New South Wales Supreme Court CITATION : The Mayo Group International Pty Ltd v Hudson Respiratory Care Inc [2005] NSWSC 445 HEARING DATE(S) : 11/04/05 JUDGMENT DATE : 5 May 2005 JURISDICTION : Equity Division JUDGMENT OF : Young CJ in Eq DECISION : Interlocutory injunction granted. CATCHWORDS : EQUITY [338]- Remedies- Interlocutory injunction- Foreign defendant submitting to jurisdiction- Mandatory order sought for continuing supply of goods pending trial- In circumstances order made. LEGISLATION CITED : Trade Practices Act 1974 (Cth) s 80 Aristoc Industries Pty Ltd v RA Wenham (Builders) Pty Ltd [1965] NSWR 581 Australian Blue Metal Ltd v Hughes [1963] AC 74 Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 Cook Industries Inc v Galliher [1979] Ch 439 Epitoma Pty Ltd v AMIEU (1984) 3 FCR 55 Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 CASES CITED : Fletcher Challenge Ltd v Fletcher Challenge Pty Ltd [1981] 1 NSWLR 196 Great North of England Railway Co v Clarence Railway Co (1844) 1 Coll 507; 63 ER 520 Megaloconomos v Metro Goldwyn Mayer Pty Ltd (1953) 54 SR (NSW) 275 Minister of Health v Bellotti [1944] KB 298 Portarlington (Lord) v Soulby (1834) 3 My & K 104; 40 ER 40 Shercliff v Engadine Acceptance Corporation Pty Ltd [1978] 1 NSWLR 729 Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173 The Mayo Group International Pty Limited (P1) PARTIES : Mayo Healthcare Pty Limited (P2) Hudson Respiratory Care Inc (D) FILE NUMBER(S) : SC 2124/05 D R Pritchard (P) COUNSEL : R A Dick (D) Kemp Strang (P) SOLICITORS : Clayton Utz (D) LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG CJ in EQ Thursday 5 May 2005 2124/05 – THE MAYO GROUP INTERNATIONAL PTY LTD & ANOR v HUDSON RESPIRATORY CARE INC JUDGMENT 1 HIS HONOUR: This is an application for an interim injunction. 2 The first plaintiff or its subsidiary, the second plaintiff, has for some years been the Australian distributor for products of the defendant, a Californian corporation. 3 The defendant manufactures disposable respiratory care and anaesthesia products and equipment. 4 The Australian market for these products is mainly focussed upon contracts made by the distributor for various health authorities and hospitals to supply them with such respiratory care products as they may order. This is well known to both the plaintiffs and the defendant though when the defendant first became aware of it is presently unclear. Although not strictly accurate, I will refer to the contracts between the plaintiffs and the health authorities as "sub-contracts". 5 By agreement made 25 August 1998 (described in the defence as the "1998 agreement") the first plaintiff was appointed the exclusive distributor of the defendant's products in Australia. 6 Clause 11.03 made the applicable law of that agreement the law of the USA, whatever that may mean. 7 It is common ground that the 1998 agreement expired about 1 January 2001. 8 The plaintiffs plead that there was then a third distribution agreement made orally and evidenced in correspondence whereby the plaintiffs were granted a licence to import and distribute the defendant's products into and in Australia. 9 The defendant says that there was no such third distribution agreement. It agrees that it supplied product to the plaintiffs up to December 2004. However, it says that it constantly complained that the plaintiffs were not selling enough of the product and that supply would not continue indefinitely. Further, the defendant says that the plaintiffs were warned by letter in December 2003 that they should not enter into any sub-contract for supply of the product that would involve supply after 31 December 2004 without its written approval. 10 Whatever be the contractual regime extant in December 2004, the defendant terminated it as from 31 March 2005 by letter of 16 December 2004 (the termination notice). 11 The plaintiffs filed their statement of claim on 24 March 2005. The pleading runs to 22 pages and it is of little purpose to deal with it in detail. Essentially the plaintiffs make the following claims: (a) that there was a third distribution agreement; (b) that such agreement could only be terminated on reasonable notice; (c) that the termination notice did not give reasonable notice; (d) that the contractual regime between the parties was such that the defendant would not terminate the regime without permitting the plaintiffs to fulfil outstanding sub-contracts; (e) that there was a collateral contract that the defendant would accept all orders placed with it by the plaintiffs prior to 28 February 2005; (f) that the defendant has breached that collateral contract; (g) unless equitable relief under the Trade Practices Act 1974 were given, not only would be plaintiffs suffer irreparable harm, but also so would public hospitals and health authorities and the patients under their care. 12 The plaintiffs also claim that the defendant is estopped from refusing to supply the plaintiffs with its product in a timely and diligent manner in order to permit the plaintiffs to fulfil their sub-contracts. 13 The schedule to the statement of claim sets out 15 sub-contracts. Six of these were entered into before the alleged warning of December 2003. The last of the sub-contracts entered into before the termination notice, expires on 30 June 2006. This is with the Western Australian Department of Health. However, the Department has two options to extend for 12 month periods. 14 The schedule also contains mention of two contracts which were entered into in 2005, at a time when the defendant had, at the very least, given clear notice of its intention to terminate. 15 Generally, the defendant denies that the so-called third distribution agreement ever existed, though it admits that there was some contractual relation between the parties after 2001. It generally denies the plaintiffs' allegations, says that it has terminated the contractual regime and that the plaintiffs are estopped from pursuing at least some of their present claims. 16 There is no mention in the pleadings of the proper law of the contract, thus, I apply NSW law. 17 The defendant says, as to the allegation that there has been a breach of the collateral contract, that it agrees that there was an arrangement to accept orders up to 28 February 2005. However, there was an understanding that such orders would only be for immediate needs. Yet, based on their historical order pattern, the plaintiffs' orders were for such large quantities that it is clear that they are intending to stockpile the product to the prejudice of the defendant and its proposed new distributor, Promedica. 18 Promedica is not a party to these proceedings. Some of the evidence suggests that Promedica will not in fact be in a position to supply hospitals or the like until July 2005. 19 The application for an interim injunction came on before me on 11 April 2005. On that occasion, Mr D R Pritchard of counsel appeared for the plaintiffs and Mr R A Dick for the defendant. 20 At the hearing, Mr Dick proffered undertakings to the Court which Mr Pritchard declined to accept. These were that the defendant would supply the product ordered by the plaintiffs and would ship it, leaving California or Malaysia on or before 25 May 2005. 21 The plaintiffs said that there was an unjustifiable delay in shipping the product involved in that undertaking. 22 The plaintiffs agreed that if the orders sought were made, they would undertake that they would not use any goods supplied by the defendant other than for the purposes of satisfying any supply request under any existing arrangements with existing customers. 23 Because there was no need to make any immediate order to preserve the status quo and because this case raises a number of significant points and because I thought it useful to see the defence which at that stage was not even in draft form, I reserved my decision. That defence was filed on 15 April 2005, but I only received it on my desk yesterday. 24 I said at the interlocutory hearing and still maintain that it would be best if this case proceeded to an early final hearing and to avoid interlocutory applications if at all possible. As at 11 April, it was not possible to say when the parties would reasonably be ready for a final hearing and how long the case would take to hear. 25 As is well known, in this type of application in equity, for the plaintiffs to succeed they must demonstrate: (1) a seriously arguable case; (2) a case where damages are not an adequate remedy; and (3) that the balance of convenience or balance of justice favours the grant rather than the refusual of an injunction. 26 The same principles are applicable to applications for interim injunction under s 80 of the Trade Practices Act; Epitoma Pty Ltd v AMIEU (1984) 3 FCR 55 at 58. 27 Mr Dick does not cavil with the submission that there is an arguable case. However, I should briefly consider the question. 28 When considering whether there is an arguable case, unless there is some clear indication to the contrary, I accept that what the plaintiffs' witnesses say will be accepted at the trial. I use the material that the defendant proffers to assist me assess whether the plaintiffs have on all the evidence shown an arguable case, but I do not evaluate the evidence nor resolve any conflict of fact: Shercliff v Engadine Acceptance Corporation Pty Ltd [1978] 1 NSWLR 729. 29 The questions as to whether there was a third distribution agreement as alleged by the plaintiffs and whether it contained terms as to its termination, will need to be considered in depth at the trial. However, there is sufficient in the evidence to show that there is an arguable case for the plaintiffs' proposition. 30 There is no doubt that there was some contractual regime in place. There also seems little doubt that the defendant knew of the sub-contracting system, though, at this stage just how much the defendant knew of the details is unclear. 31 Whatever contractual regime was in place, the vital matter is the question of termination. 32 Mr Dick says that it is relevant to note that clause 9 of the 1998 agreement provided for termination with immediate effect. This is so, but the only right to terminate was for cause if certain events occurred. There was no express right to terminate otherwise. 33 In any event, a termination with immediate effect still requires a period of grace in which the licensee may wind down: Australian Blue Metal Ltd v Hughes [1963] AC 74. 34 Mr Dick also submits that it would be wrong to consider the termination notice in isolation. The evidence discloses that warnings of what was to occur were communicated for at least a year beforehand. 35 Where a contract in the nature of a licence makes no provision for its termination, the law normally will imply a term that it may be terminated by either party on reasonable notice communicated to the other party; see eg Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173 at 206. 36 What is reasonable is a question of fact but will be geared to what the parties must have appreciated would be necessary to allow the licensee to rearrange their affairs consequent upon the withdrawal of the licence which they might have assumed would continue indefinitely. There is no hard and fast rule, but the cases give guidelines. 37 In Minister of Health v Bellotti [1944] KB 298 a notice to quit for evacuees from Gibraltar needed to give them sufficient time to find other accommodation. Again, in Australian Blue Metal Ltd v Hughes [1963] AC 74 reasonable notice to terminate a licence to mine involved the time necessary to remove spoil and redeploy men and equipment elsewhere. 38 There is sufficient material to show that, with the knowledge that the defendant appears to have of the sub-contracts, the period from 16 December 2004 to 31 March 2005 was prima facie too short to be held to be reasonable notice of termination. 39 The consequence of this may be that whatever contractual regime was in place on 16 December 2004 is still in place. However, I can see arguments each way and will not develop this point. I only make it in case someone might think it prudent to give a further notice of termination. 40 I now turn to the question of damages and whether they are an adequate remedy. 41 The defendant says that there are alternative supplies of each of its products in the Australian marketplace from which the hospitals could secure their supply. 42 The plaintiffs say that if they do not get the product from the defendant, not only will they be liable in breach of contract to their sub-contractors, but also their reputation will be irreparably ruined. 43 I have looked at the extracts from the sub-contracts which have been tendered. Because these are in the favourite form of each health authority, each is in a different form. However, it seems common that: (1) sub-contracts may be summarily terminated by the health authority for cause; (2) if the plaintiffs do not supply in good time the authority may buy the goods elsewhere; and (3) the sub-contract may be extended at the option of the health authority. 44 It would certainly be extremely difficult to quantify damages if a health authority terminated a sub-contract or purchased its needs elsewhere because the plaintiffs were not able to provide supply. 45 The plaintiffs say that their damages will be almost impossible to calculate and I can see how this may be so. 46 One answer to the plaintiffs' claim is that many of the sub-contracts were entered into at a time when a reasonable person in the position of the plaintiffs would have realized that, in view of the correspondence being received by the plaintiffs from the defendant, entering into long term sub-contracts was a risky business. 47 A riposte is that self-induced hardship is still hardship, though the Court takes into account that the plaintiffs have been caught out taking a voluntary commercial risk. 48 The attitude to leaving a plaintiff to remedies at law, and in particular to damages, has softened since the Judicature Acts after which law and equity are administered by the one court. The modern test is as set out by Sachs LJ in Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 at 379, "The standard question … 'are damages an adequate remedy?' might perhaps in the light of authorities in recent years, be rewritten, 'is it just in all the circumstances that a plaintiff should be confined to his remedy in damages?' " 49 In my view, under the modern test, the answer is "No". 50 This brings me to the balance of convenience. 51 Before dealing with the actual question, where does the balance of convenience lie? I need to deal with some collateral issues. 52 In Megaloconomos v Metro Goldwyn Mayer Pty Ltd (1953) 54 SR (NSW) 275, the defendant leased a milk bar adjoining a cinema to the plaintiff. The defendant directed the plaintiff to sell only Peter's ice cream. Because of this, the defendant entered into a contract with the suppliers of Peter's ice cream to hire refrigerators from them under an agreement which provided that the plaintiff would only sell Peter's ice cream. The defendant did not know of this arrangement. In 1953, the defendant directed the plaintiff to sell only Street's ice cream. The plaintiff sought an injunction based on equitable estoppel. 53 C McLelland J refused the injunction. He dismissed the plaintiff's plea that it was reasonable and to be expected that he would enter into an agreement with Peter's and branded his conduct "imprudent" and enjoined the plaintiff from selling any other ice cream other than Streets. 54 This illustrates the general approach of equity to persons who make sub-contracts which appear to be commercially sensible, but where there is a commercial risk that the sub-contract might not be able to be performed if circumstances change. 55 The distinguishing feature of the present case is that at the time of the alleged breach, the defendant knew of the existence of the sub-contracts. 56 This factor is relevant to the assessment of damages. However, if one is to imply a term into the contract that reasonable notice is to be assessed bearing in mind the sub-contracts, there would need to be evidence that the defendant knew of the sub-contract system and the approximate duration of those contracts at the time of making the contract. 57 There is little evidence of this matter to date. 58 The next problem is that the plaintiffs are virtually seeking a mandatory injunction to continue supply pending the hearing. 59 I was taken to the usual cases mentioned whenever this point occurs. However, I take the view that the modern law applicable in NSW is to be found in the judgment of Gummow J when a judge of the Federal Court of Australia in Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499. In essence this is that whilst a judge bears in mind that he or she is being asked for a mandatory order, and exercises the appropriate degree of caution, generally speaking, no special factors are considered merely because the injunction sought is mandatory. See also Great North of England Railway Co v Clarence Railway Co (1844) 1 Coll 507 at 521-2; 63 ER 520 at 526-7 and Fletcher Challenge Ltd v Fletcher Challenge Pty Ltd [1981] 1 NSWLR 196. 60 Then there is the considerable problem that the defendant is a Californian company. It has a local representative, a Ms Rikki Mills who is resident in this State, but it is unclear what other assets and infrastructure it has here. 61 In this connection, there is no problem with the exercise of jurisdiction: the defendant has appeared. Any problem is with the efficacy of orders that the Court might make. 62 In his Mareva and Anton Piller Orders (LexisNexis Australia, 2005) Biscoe QC puts the Court's dilemma in this situation very concisely at p 121: "there is a tension between competing principles. On the one hand, the courts assume that a person subject to their jurisdiction will obey their orders. On the other hand, they are careful to avoid conflicts of laws and are careful about making orders against foreigners in respect of their conduct outside the court's territorial jurisdiction." 63 In Portarlington (Lord) v Soulby (1834) 3 My & K 104 at 108; 40 ER 40 at 42, Lord Brougham LC said that the court could in the proper case restrain a party who was subject to its jurisdiction from doing anything abroad. He gave several illustrations where courts had done so. A more recent illustration is the decision of Templeman J in Cook Industries Inc v Galliher [1979] Ch 439 that the defendant permit search of his flat in Paris, France. 64 Accordingly, if it is otherwise appropriate to do so, an order may be made that the defendant continue to supply the plaintiffs with the goods that they have ordered. 65 There is another matter which must be taken into consideration. In Aristoc Industries Pty Ltd v RA Wenham (Builders) Pty Ltd [1965] NSWR 581, Jacobs J made it clear that in cases where the public interest is affected, it is appropriate to take that interest into account when considering whether to make an injunction. 66 The material to date suggests that the hospitals and health authorities are dependent on the plaintiffs for their supply of these goods at least in the short term. The material also strongly suggests that Promedica would not be in a position to supply these institutions until July. 67 There is nothing to contradict the defendant's assertion that equivalent goods can be sourced in Australia. However, especially to acquire the goods in commercial quantities may take some time. 68 Accordingly, when I consider the question of balance of convenience, there are the substantial factors which I have recently reviewed in favour of granting an injunction. 69 On the other side of the ledger, the principal factor is that, on the defendant's case, the plaintiffs have been unsatisfactory distributors of its product, it has found a company which it considers will do a better job and any injunction will delay the implementation of the new arrangement. 70 On balance, I consider that the factors favouring the grant of an injunction for a short time outweigh contrary factors. 71 I have noted that the defendant was prepared to give undertakings at the hearing on 11 April. Had these not contained reference to delayed shipment they would have been acceptable, even though the offer was made late in the day. However, without evidence, it seems difficult to accept that the transport between San Francisco and Australia is so woeful that it will take four months for vital health products to reach Sydney. 72 As to the fear of stockpiling, the undertaking proffered by the plaintiffs mentioned earlier, should allay those fears. 73 I considered at first that some complicated orders may have to be made. However, the better view is that, despite the fact that the defendant is overseas and the relevant goods are manufactured overseas, an "ordinary" order should be made and should suffice, at least in the first instance. 74 In their notice of motion, as amended, the plaintiffs sought an order that the defendant by itself, its servants, agents and employees, be restrained from acting or purporting to act upon any purported termination of the plaintiffs' distribution rights in relation to any products of the defendant to the extent of the defendant supplying to the plaintiffs the products the subject of orders, S2000098 of 31 December 2004; SC900182 of 14 January 2005; SC900183 of 14 January 2005; SC900195 of 1 February 2005; SC900201 of 11 February 2005; SC900213 of 25 February 2005 and SC900215 of 25 February 2005. 75 Upon the usual undertaking as to damages and the further undertaking in Exhibit PX1016, I make those orders until further order. Costs of this application are to be costs in the cause. 76 The final hearing is provisionally fixed before me for four days commencing 26 July 2005 with pre-trial directions at 9.30 am on 28 June 2005. ******************** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.