FEDERAL COURT OF AUSTRALIA Rinbridge Marketing Pty Limited v Rinbridge Pty Ltd (In Liq) [2000] FCA 851 TRADE PRACTICES – misleading or deceptive conduct – representation as to features of electrical socket outlets – persons involved in contravention by company. RINBRIDGE MARKETING PTY LTD v RINBRIDGE PTY LTD (IN LIQUIDATION), JOHN PROSPER CULLEN and PETER THOMAS WALSH N 434 OF 1996 JUDGE: WHITLAM J DATE: 23 JUNE 2000 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 434 OF 1996 BETWEEN: RINBRIDGE MARKETING PTY LTD APPLICANT AND: RINBRIDGE PTY LTD (IN LIQUIDATION) FIRST RESPONDENT AND: JOHN PROSPER CULLEN SECOND RESPONDENT AND: PETER THOMAS WALSH THIRD RESPONDENT JUDGE: WHITLAM J DATE OF ORDER: 23 JUNE 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Judgment is given for the applicant against the second respondent in the sum of $560,000. 2. The second respondent pay the applicant's costs of the action against him. 3. Judgment is given for the third respondent in respect of the action against him. 4. The applicant pay the third respondent's costs of the action against him. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 434 OF 1996 BETWEEN: RINBRIDGE MARKETING PTY LTD APPLICANT AND: RINBRIDGE PTY LTD (IN LIQUIDATION) FIRST RESPONDENT AND: JOHN PROSPER CULLEN SECOND RESPONDENT AND: PETER THOMAS WALSH THIRD RESPONDENT JUDGE: WHITLAM J DATE: 23 JUNE 2000 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 The applicant, Rinbridge Marketing Pty Ltd ("Rinbridge Marketing"), commenced this proceeding against the respondents for contraventions of s 52 of the Trade Practices Act 1974 ("the Act"). Its action against the first respondent, Rinbridge Pty Ltd ("Rinbridge"), is stayed because that company is in the process of a creditors' voluntary winding up. The actions against the second respondent, John Cullen, and the third respondent, Peter Walsh, rely on pars (a) and (c) of subs 75B(1) of the Act. 2 Rinbridge Marketing spent hundreds of thousands of dollars gearing up to sell products to be supplied by Rinbridge. The money was wasted, and Rinbridge Marketing alleges its loss was caused by Rinbridge's conduct. There is no question that Rinbridge Marketing suffered the loss. Any finding of a contravention by Mr Cullen or Mr Walsh turns on whether certain alleged conduct of Rinbridge was misleading or deceptive and, if so, whether either of them was involved in a s 75B sense. Liability to damages ultimately depends on a question of causation. 3 There was a massive documentary tender in the trial of these actions. Unravelling that material and piecing together a coherent account of developments from the testimony is not easy. However, I shall set out a chronicle of relevant events and the effect of the evidence given by the protagonists in the case. The Invention 4 Mr Cullen lives in Wagga Wagga. He is, by trade, a wall and floor tiler. However, Mr Cullen is also an inventor. Together with another Wagga Wagga man, he invented an electric power socket. In 1987 Mr Cullen applied for a patent for this invention. 5 The evidence includes the abstract for the invention published by the United States Patent Office. That summary mentions the main technical features of the invention. Omitting references to the drawings, the abstract states: "Electric power socket having structure supporting electric contacts. A plug receptacle, having [three] openings therethrough is positioned for rotation in front of the contacts. The plug receptacle is normally locked at an inactive position, at which it covers the contacts, by means of resiliently depressible locking tongues which engage openings of the plug receptacle. When pins of an electric plug are pressed into the plug receptacle to pass through the openings, the pins engage the tongues, depressing them to allow the plug and plug receptacle to be rotated to align the plug pins with the contacts. Subsequent inward movement of the plug engages the pins with the contacts. The receptacle has a front pin guard which is forwardly resiliently biased against the plug body to cover the plug pins, this being depressed inwardly during the movement of the plug to engage contacts." 6 In May 1990 Mr Cullen invited several people, including Mr Walsh, to a meeting in Wagga Wagga in order to hear his proposals for the development of the invention and marketing of what he called the "Safety Twister" power point. Each invitee was asked to sign a non-disclosure agreement in respect of information given about this product. Along with other Wagga Wagga businessmen, Mr Walsh attended this meeting and later meetings on the same subject organized by Mr Cullen from time to time. 7 On 4 October 1991 Mr Cullen was granted the Australian patent for his electric power socket invention. Development of the Invention 8 Rinbridge was a shelf company that Mr Cullen had acquired in 1987. He decided to use Rinbridge to raise funds for the development of the patent. Capital was obtained from the issue of shares to residents of the Wagga Wagga district. Mr Cullen was the chairman and managing director, and Mr Walsh became a director at the end of 1991. 9 During 1992 Mr Cullen visited several countries in Asia to investigate the manufacture of a prototype of the invention. In January 1993 three other residents of Wagga Wagga – Gordon Saggers, Scott Breust and Glen Seymour – were appointed directors of Rinbridge. 10 Electrical socket outlets sold in Australia must be approved by the electrical safety authority in one of the States or Territories. Mr Cullen commissioned a Hong Kong company, Modern Metals, to manufacture a prototype to be submitted for the testing required for approval. The proposed product was by now referred to as the "Protecta Point" power socket. (On 25 June 1993 Rinbridge applied to register a trade mark incorporating the words Protecta Point.) 11 However, Mr Cullen lost faith in the ability of Modern Metals to produce a prototype. On 24 June 1993 he wrote on behalf of Rinbridge to rescind the contract. In this communication he remarked that Modern Metals' former engineer, Mr W. S. Chan, "did a great job of the design changes that were necessary to bring the concept to reality." 12 W.S. Chan was evidently Mr Cullen's confidant. In April 1993 he had introduced Mr Cullen to Sam Kwok, the managing director of Mai Chung Metal Works Ltd ("Mai Chung"). This was a Hong Kong company with factories in Hong Kong China. Modern Metals had subcontracted Mai Chung to produce the necessary tooling and to make the prototype of the Protecta Point power socket. Following the termination of Rinbridge's contract with Modern Metals, Mr Cullen arranged for W. S. Chan to have Mai Chung complete the prototype for Rinbridge. With its headstart, Mai Chung quickly produced a prototype socket outlet, which Mr Cullen submitted on 7 July 1993 to Sydney Electricity's testing laboratory in the Sydney suburb of Chatswood. 13 Mr Cullen's moment in the sun had arrived. On 14 July 1993 he appeared on the Nine Network's popular television show, "Ray Martin at Midday", where he was awarded a prize for Australian Inventor of the Year given by two program sponsors. The prize included representation at an international exhibition of inventions to be held in Geneva in April 1994. On 23 July 1993 the Wagga Wagga radio station, 2WG, informed Mr Cullen that he was to receive its VIP Listener Award in recognition of the enormous safety potential of his "childproof" power point. 14 The article submitted for testing by Sydney Electricity was described as a "switched socket-outlet incorporating two single-pole switches and two 10 ampere socket-outlets intended for attachment to fixed wiring". The results of the preliminary testing completed in July 1993 were not good news for Mr Cullen. The sample failed to comply with the Australian Standards for socket outlets relating to insulating materials, the dimensions of the earth pin aperture, the arrangement of the earthing corrections and the minimum force required to withdraw a three-pin flat-pin plug. Two samples subsequently submitted for testing also failed to comply with the Standards. Design alternations were made, and a fourth sample was submitted. Tests on this sample were completed on 14 October 1993, and it was found to comply with the relevant Australian Standards. On 5 November 1993 the Director of the New South Wales Government's Office of Energy issued Rinbridge a certificate of approval in respect of a "Double flush-mounted socket outlet with safety shutters faceplate rotation during plug insertion and single pole switches" identified by the trade name "Protecta-Point". The Director advised that articles of the approved type "may now be marketed without further formalities in all States and Territories in Australia". Manufacturing Production 15 At the end of November 1993 Mr Cullen visited Mai Chung's factory in China with Mr Kwok. They discussed the modifications required so that production models would conform with the sample approved by the Office of Energy. In December 1993 Mr Cullen ordered on behalf of Rinbridge 20,000 sockets from Mai Chung. Half of that order was delivered by mid-January. 16 One of that batch was given to a potential purchaser who arranged to have an evaluation of its safety benefits carried out by Qualtest Consumer Product Testing Services ("Qualtest"), a division of the well-known retailer Woolworths Limited. The socket was tested by Gerard Putt, Qualtest's senior technical officer, and he produced a report dated 3 February 1994. 17 Mr Putt began his report by observing that the testing for compliance with the Australian Standard for socket outlets, which the Office of Energy required, covered basic mechanical and electrical safety. On the other hand, he had investigated the additional safety benefits for "a child with a conducting probe type object investigating the power point". Significantly, Mr Putt had attempted to contact live parts by inserting probes not just into the sockets, but also around the switches. He concluded that the size, shape and angle of insertion of probes able to contact live parts had been considerably restricted compared with commonly available socket outlets. 18 After Mr Cullen received a copy of the Qualtest report, he faxed W S Chan at the beginning of March 1993 suggesting that the models supplied needed further modification. He indicated four areas "requiring attention". One of these was "a line of sight behind the top of the [switch] button". (The suggested modification in this area was said to be "not necessary" if the existing order had already been made, but that the modification would stop the switch jamming.) Frank Ceh and Stephen Ceh 19 Peter Shanks was a salesman whom Mr Cullen asked to help Rinbridge sell its socket outlets. Mr Shanks worked out of his residence at the Dural Village Caravan Park. In March or April 1994 he called on a construction site in Sydney run by Frank Ceh, a builder, and his younger brother, Stephen Ceh, a plumber. They were impressed with the sales potential for the outlets. Frank Ceh had seen the Ray Martin program in 1993. Mr Shanks discussed the possibility of the Cehs' involvement in marketing the Protecta Point power point. 20 Soon afterwards, Mr Shanks sent Mr Cullen a report proposing a marketing strategy for the Protecta Point power point. His strategy envisaged his company Cullshan Marketing Pty Ltd (in which the Cehs would have an interest) being appointed sole distributor. In the last week of April Mr Cullen agreed to come to Sydney for a meeting on 2 May 1994 with the potential investors found by Mr Shanks. 21 The minutes of Rinbridge's meeting of directors held on 29 April 1994 at Wagga Wagga are instructive. They record the execution that day of a patent licence agreement between Mr Cullen as licensor and Rinbridge as licensee, granting an exclusive world wide licence to manufacture and sell power safety outlets based on his patent. According to the minutes, local electricians had been slow to purchase the power points but the company that had commissioned the Qualtest report was "keen to market the point". Finally, they record the decision that Mr Cullen and Mr Walsh should attend the meeting arranged by Mr Shanks. The First Meeting 22 On 2 May 1994 Mr Shanks introduced Mr Cullen and Mr Walsh to Mr Stephen Ceh at a hotel in Parramatta. They met for a couple of hours, including lunch in the hotel restaurant. Mr Cullen held the floor. He produced a working model of the approved outlet and demonstrated how it functioned. Mr Cullen explained that he had been inspired to invent this device by the death of a friend's child in an electrical accident. The product was designed to prevent a child contacting the active parts of the outlet with any kind of conductive probe. Mr Cullen accepts that he described the product as child safe, but denies that he said it was child-proof. Each of the participants in this meeting has deposed to what they recall of the discussion, frequently using direct speech to indicate what was said and by whom, and each of them has been cross-examined with any contradictory version of events being put to him. It is unnecessary to set out in terms their various accounts. It is common ground that the manufacture and testing of the product in China were discussed, together with the fact that it had been approved for sale in Australia. They also discussed the existing stock held by Rinbridge, in which context reference was made to alterations that had been made in the more recently produced pieces. Mr Cullen plainly dominated this aspect of discussion. Despite Mr Cullen's reluctance to acknowledge that the discussion also concerned changes made to overcome problems encountered with the early production models, it is clear that such problems were discussed. Mr Walsh is said by Stephen Ceh to have offered reassurance that all problems were solved, but I am satisfied that Mr Walsh never conveyed any impression other than that he relied entirely on Mr Cullen for information about the production and performance of the product. 23 I have mentioned that Mr Cullen denies saying at this initial meeting that the outlet was "child proof". He does accept that he said that it was the safest power point on the market in Australia, but insists that he qualified such statement by the phrase "according to the Qualtest report". None of the other participants recalls him making that qualification or any reference to such a report. 24 One other topic on which Mr Cullen's evidence is contradicted by all the others is "the toothpick". Stephen Ceh says that he probed the outlet with a toothpick. Mr Shanks and Mr Walsh recall this, but Mr Cullen denies that he did so. Stephen Ceh says that was able to demonstrate that he could contact the live parts of the outlet. Mr Shanks recalls Stephen Ceh making such a claim, but Mr Walsh does not. I am satisfied that, at the very least, Stephen Ceh did use a toothpick to probe the outlet and that, from the outset, it was apparent to Mr Cullen and Mr Walsh that he was concerned about the possibility of a child inserting a fine object into the outlet. Commitment and Negotiations 25 The next day Mr Shanks faxed Rinbridge confirming proposed terms of payment for any items ordered by his company. Mr Cullen replied on behalf of Rinbridge that "we are ready to roll with a positive response to your proposal". He indicated "only two areas" where distribution rights needed to be clarified – Newcastle where his relatives currently serviced the area, and Wagga Wagga where one of the directors, Glen Seymour, was an electrician who used the product in his own business. On 4 May Mr Cullen wrote to Rinbridge's directors that "we should proceed post haste to a conclusion" and "get the money in for our cash strapped organisation". 26 Rinbridge Marketing was a shelf company, which Stephen Ceh and Mr Shanks arranged to acquire on 4 May 1994. They were also appointed directors that day. On 5 May 1994 Mr Cullen wrote on behalf of Rinbridge to the Cehs and Mr Shanks confirming that, pending the signing of a marketing agreement, "it would be in our both [sic] best interests to proceed as if final papers were signed, safe in the knowledge that we are fully and totally committed to do so." On 9 May, Rinbridge Marketing entered into a six months' lease of warehouse premises at Wetherill Park. On 12 May, Rinbridge Marketing applied for space at the 6th International Building Materials and Equipment Exhibition to be held in Melbourne at the end of June 1994. 27 There is some controversy about when Frank Ceh first met Mr Cullen and Mr Walsh. Mr Walsh says that they first met on 16 May. Minutes of a meeting of Rinbridge's directors purportedly held on that day are in evidence. They record Mr Cullen reporting that he and Mr Walsh had met with "the principals of Rinbridge Marketing" that day and that: "The company is very well set up with offices, complete with four computers and fax and telephone and warehousing facilities and at the moment one company car. The principals Frank and Stephen Ceh indicated that they will not purchase any stock until the marketing agreement is signed." However, I am satisfied that that meeting did not take place until 2 June. Not only is this the date recalled by the Cehs and Mr Cullen, but it is most unlikely that, by 16 May, Rinbridge Marketing could have set up its offices so quickly. 28 In any event, on 15 May, Mr Cullen wrote an extraordinary letter to Stephen Ceh in which he criticized Mr Shanks for "spending money like it is going out of style" and enclosed an alternative marketing plan evidently prepared by his relatives in Newcastle. At the same time Rinbridge's solicitors submitted a proposed agreement to Rinbridge Marketing. 29 Correspondence ensued between the parties' solicitors. Rinbridge Marketing sought an exclusive Australian distributorship for the product. It was not prepared to exclude the Newcastle area or sales to Mr Seymour. Rinbridge Marketing offered to place an initial order for 20,000 sockets and, after 1 September 1994, to order a minimum of 60,000 units each year provided that in the first year the initial order would count as part of that minimum. Rinbridge Marketing also sought an indemnity in respect of claims for defects in the product. Mr Cullen intervened and wrote directly to Rinbridge Marketing, insisting that the position of his Newcastle relatives and Mr Seymour be maintained and rejecting the proposed commitment to a minimum annual purchase of 60,000 units as unviable. Stephen Ceh replied to Mr Cullen, indicating that Rinbridge Marketing would seek to negotiate an "equitable arrangement" with his Newcastle relatives and would have a "similar agreement" with Mr Seymour. Stephen Ceh also offered to purchase a minimum of 90,000 units annually. On 26 May Stephen Ceh wrote to Mr Walsh confirming Rinbridge Marketing's preparedness to appoint the company of Mr Cullen's relatives as a sub-distributor in the Newcastle area. 30 Since Rinbridge's rights to make and sell the power points depended on the patent licence agreement of 29 April 1994, Stephen Ceh proposed to Mr Cullen an agreement whereby, if that licence agreement were terminated, he would enter into a similar agreement with Rinbridge Marketing. On 29 May the solicitors for Rinbridge Marketing forwarded to Rindbridge's solicitors a copy of the proposed agreement with Mr Cullen together with an amended version of the intended marketing agreement. The proposed agreement with Mr Cullen included a recital that he acknowledged Rinbridge Marketing would expend "considerable amounts of money" marketing the socket outlets to be purchased by it from Rinbridge. On 30 May Mr Cullen wrote directly to Rinbridge Marketing's solicitors, indicating his willingness to sign the proposed agreement between him and their client, but expressing reservations about penalty clauses inserted in the proposed marketing agreement with Rinbridge. He concluded by asking the solicitors to bear in mind "my responsibility to my Company to expedite this Contractual arrangement" and deploring delay "whilst solicitors to and fro with ever increasing complexity". Meeting with Frank Ceh and Jettisoning Peter Shanks 31 On 2 June 1994 Mr Cullen and Mr Walsh visited Rinbridge Marketing's premises at Wetherill Park, where they met Frank Ceh and Stephen Ceh. As I have said, I am satisfied that this was the first time Frank Ceh met Mr Cullen and Mr Walsh. Frank Ceh says that he expressed great concern that pins and needles could be inserted into the outlet. He sought assurance that, in addition to intrusion protection, the outlets functioned as intended. Stephen Ceh confirms these concerns being expressed. Mr Cullen denies these concerns were expressed, but, somewhat incongruously, allows that he said he was going to Hong Kong in a couple of days and that any problems would be solved. The meeting obviously lasted a good part of the day. Mr Cullen met the marketing and sales staff engaged by Rinbridge Marketing and inspected the warehouse and office at Wetherill Park. (This seems to be the occasion recorded in the minutes to which I have earlier referred.) That night the Cehs took Mr Cullen out for a dinner which lasted well into the night. 32 Subsequently Mr Cullen signed a letter dated 3 June 1994 addressed to the Cehs informing them, in effect, that Rinbridge was only prepared to enter into an agreement with a company that had no involvement with Mr Shanks. (Mr Cullen says that this letter was drafted by Frank Ceh, but it seems to have suited both parties' purposes.) On 4 June Mr Cullen travelled to Hong Kong. On 6 June Mr Shanks resigned as a director of Rinbridge Marketing, Frank Ceh was appointed a director, and the share held by Cullshan Marketing Pty Ltd in that company was transferred to a company controlled by the Cehs. Frank Ceh wrote to Mr Cullen on 6 June, confirming that Mr Shanks was no longer involved in Rinbridge Marketing. Problems with Initial Supply 33 On 6 June, Stephen Ceh collected 2400 socket outlets from Rinbridge's customs agent and copies of Rinbridge's advertising leaflets were also delivered to Rinbridge Marketing's warehouse. These leaflets said that the Protecta Point powerpoint was "child safe" and it was manufactured "in the interest of child protection". Stephen Ceh inspected the socket outlets. He said that he found he could contact the "live parts" through a hole in the plug receptacle. 34 The next day, 7 June, Stephen Ceh telephoned Mr Cullen's residence and spoke to Mr Cullen's wife about this problem. He asked her to have Mr Cullen contact him from China so that they might urgently discuss how to fix the problem. Mrs Cullen prepared a fax to her husband describing the problem and confirming that the Newcastle distributor had "found the same problem". Mr Cullen said that he did not receive this fax. Later, on 7 June, a further 20,000 socket outlets were delivered to Rinbridge Marketing's warehouse. 35 Stephen Ceh also telephoned Mr Walsh, who told him that he should speak to Mr Cullen. On 9 June, Stephen Ceh wrote on behalf of Rinbridge Marketing to Mrs Cullen and Mr Walsh in identical terms as follows: "As you are aware there were 20,000 Protecta-Points delivered to our warehouse on the 7th June, 1994. They are not up to the standard of the Child Safe Protecta-Point as advertised on the colour brochure supplied by Rinbridge Pty Limited. After examining and testing the Protecta-Point we have found that a child or adult can at anytime make contact with internal parts of the Protecta-Point that has live electricity, by inserting through the front cover of the Protecta-Point common household metal objects such as, hairpins, paper clips, needles and other objects, that are approximately 1.0mm in diameter. We understand through our telephone conversation the problem is being rectified." 36 Later, on 9 June, Stephen Ceh telephoned Mrs Cullen to explain that there was "another problem" with a plastic mechanism in the outlets. Mrs Cullen again sent a fax to her husband in China informing him that wholesalers had been informed of the problem by "Clipsal and/or HPM" (who are the major manufactures of electrical socket outlets in Australia) and that the Newcastle distributor had recalled Rinbridge's products for testing. Mr Cullen said that he did not receive this fax. 37 There was obviously a great deal of consternation and confusion at this time. Stephen Ceh eventually spoke to Mr Cullen by telephone whilst he was in China and was told that all the problems would be fixed. Frank Ceh says that he also had a telephone conversation with Mr Cullen and was told the "new powerpoint cannot be faulted in any way. I don't call it child safe; I call it a child proof powerpoint". Mr Cullen denies that he described the product as "child-proof". Rinbridge Marketing carried on with its plans, and on 20 June it procured the registration of the business name Protecta Point. 38 Mr Cullen returned to Australia on 21 June. He faxed the Cehs the next day, stating: "The power point is perfect, and it cannot be faulted in any way. The locking tab has been metal faced to prevent wear, and the active terminal is completely covered, so that in the event of intrusion of an object, it cannot get to the power." Mr Cullen went on to say that 100 pieces were being manufactured for "destruction testing" and 500 pieces for "immediate air freighting to Australia". He said "This will allow us the proper time for analysis of the product which was only finally available to me 30 minutes before departure from Hong Kong." Mr Cullen concluded: "Please be aware that the sale of all or any of the unmodified power points, as suggested by Frank to my wife, will not be tolerated in any way, and will immediately result in a complete review of the contracts, as that stock is ours and not yours. The damage resultant from such an action would be viewed as an act of sabotage, and dealt with accordingly. I will be interested to hear the outcome of any contractual negotiations that may or may not be in progress with the Newcastle connection. You are no doubt aware that I view the successful completion of negotiations as being of great importance, and you would appreciate the need for expedience and fair completion." The Exchange of Contracts 39 On 22 June the solicitors for Rinbridge Marketing sent two copies of the marketing agreement executed by their client to Rinbridge's solicitors. 40 Also, on 22 June, one of Rinbridge Marketing's employees, Julie Markillie, faxed Mr Cullen seeking information for the product launch. One item she requested was a clear plastic model for demonstration. Mr Cullen replied next day: Clear Protecta Points are not available at this time, as we have made substantial changes to the tooling, whilst remaining in the spirit and context of the patent claims for the product. We must therefore make production of power points a priority over production of clear samples. We will produce these after the first production is complete." 41 Stephen Ceh faxed Mr Cullen on 23 June, acknowledging receipt of a modified product. He pointed out that, in testing this socket, "the safety mechanism did not lock in the safety position" two out of five times. Stephen Ceh said that Rinbridge Marketing would return the unmodified powerpoints. He indicated that Rinbridge Marketing must control distribution in the Newcastle area, but confirmed the position it had earlier outlined in its letter of 26 May. Mr Breust and Mr Walsh faxed Mr Cullen's relatives on 24 June, advising that Rinbridge had appointed Rinbridge Marketing as exclusive marketeer within Australia. They said they understood Rinbridge was "about to appoint" the relatives' company as a sub-distributor. 42 Mr Cullen also evidently applied for modification of the approval granted by the NSW Office of Energy, but he was told by letter dated 23 June 1994 to lodge a production sample of the modified article. On 25 June Stephen Ceh faxed Mr Cullen, reminding him of the agreement between him and Rinbridge Marketing that still remained to be signed. 43 Stephen Ceh had arranged for Qualtest to test the modified socket outlet for exclusion of probes from contact with live parts. Mr Putt prepared a report dated 30 June 1994, in which he concluded that: "Probes of diameter 1 mm or less can contact the Active conductors if inserted in the inner corners of the switch." Stephen Ceh sent this report to Mr Cullen, indicating his concern about Mr Putt's conclusion and also his concern that "the safety mechanism is still not locking back into the safe position after removal of a three point plug." Mr Cullen, in turn, sent the report to W. S. Chan in Hong Kong. He said the answer to this minor problem" was "simple" and proposed that Mr Kwok be asked to paint the top busbar and the terminal conductors with non-conductive paint. Mr Chan replied to Mr Cullen pointing out the use of such paint would cause the switches not to function. He suggested putting a "nylon sheet cover on the active copper bar only". 44 Mr Cullen then sent the Cehs for further testing by Qualtest a modified sample which was of the "exact material and placement" as "the new models in transit from the manufacturers". He did indicate that "the nylon interfaces in the test sample were hand cut and not as neat as the machine punched pieces in the production models". On 5 July Mr Putt reported that: "Insertion of all probe sizes at forces up to 10N into the inner corners of the switches did not contact any live parts. Subsequent insertion of the 0.5mm probe at the maximum force it would withstand (40N) into the upper inner corner of the right hand switch contacted the active conductor. After this, insertion of the 0.5mm probe at a minimal force contacted the active conductor, insertion of the 1.0mm probe at 6N contacted the active conductor, insertion of the 1.5mm probe at 12N contacted the active conductor, and insertion of the 2.0mm probe at a 18N contacted the active conductor. . . . Subsequent dismantling showed that the second insertion of the 0.5mm probe into the upper inner corner of the right hand switch had displaced the plastic cover glued over the active conductor, allowing the subsequent insertion of the larger probes to make contact." 45 Frank Ceh visited Wagga Wagga on 6 July and met Rinbridge's directors. On the same day Rinbridge's solicitors sent a counterpart of the marketing agreement executed by their client to the solicitors for Rinbridge Marketing. 46 In Wagga Wagga Mr Cullen also gave Frank Ceh a further sample for testing by Qualtest in comparison with outlets manufactured by HPM and Clipsal. Mr Putt subsequently prepared a report dated 12 July 1994. Using the lower test forces suggested by Mr Cullen, this sample compared very favourably with the HPM and Clipsal outlets, but contact with the neutral conductor was still possible in both sockets on the Protecta Point outlet. Visit to China in July – Further Product Modifications 47 On 12 July Mr Cullen and Frank Ceh travelled together to Hong Kong. There they met Mr Kwok and visited Mai Chung's factory in China. They discussed changes necessary in order to prevent a child with a fine probe contacting the active terminal in the outlet. For this purpose Mr Cullen authorized re-tooling, which was initially carried out by a company connected with W.S. Chan. However, the changes made to the mould were not satisfactory, and Mr Cullen arranged for Mai Chung itself to make the necessary tooling alterations. Mai Chung produced about twenty samples of the modified outlet, which Mr Cullen took back to Australia when he and Frank Ceh returned on 20 July. That same day the solicitors for Rinbridge Marketing sent to Mr Cullen for signature the agreement with him signed by their client. 48 Mr Cullen supplied a production sample to the NSW Office of Energy. On 29 July the Director of that Office approved the modifications, which were described as follows: "(a) Addition of metal lock tongue protection to make tongue more durable. (b) Addition of fibre insulation at switches and behind lock tongue on both socket bases. (c) Addition of plastic (ABS 94V0) block behind the faceplate to prevent objects entered at an acute angle through the pin entry apertures from contacting active contacts." 49 However, the shipments of the modified product (which had by now arrived in Australia) were not satisfactory. Mr Cullen sent a flurry of faxes to Mr Kwok and W.S. Chan, in which he complained about "the problems we keep having with the product" and described Rinbridge's existing stock as "useless". Mr Cullen pointed out that "you can still put a 0.5mm probe into the area next to the locker tab", and he mentioned further problems with "the insulation material on the bottom half of the switch plate" and the backing-off of the screws supplied with the product. He proposed possible alternative solutions. Mr Cullen remarked that: "Our customer becomes very nervous and worried that we are not capable of fixing the problem, but I assure him once again that we will get it right. It is now time to get it right." On 27 July Mr Cullen faxed the Cehs to say that W.S. Chan assured him that the product was "perfect this time". He observed facetiously that the "power outlet socket will be absolutely Che [sic] proof". 50 The revised model promised by Mr Cullen arrived in Australia in the first week of August. Stephen Ceh faxed Mr Cullen indicating faults that had not been rectified. Mr Cullen then faxed Mai Chung noting that "one small problem with the power outlet has not been fixed". Mr Cullen requested modifications to the front rotating plate and, in his attached drawing, described how the "block can be easily moved with a probe to reveal open active hole". August Visits to China and Yet Further Modifications 51 Rinbridge Marketing had planned to launch its marketing campaign on 15 August. Accordingly, Frank Ceh accompanied Mr Cullen and Mr Seymour to Hong Kong on 7 August. All three of them then went to Mai Chung's factory in China with Mr Kwok. A sample incorporating changes requested by Mr Cullen was produced within a few days. Frank Ceh was initially satisfied that a probe could not contact the active conductor in this sample but, after further testing, he was not so satisfied. Accordingly, further design changes were made. The party returned to Australia with samples of the new product on 12 August. 52 On 17 August Mr Cullen returned to China in order to arrange for a "harder spring" to be installed. Again, design changes were made. Mr Cullen returned to Australia with yet another modified sample on 25 August. This sample was delivered to the NSW Office of Energy for approval. On 5 September the Director of that Office approved further modifications described as: "(a) Addition of steel springs to active and earth contacts. (b) Uprated return spring for rotating face plate section. (c) One-piece sheet insulation added to cover busbars." Product Failures – Contract Rescission 53 Meanwhile, against the background of litigation with a major manufacturer of socket outlets, Rinbridge agreed to alter its advertising fliers to include the statement "Child safe does not mean Child Proof". Mr Cullen was also informed on 27 August that the Defence Housing Authority's electrical contractors would not buy the Protecta Point because it failed tests relating to withdrawal forces. 54 On 5 September Mr Cullen faxed Mai Chung requesting modifications designed to strengthen the front rotating part. Extraordinarily, he instructed that: "If this requires any extra delay, then please put chloroform or that glue that Sam [Kwok] uses on the part I have drawn for you, and modify the tools later." He concluded: "This is a matter of urgency, and your immediate action on this is of most importance. Our company stands to lose a lot if you don't respond urgently, hopefully today, with modified product." 55 At the end of September, Stephen Ceh discussed with Mr Ceh a jamming problem with the rotating part of the faceplate that occurred when the modified outlet was being installed. Correspondence ensued about the cause of the problem, but Mr Cullen faxed W.S Chan and Mr Kwok on 28 September as follows: "The holes where the power point is mounted to the wall are too weak, allowing the face plate to flex inward and jam the rotation plate at the front. This must be corrected immediately or our suppliers will start to cancel orders. You have on file a fax from me of some months back foreseeing this problem, and asking that the area be strengthened to stop it happening. Had the suggested modifications from that fax been followed, then I would not be having this problem now. Please take urgent action we cannot afford to have this problem continue. Our competitors will have a field day with us over this." The next day Mr Cullen faxed W.S. Chan and Mr Kwok asking for nylon bushes to be sent immediately so that they may be used during installation "as a temporary measure only until the front plate is strengthened enough". 56 Mr Walsh faxed Stephen Ceh to ask whether Rinbridge Marketing would accept delivery of shipments of product ordered before the latest problem was detected. On 1 October Stephen Ceh faxed Mr Cullen and Mr Walsh to inform them that Rinbridge Marketing would not accept delivery of any products and, as it had no confidence that the outlet would be rectified, it was terminating the advertising. 57 Prospect County Council informed Rinbridge Marketing that tests of the Protecta Point outlets by an inspector had revealed faults. Mr Cullen went to China on 19 October in order to have modifications made to the faceplate of the socket outlet. On 23 October Mr Walsh faxed Stephen Ceh to say that Mr Cullen was returning from China with modified samples "where no jamming under any adverse force occurs". He indicated that all existing stock would be collected from Rinbridge Marketing's warehouse. The next day Rinbridge Marketing gave notice rescinding the marketing agreement with Rinbridge. Mr Cullen returned to Australia on 26 October. Rinbridge subsequently arranged for all stock to be collected from the Wetherill Park warehouse. Alleged Misleading or Deceptive Conduct 58 The statement of claim makes the following allegation: "18. The First Respondent made the following representations to the Applicant namely: (a) the Protecta Point is child safe; (b) the Protecta Point is child proof; (c) objects cannot be inserted into the Protecta Point whilst there is no electrical plug inserted; (d) the barrel of the Protecta Point will always return when an electrical plug is removed; (e) the Protecta Point is the safest power point in Australia; (f) defects that appeared in the Protecta Point as first exhibited to the Applicant had been removed; (g) the First Respondent was able to supply, within two weeks of about 2 June 1994, to the Applicant a Protecta Point which has the features of: (i) the inability to insert an object into the Protecta Point whilst there is no electrical plug inserted; and (ii) the barrel returning to its original position when the electrical plug is removed; and (h) the Protecta Point would function in accordance with its design." 59 The pleader has there identified with some precision the particular representations said to have been made to the Cehs. However, senior counsel for Rinbridge Marketing described the essential representations as being: that the product worked, that it was capable of being manufactured economically so as to be marketed in Australia as a child safety device, and that it would achieve the objects for which it was designed. I think that is a fair and realistic way of approaching the case put against Mr Cullen and Mr Walsh. 60 There are issues of credit to be determined. Mr Cullen and the two Cehs did not impress me as careful witnesses. They were all overly eager to make their case. Mr Cullen, in particular, was obviously reluctant to permit himself a moment's reflection in a genuine attempt to recall discussions that occurred many years ago. All three men conveyed the impression that they wished to be perceived as men of action, not to be held up in their dash through life by pettifogging detail. This observation does not, of course, mean they are dishonest. Mr Walsh, on the other hand, was a far more impressive witness. He paid attention to questions and gave his answers in a straightforward manner. Although he must have realised that his interests were ultimately not the same as those of Mr Cullen, I detected no attempt on his part to trim his evidence in order to inculpate Mr Cullen. 61 It does not seem to me that the expressions "child proof" and "child safe" convey any real difference in the present context. However that may be, I am satisfied that the expression "child proof" was used by Mr Cullen at the initial meeting with the Cehs and also in his telephone call from Hong Kong in June. That expression had reached the ears of the local radio station 2WG back in mid-1993. Its use is consistent with Mr Cullen's later use of the pun "Che proof" when he spelled Frank Ceh's surname phonetically in his fax of 27 July. The use of such extravagant language by Mr Cullen strikes me as entirely typical of his unrestrained commitment to the development of his invention. I also find that at no time in May or June 1994 did Mr Cullen qualify his statements about the safety of his outlet by reference to the Qualtest report of 3 February 1994. It was not until early July that an obviously frustrated Mr Cullen suggested the comparison test with the HPM and Clipsal outlets that resulted in the Qualtest report of 12 July. In addition, it seems to me very unlikely that, at his first meeting with Stephen Ceh, Mr Cullen would make available a report commissioned by a third party. Mr Cullen must be mistaken in his recollection on this point too. 62 I have found that at the first meeting Stephen Ceh used a toothpick to probe the outlet. This is important. As the first Qualtest report of 3 February 1994 shows, the apertures in the plug receptacle were not the only possible points of entry to be considered from a child safety point of view. I am sure that, with his practical background in the tough world of home construction, Frank Ceh stressed his concerns on this topic at the meeting on 2 June, and I am unable to accept Mr Cullen's denial that he did not do so. 63 The upshot is that, wherever there is a conflict between the evidence of Mr Cullen and that of one of the Cehs on an issue of any substance, I accept the evidence of Stephen Ceh or Frank Ceh. I say issue of substance because there are, some peripheral matters, such as clear plastic models, about which Mr Cullen's conflicting version was plainly right. 64 In broad terms, Rinbridge did represent that it had an effective, functioning product from the time of the meeting on 2 May up until the first supply in early June. That representation was repeated and reinforced by the assurances given by Mr Cullen in the most explicit terms of every one of his communications after that time. Leaving aside his petulance about the destructive forces employed in the Qualtest testing of 5 July, Mr Cullen's written communications with Rinbridge Marketing, W.S. Chan and Mai Chung speak for themselves. I need not reiterate their plain effect. However, confronted with their terms, Mr Cullen says that (1) he was under instructions from Rinbridge's directors to go along with anything Rinbridge Marketing requested, and (2) that he only used critical language in his communications with W.S Chan and Mai Chung "in order to elicit a prompt response". I am quite unable to accept this explanation of Mr Cullen's behaviour. Rinbridge had no money, but there is no evidence that its directors interfered in any way with Mr Cullen's authority in connexion with design changes to the approved socket outlet. 65 The fundamental representation that the outlet was safe and capable of functioning in accordance with its design was, at every turn, shown to be misleading or deceptive. Mr Cullen expressly acknowledged that the first lot of outlets supplied to Rinbridge Marketing were defective and that their sale would destroy the Protecta Point brand name. This required "substantial changes to the tooling". Subsequent correspondence reveals a floundering Mr Cullen, largely dependent on W.S. Chan for suggestions as to how the outlet might be altered so as to function as intended. The extensive nature of at least some of the major modifications subsequently made at Mr Cullen's request is starkly recorded in the terms of the official approvals. I have not reproduced the drawings submitted by Mr Cullen to his Hong Kong correspondents. They are almost comical in their execution. The alternatives he proposed suggest that Mr Cullen had no clear grasp of design solutions to the deficiencies in the outlets manufactured according to his specification. His helplessness was exemplified in his desperate reference to the seemingly talismanic "glue that Sam uses". 66 Rinbridge Marketing's case that Rinbridge's representations were misleading or deceptive is made out, not just by the experiments of the Cehs and the complaints of the customers, but by the very deficiencies that Mr Cullen was obliged to acknowledge and attempt to rectify. I am satisfied that Rinbridge contravened s 52 of the Act. Involvement of Mr Cullen and Mr Walsh 67 Mr Cullen was aware of the facts giving rise to those contraventions. He was the author of the very representations found to be in breach. Mr Cullen knew of the early difficulties in production. He knew that, despite very limited sales in the Wagga Wagga district, the outlet was largely untested and required modification. Yet he continued blithely to assure the Cehs that the problems would be fixed. Mr Cullen was the chairman and managing director of Rinbridge, but he was also the person with the actual authority in the company to make all the design decisions. This was well illustrated in August when Mr Seymour, a qualified electrician, accompanied him to China, but played no part at all in the re-design decision on that trip. I find that he was involved in the contravention. 68 Mr Walsh is in an entirely different position. He was certainly present at the first meetings with both Stephen Ceh and Frank Ceh. He was not a passive observer, but any limited information he gave about the outlet was plainly derived from Mr Cullen. He did not know of the deficiencies in prototype, nor should he have been aware of those matters. Mr Walsh played no part in the assurance given after the initial supply of defective products in early June. Stephen Ceh wrote to him, but he also wrote to Mrs Cullen. The reassurance came from Mr Cullen overseas. The Cehs did not look to Mr Walsh for assurance. On his trip to Wagga Wagga in July, the substantial discussions of Frank Ceh were with Mr Cullen not the other directors, including Mr Walsh. Mr Walsh then largely disappeared until 1 October when arrangements were coming to an end. Mr Walsh's situation was like that of the director in Crocodile Marketing Ltd v Griffith Vintners Pty Ltd (1989) 28 NSWLR 539. In my opinion, he was not involved in the contravention by Rinbridge. Causation and Damages 69 The statement of claim alleges that, acting on the representations (which I have found to be misleading or deceptive), Rinbridge Marketing executed the marketing agreement on 22 June 1994. Counsel for Mr Cullen seizes on such pleading to protect his client from liability for the expenditure wasted by Rinbridge Marketing as a result of any representations made after that date. It might have been prudent for the pleader to rely on the representations made after 22 June. (Contracts were not even exchanged until 5 July 1994.) However, this is not a contract case. The nexus between the expenditure and the conduct prior to 22 June is not broken by the subsequent reassurances given by Mr Cullen. Indeed, in my view, the causal link becomes clearer. In any event, it is plain that the pace and style with which Rinbridge Marketing got its business up and running was set in train back in May, when the likelihood of substantial expenditure commitments were acknowledged by Mr Cullen as the basis upon which he was being asked to enter into the side agreement about the use of his patent. Counsel for Mr Walsh submits that any causal link must have been broken by the time of the meeting on 2 June because the Cehs were by then aware of deficiencies in the samples. I reject that submission. Mr Cullen constantly sought to assuage any doubts or reservations of the Cehs, and they acted on those reassurances. Ultimately counsel for Mr Cullen and Mr Walsh were driven to submit that Rinbridge Marketing's huge expenditure was, in effect, attributable to an irrepressible enthusiasm and optimism of the Cehs for the product that Frank Ceh had harboured since watching the Ray Martin television program. This is completely unrealistic and is, of course, denied by the Cehs. I am satisfied that the Cehs acted on the basis of the representations by Mr Cullen. 70 Evidence of Rinbridge Marketing's expenditure on this aborted project was given by Stephen Ceh. Such expenditure totalled $441,144. Exquisite detail was set out in annexures to his affidavit, and complete discovery was given in respect of those details. This permitted some effective and well-targeted cross-examination on certain items. As a result, counsel for Rinbridge Marketing conceded that items amounting to $8,138.34 in those annexures could not be pressed. That left a claim for $433,144. Rinbridge Marketing was a company formed solely to market outlets supplied by Rinbridge. The expenditure was huge. There is a faint suggestion on the part of the respondents that the operation established at Wetherill Park was a little excessive. However, from the outset, Rinbridge Marketing set out to establish a highly professional sales organisation, distributing the safety socket-outlets throughout Australia competing against well-established manufacturers. Equipment and staff were required. Rinbridge Marketing has established that it spent the moneys and that it has suffered a loss in excess of $400,000. I propose to award damages in that amount. Rinbridge Marketing also claims interest up to judgment. The action against Mr Cullen was commenced on 30 May 1996. All the expenditure was incurred prior to that date. Interest rates specified in Schedule J of the Supreme Court Rules 1970 (NSW) provide useful guidance. I propose to award interest on the damages awarded at a rate of 10 per cent per annum for four years. 71 There will be judgment against Mr Cullen for the sum of $560,000. He must pay Rinbridge Marketing's costs of the action against him. There will be judgment for Mr Walsh on the action against him. Rinbridge Marketing must pay Mr Walsh's costs of that action. I certify that the preceding seventy-one (71) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Whitlam. Associate: Dated: 23 June 2000 Counsel for the applicant: D E Grieve QC with G F Cohen Solicitors for the applicant: Cutri & Associates Counsel for the second respondent: D B Studdy Solicitors for the second respondent: Gilbert & Tobin Counsel for the third respondent: R J H Darke Solicitors for the third respondent: Corrs Chambers Westgarth Dates of hearing: 12-14, 19-21 April 1999 Date of judgment: 23 June 2000