JUDGMENT No. 2&27SS f_seescemeceetoeens CATCHWORDS Trade Practices Act s.52 - Sale of goodwill of business allegedly exploiting a secret formula - No secret formula in reality - Orders made under s.87 including orders for refunding of moneys paid and payment of compensation by way of interest - Scope of s.87. Trade Practices Act 1974, ss.52, 87. DEANE & ORS -V- BRIAN HICKEY INVENTION RESEARCH PTY LIMITED & ANOR NSW G.17 of 1987 Burchett J. Sydney 6 July 1988 - f See . rv ae | woo yt rel eee? fot i> . i; \ \ Y , x es / IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY ) No. G17 of 1987 ) GENERAL DIVISION ) BETWEEN: REGINALD ERIC DEANE and DEBORAH ANN DEANE First Applicants DHC ROOF REPAIRS PTY LIMITED Second Applicant BRIAN HICKEY INVENTION RESEARCH PTY LIMITED First Respondent BRIAN JAMES HICKEY Second Respondent REASONS FOR JUDGMENT BURCHETT J. In or about the year 1975 Mr. Noel vail, a chemical engineer and the New South Wales Manager of the Plastics Division of Ciba-Geigy Australia Limited, devised a waterproof coating with high resistance to ultra-violet light degeneration for use in situations exposed to full sun. Mr. Vail did not claim to have made any startling new discovery. He had utilized acrylic resin, an appropriate solvent, and an ultra-violet stabiliser which Ciba-Geigy had developed in Switzerland, known as tinuvin. Since the material was intended to have a particular application 2. as a coating for swimming pool surrounds, it was sold as "Pebble Coat LC263". About 1978, Mr. Hickey (the second respondent, who is a director of the first respondent which I shall call his company) approached Ciba-Geigy to obtain a substance suitable for application to roofs. He was provided with some Pebble Coat LC263, which proved so satisfactory that thereafter he purchased substantial quantities of the substance. He sprayed it on deteriorated tile, slate, cement, asbestos-cement, and iron roofs. Mr. Hickey was engaged, through his company, in the business of roof restoration, for the purposes of which he followed a particular procedure involving the steam cleaning of roofs and the application of fungicide and Pebble Coat LC263. Mr. Hickey, who has no formal qualifications in chemistry, ascertained that the ultra-violet stabiliser employed by Ciba-Geigy was tinuvin, and conceived the idea that the addition to the Pebble Coat LC263 of extra tinuvin would produce a significantly improved coating. In fact this is not so. Both in terms of the economics of the substance and in terms of its function, there is an opt2zmum proportion of tinuvin, and Pebble Coat LC263 was produced utilizing tinuvin at that level. In accordance with its normal practice, Ciba-Geigy was prepared to affix to product, delivered to auser of large quantities, the user's own label. Mr. Hickey's company was a large user, and at his request Ciba-Geigy labelled drums of Pebble Coat LC263 for its use as "Pebble Coat LC263 Hickey", or 3. "Hickey Resin", or (after 1986 when the name "Pebble Coat" was changed to "Top Coat") "Top Coat LC263 Hickey". Mr. Hickey claims that, after the drums had been delivered to his premises, he removed the bunghole covers and bungs and inserted additional tinuvin to produce what he described as the secret Hickey formula. There is at the top of a 200 kilogram drum (the kind that used to be called a 44 gallon drum) a space of approximately 100 millimetres depth known as the ullage. During the year 1980, Mr. Hickey (who described himself as a professional inventor) won a prize in a television competition organized by Sydney's TCN Channel 9, where Mr. Hickey's "tile process" was referred to as an "invention". In newspapers and journals, articles appeared containing statements such as the following, which is taken from "Australian House & Garden" of August 1981: "Combining certain fundamental principles of physics and chemistry, Hickey came up with a special treatment. Of course he won't release the formula ... ." Mr. Hickey claimed to have been "developing this idea ... some twenty years now", and to be "quite happy to guarantee it for ten years". The publicity given to Mr. Hickey's "invention" attracted the applicants Mr. and Mrs. Deane. Mrs. Deane worked with the then Mrs. Hickey, who told her of Mr. Hickey's television triumph. Mr. and Mrs. Deane, through a small family company, carried on business as contract cleaners, and Mr. Deane 4. considered roof restoration a natural sequel to roof cleaning, upon which he was from time to time engaged. Mr. Deane's initial contact with Mr. Hickey on 8 June 1984 proved abortive, but in early February 1985 he went to see Mr. Hickey about obtaining roof glaze material. Mr. Hickey said "his material had won a Tv prize ... and it had also won a building industry award, another 'inventor of the week' award." He also said "that Monier had spent approximately a million dollars trying to break the formula but eventually gave up because they were not able to do it." In the course of the conversation, Mr. Hickey made the statements "that he mixed the material at his premises at 253 West Botany Street, Rockdale" and "that he had the secret ingredients and he had the glaze material that no-one else had." About two weeks later, Mr. and Mrs. Deane went together to see Mr. Hickey at his home at Rockdale. Mrs. Deane was asked in evidence whether she remembered anything that Mr. Hickey said to her husband at that time, and answered: "He told him that he made the glaze up in the back shed." She also said that Mr. Hickey stated "that it was his own formula and it was a secret formula; no-one else knew it." I should say at this point that both Mr. and Mrs. Deane impressed me as truthful witnesses whose evidence might safely be acted upon. Mr. Hickey, on the other hand, did not impress me favourably, and I do not accept his evidence where it is in conflict with that of other witnesses or with what, apart from his statements, appears to me to be the probability. There followed further meetings between Mr. Deane and Mr. Hickey, and also a Mr. Collins, who was Mr. Hickey's friend and accountant. From these meetings, a proposal evolved that Mr. and Mrs. Deane would contribute the sum of $16,500, to be used, as they were told, to pay out certain leases of equipment employed in the roof restoration work, although it was not in fact so used, and that a shelf company would be acquired in which shares were originally to be taken up by Mr. Hickey and Mr. Collins as well as by Mr. and Mrs. Deane; under subsequent arrangements Mrs. Deane seems at one stage to have dropped out, and then, by a further change which will be described, the shares in the company came to be owned by Mr. and Mrs. Deane. The $16,500 was borrowed from a finance company associated with Barclays Bank upon the security of a second mortgage over Mr. and Mrs. Deane's home. Mr. and Mrs. Deane have paid interest on the sum borrowed ever since. The shelf company was acquired, and changed its name to DHC Roof Repairs Pty Limited, the three initial letters standing for the names of Mr. Deane, Mr. Hickey and Mr. Collins. From the beginning of April 1985, the new company (to which I shall refer as DHC) commenced trading, but at the end of June 1985 Mr. Hickey announced that he wished to sever all connection with DHC. On the basis that Mr. and Mrs. Deane would take over the shares of Mr. Hickey and Mr. Collins, Mr. Hickey said that the interests of his company and of himself would be transferred to DHC for the sum of $30,000 payable at the rate of $200 per week. "The Hickey process" was excluded, but Mr. Hickey 6. is recorded in certain minutes as undertaking "that as long as DHC Roof Repairs Pty Ltd continued to pay for the supply of the materials containing the formula, that supply would continue inhibited (sic) in Sydney metropolitan area." In case of any possible mishap to himself, Mr. Hickey also agreed to deposit with a bank a written statement of the formula. It was agreed that DHC would pay to Mr. Hickey the sum of $47,044-67 at the rate of $200 per week, being the sum of $30,000 together with what was described as "the advance account in the name of Mr, Brian J. Hickey". It was further agreed that Mr. and Mrs. Deane would guarantee DHC's obligation. On 18 July 1985 two deeds were entered into. By one, Mr. Hickey''s company sold "all the goodwill of its business" to DHC for $30,000, payable at the rate of $130 per week with interest at 14% upon default, and Mr. and Mrs. Deane guaranteed the payment of the balance of purchase moneys and interest. By the other, DHC covenanted to pay the sum of $17,044-67 by weekly instalments of $70 to Mr. Hickey with interest at 14% per annum upon default, and again Mr. and Mrs. Deane guaranteed DHC's debt and the interest. Thereafter, DHC continued to carry on the roof restoration business, acquiring the resin it applied to roofs from Mr. Hickey, under the name of Hickey resin or Hickey glaze, at a price of $900 per drum. But, in October 1986, a particular drum of resin obtained from Mr. Hickey was noticed to bear, as well as the description "Top Coat LC263 Hickey", an address which was unknown to Mr. and Mrs. Deane - 131 Ballandella Road, Pendle 7. Hill. Mr. Deane decided to investigate. He went out to Pendle Hill, and ascertained that the address was the address of premises occupied by Ciba-Geigy Australia Limited. He then had chemical analyses performed in respect of some of the Hackey resin he had received, in order to compare it with Top Coat LC263 obtained from Ciba-Geigy's agent Meury Enterprises Pty Limited. The results suggested there was no difference - apart from the price which was only $640, and had been $585 in 1985. Following these discoveries, the present proceedings were commenced by Mr. and Mrs. Deane and DHC against Mr. Hickey's company and Mr. Hickey. The amended statement of claim alleges breaches of ss.52 and 53 of the Trade Practices Act 1974, that Mr. Hickey was involved in the contraventions in question within s.75B, breach of warranty, negligent representation, and fraud. Damages were sought under s.82 of the Act, together with further relief under s.87, including the setting aside of the guarantees. By defence and cross-claim, the applicants' allegations were put in issue, and a cross-claim brought for the sum of $38,487-44 alleged to be due under the deeds. In my opinion, the applicants are entitled to succeed under s.52 of the Trade Practices Act, and it is unnecessary to consider the position at common law. I think the conduct of the corporate respondent, in which Mr. Hickey was not only involved but was the sole active party, was plainly misleading. Even if Mr. Hickey always added more tinuvin, as he claimed, the product was essentially no different from the Top Coat LC263 developed and produced by Ciba-Geigy. It was not a secret invention 8. achieved over years of research by Mr. Hickey, and I am satisfied that his alleged contribution to its formulation was a mere subterfuge designed to give colour to his pretended discovery. I do not accept his evidence of experiments he claimed to have carried out in the course of developing the Hickey resin and the Hickey process. The statement that he mixed the material at his premises conveyed an impression which was deliberately and grossly misleading. Iam also satisfied that the misrepresentations in question were effective to persuade Mr. and Mrs. Deane in the actions which they took on their own behalf and as directors of DHC. They relied upon the asserted invention and secret formula, believing they would have an unique opportunity of developing a new market. By reason of the misrepresentations, Mr. Hickey was able to procure, for himself and for his company, agreements which involved the sale at a significant price of what was described as the goodwill of the roof restoration business previously conducted by his company. That business was in fact not profitable, and DHC has never made a profit, but instead has regularly returned losses. It is not a case where there is any basis for suggesting that a change of management has resulted in the collapse of a previously valuable business. The operations have been continued very much in the same way as before, with the same employee in the field carrying out the work, and under the administration of Mr. Deane, who has proved capable of administering a comparable small company in the area of office 9. and club cleaning. The evidence of the employee, Mr. Harrison, in no way impugns Mr. Deane's conduct of the business. In the circumstances, it 1s appropriate to make orders, under s.87 of the Trade Practices Act, which will in part afford compensation for the loss and damage inflicted, and will prevent or reduce loss or damage in the future, by declaring void ab initio: (1) so much of the agreement between Mr. Hickey's company, and/or Mr. Hickey, and DHC, and/or Mr. and Mrs. Deane, as requires payment of the sums of $30,000 and $17,044-67, and of interest in respect of those sums; (2) any guarantees in respect of those sums or interest thereon; and (3) each of the deeds previously referred to made 18 July 1985. Further, in pursuance of s.87(1A) and (2)(c), it is appropriate to order Mr. Hickey's company and Mr. Hickey (in this case, an order against the company alone might well be fruitless, and I think the two subsections are wide enough to allow me to order both the company and Mr. Hickey, as a party involved, to make the required payments: ef. the position in Haydon v. Jackson (1988) ATPR 49094) to refund to DHC the total of the amounts which it has paid under the deeds declared void, namely $13,600, together with the excess of the amount paid by DHC, during the period prior to October 1986, for drums of resin over the amount for which the resin could have been purchased, from an agent of Ciba-Geigy, if DHC had not been misled into acquiring it from Mr. Hickey. There were 28 drums of resin involved, and the excess was at least $260 per drum (it was greater for some period, but the evidence does not enable that period to be 10. fixed). On this basis, I shall order Mr. Hickey and his company to refund to DHC, in addition to the $13,600 mentioned above, the sum of $7,280. As well, DHC is entitled to compensation in the nature of interest in respect of the loss of the use of the moneys paid out: Fenech v. Sterling (1985) 61 ALR 465 at 469; Haydon v. Jackson (supra) at 49100. For that purpose, I think the rates utilized by the Supreme Court of New South Wales in common law proceedings will suffice, and that interest should be calculated on the full amount of $20,880 from 1 July 1986. I have not overlooked the fact that the granting of these remedies effectively deprives the respondents of all reward for what DHC acquired. But, in the particular circumstances of this case, the alternative of assessing damages, rather than ordering the refunding of money, would not have produced a different result. Section 87 confers wide powers and discretions upon the Court to enable it to do more complete justice than can in some cases be done merely by an award of damages. See Haydon v. Jackson (supra) at 49097. Nevertheless, if I had not' been empowered to make these orders under s.87, I would have assessed damages under s.82 upon the basis that the same sums represented losses suffered by DHC in respect of which it should be compensated. I should not have thought it as appropriate to rely on the eventual trading losses which reflected the further activities (for good and ill) undertaken by the applicants, over quite a long period, after their discovery of the truth. 11. A claim is also made by each of Mr. and Mrs. Deane in relation to the loan of $16,500 raised by them in equal shares through Barclays Bank, and provided at the beginning to enable DHC to be born. The evidence establishes that this loan has been effectively lost to Mr. and Mrs. Deane, having regard to the financial plight of DHC. For the applicants, calculations were placed before me which showed that Mr. and Mrs. Deane, allowing for some interest received from DHC, have incurred a net outgoing in respect of interest on the amount of $16,500 of $4,197-57. The calculations have not been disputed. In addition, Mr. Deane claims in respect of the loss of wages he could have earned doing other work if he had not been engaged in the affairs of DHC. There are difficulties about this claim. Much of the work of DHC has been performed by an employee, who was taken over from Mr. Hickey, and by Mr. Deane's mother, who has worked part-time under a family arrangement not readily susceptible of reduction to a monetary calculation. If Mr. Deane had not been engaged in the affairs of DHC, to the extent that he has been so engaged, ain addition to running his cleaning company, he may or may not have ventured upon some other small business operation which may or may not have been successful. He had apparently not done so over a period of many months in late 1984 and up to 1 April 1985. It is at least arguable that any amount allowed would have to be related to the period prior to the discovery of the true source of the resin, since after that Mr. Deane could have simply wound up the business and treated any loss as part of his damages. As he has not done so, he still has the company DHC, for what it is worth, 12. and may at some time derive some benefit from its losses from a taxation point of view: cf. the remarks of Pincus J. in Neilsen v. Hempston Holdings Pty Ltd (1986) 65 ALR 302 at 314-5. I have taken all these matters into account, and have come to the conclusion that Mr. Deane will be sufficiently compensated if, in addition to the orders I have decided to make in relation to the claim of DHC, I make an order in his favour against Mr. Hickey and Mr. Hickey's company for damages calculated as half of the sum of $16,500 together with half of the sum of $4,198-57. There will be a similar order in favour of Mrs. Deane. Counsel for the applicants at one stage submitted that, in addition to the foregoing relief, I should make an order, under s.87 of the Act, varying the agreement between the parties by the insertion of a term requiring Mr. Hickey and his company to indemnify Mr. and Mrs. Deane and DHC against liability upon the ten year guarantees which were given, 1n a number of cases, in respect of work done by DHC under contracts entered into prior to the discovery made in October 1986. There was no specific prayer for this form of relief in the application, but there was a prayer for "such further or other relief as the Court sees fit" (to grant). (C£. Haydon v. Jackson (1988) ATPR 49094 at 49097, per Fisher J.) However, counsel ultimately withdrew his submission, and it is therefore unnecessary to consider this matter further. Had the submission been pursued, it would, in the particular circumstances of this case, have encountered some quite formidable obstacles. The cross-claim will be dismissed. 13. I direct the applicants to bring in short minutes of appropriate orders to reflect must of course pay the costs cross-claim. I certify that this and _ the preceding twelve (12) pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Burchett. Aur Uohor Associate Dated: 6 July, 1988. Counsel for the Applicants: Solicitors for the Applicants: Counsel for the Respondents: Solicitors for the Respondents: Dates of hearing: these reasons. The respondents of the application and of the Mr J.B. Whittle Messrs Thomson Rich & Co. Mr C.R. Birch Messrs Mansell & Norton 27, 28, 29, 30 June 1 July