which include “technical information” including “design and drawings”; and “engineering and manufacturing know-how and processes”.
· the requirement for subcontractors to either enter into an agreement containing a provision similar to clause 12 of the 1984 Agreement or signing what has been referred to as a confidentiality or secrecy agreement;
· instructions to employees that certain materials were confidential and were to be kept confidential;
· exercising “supervisory control” over the manufacture of the Split Sets by requiring the manufacturer (a) to comply with its quality assurance code and (b) to agree to audits and testing of the product, and accepting directions for changes to the manufacturing process from the plaintiff;
· the careful creation of drawings to be provided to customers in a manner which the plaintiff believed could not be used to manufacture the Split Sets; and
· the inclusion of a provision in its purchase orders which stated that a standard term and condition of purchase was an acknowledgment by the purchaser that the “order and all information” made available “relating in any way thereto” constituted confidential trade information and secrets (Ex. 11).
168 The plaintiff claims that the Split Set has a number of key design elements which are critical to its successful operation. Those elements include the type and grade of steel used to manufacture the Split Set (the Steel), and the specifications and tolerances of the Split Set (the Plaintiff’s drawings).
169 The plaintiff also claims that these key design elements have been developed by it at its cost through extensive analyses, laboratory testing, field testing and underground testing in different mines and under different conditions. It is these key elements that the plaintiff claims are set out in the technical drawings and subsequent revision of the drawing which were provided to the defendants.
The Steel
170 Mr Landsberg gave evidence that the type and grade of the steel determines the strength and tensile nature of the Split Set. Dr Peter Gilmour Fuller, an expert called by the defendants, agreed with this evidence. Mr Landsberg was cross examined about his claim that the steel type and grade is confidential to I-R and the plaintiff. He agreed that:
· a metallurgist could determine the composition of the steel used in the Split Set by use of a mass spectrometer in a process known as spectrographic analyses of the Split Set;
· such a metallurgist could ascertain the composition of the steel with precision; and
· such an ascertainment could be achieved within a matter of days.
(Tr.222)
171 Another matter relevant to this claim is that Mr Halliday, another expert called by the defendant, telephoned George Ward, a wholly owned subsidiary of BHP, in May 2000 and was advised by that company:
· of the identity of the steel used in the Split Set and the identity of an identical specification used by a third party and the detail (with copy faxed to him) of test certificates in relation to both types of steel;
· it supplied the steel used in the plaintiff’s Split Set; and
· that there was no restriction on it supplying that steel to the public.
172 Upon further cross examination in relation to any impediment to the public obtaining this information from BHP or George Ward, Mr Landsberg gave evidence that he would need to go back to the “documents” to determine whether “BHP agreed to keep it confidential because it was a negotiated grade” (Tr. 286). No such document was produced in evidence.
The Plaintiff’s drawings
173 It seems to me that the ultimate decision on whether much of this material is confidential within the meaning of clause 12 of the 1984 Agreement, or generally, will depend upon the decision I make in relation to the plaintiff’s drawings, more particularly, the specifications and tolerances contained thereon. If that information is not confidential information then it seems to me that much of the plaintiff’s case in relation to these other matters will fall away. If however I am of the view that they are confidential then, at least, the ISIS material and the R & D information will probably fall within the same category.
174 The drawings of the tube of the Split Set of each of the SS-33, SS-39 and SS-46 were revised at least 12, 25 and 13 times respectively. All of these revisions were prepared by Mr Landsberg between October 1982 and February 1998. Some revisions related to design improvements others related to administrative matters such as a company name change. Some revisions were made by hand and others were made with the aid of a computer, otherwise referred to as computer aided drawings or CADs.
175 From the evidence (affd. Thomas Landsberg 12/5/2000 par. 35; affd. James Fergusson 19.5.2000 par. 51(h)) it is clear that certain technical drawings and revisions were provided to the first defendant. There is some dispute between the parties as to whether revision F of the SS-46 drawing which was dated 23 March 1984 had been provided to the first defendant.
176 D.J. Fergusson gave evidence that drawings SSD001B02E, Revision AC in relation to model SS-33, SSD001B01E, Revision AC in relation to model SS-39 and SSD001B09E, Revision AB in relation to model SS-46, all of which were marked “confidential”, were the last revisions provided to the first defendant by the plaintiff in about April 1991 and had been used by it since the date of provision. Those drawings have the same specifications and tolerances as the drawings in Ex. B -Confidential (RM 1 and 3) and Annexure J to Mr Landsberg’s affidavit.
177 Mr Grieve QC took Mr Landsberg carefully through the specifications and tolerances of the various components of the Split Set contained in the plaintiff’s drawings including the ring stand off (Tr. 267- 270); the outer ring gap (Tr. 270 - 273); the ring wire (Tr. 273 - 276); the taper tip diameter (Tr. 276 - 277); the length tolerance (Tr. 277 - 281); and the outer diameter (Tr. 293 - 294).
178 The only matters referred to in the previous paragraph upon which Mr Landsberg was cross examined that the defendants’ expert, Dr Fuller, gave evidence were the diameter and the length tolerance. Dr Fuller agreed that the way in which the Split Set performs, both in terms of its ability to be easily installed and its performance when installed, depends upon adherence to specifications which would achieve maximum results (Tr. 577).
Ring Stand Off179 The ring stand off was designed by Dr Scott to accommodate the deforming forces which are impacted upon the bottom end of the friction bolt when the shoulder of the driver makes contact with it in order to drive the tube into the pre-drilled bore hole.
180 Mr Landsberg gave evidence that the tolerance for the ring stand off specified in the plaintiff’s drawings is critical to the functionality of the Split Set. He said that the purpose of the ring stand off is to have the impact occur on the end of the tube and not on the weld. It is designed to avoid the ring stand off being crushed to the point which creates a flat spot on the ring.
181 If the ring stand off were to be crushed on the shallow side the driver tool would be impacting on the weld, which is a relatively brittle component, and in those circumstances the weld may be vulnerable to failure.
182 At the longer side the concern is to ensure buckling does not occur to the point where the tube will be deformed so as to protrude inside the hole. This could cause the driver tool to be permanently lodged inside the tube.
183 If the plaintiff’s specified tolerances for the ring stand off are not complied with the chances of such problems are greater. Mr Landsberg could not put a figure or percentage on these chances and stated that it was an “engineering judgment”. He said that such dimensions and tolerances were reached based on much laboratory and field testing. For this reason Mr Landsberg rejected the suggestion that any worker skilled in the art could perform tests over a number of days to determine the likelihood of deformation.
Outer Ring Gap184 The outer ring gap is at the outer diameter of the ring. There is what is known as a “sliding requirement” during the manufacturing process. The process of inserting the ring on the tube is achieved using a slide on which fifty rings are placed. The slide is a thin piece of metal over which the ring gap slides and is pressed onto the tube. The tolerances have to be such as to allow it to slide easily.
185 The aim is to have the weld attached to as much of the ring wire as possible. If there is a very large gap it could jeopardise the overall strength of the flange. It is the inner ring gap, rather than the outer ring gap, that is critical and when the outer ring gap is at the required tolerance the inner ring gap meets the sliding requirement as well as limiting the gap to a minimum. Mr Landsberg said that this protects the strength and integrity of the flange.
Ring Wire186 Mr Landsberg used this item to make the point that it is important to consider the Split Set as a system in which there is an interaction between different components of different elements of the design. He said that it was not appropriate to analyse one aspect of the Split Set in a vacuum.
187 He claimed “absolutely” that the precise location of the ring and therefore the ring wire specification, within a fraction of a millimetre had an impact upon the “functionality” of the Split Set.
Taper Tip Diameter188 The end of the tube of the Split Set is tapered to enable the operator inserting the bolt into the bore hole to see the top end of the tube entering the bore hole thereby assisting its installation.
189 If the tapered tip is too small it becomes vulnerable as the bolt is being installed. Mr Landsberg gave the example of pushing hard on a pencil to the point that it breaks. He said it is an important dimension and the tolerances are essential to the proper functioning of the bolt and rejected the suggestion that this was not so.
The Length Tolerance190 Dr Fuller expressed the opinion that the tolerances on the length of the friction bolt can be broad but that a maximum limit must be known. He was of the view that as long as the miner bores a hole longer than the tube, the friction bolt length is not crucial. In his opinion tolerances in relation to length are not important.
191 Mr Landsberg disagreed and gave evidence that the length of the bolt has a direct application on the holding force that the bolt will exert on a given rock face. The tolerances are therefore significant. A circumstance in which the length of the bolt becomes increasingly important is if the ground immediately above the roof is not well-structured.
Outer Diameter192 Dr Fuller expressed the opinion that the diameter must have a small tolerance. Such a small tolerance assisted in developing maximum friction and “in the ground performance”. He was of the view that so long as the miner knows what the diameter of the friction bolt is and each friction bolt has a consistent diameter, consistent in the ground performance can be achieved. He was of the view that consistency is achieved in the manufacturing process and has nothing to do with the diameter of the friction bolt. He concluded that the actual diameter is not as important as the consistency in manufacture of a specified diameter.
193 Mr Landsberg gave evidence that the outer diameter of the product will vary from day to day, even from hour to hour in the manufacturing process. It will vary in its stiffness and thickness and vibrations in the plant will cause the adjustments of rolls to vary. The common practice would be to measure the product about every hour so as to be sure that it does not stray from the specification.
194 The product is manufactured to a diameter larger than that of the hole into which it must be inserted. It is that difference between the two diameters that establishes the friction holding force in the rock and that is critical to its performance.
195 Mr Landsberg was at pains on a number of occasions to stress in his evidence the importance of considering that the dimensions, specifications and tolerances of the Split Set had to be viewed as a system rather than analysing each in a vacuum. Dr Fuller conceded that the Split Set operates as a system of many parameters acting together and is not solely dependent on outside diameter (Tr. 580).
196 Ultimately the differences between Dr Fuller and Mr Landsberg in relation to the attributes of the Split Set were few. Dr Fuller’s opinion in relation to the outer diameter was ultimately qualified in his evidence by his concession that the Split Set operates as a system. So far as the other matters upon which Mr Landsberg expressed an opinion and Dr Fuller did not, I am of the view that I should accept Mr Landsberg’s evidence. This is so notwithstanding the careful cross examination of him by Mr Grieve QC and the submissions put to suggest that some of those opinions should be rejected.
Information on the Internet
197 The defendants resist the plaintiff’s claim that the contents of its technical drawings are now confidential, although little issue is raised that they were originally confidential. In support of this claim D.J. Fergusson gave evidence that he had searched the Internet and found a number of Web-sites which he claimed contain information relating to Split Sets. These were the Steeldale SCS, Rock Technology, Jennmar, Thiessen and Skema Web-sites.
198 D.J. Fergusson gave evidence that a document down loaded from the Thiessen Web-site, which he claimed was a manufacturer of Split Sets for I-R, contains “all the relevant dimensions and technical data” for the SS-33, SS-39 and SS-46. He also claimed that the printout from the Skema Web-site, a manufacturer of friction bolts in South Africa, contains the same diameter tolerances, thickness of material and composition of material as that specified for the plaintiff’s SS-33, SS-39 and SS-46.
199 The Steeldale SCS Web-site information described the Split Sets and their installation in general terms together with a very short overview of the way in which they operate. Although there is reference to the recommended diameter of the bore hole into which the Split Set is installed and some dimensions of the plate, there is no information at all and no specific reference to the specifications or tolerances of the Split Set tube.
200 The Rock Technology Web-site information reports on investigations in October 1997 performed by that company at Roxby Downs to evaluate the performance of and compare the Hardi Friction Rock Stabilizer with the I-R Split Set. The report refers to results in relation to the use of a range of bit sizes, bore hole sizes and rock types. Once again there is no information at all in relation to the specifications or tolerances of the Split Set tube.
201 The Jennmar Web-site information is really of a promotional nature and there is no information at all in relation to the specifications or tolerances of the Split Set.
202 Thiessen is not currently a manufacturer but is a distributor of Split Sets for I-R in Canada. The Thiessen Web-site contains a drawing of the Split Set and two tables, one dealing with dimensions and the other with technical data. The dimensions provided are for each of the SS-33, SS-39 and SS-46 and list taper diameter, taper length, slot width, steel thickness and bolt size. All dimensions are stated to be “nominal”.
203 The Skema Web-site information contains a table entitled “measurements and sizes”. The diameters of the SS-33, SS-39 and SS-46 are contained within that table.
204 Mr Grieve QC cross examined the plaintiff’s quality assurance/control subcontractor, Mr Paterson from ISIS, in relation to the information in the Thiessen and Skema Web-sites. The following evidence was given:
Q The fact of the matter is, is it not, that the outside diameter dimension that is shown in the Ingersoll drawing in Exhibit B in the SS-33 is disclosed in the Thiessen material at p 95 of Mr David Fergusson’s affidavit?
A The Ingersoll drawings are tighter than…A …you are correct.
Q The fact of the matter is, is it not, that the OD that is the external diameter of the SS-33 appearing on the Ingersoll drawing within Exhibit B, is disclosed in the Thiessen material at p 95 to Mr David Fergusson’s affidavit that’s correct, isn’t it?
Q And similarly the tolerance that is disclosed in the Ingersoll drawing is also disclosed in the Skema publication at p 100 of David Fergusson’s affidavit. That’s correct, isn’t it?
A It is correct. (Tr.183)
205 When asked similar questions about the SS-39 Mr Paterson gave evidence that the tolerances were different (Tr. 184). Although Mr Grieve QC pressed Mr Paterson for a time about the differences, the evidence is of little assistance by reason of an impasse between counsel and the witness in relation to a matter of mathematics (Tr. 185-186).
206 Mr Landsberg was also cross examined upon this topic. He gave evidence that the dimensions in the Thiessen Web-site had been taken from drawings prepared by him in 1992 (Tr. 294) (annexure L affd. 29 May, 2000). In contrast to Mr Paterson’s evidence he gave evidence that such drawings were prepared “carefully” to avoid them being used as manufacturing drawings. He said that all dimensions on the Web-site are approximate and appear to be rounded to the nearest one-eighth of an inch. He said they “are not manufacturing drawings” (Affd. 29 May, 2000 par. 59(c)).
207 Mr Landsberg described the material in the Technical Data Table on the Thiessen Web-site as general information which I-R provides to customers. He said that it is essentially sales literature and does not contain any information relevant to the development or manufacturer of the Split Set.
208 In assessing the evidence of Mr Paterson on the one hand and Mr Landsberg on the other, it seems to me that although the Thiessen Web-site contains some measurements which the plaintiff obviously published to Thiessen, which Mr Paterson identified, the Web-site does not contain what Mr Landsberg claims is the critical information - the tolerances.
209 To succeed on this aspect of the case it is not good enough to point to published material that contains measurements between point A and point B and claim that some of the plaintiff’s tolerances may fall partly above and below point A and/or point B. It is clear that the specifications of the bolt referred to in the Thiessen and Skema Web-sites are different to the tolerances in the I- R drawings. I am of the view that they are not the same measurements as the I-R specifications and tolerances.
210 I am satisfied that the information on the Internet has not resulted in the loss of confidentiality of the information in the plaintiff’s drawings.
Reverse Engineering
211 Dr Fuller gave evidence that it was his opinion that a successfully operational friction bolt could be re-engineered merely by manufacturing it to have a close tolerance on its maximum diameter. He was of the view that only a few tests in the laboratory and in the field would be needed to ensure at least an equivalent performance to the Split Set.
212 Dr Fuller was of the view that the dimensions contained in the drawing that Mr Landsberg had produced for provision to clients, which is contained on the Thiessen Web-site with the dimensions to which I have already referred, could be used to manufacture the product. He was of the view that the only additional information required would be “any tolerances on the dimensions that Ingersoll may require”.
213 Dr Fuller also referred to the tolerance in the Skema Web-site information and opined that the tolerances were excessive because he was of the view that it is preferable to manufacture a friction bolt with a tolerance on the maximum diameter of no more than 0.5 mm.
214 In cross examination Dr Fuller gave the following evidence:215 Mr Landsberg expressed the opinion that a reverse engineering process would not be successful in reaching the exact specifications and tolerances for the I-R product and said that it was “as slim a possibility” as he could imagine. (Tr. 211) In his cross examination he gave the following evidence:
Q Would you not agree with me that it would be extremely difficult for a person seeking to reverse engineer the Ingersoll-Rand Split Set to determine the tolerances?
A It wouldn’t be an easy task but it could be done.
Q But to do that you would need to examine many many examples of it, would you not?
A I would suggest you would need to do more than examine.
Q What else would you have to do?
A You would have to undertake a series of measurements of size, dimensions, various dimensions. You would also have to test a number of products to determine the strength and the range of strength.
Q Because, for example, you could purchase a number of products, a number of examples of a Split Set and seek to measure the outside diameter, both minimum and maximum, and unbeknown to you you may, in fact, have chosen a number of examples which are at the higher or lower end of that range respectively?
A That’s correct.
Q So even by looking at a number of examples you wouldn’t necessarily easily be able to determine what the mean was?
A That’s correct.
Q That’s the sort of problem a person seeking to reverse engineer would experience in seeking to determine the tolerances of the Ingersoll-Rand product?
A Yes. If by reverse engineering you mean to make an identical product, physical product, that’s correct.
Q If in fact you set about the process of reverse engineering in that way that I just described, it would be highly unlikely that you would come up with a range of tolerances and specifications that were almost exactly the same as the Ingersoll-Rand tolerances and specifications?
A Can I seek clarification there. Did you say “almost exactly”?
Q Yes.
A That’s correct.
(Tr. 565)
Q You have said several times over quite emphatically that it would in your view be either impossible or very difficult for any person skilled in the art of roll forming to reverse engineer these bolts, is that right?
A No, with explanation.
Q What is your explanation?
A What I have said is, very specifically, is that it will be very difficult if not impossible for a roll former or anyone skilled in the art to reverse engineer the Split Set, to reverse engineer to the exact drawings on our manufacturing product.
Q And I take it from that, that the focus of your evidence in that regard is to the reproduction of one of these bolts to the Ingersoll specifications rather than to standards of or acceptable standards of efficacy within the relevant consuming industry?
A If I understand your question, my comment on reverse engineering was not that one could not reverse engineer something that looks alike but that one could not reverse engineer a product drawing, a product and drawing to Ingersoll-Rand exact specifications.
(Tr. 221)
Other friction bolts - Jennmar and ANI
216 Since 1992 Jennmar and ANI have produced friction bolts that are apparently competitive with the plaintiff’s Split Set. These friction bolts are not in evidence nor is there evidence of the particular dimensions, specifications or tolerances of these bolts. There is evidence that, at least one witness, Mr Paterson, was unaware of any reported failures of the Jennmar and ANI bolts.
217 When Mr Grieve QC was cross examining Mr Landsberg only one question was asked of him in respect of the dimensions of the Jennmar and ANI bolts. It was as follows:
Q Can I just revert to the 18th item, the weld size. That which is shown on the Ingersoll’s drawings is closely comparable to the weld size used on the product manufactured by Jennmar and ANI Arnalls?
A I have not seen those bolts and cannot comment on it.
(Tr. 299)218 Dr Fuller swore an affidavit after the trial had commenced on 1 June 2000 which dealt with a number of visits to ANI’s premises. That evidence was tendered in relation to the length of time it would take a manufacturer to “tool up” to manufacture friction bolts.
219 It is clear that Dr Fuller met with representatives of ANI in February 1992 in which he discussed technical and manufacturing issues and research and development capability. In November 1992 Dr Fuller attended ANI’s premises again and was shown the new friction bolt manufacturing line.
220 No questions were asked of Dr Fuller and no evidence was given by him about the specifications or tolerances of the ANI friction bolt known as the “Flexibolt”.
221 During final submissions the defendants sought to rely upon some findings of fact in the decision Ingersoll-Rand Company (USA) v Ciavatta 509 A.2d 821 (NJ Super. Ch. (1986)). Reliance was also placed upon the Appellate Division decision Ingersoll-Rand Co v Ciavatta 3 USPQ2d 1120 and the ultimate appeal of the matter in the New Jersey Supreme Court in Ingersoll-Rand Co v Ciavatta (1988) 8 USPQ2d 1537.
222 The defendant submitted that the observations made by the various Courts in that case are “no less correct now than when they were made in 1986-1988”.
223 The main statements of fact from those cases upon which the defendants relied were that “there was no evidence that the plaintiff’s friction stabilizer involved trade secrets” and “the specifications and methods of manufacture are easily discoverable” (509. A.2d 821 at 830; 3 USPQ2d 1120 at 1123 fn. 4(h)).
224 By the time the case reached the ultimate appeal, that finding of fact was expressed thus: “the trial court found that Ingersoll-Rand’s split set technology ‘does not involve trade secrets or other confidential information since the specifications, methods of manufacture and operating principles relating to the device are available to the public or are easily discoverable’” (8 USPQ2d 1537 at 1541).
225 The issue in that case was whether a former employee had utilised confidential information or trade secrets in the preparation of an invention. The plaintiff contended that “certain drawings of alternative configurations” had been developed during the defendants’ employment to which the defendant had access and allegedly utilised in conceiving his invention.
226 Those drawings were in evidence at first instance and were identified as drawings P-13 and P-14. The Court found that each of P-13 and P-14 did not contain information of significance. Each drawing contained simple drawings of various shapes. They included elliptical shapes, similar to the elliptical shape of the defendants’ stabilizer.
227 However the Court found that the drawings did constitute information that was confidential “within the I-R family” but that the direct evidence was “insufficient to support a finding of piracy by the defendant or that the defendant was aware of them or had seen them”. (At 828)
228 The facts of this case to which I must have regard appear to me to be different from those before the New Jersey Superior and Supreme Courts. Notwithstanding that Court’s findings I must decide this case on the evidence before me.229 The principle applicable to this matter is helpfully set out in Saltman Engineering Co Ltd v Campbell Engineering Co (1948) 65 RPC 203 (C.A.) at 215:
Are the Plaintiff’s Drawings Confidential Information?
The information, to be confidential, must, I apprehend, apart from contract, have the necessary quality of confidence about it, namely, it must not be something which is public property and public knowledge. On the other hand, it is perfectly possible to have a confidential document, be it a formula, a plan, a sketch, or something of that kind, which is the result of work done by the maker upon materials which may be available for the use of anybody; but what makes it confidential is the fact that the maker of the document has used his brain and thus produced a result which can only be produced by somebody who goes through the same process.
230 In my view the specifications and tolerances within the plaintiff’s drawings fall within this category and are in the nature of a trade secret as referred to in the authorities cited earlier in this judgment. They have resulted not only from the use of I-R’s representatives’ brains in reaching and applying “engineering judgments” but also from a great deal of testing in both the laboratory and in the field at quite a deal of cost.
231 In my view the particular tolerances achieved for the Split Set could only be produced by someone going through the same processes. This is so notwithstanding production by competitors of mining roof supports that are similar in presentation. To suggest that confidentiality is lost by reason of the creation by others of a competitive and efficacious product is in my view, on the facts of this case, not a sound approach.
232 The thrust of the detailed cross examination of Mr Landsberg was to prove that many of the specifications and tolerances were not essential to the workings of the plaintiff’s Split Set. In each category Mr Landsberg resisted those suggestions. It has been suggested that the Split Set is a simple product. I am satisfied that, although to the naked eye it may present as simple, it is a complex system with specifications and tolerances that are important to its particular efficiency.
233 I am satisfied that the plaintiff’s drawings contain confidential information in the nature of a trade secret. The next question that arises is whether the information has lost its confidentiality by reason of it becoming public.
234 I am satisfied that on the balance of probabilities, having regard to the evidence given by Mr Halliday of his conversation with George Ward and of a lack of production of any document in support of any impediment upon BHP or George Ward to publish the information in relation to the steel grade used in the production of the Split Set, that such information has become public. I am also satisfied that the ease with which such information can be ascertained by a metallurgist supports this view.
235 It is clear that some measurements, for example length and weld size, are able to be obtained from a sample of the Split Set. It is also clear that the descriptions SS-33, SS-39 and SS-46 refer to the outer diameter measurement of each of the Split Sets. However the fact that these measurements may be able to be made does not expose the specifications and tolerances within the plaintiff’s drawings.
236 The fact that there are tolerances within which the Split Set may be manufactured is a significant matter in this analysis. Any particular Split Set may be manufactured at the higher or lower end or in the middle of the permitted range. The tolerances of the Split Set have been specified after years of testing and years of manufacture and the refinement of that process. It is those tolerances that Dr Fuller conceded would be “highly unlikely” to be able to be discovered by reverse engineering.
237 One of the matters relied upon by the defendants is the existence of the competitive products manufactured by ANI, AGS and Jennmar. The defendants submitted that the onus was upon the plaintiff to prove that such products have specifications and tolerances that are different from those of the Split Set. It submitted that no such evidence had been called by the plaintiff and that any inference to be drawn should be adverse to the plaintiff.
238 I disagree. The defendants have raised this as an issue in their defence (par 69(b)) and I am of the view that the onus of establishing that the specifications and tolerances have been published to those parties upon which they have relied in producing their product, lies upon the defendants in this case. It seemed at one stage that the defendants may have been embarking upon such a course in their cross examination of Mr Landsberg. But Mr Landsberg’s answer that he had not seen those products put an end to the cross examination . No products from Jennmar, ANI or AGS are in evidence.
239 The defendants did call evidence of the Jennmar Web-site information. I am satisfied that there is nothing on that Web-site to suggest that the specifications and tolerances of the Split Set have been published to Jennmar.
240 The defendants relied upon the information on the Thiessen and Skema Web-sites to submit that the confidential information had become public. By reason of the conclusions that I have reached in relation to that information set out earlier in this judgment, I am satisfied that the specifications and tolerances of the Split Set are not in the public domain by reason of the information on the Thiessen and Skema Web-sites or any of the other Web-sites relied upon by the defendants.
241 A further matter relied upon by the defendants was that the specifications and tolerances were provided to ISIS without any restriction upon it between 1988 and 1991. The relevance of the dates is that Mr Paterson, on behalf of ISIS, did not sign a Secrecy Agreement (affd. Moore 4.2.2000 Ann. A) until July 1991.
242 Mr Paterson was cross examined to the effect that prior to July 1991, ISIS had access to the plaintiff’s information without restriction. Mr Paterson denied this and referred to the contents of a purchase order that he signed at the time that ISIS commenced its contractual relationship with the plaintiff. He produced a document (Ex. 11) dated 22 November 1989 which contains clause 12 “Trade Secrets” as a standard term and condition on its reverse side which referred back to a previous agreement between ISIS and the plaintiff.
243 I am satisfied that the disclosure of the material to ISIS in the circumstances of it contracting with the plaintiff to implement its quality control code has not caused the plaintiff’s drawings to lose their confidentiality.
244 Another matter relied upon by the defendants was that the plaintiff had disclosed the information to WMC’s Independent Research Consultant, Rock Technology. This submission relies upon evidence that when the plaintiff was preparing to submit a tender bid to WMC it provided the first defendant with computer discs, upon which the confidential information appeared, for the purpose of assisting in the compilation of the tender documentation. Mr Moore gave evidence that he knew once WMC obtained the details from the plaintiff it would pass it on to Rock Technology, a consulting research company engaged independently by WMC.
245 It is apparent that the tender documentation received by the respective bidders included documents from WMC and Rock Technology (Tr. 426). The plaintiff submitted that the Court is well able to infer that information provided in the context of a commercial tender, particularly when supplied for safety analysis demanded by a customer, is provided in circumstances imparting an obligation of confidence on the recipient of the material: Faccenda Chicken Ltd v Fowler (1987) Ch 117.
246 I am satisfied in all the circumstances that the disclosure to WMC with the consequence of the disclosure to Rock Technology for the purposes of the tender is not a disclosure that strips the plaintiff’s information of its confidentiality.
247 The parties dealt in supplementary submissions with the provisions of the Portec secrecy agreement in which disclosure was prohibited for a ten (10) year “maximum” period. All parties were in agreement that there was no evidence that any disclosures had been made either to specific sub-contractors or by such sub-contractors after the tenth anniversary of the signing of such an agreement.
248 In all the circumstances I am satisfied that, with the exclusion of the steel, the specifications and tolerances within the plaintiff’s drawings remain confidential. I am also satisfied that the material received by the defendants from the plaintiff, including the R & D Information and the ISIS material which contained direct or indirect references to those specifications and tolerances, is confidential information.
Were the Strata Bolt Drawings prepared using the Plaintiff’s confidential information?
249 D.J. Fergusson gave evidence that the second defendant began manufacturing the Strata Bolt product in September 1999 using the technical drawings drawn by him. He gave evidence that those technical drawings were produced “without any reference to the plaintiff’s Split Set drawings” and that he prepared them using his own knowledge and expertise of friction bolts and by measuring and analysing existing friction bolts manufactured by other parties and available in the market place.
250 He annexed those drawings “Q” (for the 33 mm) “R” (for the 39 mm) and “S” (for the 46 mm) to his affidavit sworn on 5 May 2000. No mention was made in that affidavit to the creation of any drawings prior to “Q”, “R” and “S”.
251 During cross examination D.J. Fergusson was shown confidential exhibit JVF1 (Ex. H in these proceedings) which was an exhibit to J.V. Fergusson’s affidavit of 7 February 2000 relied upon in the interlocutory proceedings before Hamilton J and not read before me. Exhibit H contains three drawings each of which is entitled “Strata Control Pty Ltd. Mining Friction Bolt for Nominal 32 mm, (38 mm and 44 mm) Hole. Material BHP 2.3 mm AB 4121 Strip Width 85 mm to BHP Specification”.
252 D.J. Fergusson admitted that drawings “Q”, “R” and “S” were created in April 2000 and gave evidence that the drawings contained in JVF1(Ex. H) were created in July 1999.
253 Also included in Ex. H is the following passage from J.V. Fergusson’s affidavit of 7 February 2000:254 The “internal correspondence” annexed is a memorandum on SCS letterhead from D.J. Fergusson to John Mercer at the second defendant dated 26 July 1999. The memorandum reads:
Indeed, in producing the prototype for the “Strata Bolt” product, my Company first procured samples of the A.N.I. and Jennmar products from the market-place (where they are readily available) and then based its “Strata Bolt” product solely on those items and without reference to the “Split Set” product. Exhibited to me at the time of swearing this affidavit and marked “JVF 1 - confidential” is a copy of internal correspondence from my company to Strata Control Pty Ltd together with working drawings which were prepared in relation to the “Strata Bolt” product.
Please find enclosed Strata Bolt drawing and specification sheet Required for production of SCS product.
So as to avoid the problem of producing Split Sets or Strata Bolts to the wrong tolerances Ingersoll’s specifications must be removed from the manufacturing area when not in use and visa versa.
255 This is a very interesting document. It refers to the product as the “Strata Bolt”. That is ten days before Mr Crick informed Mr Moore that the first defendant was going to produce its own friction bolt. There was no mention of the name Strata Bolt in that conversation nor was there any mention of the Strata Bolt in the WMC tender of the same date.
256 Notwithstanding Mr Crick’s explanation that he only used the term “Split Set” in the WMC tender because WMC had used it and he did not want to confuse WMC, I find it curious that he would not have informed Mr Moore and WMC of the Strata Bolt’s existence.
257 Additionally the contents of the memo suggest that the purported differences in tolerances may be of some importance because Mr Mercer was requested to remove Ingersoll’s specifications before commencing to manufacture the Strata Bolt. Such a position is peculiarly opposed to the way in which the defendants have conducted their case. They have claimed in these proceedings that the specifications and tolerances are in the public domain and are of little importance to the efficacy of the Split Set.
258 The specification sheet provided to Mr Mercer contained specifications and tolerances including those for the outside diameter, length, material thickness and slot width of each of the Strata Bolts, 33, 39 and 46 which were identical to those provided to WMC on the same day in the tender bid but under the description of Split Sets 33, 39 and 46 respectively. The specification sheet attached to the memorandum of 26 July was signed by D.J. Fergusson and dated 21 July 1999.
259 There is no date on the drawings and there is no identification of the author of the drawings although each has the heading “Strata Control Pty Ltd Mining Friction Bolt”. That is in contrast to the covering memorandum enclosing such drawings on the letterhead of the first defendant and the evidence of J.V. Fergusson that it was his company (the first defendant) that procured the ANI and Jennmar samples and produced the drawings.
260 A further puzzling feature of the evidence is that the drawings created in July 1999 are labelled “Mining Friction Bolt” with no mention of the name “Strata Bolt” that was included in the 26 July Memo.
261 The plaintiff claims that the defendant’s drawings, in particular those in JVF1 (Ex. H) contain tolerances identical and almost identical to those in the plaintiff’s drawings and submitted the Court would be comfortably persuaded that the plaintiff’s drawings were used to create the drawings of the Strata Bolt. The difference between the drawings in JVF1 (Ex. H) and the drawings “Q”, “R” and “S” is a change in dimensions in the latter in respect of the outer diameter minimum and maximum, the slot width minimum and maximum and the taper tip diameter minimum and maximum.
262 The drawings in Exhibit H contained tolerances almost identical to the tolerances in the plaintiff’s drawings. Of the 21 items specified for analysis by Mr Landsberg, 8 were identical, 7 were within 0.5 of a millimetre and a further 2 were within 0.8 of a millimetre of the plaintiff’s tolerances. After the drawings in Exhibit H were changed, for example in relation to the 33 mm in drawing “Q”, the dimensions changed slightly by 0.6 mm for minimum outside diameter, by 0.1 mm of the maximum outside diameter, by 8.5 mm for the slot width minimum and 0.50 mm for the taper tip minimum diameter.
263 D.J. Fergusson was cross examined upon the tolerances in the Ex H drawings and the “Q”, “R” and “S” drawings and their relationship to the tolerances in the plaintiff’s drawings. The following evidence was given:
Q What I want to suggest to you is that all you have done there is simply round down what you knew to be the minimum outside diameter specified by Ingersoll-Rand for its product?
A Based on my knowledge and experience I have determined that.
Q What I have put to you is correct, isn’t it, you have known that the Ingersoll-Rand product had an outside diameter minimum of ------?
A Yes I did.
Q You saw no need for that fraction to be present in that specification and so you rounded it down to -------?
A It was a most rounded number, yes.
Q That’s what you did, you used your knowledge of the Ingersoll-Rand specification which you have acquired over the years?
A Yes.
Q From the plans of the specifications which have been provided?
A Yes.(Tr. 538-539)
Q You then rounded that down by two decimal points to get -----?
A Yes.
264 In respect of the outer diameter maximum D.J. Fergusson gave similar evidence. He said that he used the figure as a result of his knowledge and experience working with the product and with the plans and specifications over the years. He said that based on his experience that was “a most rounded number” (Tr. 539).
265 In respect of the slot width minimum D.J. Fergusson admitted that he utilised the particular measurement as it was more conveniently expressed in metric terms than that of the plaintiff. He resisted a suggestion that it was chosen because it was Ingersoll-Rand’s specification and simply rounded. He said it was also a matter of geometry and then gave the following evidence:266 D.J. Fergusson gave evidence that the second defendant only manufactured the SS-46. He said he had not provided the second defendant with the plaintiff’s drawings until approximately 1994/1995. However the second defendant was manufacturing the SS-46 from late 1992. Mr Douglas QC suggested to D.J. Fergusson that the second defendant must have been using the drawings prior to 1994. That was denied. The following evidence was then given:
Q Essentially it is based upon the knowledge and experience which you have gained from manufacturing the Ingersoll-Rand product over the years in accordance with their plans and specifications?
A Over nearly 20 years yes.
(Tr. 540)
Q They must have been using the tolerances and specifications contained on them?
A Yes, yes.
Q And you must have provided that information to them?
A I had that knowledge, yes.A That is how we started up the business, yes.
Q Is this the situation, Mr Fergusson, that you’re seeking to suggest to the Court that Strata Control Pty Ltd has at all times simply used your knowledge to manufacture product and not knowledge gained from Ingersoll-Rand’s plans and specifications?
Q What I want to suggest to you is that such knowledge as you had is knowledge that you had from the plans and specifications?
A Possibly, yes. It was Ingersoll product that we were manufacturing.A Yes.
Q And you knew that those plans and specifications had been provided to enable that product and only that product to be manufactured?
(Tr. 548)
267 D.J. Fergusson agreed that the rollforming equipment used to manufacture the tube of the plaintiff’s Split Set could be utilised, without modification, to manufacture the second defendant’s Strata Bolt. (Tr. 549)
268 Although D.J. Fergusson claimed that he had used the Jennmar and ANI products to produce the drawings in Exhibit H and annexures “Q”, “R” and “S”, no evidence has been given of the specifications and tolerances of those products. As I have already said, the Jennmar material on the Internet does not provide any detail of these specifications or tolerances. Additionally D.J. Fergusson admitted that none of the information contained in the material on the Internet would have enabled him to devise the exact dimensions which are in the drawings of the Strata Bolt (Tr. 499 line 5-10).
269 A further matter of some significance is that in his cross examination D.J. Fergusson said that although he had a sample from Jennmar and ANI at the time he produced his drawings he did not “necessarily make a lot of reference” to them (tr.483).
270 The Court simply does not know whether the specifications and tolerances arrived at by D.J. Fergusson in the drawings (Ex. H and annexures “Q”, “R” and “S”) are anything like the specifications and tolerances of the products said to have been used for the purposes of the drawings.
271 The evidence in relation to the two sets of drawings, the first in Ex. H and the second in annexures “Q”, “R” and “S” to D.J. Fergusson’s affidavit of 5 May, 2000 warrant analysis. J.V. Fergusson gave evidence that it is a process of evolution of drawings. He said that he had not trained D.J. Fergusson very well because there was no date upon the drawings in Ex. H (Tr. 391). He said “he’s obviously changed his thing. It’s in a very short period of time, a couple of months” (Tr. 391).
272 However if I accept D.J. Fergusson’s evidence it is not merely a “couple of months” between the two sets of drawings. It is nine months, the first having been produced in July 1999 and the second produced nine months later and four months after the commencement of these proceedings.
273 In stark contrast to the plaintiff’s drawings, which contain the dates of the various changes and the identity of the author within a legend on each of the drawings, the readers of the Strata Bolt drawings (Ex. H and annexures “Q, “R” and “S”) are left to their own devices in trying to ascertain the differences between the two and are not informed of the date of the production of the drawings nor the identity of the author of them.
274 D.J. Fergusson gave evidence that the reason he changed the drawings in April 2000 was because of some advice he received at a seminar conducted at the first defendant’s premises in April 2000 by Dr Fuller, the defendants’ expert in these proceedings. However had the advice given by Dr Fuller in that seminar been followed strictly by D.J. Fergusson the drawings would not be as they appear in annexures “Q’, “R” and “S”.
275 There was a difference of 0.3 mm between the advice given by Dr Fuller and the drawings created by D.J. Fergusson in April 2000. D.J. Fergusson explained that he had increased the dimension by 0.3 mm (a total of 0.8mm) to accommodate the reality on the factory floor in manufacturing the product.
276 It is clear that the defendants came up with specifications and tolerances identical in some respects and almost identical in others to the plaintiff’s Split Sets as contained in the plaintiff’s drawings.
277 On the evidence before me, for this to have occurred by a process of using the Jennmar and ANI product, or even using the plaintiff’s Split Set would be “highly unlikely” and “as slim a possibility” as one could imagine. Although I have adopted Dr Fuller’s and Mr Landsberg’s descriptions of the reverse engineering outcomes, I regard them as applicable to the process which has been described for the drawings in exhibit H.
278 In the light of the evidence from both the plaintiff and the defendants’ experts and the admissions made by D.J. Fergusson in cross examination I am satisfied on the balance of probabilities that the plaintiff’s confidential information was used to create the drawings of the Strata Bolt.
The Origins of the Strata Bolt
279 There is no doubt that J.V. Fergusson claimed that the first defendant created the Strata Bolt. This evidence appears in that portion of his affidavit of 7 February 2000 (Exhibit H), in which he said “my Company first procured samples of the ANI and Jennmar products from the market place (where they are readily available) and then based its ‘Strata Bolt’ product solely on those items and without reference to the ‘Split Set’ product”. Throughout the proceedings before me J.V. Fergusson has used the description “my Company”.
280 J.V. Fergusson is currently the Chairman of the Board of Directors and a shareholder of the first defendant. He claimed that he retired from active involvement in the management of the company in 1993. He does not own any shares in the second defendant nor does he hold any office with that company. Additionally J.V. Fergusson gave evidence that the memo of 26 July 1999 which he referred to as “internal correspondence” was from “my company to Strata Control Pty Ltd” (Ex. H).
281 There is no suggestion in Exhibit H that D.J. Fergusson was referring to the Strata Bolt being anything other than “SCS Product”. Of course SCS is an acronym for Strata Control Systems the business name of the first defendant. The second defendant is Strata Control Pty Ltd. The irresistible conclusion from the contents of the memo of 26 July 1999 is that the first defendant was claiming ownership of the Strata Bolt and that it was requesting the second defendant to manufacture the Strata Bolt for the first defendant.
282 The first defendant’s WMC tender bid did not refer to the “Strata Bolt”. At that time the first defendant represented that it had “Split Sets” in inventory for supply within one or two days of the receipt of an order and that:
Strata Control Systems are always willing to supply customers with installation procedures for Split Sets. To ensure proper performance of Split Sets Strata Control Systems are willing to conduct, or collaborate in a program of field tests to determine insitu performance and to identify any design changes that may be required to the installation procedure to achieve adequate system performance.
There was no mention of the second defendant as a separate contracting entity nor as a bidder for the WMC contract.
283 J.V. Fergusson also referred to the Strata Bolt in similar terms in an affidavit of 19 May, 2000. In that affidavit he gave evidence that “the Strata Bolt product (being the friction bolt which has been developed by my company)”.
284 J.V. Fergusson also gave evidence that in late June or early July 1999 he “directed David Fergusson of Strata Control to design and develop its own friction roof bolt which was named the Strata Bolt”. He then referred to annexures “Q”, “R” and “S” to which reference has already been made. He continued “in doing so, my company and Strata worked from independent drawings prepared by it and it based its development on such public knowledge as was freely available in the market-place and from the Internet”.
285 He stated further “my company did not at that point in time terminate the agreement with Ingersoll. My company continued to allow the agreement to remain on foot and to make and supply the Split Set product to Ingersoll. At the same time my company commenced making its own ‘Strata Bolt’ product for sale to third parties. At this stage, my company did not approach customers or seek out potential business. My company proceeded to enter the market-place with its Strata Bolt product on or about 29 September 1999”.
286 J.V. Fergusson was cross examined about his evidence that he had directed D.J. Fergusson to develop the Strata Bolt. It was suggested to him that the existence of such a direction suggests that J.V. Fergusson had a continuing managerial influence in the company. It seems to me however that such a direction is more akin to D.J. Fergusson still having a role with the first defendant, notwithstanding his resignation in 1992. He held himself out as an officer of the first defendant (Exs. W & X) and recently gave directions from the first defendant to the second defendant in the 26 July 1999 memorandum (Ex. H).
287 J.V. Fergusson said that probably the affidavit should have read “suggested” to him or “talked to him” rather than “directed him”. He explained this description as being part of his role as a father and having been involved for some twenty years in the business. In any event D.J. Fergusson denied that his father had directed him to develop the Strata Bolt. He claimed that he developed the Strata Bolt independently without direction from him.
288 The public announcement on 29 September 1999 was not an announcement that Strata Control Pty Ltd was producing its own Strata Bolt but that the first defendant was producing the Strata Bolt.
289 Although the claim now made by the defendants is that the Strata Bolt was created by the second defendant I have to decide whether I am satisfied that such a claim is supported by the evidence.
290 What am I to believe? The ubiquitous “licence” and “marketing” epithets seem to be a familial and corporate refuge which does not assist me in this process. Have the defendants merely engaged in puffery to boost the first defendant’s chances of winning the WMC tender or have they put forward an honest and accurate picture of the company profile in that bid. Have the many references to “my company” really been a familial habit which should be translated as “not my company but the second defendant”.
291 The evidence of J.V. Fergusson, the memorandum of 26 July 1999 from the first defendant to the second defendant (Ex. H), the terms of the first defendant’s WMC tender bid and the public announcement by the first defendant on 29 September 1999 all lead me to the irresistible conclusion that it is the first defendant who was the instigator and creator of the friction bolt known as the Strata Bolt. I am satisfied that the first defendant did so with the assistance of D.J. Fergusson and the second defendant.
Breach of Clause 12 by the First Defendant - Use of Confidential Information during the Agreement
292 Clause 12 of the 1984 Agreement prevented the first defendant from making use of or disclosing the plaintiff’s confidential information without the authority in writing of the plaintiff during the Agreement and for a period of five years from the termination of the Agreement.
293 I am satisfied that the first defendant used the plaintiff’s confidential information without the authority of the plaintiff in creating the drawings of and manufacturing the Strata Bolt. I am satisfied that was in breach of Clause 12 of the 1984 Agreement.
294 I am further satisfied that the first defendant used the plaintiff’s confidential information in its WMC tender bid in July 1999. I am satisfied that was also in breach of clause 12 of the 1984 Agreement.
295 I am also satisfied that the circumstances of the receipt of the plaintiff’s confidential information were such as to impose an equitable duty of confidence upon the first defendant not to misuse such confidential information. The first defendant is in beach of that duty by reason of the conduct referred to above.
The Second Defendant’s Position
296 The plaintiff claims that the evidence establishes that the second defendant must reasonably be taken to have adopted the terms of the 1984 Agreement between the plaintiff and the first defendant. It is conceded there is no formal written agreement.
297 The plaintiff submitted that when J.V. Fergusson swore an affidavit on 19 May 2000 he did not annex the complete 6 November 1992 letter from the first defendant to the plaintiff. The attachments which were the two draft agreements were not annexed. Notwithstanding that these were already annexed to Mr Moore’s affidavit of 9 December 1999 as annexure J, the plaintiff submitted that the Court is entitled to infer that J.V. Fergusson’s omission was deliberate.
298 It is submitted the Court would infer that such an omission was an attempt to “play down” the strong inference that it submitted is available from the contents of this letter that the second defendant regarded itself as bound by the 1984 Agreement.
299 The plaintiff asked rhetorically, if the second defendant did not regard itself as bound by the terms of the 1984 Agreement, why was J.V. Fergusson sending a letter seeking amendments to that Agreement on behalf, in part, of the second defendant?
300 A partial answer to that question emerged in the evidence. The unchallenged evidence given by D.J. Fergusson is that Mr Hall requested the second defendant to sign an agreement in identical terms to the 1984 Agreement. D.J. Fergusson refused to sign it because he claimed clause 15 (the restraint clause) was unfair. Mr Hall suggested that D.J. Fergusson send him a proposed contract. That proposed contract was given to J.V. Fergusson by D.J. Fergusson and became an attachment to the letter of 6 November 1992.
301 The letter of 6 November 1992 certainly proposed that the two agreements attached to it between the plaintiff and the first defendant and the plaintiff and the second defendant were in J.V. Fergusson’s view “sufficient to guard Ingersoll-Rand’s interests”. The letter did not delineate between the first and second defendant and proposed that the new agreement be accepted as “more equitable towards our company”.
302 The proposed agreements between the plaintiff and the first defendant and the plaintiff and the second defendant contained clauses identical to paragraphs 12 and 13 of the 1984 Agreement in respect of the confidential information with the exclusion of the restraint on using the confidential information for five years after termination. Neither contained the restraint clause prohibiting the defendants for a five year period after termination from making a “similar” mining roof support.
303 Mr Moore’s affidavit evidence put forward an oral agreement between the plaintiff and the first defendant that the first defendant would take on the contractual obligation to manufacture in Western Australia but would use a corporate entity, the second defendant, to reduce its payroll tax. However during Mr Moore’s cross examination he was shown a document which had not previously been disclosed in any of the plaintiff’s evidence.
304 It was a fax from Mr D. Bronder from I-R to him with a copy to Mr Hall dated September 9, 1992 (Ex. 7). It reads as follows:
SUBJECT Industrial Rollformers/Strata Control
Fax
Referring to our phone conversation earlier this week, this is to confirm I would like you to fax me a copy of Jim Fergusson’s contract proposal for the Strata Control contract as soon as you received it. Also please make sure that strata control completes a secrecy agreement immediately. The secrecy agreement can be executed before any contract and should be executed before IR confidential material like work drawings, quality assurance standards and similar information is released to them. Please advise as soon as strata control has executed the secrecy agreement.
305 At the foot of the fax there is a handwritten date 14 September 1992 with a note “Jim, I will ring you tomorrow to discuss. Regds R.M”. Mr Moore gave evidence that he received this fax and “must have sent” it to J.V. Fergusson. The fax refers only to “Jim Fergusson’s contract proposal for the Strata Control contract”.
306 The letter of 6 November 1992 enclosing the proposed contract made no reference to the second defendant’s refusal to sign a contract. The language of this letter is indicative of the way in which J.V. Fergusson continued even in his evidence before me, to deal with the two entities as one and refer to them as “my company”. In this letter he advised the plaintiff that his proposed agreement was more equitable for “our company”.
307 Apart from an acknowledgment and advice that it would be considered, nothing further was heard from the plaintiff in respect of this proposal. In May 1993 the first defendant confirmed in writing an oral agreement it had reached with the second defendant. Such confirmation was as follows:
This is to confirm our recent discussion and agreement in respect of a licence fee payable by Strata Control Pty Ltd to Industrial Rollformers Pty Ltd for the right to manufacture and sell the Split Set range of products, Strata Plates and any other product our company requests you to manufacture and sell from your Perth operation.
The agreed licence fee is one dollar ($1.00) per Split Set sold and twenty five cents ($0.25) per Strata Plate sold.
Since you have had additional costs to bear in setting up Perth, the commencement time for the liability to pay licence fees will be 1st July 1993. We will invoice you each quarter based on sales quantity from your sales analysis.
We agreed to review the rates each year, probably in June. Could you please indicate your agreement to the above by signing a copy and returning to me.
(Ex Y)
308 In September 1995 the first defendant and the plaintiff reached agreement that the plaintiff would pay the first defendant $1,000 per month in respect of “product distribution from Strata Control Pty Ltd in Perth”. Such agreement was to be reviewed after three months.
309 In December 1995 the first defendant advised the plaintiff that $1,000 per month was “quite inadequate to recover part of the costs” the first defendant had incurred. It requested an increase to $2,000 from 1 January 1996 and advised that on such basis “Strata Control will absorb various costs” which included forklift running, repairs, maintenance and depreciation costs, and material and labour expenses.
310 The plaintiff agreed to this request and the first defendant confirmed agreement for the “amount of $2,000 per month contribution for existing services out of Strata Control Pty Ltd warehouse for calender year 1996”.
311 Factors upon which the plaintiff relied in support of its submission that the second defendant ought properly to be regarded as being bound by the terms of the 1984 Agreement included the following:
· when the second defendant invoiced the plaintiff direct for a period of time for the manufacture of the Split Sets, the invoices were sent care of the address of the first defendant;
· all the administrative work of the second defendant has at all relevant times been done from the premises of the first defendant and none is done from Perth;
· D.J. Fergusson is a major shareholder in the first defendant and is not a director or employee of the first defendant but works on a daily basis from its premises. He only travels to the second defendant’s premises in Perth about four times a year;
· a statement in the 6 November 1992 letter by J.V. Fergusson that the first defendant had invested some $350,000 in assisting “Strata Control to establish the Perth company and in so doing have reduced our sales by 40%”;
· the failure of the first defendant to require the second defendant (if it truly was merely a subcontractor) to execute a secrecy agreement in accordance with the requirements of clause 12 of the 1984 Agreement.
312 The plaintiff put an alternative submission that the second defendant has at all times acted “merely as an agent” of the first defendant evidenced by the “numerous instances in evidence” of the first and second defendants effectively treating themselves and holding themselves out as being the one business.
313 Certainly on the pleadings the first defendant admitted that it represented in correspondence to the plaintiff and third parties that the second defendant was “its Perth operation” (par. 23(b) Statement of Claim; par 17 Defence).
314 Additionally the plaintiff places particular emphasis on the evidence of Mr Crick as follows:
Strata Control does not have the broad range of activities that you saw reflected in these accounts. They don’t have anything to recover in that regard. They were given probably the most voluminous and easy to make product of the full product range, that is the 46 Split Set without knocking on doors, without selling it, they don’t employ any sales people, they don’t employ any technical people and all that product was given to them without effort…they manufacture the product and all of the ongoing costs of running an organisation in terms of product development and maintenance and running a typical group and so on, they are all costs that belong to Industrial Rollformers.
( Tr. 522. Line 36-50)315 The plaintiff relied upon Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 in support of the submission that by its conduct the second defendant adopted the 1984 Agreement or is estopped from denying that it adopted it.
316 The starting point is the general principle that “an offeror may not impose a contractual obligation upon an offeree by stating, that if the latter does not expressly reject the offer as made, it will be taken to have accepted it” (per Kirby P, as His Honour then was, at p 527). His Honour continued at 528:
From the facts, looked at objectively, a court may be willing to infer a party’s acceptance. Various categories of cases of this kind have emerged over the years. One arises where there have been previous dealings between the parties or where something in the history of the transaction between the parties gives rise to an ‘inevitable inference from the conduct’ of the disputing party, and from ‘its doing and saying nothing’, that it accepted the [contract] as valid.
317 The plaintiff submitted that looked at objectively the facts outlined above establish the existence of a contractual relationship between the plaintiff and the second defendant in terms identical to the 1984 Agreement.
318 The defendants submitted that the combined effect of the fax from Mr Bronder (Ex. 7), the letter of 6 November 1992 from the first defendant to the plaintiff and the plaintiff’s response on 10 November together with the licensing arrangement entered into in May 1993 between the first defendant and the second defendant is fatal to the plaintiff’s case. The defendant also relied in this regard on the conversation between D.J. Fergusson and Mr Landsberg at the Vinidex premises in 1997.
319 This case is slightly different to the facts in Empirnall. In that case one of the reasons the contract was not signed was because of a statement that the particular party “does not sign contracts”. There was no particular reference to any clause within the contract being unacceptable or unfair. In this case there was. D.J. Fergusson referred to clause 15 as unfair.
320 It is demonstrably clear that D.J. Fergusson was well aware of the terms of the 1984 Agreement. He had been the recipient of Ellicott QC’s advice and had been present at the meeting with the plaintiff in February 1992 when price increases were sought pursuant to the 1984 Agreement. Although it may have been the second defendant’s intention to set up in competition with the plaintiff in servicing the mining industry in Western Australia in 1992 it is clear that did not happen.
321 The following views expressed by the Full Court in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117-118 seem applicable to the circumstances of this case:
And:
It is often difficult to fit a commercial arrangement into the common lawyers’ analysis of a contract arrangement. Commercial discussions are often too unrefined to fit easily into the slots of “offer”, “acceptance”, “consideration” and “intention to create a legal relationship” which are the benchmarks of the contract of classical theory.
Moreover, in an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at a particular time in the relationship may by reason of the parties’ subsequent conduct become sufficiently specific to give rise to legal rights and duties. In a dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed.
322 In this instance certainly the conversations between J.V. Fergusson, Mr Moore and Mr Hall when viewed objectively suggest to me that the first defendant agreed to manufacture the Split Sets for the plaintiff by using a factory in Perth that was operated by the second defendant. It is also clear that there were some discussions between the second defendant and the plaintiff separately in relation to price and the topic of the restraint clause in the 1984 Agreement.
323 In this case the difficulty of pointing to the precise moment when the legal criteria of a contract have been fulfilled has been exacerbated by the defendants’ habits of using “marketing” language and behaving in a manner which suggests a lack of separate corporate borders.
324 On the evidence of the manner in which these two companies operated I am satisfied that once Mr Bronder’s fax was sent to J.V. Fergusson the second defendant was aware that a secrecy agreement was required before it commenced any manufacturing of Split Sets for the plaintiff whilst its “proposal” was being considered. Although no such agreement was ever signed I am satisfied that the conduct of the parties leads to an irresistible conclusion that the second defendant agreed to keep secret the plaintiff’s confidential information.
325 I am of the view that once D.J. Fergusson agreed that J.V. Fergusson could inform the plaintiff that “the manufacture of friction bolts in Perth can be started in six weeks” ( D.J. Fergusson affd.5 May 2000 par 22) the second defendant was willing to contract with the plaintiff. The initial response to the request for a signature on a contract in the form of the 1984 Agreement was to reject clause 15. The proposed contract also deleted the post termination five year restraint on use of confidential information.
326 I do not agree with the defendant’s submissions that the fax from Mr Bronder (Ex 7) and the 6 November 1992 letter are fatal to the plaintiff’s case. They may have been if the conduct of the parties since 1992 had been different. The failure to follow up the 1992 letter has to be viewed in the light of the following matters.
327 The second defendant’s conduct since 1992 in so many respects has been consistent with the terms of the 1984 Agreement. The second defendant has:
· manufactured the bulk of the plaintiff’s Split Sets - the “flagship”SS-46 - since that date;
· manufactured the Split Sets in accordance with the drawings (and revisions) specified in the 1984 Agreement;
· manufactured the Split Sets in accordance with the Quality Assurance Specification stipulated in the 1984 Agreement;
· between 1992 and 1999 treated as confidential and from July 1999 purported to treat as confidential that information that the plaintiff identified as ‘confidential’ in accordance with the 1984 Agreement;
· for a period, invoiced the plaintiff for the manufacture and supply of the Split Sets in accordance with the 1991 agreed price under the 1984 Agreement;
· sought price increases pursuant to the formulae contained within the 1984 Agreement;
· permitted inspections of the manufacturing process by the plaintiff’s quality assurance contractor ISIS;
· liaised and co-operated with ISIS and the plaintiff in respect of the manufacturing process; and
· restricted its manufacture of Split Sets exclusively for the supply to the plaintiff in accordance with the recitals of the 1984 Agreement.
328 Mr Grieve QC raised two further matters as fatal to the plaintiff’s case with which I must deal. The first is the May 1993 letter (Ex Y). I am of the view that this arrangement does not detract from the force of the observations I have made in respect of the conduct of the second defendant during the period. It is clear that notwithstanding this arrangement the above conduct was pursued by the second defendant consistently with the terms of the 1984 Agreement.
329 I am satisfied that this arrangement evidenced in Exhibit Y was one to which the defendants agreed in the circumstances of the financial requirements of “the group”. It was to the advantage of “the group” but is not evidence inconsistent with the second defendant being contractually bound to the plaintiff.
330 The second matter is the conversation with Mr Landsberg at the Vinidex factory in 1997. This evidence was not put on until well after the commencement of the trial. D.J. Fergusson was not really tested about it and Mr Landsberg said he had no recollection of it and he was not tested further about it. I have some real doubts about whether the conversation occurred in the terms claimed.
331 However on the assumption that it occurred an analysis of what it means is required. The words relied upon are “a lot of people at Ingersoll have been concerned for some time that Strata is set up in Perth without a contract and it seems to be causing a lot of unrest within the ranks”.
332 There is no doubt that the second defendant did not sign a contract. However there is no evidence of any discussion between 1992 and 1997 about the status of the second defendant’s contractual relationship with the plaintiff. These few words do not in my opinion support the proposition that there was no contractual relationship between the plaintiff and the second defendant. I am of the view that at best they may support a finding that there was some anxiety that there was no signed contract.
333 I am satisfied on the balance of probabilities that the second defendant’s conduct since 1993 does amount to an acceptance of the terms of the 1984 Agreement notwithstanding its initial claim that clause 15 was unfair.
334 If, contrary to my finding, the second defendant was only an agent of or subcontractor to the first defendant, I am satisfied that by its conduct with the knowledge of the requirements of a contract of which it was well aware, it accepted that it would be bound by a Secrecy Agreement not to disclose the plaintiff’s confidential information without the authority of the plaintiff. Further, I am satisfied that such restraint was in the terms of the ISIS Secrecy Agreement, not limited in time, but not applicable if such information becomes public.
335 In this latter situation the second defendant would not be restrained from manufacturing and selling a mining roof support similar in design to the plaintiff’s mining roof support so long as it did not use the plaintiff’s confidential information.
Breach by the second defendant-use of confidential information
during the Agreement
336 In all the circumstances I am satisfied that the second defendant has breached clause 12 of the 1984 Agreement by using the plaintiff’s confidential information in the assistance it provided to the first defendant in the creation of the Strata Bolt. I am also satisfied that it used the plaintiff’s confidential information when it assisted the first defendant in its WMC tender.
337 If, contrary to my finding, the second defendant is a third party recipient of the plaintiff’s confidential information, I am satisfied that the second defendant had an equitable duty of confidence and the plaintiff is entitled to restrain the second defendant from misusing the confidential information. I am satisfied that such misuse has occurred in the creation of the drawings of the Strata Bolt, the manufacture of the Strata Bolt and in assisting the first defendant in the provision of the plaintiff’s confidential information to WMC in its tender: Wheatley v Bell (1982) 2 NSWLR 544 at 550 See also Argyll v Argyll [1967] 1 Ch 302 at 333; Stevenson, Jordan & Harrison Ltd v McDonald [1951] 68 RPC 190; Attorney General v The Guardian Newspapers Ltd (No2) [1988] 3 All ER 545 at 642-643, 652; Best Australia Ltd v Aquagas Marketing Pty Ltd (1989) 13 IPR 600; Marcel v Commissioner of Police of the Metropolis (1990) 20 IPR 532 at 539 per Brown Wilkinson V-C; National Education Advancement Programs (NEAP) Pty Ltd v Ashton (1995) 33 IPR 281 at 290; Dart Industries v David Bryar & Associates Pty Ltd (1997) 38 IPR 389 at 406..
338 In the light of my earlier findings in respect of the origins of the Strata Bolt the plaintiff’s claim that the second defendant induced the first defendant to breach its contract with the plaintiff must fail.
The Restraint Clause
339 Consistently with the defendants’ case on contract the first defendant was the only party to the Cross Claim attacking the Restraint Clause. However in the light of my findings I will treat the second defendant as a party to the Cross Claim and as having made the same submissions as the first defendant but with the further submission that the entry into such agreement was after the patent had expired.
340 Clause 15 provides that during the term of the Agreement and for five years following its termination, except as authorised by the plaintiff, the defendants “shall not make a mining roof support which is similar in design to the mining roof support” covered by the 1984 Agreement. There is no issue between the parties that the Strata Bolt is a mining roof support similar in design to the Split Set.
341 In determining whether or not the restraint imposed by clause 15 was reasonable at the time of the execution of the 1984 Agreement and has been so since (Gibbs J in Amoco Australia Pty Ltd v Rocca Bros. Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 318) the defendants rely upon the following facts:
· Ingersoll was a non-exclusive sub-licensee of the relevant patent which was due to expire and ultimately did expire on 29 January 1990. It submitted that in theory, at least, the plaintiff could have chosen for any number of reasons to grant other sub-licences. Additionally the limited “life expectancy” of the patent bore upon the degree to which the parties could realistically expect to capitalise on the statutory monopoly conferred by the patent.
· the first defendant was purportedly bound to manufacture the product exclusively for the plaintiff for the life of the contract while the reverse was not so. In these circumstances the first defendant was bound to refrain from a change in course, not only during the agreement but for five years beyond its termination while leaving the plaintiff entirely without restriction during both periods: Mouchel v Williams Cubitt & Co [1907] 24 RPC 194 at 200.
· the clause is without geographical limit and there is no provision in the contract binding the plaintiff to provide the first defendant with any minimum orders;
· there was no provision in the contract for the contribution by the plaintiff to any of the capital costs which the first defendant was bound to incur in establishing its plant;
· it was possible, if not probable, that on expiry of the patent, competitive manufacturers would enter the market place, as indeed did occur; and
· the time within which an alternative manufacturer could “tool up” to meet the plaintiff’s requirements was potentially as short as six months.
342 When the first defendant entered into the 1984 Agreement the patent had not expired. This was not the case when the second defendant contracted with the plaintiff. It has been submitted by the plaintiff that at the time of the formation of the contract, at least in the first defendant’s case, the first defendant was not free to manufacture Split Set mining roof supports by reason of the existence of the patent. Thus it is submitted there was no shackling of any pre-existing freedom or sterilisation of a pre-existing capacity to trade free of the restraint: Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269.
343 Assuming however that the restraint of trade doctrine does apply, a restraint in a commercial agreement can be viewed as reasonable if it is necessary to protect a genuine commercial interest rather than being simply a bare attempt to stifle competition. Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607.
344 The applicable principle has endured for over one hundred years and has been repeated and applied in so many cases. I have been referred to many of them. Lord Macnaghten in ThorstenNordenfelt (Pauper) v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] A.C. 535 at 565 expressed it thus:
It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable, that is in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.
345 J.D. Heydon in “The Restraint of Trade Doctrine” (1999) 2nd Ed, helpfully sets out the factors appropriate for consideration in assessing the reasonableness of a restraint (p 178-184). In this case those factors include:
· whether there was disparity of obligations;
· whether solus agreements are normal in the mining industry;
· the advantages obtained by the parties;
· the resulting position the restraint would place on the defendants; and
· interests of the public.
Disparity of Obligations
346 The first defendant submitted that the absence of any requirement for exclusivity on the plaintiff in the 1984 Agreement whilst imposing such a requirement on the defendants demonstrates that unfair advantage has been taken of the defendants: British American Oil Co Ltd. v MacLaren (1927) 33 OWN 239 at 240; ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640.
347 The plaintiff emphasised the fact that although there was a disparity of obligations in respect of exclusivity the plaintiff dealt only with the defendants and the 1984 Agreement operated as an exclusive manufacturing agreement. However if I am to look at the way in which the 1984 Agreement operated in considering whether there was disparity of obligations, I am of the view that further analysis is required of how this lack of obligation of exclusivity operated.
348 The plaintiff utilised its entitlement of non-exclusivity to facilitate an agreement, which I believe was reached, with the defendants to freeze prices. This agreement was reached in an environment in which the defendants feared that if they did not accept the freeze the plaintiff would find other cheaper manufacturers.
349 From 1992 to 1999 the prices at which the defendants manufactured the Split Sets for the plaintiff were those prices agreed in 1991. The plaintiff’s freedom to go elsewhere was utilised in taking advantage of the defendants in this regard. Although there were other products being manufactured by the defendants it is clear that the major part of its business was the production of Split Sets for the plaintiff.
350 I am satisfied that there was a large disparity of obligation between the plaintiff and the defendants in respect of exclusivity. I am also satisfied that the plaintiff dealt only with the defendants for the manufacture of the Split Sets during the period 1984 to 2000.
Industry Practice351 In deciding the validity of solus agreements it is clear that Courts often look at the industry as a whole in determining whether such arrangements are normal: TheQueensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 at 270; Amoco Australia Pty Ltd v Rocca Bros. Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 318-319.
352 In this case friction bolts similar to the plaintiff’s Split Sets are manufactured in Australia both by ANI and Jennmar. The manufacturers sell the products directly to the mines and, on the evidence before me, it seems that a retailer such as a plaintiff is exceptional in the mining industry.
Advantages Obtained by the Parties353 The plaintiff has always been free to contract with another manufacturer and it is now competing as a retailer with other manufacturers. It has contracted in late February/early March this year with another manufacturer, Phoenix Metalform, for the manufacture of its Split Sets.
354 It is submitted that the price regime the plaintiff has imposed on the defendants has enabled the plaintiff to compete as a retailer at the defendants’ expense.
355 It is submitted that no such converse advantage exists for the defendants. I am satisfied that the manufacturing competence and capacity the defendants have developed over the years by their participation in the contract with the plaintiff have facilitated their capacity to enter the market immediately in the supply of mining roof supports.
356 The defendants have removed the problem of the two cost structures and thus have gained the advantage of more freedom in the pricing structure of the products they manufacture.
The resulting position357 A restraint must not extend to the point where the interests of the defendants are so reduced as to substantially prevent their earning capacity within the area over which their interests extend: Herbert Morris Ltd v Saxelby [1916] 1 AC 688; GW Plowman & Son Ltd v Ashe [1964] 1 WLR 568.
358 There is no doubt that the earning capacity of the defendants would be adversely affected if they were not able to manufacture and sell mining roof supports to the industry.
Interest of the Public359 The friction bolt mining roof support is a safety product. It is a product essential for the protection of life and limb of Australian miners. There is no issue that the defendants are experienced and competent manufacturers. It is clear that at least the first defendant has been able to secure contracts at prices acceptable in the market place.
360 It is submitted that it is in the interests of the industry and the public that roof supports be made available in a functional form at the lowest practicable costs, subject, of course, to appropriate standards as to safety and efficacy.
361 The availability of competent manufacturers with recognised safety records is in my view a very important factor for consideration.
Generally362 The plaintiffs claim for an injunction to prevent the defendants manufacturing a mining roof support similar in design to the Split Set has been based upon a claim that it would take the plaintiff two years to “tool up” a new manufacturer to supply Split Sets which are to a standard required by it. It is submitted by the plaintiff that even if the Court regarded the restraint of five years as unreasonable a restraint of two years would be reasonable.
363 Mr Landsberg gave detailed evidence of the process through which the plaintiff would have to go to “tool up” such a manufacturer (par. 47 Affd 29 May, 2000). However during the course of the trial it became quite clear that the plaintiff has entered into a contract with Phoenix in which it expects to have delivery of product probably at about the time this judgment is delivered or a little later. This seems to be in stark contrast to the evidence before Hamilton J and to the claim made by the plaintiff before me that it would take two years.
364 The plaintiff explained that, although it may receive product within six months of the signing of the contract with Phoenix, the process of “tooling up” required an additional period during which any manufacturing deficiencies could be rectified. Such a period was also necessary so that the plaintiff could reach a level of satisfaction with the manufacturing process similar to that which was achieved with the defendant’s manufacturing process. It claimed this would take two years.
365 The defendants submitted that there had been a material non-disclosure before Hamilton J which would persuade the Court that the injunction granted should be dissolved. It was suggested that the plaintiff was in a position to disclose to Hamilton J the facts as disclosed to me in respect of the time within which an alternative manufacturer could provide product.
366 I am of the view that the plaintiff was in a position to inform Hamilton J of far more material than it did in relation to the status of the Phoenix negotiations and the capacity of that company to manufacture product within six months of entry into a contract. However I am not satisfied that such non-disclosure was material to the decision made by Hamilton J to grant the interlocutory injunctive relief.
367 I am satisfied that two years is too long for “tooling up” a new manufacturer. I do not accept that, with the plaintiff’s expertise and experience in this field over so many years in this country, such a lengthy period would be necessary. This is supported by the fact that Phoenix was able to promise to have product manufactured to the plaintiff’s specifications and tolerances within six months of signing a contract.
368 The plaintiff maintained its submission that the five year period was reasonable because it is reasonably necessary to protect the plaintiff’s business goodwill: Tavener v Sheridan (2000) FCA 219 at 32 (Wilcox, Emmett and Gyles JJ 7 March, 2000). The plaintiff also cautioned me against substituting my view as to what is reasonable for those of the contracting parties. This is more so because the parties bargained from a position of apparent equality by reference to their respective commercial interests at the time: Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) AC 269 at 323; Amoco Australia Pty Ltd v Rocca Bros. Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 294.
369 The plaintiff submitted that, if the Court finds the restraint is unreasonable, the Court should read down the restraint to a point that makes it enforceable. In this instance it is submitted that I should read the clause down from five years to two years. It was submitted that this would be the minium period necessary to neutralise any “springboard” advantage that would otherwise accrue to the defendants: Terrapin Ltd v Builders Supply Co (Hayes) Ltd [1967] RPC 375; Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 at 43,830.
370 The plaintiff also submitted that I could read clause 15 down to limit it geographically from the whole world to Australia, Indonesia, Fiji, France, New Zealand and Papua New Guinea.
371 The Restraints of Trade Act 1976 (NSW) (the Act) enables the Court to read clause 15 down to an extent that makes its enforcement not against public policy: s 4 of the Act: Kone Elevators Pty Ltd v McNay & Anor (1997) ATPR 41-564 at 43,833.
372 I have found that the similar mining roof support - the Strata Bolt - that has been manufactured by the defendants was manufactured using the plaintiff’s confidential information.
373 The defendants case in this regard failed in two relevant respects. Firstly I rejected the claim that the information was not confidential and secondly I rejected the claim that the Strata Bolt drawings and manufacture did not utilise the plaintiff’s confidential information.
374 Mr Grieve QC submitted that the plaintiff was adequately protected by clause 12 without any need for clause 15. Such submission was made without conceding the appropriateness of clause 12. However the evidence in this case and the experience in others demonstrates that it is unsatisfactory to have only a covenant against disclosing confidential information because of the difficulty in drawing the line between information that is confidential and information that is not: Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 per Lord Denning at 1479.
375 The first defendant took advice from Ellicott QC on whether clause 15 was enforceable. It received advice that it could terminate the 1984 Agreement and immediately manufacture a similar mining roof support so long as it did not use the plaintiff’s confidential information. Notwithstanding that advice, the defendants chose to continue in a contractual relationship with the plaintiff and not only manufacture a similar mining roof support during the Agreements but also use the plaintiff’s confidential information to do so.
376 On the evidence before me and in the light of my findings that the information within the plaintiff’s drawings remains confidential (excluding the steel) I must decide whether the restraint provision in clause 12 is reasonable.
377 In this regard the defendants rely on the “maximum” period of ten (10) years provision in the Portec Agreement (Ex.R) and the “Tubauto type Agreement” (Ex A Confidential RM 3) which was described as a “standard manufacturing agreement” used by I-R. It is submitted that such a provision is instructive of the plaintiff’s long held (since at least 1982) recognition of the finite degree of the confidentiality which can attach to such information.
378 The plaintiff submitted that it would be rather odd to construe the 1984 Agreement as imposing on the defendants a continuing obligation of confidentiality in relation to the very same information which under other contracts relating to the same subject matter, others had, for some considerable time, been quite legitimately at liberty to divulge to the world at large.
379 That submission is a little too broad to be acceptable. There may be the potential for such a situation but there is no evidence that such potential has ever been or will ever be realised. There is no evidence that the information that I have found to be confidential was provided to any person or entity that had signed such an agreement. Nor is there any evidence of the terms of any signed contracts upon which I could make a finding that the confidential information is in the public domain.
380 The information is confidential and the defendants agreed that they would not use it for five years after the termination of the 1984 Agreement. It is a qualified restraint that allows the use if and when it becomes public. In my view this is a reasonable restraint.
381 Although there are other mining roof supports similar in design in the marketplace the plaintiff’s specifications and tolerances (excluding the type and grade of the steel) remain confidential. To prevent the use of that confidential information in the circumstances is in my view not a restraint upon competition but in reality a protection of a valuable, genuine commercial interest.
382 I am of the view that the restraint in clause 12 is not against public policy and is enforceable.
383 In all the circumstances of this case I am satisfied that restraints of the defendants breaches are not contrary to public policy since the protection of the plaintiff’s confidential information and goodwill was clearly within the bounds of reasonableness as between the parties: Orton & Ors v Melham (1981) 1 NSWLR 583. This finding is consistent with my view that the restraint in clause 15 is not against public policy during the life of the 1984 Agreement
384 The 1984 Agreement was terminated as at 29 May 2000. I am satisfied that the notice of termination given by the first defendant in November 1999 was also notice of termination of the Agreement between the plaintiff and the second defendant. This is consistent with the manner in which the parties have conducted themselves over the past eight years.
385 That leaves the final question of whether the restraint in clause 15 for the period of five years after the termination of the Agreement is valid.
386 The defendants expected and understood that the plaintiff was dealing with them as exclusive manufacturers. The first defendant accepted the terms of the agreement without demur until 1992 and was of the view that this restraint was reasonable. Although both defendants put forward a different proposal in 1992 they did not press it.
387 An important difference now is the presence of at least two competitors in the Australian marketplace facilitated in part by the expiry of the patent. Those competitors manufacture mining roof supports that are similar in design to the plaintiff’s Split Set. However it is clear that they do not have the reputation of the plaintiff nor the years of experience from which the plaintiff has earned this valuable reputation.
388 Competitors were not present when the first defendant entered into the 1984 Agreement but were present when the second defendant adopted the 1984 Agreement. By 1992 the patent had expired and the second defendant had the capacity, and was willing, to set up in competition with the plaintiff in servicing the Western Australian Mining Industry.
389 Is it reasonable both with reference to the interests of the parties and the interests of the public to restrain the defendants in terms of clause 15 for five years after the termination of the 1984 Agreement?
390 I regard the process of “tooling up” as including time for the ironing out of any manufacturing deficiencies to ensure the safety of the product. That process may reasonably have been envisaged to take five years sixteen years ago when the 1984 Agreement was struck.
391 However times have changed quite dramatically. The mining industry in Australia has been exposed to the use of the Split Set for the last eighteen years. The refinement of the manufacturing process has been the subject of much discussion and assessment with the assistance of the quality assurance process over the same period.
392 I am satisfied that with the wealth of the plaintiff’s experience in tooling up the defendants a reasonable period within which the plaintiff will be able to “tool up” another manufacturer is probably about six months from the first production of the Split Set. That will be nine months after the termination of the 1984 Agreement.
393 The springboard advantage is starkly exemplified in this case. The first defendant used its relationship with the plaintiff as a very prominent marketing tactic in its announcement in September 1999. It is submitted that it stole a march on the plaintiff and was successful in obtaining the WMC contract which, but for the defendants presence in the market, probably would have been won by the plaintiff.
394 Although the defendants would have it that there is no spring left in the board from which the defendants could launch themselves in the marketplace, I am of a different view. Although it has been diminished by reason of the different circumstances that now pertain I am satisfied there is still a springboard advantage present.
395 I am of the view that the period of five years is unreasonable in the circumstances that now pertain and is against public policy. I am also of the view that the geographical restraint is far too broad and against public policy.
396 Although there was ample opportunity for the plaintiff to create or join in creating a reasonable restraint it did not do so. It was well aware of the changing environment with the expiration of the patent and the entry of competitors into the market. The defendants proposals in the 6 November 1992 letter created a good opportunity for the plaintiff to respond with a suggested reasonable restraint. Nothing was proffered.
397 I am of the view that I should exercise my discretion under the Act and read the restraint down so as to make it enforceable. The fact that this is a safety product with a need for competent and safe manufacturers in the market has also featured prominently in my mind in reaching this conclusion.
398 I am of the view that I should read down the restraint in clause 15 as follows: that “for a period of nine months from the date of termination of the Agreement the (defendants) shall not, within Australia, make a mining roof support similar in design to the mining roof support” covered by the 1984 Agreement.
399 The defendants will be free to manufacture and sell a similar mining roof support which does not use any of the plaintiff’s confidential information from March 2001.
Implied Terms
400 At the outset of its written submissions the plaintiff advised that no matters had been “abandoned” however it conceded that its principal claims were for breaches of contract and for breach of equitable duty of confidence. The plaintiff’s written outline contains no final submissions in respect of the implied terms pleaded. Other than submitting that it was a matter for the Court to determine whether the terms were implied the plaintiffs made no further submissions in final oral submissions.
401 On the basis that both defendants are bound by the 1984 Agreement the plaintiff’s case is that such Agreement contained the following implied terms:
(a) the defendants would not, during the term of the Agreement, market or sell products which are similar in design to the plaintiff’s Split Set in competition with the plaintiff, unless authorised by the plaintiff; (Competition)
(b) the defendants would not, during the term of the Agreement, do anything to damage or destroy the plaintiff’s ability to sell Split Sets; (Damage to Plaintiff)
(c) the defendants would not, during the term of the Agreement, do anything inimical to the plaintiff’s business of selling Split Sets; (Inimical Conduct)
(d) the defendants would not, during the term of the Agreement, solicit, approach or entice away any of the plaintiff’s employees and clients; (Soliciting Employees) and
(e) the defendants would not, during the term of the Agreement, procure or assist any other party do any of the things described in paragraphs (a) to (d) above. (Assisting Others)
402 The plaintiff claimed that each of the implied terms was to be inferred from the “nature” and the whole of the terms of the Agreement, and “the nature of the relationship between the parties”.
403 The questions that arise in respect of this claim are whether such terms are reasonable and equitable, necessary to give business efficacy to the contract, so obvious that they go without saying, capable of clear expression and not in contradiction of an express term: BP Refinery (Westernport) Pty Ltd v Hastings (1977) 180 CLR 266 at 282-283; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 441-442; Peters American Delicacy Co Ltd v Champion (1928) 41 CLR 316 at 322-324.
404 Without the benefit of any submissions from the plaintiff on this topic the Court is tempted to assume that although the plaintiff has indicated that it has not abandoned any claims, it has by its lack of apparent commitment actually abandoned it. Notwithstanding that temptation the Court must give consideration to these matters in the circumstances and has only been assisted by submissions from the defendants.
Competition405 Mr Grieve QC highlighted the “one-sided” nature of the contract. This springs from an interpretation of the recitals to the 1984 Agreement in which the plaintiff is referred to as desiring to procure the manufacture of the Split Set on a non-exclusive basis. The next recital as recorded earlier in the judgment refers to the defendants being willing to supply the Split Sets on that basis. On one reading of such recitals it may be open to construe the Agreement as the defendants being entitled to manufacture on a non-exclusive basis. However it is clear that the parties intended and understood that such was not the construction of the contract.
406 Additionally Mr Grieve QC highlighted the capacity of the plaintiff at any time to have chosen another manufacturer and reminded the Court that when the first defendant was exercising its rights to increase the prices the plaintiff threatened that it would go to another manufacturer.
407 I am not at all satisfied that this term would be reasonable or equitable in all the circumstances. Having regard the express terms of the 1984 Agreement I am not satisfied that it is necessary to give business efficacy to the contract.408 Once again the contract enabled the plaintiff to threaten to go to another manufacturer, or indeed to go to another manufacturer whilst requiring the first defendant to manufacture products for it at prices less than the defendants thought were reasonable. This was potentially damaging and inimical to the defendant’s capacity to continue to survive in the exclusive contract.
Damage to Plaintiff/Inimical to the Plaintiff409 Having regard to the express terms of the 1984 Agreement I am not satisfied that such a term is necessary to give business efficacy to the Agreement. I am therefore not satisfied that I should imply such a term in the contract.
It seems that commercial good sense would ensure that the defendants did not act during the course of the contract in a way that would damage or destroy the plaintiff’s ability to sell products because such conduct would impact adversely on the defendants as they were dependent upon the plaintiff for their income.
Soliciting Employees410 It is quite unnecessary to consider this alleged implied term because the evidence is overwhelmingly in favour of the defendants on this aspect of the case. Not only did they inform the plaintiff of the intended approach to employees but they were positively assisted by Mr Moore telling them what might be an attractive offer to one of the employees.
411 The disclosure of the intended approach to the plaintiff gave it the opportunity to match the offer or better it. I am not satisfied in the circumstances that such a term could be implied.
412 There was other evidence about the conduct of one of those employees with which I should deal shortly. During the course of the trial the plaintiff uncovered material which Mr Mills had forwarded to his computer at home by e-mail. Without descending into the detail of that material it obviously contained the plaintiff’s price lists and various other items which prima facie seem to be confidential to it.
413 The process of uncovering the sending of the information to the plaintiff’s home computer required the plaintiff to employ a computer expert to recreate a file that had been deleted. Mr Mills gave evidence that although he had attempted to send the material to his home by e-mail, such attempt had failed because the files were not attached.
414 I found the explanation that Mr Mills offered for sending these files home quite unsatisfactory. He suggested that it was just in case somebody asked him for a price after hours. The timing of this e-mail militates against a finding that such a course was in the interests of the plaintiff.
415 However I am not satisfied that this ultimately has very much to do with the case. There was no evidence that the defendants have had access to that material through Mr Mills to the detriment of the plaintiff and there was no evidence that the defendants knew about this conduct even at the time of trial.416 In the circumstances of my findings in respect of the implied terms it is not necessary to deal with this matter.
Assisting Others417 The first defendant’s announcement of the Strata Bolt is the source of the representations pleaded that:
Section 52 Representations
(a) the first defendant developed the 46 mm Split Set;
(b) there were no restraints on the ability of the first defendant to supply its Strata Bolt product direct to customers; and
(c) the first defendant had the sponsorship and approval of the plaintiff to manufacture the first defendant’s Strata Bolt, or any product similar to the plaintiff’s Split Set products.
418 The representations in (a) and (b) are admitted on the pleadings. The first representation arises from the second sentence of the announcement which states “During the 1980’s SCS developed the 46 mm Split Set which is now the most widely used friction bolt in Australia”. The evidence satisfies me that the 46 mm Split Set was in fact developed by the plaintiff.
419 There is no doubt that the first defendant assisted the plaintiff with costing and manufacturing assistance whereby a statement that the first defendant assisted in that way would not be likely to mislead or deceive. However the statement as made in my view would be likely to mislead or deceive.
420 Because the Strata Bolt was manufactured by use of the plaintiff’s confidential information I am also of the view that representation (b) has that capacity to mislead or deceive the recipient of the announcement.
421 Representation (c) is not admitted but on a reading of the whole of the announcement I am not satisfied that such a representation is contained within it.
422 Although these claims were not abandoned and although I have found that such representations were made, in the state of the evidence and with no submissions from the plaintiff I am not satisfied that the plaintiff can take the matter any further.
Cross Claim for Price Increases
423 Price increases were agreed to between 1984 and 1991. These were in accordance with the formulae in the 1984 and 1986 Agreements. The plaintiff informed the first defendant on 10 February 1992 at the meeting in Victoria that the 1991 prices would apply. No further price increases were agreed.
424 The defendants claim that this amounted to a repudiation of the contract and they are entitled to damages in the amount claimed. The evidence does not support this claim.
425 J.V. Fergusson gave evidence that no further notifications were given under the contract after 1992. He said the reasons included a fear that the Agreement may be terminated. He also gave evidence that the five percent volume discount that had been provided to the plaintiff was waived as a quid pro quo for the lack of price increases. This evidence was damning for the cross claim.
426 Mr Crick did not agree that it was a quid pro quo. He took the view that he would remove the discount in the light of the lack of price increases and see what happened. There was a further request to Mr Drumheller in the letter in 1996 to which reference has been made earlier in this judgment
427 I am satisfied that the defendants agreed to the price freezes from 1992 and in return removed the plaintiff’s volume discount. I am satisfied that the cross claim is without merit and should be dismissed.
Orders
428 The parties are to bring in short minutes of order reflecting my findings which should include the following:
· the restraint in clause 15 of the 1984 Agreement for the period after the termination of the Agreement is invalid and unenforceable;
· the restraint in clause 15 in relation to the period after termination is read down pursuant to the Restraints of Trade Act 1976 to a period of 9 months after termination and limited geographically to within Australia;
· the specifications and tolerances (excluding the type and grade of the steel) of the plaintiff’s Split Sets contained in the plaintiff’s drawings is confidential information;
· the material received by the defendants from the plaintiff including the R & D information and the ISIS material which contained direct or indirect references to the specifications and tolerances of the Split Sets is confidential information;
· the first defendant has breached clause 12 of the 1984 Agreement by use of the confidential information in the plaintiff’s drawings for the production of the Strata Bolt and in the WMC tender;
· the second defendant is bound by the terms of the 1984 Agreement;
· the second defendant has breached clause 12 of the 1984 Agreement by use of the confidential information in the plaintiff’s drawings for the production of the Strata Bolt and in the WMC tender;
· the first and second defendants are in breach of clause 15 by the manufacture of a mining roof support similar in design to the Split Set during the period of the Agreement;
· the defendants are in breach of their equitable duty of confidence by using the plaintiff’s confidential information in the production of the Strata Bolt and in the WMC tender;
· the cross claim for damages in relation price increases since 1992 is dismissed.
429 The parties are to approach my Associate to obtain a convenient date for the filing of Short Minutes, directions as to the hearing in respect of damages or account of profits and any argument in relation to costs if a costs order is not agreed between the parties. The injunctions are to remain in place until final orders are made which should include the adjustment of the restraining orders.
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