Painaway Australia Pty Ltd v JAKL Group Pty Ltd
[2011] NSWSC 205
•24 March 2011
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of Painaway Australia Pty Ltd (in prov liq)(admin apptd) - Painaway Australia Pty Ltd v JAKL Group Pty Ltd & ors [2011] NSWSC 205 Hearing dates: 3, 4, 8-11 February 2011 Decision date: 24 March 2011 Before: Ward J Decision: Held that a binding agreement came into existence by mutual assent (or on the application of principle of conventional estoppel) under which Painaway has exclusive licence regarding intellectual property, trade marks and formulas, such licence not validly terminated by Nature's Remedies. Short minutes of order to be prepared.
Catchwords: CONTRACT - OFFER & ACCEPTANCE - whether offer constituted by signing of licence and shareholders agreements by some parties thereto - whether inferred acceptance thereof - whether manifestation of mutual assent to contract - HELD - contract established by mutual assent - ESTOPPEL - whether conventional estoppel applied to preclude denial of licence agreement - HELD - conventional estoppel established - INTELLECTUAL PROPERTY - whether exclusive licence in respect of registered trade marks and formulas -whether registered owner of trade marks can contractually fetter statutory right to use trade mark - whether confidential information in formulas is assignable - HELD - exclusive licence - statutory right of registered owner can be so fettered by contract - confidential information not property assignable as such - CORPORATIONS - whether pre-incorporation contract - HELD - no pre-incorporation contract Legislation Cited: Corporations Act 2001 (Cth)
Therapeutic Goods Act 1989 (Cth)
Trade Marks Act 1995 (Cth)
Trade Practices Act 1974 (Cth)
Fair Trading Act 1987 (NSW).Cases Cited: Aarn E Levine and Co Inc v Calkraft Paper Co 429 F Supp 1039 (1976)
Ainsworth v Criminal Justice Commn (Qld) [1992] HCA 10; (1992) 175 CLR 564
Air Great Lakes v K S Easter (Holdings) (1985) 2 NSWLR 309
Aquaculture Corp v New Zealand Green Mussel Co Ltd (1985) 5 IPR 353; (1986) 10 IPR 319; (1990) 19 IPR 527
Attorney-General (NSW) v Brewery Employees Union (NSW) (1908) 6 CLR 469
Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 68 FCR 406; (1996) 139 ALR 663
Australian Blue Metal Ltd v Hughes and Ors [1962] 3 All ER 335
Australian Broadcasting Corporation v XIVth Commonwealth Games Limited (1988) 18 NSWLR 540
Aztech Science v Atlanta Aerospace (Woy Woy) [2005] NSWCA 319; (2005) 55 ACSR1
Banks v Transport Regulation Board (Vic) (1968) 119 CLR 222
Barrier Wharfs v W Scott Fell & Co (1908) 5 CLR 647
Baulkham Hills Private Hospital Pty Limited v G R Securities Pty Limited (1986) 40 NSWLR 622
Boardman v Phipps [1967] 2 AC 46; [1966] 3 All ER 721
Bowden Wire Co Ltd v Bowden Brake Co Ltd (1914) 31 RPC 385
Brambles Holdings v Bathurst City Council [2001] 53 NSWLR 153
Branir Pty Ltd & Ors v Owston Nominees [No 2] Pty Ltd & Anor [2001] FCR 1833; (2001) 117 FCR 424
B Seppelt & Son Limited v Commissioner for Main Roads (1975) 1 BPR 9147
Budget Rent A Car System Pty Ltd v Kay Rent A Car Pty Ltd (1985) 8 FCR 116
Campbell v Backoffice Investments Pty Ltd (2009) 83 ALJR 903
Coles v Wood [1981] 1 NSWLR 723
Commonwealth of Australia v BIS Cleanaway Limited [2007] NSWSC 1075
Con-Stan Industries Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226
Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 14 FCR 434
Crawford Fittings Co and Ors v Sydney Valve & Fittings Pty Ltd and Anor (1988) 14 NSWLR 438
Cypjayne Pty Ltd v Rodskog [2009] NSWSC 301
Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361
Delphic Wholesalers Pty Ltd v Elco Food Co Pty Ltd (1987) 8 IPR 545
DPC Estates Pty Ltd v Grey & Consul Development Pty Ltd [1974] 1 NSWLR 443
Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288
Empirnall Holdings v McMahon Paull Partners (1988) 14 NSWLR 523
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471
Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95
Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175
Film Bars Pty Limited v Pacific Film Laboratories Pty Limited (1979) 1 BPR 9251
Forster v Jododex Australia Pty Ltd [1972] HCA 61; (1972) 127 CLR 421
General Electric Co v General Electric Co Ltd [1972] 1 WLR 729; [1972] 2 All ER 507
G R Securities v Baulkham Hills Private Hospital Pty Limited (1986) 40 NSWLR 631
Hanson v Radcliffe UDC [1922] 2 Ch 490
Heap v Hartley (1889) 42 Ch D 461 (CA)
Heggies Bulkhaul v Global Minerals Australia (2003) 59 NSWLR 312
Hillas v Arcos Ltd (1932) 147 LT 503
Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810; [2008] ATPR 42-410
Ibeneweka v Egbuna [1964] 1 WLR 219
Industrial Equity Ltd v Lyons (NSWSC unreported, Cohen J, 15 October 1991)
Inline Logistics Ltd v UCI Logistics Ltd [2002] R.P.C 32
Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11
Integrated Lighting & Ceilings Pty Limited v Phillips Electrical Pty Limited (1969) 90 WN (Pt 1) (NSW) 693
Lawfund Australia Pty Limited v Lawfund Leasing Pty Limited (2008) 66 ACSR 1
Lohar Corp Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 9177
Mackay v Dick (1881) 6 App Cas 251
Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616
Masters v Cameron (1954) 91 CLR 353; (1954) 28 AJLR 438
Mid-City Skin Cancer & Laser Centre v Zahedi-Anarak [2006] NSWSC 844
Milne v Sydney MC (1912) 14 CLR 54
MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39
Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414
Morison v Moat (1851) 9 Hare 241; 68 ER 492
Neeta (Epping) Pty Ltd v Phillips [1974] HCA 18; (1974) 131 CLR 286; (1974) 3 ALR 151
Newbery v James (1817) 35 ER 1011
Norman v Federal Commissioner of Taxation (1963) 109 CLR 9
Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288
Pacific Carriers v BNP Paribas (2004) 218 CLR 451
Pioneer Kabushiki Kaisha v Registrar of Trade Marks (HCA, unreported, Aickin J, 1 November 1977)
Prints for Pleasure Ltd v Oswald-Sealy (Overseas) Ltd [1968] 3 NSWR 761
Ray v Davies (1909) 9 CLR 160
Re Judiciary and Navigation Acts (Advisory Opinions Case) [1921] HCA 20; (1921) 29 CLR 257
Re Keene [1922] 2 Ch 475
Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1
RJ Baker Nominees Pty Ltd v Parsons Management Group Pty Ltd [2010] WASCA 128
R T & Y E Falls Investments Pty Limited v The State of New South Wales & ors [2001] NSWSC 1027
Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
Smith Kline & French Laboratories (Aust) Ltd v Secretary, Dept of Community Services and Health (1990) 22 FCR 73
The Commonwealth v Verwayen (1990) 170 CLR 394
Thomas v Sorrell (1674) Vaughan 330; 124 ER 1098
Thompson v Palmer (1933) 49 CLR 507
Toll (FGCT) v Alphapharm (2004) 219 CLR 165
Trans Realties Pty Limited v Grbac [1975] 1 NSWLR 170
TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3) [2007] FCA 151
United Dominion Corporation Limited v Brian (1985) 157 CLR 1
University of New South Wales v Moorhouse Angus & Robertson (Publishers) Pty Ltd [1975] HCA 26; (1975) 133 CLR 1
Vroon BV v Fosters Brewing Group Ltd [1994] 2 VR 32
Waldorf Apartment Hotel v Owners Corp SP 71623 [2010] NSWCA 226
Waltons Stores v Maher (1988) 164 CLR 387
Watson v Foxman (1995) 49 NSWLR 315
Winter Garden Theatre (London) Ltd v Millenium Productions Ltd [1947] 2 All ER 331Texts Cited: McKeough et al, Intellectual Property: Commentary and Materials (4th edn)
Meagher, Gummow and Lehane's Equity - Doctrines and Remedies (4th edn)
Radan et al, Equity and Trusts (2nd edn)
Stuckey 'The Equitable Action for Breach of Confidence: Is Information Ever Property?' (1981) 9 Sydney Law Review 402Category: Principal judgment Parties: Painaway Australia Pty Ltd (Applicant)
JAKL Group Pty Ltd (First Respondent)
Mickey Rose Investments Pty Ltd (Second Respondent)
Angelo's Angels Pty Ltd (Third Respondent)
Nature's Remedies Pty Ltd (Fourth Respondent)
John William Carroll (Fifth Respondent)
Linda Jane Carroll (Sixth Respondent)
Angelo Hyder (Seventh Respondent)
Elias Michael Nassar (Eighth Respondent)Representation: Counsel:
J Svehla (Applicant)
J Ireland QC with C Cassimatis (First, Fourth, Fifth & Sixth Respondents)
D Stack (Second, Third, Seventh & Eighth Respondents)
Solicitors:
Holding Redlich (Applicant)
PA Legal (First, Fourth, Fifth & Sixth Respondents)
Kemp Strang (Second, Third, Seventh & Eighth Respondents)
File Number(s): 10/253120
Judgment
HER HONOUR: These proceedings were commenced in July 2010 on an application by Mr John Carroll, a director of Painaway Australia Pty Ltd (and also a director of one of its shareholders - the first respondent, JAKL Group Pty Limited), seeking to have Painaway wound up on the just and equitable ground under s 461(1)(k) of the Corporations Act 2001 (Cth) and on the basis of oppression (based on allegations that the other two directors, Mr Elias Nassar and Mr Angelo Hyder, had acted in their own interests rather than in the interests of members). (JAKL, as a shareholder of Painaway, was subsequently substituted as the plaintiff in the proceedings.)
Painaway carried on the business of the marketing and distribution of pharmaceutical products, comprising arthritis creams and sprays and sports creams and sprays, to which I will refer collectively as the Painaway products. (These include products marketed under a "PainAway" trade mark and others marketed under a "Johno's Edge" trade mark.)
JAKL, as trustee for the Carroll Family Trust, is one of the three shareholders of Painaway. The remaining shareholders are Mickey Rose Investments Pty Limited and Angelo's Angels Pty Limited, being the trustees of family trusts established by the Nassar and Hyder families respectively.
In August 2010, the shareholders other than JAKL (Mickey Rose and Angelo's Angels), together with Messrs Nassar and Hyder, filed an interlocutory process in the winding up proceedings, seeking (amongst other things) the appointment of a receiver, relief from oppression and an order for the sale of the Painaway business and compulsory purchase of either the Nassar/Hyder companies' shares or JAKL's shares in Painaway by the remaining shareholder(s) as the case may be. One advantage of a receivership over a winding up was, as I understand it, perceived to be that it avoided the possibility that any licence held by Painaway in respect of the Painaway products might be automatically terminated as a consequence of a court-ordered winding up of the company.
The matter came before me initially in November last year on the application of Mr Neil Geoffrey Singleton, who had been appointed in August 2010 as the receiver and manager of Painaway. By a Second Amended Interlocutory Process filed in court on 11 November 2010, Mr Singleton sought various orders, including an order for his appointment as provisional liquidator of Painaway. Although this was at first opposed by JAKL, ultimately each of the Painaway shareholders on that occasion consented to an order for Mr Singleton's appointment as provisional liquidator of Painaway; leaving as the only matter then before me Mr Singleton's application (made consequent upon his appointment as provisional liquidator) for leave pursuant to s 436B(2)(g) of the Corporations Act 2001 (Cth) to appoint himself and his business partner, Mr Alan Hayes, as voluntary administrators of Painaway. That application was opposed by JAKL (and by a creditor of the company, Alchemy Agencies, who was represented by Mr Carolan of Counsel on that occasion). After hearing argument on that (more limited) application, I acceded to it for the reasons given on 11 November 2010 and gave leave accordingly.
As a consequence, since November 2010, Mr Singleton and Mr Hayes have acted in the capacity of voluntary administrators of Painaway. In that capacity, they were obliged to convene a meeting of creditors within the statutory time period and to report to creditors on their investigations. Relevant for that purpose was the question as to what rights, if any, Painaway now has in relation to the manufacture, marketing or distribution of the Painaway products (and, in particular, whether any such rights are assignable, so as to provide a potential commercial benefit for the company, by way of entry into a Deed of Company Arrangement or the like that the administrators might in due course be able to recommend to creditors).
The view of Mr Singleton, as at November 2010, was that the company was then, or was likely to become, insolvent but that if Painaway could sell the stock presently in its possession, and make use of the raw materials also in its possession to manufacture and sell more stock, then it would be able to repay trade creditors; and that, if it does have an assignable exclusive licence in relation to the Painaway products, then it would be able to realise value for the company by its sale.
On 2 November 2010, I ordered that particular questions (broadly relating to the binding or otherwise nature of a licence agreement that the administrators, and the Nassar/Hyder interests, asserted was in place between Painaway and another company associated with Mr Carroll, Nature's Remedies Pty Ltd, in relation to the Painaway products) should be heard and determined separately from other matters in the proceedings. I listed the matter for the hearing of those separate questions on an urgent basis. In anticipation of that hearing, Painaway filed and served an Interlocutory Process dated 24 November 2010 in relation to the separate questions.
The order for the hearing of the separate questions was subsequently vacated by me when it became apparent that the issues raised in relation to the alleged licence (and rights claimed by Messrs Nassar and Hyder in relation to matters concerning Nature's Remedies) were such that pleadings would be necessary. In particular, the Nassar/Hyder interests had sought an order that the hearing and the determination of the Separate Questions not prevent them from seeking, arguing and obtaining, at some future time, relief on the basis that they have an equitable and/or legal interest in Nature's Remedies and in the Intellectual Property and/or the Painaway Formulas, as those terms are defined in a document entitled Shareholders Agreement. This gave rise to the need for pleadings. I made directions for this aspect of the matter (ie, the disputes in relation to the alleged licence and the shareholdings in Nature's Remedies) to continue on pleadings, with a view to there being an expeditious hearing of the licence issues early in the 2011 law term.
Pleadings were filed by the respective parties and the matter was listed for hearing (broadly on the issues raised in those pleadings) before me from 3 February 2011. The winding up application and the oppression claims were not the subject of the hearing before me in February; in relation to the latter it being accepted as a matter of practicality that any oppression suit was predicated on there being some value remaining in the company. (If, as is submitted on behalf of the Carroll interests, Painaway has no enduring or valuable intellectual property or other rights in relation to the manufacture or distribution and sale of the Painaway products which the administrators are in a position to sell or otherwise deal with on a commercial basis, then it is unlikely as I understand it that a compulsory purchase order will be of much value to the parties even if one or other of the oppression suits were to succeed.)
The administrators sought (and obtained) in December last year an extension, under s 439A(6) of the Corporations Act , to late February, of the convening period for the holding of the requisite creditors' meeting in the voluntary administration of the company, in order to enable the administrators (in assessing the recommendations or opinions that they would be required by statute to make for the purposes of their report to creditors) to obtain the court's determination of the separate questions. (As noted, however, the matter did not ultimately proceed by way of separate questions.)
As it became apparent, not least from the volume of material tendered during that hearing, that it was unlikely that my reasons for judgment would be published in sufficient time for consideration by the administrators and report to the creditors (with such consequential recommendations as they might make as to the ongoing course of the administration) in advance of the convening of the creditors' meeting within the extended time period to late February 2011, the administrators made (and I acceded to) a further application for an extension of the convening period for the creditors' meeting until April 2011.
Issues
With that introduction, I turn to the issues that are now before me for determination which are as follows:
(i) did a binding agreement come into existence under which Painaway was granted an irrevocable and exclusive licence to manufacture, market and distribute the Painaway products and to use the Painaway trade marks in relation to those products: and, if not, is Nature's Remedies (the registered owner of the Painaway trade marks) estopped from denying the existence of such an agreement?
(ii) if the answer to either part of (i) is in the affirmative, is the licence so granted to Painaway assignable by it?
(iii) if all that Painaway had at the relevant time (as the Carroll interests contend) was an implied licence in relation to the marketing distribution and sale of the Painaway products, was that implied licence terminable at will or only on the provision (and, if so, on what period) of reasonable notice?
(iv) if the answer to (i) is in the negative, then on the alternative claim put by the Nassar/Hyder interests are Messrs Nassar and Hyder entitled to a beneficial interest in the Intellectual Property and Painaway Formulas (and the net proceeds of any sale thereof) or, alternatively, to a 49% shareholding in Nature's Remedies.
Summary
For the reasons set out below, I am of the view that:
(i) a binding agreement did come into existence under which Painaway was granted an exclusive licence to manufacture, market and distribute the Painaway products and to use the trade marks in relation to those products, that licence being irrevocable (though terminable in accordance with the provisions of the signed Licence Agreement); had that not been the case, Nature's Remedies (the registered owner of the Painaway trade marks) would in any event have been precluded by virtue of the principles of conventional estoppel from denying the existence of such an agreement;
(ii) while the licence so granted to Painaway in relation to the use of the Painaway trade marks is assignable by it, the confidential information comprised in the Painaway formulas is not property which is assignable, as such; nevertheless the court should strive to give meaning to the intent of the parties expressed in their agreement that the rights under the Licence Agreement be transferable; Nature's Remedies and the Carrolls having agreed that the rights in relation to the formulas are transferable could not complain if Painaway were to grant rights to use the Painaway Formulas to an "assignee" (provided that did not materially affect the integrity of the intellectual property) and, if Painaway did so, Nature's Remedies and the Carrolls would have a contractual obligation to facilitate the use of such formulas by an "assignee" in accordance with the agreement;
(iii) this issue does not arise given the finding in (i); had it arisen, I would have held that the implied licence (that the Carroll interests have acknowledged Painaway had in relation to the Painaway products) was terminable only on reasonable notice and that the period of such notice would in all the circumstances not expire before 31 December 2012;
(iv) Messrs Nassar and Hyder are not entitled as a matter of contract to a shareholding in Nature's Remedies nor are the Carroll interests estopped from denying such an entitlement; as to the claimed beneficial interest in the Intellectual Property and Painaway Formulas (and the net proceeds of any sale thereof), the entitlement of the Nassar/Hyder interests is, as contained in the signed Licence Agreement, limited to a contractual right to a share of the net proceeds of sale if the Carrolls at their election decide to sell such of the goodwill, or such of the Intellectual Property, "as is attributed to the Painaway Formulas" but in the interim Messrs Nassar and Hyder have no proprietary interest in the said Intellectual Property. Further, as there is no sale currently in the contemplation of the parties, it is not possible to determine in advance whether a liability to pay any part of the net proceeds of such a sale would arise and it is not appropriate to grant any declaratory relief in those circumstances.
Parties
Before setting out the relevant facts, I outline the relationship between the respective parties.
When I refer in these reasons to the Carroll interests, I refer collectively to the fifth respondent (Mr John Carroll), the sixth respondent (his wife, Mrs Linda Carroll) and the companies associated with them, namely the fourth respondent (Nature's Remedies) and the first respondent (JAKL, the plaintiff in the winding up proceedings and the trustee of the Carroll Family Trust). Mr & Mrs Carroll are the shareholders and directors of both JAKL and Nature's Remedies.
It was Mr Carroll (whose grandfather had earlier developed a pain relief formula, as deposed to by Mrs Carroll in her affidavit of 18 October 2010 para [10]) who created or developed the formulas now used in the manufacture of the Painaway products. Much emphasis has been placed by the Carroll interests on the confidentiality of the said formulas (not so much as to the ingredients used therein, but as to the manner in which they are combined), a matter to which I return in due course.
Nature's Remedies is the registered owner of the "PainAway" and "Johno's Edge" trade marks, under which the respective Painaway products are sold. (Although the registered trade mark is "PainAway", for convenience I have used the lower case when referring to each of the company Painaway, the Painaway products and the Painaway trade marks throughout this judgment. Further, I have in general not differentiated between the "PainAway" and "Johno's Edge" trade marks simply referring to them collectively.) Nature's Remedies is licensed for distribution of the Painaway products under the Therapeutic Goods Act 1989 (Cth). Mrs Carroll is the Qualities Assurance Manager of Nature's Remedies (having what she describes as "many roles" in that position, at least two of which relate to the certification for release to the public of the Painaway products.)
As noted earlier, JAKL is one of the three shareholders of Painaway. The other two shareholders are the companies associated with the Nassar/Hyder interests. Broadly speaking, the Nassar/Hyder interests are aligned.
When I refer to the Nassar interests, I refer collectively to the eighth respondent (Mr Elias Nassar) and the second respondent (Mickey Rose), which is the trustee of the Nassar family's discretionary family trust. (Mrs Nassar, not a party to these proceedings, is the sole director and shareholder of Mickey Rose. Some of the Nassar family's contributions to the Painaway business venture were made through another corporate entity, Blackrock Multiworx Pty Ltd, but nothing seems to turn on this as it is not disputed that each of the Nassar and Hyder interests separately contributed a substantial amount of funding for the venture.)
When I refer to the Hyder interests, I refer collectively to the seventh respondent (Mr Angelo Hyder) and the third respondent (Angelo's Angels), which is the trustee of the Hyder family's discretionary family trust. Mr Hyder's wife (Mrs Leanne Hyder) gave evidence in the proceedings but is not a party to the proceedings in her own right. She worked for some time as bookkeeper in relation to the Painaway business, although the extent of her role seems to be disputed by the Carrolls.
I have referred in these reasons to the critical documents in question (the Shareholders Agreement and Licence Agreement) for convenience by their titles, though it is not disputed that neither was fully executed and the question to be determined is whether those documents in fact record a binding agreement between the parties. I have used the word 'venture' or 'joint venture' in these reasons in the general sense of a joint endeavour or undertaking in which the various individuals or entities were involved, as a more neutral term (given that there is a live dispute between the parties as to the form in which their venture was conducted). In that regard, I note that in United Dominion Corporation Limited v Brian (1985) 157 CLR 1 , Mason, Brennan and Deane JJ said [at 746]:
The term "joint venture" is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or, under Scots' law, "adventure") will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a "joint venture" and what should more properly be seen as no more than a simple contractual relationship may on occasion be blurred . (My emphasis)
I should also note that I have not based my findings in this judgment on any particular credit issues in relation to the witnesses (although criticism was levelled against the Carrolls and Messrs Nassar and Hyder by the opposing sides). It was apparent that feelings have run high in relation to this matter and that the relationship between the parties that had led to such a successful financial venture has unfortunately deteriorated such that the parties are now on very poor terms as between themselves. The fact that there are different versions of the conversations, and that the parties had different understandings of what was to occur from time to time, is not surprising given that each would naturally have perceived matters from his or her own perspective and none has taken any detailed note of the relevant meetings (nor would be likely to have done so).
The difficulties in such a situation were recognised in Watson v Foxman (1995) 49 NSWLR 315 (at 318-319), McLelland CJ in Eq (as his Honour then was):
... human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. (my emphasis)
His Honour went on to say that:
Each element of the cause of action [there, for misleading and deceptive conduct, though his Honour noted that the principles also applied in considering a claim in contract or estoppel] must be proved to the reasonable satisfaction of the court, which means that the court "must feel an actual persuasion of its occurrence or existence". Such satisfaction is "not ... attained or established independently of the nature and consequence of the fact or facts to be proved" including the "seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding": Helton v Allen (1940) 63 CLR 691 at 712 .
In Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810; [2008] ATPR 42-410 (at [41]), referring to the above passages, Rares J said:
His Honour's observations as to the frailty of human memory are, of course, not to be taken as limited simply to cases invoking claims under the Trade Practices Act or its analogues. They are just as apposite in a case such as this where the question arises of what oral terms of the contract were agreed in the course of negotiations.
I have therefore placed weight instead on the contemporaneous notes and records of the meetings and conversations between the parties as recorded by their legal and accounting advisers and, in particular, the solicitor who acted in the preparation of the documents signed at the 18 April meeting, Mr Innis. He struck me as a careful and considered witness, whose evidence was that of an objective observer of the relevant events. Mr Innis was candid in his acceptance of the proposition that in hindsight it would have been better for him to have taken other steps in relation to the execution of the relevant agreements, but there was no suggestion that he had any personal interest in the outcome of the proceedings and no criticism of the truthfulness of his evidence or the accuracy of his note-taking.
The underlying dispute (and genesis of the current proceedings) is one between the Carroll interests and the Nassar/Hyder interests. It is clear from Mr Carroll's evidence in the witness box that he regards Messrs Nassar and Hyder as seeking to take from him something that is rightfully his or as otherwise having acted wrongly in relation to the business venture in which they were together involved (to put it in more neutral terms than did either Mr Carroll or his adviser, Mr Lombardo). For their part, Messrs Nassar and Hyder have emphasised the 'spectacular' success of their marketing and promotional efforts (through their contacts in the sporting, and more particularly boxing, world) and the significant financial contribution they made in order to prepare for the 2007 launch of the Painaway products. They complain that this is an attempt by the Carroll interests to prevent them from sharing in the fruits of that investment.
In the midst of this dispute, the administrators stand in a neutral position, their concern being to establish what assets are available for the benefit of the company (having regard to the statutory objective of Part 5.3A of the Corporations Act , which is to maximise the prospects of a better return for creditors than on a winding up of the company). While the administrators and the Nassar/Hyder interests both contend that there is an existing and enforceable licence agreement in respect of the Painaway products, the administrators do not take a position in relation to the alternative claims made by the Nasser/Hyder interests.
Pleadings
Painaway was the moving party on the hearing before me, though not the plaintiff in the substantive proceedings. It filed a Statement of Claim on 17 December 2010 and an Amended Interlocutory Process on that date. The Nassar/Hyder interests (by their Defence filed on 27 January 2011) have (save for a few paragraphs to which they do not plead) admitted the entirety of Painaway's claim. In contrast, the Carroll interests (who filed their Defence on 31 January 2011) take issue with the substance of Painaway's claim (though admitting various parts either on a qualified basis or without qualification).
Filed also in the proceedings since the filing of the Painaway Statement of Claim were various statements of cross-claim:
(i) First, the Nassar/Hyder interests filed on 12 January 2011 the First Statement of Cross-Claim (the Nassar/Hyder cross-claim), against the Carroll interests and Painaway, in which they principally seek declaratory relief. In particular, Mr Nassar and Mr Hyder seek declarations that they own or are otherwise beneficially entitled to 40% of the Intellectual Property and Painaway Formulas (as defined in the Shareholders Agreement) and the goodwill therein and are entitled to 40% of the net proceeds from the sale thereof (the IP Ownership Claim) or, alternatively, that they are the beneficial owners of 49 shares in the capital of Nature's Remedies and own or are otherwise beneficially entitled to 49% of the Painaway Formulas and the Painaway Trade mark, and to that percentage of the net proceeds of the sale thereof (the Shareholding Claim). Relief is also sought by reference to alleged oppression in the conduct of the affairs of Painaway (though, as noted earlier, the claim in oppression was not argued in the hearing before me) or damages for misleading and deceptive conduct by Mr and Mrs Carroll and Nature's Remedies. The Carroll interests filed a Defence to the Nassar/Hyder Cross-Claim on 19 January 2011 and Painaway filed its Defence thereto on 2 February 2011.
(ii) Secondly, on 19 January 2011, Nature's Remedies filed the Second Statement of Cross-Claim (the Nature's Remedies Cross-Claim) against Painaway in which Nature's Remedies seeks orders permanently to restrain Painaway from manufacturing, marketing, advertising and selling Painaway products without the licence or consent of Nature's Remedies. Significantly, for the administrators' alternative claims in relation to the implied licence, Nature's Remedies pleads that Painaway sold and distributed Painaway products with its implied licence from March 2006 (at [5]) but alleges that, by a letter dated 9 December 2010 from its solicitors, Nature's Remedies terminated all authority or licence that might then exist for Painaway to continue to manufacture, market, advertise and sell products bearing the Painaway trade mark. Painaway filed its Defence to the Nature's Remedies Cross-Claim on 27 January 2011.
At the outset of the hearing in February, issue was taken between the Carroll interests and the administrators as to whether the actions of Nature's Remedies in terminating the only licence that the Carroll interests concede Painaway had in relation to the Painaway products precluded the administrators from selling the Painaway stock currently on hand, or from using the existing stock of raw materials to manufacture and sell further Painaway product. Suffice it at this stage to say that as at the conclusion of the hearing before me it was agreed by the Carroll interests that the administrators could sell such of the stock presently on hand that was not otherwise quarantined by Mrs Carroll and could make use of the existing raw materials to produce and sell further stock but they maintained that it was open to Nature's Remedies to manufacture and market its own stock and thus to compete with Painaway in the marketplace.
(iii) Thirdly, on 27 January 2011, Painaway filed a Third Statement of Cross-Claim (the Painaway Cross-Claim) against all of the other parties, alleging a failure by Nature's Remedies (since the appointment of Mr Singleton as receiver on 31 August 2010) to comply with certain alleged terms of the implied licence pleaded by Nature's Remedies in the Nature's Remedies Cross-Claim. It is alleged that this has precluded the advertisement, distribution, marketing and sale of the Painaway products first by the receiver and then by the voluntary administrators and is in breach either of the agreements as alleged by Painaway or alternatively in breach of the implied licence acknowledged by the Carroll interests. In this Cross-Claim, Painaway sought, among other things, an order that the Carroll interests grant to it a transferable non-revocable exclusive perpetual right and licence to use the Intellectual Property and the Painaway Formulas and to manufacture and sell the Painaway products.
Objection was raised by Senior Counsel for the Carroll interests (Mr Ireland QC) to the administrators moving on the Painaway Cross-Claim given that it was only filed (outside the time for the filing of cross-claims set out in the directions I made in December last year) and on the basis that it purported to be a cross-claim by a party in the position of the plaintiff in the proceedings. Without making any concession in this regard, Counsel for Painaway (Mr Svehla) indicated that his clients did not press the Third Statement of Cross-Claim at this time (though suggesting that relief of the kind articulated therein might be sought at the conclusion of the hearing based on the matters established on the issues raised in the other pleadings - in particular, its defence to the Nature's Remedies Cross-Claim). I therefore did not need to deal with the discretionary/procedural issues thrown up by Mr Ireland's objection to the Painaway Cross-Claim.
Background Facts
It is not disputed that, in or about 1996, Mr Carroll developed a formula for a product then called "Johno's All Natural Pain Spray". That product was manufactured by a company known as Building Health Pty Ltd (in which the Carrolls had an interest) and distributed by a company known as Australia's Own Pty Ltd. It was registered with the Therapeutic Goods Administration in 1997. (Later, in May 1999, products known as Painaway Sports & Recovery Spray and Painaway Pain Relief Therapy were similarly registered).
Nature's Remedies was incorporated in May 1998, with Mr and Mrs Carroll as its directors and Mr Carroll as its secretary and sole shareholder. Its principal place of business was the Carrolls' property at Jilliby.
On 20 July 1998, a Mr Gary Valentine was appointed a director of Nature's Remedies and his company, LSJK Holdings Pty Ltd, became a shareholder of Nature's Remedies, holding 49% of the share capital (Mr Carroll retaining the remaining 51%) of the company. (It is LSJK's shareholding to which Messrs Nassar/Hyder contend, in the alternative claim contained in the Nassar/Hyder Cross-Claim, that they are entitled.) LSJK also held an interest in the Building Health company. The precise arrangements between Mr Valentine and the Carrolls were not made clear. The books of Nature's Remedies (as at late 2003/early 2004) recorded a loan from Mr Valentine to the company in the sum of $100,000; however, Mr Hyder deposed to discussions with Mr Valentine in 2003 in which he says the latter claimed to have invested $500,000 in the company.
At various times in 1998 (May and August, respectively), the trade marks "PainAway" and "Johno's Edge" were registered in Australia under the Trade Marks Act 1995 (Cth), the registered owner of those trade marks being Nature's Remedies. ("PainAway" was also in due course the subject of a registered patent in the United States in the name of Mr Carroll.) As between Nature's Remedies and the Carrolls, it seems that the latter assert that the confidential information comprised by the Painaway formulas belongs to them (and presumably made available to Nature's Remedies in some fashion). However, some of the documentation (such as the distribution agreements entered into in 2006 with a third party) expresses equivocation as to who, as between Nature's Remedies and the Carrolls has the rights in relation to the confidential information comprised in the formulas.
On 26 March 1999, Nature's Remedies was issued a licence under the Therapeutic Goods Act to manufacture therapeutic goods. Under the Act, there is a statutory regime mandating a code of practice in relation to the manufacture and sale of therapeutic goods. It is not disputed that the Painaway products can only be manufactured and released for sale by licensed entities in accordance with that Act and that code of practice. Under the Australian Code of Good Manufacturing Practice, regulated by the Therapeutic Goods Administration, there must be appointed a Quality Control Officer. (Mrs Carroll has filled that role.) Mr Singleton's report to creditors of 5 October 2010 noted that Nature's Remedies was the Therapeutic Goods Act sponsor of the seven Painaway products registered on the Australian Register of Therapeutic Goods.
In about August 1999, another company (The Pain Away Company Pty Limited) was formed by Mr & Mrs Carroll, together with two other individuals (Mr Peter Beeby and Mr John Crisp) for the purpose of distributing the Painaway product. That company launched and promoted the initial Painaway product during 1999 for sale to pharmacies and to warehouses supplying pharmacies. (The Carroll interests apparently subsequently bought out the interests held by Messrs Beeby and Crisp in that company and it ceased trading.) It does not seem to be disputed that this product launch was on a minor scale compared to that which took place in 2007.
By letter dated 28 April 2000, Mr Valentine notified Mr Carroll of his intention to resign as a director of Nature's Remedies. There was a suggestion from the Nassar/Hyder interests that there had been a falling out or dispute of some kind between Mr Valentine and the Carrolls, which had led to Mr Carroll seeking to force Mr Valentine out of the business. Certainly, a dispute of some kind seems to be indicated by the presence of releases in the Deed of Sale of Shares ultimately entered into between the Carrolls and the Valentine interests. However, the precise nature of any such dispute was not articulated in the Deed. Suffice it to note that for some time from 2000 Mr Valentine had communicated an intention to resign as a director and that, from at least around 2002/2003, there were discussions as to a parting of the ways between Mr Valentine and the Carrolls (the cause of which does not seem to be of relevance to the issues in these proceedings).
Mr Hyder says that in around 2002 he had a discussion with Mr Carroll (whom it seems he had met in about mid 2001) in which there was a general discussion as to Mr Hyder and Mr Nassar (whom Mr Hyder had met in 2000 but whom Mr Carroll had not at that stage met) becoming involved in a business venture with Mr Carroll in relation to the Painaway products (as noted I use this as a generic term to cover the various pharmaceutical products produced from time to time by Nature's Remedies/Painaway). Mr Hyder says that what was discussed was that there would be a 51% 'share' to Mr Carroll and 49% to Messrs Hyder and Nassar (in effect, mirroring the existing Valentine/Carroll shareholding in Nature's Remedies) and that the intellectual property rights would be owned as to 60% by Mr Carroll and as to 40% by the others (see Mr Hyder's affidavits of 20 August 2010 at [17] and 29 November 2010 at [6]). (It is not clear that there was any precision in the discussions at that time as to what the respective percentage 51%/49% 'shares' were to be in - ie, whether this was a reference to a share of the company shareholding (as had been the case with Mr Valentine) or more generally of the 'business' and, if the latter, how that was to be achieved.)
In July 2002, Mr Carroll was introduced to Mr Nassar and from shortly after that time discussions took place as to the Painaway business. At least by 2003, those discussions seem to have included discussion as to the opportunity for Mr Hyder and Mr Nassar to become involved in some way in the 'Painaway business'.
(Issue was taken by Mr Ireland during the cross-examination of the Carrolls to the use of the term "Painaway Business" as something prone to lead to confusion (and I note that in some of the affidavit evidence - such as para [20] of Mr Nassar's 20 August 2010 affidavit, the term "Painaway Business" might be read as being a reference to the company Nature's Remedies and not the business of that company as such). Where I use that term in these reasons, I do so simply as a shorthand means of referring to the business activity involved in the manufacture, marketing, advertisement, distribution and sale of the Painaway products from time to time.)
The Carrolls say that what was discussed at this time was an arrangement whereby Mr Hyder and Mr Nassar would assist the Carrolls with the buy-out of Mr Valentine from the company and that Mr Hyder and Mr Nassar each agreed to lend a sum of $50,000 (i.e. $100,000 in total) for the purpose of assisting the buy-out of Mr Valentine (with Mr Hyder, according to Mr Carroll, having said that he wanted to be repaid within five years) and that the four individuals agreed to continue discussions with respect to the business terms upon which the future manufacture and marketing of Painaway products might take place.
Messrs Nassar and Hyder, in contrast, say that what was referred to by Mr Carroll in 2003 was for them , not the Carrolls, to buy Mr Valentine out of the company (Nassar 20/8/10 affidavit at [21]; Hyder 20/8/10 affidavit at [17]). The distinction is a critical one for the Nassar/Hyder interests' alternative cross-claim in these proceedings - in other words, were they to acquire the shares held by LSJK (for payment of the sum of $100,000) or were they to fund the buy-out by the Carrolls of those shares? (The Nassar/Hyder alternative claim is predicated on there being an agreement in late 2003 for them to gain a 49% share of the company itself (though, as Mr Ireland explored in cross-examination, there was no later demand for any shares to be transferred to them in Nature's Remedies until the commencement of these proceedings and it seemed to be accepted by Messrs Nassar and Hyder that at least as at late 2003 the arrangements under which they had agreed to fund the Valentine buy-out had not been finally agreed).
The main point of difference between the parties as to the subsequent discussions is whether they resulted in a concluded and binding agreement and, if so, the substance of that agreement.
As at around September 2003, Mr Tim Cullen an accountant of Purkiss Cullen (who had been acting for the Carroll interests) became involved in the discussions as to how the buy-out of Mr Valentine was to be effected. At p15 of the Applicant's Trial Tender Bundle is a document headed "Mr John and Mrs Linda Carol [sic] - Points for Discussion - Meeting 10 September 2003" in which two options were set out: the first was for payment to Mr Valentine of the sum of $100,000 'for his shares', with the waiver of the loan, cancellation of distribution agreement and the transfer of shares to the 'new entity'. Under that option, the new entity was to own 49% of the 'company' (presumably Nature's Remedies) and under this entry was the comment "Agree capitalise and advertising company". All rights to the "Intellectual Property Bank" were to be transferred to the Carrolls from Nature's Remedies (and the document noted that there might be 'TGA issues'). The second option was a loan of $100,000 to the company ("Terms"); Mr Valentine was to sell shares to the Carrolls and they were to enter into a distribution agreement with the new entity. Again this option recorded that all rights to "Intellectual Property Bank" were to be transferred to the Carrolls from Nature's Remedies (though did not again note that there might be 'TGA issues').
I refer to this note only as an indication that there was at least some consideration given, prior to the payment of the money in respect of the Valentine buy-out, to the creation of a new entity to be involved in the distribution of the Painaway products.
In September 2003, a meeting took place at the offices of a firm of accountants (Purkiss Cullen) attended by the Carrolls and each of Mr Hyder and Mr Nassar. The Carrolls admit that at this meeting there was discussion of a possible partnership in relation to the Painaway business (see paragraph 8 of Mrs Carroll's second affidavit and the Carroll interests' Defence at [11]). Mr Cullen apparently suggested that they consult a law firm (Gillis Delaney Brown) in relation to this and on 18 September 2003, Mr Cullen wrote to that firm "re Nature's Remedies" in which he said:
Further to our earlier meetings we have come to a satisfactory arrangement with Gary Valentine.
The agreement is that Angelo Hyder and Elias Nassar (or their nominee) will loan $100,000 to John and Linda Carol [sic] on the following terms:
...
[Reference was made to an interest rate of 8% payable over 5 years with security over stock holdings] John and Linda will then use this money to purchase shares held by LSJK in Nature's Remedies and Building Health Pty Ltd.
LSJK Gary Valentine and Mrs Valentine will waive all distribution rights or any rights over Intellectual Property or other assets of the 2 companies.
Gary Valentine will also wave [sic] his rights to the $100,000 loan made to Nature's Remedies.
[There was also a reference made to a supply of product free of charge to Mrs Valentine for a period of time]
Mr Cullen gave instructions to Gillis Delaney Brown to draw up the documents to evidence the transaction to which reference was made in his letter.
Cross-examined on this issue, Mr Hyder could not recall any agreement as to a loan to the Carrolls nor could he recall any discussion as to the terms of any loan arrangement. He and Mr Nassar were adamant that what they were agreeing to do in late 2003 was to purchase Mr Valentine's company's shares in Nature's Remedies (or a 'share of the business'). I consider this issue in due course. However, insofar as the contemporary documents suggest that the Carrolls' understanding (as must have been conveyed to Mr Cullen) was inconsistent with such a position, this is inconsistent with any consensus having been reached at that time.
On 17 and 19 December 2003, respectively Mrs Hyder (on behalf of the Hyder family) and Mr Nassar each paid a sum of around $50,000 to Nature's Remedies (for some reason it seems that the amount paid by Mr Nassar may have been slightly more - $50,008, but nothing turns on this). This amount was recorded in the books of Nature's Remedies as a loan from Mr and Mrs Carroll to the company. (At that stage the books of the company recorded a loan of $100,000 from Mr Valentine to the company.) The Nassar/Hyder interests say that this payment was for the purchase by them of Mr Valentine's share in the "Painaway business" (Hyder para [19] - [20]). (Mr Nassar further deposed that from that time he understood that there was a 'joint venture' between Nature's Remedies, he and Mr Hyder operating the Painaway Business (at [24]), with his role and that of Mr Hyder being the promotion and marketing of the product and Mr Carroll's responsibility being the creation, production, manufacture and licensing of the product (at [41].) The Carroll interests say that this money was a loan to the Carrolls that was then used by them to pay out Mr Valentine's loan. (The company's books record that the Valentine loan was repaid on 23 December 2003.)
There was no signed documentation recording any concluded loan agreement between the Carrolls and the Nassar/Hyder interests in respect of the sums paid in December 2003 (although as noted above there had been an instruction to produce documentation to record such a transaction and it seems to have been the understanding of Mr Cullen, consistent with his earlier letter outlining the transaction, that the money paid by the Nassar/Hyder families represented a loan to the Carrolls -see his letter of 17 May 2004 to Gillis Delaney Brown, Ex AH1 p 63, to which I will refer shortly).
Whatever may have been in the contemplation of the parties in September 2003, it was accepted by Messrs Nassar and Hyder in cross-examination that as at the time that the money was paid (in December 2003) there was no firm agreement as to how their business arrangements were to go forward (and that included how the payment of the moneys was to be treated) although it seems to have been understood that Messrs Nassar and Hyder were expecting that the moneys would be repaid to them in some fashion.
In February 2004, a deed was signed between the Carroll interests, on the one hand, and Mr Valentine and his company, on the other. (The delay between payment of the moneys and discharge of the Valentine loan in late December and the documentation of the sale of shares in February was not explained.) Under that Deed, LSJK agreed to sell its shares in Nature's Remedies to Mrs Carroll. Mr Valentine resigned as a director and LSJK's shares were transferred as to 48 to Mrs Carroll and as to one share to Mr Carroll. (A similar transfer of the shares in Building Health occurred.)
Significantly, in my view, on 23 February 2004, Mr Carroll (on the letterhead of Nature's Remedies) sent a facsimile transmission to Mr Nassar (Ex EN1 p 1) (signed off by him as "Johno your partner and friend") saying:
Linda and I would like to know what you and Angelo intend to do regarding the structure of a new company whether you will be separate to Nature's Remedies or you would like to draw along side Linda and I in Nature's Remedies, your decision.
The letter went on to give an explanation as to the use of arnica as an ingredient in the formula, including its price, and promised to answer all questions in relation to the product. (Presumably, given the emphasis later placed on the confidentiality of the formula, this was not an offer to answer every question that the Nassar/Hyder parties might have had in relation to the product notwithstanding the terms in which it was expressed.)
Both Mr Nassar and Mr Hyder accept that there was a decision open to them to be made as at February 2004 as to how their business venture with the Carrolls was to be structured. This is of relevance when considering their alternative claim to part of the shareholding in Nature's remedies (since the adoption of the arrangements put in place in April, whether binding or not, seems to be consistent with an election being made as to which of two alternative structures was to be followed - ie a shareholding in the new company - Painaway - or a shareholding 'alongside' the Carrolls in the existing company, Nature's Remedies).
In early 2004 (and Mr Svehla places some weight on the timing of this and later steps of this kind as being consistent with the parties acknowledging the existence of an agreement or understanding as to their business arrangements) an order was placed for 13,000 units of arnica (one of the main ingredients used in the Painaway formulas). It is suggested that it is significant that this order went forward only after Mr Valentine no longer had an interest in the company.
Further consideration of the structure of the parties' arrangements occurred in April 2004 - in the applicants' trial tender bundle is a note dated 8 April 2004 in which there is contemplated a joint venture between Nature's Remedies and a new company with proposed profit share of 51%:49%. The involvement of Messrs Nassar and Hyder in the joint venture is indicated by the note "loan of $100,000 forgiven" (that can only have been referring to the payments made in December 2003, since there was no suggestion of any other loan of that amount) and possibly by the note "repay stock as soon as possible" (which may or may not refer to a repayment of amounts paid for the raw materials such as arnica). The note recorded that new product formulas were to be owned by 'John & Linda' and that product rights were to be owned by the joint venture.
On 17 May 2004, Mr Cullen of Purkiss Cullen wrote to two separate firms of solicitors - he wrote to Aubrey Brown Partners (p 23 applicants trial tender bundle) and in that letter Mr Cullen referred to having previously set out instructions to have a partnership agreement drawn up by another firm and stated that: "We now realise our clients would prefer to have a shareholders agreement drawn up between the parties" (thus seemingly indicating a change in instructions from a venture carried out solely through a partnership and a venture involving a jointly held company).
Mr Cullen also wrote on that date to Gillis Delaney Brown (Ex AH1 p 63) (having written back in September to instruct them to prepare documentation to record a loan transaction) enclosing "details regarding the formation of a partnership to promote the sales of Painaway products". That letter stated "As a background Elias Nassar and Angelo Hyder have injected $100,000 into Nature's Remedies Pty Ltd to repay a loan made by Gary Valentine. As consideration for entering into this new partnership agreement the $100,000 loan will be forgiven (this will need to be considered as part of the settlement documents as all shares in Nature's Remedies are now held by John and Linda Carroll.) In addition all formulas are owned by John and Linda Carroll personally." (That letter broadly reflects the 8 April note as to the proposed structure of the venture between the parties.) Mr Cullen referred to a proposed partnership between Nature's Remedies and a company owned by Messrs Nassar and Hyder (Nitro Boxing) and set out the "main terms" of the proposed partnership, including a term that the profit was to be split 51 % to the Carrolls and 49% to Nitro Boxing. Item 3 noted that the partnership was to be set up with capital to be treated as loans and repaid back to the respective parties as soon as practicable; item 5 referred to the formulas being licensed to the partnership; and item 6 stated that if the Carrolls "sell the IP, being the formulas , while the partnership is still in operation" (my emphasis) the split of profits will be Nitro Boxing 40% and John and Linda Carroll 60%.
On 20 May 2004, Mr Hyder and Mr Nassar incorporated Nitro Boxing (and thus must have been privy to the discussions which had led to that company being nominated as the other partner in the proposed joint venture in Mr Cullen's earlier letter to Gillis Delaney Brown).
Gillis Delaney Brown then proceeded to prepare a draft Partnership Deed, clause 9(3) of which included a provision that if the "intellectual property" was sold then 40% of the proceeds of that sale would be paid to Nitro Boxing, and forwarded to that Mr and Mrs Carroll in September 2004. They also forwarded a copy of the draft partnership agreement to Purkiss Cullen, placing on record that they were acting only for Nature's Remedies and not for Nitro Boxing or its directors (see letter 3 September 2004 Ex AH 1 p 69). That draft partnership deed contained a definition of Intellectual Property as including, among other things, the Painaway trade marks; the Business Name (Painaway Australia) and the Painaway Formulas (themselves defined as the therapeutic formulas created by Mr and Mrs Carroll). The draft also recited that Mr and Mrs Carroll granted to the partnership the right and licence to manufacture and produce the Painaway formulas.
Gillis Delaney Brown recommended to Purkiss Cullen that a corporate agent be appointed to act as agent of the partnership to manage the business of the partnership (Ex AH 1 p 69).
At this stage, therefore, what seemed to be contemplated (at least by the Carrolls and the solicitors then acting for them) was the creation of a partnership between Nature's Remedies and Nitro Boxing, with the partnership having the right and licence to manufacture and produce (and presumably then to sell) products using the Painaway formulas.
Meanwhile, on 30 June 2004, "Painaway Australia" was registered as a business name in New South Wales and on 29 June 2004 a patent was registered in the United States by Mr Carroll in relation to the Painaway formulas.
In late 2004, according to Mr Nassar, there were conversations as to the placement of a large order for arnica (12 tonnes) and on 15 and 24 November 2004, respectively, each of Mr Nassar and Mr Hyder contributed a sum of around $50,000 towards that arnica order. (They pressed Mr Carroll in due course to contribute a half share to that order, which he did.)
On 19 October 2004, Nature's Remedies entered into a manufacturing agreement with Teradoran Pty Ltd trading as Kenkay Pharmaceuticals. (In evidence was a copy of the form of secrecy agreement required to be entered into by the Carrolls in relation to the formulas provided to Kenkay for that purpose). Kenkay had been the manufacturer for Nature's Remedies of the earlier products and Mr Carroll had dealt with "George" of Kenkay.
His Honour said, at [28]:
... it is generally inappropriate to grant declaratory relief if it will be inconclusive, in the sense that the proposed declaration would leave unresolved issues, with the parties still in dispute as to the consequences so that further litigation would be required to resolve the controversy [ Smart v Allen (1970) 91 WN(NSW) 241; Integrated Lighting & Ceilings Pty Ltd v Phillips Electrical Pty Ltd (1969) 90 WN (Pt 1) (NSW) 693, 702].
His Honour considered t he case to be practically indistinguishable from Neeta , saying that, at [35]:
Nothing appears which makes it such an exceptional case as to warrant the exercise of the discretionary jurisdiction to grant a declaration, despite Supreme Court Act, s 63: granting the declarations would not resolve a potential future dispute, because they would leave subsequent issues unresolved.
(I note, however, that in dismissing leave to appeal from his Honour's judgment in BIS ( Commonwealth of Australia v BIS Cleanaway Limited [2008] NSWCA 170), Hodgson JA expressed the view (at [4] - [5]) that there was some force in the contentions that the trial judge had erred (first) in applying s 63 of the Supreme Court Act , because there were no claims that had been brought forward which the court would not be determining and (secondly) in considering that the cases of Neeta and Coles v Wood dictated that the only proper exercise of discretion would be refusal of declaratory relief. Hodgson JA said that he did not wish to be taken as endorsing everything which had been said as to those points. A similar qualification was made by Ipp JA (at [21] - [22]), it would seem as to whether the appropriate test for exercise of discretion was whether other issues would be left unresolved.)
Brereton J in Cypjayne Pty Ltd v Rodskog [2009] NSWSC 301 again considered the issue of declaratory relief in circumstances where it was said to be hypothetical, and said at [16]:
This is not a case of resolution of only one step in litigation ... there may be a further dispute, but it will involve issues different from those immediately under consideration. Absent intervention, the partners cannot progress their negotiations with the Adelaide Bank. The declaratory relief sought at this stage will, if granted, permit the negotiations with the Adelaide Bank to move forward.
His Honour there held that even if there might be such a further dispute, the declaration was not hypothetical and would have utility because there was a live controversy and its resolution would have practical consequences, at [59].
I have set out my findings in relation to the existence and operation of the Shareholders Agreement (and, for that matter, the Licence Agreement). I consider that the proper construction of clause 14.2 is not that Messrs Nassar and Hyder have any beneficial or ownership interest in the "goodwill and Intellectual Property attributed to the Painaway Formulas" but rather that, if and when there is a sale of that goodwill/Intellectual Property (which is at the Carrolls' discretion), Messrs Nassar and Hyder would have a contractual entitlement to 40% of the net proceeds of sale thereof, assuming that the contractual arrangements between the parties by then relevantly remain on foot. However, in circumstances where there is no proposed sale and where it is impossible to know whether any such sale would be of the "Intellectual Property attributed to the Painaway formulas" or as to whether events might arise in the future to preclude reliance by the Nassar/Hyder parties on such an entitlement, I consider it inappropriate to make any formal declarations as to the proper construction of the clause. I accept Mr Ireland's characterisation of the position in this regard: that there is simply a promise to pay money in certain circumstances that have not yet eventuated.
Conclusion
For the reasons set out above, I find that a binding agreement came into existence on the terms of the Licence Agreement (as did a binding agreement on the terms of the Shareholders Agreement) as executed by the Carroll interests other than JAKL on 18 April 2005 (by mutual assent) and that the Carroll interests are estopped from denying such an agreement. In reaching that conclusion I have placed weight on the conduct of the Carrolls in insisting on adherence to the arrangements agreed with Messrs Nassar and Hyder as documented in the 2005 agreements and Mr Carroll's conduct, as a director of Painaway, in committing it to obligations consistent either with the existence of such a licence (the Blend agreements) or with Painaway having the benefit of licence rights of more than the ephemeral nature suggested by the Carroll interests (such as the NRL sponsorship agreement). It follows that the Nature's Remedies Cross-Claim should be dismissed.
I find that under that agreement Painaway has the right to assign the exclusive right to use the Painaway trade marks without the consent of the Carroll interests (provided this does not materially affect the integrity of the Intellectual Property or the Painaway Formulas) and that, although the Painaway Formulas are not property assignable as such, Painaway is entitled to authorise the use of those by, or sub-license those to, a third party (again provided this does not materially affect the integrity of the Intellectual Property or the Painaway Formulas). I find that Nature's Remedies and the Carrolls have an implied obligation not to hinder (and a positive obligation to do what is necessary to enable) such dealings with the rights under the Licence Agreement.
I further find that Nature's Remedies, as a contractual matter, cannot compete with Painaway (or any assignee or sub-licensee) in the manufacture, marketing advertising distribution and sale of the Painaway products while the exclusive licence remains on foot. As the Painaway Cross-Claim was not pressed, I make no orders in relation to that Cross-Claim but will stand it over to a date to be fixed in the event that Painaway's administrators wish to press for any of the relief therein claimed,
It follows from the above that I find that the Licence Agreement (and Painaway's right to use the Painaway trade marks and Intellectual Property, as defined under the respective agreements) was not validly terminated in December 2010.
Had there been no more than an implied licence (as contended for by the Carroll interests), I would have held that it was not a licence terminable at will but that there was an obligation to provide reasonable notice of termination and that, in the circumstances, that reasonable notice would be one not expiring before 31 December 2012.
I find that Messrs Nassar and Hyder are not entitled to a shareholding in Nature's Remedies and that their rights on a sale of the goodwill and Intellectual Property attributed to the Painaway Formulas are as provided for under clause 14.2 of the Shareholders Agreement (as it may be properly construed and apply in the circumstances of any ultimate sale). Given that there is no such sale contemplated by the Carrolls at the present, I do not think it appropriate to grant any declaratory relief in that regard. Accordingly, other than in relation to the claim based on oppression (which was not pressed) the Nassar/Hyder Cross-Claim should be dismissed. The balance should be stood over to a date to be fixed.
I direct the parties to bring in Short Minutes of Order to reflect these reasons and I will hear any submissions as to the form of those orders and as to costs at a time convenient to Counsel.
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Decision last updated: 25 March 2011
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