William Felton & Co Pty Ltd v Phillips, N.J.

Re: WILLIAM FELTON AND CO PTY LIMITED; WILLIAM FELTON USA INC and PHILLIPS USA
INC
And: NORMAN JOHN PHILLIPS; ROBERT M. ABRAHAMS; N.J. PHILLIPS PTY LIMITED;
ANTHONY C. BROWNE and ALAN FELTON
No. G718 of 1991
FED No. 332
Contract

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies J.(1)

CATCHWORDS

Contract - exclusive distributorship agreement - interpretation - whether a breach - no question of principle involved.

HEARING

SYDNEY

#DATE 29:5:1992

Counsel for the Applicants: Mr D.H. Lloyd QC and Mr E. Strasser

Solicitor for the Applicants: Jennifer E. Darin

Counsel for the Respondents: Mr J.N. West QC and Mr F. Kunc

Solicitors for the Respondents: Pryor Tzannes and Wallis

ORDER

THE COURT ORDERS THAT:-

(i) The questions set aside on 25 March for separate determination

from any other question in the proceedings be answered as follows:-

1. Whether there has been a breach of the Trade Practices Act by virtue of the representations alleged in paragraphs 7 and 8 of the further amended statement of claim.

Answer: "No".

2. Whether the agreement of 1 January 1989 should be rectified as claimed in paragraph 6 of the amended application.

Answer: "No".

3. Whether there has been a breach of paragraphs 1 and 9.1 of the agreement of 1 January 1989 as executed or as rectified as claimed in paragraphs 1 to 11

(inclusive), 17, 18(b) and 21 of the further amended statement of claim.

Answer:- The Third Respondent was in breach of paragraphs 1 and 9.1 of the agreement of 1 January 1989 with the First Applicant by virtue of its entry into the distribution agreement of 10 December 1991 and its appointment thereby of Allflex New Zealand Limited as distributor in the North American territories of the Third Respondent's products, and by the sale to Allflex New Zealand Limited of goods to be distributed in the North American territories by Allflex USA Inc.

4. Whether there has been a breach of paragraph 4 of the agreement of 1 January 1989 as claimed in paragraph 18A of the further amended statement of claim. Answer: "No".

5. Whether there has been a breach of sections 52 and 53(d) of the Trade Practices Act by the applicants' use of a company with the name of Phillips. Answer: "No".

6. Whether the applicants repudiated the agreement of 1 January 1989 as alleged in paragraph 18 of the amended cross-claim.

Answer: "No".

7. Whether there has been a breach of paragraph 14 of the agreement of 1 January 1989 as alleged in paragraph 13 of the amended cross-claim." Answer: "No".

(ii) The Respondents pay one-half of the Applicants' costs to date.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

At the hearing of this application, Mr D.H. Lloyd QC, with him Mr Eric Strasser of counsel, appeared for the applicants. Mr N.J. West QC, with him Mr F. Kunc of counsel, appeared for the respondents.

The application raises issues under ss.52, 82 and 87 of the Trade Practices Act 1974 (Cth) and under the general law of contract. There is a cross-claim in respect of the sale price of goods sold and delivered and in respect of the name of the third applicant, Phillips USA Inc.
The third respondent, N.J. Phillips Pty Limited ("Phillips Co"), carries on business as a manufacturer of equipment to be used in association with health and veterinary products. Many of its products are vaccinators, applicators and syringes used in the application of drenches and medicines, particularly in the veterinary field. Phillips Co has carried on business for many years and its goods are distributed worldwide. The first respondent, Mr Norman John Phillips, is the managing director of Phillips Co. The second respondent, Mr R.M. Abrahams, and the fourth respondent, Mr A.C. Browne, are officers of Phillips Co.
William Felton and Co Pty Limited ("Felton Co") is an Australian company which carries on business in the United States of America. The second respondent, Mr Alan Felton, is the managing director of Felton Co. The second applicant, William Felton USA Inc ("Felton USA") is a wholly owned subsidiary of Felton Co and the third applicant, Phillips USA Inc ("Phillips USA") is a wholly owned subsidiary of Felton USA. Neither of these companies is a company of substance in its own right. Phillips USA is the agent through which Felton Co carries on business as distributor of the products of Phillips Co.
Phillips Co and Felton Co have been associated for approximately 30 years. It is however typical of the evidence given in this case by the witnesses on both sides that the history as described by Mr Phillips on the one hand, and by Mr Felton on the other, is quite different. Mr Phillips, Mr Felton and other witnesses all overstated the picture which they wished to convey. I would not accept the evidence of any of the officers of Phillips or of Felton Co on a significant point unless it accorded with the probabilities of the matter.
Mr Felton in his evidence tried to convey that Phillips Co's business in the United States had from the late 1970's been built up through the efforts of Felton Co. Mr Phillips said, however, that Felton Co had been a mere shipping or confirming agent. The history is not itself of much importance but the truth obviously lies between the two versions.
For many years, the main distributor in the United States was William Cooper and Nephew ("Coopers"). In the early 1980's, Coopers withdrew from the business and Eidson Associates Inc ("Eidson") became the major distributor in the United States. Over the years Felton Co, which was the intermediary between Coopers and Eidson on the one hand and Phillips Co on the other, took some steps to assist the development of the market in the United States. In latter years, Felton Co supported Eidson financially and Mr Felton himself interviewed persons who were potential clients and proposed means of increasing the business.
Most of Phillips Co's products which went overseas did not, in fact, go to Coopers and Eidson. Most sales were to large multi-national companies such as Syntex and Bayer which produced health or veterinary products. Generally, the sales were made to the Australian subsidiaries. The goods then were distributed by the large corporations as a package with other products under the brand name of the multi-national company.
In the middle 1980's, most of Phillips Co's products sold in the United States were sold by the multi-national drug companies in a package under those companies' brand names. Eidson's was a general distributor to the trade. Jorgensons was also a general distributor but smaller. Phillips Co sold goods directly to Franklin Laboratories and had dealings with organisations involved in research and development in the United States. At some stage, goods were sold to the Sunbeam Corporation, which was not a drug company, for distribution by it under its brand.
In about 1986, Mr Felton commenced negotiations to purchase Eidson's business. The acquisition became effective in January 1988, the consideration being $518,107.92. In January 1988, Phillips USA was incorporated and the business was thereafter conducted in its name.
Whilst this was occurring, Mr Felton entered into discussions with Mr Phillips with a view to obtaining for Felton Co a formal agreement appointing it exclusive distributor of Phillips Co's products in the American markets. Mr Felton required such a document so that he could justify to his bankers the purchase of Eidson's business and also a warehouse and offices from which he could trade. Mr Phillips was at the time content to grant to Felton Co exclusive distributorship for a period of 10 years provided that the direct sales by Phillips Co to organisations such as the multi-national companies for packaging with those companies' brand products and for sale under the companies' brand names was not covered. Negotiations went on for a considerable time. They were finalised in about the middle of 1989 and an agreement backdated to 1 January 1989 was signed.
Principal terms were as follows:-

"1. PHILLIPS hereby grants FELTON the exclusive right during the continuance in force of this Agreement to purchase for resale in the Territory specified in the first schedule hereto (hereinafter referred to as "The Territory") of the merchandise manufactured, fabricated or assembled by or under the direction of PHILLIPS (hereinafter referred to as "The Products" and specified in the Second Schedule) subject to the terms and conditions hereinafter appearing.

2. This Agreement shall be deemed to have commenced on the 1st day of January 1989 and shall continue in force for a period of ten (10) years from that date and thereafter from year to year until determined by twelve (12) months notice in writing given by either party to the other party or in accordance with Clause 17 hereof.

3. PHILLIPS shall sell to and supply FELTON with the Products and deliver the same during the continuance of the said term in such quantities with proper directions and in every way ready for sale as shall from time to time be required and of the same quality as the same has been hitherto composed in accordance with orders from FELTON at the full ex factory price as shown in PHILLIPS' U.S.A. price list.

4. PHILLIPS shall allow FELTON the best possible prices as they have in the past with the basis of pricing to be typically better than the local market and considering that FELTON incurs the following broad expenses: 4.1 travel

4.2 promotion

4.3 financing costs

4.4 consulting fees

4.5 establishment and operation of office, warehouse and service facilities in The Territory ...

8. FELTON agrees that it will at all times during the continuance in force of this Agreement observe and perform the terms and conditions set out in this Agreement and in particular: 8.1 Will use at all times its best endeavours to provide and extend sales of the Products throughout the Territory to all potential purchasers thereof and work diligently to obtain orders therefore. 8.1.1 By means of regular personal visits to and correspondence by letter, telex, telephone, facsimile and telefax with such purchasers and by participation in Trade Shows, Conventions, Seminars and the like. 8.1.2 By advertising and by the distribution of printed matter subject however to the specific prior approval in writing in all cases of PHILLIPS to the form, manner, extent and wording of such advertising and such distributed matter (which approval shall not be unreasonably withheld) and without recourse to PHILLIPS for any expense incurred unless such expense is specifically authorised by PHILLIPS in writing. 8.1.3 By the operation of the office, warehouse and service facilities within The Territory. ...

8.3 Will in all correspondence and other dealings relating directly or indirectly to the sale or other dispositions of the Products clearly indicate that FELTON is acting as principal export distributor for the Territory. ...

8.6 Will immediately bring any improper or wrongful use in the Territory of PHILLIPS' patents, trade marks, emblems, designs, models or other similar industrial or commercial monopoly rights which come to FELTON's (sic) notice to the attention of PHILLIPS and will in and about the execution of FELTON'S

(sic) duties use every effort to safeguard the property rights and interest of PHILLIPS and will assist PHILLIPS at the request and expense of PHILLIPS in taking all steps to defend the rights of PHILLIPS other than by the institution of legal proceedings. ...

9. PHILLIPS agrees that it will at all times during the continuance in force of this Agreement observe and perform the terms and conditions set out in this Agreement and in particular: 9.1 Will not sell or provide any of the Products to any person or body corporate or unincorporate within the Territory other than Felton or to any person or body corporate or unincorporate outside the Territory with a view to the resale of the Products within the Territory and will not effect any such sale or supply where PHILLIPS is aware or ought to be aware or has reason to believe that all or part of such Products may be sold or supplied within the Territory except as provided for in Clause 10 hereof. ...

9.3 Will notify FELTON of any person or firm or bodies corporate or unincorporate carrying on business in the Territory who appear to PHILLIPS to be potential purchasers of the Products. 9.4 Will refer to FELTON all enquiries for the Products received from persons residing in the Territory who wish to purchase and/or intend to use the Products in the Territory. ...

9.6 Will use its best endeavours to safeguard the sale and exclusive rights hereby granted to FELTON including the taking of such steps as may be available to PHILLIPS to prevent the infringement of PHILLIPS' patents, trade marks, emblems, designs and other similar industrial or commercial monopoly rights within the Territory. ...

10. PHILLIPS reserves to itself notwithstanding anything to the contrary herein contained the right to sell the Products to third parties outside the Territory for ultimate re-sale within the Territory provided that PHILLIPS

(sic) exercise of such right shall be expressly subject to PHILLIPS' obligation (i) to notify FELTON in writing upon commencing negotiations as soon as practical and (ii) to pay FELTON a commission of six (6) percent or such percentage that may be agreed from time to time of the net ex-factory price.

11. Where in order to enable FELTON to maintain adequate sales coverage the appointment by FELTON of agents or sub-distributors is desirable, FELTON shall be entitled to make such appointments and FELTON shall be at all times (subject to the provision of 9.7 hereof) responsible for the acts, deeds or omissions of all persons, firms or companies so appointed. ...

14. FELTON shall be entitled to reproduce, display and distribute in the Territory any registered trade mark or other mark the property of PHILLIPS to identify and promote the Products except that this right will not extend to the use of the name `Phillips' or `N.J. Phillips' or its logo in the Territory save with the express permission of N.J. Phillips Pty Limited. ...

20. This Agreement embodies the active understanding of the parties and there are no promises, terms, conditions or obligations oral or in writing expressed or implied other than those contained herein." (I have emphasised important clauses).

"The Territory" was defined as "United States, Canada and territories or possessions or such other areas and countries as may from time to time be agreed by the parties."

Aspects of the agreement were subsequently clarified by a letter dated 9 January 1991 from Mr Phillips to Mr Felton which read in part:-

"In response to yours of December 28th I believe our original agreement was intended to cover the existing range of animal health products and, at no stage, was it meant to cover items we may in future produce for other fields. Much of the confusion you mention has undoubtedly been caused by the distribution company's use of our name. However, I can see no benefits to be derived from further provocative comments by either party and heartily endorse the statement that we should `get on with keeping NJP products as the market leader in the U.S.A.'

To clarify our intent on those points which appear to be at issue, the following may prove helpful.

1. N.J. Phillips Pty Ltd is committed to a firm legal distribution agreement for a ten year period.

2. The agreement covers a specified range of animal health products as described in the second schedule.

3. New models of existing products are automatically included.

4. New animal health products designed by us will be included as and when appropriate.

5. Products for use outside the animal health field are not included.

6. Products where we act as a `contract manufacturer' are not included.

7. Products designated as `exclusive' and/or those covered by a pre-existing agreement are not included.

8. Products purchased by a U.S. based corporation for sale outside the prescribed territories are not included."

Clause 10 of the agreement dealt with the specific issue I have mentioned, namely that Phillips sold directly to and wished to continue to sell directly to some companies which would then incorporate the products into equipment sold under the brand names of those companies. Clause 10 went through a number of drafts. In most drafts of the agreement, the clause appears as Clause 11.
There is in evidence a copy of the notes of Felton Co's solicitor of 13 June 1987 which records that Mr Felton had requested the solicitor to prepare a draft. Attached is the solicitor's hand written draft which reads:-

"11. Phillips reserves to itself notwithstanding anything to the contrary herein contained the right to trade direct outside the territory for ultimate delivery of the products within the territory but so that where the products are sold or supplied by Phillips and the products are sold supplied or used in the territory Felton shall be entitled to be paid a commission of ___ per cent of the full list price of such products as shown in Phillips' price list or the nett price FOB for which the products were in fact supplied whichever is the greater of the two."

That draft was typed and sent to Mr Felton and to a Mr Peter Hodgkison, who was a consultant to Felton Co. Mr Hodgkison commented inter alia:-

"11. Needs discussion. (eg Smith Klein) percentage to be negotiated."

Another draft carrying a 1987 date shows the clause in this form:-

"11. Phillips reserves to itself notwithstanding anything to the contrary herein contained the right to trade direct outside the territory for ultimate delivery of the products within the territory but so that where the products are sold or supplied as used in the territory Felton shall be entitled to be paid a commission of per cent of the full list price of such products as shown in Phillips' price list or the nett price FOB for which the products were in fact supplied whichever is the greater of the two."

A letter from the solicitors of Felton Co to that company, dated 20 October 1987 records:-

"You will note that we have not made any amendment to clause 11 as at this stage if the clause is to be amended the way Phillips suggests we can see no reason why the clause should even be inserted."

There were several other drafts during 1988. A fax from Felton Co to its solicitors dated 19 February 1988 shows the clause reading as follows:-

"11. PHILLIPS reserves to itself notwithstanding anything to the contrary herein contained the right to sell the products to third parties outside the territory for ultimate re-sale within the territory provided that Phillips' exercise of such right shall be expressly subject to Phillips' obligation (i) to notify Felton in writing immediately upon consummating such sales and (ii) to pay Felton a commission of ten percent or such percentage that may be agreed from time to time of the ex-factory price."

A fax of 17 June 1988 from Felton Co to its solicitors shows the clause to be in these terms:-

"11. PHILLIPS reserves to itself notwithstanding anything to the contrary herein contained the right to trade direct outside the territory for ultimate delivery of the products within the territory but so that where the products are sold or supplied as used in the territory FELTON shall be entitled to be paid a commission of six

(6) percent of the full list price of such products as shown in PHILLIPS' price list or the nett price FOB for which the products were in fact supplied whichever is the greater of the two."

In 1988, Mr Felton prepared a draft of his own which included Clause 11 in the following form:-

"11. Phillips reserves to itself notwithstanding anything to the contrary herein contained the right to sell the products to third parties outside the territory for ultimate re-sale within the territory provided that Phillips' exercise of such right shall be expressly subject to Phillips' obligation (i) to notify Felton in writing immediately upon consummating such sales and (ii) to pay Felton a commission of 10 percent of the ex factory price."

A later draft of 1989 shows Clause 10 in the following form:-

"10. Phillips reserves to itself notwithstanding anything to the contrary herein contained, the right to sell the products to third parties outside the Territory for ultimate re-sale within the Territory provided that Phillips' exercise of such right shall be expressly subject to Phillips' obligation (i) to notify Felton in writing upon commencing negotiations and (ii) to pay Felton a commission of six (6) percent or such percentage that may be agreed from time to time of the net ex-factory price."

Against this clause is a handwritten notation which substitutes the words "as soon as practical" for "upon commencing negotiations".

Exhibit No. 22 is a copy of notes of a meeting between Mr Felton, and Mr Phillips and others of 25 July 1989. There are comments as to a number of the clauses. However, no comment is recorded concerning Clause 10. The agreement was signed in the form I have already set out.
Over the period of time during which these negotiations continued, there were statements made by Mr Phillips and officers of Phillips Co to Mr Felton and officers of Felton Co concerning the future operation of Clause 10. The applicants have pleaded that Mr Phillips and Mr Abrahams and Mr Browne represented to Mr Felton and to Mr Peter Macaluso that the occasions on which sales to which Clause 10 would apply would be "infrequent, ephemeral, secondary to the business of a large multi-national company in selling or distributing its own product and would not have any material effect on the business of Felton Co" and that "paragraph 10 of the deed ... was designed to give effect only to that purpose."
All the persons I have mentioned made affidavits which were read and each of them was cross-examined on his affidavit. I do not think that any particular purpose would be served by discussing each and every incident which was the subject of this evidence. No witness seemed to me to have a perfect recollection of the conversations and each witness seemed to me to overstate his case. Mr Phillips deposed that he said:-

"We cannot control the activities of companies to whom we sell. They may on-sell goods into the United States. We must reserve the right to Phillips to sell products to companies outside the United States which may ultimately be resold in the United States."

On the other hand, Mr Felton deposed that Mr Phillips said:-

"We need to be able to make the occasional sale to the Majors like Bayer. Syntex USA for example, are expressing interest in the Phillips/Syntex Australia Intra Ruminal Drencher. Syntex are very sensitive and want to negotiate with us. They may deal through Syntex Australia. This type of deal will be rare and will not have much effect on your activities."

The difference of substance between these two statements is that, on Mr Phillips' evidence, he did not say that the transactions would be rare. I accept the substance of Mr Phillips' evidence on this point. It is clear in general he wished the clause to cover the existing business of Phillips Co which was not the business of Felton Co. Felton Co was a general distributor of Phillips Co's goods and marketed those in the American markets under the Phillips brand. Phillips Co had its other business, which did not affect the general distributorship for it sold in Australia implements primarily to the large multi-national companies which incorporated the implements in a product with health or veterinary products of their own for marketing as a package under the brand name which the multi-national or other company used for the marketing of its product. This was a business which Phillips Co had developed and many sales had been made. Mr Phillips has given evidence that 80% of Phillips Co's business was of this nature and, whether or not that is so, I am prepared to accept that it was a substantial part of the business. Such sales were therefore not rare. At the same time, sales of that type did not impinge upon the general distributorship. These facts were known to Mr Felton.
It is worthy of note that, in the late 1980's, sales to the multi-national companies were becoming increasingly significant. The market was changing. Companies were increasingly selling their veterinary drugs packaged with the implements and applicators necessary for their use.
I assume that, in the course of the discussions, comments were made to the effect that there might be other sales ultimately finding their way into the American market but that they would be rare. I assume that comments to that effect were made because Clause 10 was never drawn to express a concept limited to large multi-national corporations. Mr Phillips would not have known the nature of every sales opportunity which might come about.
I reject the contention that Mr Phillips, Mr Abrahams and Mr Browne represented that the occasions for the application of Clause 10 would be "infrequent, ephemeral, secondary to the business of a large multi-national company". I reject the contention that, on this issue, Mr Phillips, Mr Abrahams and Mr Browne made representations which they did not believe to be true or which were made without reasonable foundation.
Much time was spent in the cross-examination of Mr Macaluso who produced a diary entry of 3 June 1988 which recorded a conversation he said he had had with Mr Browne as to the effect of Clauses 10 and 11. Mr Browne denied the conversation. It is unnecessary to resolve the conflict as the diary entry does not suggest that the sales to which Clause 11 would apply would be infrequent or ephemeral. I have not relied upon Mr Macaluso's evidence or the diary note. However, the diary note is consistent with the evidence given by Mr Phillips which I have set out above.
Because of losses incurred during 1989, 1990 and 1991, Phillips raised its prices, which disturbed Mr Felton. Phillips Co became disillusioned with the service provided by Felton Co in the United States. Felton Co had, during 1989, 1990 and early 1991, as a distributor acting for it, a company known as Allflex USA Inc ("Allflex USA"). In early 1991, Felton Co advised Phillips Co that, if Phillips Co continued to impose its price increases on Felton Co, Felton Co would have to dispense with the services of Allflex USA as its margin of profit would be inadequate to maintain that agency. Phillips Co did not reduce its prices to Felton Co. Felton Co terminated the agency of Allflex USA.
In January 1991, representatives of Phillips Co were invited to meet representatives of Allflex USA in the United States. There was communication between the two companies thereafter. There was a meeting on 20 June 1991 between officers of Phillips Co and officers of the Allflex group in which an agreement was negotiated. The minutes recorded:-

"Allflex N Zealand Felton goes away - no need to export to NZ"

Notwithstanding Mr Browne's evidence to the contrary, I take this to disclose an intention, once Felton had faded from the scene, to trade direct between Phillips Co in Australia and Allflex USA in the United States.

Formal notice of these negotiations was given to Felton Co by letter dated 28 June 1991.
On 19 August 1991, Allflex USA faxed to Phillips Co its proposed opening orders for November 1991 and 15 January 1992.
These orders were subsequently placed by Allflex USA in Allflex New Zealand Limited ("Allflex NZ") and by that company with Phillips Co. The first delivery by Phillips Co to the Allflex group was made in October 1991.
On 10 December 1991, Phillips Co entered into a formal agreement with Allflex NZ, a subsidiary of Allflex SA, terms of which were, inter alia:-

"1.1 The Principal hereby grants the Distributor during the continuance of this agreement exclusive rights (subject to sub paragraph 2 hereinafter appearing) to the resale of the products listed in Schedule 1, (`the Products') within the territory described in Schedule 2 hereof (`the Territory'). 1.2 The Principal has entered into a Distribution Agreement with William Felton and Co Pty Limited, which agreement is dated 1st February 1989 and a copy of which has been furnished to the Distributor (the "Felton Agreement"); therefore the Distributor acknowledges that the distribution rights within the Unites States, Canada and territories and possessions described in the Felton Agreement (the "Felton Territory") are not exclusive. The Principal represents to the Distributor that to the best of its knowledge the Felton Agreement sets forth the entire agreement between the parties thereto, that the Felton Agreement has not been amended or modified and that there are no other distributors in the Felton Territory other than William Felton and Co Pty Limited. 2.1 This agreement shall be deemed to have commenced on the tenth day of December 1991, and shall remain in force for a term of five (5) years from that date (the `Initial Term') and thereafter from year to year unless either party shall not later than two (2) months prior to the expiration of any twelve month period notify the other in writing that it does not wish to renew the agreement; provided that Distributor and the Principal may effect an early termination of this agreement by two (2) months written notice given at any time during the last three (3) months of the initial twelve (12) month period. ...

4.1 Initial prices for the Products have been agreed as set forth in the Price List attached as Schedule Five. Price changes and prices for additional Products shall be mutually agreed after giving due consideration to the marketplace and the ability of Distributor to pass any price increases through to its customers. Beginning in 1993, Principal shall have the unilateral right to annually impose a price increase not to exceed five percent (5%), effective on June 30 of that year, but only if there has been no mutually agreed price increase since the next preceding June 30. ...

5.1 The Distributor will at all times use its reasonable best endeavours to promote and develop the sale of the Products in the Territory, and in particular will use its reasonable best endeavours to ensure that the performance levels set out in Schedule Four are maintained.

5.2 For the purpose of promoting and developing the sale of the Products in the Territory, the Distributor will:

i) Maintain permanent representation in the scheduled Territory. ii) Maintain regular attendance at trade fairs, seminars and field days. iii) Maintain advertising in print media and effect the distribution of printed promotional material with respect to the Products, subject to the approval of the Principal in writing as to content and accuracy.

iv) Maintain repair and service facilities throughout the Territory, including sufficient stock of spare parts and the employment of competent personnel to undertake repair and servicing of the Products.

v) Forecast sales on a six monthly basis, and carry sufficient inventory of scheduled Products to meet sales forecasts and the Principal's production requirements. vi) Provide the Principal with quarterly reports on projected sales against actual sales on a Territory wide basis. vii) From time to time gather and correlate market research data to assist with product development and promotion of existing Products, including competitive activity.

viii) Generally do all things as may be reasonably required to successfully and vigorously market the Products within the Territory.

...

6.5 The Principal will not directly or indirectly make any sales of Products and will not enter into any distribution agreement permitting sale of products competitive with the Products in the Territory; but the following may continue: i) Sales to William Felton Co Pty Limited for resale in the Felton Territory under the existing Felton Agreement; and ii) Sales to major pharmaceutical firms of products for resale by them as part of a proprietary pharmaceutical package."

Schedule 1 set out the Scheduled Products as follows:-

"SCHEDULED PRODUCTS - ALLFLEX NEW ZEALAND PRIVATE LABEL "1. Allflex 2 ml Vaccinator with bottle attachment.....EAS625

2. Allflex 5 ml Automatic Vaccinator........ ........ ..EAS627

3. Allflex 5 ml Vaccinator with bottle attachment.....EAS628

4. Allflex 3 ml Disposable Vaccinator ........ ........ EAS626

5. Allflex 10 ml Metal Auto Injector ........ ........ .EAS629

6. Allflex 10 ml Plastic Injector ........ ........ ....EAS630

7. Allflex 20 ml Auto Drencher Injector ........ ......EAS631

8. Allflex 50 ml Semi Auto Injector ........ ........ ..EAS632 SCHEDULED PRODUCTS - N.J. PHILLIPS INSTRUMENTS (STOCK STANDARD)"

Schedule 2 set out the schedule territory as follows:-

"SCHEDULED TERRITORY

1. EUROPE.

2. NEW ZEALAND.

3. UNITED STATES, CANADA and MEXICO, together with their territories and possessions hereinafter `North American Territories'."

Schedule 3 provided inter alia:-

"SHIPMENTS TO MARKETS OUTSIDE OF NEW ZEALAND: Distributor may, from time to time, ship orders received from Principal (either partial or total orders) into other international markets. In these instances, Principal shall compensate Distributor for all costs of delivery F.I.S. to all mutually agreed destination countries. ...

ALLFLEX PRIVATE LABEL PRODUCTS: Distributor shall have the right to purchase and market world-wide into any Allflex group markets, a private label line of Principals selected instruments packaged under the Allflex brand. The Distributor shall retain exclusive distribution rights to the Allflex brand line of products and Principal shall produce and sell these items exclusively to Distributor."

Schedule 5 provided:-

"N.J. PHILLIPS INSTRUMENTS (STOCK STANDARD) - For Products to be sold to the scheduled New Zealand Territory only. Stock standard pricing or other Products or Territories shall be as agreed from time to time."

The dealings between Phillips Co and the Allflex Group led to the institution of these proceedings. The following questions, which are the issues now under consideration, have been set aside to be decided separately from any other question in the proceedings:-

"1. Whether there has been a breach of the Trade Practices Act by virtue of the representations alleged in paragraphs 7 and 8 of the further amended statement of claim.

2. Whether the agreement of 1 January 1989 should be rectified as claimed in paragraph 6 of the amended application.

3. Whether there has been a breach of paragraphs 1 and 9.1 of the agreement of 1 January 1989 as executed or as rectified as claimed in paragraphs 1 to 11 (inclusive), 17, 18(b) and 21 of the further amended statement of claim.

4. Whether there has been a breach of paragraph 4 of the agreement of 1 January 1989 as claimed in paragraph 18A of the further amended statement of claim.

5. Whether there has been a breach of sections 52 and 53(d) of the Trade Practices Act by the applicants' use of a company with the name of Phillips.

6. Whether the applicants repudiated the agreement of 1 January 1989 as alleged in paragraph 18 of the amended cross-claim.

7. Whether there has been a breach of paragraph 14 of the agreement of 1 January 1989 as alleged in paragraph 13 of the amended cross-claim."

For the reasons I have stated above, Question 1 should be answered: "No".
The applicants seek rectification of the agreement of 1 January 1989 with Phillips Co so as to add the following provision to Clause 10:-

"Provided that such occasions are intended to be infrequent, ephemeral and secondary to the businesses of large multi-national companies in selling or distributing their own product."

Yet there was no agreement between the parties with respect to this subject matter other than that which was expressed in Clause 10. The terms of Clause 10 were pondered over and considered and amended over a period of two years. The final clause was the clause which the parties agreed represented their common intention. As Higgins J. said in Bacchus Marsh Concentrated Milk Co Ltd (In Liq) v. Joseph Nathan and Co Ltd (1919) 26 CLR 410 at 451, citing from the Harvard Law Review, Vol. 23 at p 610:-

"If the writing be exactly what the parties intended, there can be no reformation".

That is the case here. Clause 10, read in its context, expressed the parties' intention and agreement. It cannot be rectified to express now what Felton Co would prefer it had said.

Moreover, the terms proposed for the rectification were not proposed as the terms of the agreement and were never agreed.
Question 2 should be answered: "No".
The principal issue in these proceedings is whether Phillips by appointing Allflex NZ by the agreement of 10 December 1991 as exclusive distributor of Phillips Co's products for the Territories of the United States, Canada and Mexico and associated territories, and by selling its goods to Allflex NZ for distribution in those territories by Allflex USA, Phillips Co breached its agreement of 1 January 1989 with Felton Co, which purported to confer the same rights upon Felton Co.
Much turns upon the effect of Clause 10 of the agreement of 1 January 1989. The issue is whether it should be interpreted according to its literal terms as if it stood on its own or should be read in the context of the agreement which appointed Felton Co as exclusive distributor for Phillips Co products in the American territories.
In my opinion, Clause 10 must be read in the context in which it appears. The agreement appoints Felton Co as exclusive distributor of Phillips Co products in the American territories. Therefore, the agreement establishes Felton Co as the general agent for the distribution of Phillips Co products in the American territories and requires it to use its best endeavours to provide and extend sales of the products throughout those territories.
Counsel for Phillips Co submitted that Clause 10 should be read as if it stood entirely on its own in the agreement. He referred to the words "notwithstanding anything to the contrary herein contained" and to the words "subject to the terms and conditions hereinafter appearing" which are used in Clause 1.
Counsel for Phillips Co went even further to submit that the agreement should be read against Felton Co and in favour of Phillips Co for the reason that it arose out of the desire by Felton Co to have a formal agreement and from the fact that Felton Co produced the first draft. Counsel went on to add some other facts which he said were relevant, such as the fact that Felton Co obtained advice from its solicitor whereas Phillips Co did not. However, I see no reason for reading the agreement or any part of it against one party and in favour of another. The agreement was intended to achieve a result which both parties thought would be beneficial to them. They negotiated the terms of the agreement. There is no basis for construing the agreement otherwise than in accordance with ordinary principles.
Clause 10 does not stand on its own. It forms a part of an overall agreement which confers the right of exclusive distributorship upon Felton Co and which, by Clause 9.1, expressly states what Phillips Co may not do.
As Clause 10 is referred to in Clause 9.1, this is a specific indication that Clause 10 is not to be read as a stand alone provision but is to be read with other clauses of the agreement and in the light of the terms of the agreement as a whole.
Had Clause 9.1 been omitted from the agreement, I would have been inclined to read Clauses 1 and 10 together so that Clause 10 would permit Phillips Co to make any sales to parties outside the territory "for ultimate resale within the territory", subject only to the necessary implication from Clause 1 that what was done should not be destructive of or inconsistent with the grant by Clause 1 of exclusive distributorship to Felton Co. However, Clause 9.1 is interposed between these two provisions and states in specific terms that which Phillips Co may not do. For convenience of reading, I again set out Clause 9.1:-

"9.1 Will not sell or provide any of the Products to any person or body corporate or unincorporate within the Territory other than Felton or to any person or body corporate or unincorporate outside the Territory with a view to the resale of the Products within the Territory and will not effect any such sale or supply where PHILLIPS is aware or ought to be aware or has reason to believe that all or part of such Products may be sold or supplied within the Territory except as provided for in Clause 10 hereof."

It will be noted that there are two effective parts of this Clause, the first being governed by the words "Will not sell or provide" and the second by "Will not effect". These two parts are joined by the conjunction "and". If one reads the Clause in this manner, one notes that Clause 10 is referred to in only the second part of the Clause.
Taking this to be an indication of the part which Clause 10 is to play in the overall agreement, one can readily read the clauses together if one reads the words "for ultimate resale within the Territory" in Clause 10 as encompassing those circumstances "where Phillips is aware or ought to be aware or has reason to believe that all or part of such Products may be sold or supplied within the Territory" which are stated in the second part of Clause 9.1. This is a very ready interpretation, for those words must surely cover every instance where goods are sold "for ultimate resale within the Territory". Furthermore, all the circumstances described in the second part of Clause 9.1 must be intended to be covered by Clause 10 for the second part provides that those acts will not be done except as provided for in Clause 10 hereof.
One may then consider what is the operation and effect of the provision in Clause 9.1 that Phillips Co will not make a sale "with a view to the resale of the Products within the Territory". The distinction which Clause 9.1 draws in this respect between the first and second parts of Clause 9.1, expresses a point of substance. The words "with a view to" have a subjective element. It is sufficient for me to refer to the decision of Cussen J. in Cox v. Smail (1912) VLR 274 and to the reasons of Deane J. in Tillmanns Butcheries Pty Limited v. Australasian Meat Industry Employees' Union (1979) 27 ALR 367 at 383.
If, for example, Phillips Co made a sale outside Australia with a view to those goods being resold by a general distributor in the United States, such a sale would be a sale with a view to the resale of the products within the Territory, for the sale would tend to promote the general sale of Phillips' goods within the Territory and would thereby enhance Phillips Co's name, good will and business. A sale, however, to a multi-national company in Australia of goods which were to be sold under the multi-national company's name would not be made with a view to their resale in the Territory. From Phillips Co's point of view, its objects would be achieved by the sale in Australia. The goods would not be sold as products of Phillips Co but under some other brand name.
As it happens, if one reads the agreement in this manner, its operation accords with that as described by Mr Phillips to Mr Felton. But, I have not interpreted the agreement as a result of the evidence given by the witnesses but simply from a reading of the agreement itself.
Counsel for Phillips Co submitted that this was an incorrect reading of Clause 9.1 for, he said, the words in the second part of the Clause, "any such sale or supply" referred back to the whole of the preceding words "to any person or body corporate or unincorporate outside the territory with a view to the resale of the products within the territory". In my view, the words "any such sale or supply" refer back to the words "will not sell or provide ... to any person or body corporate or unincorporate outside the territory". I come to this conclusion both because Clause 9.1 has two separate parts and because the test in the first part of the Clause "with a view to the resale of the products within the territory", which is a subjective test, is quite a different test from the objective test specified in the second part of the Clause, namely "where Phillips is aware or ought to be aware or has reason to believe that all or any part of such Products may be sold or supplied within the Territory".
Accordingly, it seems to me that the agreement by its terms has specifically provided that Phillips Co will not sell to another person "with a view to the resale of the products within the territory". I take this to impose a subjective test and to preclude Phillips from selling to someone who will act as a general distributor of Phillips' goods within the territory. Such a sale would be a sale "with a view to" the overall development of the American market for Phillips' products. Such a sale is prohibited for Felton Co is, by the agreement, appointed the exclusive distributor. I read Clause 10 as referring by its words "for ultimate re-sale within the Territory" to those cases which fall within the second part of Clause 9.1 and not to the prohibition imposed in the first part of Clause 9.1.
Even if this interpretation be wrong, Clause 10 would not, in my view, authorise Phillips Co to make any sale which was inconsistent as a matter of substance with the rights granted to Felton Co.
The case put for Phillips Co was that the goods sold to Allflex were different from those in which Felton Co traded. The difference was said to be that the goods were a different colour, packaged with the Allflex name and that they were given a different stock number. However, it is clear that the goods were, for practical purposes, identical with those sold by Felton Co and that the principal items which Felton Co distributed were also the items which Allflex sold. Moreover, although the Allflex name was placed upon the packages, the goods were marketed and intended to be marketed as goods manufactured by Phillips Co. The Phillips' logo was used in their sale.
It was further said that Phillips Co made the sales only to Allflex NZ. Much was made of the point that Mr David Warren, who is President of Allflex USA and from whom several letters went to Phillips Co on the letterhead of Allflex USA, was also Marketing Director of the Allflex Group. It was said that all the dealings with Mr Warren were with him in the latter capacity. It was further said that when sales were made to Allflex NZ, Phillips Co had no knowledge of their ultimate destination and had no control over where they went.
However, the evidence along these lines was fanciful. Not only was Phillips Co liable under the agreement of 10 December 1991 to meet the costs and charges of an FIS shipment, that is to say, free into store in the United States of America if the goods were destined for the American market, but the price paid for the goods was specified in the agreement of 10 December 1991 to be in American dollars for goods destined for the United States and in Australian dollars for the goods destined for the New Zealand market. Accordingly, Phillips Co would have been aware what was the destination of the goods.
The sales made to the Allflex Group which were destined for the American market were made with a view to their sale in that territory. The agreement of 10 December 1991 appointed Allflex NZ as the exclusive distributor in the specified territories including the American territory. The arrangement between them was that Allflex was to promote the general distribution of Phillips Co's products. That was the object. Phillips Co's purpose was not ended when it made the sale in Australia. Its purpose was to develop the market for Phillips Co's products overseas including in the American territory.
In my view, the facts fall within the first part of Clause 9.1, being sales with a view to resale in the American territory. Therefore, these sales did not fall within Clause 10.
In any event, the establishment of the Allflex Group as exclusive distributor in several territories including the American territory, though acknowledging Felton Co's continued right to trade, was, in my opinion, such a fundamental breach of the rights of Felton Co granted to it by the agreement of 1 January 1989 that it was not an action which was authorised by Clause 10.
I would answer Question 3 as follows:-

Phillips Co was in breach of paragraphs 1 and 9.1 of the agreement of 1 January 1989 by virtue of its entry into the distribution agreement of 10 December 1991 and its appointment thereby of Allflex New Zealand Limited as distributor in the North American territories of Phillips Co's products, and by the sale to Allflex New Zealand Limited of goods to be distributed in the North American territories by Allflex USA.

This is not precisely the way the matter is pleaded in the statement of claim. For example, paragraph 10 of the Further Amended Statement of Claim reads:-

"By reason of the facts and matters pleaded in paragraphs 8 to 11 (inclusive) the first applicant is the sole authorised distributor for the third respondent within North America and the provisions of paragraph 10 of the deed preclude the third respondent from supplying the product to any person for ultimate resale within the territory other than to large multi-national companies, including in particular pharmaceutical companies for the purpose of the inclusion of the product as part of marketing their own products world

However, I would not substitute for the words of Clause 10 of the agreement of 1 January 1989 any other words.

The next issue is whether there was a breach of Clause 4 of the agreement. With respect to this issue, it seems to me that counsel for the applicants have not put forward sufficient evidence for me to find that there was a breach of the clause.
Certainly, Clause 4 uses the expression "the best possible prices" but goes on to add "as they have in the past with the basis of pricing to be typically better than the local market". The Clause then goes on to mention specific expenses which Felton Co was to incur. Accordingly, the term "best possible prices" does not stand on its own but is to be read by reference to past practice, pricing in the local market, that is Australia, and on the footing that Felton Co would incur the listed expenses. Moreover, pursuant to Clause 3, each price is to be the "ex factory price."
Counsel for the applicants adduced evidence that, from the middle of 1990 onwards, there were price increases which Felton Co thought would harm their sales in the United States. But the evidence did not compare the method of calculating the prices with the means by which prices have been calculated in the past. Nor was a comparison made with local prices in Australia. Nor did the evidence relate the prices to the expenses which Felton Co had to incur.
Thus, evidence did not establish that the prices charged to Felton Co were not typically better than the Australian prices or that the prices charged were not the best possible prices that Phillips Co could charge having regard to the volume of sales to Felton Co or that the prices were calculated on a different basis from that adopted in the past. Nor was it shown that the prices were increased so as to disadvantage Felton Co.
Rather, evidence was adduced for the purpose of showing that, taking into account the overall terms of trade between the Allflex group and Phillips Co, Allflex USA received a benefit over Phillips Co.
Counsel for the applicants adduced evidence from a chartered accountant, Mr G.V. Steer, who compared the price list which applied to Felton Co and the price list which applied to Allflex New Zealand Limited. Mr Steer said that some of the prices charged to the Allflex Group were less than the price charged to Felton Co but he did not express a view that Felton Co was disadvantaged, just by comparing the price lists. Mr Steer went on to compare the trading terms which were applicable as between Felton Co on the one hand and the Allflex Group on the other. These were different in a number of respects. For example, Phillips Co sold Felton Co on ex factory terms and sold to the Allflex Group on FIS terms. Mr Steer made a number of assumptions concerning the terms and conditions of sale, some of which appear to have been unjustified and expressed the view that, overall, the Allflex Group received 7% better terms. Mr Phillips, in his evidence, challenged a number of factors relied upon by Mr Steer and, in addition, said that the quantities sold to the Allflex Group were greater, thereby justifying a lower cost and, moreover, the goods sold to the Allflex Group were not exactly the same. Mr Browne made calculations and contended that, at an exchange rate of AUD 1 to USD .75, Felton received a benefit. But in calculating the benefit, Mr Browne took into account the 6% payable under Clause 10, which was not an element of price.
On the whole, it seems to me that Allflex USA receives more favourable terms than those which apply to Felton Co. However, I cannot make a finding against Phillips Co on this basis. Clause 4 of the agreement of 1 January 1989 refers to prices as they have been in the past and thereby contemplates that the terms of trade will be similar to the terms which applied in past years. Clause 3 specifies ex factory prices. No assistance is gained by evidence comparing the different terms of trade given to the Allflex Group. Clause 4 refers to "prices ... typically better than the local market". The evidence as to the prices and terms of trade with the Allflex Group do not assist an assessment of this factor. On the evidence before the Court, I am not satisfied that Phillips Co has breached Clause 4.
In the circumstances, I would answer Question 4 "No".
The next issue is raised by Question 5 which asks whether there has been a breach of ss.52 and 53(d) of the Trade Practices Act by the applicant's use of a company with the name of Phillips. This is a reference to the use of the name of the third applicant, Phillips USA Inc.
The name N.J. Phillips USA Inc was originally adopted in about December 1989 when it was thought that Phillips Co might invest in the American company. When this did not proceed in April 1990, the initials were removed but the name "Phillips" was retained. Mr Phillips was displeased but his letter of 9 January 1991 expressed an acceptance of the position. Moreover, the goods sold by Phillips Co to Felton Co were packaged by Phillips Co with a slip which read:-

"FOR PARTS AND SERVICE CALL:

N.J. PHILLIPS USA, INC.

8176 NIEMAN ROAD,

LENEXA, KANSAS 66214

PH: (913) 599 5959

FAX: (913) 599 0909"

This was the address, telephone and fax number of Phillips USA.

It was contended by counsel for Phillips Co that the use of the name "Phillips USA" implied an association in shareholding or ownership as between Phillips Co and Phillips USA. However, I do not think that this is a necessary or appropriate implication. Certainly, in the context that Phillips USA is distributing the goods of Phillips Co., the use of the name implies a connection with those goods and approval of the use of the name by Phillips Co. Both these elements are satisfied for Felton Co had been appointed the exclusive distributor in the United States of Phillip Co's products and the goods are supplied to it for distribution by Phillips USA.
As the sole business of Phillips Co is the marketing of goods of Phillips Co, I see nothing in the use of the name "Phillips USA" which breaches s.52 or s.53(d) of the Trade Practices Act. Phillips USA is duly authorised via the agreement of 1 January 1989 and its appointment by Felton Co to act as agent for Felton Co to act as exclusive distributor of Phillips products. The use of the Phillips' name in such a circumstance is not likely to mislead or deceive nor does the use of the name represent that Phillips USA has a sponsorship approval or affiliation it does not have.
I would answer Question 5: "No".
The next issue is Question 6, whether the applicants repudiated the agreement of 1 January 1989 as alleged in paragraph 18 of the amended cross-claim. Paragraph 18 reads:-

"Further and in the alternative, the Cross Claimant says that the First Cross Respondent by its conduct has evinced its intention not to perform its obligations under clause 8 of the agreement, and has thereby repudiated the said agreement."

However, although there were cross words between Mr Felton and Mr Abrahams, who was an officer of Phillips Co, on 29 January 1992, I am satisfied that nothing was said by Mr Felton that amounted to a repudiation of the business. Felton Co has in fact continued to act as distributor of the goods for Phillips Co in the United States and has continued to place orders with Phillips Co and to receive goods from Phillips Co.
Mr Abrahams gave this evidence:-

"On 29th January 1992, I had a meeting with Alan Felton. I said to him words to the effect: `Please provide me with a plan detailing how you propose to promote our products to the major pharmaceutical companies over the next year.'

He replied words to the effect:

`This is all a bit academic really, isn't it, given the situation between us?'"

Clearly, there has been a serious breaking down of the relationship between the parties. But this is necessarily so having regard to the agreement into which Phillips Co has entered with Allflex NZ. The applicants have gone almost to the extent of saying that the relationship has totally broken down. Paragraph 21 of the amended statement of claim alleges that "the third respondent has committed a fundamental breach of the agreement between it and the first applicant". However, the companies have continued to do business and the agreement is still on foot. Felton Co instituted these proceedings seeking to enforce the agreement, not to repudiate it.
The answer to Question 6 will be "No".
The final question is Question 7 "whether there has been a breach of paragraph 14 of the agreement of 1 January 1989 as alleged in paragraph 13 of the amended cross-claim". The question is whether the use of the name "Phillips" in the name of the third applicant is in breach of Clause 14 of 1 January 1989. The question is whether the use of this name was without "the express permission of N.J. Phillips Pty Limited".
It seems to me that the course of dealing has amounted to "express permission" for the purposes of Clause 14. Plainly, Clause 14 does not require a written letter from Phillips Co for each specific use of the Phillips' name and logo. Express permission was given by the sale of the goods to Felton Co for shipment to the United States and distribution by Phillips USA. Since Phillips USA has been the distributor, the sale to Felton Co of goods which were to be distributed by Phillips USA has amounted to the granting of express permission.
Late in the trial, Mr Phillips gave this evidence:-

"To the extent that you may have expressly or by acquiescence permitted the use of that name, is that permission now withdrawn?---We would seek to withdraw it, yes."

However, having regard to the course of conduct between the parties, I am of the view that the permission could not be withdrawn save on reasonable notice.

Question 7 should therefore be answered "No".
I shall answer the questions asked accordingly.
The applicants have had substantial but not complete success. The trial has been significantly lengthened by claims on the applicants' part which were not successful. I shall order that the respondents pay one-half of the applicants' costs to date.

[1992] FCA 332

29 MAY 1992