The Ohio Art Co v Hunter Leisure Pty Ltd

[1998] FCA 982

FEDERAL COURT OF AUSTRALIA

Interpretation of instruments – sub-licence agreement – whether agreement void for uncertainty – whether restrictions on use and transfer of technology and tooling were operative after expiration of agreement.

Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 – appl.

THE OHIO ART COMPANY V HUNTER LEISURE PTY LIMITED

NG 463  of   1998

JUDGE:         BEAUMONT J.
PLACE:         SYDNEY
DATE:           12 JUNE 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 463 of 1998

BETWEEN:	THE OHIO ART COMPANY APPLICANT
AND:	HUNTER LEISURE PTY LIMITED RESPONDENT

JUDGE:	BEAUMONT J.
DATE:	12 JUNE 1998
PLACE:	SYDNEY

REASONS FOR RULING

Before the Court is an application for final injunctive relief sought by The Ohio Art Company (“Ohio”), as applicant, against Hunter Leisure Pty Limited (“Hunter”), as respondent. Relief is sought under the general law, and under s 52 and 53 of the Trade Practices Act 1974 (“the Act”). In the course of final submissions by counsel, it emerged that one of the principal claims of Ohio depended upon a particular construction of the terms of a sub-licence agreement made between Ohio and Hunter in 1993. In this connection, Ohio seeks a permanent injunction restraining Hunter from using or transferring, except with Ohio's consent, technology or tooling or improvements thereto, developed and used by Hunter in the manufacture and distribution of Ohio's product "Pro Basketball" in Australia and New Zealand. Pursuant to the agreement, Ohio also seeks a final mandatory injunction for the delivery up of technical drawings provided by Ohio to Hunter in that context.

The sub-licence agreement, which is expressed to be effective on 1 January 1993, was for an initial term of two years commencing on 1 January 1993 and ending on 31 December 1994.  It was renewable for successive additional terms of one year each.  In fact, the agreement was renewed from time to time but it is now common ground that it finally expired on 31 December 1997.  The agreement recited that Ohio, as licensor, was the holder of a licence to manufacture, distribute, market and sell the products registered and marketed under the registered trademarks as defined in the addendum attached to the agreement and had the right to grant the sub-licence (recital (1)).

The addendum to the agreement referred, in this connection, to the following:

“No.                   Description  Royalty Rate                Royalty Advance

692Michael Jordan Pro Basketball         4% Michael Jordan     $10,000.00

5% Ohio Art

TOTAL ADVANCE  $10,000.00

All advances and royalties are payable in U.S. FUNDS.”

The recitals went on to state that Hunter desired to obtain an exclusive non-transferable sub-licence to manufacture, distribute, market and sell in the Territory (defined in the agreement as Australia and New Zealand) and that Ohio was willing to grant such a sub-licence in accordance with, and subject to, the terms and conditions of the agreement.

For immediate purposes, the relevant provisions of the agreement are as follows:  Article 2 dealt with the grant of the sub-licence;  Clause 2.01 was in these terms:

“GRANT – The Licensor hereby grants to the Sub-Licensee an exclusive nontransferable sub-license to manufacture, distribute, market and sell the Product(s) only.”

Clause 2.03 was as follows:

“Improvements – Each of the Licensor and the Sub-Licensee shall keep the other party continuously informed as to any improvements in the product or the Technology made by it, subject to any rights of the Licensor therein.  Licensor shall keep the Sub-Licensee continuously informed as to any improvements in the Product or the Technology which the Licensor has obtained from others and is free to disclose to the Sub-Licensee.  All such improvements in the Product and the Technology shall fall within the scope of this Agreement.  In the event of termination of the Sub-License, all improvements in Product made by Licensee, including any patents, will be transferred to Licensor at no charge to the Licensor.”

The "Product" was defined in cl 1.01 to mean:

“…the individual items sold under designated trade marks as outlined and defined in the addendum . . . or other trademarks as selected by Sub-Licensee.”

There was, however, no definition of "technology".  Rights on Termination were dealt with by cl 3.03 relevantly as follows:

“3.03   Rights on Termination – Upon termination of this Agreement the Sub-Licensee shall within thirty (30) days report in writing to the Licensor the quantity on inventory of all Product and raw material relating thereto and shall have the right to continue to sell any Product made, on hand, in stock or otherwise under the control of the Sub-Licensee for a period of one hundred twenty (120) days following termination, provided Sub-Licensee shall account for such sales and shall pay the Royalty applicable thereto.  Upon termination of this Agreement, all rights to the Product granted to the Sub-Licensee shall cease and Sub-Licensee shall return to Licensor all written material embodying the Technology.  If rights to said Product are given to another party, Sub-Licensee agrees not to dispose of said Product at prices lower than the established wholesale price of the previous year, in which case, Licensor shall cause said successor Sub-Licensee to purchase the then current stocks of such materials, at Sub-Licensee’s cost, the total quantity of said stock not to exceed 10% of the prior year’s cost of the Sub-Licensee’s unit shipments.”

Restrictions on use were dealt with in article 7.  By cl 7.01, it was provided as follows:

“7.01   Restriction on Use – Except with the price written approval of Licensor, the Sub-Licensee shall not use or transfer the Technology or tooling and any changes or improvements thereof for any other purposes than those pertaining to exercising the rights granted by the Licensor pursuant to this Agreement.”

Article 10 dealt with some general matters including "Survival" which, in cl 10.03, was dealt with as follows:

“All obligations of Licensor and Sub-Licensee which expressly or by their nature survive termination or expiration of this Agreement shall continue in full force and effect subsequent to and notwithstanding such termination or expiration and until they are satisfied or by their nature expire.”

Two questions of construction of the agreement have been agitated by counsel in the course of final submissions and, in accordance with my suggestion, these questions have been separately argued. 

The first question is whether, having regard to the absence of any definition of "technology" in the agreement, the agreement is void for uncertainty.  In my opinion, there is no substance in the submission made on behalf of Hunter that the agreement is meaningless for this reason.  The position is, in my view, squarely covered by the reasoning in authorities such as Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429. There, Barwick CJ said (at 437):

“I do not think there is any uncertainty or for that matter ambiguity in the expression ‘supplier’s costs’ in cl. 5, however wide may be the area of possible disagreement as to its denotation in a particular case.  A contract to build a bridge at cost could not, in my opinion, be held void for uncertainty:  it could not properly, in my opinion, be said to be meaningless:  nor is it, in my opinion, ambiguous.  Endless might be the arguments pro and con as to whether or not in marginal cases some item of expenditure is as claimed a cost, or as to how much of an expenditure is a cost, of the particular activity.  But to my mind, generally speaking, the concept of a cost of doing something is certain in the sense that it provides a criterion by reference to which the rights of the parties may ultimately and logically be worked out, if not by the parties then by the courts.  There are no elements in the circumstances of this contract to deprive the concept of that certainty.”

On behalf of Hunter it was submitted that the concept of "supplier's costs" was, in principle, something different from the notion of "technology" in the present context.  In my view, the analogy provided by the Upper Hunter case should, however, be adopted here.

I accept, as Barwick CJ accepted, that there may well be arguments pro and con as to whether or not in marginal cases some item is, in truth, technology that was developed and used in the manufacture and distribution of Ohio's product by Hunter in Australia and New Zealand.  Nevertheless, for the reasons given by Barwick CJ, it does not follow that the contract is void for uncertainty.  In my view, the concept was sufficiently defined by the parties by its description as "technology".  It is then a matter for the parties, or in the event of disagreement, for the Court ultimately, to determine how that concept should be applied in particular circumstances so as to enable a process of identification of an item as technology or not as technology, as the case may be.  But even if it be assumed that in a particular instance, it is necessary to embark upon that process of inquiry, it does not follow that, as a matter of law, the contract is void for uncertainty.

The second question argued depended on the meaning and operation of the agreement as a whole and, in particular, the operation of cl 7.01 after the expiration of the term of the agreement.  On behalf of Hunter it is submitted that, upon that expiration, the restrictions on use imposed by cl 7.01 were no longer operative as a matter of interpretation, both of that provision and of the agreement as a whole.

I have difficulty accepting this interpretation, whether cl 7.01 is looked at in isolation, or in the context of the agreement as a whole.

Taking the former position first, it will be recalled that the clause provides relevantly that there is to be a restriction on the use or transfer of the technology or tooling and any changes or improvement thereof “for any other purposes than those pertaining to exercising the rights granted by the Licensor pursuant to this Agreement”.  Read literally, and if it were necessary, also read purposively, that language could only mean that the sole rights conferred upon Hunter were those granted under the agreement itself.  Any other use or transfer of the technology etc., without the approval of Ohio, was restricted.  Viewed in that way, it is clear, I think, from the language of cl 7.01, that its provisions conferred no rights upon Hunter that were to subsist beyond the term of the agreement itself.  And, as has been noted, the agreement has now expired.

This interpretation is reinforced by reference to other provisions in the agreement to which I have referred; in particular, cl 10.03 which, it will be remembered, provides that all obligations there described will survive in the circumstances there specified.  There is no mention in that provision of any survival of rights that might have been exercisable by Hunter during the term of the agreement.  On the contrary, cl 10.03, in my view, is consistent with the interpretation of cl 7.01 that I prefer.  That is to say, I would read cl 7.01 as providing for a restraint upon any use or transfer of the technology etc. by Hunter, except if this act is done in the exercise of rights granted to Hunter pursuant to the agreement.  The proviso or exception has, in my opinion, no relevant application in the present case.  For present purposes, those rights expired on 31 December 1997.

The position so far as the obligation to return written material, contained in cl 3.03, is even more specific.  As has been noted, this provision deals with "Rights on termination".  The introductory words of this clause provide, in substance, that upon termination of the agreement, Hunter “shall have the right to continue to sell any product made, on hand, in stock or otherwise under [its] control… for a period of one hundred twenty (120) days following termination”.  There is a proviso which is not material for our purposes.  This is a further indication, in my opinion, of an intention that, apart from this specific limited right to continue to sell in the 120 day period following termination, it was the intention of the parties that upon termination, any right of Hunter to use or transfer technology, etcetera, was also to expire.

I so interpret cl 7.01 and the agreement as a whole.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont

Associate:

Dated:             12 June 1998

0Counsel for the Applicant:	Mr D Ryan
Solicitor for the Applicant:	Deacons Graham & James
Counsel for the Respondent:	Mr J Styring
Solicitor for the Respondent:	Kennedy Guy
Date of Hearing:	11 and 12 June 1998
Date of Judgment:	12 June 1998