Pharmaceutical Processing Technology Inc v Sci-Chem International Pty Ltd

Case •

[2021] NSWSC 1078

•

27 August 2021

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: Pharmaceutical Processing Technology Inc v Sci-Chem International Pty Ltd [2021] NSWSC 1078
Hearing dates: 26 August 2021
Date of orders: 27 August 2021
Decision date: 27 August 2021
Jurisdiction:Equity - Commercial List
Before: Williams J
Decision:

See orders at [96].

Catchwords:

INTERNATIONAL COMMERCIAL ARBITRATION – Application for interim measure under Article 17J of the UNCITRAL Model Law on International Commercial Arbitration – sparing approach to exercise of the power under Article 17J – where serious question to be tried concerning validity of notices issued by defendant terminating or purporting to terminate contract – where plaintiff likely to suffer harm for which damages would not be an adequate remedy in the short-term if interim injunction not granted – where evidence does not establish that defendant likely to suffer harm in short-term – where plaintiff commenced arbitration proceedings only four days after commencing proceeding in this Court – where plaintiff accepts that continuation of injunction may be revisited by arbitral tribunal and submits that conditions for any longer-term interim injunction, including any security for the plaintiff’s undertaking as to damages, are “quintessentially matters for the arbitrator” – injunction granted only for short period necessary for plaintiff to have the opportunity to apply expeditiously to arbitral tribunal for any longer term interim injunction

Legislation Cited:

International Arbitration Act 1974 (Cth), s 16

UNCITRAL Model Law on International Commercial Arbitration, Articles 17 and 17J

Cases Cited:

Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; [2001] HCA 63

Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618

Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd (2013) 298 ALR 666; [2013] WASCA 66

Celetem SA v Roust Holdings [2005] 4 All ER 52; [2005] EWCA Civ 618

Cherry v Steele‑Park (2017) 96 NSWLR 548; [2017] NSWCA 295

Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438

Kawasaki Heavy Industries Ltd v Laing O’Rourke Australia Construction Pty Ltd (2017) 96 NSWLR 329; [2017] NSWCA 291

Lawrence v Ciantar [2020] NSWCA 89

Mineralogy Pty Ltd v Sino Iron Pty Ltd [2016] WASCA 105

Papas v Grave [2013] NSWCA 308

Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (2015) 246 FCR 479; [2015] FCA 1028

Texts Cited:

Nygh’s Conflict of Laws in Australia (10th ed, 2020) at [17.37]-[17.47]

Category:Principal judgment
Parties: Pharmaceutical Processing Technology Inc (Plaintiff)
Sci-Chem International Pty Ltd (ACN 115 411 599) (Defendant)
Representation:

Counsel:
Mr M Izzo SC with Ms King (Plaintiff)
Mr A Shah (sole director of Defendant, with leave) (Defendant)

Solicitors:
Connor & Co Lawyers (Plaintiff)
N/A (Defendant)
File Number(s): 2021/233775
Publication restriction: N/A

Judgment

Introduction

  1. These reasons relate to an application by the plaintiff for an injunction as an interim measure in relation to an international commercial arbitration commenced by the plaintiff on 20 August 2021. The application is made pursuant to Article 17J of the UNCITRAL Model Law on International Commercial Arbitration (the Model Law), as applicable in Australia by operation of s 16 of the International Arbitration Act 1974 (Cth) (the IA Act).

  2. For the reasons that follow, I have decided to grant the injunction, but only for a limited period of 28 days to allow time for the arbitral tribunal to be constituted and to hear and determine any application by the plaintiff for an injunction pending the determination of the arbitral proceedings.

The parties to these proceedings and the Agreement

  1. The plaintiff, Pharmaceutical Processing Technology Inc, is a company incorporated in the State of New York in the United States of America (PPT). Mr Mark Gaeta is the Chief Executive Officer and President of the plaintiff.

  2. The defendant, Sci-Chem International Pty Ltd (ACN 115 411 599) is a company registered in New South Wales (Sci-Chem). Mr Aiyaz Shah is the sole director of the defendant.

  3. Sci-Chem is the owner of patents registered in Australia and in the United States of American for compositions for treating skin lesions or infections caused by the herpes simplex viruses. The products in respect of which those patents have been registered are known in the market by the name “Dynamiclear”.

  4. On 28 February 2015, the parties entered into an “Exclusive Representative Agreement” (the Agreement).

  5. Clause 3 of the Agreement describes the nature of the business of each of Sci-Chem and PPT. Sci-Chem is described as a privately owned company developing, manufacturing and marketing over the counter products (referred to as “OTC products”). PPT is described as specialising in providing manufacturing and commercial development advice to third parties in various fields, including OTC products, for subjects including international sales, market and business development.

  6. Clause 3 also contains a representation by Sci-Chem that it owns the intellectual property of the properties of Dynamiclear, including (but not limited to) patents and trademarks in specified territories, including the United States.

  7. Clause 4 of the Agreement, entitled “RECITALS”, states that Sci-Chem “is entering into the international markets, and mainly the United States of America” with its products. Clause 4 also states that PPT is interested in marketing and promoting Dynamiclear, amongst other products, to potential partners in the specified territories. Clause 4 also states: “PPT INC sincerely declares to always work in the best interest of SCI-CHEM AUST.”

  8. Pursuant to clause 5 of the Agreement, Sci-Chem appointed and authorised PPT to act as its exclusive representative for its products in the specified territories “to identify and open negotiations with potential strategic Distribution or Licensee Partnering company(s)”.

  9. Clause 8 of the Agreement is entitled “OBLIGATIONS”. Clauses 8(b) and (c) set out certain obligations of Sci-Chem. Clause 8(c) is of particular relevance for the purpose of the present application. It repeats Sci-Chem’s representation in relation to intellectual property ownership in clause 3 and contains a covenant by Sci-Chem not to transfer such intellectual property rights. Clause 8(c) also provides that Sci-Chem’s payment obligations under the Agreement continue regardless of any transfer of intellectual property rights, provided that Sci-Chem must notify PPT of the contemplated transfer and any assignee or acquirer of the intellectual property rights “must first agree in writing to be jointly and severally liable with Sci-Chem for the payment obligation set forth herein”.

  10. The payment obligations are set out in clause 9 of the Agreement in terms of percentages referable to net sales and certain other metrics achieved in relation to the Dyanmiclear products in the specified territories.

  11. Returning to clause 8 of the Agreement, sub-clauses 8(d)-(i) set out the obligations of PPT, including:

  1. to facilitate Sci-Chem in identifying and introducing strategic partners who may interested in marketing, distributing, selling and also manufacturing Sci-Chem’s products; and

  2. to use “commercially reasonable efforts” to carry out a range of activities, including liaisons, meetings, marketing, negotiations, customer visits and audits of client’s sites and facilities where required.

  1. Clause 6 of the Agreement provides:

“THE TERM OF THIS AGREEMENT IS PERPETUAL”

  1. The payment obligations in clause 9 of the Agreement are expressed in terms of an agreement by Sci-Chem to “the following commission from the business in the Territories perpetually” (my emphasis).

  2. The only express right of termination in the Agreement is in clause 7(a), which provides:

“Should there arise a situation where Sci-Chem finds and can demonstrate that PPT INC is representing interest of another competitive product, Sci-Chem shall notify PPT INC and allow 30 days to cure the situation. Should the cure not take place, Sci-Chem can withhold payment until a resolution is reached pursuant to Section 14 hereof.”

  1. For the purpose of the present application, PPT does not dispute that Sci-Chem has a right at general law to terminate the Agreement in the event that there was a material breach of the Agreement by PPT.

  2. Clause 14 of the Agreement relevantly provides:

“14. APPLICABLE LAW, ARBITRATION

(a)    This Agreement shall be governed and construed in accordance to the laws of the state of New York and New South Wales, Australia.

(b)    This Agreement, and any dispute, controversy, proceedings or claim of whatever nature arising out of or in any way relating to this Agreement or its formation (including any non-contractual disputes or claims), shall be governed by and construed in accordance with the laws of the state of New York and NSW, Australia. All disputes arising from this Agreement must be submitted to the International Chamber of Commerce (ICC) and shall be finally settled under the Rules of Conciliation and Arbitration of the ICC by One arbitrator appointed in accordance with afore-said rules. The place of Conciliation and Arbitration shall be in a neutral country to be agreed upon by the parties hereto and the language shall be English.

(c)    This Agreement sets forth the entire agreement between the parties. No modification or amendment to this Agreement or any waiver of any of the rights or obligations hereunder shall be effective unless it is set forth in a writing, signed by both parties hereto.”

  1. It is common ground between the parties that clause 14(b) of the Agreement is an arbitration agreement within the meaning of the IA Act and that their dispute must be resolved by arbitration in accordance with that clause.

  2. On 30 June 2021, Sci-Chem issued a notice to PPT stating that it was terminating the Agreement on 60 days’ notice (that is, on 30 August 2021, Australian Eastern Standard Time) pursuant to an implied right to terminate for convenience on reasonable notice (the 30 June notice). The defendant’s letter stated:

“Despite the fact the Agreement purports to be perpetual, the laws of New South Wales, which the Agreement is governed by, will imply a term into a contract permitting a party to terminate for convenience on the giving reasonable notice. For example, see Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438.”

  1. PPT first responded to the 30 June notice on 15 July 2021, when its solicitors (Connor & Co) wrote to Sci-Chem disputing that the Agreement included an implied right to terminate for convenience and also disputing that 60 days would be a reasonable period of notice if such a term were to be implied. The letter further stated that Sci-Chem was estopped from terminating the Agreement by reason of the express provision in clause 6 that the term is “PERPETUAL” and the efforts said to have been expended by PPT in performing work under the Agreement to date on the basis of its entitlement to the fees in clause 9 “perpetually”. The letter continued:

“As there is clearly a dispute between the parties, clause 14 of the Agreement requires the dispute to ‘be submitted to the International Chamber of Commerce (ICC) and shall be finally settled under the Rules of Conciliation and Arbitration of the ICC by One Arbitrator appointed in accordance with the afore-said rules.’”

  1. The letter requested that the 30 June notice be withdrawn, that the parties submit the dispute to the ICC and that Sci-Chem undertake not to issue any further notice of termination pending resolution of the dispute and that Sci-Chem continue to comply with its obligations under the Agreement.

  2. The letter concluded by notifying Sci-Chem that, if it failed to comply with the requests above by 5pm on 21 July 2021, PPT’s solicitors were instructed to immediately approach the Duty Judge in the Equity Division of this Court to seek an urgent interim injunction restraining the purported termination of the Agreement pending resolution of the dispute by arbitration.

  3. Sci-Chem replied to Connor & Co’s letter on 21 July 2021 through Minter Ellison (the solicitors then acting for Sci-Chem). Sci-Chem maintained that it was entitled to terminate for convenience and that 60 days was a reasonable period of notice, and denied that it was estopped from terminating for convenience.

  4. Minter Ellison’s letter then stated that Sci-Chem was also entitled to terminate the Agreement for material breach by PPT, and set out the following alleged material breaches:

  1. failure to procure introductions to potential partners in the territories specified in the Agreement (with the exception of the United States);

  2. failure to use reasonable commercial efforts to market and promote the Dynamiclear product in territories outside the United States;

  3. communications with potential partners in the United States, allegedly for the specific purpose of discouraging their investment in Dynamiclear;

  4. threatening legal action against those potential partners, which was said to be inconsistent with PPT’s obligation to work in the best interests of Sci-Chem; and

  5. failing to undertake an audit at the facilities of a specified entity as instructed by Sci-Chem on 29 December 2020, for the purpose of further negotiations between Sci-Chem and that entity. The evidence establishes that those negotiations led to the signing of a letter of intent on 5 May 2021, to which I will refer later in these reasons.

  1. I interpolate to note that Sci-Chem does not allege that PPT has committed any breach of the Agreement that would enliven the express termination right in clause 7(a) of the Agreement.

  2. After setting out the alleged breaches referred to above, Minter Ellison’s letter stated that Sci-Chem had decided to terminate the Agreement for material breach with effect from 29 August 2021. I will refer to this part of the letter as the 21 July notice. [1]

    1. For the avoidance of doubt, by using the terms “30 June notice” and “21 July notice”, I do not express any opinion about whether those letters were valid notices of termination of the Agreement. That is a matter for the arbitral tribunal.

  3. Minter Ellison’s letter also stated that Sci-Chem agreed that the Agreement requires any dispute to be referred to the International Chamber of Commerce (the ICC) and that, in circumstances where Sci-Chem had terminated the Agreement, it was incumbent on PPT to submit the dispute to the ICC for arbitration if it believed that the termination was unlawful. The letter urged PPT to do so expeditiously.

  4. The letter continued:

“12.    Your client has threatened to seek an urgent injunction from the Supreme Court of New South Wales restraining our client’s termination of the Agreement pending resolution of an ICC arbitration.

13.    We note that the Agreement requires all disputes between the parties be submitted to the ICC. As such, our client’s position is that seeking relief from the Supreme Court is not an option provided for pursuant to the Agreement.

14.    In any event, we reiterate that our client will continue to meet any obligations pursuant to the Agreement until its termination, in 39 days. As such, your threat to obtain urgent relief tomorrow is entirely unwarranted. Further, PPT has not taken any steps to initiate an arbitration through the ICC. Surely, in circumstances where your client is asking the Court to exercise its coercive powers, it should at a minimum act without delay in commencing an arbitration through the ICC. As you would appreciate, delay in taking this step will likely disentitle your client from obtaining interlocutory relief.

15.    Further, in the event PPT obtains an injunction, our client will suffer substantial losses as a result of the continuation of the Agreement. Should an injunction be granted, our client will be unable to seek opportunities even in circumstances where PPT has made no effort to do so. As a result, the balance of convenience does not favour the grant of an injunction.

16.    As you would appreciate, in the event your client seeks an urgent interlocutory injunction, it will be required to give an undertaking as to damages (Practice Note SC Eq – 8 Urgent Matters in the Equity Division). Further, based on our inquires PPT has no assets in the jurisdiction.

17.    Given the above, if your client wishes to obtain interlocutory relief, our client will seek an order requiring PPT to pay in the court monies to be held as security for the undertaking as to damages...”

  1. Minter Ellison’s letter then set out Sci-Chem’s formal response to PPT’s requests, namely:

  1. the 30 June notice would not be withdrawn;

  2. it was incumbent on PPT to submit the dispute to the ICC;

  3. Sci-Chem reserved its position to issue further notices of termination, including in the event of any further breaches of the Agreement; and

  4. Sci-Chem would comply with its obligations under the Agreement until the date of termination.

  1. The letter concluded by stating:

“In the interest of avoiding extensive costs and protracted litigation, our client will not contest an urgent interlocutory application on the basis that your client:

(a)    submits an application to the ICC within the next 48 hours and undertakes to expeditiously prosecute the arbitration; and

(b)    provides security for its undertaking as to damages and our client’s costs, in an amount agreed by the parties or, otherwise determined by the Court.”

  1. Connor & Co replied to Minter Ellison by letter dated 23 July 2021, disputing the allegations of material breach, setting out alleged breaches of the agreement by Sci-Chem and providing a more detailed description of the efforts that PPT claims to have expended on the Agreement on which it relies in support of its contention that Sci-Chem is estopped from terminating the Agreement.

  2. The letter then stated:

“The proposed injunction proceedings

Our client agrees to provide an undertaking as to damages in the usual form in respect to the proposed injunctive proceedings.

Our client does not concede that an order for security is appropriate (whether in relation to costs or its undertaking) in circumstances where both parties agree that a dispute under the Agreement should be with the ICC. …

To the extent that your client asserts that any anticipated damage to them might weigh into the balance of convenience, please provide details of the alleged damage that your client believes it will suffer as a result of any injunction and the amount of those damages.

In relation to your clients request for security for costs, please provide details of your client’s estimate of the proposed injunctive proceedings.

We note that, pending the commencement of the injunctive proceedings, ‘without prejudice’ conversations will take place next week.”

Commencement of these proceedings and PPT’s claims for relief

  1. On 16 August 2021, PPT commenced these proceedings on an urgent basis by filing in court a Summons seeking an interlocutory injunction “restraining the defendant from terminating or purporting to terminate” the Agreement, without further order of this Court or further order of the arbitrator to be appointed by the International Chamber of Commerce (ICC) under its Arbitration Rules.

  2. Orders for short service were made on 16 August 2021, and the matter returned to court on 17 August 2021. On that occasion, Hammerschlag J granted leave to Mr Shah, the sole director of Sci-Chem, to appear on its behalf. His Honour listed PPT’s application for an injunction for hearing on 26 August 2021 and made directions for the service of evidence.

  3. On 20 August 2021, PPT lodged a Request for ICC Arbitration with the ICC. Evidence tendered by PPT at the hearing on 26 August 2021, included correspondence from the Secretariat of the International Court of Arbitration of the ICC acknowledging receipt of the Request and confirming that, pursuant to Article 4(2) of the ICC Rules of Arbitration, the arbitration commenced on 20 August 2021.

  1. At the outset of the hearing on 26 August 2021, PPT sought leave to file an Amended Summons. For reasons that will be plain from the transcript and need not be recorded here, I granted leave only to the extent of the amendments set out in prayer 2 of that Amended Summons. Prayer 2 (incorporating the definition of “Agreement” in prayer 1 and incorporating further minor amendments made informally by senior counsel for PPT in the course of oral submissions) seeks the following relief:

“An interim measure under Article 17J of the Model Law (as specified in s 16 of the International Arbitration Act 1974 (Cth)) restraining the defendant from acting as though the Letter purporting to be a Notice of Termination dated 30 June 2021 and the Letter purporting to be a Notice of Termination dated 21 July 2021 were valid notices of termination of the Exclusive Representative Agreement between Sci-Chem International Pty Ltd and Pharmaceutical Processing Technology Inc dated 28 February 2015, without further order of the Court or further order of the arbitrator(s) to be appointed by the International Chamber of Commerce under its Arbitration Rules.”

  1. PPT, through its senior counsel, offered the usual undertaking as to damages and an undertaking to pursue expeditiously the arbitration proceedings commenced on 20 August 2021.

  2. In its written and oral submissions, PPT emphasised that prayer 2 of the Amended Summons:

“… seeks only to maintain the status quo until an arbitral tribunal is convened to entertain the dispute and give such further or different interim relief as the case may require.”

  1. PPT submitted that, once an arbitrator is appointed by the ICC in accordance with its Arbitration Rules, it will be open to Sci-Chem to raise with the arbitrator whether any interim injunction granted by this Court should continue (and, if so, on what terms), without Sci-Chem needing to demonstrate any change in circumstances since the hearing of the present application.

  2. PPT identified Article 17 of the Model Law as the arbitrator’s source of power to order interim measures, and referred to the express terms of the order sought in prayer 2 of the Amended Summons which provides that the order (if made) would operate only until further order of the Court or the arbitrator. Accordingly, in PPT’s submission, it would be open to the arbitrator to make an order bringing to an end the operation of any interim injunction granted by this Court, and to substitute a different interim measure pursuant to Article 17 of the Model Law if the arbitrator determined that any interim measure was appropriate.

Consideration and determination

Applicable principles

  1. Article 17J of the Model Law provides:

“A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their place is in the territory of this State, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures in consideration of the specific features of international arbitration.”

  1. As PPT submitted, the power under Article 17J “should be exercised very sparingly and in circumstances in which such orders were effectively the only means by which the position of a party could be protected until an arbitral tribunal was convened”: Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd (2013) 298 ALR 666; [2013] WASCA 66 at [96] (Martin CJ, Buss JA agreeing), citing Celetem SA v Roust Holdings [2005] 4 All ER 52; [2005] EWCA Civ 618; Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (2015) 246 FCR 479; [2015] FCA 1028 at [105] (Edelman J); Kawasaki Heavy Industries Ltd v Laing O’Rourke Australia Construction Pty Ltd (2017) 96 NSWLR 329; [2017] NSWCA 291 at [101].

  2. I accept PPT’s submission that the general principles that apply to the grant of interim injunctions otherwise apply to an application for an interim injunction under Article 17J of the Model Law.

  3. Those general principles are well established: see Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; [2001] HCA 63, especially at [8]-[13], [18] (Gleeson CJ), [91] (Gummow and Hayne JJ, Gaudron JJ agreeing); Papas v Grave [2013] NSWCA 308 at [83] (Emmett JA, Sackville AJA agreeing).

  4. The purpose of an interim injunction is to preserve the status quo until the rights of the parties can be determined at a final hearing or, to adopt the language of Gleeson CJ in Australian Broadcasting Corporation v Lenah Game Meats, supra, to “prevent the practical destruction” of the right in respect of which the plaintiff claims final relief “before there has been an opportunity to have its existence finally determined”. [2]

    2. (2001) 208 CLR 199; [2001] HCA 63 at [12].

  5. A plaintiff must establish that:

  1. its claim for final relief raises a serious question to be tried in the sense that, if the evidence remains as it is, there is a probability that at the trial of the action the plaintiff will be entitled to relief;

  2. if the interim injunction is not granted, it will suffer irreparable harm for which damages will not be an adequate remedy; and

  3. the balance of convenience favours the grant of the interim injunction.

  1. As Newnes JA said in Mineralogy Pty Ltd v Sino Iron Pty Ltd [2016] WASCA 105 at [87] (McLure P and Corboy J agreeing), the first requirement:

“… does not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed. It is sufficient that the plaintiff show a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial. How strong the probability needs to be depends upon the nature of the rights the plaintiff asserts and the practical consequences likely to flow from the orders the plaintiff seeks.” 

  1. The inadequacy of a remedy in damages is often stated as a separate factor to be considered, but it is more accurately assessed as one aspect of the balance of convenience. The Court must determine whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622-623.

Evidence

  1. PPT relied on two affidavits of Mr Gaeta sworn on 15 August 2021 and 25 August 2021 (and the documents exhibited to those affidavits) and an affidavit of Ms Amanda Johnstone sworn on 20 August 2021. Ms Johnstone is a solicitor employed by Connor & Co.

  2. Sci-Chem relied on an affidavit of Mr Shah sworn on 23 August 2021 (and documents exhibited to that affidavit).

  3. I have considered all of that evidence and all of the parties’ submissions. Given the urgency with which these reasons are required to be prepared, and to avoid undermining the effect of orders that I made to protect the confidentiality of commercially sensitive information contained in the exhibits to the affidavits of Mr Gaeta and Mr Shah, I refer only to those aspects of the evidence and submissions to which it is strictly necessary to refer in order to explain the reasons for my decision.

Serious question to be tried in relation to the 30 June notice

  1. The ordinary meaning of the word “perpetual” is never ending or changing. As I have referred to earlier in these reasons, the parties used that word to describe the duration of the term of the Agreement and also to describe the period for which Sci-Chem’s payment obligations under clause 9 of the Agreement would apply.

  2. Whether the legal meaning of that word in clause 6 of the Agreement is consistent with its ordinary meaning, and whether the Agreement contains an implied term that it may be terminated for convenience on reasonable notice, are questions of construction: Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 at 443 (McHugh JA, with whom Priestley JA generally agreed).

  3. In New South Wales, the principles that apply to the construction of commercial contracts were recently summarised by Bathurst CJ (with whom Meagher and Gleeson JJA agreed) in Lawrence v Ciantar [2020] NSWCA 89 at [98]–[99]):

98    The principles surrounding the construction of commercial contracts in this country are well established. In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] , the plurality (French CJ, Hayne, Crennan and Kiefel JJ) stated that ‘[t]he meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean’ in context. The Court stated that ‘it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract”: see also Mount Bruce Mining at [46]–[49]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [78] ; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16] ; Victoria v Tatts Group Ltd (2016) 90 ALJR 392; [2016] HCA 5 at [51] .

99    In Mount Bruce Mining it was pointed out at [46] that context includes ‘the entire text of the contract as well as any contract, document or statutory provision referred in the text of the contract’.”

  1. The language chosen by the parties is the starting point and the ending point in construing a written commercial contract: Cherry v Steele‑Park (2017) 96 NSWLR 548; [2017] NSWCA 295 at [57]-[86] (Leeming JA, Gleeson JA agreeing) and [123]-[124] (White JA) and the authorities there referred to.

  2. There was no evidence before the Court identifying the principles of construction that apply under the law of the State of New York. In those circumstances, the Court presumes for the purpose of the present application that the same principles apply under the law of the State of New York as under the law of New South Wales, as PPT submitted: see Nygh’s Conflict of Laws in Australia (10th ed, 2020) at [17.37]-[17.47]. I note that the 30 June notice expressly relied on a right of termination for convenience that Sci-Chem contends is implied in the Agreement under New South Wales law.

  3. On behalf of Sci-Chem, Mr Shah submitted that the word “perpetual” cannot exclude a right to terminate in circumstances where Sci-Chem contends that PPT is not working for the best interests of Sci-Chem because PPT’s efforts are inadequate and are failing to secure agreements for Sci-Chem with distribution and licensing partners in the territories. Mr Shah’s submissions emphasised that Sci-Chem is unable to commercialise its intellectual property and is not generating profits for itself and its investors as a result of what it considers to be PPT’s failure to use reasonable commercial efforts to market and promote its products in those territories. In my opinion, this submission is relevant to whether there is a serious question to be tried about the validity of the 21 July notice terminating (or purporting to terminate) the Agreement for material breach. Whether the Agreement includes an implied right to terminate for convenience falls to be determined as a matter of construction as at the time the Agreement was entered into, and not by reference to subsequent events.

  4. In my opinion, having regard to the importance accorded to the language used by the parties in the exercise of construing a commercial contract, the ordinary meaning of the word “perpetual” and the use of that term in clauses 6 and 9 of the Agreement, the plaintiff has demonstrated a reasonably strong argument that, as a matter of construction applying the principles referred to above, a right to terminate for convenience on reasonable notice is not implied in the Agreement. I am therefore satisfied that there is a serious question to be tried as to whether the 30 June notice is a valid notice of termination of the Agreement.

Serious question to be tried in relation to the 21 July 2021 notice

  1. Both parties have adduced evidence directed to the question whether PPT has breached the Agreement in the manner alleged in the 21 July notice.

  2. As to the first and second alleged breaches referred to at [25] above, Mr Gaeta has given evidence in his affidavit sworn on 25 August 2021 of efforts that he has made to identify and introduce and open negotiations with potential distribution and licensing partners for Sci-Chem in territories outside the United States in the period since 2015. Mr Gaeta has also given evidence of to a distribution agreement that Sci-Chem entered into in September 2015 with a company incorporated in Florida, following Mr Gaeta’s introduction of the principal of that company to Sci-Chem. That agreement is for the distribution of the plaintiff’s products in several territories, including the United States and other territories to which the Exclusive Representative Agreement applies. Mr Shah submitted that the agreement to which Mr Gaeta refers ended in litigation, but there is no evidence of that. Nor is there any evidence of the nature, cause or outcome of the litigation. Nor is there any evidence to suggest that the litigation was attributable to any conduct of PPT or Mr Gaeta.

  3. Mr Shah’s evidence and submissions focussed on the lack of concluded or successful agreements with licensing and distribution partners in territories outside the United States rather than whether PPT had opened negotiations with potential partners for Sci-Chem. Lack of success does not necessarily indicate that PPT has breached its obligations under the Agreement. Amongst other reasons, there is a dispute between the parties about whether Mr Shah instructed Mr Gaeta that PPT should focus only or predominantly on the United States market.

  4. On the basis of all of that evidence, I am satisfied that there is a serious question to be tried in relation to whether Sci-Chem was entitled to terminate the Agreement for material breach relying on the first and second alleged breaches.

  5. I accept PPT’s submission that the only evidence relevant to the third and fourth alleged breaches referred to at [25] above is Mr Shah’s evidence of concerns that have been recently raised by potential investors in Sci-Chem about Sci-Chem’s obligations under the Agreement, and PPT’s refusal to agree to the termination or renegotiation of the Agreement. There is no evidence of PPT threatening legal proceedings other than by giving appropriate notice of its intentions to seek injunctive relief. Having regard to that evidence, I accept PPT’s submission that there is a serious question to be tried in relation to whether Sci-Chem was entitled to terminate the Agreement for material breach on the basis of the third and fourth alleged breaches.

  6. In relation to the fifth alleged breach referred to at [25] above, Mr Shah’s evidence is that he requested PPT on 29 December 2020 to undertake an audit at the facility of the potential investors referred to immediately above “for the purposes of further negotiations with them”. Mr Shah says that PPT did not undertake that audit.

  7. Mr Gaeta’s evidence is that an entity associated with those potential investors was manufacturing Sci-Chem products under an existing arrangement with Sci-Chem as at December 2020. Sci-Chem had issued a notice to that entity on 22 December 2020 requiring it to cease all manufacturing of Sci-Chem products immediately unless the entity agreed to certain terms stipulated by Sci-Chem for a new agreement. It was in that context that Sci-Chem instructed PPT to undertake the audit at the entity’s premises. Mr Gaeta’s evidence is that he made attempts to carry out this request in the period prior to New Year and did ultimately meet with one of the principals of the entity in early January 2021, who undertook to compile the information sought and provide it to PPT for Sci-Chem. Mr Shah does not give evidence of any follow up requests for PPT to pursue the audit.

  8. On the basis of the evidence summarised above, I accept PPT’s submission that there is a serious question to be tried as to whether Sci-Chem is entitled to terminate the Agreement for material breach on account of PPT’s conduct in relation to the audit or whether, in all the circumstances, PPT made commercially reasonable efforts as required by clause 8(h) of the Agreement to carry out the audit.

  9. For all of those reasons, I am satisfied that there is a serious question to be tried as to whether the 21 July notice is a valid notice of termination of the Agreement. On the basis of the evidence presently before the Court, I consider that PPT has demonstrated not only that there is a serious question to be tried but also that it has a reasonably strong case, at least in relation to the third to fifth alleged breaches.

Harm to plaintiff if interim measure not granted?

  1. In support of its submission that it will suffer irreparable harm if the interim injunction is not granted, for which damages will not be an adequate remedy, PPT refers to Mr Shah’s evidence of the transaction that he intends to cause Sci-Chem to enter into on the expiry of the notice periods (or purported notice periods).

  2. Mr Shah’s evidence concerning that transaction may be summarised as follows. He has been negotiating with two investors since about December 2020. Those investors have signed a letter of intent dated 5 May 2021 setting out the terms of their proposed investment. Those terms include that Sci-Chem’s intellectual property is to be transferred to a new entity (referred to as “NewCo”) in consideration for a sum that Mr Shah has complained in email correspondence with the investors does not reflect what he considers to be the true value of the intellectual property. The investors are to pay a specified capital contribution to NewCo. The shareholders in NewCo are to be the two investors and Mr Shah. Profits are to be distributed between them in proportions specified in the letter of intent. Sci-Chem is not to be a shareholder in NewCo. Contrary to clause 8(c) of the Agreement, the letter of intent does not include any term to the effect that NewCo, as assignee of the intellectual property, will be jointly and severally liable with Sci-Chem for commission payments to which PPT is entitled “perpetually” under clause 9 of the Agreement.

  3. PPT submitted that, if an interim injunction is not granted and Sci-Chem proceeds with the steps set out in the letter of intent before PPT’s claims are determined on their merits by the arbitral tribunal, the value of PPT’s rights under the Agreement will have been effectively destroyed even if it succeeds in the arbitration proceedings. Sci-Chem will no longer own the intellectual property, so any claim for damages against Sci-Chem to recover payments under clause 9 of the Agreement would be worthless. There is no evidence to suggest that Sci-Chem has any other assets of material value. Mr Shah’s evidence suggests that Sci-Chem has limited financial resources.

  4. I accept PPT’s submission that, for the reasons outlined immediately above, damages will not be an adequate remedy for the harm that PPT will suffer if the interim injunction is not granted and if PPT subsequently establishes that the 30 June and 21 July notices are invalid.

  5. Mr Shah protested that, in that scenario, Sci-Chem could be trusted to honour its payment obligations under clause 9 of the Agreement, as it has done so in the past. However, PPT entered into the Agreement pursuant to which it has a right to payment under clause 9 enforceable against Sci-Chem and the benefit of a covenant by Sci-Chem not to transfer the intellectual property. I reject Sci-Chem’s submission that PPT would not be harmed by this right being replaced with a need to trust Sci-Chem to pay the fees in circumstances where, if it failed to do so, any award of damages that PPT may obtain against Sci-Chem for breach of clause 9 could not be enforced against the intellectual property assets.

Harm to defendant if interim measure granted?

  1. Against this harm to PPT must be weighed any harm that Sci-Chem may suffer if the interim injunction is granted. Sci-Chem claims that it will suffer two kinds of harm identified in Mr Shah’s affidavit.

  2. First, Mr Shah deposed that Sci-Chem “will be unable to proceed” with the proposed investment referred to above and that the interim injunction “would certainly result in” the loss of that investment opportunity for Sci-Chem. Mr Shah gave evidence that Sci-Chem’s cashflow is reliant on the funds to be contributed by the proposed investors. Mr Shah exhibited to his affidavit a projection prepared by Sci-Chem’s accountant forecasting specified gross profit for Sci-Chem for the financial year ending 30 June 2022 on the assumption that the capital injection referred to in the letter of intent is received from the investors.

  3. Mr Shah also deposed that, without the cashflow expected to be generated with the benefit of the investors’ capital contribution, “it will be difficult for Sci-Chem to meet the costs of packing and manufacturing to complete export orders to Canada, South Africa and Mexico in early 2022.” There is no evidence as to the amount of those costs.

  4. Second, Mr Shah deposed that, if the interim injunction is granted, Sci-Chem will be unable to implement plans to pursue opportunities in the territories that are covered by the Agreement and that Sci-Chem alleges PPT has failed to pursue. Mr Shah’s evidence is that “[w]ithout such opportunities, it is likely that Sci-Chem will be unable to continue paying its expenses” for the duration of the interim injunction.

  5. The expenses to which Mr Shah refers are those set out in paragraph 45 of his affidavit. That paragraph sets out various expenses incurred in the past, the ongoing expenses of one clinical trial, and a recent loan. There is no evidence of the amount or timing of any repayments under the loan. Mr Shah’s affidavit simply annexes an email to the lender in which Mr Shah promises on behalf of Sci-Chem to repay the loan as soon as possible. It is reasonable to infer that the loan is repayable on demand.

  6. In addition to likely inability to pay expenses, Mr Shah deposes that he expects that Sci-Chem will suffer significant damage if it is unable to pursue other opportunities in the territories referred to above during the term of any interim injunction. However, he describes such damage as “impossible to assess”.

  7. Drawing together his evidence about the two kinds of harm that Sci-Chem claims it will suffer, Mr Shah deposes:

“On a conservative view, Sci-Chem will lose at least USD$1,500,000 over the next 12 months as a result of an injunction. If the ICC arbitration takes longer than 12 months, the loss will be greater.”

  1. In relation to the first kind of harm, I accept PPT’s submission that the totality of the evidence adduced on this application does not establish that the investment opportunity will be lost if an interim injunction is granted. Mr Shah’s assertion that the opportunity will be lost is just that – a bare assertion. As such, it carries little weight. Moreover, it is inconsistent with the recent correspondence between the investors and Mr Shah. In that correspondence, the investors expressed the view on 12 June 2021 they would “be more comfortable going forward” if PPT would vary the Agreement insofar as it covers the same territories as those covered by the letter of intent. There is evidence to the effect that Mr Shah subsequently sent several versions of proposed amendments to the Agreement to Mr Gaeta and that those proposed amendments were rejected by Mr Gaeta on behalf of PPT. The investors then told Mr Shah on 29 June 2021 that they “do not see a way to move forward prior to the resolution of outstanding issues between SciChem and [PPT]”. Whilst this conveys that the investors do not wish to proceed until those outstanding issues have been resolved, it does not convey that they intend to abandon the letter of intent, or that they intend to do so if the issues are not resolved within a specified time frame.

  2. In any event, as PPT submitted, the proposed investment is not an opportunity for Sci-Chem. It is an opportunity for Mr Shah to benefit from being a shareholder in NewCo, to which Sci-Chem’s intellectual property is proposed to be transferred. The projected gross profits referred to above will be generated by NewCo. As I have already mentioned, the shareholders of NewCo who will benefit from any such profits do not include Sci-Chem. The proposed shareholders are Mr Shah and the two investors.

  3. For the same reasons, the investors’ capital contributions to NewCo will not enable Sci-Chem to meet the costs of completing export orders to Canada, South Africa and Mexico in early 2022, to meet the costs that it is liable to pay in respect of its clinical trial or to repay the loan referred to above.

  4. In relation to the second kind of harm, Mr Shah’s evidence that he intends for Sci-Chem to immediately pursue opportunities in other territories upon termination of the Agreement does not rise above the level of bare assertion. There is no evidence of particular plans made, or steps taken, in preparation to give effect to any such intention. The only reasons offered by Mr Shah as to why Sci-Chem could not pursue those opportunities through PPT if an interim injunction were granted are the alleged failure by PPT to use reasonable efforts do so in the past (about which there is a dispute to be determined at arbitration) and Mr Shah’s claim that his working relationship with Mr Gaeta has been irreparably damaged by the present dispute such that they would be unable to work together effectively. I give little weight to that claim, as it seems to me to be inconsistent with Mr Shah’s persistent efforts until the end of June 2021 to negotiate a new agreement with PPT. Mr Gaeta has given evidence that he remains willing to work with Mr Shah and Sci-Chem. Indeed, the evidence reveals that Mr Gaeta played a role in introducing the investors who have signed the letter of intent to Sci-Chem.

  5. The whole of the evidence summarised above does not establish a real risk that the investment opportunity will be lost if an interim injunction is granted for a short period of time pending any application by PPT to the arbitral tribunal for an interim injunction for a further period. Nor does the evidence establish that the loss of the investment opportunity (even if that were to occur) would occasion loss to Sci-Chem. In the absence of evidence of any planning or preparation by Sci-Chem to embark on the pursuit of opportunities independently of PPT, I am not satisfied that Sci-Chem would be in a position to do so in the weeks immediately following 30 August 2021 if the interim injunction were not granted. Accordingly, any risk of loss to Sci-Chem arising from the inability to pursue those opportunities would lie in the longer term rather than in the short term (assuming, without deciding, that it is not feasible for Sci-Chem to pursue those opportunities through PPT).

  6. By contrast, if an interim injunction is not granted, the evidence establishes that the harm to PPT referred to at [69]-[72] above is likely to occur very soon after 30 August 2021 and will continue if PPT succeeds in the arbitration proceedings.

  7. For those reasons, I consider that the harm that is likely be suffered by PPT if an interim injunction is not granted substantially outweighs the risk of any harm that may be suffered by Sci-Chem (if any) if the interim injunction is refused.

Delay

  1. Mr Shah submitted that the balance of convenience does not favour the granting of an interim injunction because PPT has delayed applying for the injunction until now, despite being on notice since 23 December 2020 that the Agreement was to be terminated.

  2. It is true that Mr Shah sent an email to Mr Gaeta on that date purporting to unilaterally inform Mr Gaeta that the agreement between Sci-Chem and PPT would operate on different terms going forward. This communication, and similar communications in the period leading up to 30 June 2021, beg the question whether Sci-Chem is entitled to terminate the Agreement and offer a new agreement on different terms. PPT has disputed Sci-Chem’s entitlement to do so throughout this correspondence. For the reasons I have already given, PPT has established a serious question to be tried in relation to Sci-Chem’s asserted right to terminate for convenience and the validity of the 30 June and 21 July notices. Those questions are to be determined by the arbitral tribunal.

Terms of interim injunction

  1. The serious questions to be tried by the arbitral tribunal, the irreparable harm that PPT will likely suffer if an interim injunction is not granted and the lack of evidence of a risk of harm to Sci-Chem, at least in the short-term, make this an appropriate case for the grant of an interim injunction for a short period that is sufficient to facilitate the arbitral tribunal being constituted and hearing any application by PPT a longer-term injunction.

  2. In the circumstances of this case, I do not consider that it would be consistent with the sparing approach to the exercise of the power under Article 17J of the Model Law referred to at [42] above to grant an interim injunction until further order of the Court or the arbitral tribunal. The effect of an injunction in those terms would be that it would fall to Sci-Chem to approach the arbitral tribunal with an application to vary or discharge the injunction. If PPT had acted promptly from the date of the 30 June notice, bearing in mind that Sci-Chem was urging it to refer the dispute to arbitration without delay, it could have taken the necessary steps to commence arbitration proceedings (in parallel with ongoing without prejudice negotiations) and make its application for the interim injunction to the arbitrator rather than to this Court. Whilst the ICC Rules of Arbitration envisage the appointment of an arbitrator within 30 days and a case management conference before the arbitrator within one month thereafter, it is open to the parties to act expeditiously to nominate an agreed arbitrator for appointment and to request a case management hearing earlier than one month after the file has been referred to the arbitrator.

  3. A further reason for limiting the injunction to be granted by this Court to a specified and relatively short period of time is that there is a real question whether any interim injunction extending beyond that short period should be conditional on PPT providing security for its undertaking as to damages. Sci-Chem has raised concerns from 21 July 2021 onwards about PPT’s capacity to pay any compensation it may be ordered to pay in accordance with that undertaking. Those concerns are not supported by any evidence, save that PPT does not own any assets in Australia. In the face of those concerns, PPT has chosen to adduce no evidence of its financial position and to offer no security for its undertaking. I infer that any evidence PPT could have adduced would not have assisted its contention that this Court should not require it to provide security. PPT’s capacity to honour the undertaking, if later called upon to do so, must therefore be regarded as uncertain.

  4. PPT submitted that it is “quintessentially a matter for the arbitrator” to determine whether security is required, taking into account the likely period of time required to finalise the arbitration, the arbitrator’s assessment of the nature and extent of any loss or damage that Sci-Chem may suffer if an injunction is granted by the arbitrator and whether there is a responsible estimate of the quantum of that loss or damage by reference to which an order for security could be made.

  5. In my opinion, those submissions underscore the importance of the interim injunction granted by this Court being only for such term is as necessary to enable PPT to expeditiously make any fresh application for an interim injunction before the arbitral tribunal. By its own course of conduct since 30 June 2021, PPT foreclosed the ability for the parties to have any application for interim protective measures determined by the arbitral tribunal in the first instance. In those circumstances, and where PPT’s financial capacity to honour its undertaking as to damages is uncertain, I consider that the interim injunction to be granted by this Court should be limited to a period of 28 days from the date of these reasons, during which time it will be incumbent on PPT to make an application to the arbitral tribunal if it wishes to have the protection of an interim injunction beyond that period. Time started running on 20 August 2021. Even assuming that the parties are unable to agree on an arbitrator to be nominated for appointment, the period of 28 days allows PPT a period of one week after the appointment of an arbitrator by the International Court of Arbitration within which to arrange an urgent hearing before the arbitrator of any application for a further interim injunction.

  6. The importance of the undertaking as to damages is well-established and it is generally only in exceptional circumstances that interim injunctions are granted without an undertaking, or with an undertaking that may possibly prove to be illusory. I consider that this case is sufficiently exceptional to warrant an interim injunction for a period of 28 days supported by PPT’s undertaking as to damages without security, having regard to the immediate and irreparable harm that PPT is likely to suffer if the injunction is not granted and the absence of evidence that Sci-Chem is likely to suffer any harm, at least in the short-term. There will be liberty for both parties to apply on 24 hours’ notice within that 28-day period. If that liberty to apply is exercised by Sci-Chem on the grounds that it is facing a risk of harm due to circumstances that have arisen subsequent to the grant of the interim injunction, it will be incumbent on Sci-Chem to adduce cogent evidence identifying the risk, the nature of the harm and a responsible estimate of the potential loss or damage in support of any application for the Court to impose a condition requiring PPT to provide security for its undertaking. A figure that is simply asserted, without any explanation of how the risk of harm may potentially result in loss of that magnitude, is not a responsible estimate.

Conclusion and orders

  1. For all of the reasons above, I make the following orders:

  1. Upon the plaintiff giving to the Court the usual undertaking as to damages, the Court orders pursuant to Article 17J of the Model Law (as specified in s 16 of the International Arbitration Act 1974 (Cth)) that the defendant is restrained for a period of 28 days from the date of this order, or until earlier further order of the Court or the arbitral tribunal to be constituted in the arbitration proceedings referred to in notation (3) below, from acting as though:

  1. the Letter purporting to be a Notice of Termination dated 30 June 2021; and

  2. the Letter purporting to be a Notice of Termination dated 21 July 2021,

were valid notices of termination of the Exclusive Representative Agreement between the defendant Sci-Chem International Pty Ltd and the plaintiff Pharmaceutical Processing Technology Inc dated 28 February 2015 (the Agreement).

  1. Grant liberty to the parties to apply on 24 hours’ notice within the period of the restraint in order (1) above.

  2. Note the undertaking of the plaintiff to the Court to prosecute expeditiously the arbitration proceedings commenced by the plaintiff in the International Court of Arbitration under the International Chamber of Commerce Arbitration Rules on 20 August 2021 in relation to the dispute between the plaintiff and the defendant concerning the Agreement.

  3. Direct the defendant to notify the Associate to Williams J in writing by 5pm on 31 August 2021 of any parts of the documents comprising Exhibits MG-1, AY-1 and AY-2 tendered at the hearing on 26 August 2021 in respect of which the defendant seeks an order prohibiting the publication or disclosure of those documents.

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Endnotes

Decision last updated: 27 August 2021

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