New South Wales Supreme Court CITATION : Insight Oceania Pty Ltd v Philips Electronics Australia Ltd [2008] NSWSC 710 HEARING DATE(S) : 26 & 27 March 2008; 10, 11, 12, 16, 17, 18, 19 & 20 June 2008 JUDGMENT DATE : 23 July 2008 JURISDICTION : Equity - Commercial List JUDGMENT OF : Bergin J DECISION : Defendant not entitled to rely upon notices of termination CATCHWORDS : [CONTRACT] - Exclusive Distributorship Agreement for Plaintiff to distribute Defendant's nuclear medical equipment in Australia and New Zealand - automatic renewal of Agreement for period of 12 months to 31 December 2008 unless parties failed to reach written agreement in respect of Plaintiff's sales goal for 2008 - whether parties reached agreement in writing in respect of Plaintiff's sales goal - whether Plaintiff entitled to place order on Defendant for certain Products - whether Plaintiff was required to have a 'binding written commitment" from customer prior to placing order on Defendant - whether Plaintiff achieved its sales goal for 2007 - [IMPLIED TERMS] - whether implied term to co-operate and/or implied term to act in good faith in discussions in relation to Plaintiff's 2008 sales goal - whether breach of Agreement - [TERMINATION] - whether Defendant entitled to give notice to Plaintiff terminating agreement on basis of the parties' failure to reach agreement in writing as to Plaintiff's sales goal for 2008 - whether Defendant entitled to terminate Agreement on basis that Plaintiff fail to achieve its sales goal for 2007 - [WORDS & PHRASES] - "discussions", "negotiate", "binding written commitment" CATEGORY : Principal judgment Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 Australian Hotel Association (NSW) v TAB Limited [2006] NSWSC 293 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 Butt v M'Donald (1896) 7 QLJ 68 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Council of the City of Sydney v Goldspar Australia Pty Ltd (2006) 230 ALR 437 CASES CITED : Empress Towers Ltd v Bank of Nova Scotia (1991) 50 B.C.L.R. 126 Hart v MacDonald (1910) 10 CLR 417 Jalun Pool Supplies Pty Ltd v Onga Pty Ltd [1999] SASC 20 Mackay v Dick (1881) 6 App. Cas. 251 McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2005) Aust Contract Reports 90-213 Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 230 ALR 56 Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 117 ALR 393 PARTIES : Insight Oceania Pty Ltd (Plaintiff) Philips Electronics Australia Ltd (Defendant) FILE NUMBER(S) : SC 50241 of 2007 COUNSEL : CRC Newlinds SC/P Silver (Plaintiff) IM Jackman SC/MR Elliott (Defendant) SOLICITORS : Johnson Winter & Slattery (Plaintiff) Deacons (Defendant) - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST BERGIN J 23 JULY 2008 50241/2007 INSIGHT OCEANIA PTY LIMITED V PHILIPS ELECTRONICS AUSTRALIA LIMITED JUDGMENT 1 On 24 November 2004 the plaintiff, Insight Oceania Pty Limited, entered into an agreement with Philips Medical Systems Australasia Pty Limited (PMSA), a division of the defendant, Philips Electronics Australia Limited, pursuant to which the plaintiff was appointed as PMSA's exclusive distributor of certain diagnostic medical imaging products in Australia and New Zealand (the 2004 Agreement). On 4 April 2005 PMSA assigned its rights and obligations under the 2004 Agreement to the defendant. On 16 June 2006 the parties amended the 2004 Agreement by a Deed of amendment (the Agreement). I will refer to the 2004 Agreement as amended by the 2006 Deed of amendment as "the Agreement". 2 This litigation arises out of the defendant's purported termination of the Agreement by Notices of Termination dated 18 December 2007 (the 2007 Notice) and 23 January 2008 (the 2008 Notice). The 2007 Notice purported to terminate the Agreement on the basis that the parties had not agreed in writing to a reasonably achievable sales goal for the calendar year 2008 referred to in clause 4.01 of the Agreement. The 2008 Notice purported to terminate the Agreement on the basis that the plaintiff had failed to meet its sales goal for the 2007 calendar year. 3 The plaintiff seeks declarations that the Notices are invalid and of no effect and an order that the defendant be restrained from terminating the Agreement on the basis of the Notices. The plaintiff also brought a claim for rectification of the Agreement. It also claims that the defendant engaged in unconscionable conduct within the meaning of s 51AC of the Trade Practices Act 1974 (Cth) (TPA) and misleading or deceptive conduct in contravention of s 52 of the TPA. The plaintiff seeks consequential relief under the TPA restraining the defendant from relying on the Notices; and an order disentitling the defendant from asserting that the 2007 Sales Goal was not achieved. There is also a claim for damages. The claims for rectification of the Agreement were abandoned on the second last day of the trial. Positron Emission Tomography (PET) 4 Positron Emission Tomography (PET) is a nuclear medicine technology that has been used overseas for approximately 28 years mainly as a research tool. As at 2000 it was an emerging technology in a diagnostic role with major clinical applications in the areas of oncology, cardiology and neurology. In 1999 the Minister for Health and Aged Care asked the Department of Health and Aged Care (Diagnostics and Technology Branch) to conduct a national review of PET to determine its proper role in the Australian clinical environment. The report of that review described PET as follows: PET is a nuclear medicine technology that uses short-lived radioisotopes to allow the noninvasive diagnostic imaging of metabolic processes – and the disturbance of these processes by disease – in the living organism. In contrast with imaging modalities such as computed tomography (CT) and magnetic resonance imaging (MRI), which primarily provide information about anatomical structure, PET can image and quantify biochemical and/or physiological function. This information is potentially valuable because functional changes caused by disease are frequently detectable before any structural abnormalities become evident. The radioisotopes used in PET are produced in cyclotrons. The most commonly used in clinical PET is fluorine-18 (18F), labelled to fluorodeoxyglucose to produce 18F – FDG, commonly referred to as FDG. This altered glucose molecule behaves sufficiently like normal glucose to participate in, and allow the imaging of, glucose metabolism. FDG is taken up preferentially by tissues that use glucose as their main energy source: malignant tumours and their metastases; myocardial cells; and neural tissue. Because of its efficacy in imaging glucose metabolism, the major clinical applications of FDG PET are in oncology, cardiology and neurology, with around 80% of PET examinations in Australia currently being performed in oncology. 5 In March 1997 limited Medicare Benefits Schedule funding became available for the evaluation of PET. That funding was limited to the PET units at the Royal Prince Alfred Hospital (RPAH) in Sydney and Austin and Repatriation Medical Centre in Victoria (the Austin), to enable the development of an evidence base for PET in relation to its impact on a limited range of indications in oncology, neurology and cardiology. By mid-1999 the arrangement had failed to produce the level of evidence required to satisfy the requirements of the Commonwealth Government's evidence-based approach to funding for health services. 6 As at 2000 there were four established providers of PET services in Australia being at the RPAH in New South Wales; the Austin in Victoria; the Centre for PET at the PMCI in Victoria; and at the PET Centre at the Wesley Hospital in Queensland. At the time of the events giving rise to this litigation there were an additional nine established providers for PET services using dedicated PET technology being: Liverpool Hospital; Newcastle Hospital; St Vincent's Hospital and Westmead Hospital in New South Wales; Peter MacCallum Cancer Institute and the Monash Medical Centre in Victoria; Royal Brisbane Hospital in Queensland; the St Charles Gairdner Hospital in Western Australia; and the Royal Adelaide Hospital in South Australia. 7 The complex arrangements between Commonwealth and State governments in relation to funding for capital works for the establishment of a PET centre and for access to Medical Benefits Schedule rebates has seen a fairly slow development of PET technology in Australia. Under the Health Insurance Act 1973 (Cth), the Minister for Health may determine that a health service not listed in the Medicare Benefits Schedule shall be treated as if it were so listed in certain specified circumstances and for specified statutory provisions. 8 On 6 December 2005 the then Minister for Health and Ageing made a Determination under the relevant section of the Health Insurance Act being Health Insurance (Positron Emission Tomography) Determination HS/07/05. That Determination remained in force until midnight on 31 October 2007. Clause 4(3) of the Determination was in the following terms: (3) An accredited and comprehensive facility is a facility that: (a) is accredited by ANZAPNM as a site for advanced training in PET; and (b) provides from one location each of the following services (whether or not other services are also provided): (i) PET; (ii) computed tomography; (iii) x-ray; (iv) diagnostic ultrasound; (v) medical oncology; (vi) surgical oncology; (vii) radiation oncology; and (viii) neurology, including neurosurgery. (4) For paragraph (3)(b), the reference to one location means: (a) all or part of one building; or (b) if the services mentioned in paragraph (3)(b) are not rendered in the same building, only those facilities where public access between the buildings where the services are rendered is by way of a covered pedestrian walkway. 9 The Determination then specified the following PET health services that qualified for a Medicare Benefits Schedule rebate: Schedule – Specified health services Item Health Service Fee for all States 61523 Whole body FDG PET study, performed for evaluation of a solitary pulmonary nodule, where the lesion is considered unsuitable for transthoracic fine needle aspiration biopsy, or for which an attempt at pathological characterisation has failed. (R) $953.00 61529 Whole body FDG PET study, performed for the staging of proven non-small cell lung cancer, where curative surgery or radiotherapy is planned. (R) $953.00 61559 FDG PET study of the brain, performed for the evaluation of refractory epilepsy, which is being evaluated for surgery. (R) $918.00 10 Although in theory private practitioners could purchase a PET scanner and provide PET scanning services to members of the public who were willing to pay a private fee, the commercial reality is that there would not be enough patients who would be in a position to pay the private fee necessary to make the practice viable. The development of PET in Australia is dependent upon government funding both for capital works and for access to the Medicare Benefits Schedule rebates. 11 On 8 September 2007 the then Minister for Health issued a further determination being Health Insurance (Positron Emission Tomography) Determination HS/05/07 which remained in force until midnight on 30 June 2008. That Determination broke up the former definition of "accredited and comprehensive facility" into two definitions, "accredited site" and "comprehensive facility". Those definitions were as follows: accredited site is one that is accredited by ANZAPNM as a site for advanced training in PET … comprehensive facility means: (a) a building or part of a building; or (b) buildings, where public access between the buildings is by way of a covered pedestrian walkway; where each of the following services is provided (whether or not other services are also provided) (i) PET: (ii) computed tomography; (iii) x-ray; (iv) diagnostic ultrasound; (v) medical oncology; (vi) surgical oncology; (vii) radiation oncology; and (viii) neurology. 12 That Determination applied at an accredited site in a comprehensive facility (clause 5(1)(a)(iii)). The Schedule of Specified Health Services to that Determination remained the same as the previous Determination. The parties 13 The plaintiff commenced operation in December 1998. The directors are John Walstab (managing director), Andrew McDonald and James Hewlett. Mr Walstab has a Certificate of Technology specialising in Electronic Instrumentation from Royal Melbourne Institute of Technology in Victoria. He has been the managing director of the plaintiff since 4 December 1998, responsible for the overall operations and financial performance of the business. Mr Walstab has worked in various management positions with a number of medical imaging suppliers. He was a Sales Manager for Advance Technology Laboratories (ATL), a subsidiary of the defendant, for the period 1990 to 1996 and General Manager for ATL in the period 1996 to 1999. 14 Mr McDonald has approximately 20 years experience in the nuclear medicine market. He holds a Diploma in Nuclear Medicine Technology from the Michener Institute, Toronto, Canada for which he obtained reciprocity when he migrated to Australia in 1990. He has routinely attended and presented at lectures and seminars in Nuclear Medicine and PET technology. His role with the plaintiff is in the marketing, sales and after sales support management of products that the plaintiff represents for the defendant. In this role Mr McDonald is responsible for setting sales targets, negotiating budgets with the defendant, approving marketing expenditures to support the defendant's products and managing the sales team selling the defendant's products. 15 Mr Hewlett has a Bachelor of Science degree in Electronic Engineering from DeVry Institute of Technology in North America. He has also completed courses in Customer Communications, Sales Marketing and People Management and routinely attends lectures and seminars on Nuclear Medicine and PET, both locally and internationally. Mr Hewlett has been a director of the plaintiff since 2005. Prior to that he was an owner-manager of the plaintiff from the establishment of the company in 1998. He has had 18 years experience in the nuclear medicine and PET market, locally and internationally. His role with the plaintiff includes: over-viewing sales performance and management of the sales team; generating sales opportunities; negotiating sales agreements and terms; completing sales contracts; liaising with product suppliers; handling customer "issues and feedback"; monitoring product and product developments; and overseeing the company's financial performance and management of significant assets and liabilities. 16 The Philips Group is a multinational group of companies, which has its head office in the Netherlands. The Group develops, manufactures and services healthcare, lighting, office and other products. The operations of the Group are divided on a regional basis in West Europe, East Europe, the Americas and Asia-Pacific. Each regional office reports to the head office in the Netherlands. The defendant is responsible for operations in Australia and New Zealand. It is a wholly owned subsidiary of Royal Philips Electronics NV, a company incorporated in the Netherlands. It sells products manufactured within the Group and provides engineering support for those products in Australia and New Zealand. It reports to the Asia-Pacific regional office, which is a separate corporate entity registered in Singapore known as Philips Electronics Singapore Pte Ltd. 17 The personnel of the defendant involved in the events giving rise to this litigation are: Harry van Dyke, the CEO of the defendant; Eric Le Bail, General Manager of Sales and Marketing; Phillip Prather, Business Manager - Imaging Systems; Michael Paholski, Business Development Manager - Nuclear Medicine; and Ian Chalmers, Legal Counsel and Company Secretary. Alister Wayne Spittle, who is the CEO and Senior Vice-President of Philips Healthcare MCR APAC, was formerly the general manager of the defendant. He left that position in April 2006 to take up the role of General Manager and Vice President of Philips Medical Systems Asia Pacific in Hong Kong. He resided in Hong Kong until May 2006 and then transferred to Singapore in October 2007. 18 Mr Paholski is the manager responsible for nuclear medicine imaging systems for Australia and New Zealand and health care informatics, being medical imaging archive and patient information systems. He commenced work in that position in January 2007. He holds a graduate certificate in business management from the University of Tasmania. Mr Prather accepted that both Mr Hewlett and Mr McDonald had many years of experience in the nuclear medicine market in Australia and that he had "very little experience" in the Australian PET marketplace (tr 261). Indeed he accepted he was a comparative "babe in the woods". 19 Mr Paholski's position in relation to the respective expertise of those within the plaintiff was more reticent. He gave the following evidence (tr 426-427): Q. … You aren't, even now, an expert on the market for PET technology in Australia, are you? A. No, I don't class myself as an expert. Q. But you would accept, would you not, that at all times in October 2007 Mr McDonald from Insight did have such expertise? A. Mr McDonald certainly has experience, yes. Q. And he would be an acknowledged expert, in your mind, in the field of the market for PET technology in Australia? A. He certainly has a lot of experience, yes. Q. He would be an acknowledged expert in your opinion, wouldn't he? A. He has a lot of experience, yes. Q. Mr Hewlett also has and had in 2007 a lot of experience? A. I don't directly know of Mr Hewlett's experience. Q. But you would certainly defer to his opinion in relation to the market for PET technology in 2007, wouldn't you? A. I would listen to his opinion. Q. And if his opinion differed from yours generally, you would defer to his, would you not? A. No. Q. Now, what about Mr McDonald? If his opinion differed from yours in relation to the market for PET technology in October 2007, would you not defer to his opinion? A. No Q. Even though he's got - had then enormously more experience than you? A. Yes … Q. Now, in relation to Mr Hewlett, you did think that he had considerable experience in the PET market in Australia as at 2007? A. I had no basis to make a judgment on that. Q. Did you ever ask him? A. No. Q. He certainly had more than you; you knew that, didn't you? A. Yes. The Agreements 20 In 1999 the plaintiff commenced distributing medical diagnostic equipment pursuant to a five-year agreement with ADAC Laboratories California (ADAC). Prior to the end of the term of that agreement, the defendant acquired ADAC and subsequently entered into the Agreement with the plaintiff. The defendant was authorised to market and distribute in Australia and New Zealand certain medical products that were manufactured and/or sold by its related companies. The products that the defendant authorised the plaintiff to distribute exclusively in Australia and New Zealand were described in the Agreement as follows (cl 1.03): "PRODUCTS" mean the following lines of products including all modifications, revisions and enhancements thereto, but excluding any portions thereof, if any, as to which PMSA is prohibited from granting the distribution rights described herein: Nuclear Medicine Gamma Cameras and related Computer Systems (collectively, "Nuclear Products"), Positron Emission Tomography Systems (collectively, "PET Products") and Radiation Therapy Planning Systems (collectively, "RTP Products") or any pre-clinical product associated with the products described above. 21 The Agreement (that is, the 2004 Agreement as amended by the Deed of amendment in June 2006) included the following: 1.02 "Measurement Period" shall mean each twelve month period beginning January 1 and ending December 31 during the term of this AGREEMENT. … 2.01 APPOINTMENT PMSA hereby appoints DISTRIBUTOR as its exclusive distributor of the PRODUCTS in the TERRITORY, and DISTRIBUTOR hereby accepts such appointment. For purposes hereof, the term "exclusive" means that PMSA or its related companies will not; other than as provided in clause 2.02 (i) sell PRODUCTS directly into the TERRITORY or; (ii) sell PRODUCTS to any third party whom PMSA knows intend to sell into the TERRITORY or; (iii) assign distribution rights with respect to the TERRITORY to any other third party. PMSA shall refer to DISTRIBUTOR all inquiries and orders for PRODUCTS that PMSA receives directly from customers in the TERRITORY. DISTRIBUTOR may distribute the PRODUCTS through its sub-distributors or other resellers in the TERRITORY, subject to PMSA's prior written consent. 2.02 Subject to DISTRIBUTOR providing prior written consent which shall not be unreasonably withheld, nothing contained in this Agreement shall prevent PMSA from supplying the PRODUCTS directly to a customer in the Territory in response to a request for quotation (or tender) for a bundle of products which include the PRODUCTS. In such cases PMSA will pay DISTRIBUTOR 15% of the usual transfer price for the PRODUCT and DISTRIBUTOR shall still remain responsible for installation and warranty support. Should a customer request a service contract from PMSA directly the DISTRIBUTOR will, upon PMSA's request, reasonably cooperate with PMSA to provide back to back service on behalf of PMSA where DISTRIBUTOR will perform the service to the customer on commercial terms with PMSA; … 3.02 Subject to DISTRIBUTOR's compliance with its obligations hereunder, this AGREEMENT shall continue in full force and effect for the term set forth in Appendix A (the "Term"). This AGREEMENT shall be automatically renewed for additional one-year periods (each such 12-month period, a "Term") provided that if DISTRIBUTOR fails to meet the SALES GOAL for a Term PMSA shall be entitled to terminate this agreement by giving 90 days written notice to DISTRIBUTOR. Such notice must be given not later than 28th February in the year following the Term in which the SALES GOAL was not met. In determining whether a SALES GOAL has been met consideration will be given to the total sales target rather than the individual modality targets; … 4.01 DISTRIBUTOR agrees to use its best efforts to sell, or procure sales contracts for, the PRODUCTS in the TERRITORY. During the Term, DISTRIBUTOR agrees to sell or procure sales contracts for such number of PRODUCTS as enable DISTRIBUTOR to meet or exceed the sales goals agreed by the parties for each Term (the "SALES GOAL"). The SALES GOAL for the period to 31 December, 2006 is set forth in Appendix A hereto. No later than 1st November, in any Term the parties shall commence discussions to set the appropriate SALES GOAL for the following Term. If the parties agree in writing to a SALES GOAL for the following Term, such agreed SALES GOAL shall be the SALES GOAL for such Term. If the parties have not agreed in writing to a reasonably achievable SALES GOAL for the following term by 15th December in any Term Philips may elect to terminate this agreement by giving 90 days written notice to Insight provided such notice is given before 31 December in the year in question; … 5. DUTIES OF DISTRIBUTOR In addition to all other duties herein set forth, DISTRIBUTOR shall have the following material obligations under this AGREEMENT: 5.01 Solicitation of Orders Etc. DISTRIBUTOR shall use its best efforts to solicit orders for and sell PRODUCTS to customers in the TERRITORY, shall not engage in the manufacture, promotion, and/or sale of any products that are competitive with the PRODUCTS, and shall not, directly or indirectly, be employed by or become associated in any capacity with any person, firm or corporation competing with or setting up to compete with PMSA in the manufacture or sale of similar products in the TERRITORY. 5.02 Prompt Payment DISTRIBUTOR shall promptly comply with all the terms and conditions of sale described hereunder, including without limitation, prompt payment of the purchase price for the PRODUCTS and any spare parts sold to DISTRIBUTOR by PMSA. Unless otherwise agreed in advance in writing by PMSA, payment for all PRODUCTS and spare parts shall be made by means and on terms and conditions as more fully set forth in Appendix A . … 5.07 Sales Reports Every four (4) weeks DISTRIBUTOR shall provide PMSA with a report on the expected sale and distribution of PRODUCTS and DISTRIBUTOR's business activities concerning the promotion and distribution thereof, together with information on the market situation in the TERRITORY, including: (a) Names of active sales prospects and status of sales, (b) Government regulations affecting PRODUCTS, (c) Competitive products and competitor's activities, (d) Prices at which PRODUCTS and components are sold to end-users, (e) Sales forecasts, including product type and expected purchase price, for the next four (4) calendar quarters, and (f) All available market data for the TERRITORY with regard to volume of similar products purchased within the TERRITORY and average selling price for same. … 6. TERMS AND CONDITIONS OF SALE 6.01 Shipment Terms PMSA shall sell PRODUCTS to DISTRIBUTOR DDP Sydney warehouse as that term is defined in Incoterms 2000. 6.02 Changes in Pricing Notwithstanding the provisions of Section 4 above, PMSA may upon written notice to DISTRIBUTOR change the prices and discount percentages set forth in such Section and Appendix B hereto. Any such change shall be effective thirty (30) days after the date of said notice to DISTRIBUTOR. In the event that DISTRIBUTOR has bona fide outstanding bids to its customers that would be affected by any price increase, PMSA will honor the previous price to DISTRIBUTOR for those bids for a period not to exceed ninety (90) days from the date of notice of the price increase. 6.03 Other Terms and Conditions All sales made by PMSA to DISTRIBUTOR shall be subject to the provisions of this AGREEMENT, and to the extent not inconsistent herewith, DISTRIBUTOR's shipping and handling instructions. Any provision of any purchase order placed by DISTRIBUTOR that is inconsistent herewith or in addition hereto shall be null and void, unless specifically accepted by PMSA in writing (other than routine acknowledgment). PMSA will not be liable for any penalty clauses from customers accepted by DISTRIBUTOR unless PMSA has specifically agreed in writing to such clauses in advance. … 6.05 Title and Risk of Loss Title to and risk of loss for each shipment of PRODUCTS and spare parts shall pass to DISTRIBUTOR upon delivery pursuant to Section 6.01. 6.06 Orders for Products (a) All DISTRIBUTOR orders for PRODUCTS shall refer to this AGREEMENT and state the required PRODUCTS, quantities, shipment dates, purchase prices, destination, carrying method, consignee at destination and other shipping instructions. Each order shall be subject to acceptance by PMSA, which shall not be unreasonably withheld, and shall be binding upon PMSA when accepted. (b) If the shipment date requested in a purchase order cannot be met, PMSA shall notify DISTRIBUTOR with the expected shipment date. DISTRIBUTOR may choose either to cancel the purchase order or accept PMSA's proposed shipment date. Failure of DISTRIBUTOR to give such notice within ten (10) days of PMSA's notice of the shipment date shall constitute acceptance by DISTRIBUTOR of the shipment date proposed by PMSA. DISTRIBUTOR's purchase order will be processed in the same manner as an order placed by PMSA's direct sales organization. … 7. CHANGES IN PRODUCTS 7.01 PMSA may, at any time prior to acceptance of any order from DISTRIBUTOR, either add to, delete, modify or change any of the PRODUCTS pursuant to any updating, obsolescence, or other change in the PRODUCTS occurring within the ordinary course of PMSA's business with or without notice to DISTRIBUTOR. 7.02 PMSA agrees to provide training for designated DISTRIBUTOR personnel at mutually agreed-upon rates (see price list(s) attached as Appendices E and F) and at DISTRIBUTOR's expense where this becomes necessary due to changes made to PRODUCTS. DISTRIBUTOR's personnel shall be required to sign appropriate confidentiality agreements with PMSA as a prerequisite to such training. … 18. RELATIONSHIP OF PARTIES The relationship of DISTRIBUTOR to PMSA hereunder is that of vendee and vendor. Nothing herein contained shall be deemed to create any agency, joint venture or partnership relationship between the parties hereto. It is understood and agreed that DISTRIBUTOR is not, by this AGREEMENT or anything herein contained, constituted or appointed the agent or representative of PMSA for any purpose whatsoever, nor shall anything herein contained be deemed or construed as granting to DISTRIBUTOR any right or authority to assume or create any obligation or responsibility, expressed or implied, for, in behalf of, or in the name of PMSA, or to bind PMSA in any way or manner whatsoever. DISTRIBUTOR shall do no act or make any statement inconsistent with this Article 18. … 23. ENTIRE AGREEMENT 23.01 The making, execution and delivery of this AGREEMENT by DISTRIBUTOR have been induced by no representations, statements, warranties, or agreements other than those expressly set forth herein. 23.02 This AGREEMENT is the entire agreement between the parties and supersedes and shall be substituted for each and every prior and contemporaneous agreement with respect to distribution of PRODUCTS in the TERRITORY, whether written, oral or otherwise in effect between DISTRIBUTOR and either PMSA or any company related to PMSA. 22 Although the 2006 the Deed of amendment did not expressly remove clause 23, the following clause 5 makes clear that the parties intended that it would replace clause 23: 5. Entire Agreement 5.1 The Agreement as amended by this Deed contains the entire agreement and understanding between the parties on everything connected with the subject matter of the Agreement. Each party has entered into this Deed without relying on the representation by any other party or any person purporting to represent that party. 23 By letters dated 24 January 2006 the defendant confirmed that the 2004 Agreement was "renewed for an additional one year term expiring on 31st December, 2006." The Deed of amendment dated 16 June 2006 was effective from that date to 31 December 2006. There is no document from the defendant to the plaintiff stating that the Agreement had been "renewed" for an additional one year term to 31 December 2007. However on 30 November 2006 the parties signed a sales goal for 2007 "pursuant to article 4.01 of the agreement". There is no issue that the Agreement continued to 31 December 2007 notwithstanding the absence any express statement to that effect. 24 Appendix A to the 2004 Agreement included the following: SALES GOAL FOR EACH PRODUCT LINE FOR CALENDAR YEAR 2005: SystemBooking QuantityAverage Value (USD)Total (USD) Nuclear Products: Skylight6 Unit418k2,508k Forte5 Unit270k1,350k RTP Products Pinnacle Server1 Unit197k197k Pinnacle Client6 Unit 40k240k PET Products: Gemini – 161 Unit1,650k1,650k A "booking" is defined as a binding written commitment by a customer in the TERRITORY to purchase a PRODUCT. 25 The letter of 24 January 2006 was in the following terms: Re. Distribution Agreement dated 24th November, 2004 We confirm that the distribution agreement between Philips and Insight dated 24th November, 2004 shall be renewed for an additional one year term expiring on 31st December, 2006 Pursuant to article 3.02 of the agreement the sales goals for the renewed term is as follows: Modality System Quantity Average Unit Price (USD) Total (USD) PET/CT Gemini GXL 6 3 1,176,659 3,529,977 SPECT/CT Precedence 2 550,240 1,100,480 VAR Angle SPECT Forte 6 186,450 1,118,700 Skylight 2 229,240 458,480 Cardio MD 2 170,750 341,500 RTP Pinnacle Server 1 197,000 197,000 Pinnacle Client 6 40,000 240,000 6,986,137 26 The Deed of amendment dated 16 June 2006 amended Appendix A as follows: (8) Appendix A (a) Initial Term is amended by replacing "31 December 2005" with "31 December 2006"; and (b) the entire text under the heading "SALES GOAL FOR EACH PRODUCT LINE FOR CALENDAR YEAR 2005" – (including the table), up to but not including the heading "PAYMENT TERMS", is replaced with: "SALES GOAL FOR EACH PRODUCT LINE FOR CALENDAR YEAR 2006 Modality System Units Average Unit Price (US$) Total (US$) PET/CT GEMINI GXL 6 1 $1,275,000 $1,275,000 GEMINI GXL 16 1 $1,475,000 $1,475,000 SPECT/CT Precedence 0 $ - Var. Angle SPECT Forte 3 $ 260,000 $ 780,000 Skylight 1 $ 280,000 $ 280,000 Cardio MD 1 $ 185,000 $ 185,000 RTP Pinnacle Server 1 $ 197,000 $ 197,000 Pinnacle Client 6 $ 40,000 $ 240,000 Other Other $ 100,000 Total $4,532,000 A "booking" is defined as a binding written commitment by a customer in the TERRITORY to purchase a PRODUCT."; and 27 The letter of 30 November 2006 was in the following terms: Re: Distribution Agreement dated 24th November, 2004 and Deed of Amendment dated April 2006 Pursuant to article 4.01 of the agreement, the sales goals for the renewed term is as follows: Modality System Units Average Unit Price (US$) Total (US$) PET/CT GEMINI GXL 6 1 $1,475,000 $1,475,000 GEMINI TF 16 1 $1,900,000 $1,900,000 SPECT/CT Precedence 1 $ 748,000 $ 748,000 Var. Angle SPECT Forte 4 $ 260,000 $1,040,000 Skylight 0 $ 280,000 $ - Cardio MD 2 $ 185,000 $ 370,000 RTP Pinnacle Server 1 $ 197,000 $ 197,000 Pinnacle Client 7 $ 40,000 $ 280,000 Total $6,010,000 Should the Variable angle camera Brightview not available for delivery before July 2007, the targets shall be reduced by $520,000. 28 The plaintiff's exclusive "TERRITORY" was Australia and New Zealand. 2007 Notice - Competing claims 29 The plaintiff claims that the defendant was obliged to act reasonably in exercising its entitlement to terminate the Agreement under clause 4.01. It was submitted that the defendant was not entitled to require agreement to a sales goal that was not reasonably achievable, particularly because of the important consequences for the plaintiff. The defendant submitted that all the defendant had to do was to "commence discussions", which, it was submitted, could be done unilaterally by promoting a particular figure to the plaintiff as a sales goal. It was submitted that thereafter if the parties did not agree in writing to a sales goal that obviously had to be reasonably achievable, the defendant was entitled to elect to terminate the Agreement. 30 The plaintiff claimed that the defendant put forward a figure that it knew was not reasonably achievable and refused, unreasonably, to budge from that figure. It was submitted that in those circumstances it was not entitled to elect to terminate the Agreement. It was submitted that a pre-requisite to such entitlement was engaging in a co-operative manner with the plaintiff to agree on what was reasonably achievable and that it failed to do so. Additionally it was submitted that the defendant was required to negotiate in good faith with the plaintiff to agree on what was reasonably achievable and it failed to do so. In those circumstances it is claimed that the defendant was not entitled to elect to terminate the Agreement. There are also claims that the defendant acted unconscionably and misled or deceived the plaintiff during the discussions in relation to the setting of the sales goal. It is claimed that such conduct disentitled the defendant from electing to terminate the Agreement. 31 There is an alternative claim that the plaintiff did agree in writing to a reasonably achievable sales goal. That claim is based on a letter dated 17 December 2007, the detail of which is referred to below, which includes the statement: "We can accept the 2008 sales goals with conditions based on market conditions". It will be necessary to analyse that statement in the surrounding circumstances of the final days and hours of the "discussions" in December 2007. 32 There is a real issue between the parties as to whether the sales goal proffered by the defendant was reasonably achievable. Indeed the plaintiff claimed that the defendant intentionally set a sales goal that it knew was not reasonably achievable for the purpose of ensuring that no agreement in writing would be reached by the required date so that it could terminate the Agreement. The plaintiff claimed that as early as May 2007 the defendant had considered the option of distributing its products directly to the market and that its conduct in the latter part of 2007 was aimed at achieving the termination of the Agreement so that it could sell the Products direct to the market. 33 The defendant claimed that it honestly believed that the 2008 sales goal it proffered to the plaintiff was reasonably achievable. It is therefore necessary to analyse the relevant background facts and circumstances leading up to the commencement of discussions in late 2007, the setting of the sales goal and the election to terminate the Agreement. The defendant's claim of honest belief in the sales goal is based in the main on the evidence of Mr Paholski and it will be necessary to review his consideration of various aspects of the market to reach his claimed belief that there would be what he described as a "PET surge" in 2008. January 2007 34 In January 2007, Mr Paholski suggested to Mr Le Bail that he be considered for a dual role in operations management for Healthcare Informatics as well as nuclear medicine. Mr Paholski advised Mr Le Bail that he had experience in nuclear medicine and would like the opportunity to manage a distributor. The job description provided to Mr Paholski included the following: Pivotal to the success of the incumbent is the close working relationship they develop with [the defendant's] distributor Insight Oceania, who are responsible for selling and servicing the equipment in the territory. 35 In correspondence with Mr Le Bail about the position, Mr Paholski said that he would "like to ensure the accountabilities are in line with the contract we have with Insight". He then asked: "For example are they obliged to share their funnel with us monthly?". Mr Le Bail's response was as follows: Regarding Insight, you're absolutely correct. By contract, they are supposed to give us a Business update on a quarterly basis only. It did not happen at all, that's why I want you and Shehaan to include them in the formal monthly follow-up for all distributors. If it ends-up being quarterly with them, it's OK as long as we formally follow up. Their adherence to this contractual obligation is a cause of termination we've never put ourselves into a position to use. The challenge will be for you to position yourself as a support to Insight and by being non-threatening talk them into being more integrated etc … 36 On 31 January 2007 Mr Le Bail advised the plaintiff that Mr Paholski would become Business Unit Manager - Nuclear Medicine as and from 29 January 2007. That advice stated that Mr Paholski would be a "great asset in assuring the interface between" the plaintiff and the defendant and that he would spend 50% of his working time in this role and 50% as the Operations Manager for Healthcare Informatics. The reference to a "funnel" was a reference to a document known as a "sales funnel" that Mr Paholski used in Healthcare Informatics to obtain information in relation to sales and proposed sales. The reference to Shehaan was to Shehaan Fernando, the then Channels/Consumables Division manager of the defendant. By this time the defendant had received a number of complaints about the plaintiff's performance. In January 2007 there was a meeting between Mr Le Bail, Mr Paholski and Mr van Dyke in which Mr van Dyke said to Mr Paholski: Mike, there has been a lot of hearsay about Insight not performing. We want to have the agreement with Insight strictly enforced. We want everything documented and we want to know what is going on in the market. We are not sure that we are receiving accurate information from Insight about the market. February 2007 37 On 1 February 2007 Mr Le Bail and Mr Paholski met with Mr McDonald at the defendant's offices at North Ryde. During this conversation Mr Le Bail asked Mr McDonald to go through the "sales prospects". He asked him what was happening in the first quarter because the defendant had not received any orders from the plaintiff for 2007. Mr McDonald advised that the first quarter was "usually quiet". After this meeting Mr Paholski informed Mr Le Bail that he would adapt the sales funnel document as a template for Mr McDonald to use so that the defendant could get something in writing in relation to the plaintiff's sales and sales prospects. Mr van Dyke advised Mr Paholski that he needed "to make it clear that Insight need to meet their obligations". March 2007 38 On 12 March 2007, Mr Paholski wrote to Mr Le Bail advising him that he had been reviewing the plaintiff's contract and had noted that there were areas where the plaintiff's responses to requests for critical business data had been "slow, incomplete or even non existent". Mr Paholski suggested the following: In order to establish a better flow of communication between Philips and Insight I am proposing that we hold a meeting once a month. At this meeting I propose that both as a funnel review and also to address any service and marketing support issues should occur. 39 Mr Paholski suggested a single point of contact between the plaintiff and the defendant before he started "pushing too hard". The pro-forma funnel document, enclosed with that e-mail to Mr Le Bail included the following: 2007 Pipeline USD AUD State End User Product order intake date required delivery date IVP end user price % buy % winComments / Issues Booked Longer term prospects 40 On 14 March 2007 Mr Paholski sent the pro-forma sales funnel to Mr McDonald with a proposal that they meet monthly to discuss the market position service support items. The covering e-mail included the following: As we have discussed several times, Philips requires the regular reporting of sales forecast and market data information. So far the responses to my requests have not been satisfactory in both the level of detail or the timeliness of the responses. As just one consequence I am unable to negotiate improved pricing for the Brightview for the ANZ market as I can not support my case due to lack of data. If you are unable to furnish this data the price supplied to you previously will have to stand. I would like to remind you that Insight has a contractual obligation to supply the following information every four weeks. (a) Names of active sales prospects and status of sales, (b) Government regulations affecting PRODUCTS, (c) Competitive products and competitor's activities, (d) Prices at which PRODUCTS and components are sold to end-users, (e) Sales forecasts, including product type and expected purchase price, for the next four (4) calendar quarters, and (f) All available market data for the TERRITORY with regard to volume of similar products purchased within the TERRITORY and average selling price the same. 41 On 19 March 2007 Mr Paholski wrote to Mr McDonald in the following terms: just a reminder that direct communication with the PMG is not allowed under the terms of your contract. Please do not put people in a position where they feel they are being rude but refusing to speak to you and your team. 42 This email apparently arose as a result of Mr McDonald contacting the Philips factory directly without notifying Mr Paholski of his intention to do so. Mr Paholski's evidence was that this reminder was in relation to the plaintiff's obligations under clause 5.11 of the Agreement that was introduced by the Deed of Amendment in 2006. It required the plaintiff to deal solely with the "nominated representatives" of the defendant in connection with all matters pertaining to the Agreement and the distribution of the products unless authorised otherwise by the defendant. That clause highlighted that the plaintiff was not to approach the defendant's "supply centre" in connection with any matter without first notifying the defendant's General Manager Sales & Marketing in writing. It seems to have been introduced as a result of the representatives of the plaintiff contacting the supply centre directly in circumstances where clients were complaining about the delay in the supply of spare parts and the like. It is clear that when Mr Paholski wrote to Mr McDonald on 19 March 2007 he was quite irritated, which is understandable in the circumstances. 43 In April 2007 a press release was issued by the New Zealand First Party in the following terms: Bureaucracy Delaying Pet Scanning Decision The snail-like progress of the case for PET scanning is another example of bureaucracy gone mad in the health system says New Zealand First's health spokesperson Barbara Stewart. "PET scans can save lives and refine treatment options thereby saving money at the same time. PET scanning has been available in Australia since 1992 where 20 million people have access to 12 PET scanners. New Zealand's public health system has none. Cancer patients have to pay their own way to Australia or, if they are very lucky, their DHB pays for them. "Somewhat belatedly the Cancer Treatment Working Party presented a report to the Ministry of Health on PET scanning in mid 2005, and the Ministry of Health eventually started drafting a proposal in March 2006. As detailed in the attached answer to a written question the proposal is slowly wending its way through the bureaucratic maze and is still some way from the finishing line. "If a favourable decision is made there will still be a set up time – possibly years – during which time patients will either have to travel to Australia or continue to miss out on the benefits of advanced technology. "We have a population of 4.1 million. At a minimum we could probably get by with two scanners. It beggars belief that decisions about lifesaving equipment can take so long to be processed. "The Minister of Health should be able to expedite the process. The word accountability again rears its ugly head. Cancer patients and their families deserve much better treatment than this and the buck stops with the Minister," said Mrs Stewart. 44 The question referred to in that press release was a question for the Minister of Health, the Honourable P Hodgson, on 22 March 2007 included a request for information of the expected timeline until a final decision on the adoption of PET scanning. The Minister set out the history of the report and a working group and advised that chief executive officers of the National District Health Boards would consider the business case at a meeting on 25 June 2007 with a final decision expected in early July 2007. 45 On 17 April 2007 Mr van Dyke asked Mr Paholski to follow up an expression of dissatisfaction in relation to Philips products that had been purchased by the Monash Medical Centre in Clayton, Victoria. Mr Paholski and another member of the defendant's staff met with the director of nuclear medicine of that institution in late April 2007. Mr Paholski reported to Mr van Dyke that the director had "strongly emphasised that Insight had greatly improved in the quality of service and sales support and on the whole he was very satisfied with them now". Mr Paholski thought it was interesting that the director had attributed that improvement to Mr McDonald moving out of the sales management role. It is apparent that in that meeting Mr Paholski was advised that the plaintiff had blamed the defendant for delays in the supply of equipment. Mr Paholski advised Mr van Dyke that he thought it was an "easy option" for the plaintiff to blame the defendant for service and delivery issues and he thought it was "happening far too often". He advised Mr van Dyke that he would discuss that matter with Mr McDonald the following weekend at the Australia and New Zealand Society of Nuclear Medicine (ANZSNM) scientific meeting. 46 Mr van Dyke asked Mr Paholski to prepare "an overview of the nuclear medicine market" and the defendant's position in the market. He asked Mr Paholski to put together a review that summarised the market and the defendant's "opportunities and options". Mr van Dyke instructed Mr Paholski that nothing "too detailed" was needed and that he just wanted a review that covered the business "as a whole including sales, marketing and customer service". Mr van Dyke asked Mr Paholski whether he could have the report by the end of the month because he wanted to get an understanding of the business. 47 On 28 April 2007 Mr Paholski attended the ANZSNM meeting on the Commonwealth PET Data Collection Project. The data that was analysed at that session had been collected between 1 March 2003 and 15 April 2005. It was reported that the data unequivocally demonstrated the significant impact of PET on management and outcomes in patients with suspected recurrent colorectal cancer and that it was the preferred imaging technique in the management of patients with suspected recurrent ovarian cancer. Mr Paholski claimed that when he left the meeting he had the impression that there was a consensus within the medical community that PET was a superior diagnostic and imaging tool which could substantially change the way in which patients were medically treated, resulting in better outcomes for patients and more cost effective procedures for operators. 48 Mr Paholski did not make any mention in his statement of evidence of a discussion with Mr McDonald at this scientific meeting in relation to the matter of blaming the defendant for the delay in service and delivery of various parts. Mr McDonald dealt with the discussions he had with Mr Paholski at the scientific meeting in his statement of 2 June 2008. Mr McDonald agreed that at the time of the meeting there was a consensus in the Australian medical community on the clinical efficiency of PET scanning, however he claimed that this consensus arose many years prior to that meeting and that the information was not new. In a conversation with Mr Paholski at the meeting in relation to the information, Mr McDonald informed Mr Paholski that this information had been known for some time and that the reason the research was undertaken was that the Federal Government required the information to be validated locally. May 2007 49 Mr Paholski gave evidence that during the ANZSNM meeting on 1 May 2007 he met with Young Chun Kim (Mr Young Chun), from the defendant's associated company in Singapore to which the defendant reported, and Olivier van der Borght from IBA, a manufacturer of cyclotrons. Mr Paholski claimed that Mr van der Borght advised him that IBA was expecting three cyclotron orders in Australia for Adelaide, Nepean and the Brain and Mind Institute (BMRI) in 2007. Mr Paholski claimed that he understood from this meeting that there was an "increased chance" of PET and PET/CT activity in Australia associated with those three cyclotron orders. He also said that he was aware that the plaintiff was the distributor for IBA. On 3 May 2007 Mr Paholski reported by email to Mr Le Bail that: At the ANZSNM meeting it was quite obvious Andrew has been sandbagging on several large opportunities. In a meeting with Olivier Van der Borght from IBA we learned that they expect 3 Cyclotron orders in Australia this year, Adelaide, Nepean and BMI? We can expect some PET activity to [be] associated with this but there is nothing in the funnel. 50 The plaintiff read an affidavit from Mr van der Borght sworn on 2 June 2008 without objection. Mr van der Borght was not required for cross-examination (tr 193). Mr van der Borght's evidence was that he did not remember that he said the words attributed to him by Mr Paholski or any words to that effect at about the time of the ANZSNM meeting. He said that he understood that Mr Paholski's reference to "Nepean" was a reference to the Nepean Hospital, however at the time of that meeting he had never heard of that hospital. His evidence was that BMRI was not a sales prospect for IBA until well after the ANZSNM meeting and did not come about until about August 2007. Mr van der Borght considered the Royal Adelaide Hospital, to which he understood Mr Paholski was referring in his description "Adelaide", to be a longer term prospect which would not consider purchasing "for a long time to come". 51 In early May 2007 Mr Paholski and Mr McDonald had a conversation in which Mr McDonald advised Mr Paholski that there was "movement in the New Zealand PET market and we need to get in there as soon as possible". Mr McDonald advised Mr Paholski that the plaintiff was trying to influence the market at a high level and that it would like to hold a PET symposium in New Zealand. 52 In the period 6 to 9 May 2007 Mr Paholski attended the defendant's Singapore Learning Centre for a nuclear medicine product training course. Mr McDonald was also present at that course. Mr Paholski, Mr McDonald and Mr Young Chun had a conversation to the following effect: McDonald: I am concerned about the overlap between the BrightView and the Forte and would like to have some BrightView systems installed quickly in order to seed the market in Australia and New Zealand. Would you consider special pricing on the basis of a multi-unit commitment from Insight. Young Chun: How many units are you talking about? McDonald: About five. Young Chun: What time frame? McDonald: This year. Young Chun: You would need to take delivery in 2007. McDonald: Yes. I would be interested depending on the price. Paholski: I will discuss this with Young Chun further, we will need to get approval for this from the factory. McDonald: I also have some strong prospects for refurbished PET. The prices I've been seeing for this are not realistic. If I were to bundle up several refurbished systems would I be able to get a discount? Young Chun: What systems would you be interested in? McDonald: We would be looking for Allegros, a Gemini Dual and a Gemini 16. Young Chun: I'll make enquiries about which systems we have in stock and discuss this further with Mike. McDonald: Okay. 53 On 9 May 2007 Mr McDonald wrote to Mr Paholski by email in the following terms: InSight would like to investigate the possibility of purchasing a demo/training Brightview system. We would use this system to allow local FSE training in Australia (perhaps this could also be useful for Ray) and customer demonstration. An add on value to this would be that it would allow us to deliver a system to customers much faster than the current lead time allows. The likelihood is that we would only have this system for the first 6 to 12 months, unless the model proved successful for customer delivery timelines. In order for us to consider this we would need some strong pricing concessions as this would be taken up on our books. Can you please see if you can start discussions with the PMG as to how strongly they would support this. If you have any questions or suggestions as to how we could make this more attractive to the PMG for a positive response please feel free to pass them on. 54 Mr Paholski gave evidence of the contents of an email, which is not included in the evidence, dated 12 May 2007, that he received from Mr McDonald. His evidence was that the email included the following: As you know the NM market has moved strongly towards SPECT/CT and we would like to take advantage of the quoting opportunity as soon as possible to stem the slide of business towards our competitors. 55 On 15 May 2007 Mr Paholski wrote to Mr Le Bail attaching two documents; one entitled "Business Case Model – hostile change over"; and another entitled "Business Case Model - clean change over". The email was in the following terms: I have been working on these sheets for some time and now I am back in Sydney have had an opportunity to check my costing assumptions with Casey. Can you please do a sanity check before I pass them on to Harry? I would really appreciate some coaching with this. The hostile sheet assumes we terminate the agreement and Insight retains the CS business. The Clean change over assumes we take over the installed base. 56 The attachments with that email were excel spreadsheets and graphs. Mr Le Bail responded to Mr Paholski's email on 16 May 2007 and Mr Paholski responded to Mr Le Bail's email on the same day. The following is a combination of the two emails with Mr Le Bail's comments in italics: Eric, thanks, I really do appreciate the assistance. I will answer your questions here to be complete, 1. Small comment but I guess it is unconsequential number wise: you included Gamma cameras in SPECT/CT line. Why no Pros in the hostile model? What's different? From information have at ANZSNM there is just about to be additional $100 Medicare rebate for CT attenuation corrected SPECT, this will all kill the low end SPECT market. (I am currently pushing the PMG for firm roadmap & pricing on Brightview SPECT/CT and discounts on Precedence in 4 public hospital prospect to protect out OIT this year) No PROS is a typo, thanks I'll fix that. 2. There is no price erosion. We could assume it would be compensated GM-wise by the factory reducing IVPRs but top line should be impacted. If not included in the model, should be noted somewhere. Yes, there is also no modelling for CPI on service contracts, is not a fine detail model. I'll note my other assumptions. 3. The overall profitability of the hostile model is based on being successful in selling more than one unit every year. o What makes you sure we can achieve that with absolutely new sales force and knowing the fight we'll get from Insight amongst their good customers. Do you have an absolute conviction it is achievable from your contacts with Monash, the Austin etc…. o Is there any other chance the market would develop from new rebate schemes? I assumed that we removed the right from Insight to sell all together, thinking both PMSA & Insight selling would be damaging in the market. There is a potential for there to be a PET rebate in November, but I think this is dangerous to bet on. I also have a proposal to reestablish our contact with the Market using Anne for Level 2 applications – She would be trainer for Insight and introduce new product to the Marconi installed base. 4. Another chart representing the impact of additional commercial on the overall PMSA's selling expense % should be presented. Please ask advice from Casey. Thanks 5. A Power point introducing the concepts/assumptions put in the spreadsheet would be good and would allow Harry to challenge them. Thanks My feeling: It is quite optimistic to assume we could achieve the same commercial business in 2008 through the hostile model as through the smooth model. We'd need better soft datas/market analysis to sustain that. Okay, I'll revisit my assumptions. Explain how not having a cyclotron would not be a handicap, how we could compensate Insight hostile attitude through loyal Philips customers (Monash, QXR?). From my informal meetings with IBA, Insight is not the exclusive distributor for them, they reserved the right to go direct if they feel they will lose. Also both GE & Siemens have their own cyclotron, IBA have an informal agreement with Philips, which I think is about to get formal – I saw a spot on the Org chat in Singapore for Proton Therapy, we are either going to partner with IBA or buy them at a guess. There is also one non aligned Japanese cyclotron manufacturer, Sumitomo who appear to be entering the ANZ market. 57 Mr Paholski was cross-examined about this series of emails as follows (tr 457-459): Q. And you're asking for a sanity check? A. Yes. Q. About costing assumptions? A. Yes. Q. May we take it from that that you are actually trying to see if you can get your assumptions right for the purpose of this report? A. I'm asking – let me have a – as I recall, I was asking Eric to review the spreadsheet to check that I had included everything that would be expected in such a model. … Q. And you had asked Casey to check the modelling you had done in relation to the costing assumptions? A. Yes. Q. And had Casey told you that the costing assumptions appeared to be reasonable? A. Costing assumptions in regard to the cost of Philips staff and head counting and salaries, et cetera, yes. Q. So you didn't need Mr Le Bail to check the costing assumptions because Casey had already done that; correct? A. That's correct. Q. And when you asked him to do a sanity check, you are asking him to check the other assumptions, weren't you? A. No, I was asking him to review that what I was trying to accomplish made sense. Q. You wanted some coaching? A. At some level, yes. Q. Can I put this to you for your consideration: there really isn't any point taking the time and trouble to make sure costing assumptions are correct if in the same model you're of the opinion that the growth in the market assumption is unrealistically low; would you accept that? A. The data I used for the growth in the market assumptions was based on our CMM data and I highlighted that as the one per cent, so. Q. It really makes what Casey was asked to do a bit of a waste of time, doesn't it? A. No. … Q. That's because Mr Le Bail was questioning, wasn't he, whether it was appropriate to assume – withdraw that. In the second bullet point, he asked you this question: Is there any chance the market would develop from new rebate schemes? See that? A. Yes. Q. And self-evidently what he's doing there is asking you a question which goes to the question of the assumed market growth? A. Yes. Q. And he's pointing out to you that perhaps you should consider whether there's a possibility of there being any change in the government's rebates scheme? A. Yes. Q. Obviously, because if there was a possibility of that happening, it might have an effect on the market growth? A. Yes. … Q. In paragraph 3, the second paragraph which starts with the words "There is", is your answer to the question posed by Mr Le Bail in the second bullet point in paragraph 3; correct? A. That's correct. Q. And you say to him: "There's potential for there to be a PET rebate in November, but I think this is dangerous to bet on." A. Yes, that's what's there. Q. It's always dangerous to bet on what the government may or may not do in the future, is it not? A. Depending on the underlying information. Q. It's always dangerous – and I say this with the greatest respect to Governments – to take what anyone tells you what a government might do in the future at face value, is it not? A. No. Q. But certainly as at May 2007 you thought it was dangerous to make any predictions based on any prospect of a change in government policy? A. At that time, yes. 58 On 17 May 2007 Mr Paholski sent his report entitled "ANZ Nuclear Medicine Marketing Strategy Evaluation – Bringing Nuclear Medicine back 'inhouse'" to Mr van Dyke. In the covering email to Mr van Dyke, Mr Paholski wrote: I very obviously have a vested interest in moving the business to a direct model. As a consequence, in the model I have endeavoured to be extremely conservative with all estimates and assumptions. 59 The Executive Summary of the report included the following: This report is high level analysis of the relative merits of maintaining or terminating the existing distributorship arrangement for Nuclear Medicine Products in Australia and New Zealand. In this analysis two options of moving to a direct market model and their potential impact have been modeled. Based on the analysis carried out in preparation of this report, it appears attractive to investigate in closer detail the transfer of the Nuclear Medicine Business from a distributor to a direct sales model. This conclusion is arrived at based both of ( sic ) the financial and strategic advantages available to Philips by moving in this direction. 60 Mr Paholski chose a figure of 1% as the market growth as an assumption for his analysis. The narrative of the report also included the following: Strategic Value The option to bring the Nuclear Medicine product portfolio back "in house" offers a number of important strategic opportunities, key among these are the ability to truly be able to take control of key accounts with a One Phillips ( sic ) approach. Closely following this is the ability to provide more profitable bundling to the market. The ability to have market intelligence in house at both a local sales office and market level also presents opportunities that are currently not being capitalized upon. Ability to execute Given the status quo execution, has been successful. These ( sic ) are no major issues with execution. There are areas which could be improved upon including marking (sic) intelligence, parts supply and closer monitoring of customer satisfaction. These improvements will requirements (sic) modification to the existing distribution agreement to be enforceable. Should the decision be taken to take over the direct marketing and sales there are a number of obstacles that must be address (sic) to be successful. These include staff recruitment, training and the establishment of customer relationships. This (sic) size and costs of these tasks have not been considered in the report. There is also the method of the take over of business to be considered, the clean option would require the purchase of the business the costing of which is also beyond the scope of this report, although Appendix B and C give an indication of the likely costs. It is also unlikely that Insight would not resort to some sort of legal manoeuvre during any take over, yet again the cost has not been considered in this report. Potential time delay causing market uncertainty and loss of sales have has (sic) been modeled over the first two years based on the listed assumptions. 61 As part of the risk evaluation of maintaining the then current arrangement with the plaintiff, the report identified the strengths of that position as: the established market presence of the plaintiff; the low cost to the defendant; access to complementary products; and connection to a good high level relationship in the PET segment in Australia via the plaintiff. The weaknesses were identified as: the dependence on the plaintiff for market intelligence including pricing and market share; an alleged lack of co-operation by the plaintiff for bundling opportunities; and a lack of a local sales presence in New Zealand. 62 The opportunities involved in maintaining the current arrangement identified by Mr Paholski in the evaluation were: · PET TF technology has market advantage for possibly another 12 months · Improve bundling · There is a potential surge in the Australian PET market with the end of the Commonwealth PET data collection project which provides a positive outcome in the areas studied. 63 Mr Paholski went to some length in his statement of evidence dated 16 May 2008 to describe what he had done in this review. Although it is a somewhat lengthy extract, it is significant in relation to the defendant's intention in setting the sales goal and I will set it out in full. It was as follows: 74. In the NM Business Review, I set out three broad scenarios. The first was an analysis of Philips' then relationship with Insight. The second was an analysis of a hypothetical purchase of Insight's business (referred to as the "Clean Transfer" model in the NM Business Review) so that the service contracts which Insight has with customers would be assigned to Philips and Philips could sell nuclear medicine products directly. The third was an analysis of changing Philips' relationship with Insight (referred to as the "Hostile Transfer" model in the NM Business Review) by using mechanisms under the Distribution Agreement to compete with Insight (by entering into customer service agreements and if possible terminating the Distributorship Agreement). 75. In my opinion as the author of the NM Business Review, the NM Business Review provides a "high level" analysis of the nuclear medicine market in Australia and New Zealand and of Philips' relationship with Insight. It was not my intention to forecast likely conditions in the Australian and New Zealand nuclear medicine market with the modelling contained within the NM Business Review and I did not do so. 76. The modelling contained within the NM Business Review is based upon Philips' Capability Maturity Model (CMM), which is an internal Philips document used for long term forecasting and analysis of trends. The CMM is updated annually in or about March each year to incorporate changes in market conditions. The CMM data used in the modelling for the NM Business Review did not anticipate any change in the PET – PET/CT market in Australia and New Zealand. 77. The assumed growth of 1% that I used in the modelling is unrealistically low. Further the transfer prices used in the modelling were based on 2006 prices, which did not take into account the increase of prices if a new product was released. The clean and hostile transfer scenarios also did not take into account capital expenditure and other associated costs, which would, in my opinion, be substantial in the short term. I also did not conduct any analysis as to how realistic the numbers of units of products used in the modelling were. In that regard, I relied on the CMM to set the market share and I came up with numbers of units of products to fit the CMM data rather than conduct an analysis of what the market was actually doing or was likely to do. 78. I note that my conclusion in the NM Business Review is that further investigations into the "Clean Transfer" and "Hostile Transfer" models may be worthwhile. I intended this conclusion to mean that the NM Business Review should not be used for making a business decision about altering Philips' business relationship with Insight. Rather, it was my intention that the NM Business Review could be used by Harry in relation to his assessment of his concerns regarding customer relations and whether Philips' reputation was being damaged by Insight. 79. It can be seen from the information contained within the sales and service revenue graph (Figure 3) in the NM Business Review and the income from the operations graph (Figure 4) in the NM Business Review, which were drawn from the modelling, that: (1) it was not in Philips' financial interests in the short to medium term to pursue the hostile transfer scenario compared to the remain with Insight scenario; and (2) while the clean transfer scenario was slightly in Philips' financial interests compared to the remain with Insight scenario, this is potentially misleading because the modelling for the clean transfer scenario did not include the costs of purchasing Insight which if included would have a substantial negative effect upon the financial impact of Philips pursuing that scenario. In my opinion, the NM Business Review modelling did not justify on a financial basis terminating Philips' relationship with Insight. 80. I also note that throughout my NM Business Review I refer to a possible PET (and PET/CT) surge. The basis for my reference to that possible PET surge was the conclusions of the Commonwealth PET Data Collection Project as outlined at the ANZSNM on 29 April 2007 and Andrew's interest in early May 2007 in a bundle of refurbished PET. However the PET surge is not factored into the modelling in the NM Business Review as a PET surge was not factored into the CMM. In addition, at the time I was not confident that there would be a PET surge. 64 The spreadsheets in respect of each of the options suggested that the number of additional PET systems in 2008 would be 1, 0, or 2. Paragraphs 74 to 80 of the statement of evidence seem to me to be an attempt to explain why the so-called PET "surge" was not reflected in the Review. Mr Paholski had only been promoted to his new position four months prior to this review. He had been asked personally by the managing director of the defendant in Australia to prepare the review. It is somewhat extraordinary that his evidence was that part of his report was "potentially misleading"; that his assumed growth rate was "unrealistically low"; and that he did not conduct any analysis as to how realistic the number of units of products were. Even more extraordinary is his statement in paragraph 78 that his intention was that the review would be used by Mr van Dyke in relation to his assessment of his concerns regarding customer relations and whether the defendant's reputation was being damaged by the plaintiff. Mr Newlinds cross-examined Mr Paholski about this claim (tr 434-435): Q. Well, certainly the NM report that you prepared does not contain anything that in any way deals with Harry's apparent concern about whether Philips and Insight were providing quality customer service to nuclear medicine customers, does it? A. No. Q. And that's something that you were expressly asked to deal with in the report, wasn't it? A. Yes, that's correct. Q. Is there any reason why you didn't deal with that in the report? A. Because it would be – because it wasn't possible to get that sort of information in the time frame. 65 This cross-examination demonstrated that Mr Paholski's claim that it was his intention that the review would be used by Mr van Dyke in relation to his assessment of his concerns regarding customer relations cannot be sustained. The plaintiff claims that Mr Paholski pursued an aim to get rid of the plaintiff and that this review was a step in that direction. Mr Prather frankly conceded in evidence that Mr Paholski had a vested interest in getting rid of the plaintiff. He accepted that if Insight was removed and the defendant sold directly to the market Mr Paholski would be in a position to manage that business. Mr Newlinds cross-examined Mr Prather further in relation to Mr Paholski's review (tr 231-232): Q. So he is saying, well, we can keep them or get rid of them and here are the strengths, the weaknesses of each idea? A. From his point of view, yes. Q. Of course from his point of view. But he was explaining it to you, wasn't he? A. Yes, he was. Q. And he was pushing the idea of getting rid of them, wasn't he? A. As we - - Q. Wasn't he? A. He was presenting me the different options as he had presented to Harry van Dyke. Q. But he wasn't doing that in a neutral fashion, was he? A. No, probably not. Q. He wanted to terminate, didn't he? A. Mike would have a, a, as previously noted, would have a reason for the termination, yes. … Q. And Mike was pushing the replacement option, wasn't he? A. Mike had an interest in that, yes. … Q. When you read Mike's analysis you did agree with Harry van Dyke that it was slanted towards termination, didn't you? A. Yes. … Q. So you did not think it was slanted towards termination? A. I felt the way that Mike was talking to it and obviously his, as, as stated previously. I mean, Mike has an interest in this and, but I felt that it did not have a compelling basis to make any move. 66 In later cross-examination of Mr Prather the following occurred (tr 304): Q. Mr Paholski wanted to get rid of them, didn't he? A. He did. Q. He didn't like them, correct? A. He had many troubles with them, yes. Q. Of course you would agree that he had a vested interest in getting rid of them? A. Yes. Q. You couldn't really trust too much what he was saying to you about Insight, could you? A. True. 67 Mr Paholski resisted any suggestion that this was an opportunity to get rid of the plaintiff. In cross-examination he gave the following evidence (tr 436-437): Q. Didn't you see this as your opportunity to get rid of Insight? A. No. Q. And didn't you see it to your personal advantage that Insight be terminated as Philips' distributor in Australia and New Zealand? A. My personal advantage would be that I would no longer have to deal with them, so there was an advantage. Q. You were having difficulty getting on with Mr McDonald, weren't you? A. That's correct. Q. But you agree that you had a vested interest in getting rid of Insight, don't you? A. Yes, in the terms I have just described. Q. What, your vested interest is you wouldn't have to deal with Mr McDonald? A. Yes. Q. Wasn't your vested interest that you would become the person who was then charged with selling nuclear medicine products into the Australian market without the need to deal with the distributor? A. No. Q. And wasn't that a good career move for you? A. If the offer was made, it would be attractive. Q. If the offer wasn't made, it would be a disastrous move for you? A. No. Q. Well, you would lose your job, wouldn't you? A. No. Q. Are you telling her Honour that the vested interest – which is your phrase, isn't it? A. Yes. Q. Was not something to do with your career opportunity as you perceived it? A. That's correct, I am telling her Honour exactly that. Q. Because you kept warning people when you showed them your report that they needed to be a bit cautious because you had a vested interest, didn't you? A. I did in that email. Q. And what I want to suggest to you is that vested interest was that you understood it was a good career move for you for Insight to be got rid of? A. No. Q. It would almost certainly mean a promotion for you? A. It would not almost certainly mean a promotion. Q. It would make your job much more important within Philips, wouldn't it? A. If I was given the opportunity and I chose to accept it, it would. Q. And it potentially meant more money for you? A. Again if I was given the opportunity and I chose. 68 I find it very difficult to accept Mr Paholski's evidence in relation to his so called "vested interest". The email to Mr van Dyke made no mention of any difficulties with Mr McDonald or any difficulties with dealing with Insight. I do not accept that Mr Paholski's reference to a vested interest was the personal advantage of not having to deal with Mr McDonald. It may have been a factor but it is quite clear to me that Mr Paholski's vested interest, as he used that term in the email to Mr van Dyke, was the prospect of him taking over the work that would come "in house" and that his role within the defendant would be far more important. July 2007 69 On 16 July 2007 Mr Paholski sent Mr McDonald an article from the ABC News website entitled "Govt rethinks PET scan funding decision". That article included the following: A positron emission tomography (PET) scan is one of the most effective diagnostic tools that can be used to detect whether a cancer remains after surgery. Only a few hospitals in mainland Australia can carry them out, following a decision to restrict funding seven years ago. But the Federal Government is now considering funding more machines because the decision to restrict funding might have been based on bad information. The decision to review funding yesterday followed revelations on the ABC's 7:30 Report that the original decision to restrict funding may have cost thousands of Australians their health, and in some cases their lives. Doctors agree PET scans can help save lives. Australia has just 16 of the machines, 10 of them funded by Medicare. Health Minister Tony Abbott says a strong case can be made for more. "The medical services advisory committee, MSAC, will be bringing a further report to Government at the end of July," he said. "Based on that report, I will be making recommendations to the Government about further funding of PET scanning through Medicare and further potential capital funding of PET scanning". 70 In the covering email to Mr McDonald, Mr Paholski suggested that the view expressed in the article was quite different to Mr McDonald's view and it seemed that there was a potential for PET funding "in the very near future". That email included the following: PMSA now have a dedicated government relations manager, David Wolf. Perhaps he can be of assistance following this through. I would very much like to know who is on the MSAC committee who will be making this decision, particularly in light of the recent purchase of the cyclotrons at ANSTO. This is too much of a coincidence not to be related. 71 Mr Paholski claimed that he had a conversation with Mr McDonald on 23 July 2007 in which he informed Mr McDonald that he was concerned that the plaintiff would not meet its sales target for 2007, even with the BrightView reduction. Mr Paholski claimed that the conversation included the following: McDonald: We'll place enough orders. Paholski: You have to do more than that, you need to have sales as well so that you can install the systems. It's not just order intake. You have agreed to this. You agreed to this with Eric and Shehaan when you agreed to this year's sales goal. McDonald: You would have been stupid to believe me, even if I did agree to that. 72 On 23 July 2007 Mr McDonald wrote by email to Mr Paholski in terms that included the following: Revised pricing for NanoSPECT product. Current pricing is so far from the market it is not even plausible. As stated, if we receive no revision allowing us to be competitive in the market we will drop sales and marketing activity for this product for current year. Our records indicate that our committed revenues to date are approximately 4.9M. This would put us on target for an estimated revenue of $8.4M if we were to continue at the current rate. I believe this is well above the target expected by Eric of $7.445M. We are still waiting to perform a requested demo with PET/CT viewer at a strategic account. This cannot be achieved until we get an upgrade to our demo EBW w PET/CT viewer to allow import of SPECT data. Please advise the mechanism for this to be done? 73 It is apparent that Mr McDonald was still making contact with other entities within the Philips Group directly without the consent of the defendant. On 25 July 2007 Mr Paholski wrote to Mr Hewlett requesting that such conduct cease. Mr Paholski claimed that apart from creating confusion and duplication of the work it was also not permitted under the Agreement. Although Mr Paholski had prepared a draft email to respond to Mr McDonald's email of 23 July 2005, Mr Le Bail suggested that he should not respond in that fashion because of the possibility of inflaming the situation between the plaintiff and the defendant. 74 On 30 July 2007 Mr Paholski wrote to Mr Young Chun in Singapore in relation to the process of fixing the sales targets for the defendant. That email included the following: Just a preliminary comments to the aop 2008 topdown target for NM to ensure you are not surprised by the AOP discussions. 1. As you are aware in 2007 the SPECT market in Australia has changed greatly. There has been the introduction of a government rebate of for Attenuation correction and for CT localisation which amounts to a 20% increase in rebate to the performing physician. This being the case, a SPECT system that cannot be sold with or upgraded to a CT option cannot be regarded as a premium solution. 2. The situation regarding PET remains unclear. There is a chance the government funding position will change, but this in (sic) no basis to make a sales forecast. The is ( sic ) especially true given that the incumbent government will struggle to be re-elected this year, no doubt bringing an (sic) change in policy. The 2007 situation is that there will very likely be no new PET sold in the ANZ market at all, we have managed to get some upside by selling referb product as a socket holding strategy. … In summary I cannot see the logic behind a 42% growth in sales in a market that has no organic growth and the current product mix. 75 The AOP is the Annual Operating Plan and the OIT is the Order Intake Target. The AOP and the OIT are fixed by the Asia Pacific company in Singapore to which the defendant reports. Mr Paholski's evidence in his statement of 16 June 2008 was that when he sent this email to Mr Young Chun he was "not yet confident" that there would be a PET surge through 2008. 76 In July and August 2007 the plaintiff, with the assistance of the defendant, was organising a symposium in New Zealand in relation to the PET market. Mr Paholski claimed that Mr McDonald had advised him that the primary reason for holding the symposium was to educate the New Zealand market and that the plaintiff was expecting "a funding change for the better in Australia for PET". Mr Paholski claimed that Mr McDonald said that the plaintiff had invested a lot of money in the symposium and would not be doing it if they did not think they would get a return. August 2007 77 On 9 August 2007 Mr Paholski met with Mr van Dyke, Mr Le Bail, Mr McDonald and Mr Walstab. Mr Paholski claimed the following conversation took place: van Dyke: It concerns me that you may not be popular with customers because of the way you service them. McDonald: I'm not worried if people like me, as long as they buy from me. van Dyke: We don't have an intention to take over Insight's customer service business but this is subject to your performance as our distributor. You should know that your performance, including your customer service, is always under review. We don't want poor customer relations to harm Philips' reputation or to get in the way of sales. For example, we have a lead that i-Med is looking for six PET units and has this in its capital expenditure budget for 2008 and we wouldn't want poor customer relations to result in the loss of such a significant prospect. 78 Mr McDonald denied that Mr van Dyke said that it concerned him that he may not be popular with customers. Rather he gave evidence that Mr van Dyke had said that it concerned him that some customers had a problem with him and his style. Mr McDonald also said: Not all customers get along with all sales personalities. That is why we have sales people with different social styles within InSight. 79 Mr McDonald denied that Mr van Dyke mentioned anything about taking over customer service but accepted that he stated in passing that he had recently had lunch with Gary Barnier from i-Med and that Mr Barnier informed him that they had budgeted for 5 – 6 PET/CT scanners in 2008. 80 The symposium was held in Auckland, New Zealand on 16 and 17 August 2007. It was primarily organised by the plaintiff with the defendant as a co-sponsor. Mr Prather, Mr McDonald and Mr Paholski were present at the symposium. On 24 August 2007 Mr Paholski sent his NM Business Review document to Mr Prather. Mr Paholski's evidence as to why he did this was as follows: I thought that the NM Business Review document might be useful to him as a summary of Philips' and Insight's performance in the nuclear medicine market in Australia and New Zealand. 81 On 28 August 2007 Mr van Dyke sent to Mr Paholski a copy of his email about the i-Med luncheon which included the following: General discussion about the state of the industry. I-Med business a little "patchy" and Gary [Barnier] feels that he needs to keep a close watch on the performance of his group short term. … I-Med are investing in MR selectively (as we are witnessing) as well as wanting to install about 6 PET/CT's on the back of recent Federal Government decisions. I-Med have also submitted a paper to the Fed on PET/CT expansion and support. Interestingly, I-Med would like us to consider working up a finance package on to fund the PET/CT purchases. This change of strategy is to free up cash for growth and acquisition opportunities as well as improve their ROCE ratios. Gary is happy to have an open book discussion on the finance model. He is willing to commit to a period of time to cover the PET/CT costs but does not want them on the balance sheet of his organisation and wants to be able to have an operating expense only (rental) with no residual implications. We will need help on this one! 82 This email was not forwarded to Mr McDonald. Mr McDonald gave evidence that had it been forwarded to him, or had that matter been discussed with him he could have advised Mr Paholski that he had a meeting with Todd Donaghy, a regional manager of i-Med, in February 2007 and that Mr Donaghy advised him that although i-Med was interested in getting into PET/CT, its parent company CVC Asia Pacific, would not commit to purchasing machines unless and until a sound business case had been established. He would also have been in a position to inform the defendant that Mr Donaghy had advised him that a lot of the prospective sites that i-Med had in mind were not eligible for the MBS rebates and until the government funding changed or i-Med was able to find a partner, it was unlikely that any purchases would occur. This seems to be consistent with the suggestion in Mr van Dyke's email that what i-Med were looking for was a "rental" arrangement rather than an outright purchase. 83 In late August the New Zealand government announced its proposed spending on Research and Development in biotechnology. The defendant wrote to the plaintiff on 28 August 2007 enclosing the figures and suggesting they indicated "the potential for animal imaging" in New Zealand. On 29 August 2007 Mr McDonald suggested to Mr Paholski that a doctor from the University of Pennsylvania, Dr Karp, meet with a number of institutions to talk about the defendant's PET technology. Mr McDonald did not ask the defendant to sponsor the trip but rather to contribute to it as recognition of Dr Karp's stature in the defendant's product development. Mr McDonald suggested that the defendant might view this "as a great opportunity to have a research/developer ambassador in this part of the world". Mr Paholski gave evidence that this request suggested to him that there may be "substantial interest in, and opportunities for, PET/CT through 2008". 84 It was in late August 2007 that the Philip's Asia Pacific office set the defendant's Nuclear Medicine AOP for 2008. The NM AOP set an order intake target (OIT) of EUR5,517,000 which was EUR300,000 more than the NM AOP figure proposed in July 2007. The breakdown of that amount consisted of EUR2,981,000 in SPECT – SPECT/CT, EUR1,916,000 in PET – PET/CT and EUR619,000 in RTP products. The NM AOP set a sales target of EUR5,415,000. The breakdown of that amount consisted of EUR3,114,000 in SPECT – SPECT/CT, EUR1,916,000 in PET – PET/CT and EUR384,000 in RTP products. Mr Paholski gave evidence that the effect of the AOP was that the defendant's nuclear medicine order intake budget for 2008 was for orders to the value of EUR5,517,000 and for sales, being delivered systems, of EUR5,415,000. September 2007 85 On 10 September 2007 a meeting took place at the defendant's offices attended by Mr Paholski, Mr Prather and Mr McDonald. The parties are at issue as to what was said at this meeting, particularly in respect of the prospect of licences being issued in 2008. Mr Paholski claimed that nuclear medicine sales prospects were discussed at the meeting and that Mr McDonald said that Concord Hospital may purchase an upgrade to 16 slice from 6 slice for its BrightView SPECT and that Palmerston North Hospital in New Zealand was looking for a SPECT but did not have funding at that time. Mr Paholski said that in relation to PET – PET/CT Mr McDonald said the following: Hawkes Bay Hospital in New Zealand is looking at a PET/CT. The New South Wales Department of Public Works [New South Wales Department of Commerce] would be looking at systems and we should prepare a bulk discount. The likely hospitals to get systems are Nepean, Prince of Wales, St George, Wollongong and Mater Newcastle. The bulk discount could be for four 16 slice time of flight systems and one 64 slice time of flight system. 86 Mr Paholski also claimed that Mr McDonald referred to the plaintiff possibly entering into a joint venture which would require a refurbished PET. During the meeting Mr McDonald provided Mr Paholski with a copy of the plaintiff's sales funnel. That was apparently the first sales funnel provided to the defendant which contained RTP prospects in addition to SPECT, SPECT/CT and PET/CT prospects. That sales funnel included the following in respect of PET: 2007 Pipeline USD AUD State End User Product order intake date required delivery date IVP end user price % buy % winComments / Issues NSW Nepean Hospital GMN2 DS Q4 2007 Q4 2007 < 8M 10 50%DOC obstruction to project viability NSW Prince of Wales GMN TF Q2 2008 < 3M 20 20%source funds, dept refurb, admin sign-off NSW Wollon gong Hospital GMN P16 DS Q3 Q4 2007 < 1M 50 50%waiting for providsion of service tender to fianlise QLD Mater GXL 16 ? ? 20 100%waiting for site to issue PO and dept refurb QLD PAH GXL 16 ~2.2M 35 50%waiting for funds for ongoing costs to be approved VIC MIA Moorabbin GMN TF Q3 Q4 2007 ~2.5M 30 33%replace older SMS Biograph, working up VIC Austin Health GMN TF Q4 Q1 2008 ~2xM 5 95%no increase to PET reabte, no monies for new camera VIC Austin Health Allegro DS Q3 2007 Q4 2007 $ 395,000.00 99 99%waiting for room to be refurbished to accommodate scanner VIC Alfred Hospital Gemini Q4 2007 Q2 2008 TBA 20 20%funding level not determined yet, site to tender for all options SA Flinders MC GXL 16 TBA gave up funding, need cyclo in Adelaide NZ ADHB GXL 16 Q4 2007 Q2 2008 TBA 10 33%awaitig gov't review of PET NZ TRG GXL 16 Q4 Q2 2008 TBA as above NSW St George Hospital GMN TF Q2 2008 TBA 10 33%System may be provided by Cyclopharma? NSW BMRI GMN TF Q2 2008 25 33%tender for services let, includes 3T MRI, CT, Xray, U/S and PET 87 Mr Prather gave evidence that the following was said at this meeting: McDonald: I expect government licences for 20 to 30 PET/CT in 2008 at approximately 16 new sites. There could be a state bulk purchase in New South Wales of 5 PET machines for St George, Mater Newcastle, Royal Prince Alfred and Wollongong Hospitals. Paholski: Approximately 5 PETs could be purchased by i-Med. 88 Mr Jackman cross-examined Mr McDonald in relation to an entry made in Mr Prather's notes of the conversation alleged to have occurred at that meeting as follows (tr 77-79): Q. Go over please to page 7 and in the middle of the page Mr Prather has recorded the words "expects government licences for 20 to 30 PET CT in 2008" and there is a reference to 16 new sites. Do you accept that you said to the representatives of Philips on 10 September that you expected government licences for 20 to 30 PET CT products in 2008? A. No. Q. I want to suggest to you, Mr McDonald, that you did say those words and that in saying those words you were referring to licences for Medicare rebates for PET procedures to be available; what do you say to that? A. I've said it is incorrect. Q. You absolutely deny, do you, saying words to that effect at the meeting? A. Unequivocally. Q. And do you also deny referring to 16 new sites for PET/CT equipment in 2008? A. Yes. Q. I want to suggest to you that you also said to the Philips representative on 10 September that you expected there to be five new PET CT pieces of equipment sold to the New South Wales government being St George, Mater Newcastle – sorry, St George, Mater Newcastle, Nepean and Wollongong, what do you so say to that? A. I say that is completely incorrect. Q. You did discuss the prospect of five new PET CT products at this meeting on 10 September did you? A. Yes. Q. And you discussed a purchase of the PET CT products at this meeting, correct? A. Yes. Q. By the NSW government? A. Yes. Q. And you also refer to the likelihood of five sales of PET CT equipment to i-Med in 2008, correct? A. Not to my recollection. Q. Now, can I ask you – I see. But you don't deny do you that you may have referred to a likely sale of five pieces of PET CT equipment to i-Med in 2008? A. Sorry – I thought I just said 'no', I did not refer to i-Med sales in that meeting. Q. Do you recall anybody from Philips referring to i-Med sales at that meeting? A. No I don't. Q. Do you positively deny on your oath that anyone from Philips referred to i-Med sales at that meeting? A. Yes. Q. And you of course have no notes in speaking, do you? A. No I don't. Q. So the topic of i-Med sales of PET CT equipment you say was not mentioned at all at this meeting, by anybody? A. Not to my knowledge, no. … Q. …[D]o you believe that there was reference at the 10 September meeting to at least one potential sale to i-Med? A. Yes. Q. Of PET CT equipment? A. Yes. Q. How many sales to i-Med were discussed at the 10 September meeting do you say? A. To my understanding two. Q. And what was the other one? A. The one that is listed here is Flinders Medical Centre. Q. What was the other one – Morrabin? A. The first one being Morrabin. 89 Mr Prather was cross-examined about his claim that Mr McDonald had informed him that he expected government licences for 20 to 30 PET/CTs in 2008. That cross-examination included the following (tr 241-243): Q. May I suggest you ought to remember if it was said because it must have been some sort of bombshell, was it not? A. It was substantial, yes. Q. Well, it was an amazing piece of news to you, isn't it? A. It was. Q. It demonstrated a number of things, did it not. Firstly Mr Paholski's projections forward were all completely wrong because he was assuming the sale of two PET machines in 2008, correct? A. Correct. Q. Secondly, you were going to look fantastic in the eyes of Asia Pacific because you were going to do much better than the AOP, no-one would believe it? A. No, not at all, because if you recall back to the August 3rd conversation I had with Jim Cavanagh, he talked about the opportunities in the PET market in Australia and I said – and what I said is that if the opportunity arises we will go after it. Q. Okay, so it wasn't a bombshell? A. It wouldn't have been a huge revelation because there was hope within the organisation right through to the global business unit for PET that there would be something happening in Australia. Q. Just let me understand this. This is September. Do you remember when the Federal election actually was? A. I believe it was November. … Q. So did you understand that Mr McDonald was telling you what would happen no matter what the result of the election? A. I was basing this on Andrew's involvement and understanding of the Australian nuclear medicine market. Q. Did you ask him where he got this piece of information from? A. No, I didn't. Q. Did you ask him any details, like did you say, well which 16 sites? A. He offered some of that further on in the discussion. … Q. And did you assume, given the 20 to 30 new licences and 16 new sites, that some sites would have more than two machines? A. My feeling there was that some sites would be replacing their older systems. Q. So did you really think that the fact that there would be 20 to 30 new licences would result in 20 to 30 sales of PET machines? I don't mean by Philips but by Philips and its competitors? A. Potentially. Q. In 2008 is that what you understood you were being told? A. Yes. 90 Mr Prather agreed that he may have misheard Mr McDonald but gave the following evidence in cross-examination (tr 244-245 and tr 251-252): Q. And it's possible that what he was talking about was the saturation point of the entire Australian market being 20 to 30 machines, isn't it? A. That's not possible. Q. Why is that not possible? A. Because he said "I expect government licences for 20 to 30 PET CTs, 16 new sites". Q. So there is no possibility that you misheard him? A. The reason why I put it in quotations in my notebook is because that's exactly what he said. Q. And is that because you thought that was an important matter? A. Absolutely. … Q. And it's possible you misheard him, isn't it? A. If I wrote that down that is specifically what I heard at that point in time in that meeting. Q. It's possible you misunderstood what you had been told, isn't it? A. If Andrew McDonald said that and he meant something else I can't speak to that, but what I heard is what I wrote down. Q. It's possible you knew so little about the topic under discussion that you were confused, isn't it? A. I don't know how we could be confused over this quote, "I expect government licences for 20 to 30 PET CTs in 2008 at approximately 16 new sites". … Q. Just because something finds its way into your notes doesn't mean it's accurate, does it? A. If I put something in my notes that was in quotations then that was exactly as I heard it in that meeting. Q. You said at transcript page 244 line 40 on Thursday that the comments by Mr McDonald were in quotation marks, do you remember that? A. Yes I do. Q. The words you used there were in inverted commas? A. Yes. Q. They're not, are they, the words you ascribed to Mr McDonald are not in inverted commas or quotation marks in your notes, are they? A. That's true. Q. Why is it on two occasions in your evidence you have thought it appropriate to tell her Honour that those words are in inverted commas when they are not? A. I must have made a mistake on that one. Q. Isn't it the case that you are trying to overstate the importance and potential accuracy of your notes? A. That's not my intention. 91 Mr Newlinds cross-examined Mr Paholski in relation to whether, at the meeting on 10 September 2008 Mr McDonald mentioned an expectation that there would be 20-30 licences issued in 2008. His evidence included the following (tr 506-507): Q. By the way you don't have any memory whatsoever of Mr McDonald saying at the meeting on 10 September that he expected 15 to 20 new licences to be issued, do you? A. I don't have a firm recollection, no. Q. You don't have any recollection, do you? A. I don't have a firm recollection. Q. You don't have any recollection, do you? A. I don't have a firm recollection. Q. Let's test that; there is no such comment recorded in the notes you took at that meeting, correct? A. That's correct. Q. If such a comment had been made at the meeting you would have considered it an important matter, correct? A. Correct. Q. Your practice is to write down important matters in your notes? A. I try to write down everything that I consider important, yes. Q. So, the fact that there is no reference to 15 to 20 new licences being issued would tend to suggest that it wasn't said? A. No. Q. At least within your hearing, correct? A. No. Q. Doesn't suggest that? A. No. Q. There is no mention in any correspondence that emanated from Philips of which you are aware after September that talks about the 15 to 20 new licences, correct? A. Not that I recall. Q. There is not, is there? A. Not that I recall. … Q. You weren't walking around thinking to yourself one of the reasons I think there is going to be a PET surge is because Mr McDonald told me that 15 to 20 new licences are going to be issued by the government, were you? A. No. … Q. You don't have any recollection whatsoever of anything along those lines being said at the September meeting, do you? A. Not a firm recollection, no. Q. Does that mean you have a recollection? A. I have a recollection of something being said along those lines but I can't recall exactly when. Q. On a number of opportunities after 10 September you were in a position where you could ask Mr McDonald questions about what Mr McDonald thought might happen in the PET market in 2008, correct? A. Correct. Q. The most obvious being the meeting on 2 November? A. Correct. Q. May I suggest to you if you had a vague recollection that he mentioned something about 15 to 20 new licences at one of those opportunities you would have said to him hey, just run that past me again, what is all this about 15 to 20 new licences, that's something you would have done, isn't it? A. It's not something I did. Q. That's because at no time have you had this unfirm recollection that you are telling us about? A. As I said, I do recall something along those lines but just so much has occurred, I just can't exactly pick a time I am comfortable with. 92 Mr McDonald denied that he said the words attributed to him by Mr Prather. If Mr McDonald had made such a statement, it would have been a most important matter to consider in deciding whether there was to be increased activity in the PET sales market in 2008. There is simply no correspondence and no mention of this matter anywhere other than in Mr Prather's note. Neither Mr Paholski nor Mr Prather raised it with Mr McDonald or Mr Hewlett in their subsequent discussions. In particular, in the meetings on 2 November 2007 and 14 December 2007, referred to below, nothing about this number of licences was raised when the parties were discussing the sales targets. In the correspondence in relation to the setting of the sales goal the defendant made no mention of these alleged licences as a basis upon which it increased the sales goal to $16 million. I am not satisfied that Mr McDonald made the statement alleged at the meeting on 10 September 2007. 93 Mr Prather may have obtained an impression about additional licences from elsewhere. It appears he communicated with Mr van Dyke about increased licenses. On 9 December 2007 Mr van Dyke sent the following email to Mr Spittle: Please see note from Phil Prather below. With the market starting to boom as a result of increased licences I think the time has come to challenge the sense of having Insight represent us. A number of key customers have indicated in the last 2 weeks that if we persist on having Insight as our distributor the (sic) simply will go elsewhere. 94 The "note" from Mr Prather is not included in the evidence so it is not clear to what Mr van Dyke was referring when he referred to the increased licences. It appears there may have been reference to Mr Paholski in the "note" because Mr Spittle wrote back to Mr van Dyke on 10 December 2007 advising that he should "make sure you have the legal grounds to proceed" and to "take Mike out of the equation". 95 Mr Paholski gave evidence of a rather self serving nature, that immediately after the meeting on 10 September 2007 with Mr McDonald, he had a further meeting with Mr Prather "to discuss how we should manage the relationship with" the plaintiff "moving forward". Mr Paholski said that at that meeting Mr Prather said: You need to make sure that we live up to our obligations under the contract and make sure that we are good business partners with Insight. You also need to make sure that Insight live up to their obligations under the contract. It appears as though the PET market is going to move significantly, can you re-visit the modelling that you did for Harry earlier in the year so that it incorporates a PET surge? 96 Mr Prather claimed that he said the following at this meeting: We should make sure that we are living up to our end of the contract and make sure we are being good business partners with Insight. We should also make sure that Insight live up to their end of the bargain under the contract – especially in relation to PET sales. There are a whole heap of issues which need to be addressed: o There needs to be trust on both sides. o In relation to service support, we need to see if we can get what Insight thinks is realistic pricing on spare parts. o Insight needs to better manage their installed base report to improve implementation of field change orders and tracking of the implementation of field change orders. o We need Insight to provide us with their spare parts inventory listings so we can review its adequacy. o We don't want customers to perceive that there are arguments between Philips and Insight about who is to blame for the support of their equipment regarding applications training, service, support and spare parts availability. o We need to make sure that when we continue to share our market information, for example i-Med's PET/CT requirements, with Insight to help them improve the accuracy of their sales forecasts. 97 Mr Prather also claimed that the following conversation then took place: Paholski: There are also opportunities in SPECT as there are possible replacements for the Philips' install base of approximately 36 Marconi and approximately 63 ADAC SPECT systems which are nearing the end of their operating life. Prather: We had better make sure that the sales goal negotiations are commenced before 1 November as required under the Distributorship Agreement so that there is no breach of that clause by Philips. We don't want Insight to miss the market if there is as much PET – PET/CT as discussed in the meeting with Andrew. Based on Andrew's positive comments regarding PET, I think you should also revise your modelling to incorporate this PET surge. And we should meet to review the PET situation. 98 On 27 September 2007 an ABC news story entitled "Doctors angry as PET scan delay wears on" was published. That report included the following: Globally it [PET] has been available since the 1990s, but it is still in very limited use in Australia because the Government has restricted funding on its use here, pending years of trialling by its medical research advisory committee. Those trials are now over, the report is in. It reveals what many had predicted: that PET scans prompted a change in treatment in 50 per cent of cases. 99 The ABC report included a reference to the then Minister for Health, Mr Abbott's statements in July 2007, when he "promised action was imminent", and that after the report of the Medical Services Advisory Committee was produced at the end of July 2007, he would make recommendations to the Government "about further funding of PET scanning through Medicare and further potential capital funding of PET scanning". The ABC report recorded that Mr Abbott confirmed that "an announcement was imminent" and referred to the fact that the election was "around the corner" and that both the major parties were promising PET machines in key electorates, one being in Tasmania and another in Geelong in Victoria. October 2007 100 On about 3 October 2007 the Member for North Sydney and then Minister for Employment and Workplace Relations, the Honourable Joe Hockey MP, issued a press release entitled "New $3.5 million PET Scanner to serve North Sydney". That press release announced that the Howard Government would provide $3.5 million in funding for a new PET scanner to be located at RNSH. It also included the following statement by the Minister: I have supported the efforts of doctors from the Nuclear Medicine Department at Royal North Shore in their efforts to gain funding for this scanner. I particularly pay credit to Dr Paul Roach who I have met with to pursue this issue and who has been a very effective advocate for the need for this scanner. I am very grateful that Health Minister, Tony Abbott, has agreed to provide funding for a P.E.T. scanner to be purchased for our area. 101 On 9 October 2007 Mr Paholski sent an article from the New Zealand press to Mr McDonald entitled "Top x-ray scanners for NZ patients". That article recorded that up to 200 patients a year were sent to Australia for PET scans but that an Australian company, Cyclotek, intended to set up a facility in Auckland for a cyclotron and associated production laboratory. The article reported that a chief executive of a major hospital company in New Zealand claimed that this news would accelerate development of a business case to his Board to install a hybrid PET-CT scanner at a cancer centre planned for a hospital in Epsom. 102 On about 19 October 2007 Mr Paholski prepared a document entitled "NM Business review", a PowerPoint presentation in relation to the nuclear medicine market. Mr Paholski said that in this document he referred to the "deterioration of the business relationship" with the plaintiff and the provision of a "Contingency business plan" which summarised personnel requirements if the plaintiff ceased to be the defendant's distributor. Mr Paholski said that he prepared that plan "solely for the reason to demonstrate that a substantial increase in personnel would be required" if the business relationship with the plaintiff continued to deteriorate and the plaintiff ceased to be the defendant's distributor. Under the heading "Insight relationship status" the following appeared: · OIT driven - will not make AOP targets despite verbal agreement to Eric · No regular Funnel updates · No parts inventory provided · No PWC analysis · $100 K of account is in arrears by more than 120 days-parts disputes · No installed base update provided · Last-minute changes to SID (2 x Skylight) · High parts cost – P1 freight – logistics (sic) 103 In the section of the review entitled "Contingency business plan" five people were identified for "Sales/Marketing". Under the heading "Contingency" the following appeared: "Sales targets 2008 - review with Ian Thursday" meaning the in-house lawyer of the defendant Ian Chalmers. Mr Paholski's cross-examination about this document included the following (tr 479 – 481): Q. Can I ask you why you needed to consult with the in-house lawyer concerning the 2008 sales targets as at October 2007? A. It's because it was the first time I had been involved in such a process and I wanted to ensure that I went about it in a correct manner. Q. Isn't it the other way around, you wanted to work out pricing how the contract worked so that you could as best you could manufacture a situation where there would be no agreement as to sales targets by the relevant date? A. No. Q. And you wanted to get Mr Chalmers advice as to how to do that? A. No. … Q. If you go back to page 182 we have the contingency business plan? A. Yes. Q. Which is an outline of what Philips would do in the event that the Insight distribution agreement was terminated, yes? A. It was a gap analysis in our skill set, yes. … Q. So part of the contingency plan was to employ, presumably following the termination of the Insight contract, at least two of Insight's employees? A. They were suggested as possible candidates. Q. Hadn't a decision being taken by this stage to terminate the contract come what may? A. No. Q. You say in paragraph 160 that the contingency plan was prepared solely to demonstrate that a substantial increase in personnel would be required if the business relationship continued to deteriorate and Insight ceased to be Philips distributor, that is what you say, isn't it? A. Yes. Q. There is nothing in the document that you prepared on 19 October 2007 that suggested that there was any likelihood of any deterioration in the business relationship, is there? A. No. Q. Indeed, there is nothing in there to suggest there is any problem with the business relationship, is there? A. I suggest yes, there is a problem. Q. May I suggest this to you also; it is blindingly obvious that if Insight's distribution agreement would be terminated that Philips would need some more staff, isn't it? A. Yes. Q. You wouldn't have to tell anyone that, would you? A. No. Q. And it's not true when you say that that document was prepared solely to demonstrate that a substantial increase in personnel would be required if the contract was brought to an end, is it? A. It is true. Q. Who do you think in Philips needed to be told that? A. The management team that had asked. Q. What they wanted to know was whether you were in a position to organise sufficient people so that Philips could take over the role, that's what they wanted to know, was it? A. That's not my understanding. Q. You were trying to demonstrate that you knew exactly how many people were required and that you had also identified the particular people who would be used? A. No. Q. Nowhere in the document do we find the sentence, PS you should understand that if we bring this agreement to an end it will require a substantial increase in personnel for Philips, it doesn't say that, does it? A. No, it doesn't say that. Q. It is implicit in the document but it doesn't say that? A. That's correct. Q. The reason it is implicit is because it is obvious? A. Yes. Q. The people you were preparing the document for did not need to be told that? A. It was put in the context of which skill sets would be needed. 104 On 23 October 2007, Mr Paholski had a meeting with Mr van Dyke, Mr Le Bail and Mr Prather to discuss "the contingency plan for nuclear medicine if Insight ceased to be Philips' distributor because Insight didn't agree to a PET-PET/CT surge sales goal or did not achieve its sale goal for 2007". At this meeting Mr Paholski presented the PowerPoint document and he claimed the following conversation then occurred: van Dyke: Are you confident that there will be a PET surge? Paholski: Yes. van Dyke: Eric, are you comfortable with the contingency? Le Bail: As a contingency, sure. van Dyke: Mike have you discussed this with Ian? Paholski: No, I haven't. van Dyke: You should discuss this with Ian. Paholski: Ok. van Dyke: If there is going to be a PET surge we should make sure Insight want to take advantage of it. 105 Mr Paholski was cross-examined about this conversation as follows (tr 482 – 484): Q. You had not said to anyone at Insight that you expected there to be a PET surge in 2008, correct? A. Correct. Q. Had you already determined that in the sales goal that you were going to propose there would be built in an assumption that there would be a PET surge in 2008? A. I was beginning to consider that, the amount of background evidence was pointing in that direction. … Q. If we go to page 54 you say that Harry said to you are you confident that there will be a PET surge, this is on 23 October? A. Yes. Q. You just told her Honour a few moments ago as at 23 October you hadn't come to a final view as to whether there would be a PET surge or not, you were leaning that way but you had not come to that conclusion? A. Yes. Q. Why did you tell Harry that you were confident there would be a PET surge? A. I was put on the spot and I said, I was asked to make a decision and I made it. Q. So, it was a snap judgment, was it? A. No. Q. Did you lie to Harry? A. No Q. Does it follow then that you had formed the view that there would be in your view a PET surge in 2008? A. Put in those terms, yes. Q. And did that happen at the time in the meeting when you were asked that question because you were put on the spot? A. It was a time where I made a commitment. Q. Is it at that same point in time that in your own mind you reached the level of certainty to be satisfied that it was reasonable to include an assumed PET surge in the sales goal? A. No Q. When did you reach that level of certainty? A. In reviewing the data in October. Q. Before the 23rd or after the 23rd? A. I can't recall an exact time but it was during the early October. Q. Early October sounds like before the 23rd, doesn't it? A. Yes. … Q. Didn't you say to her Honour some time in the last five or 10 minutes that when you prepared the 19 October document you still had not formed a final view yourself as to whether there would be a PET surge or not? A. Yes, I think so. Q. And didn't you also tell her Honour when I was asking you about the first sentence in paragraph 162 that as at 23 October you still hadn't formed that view? HER HONOUR Q. I can tell you you did tell me that, you said you were leaning towards it? A. Yes. Q. But you hadn't formed that view? A. Yes. NEWLINDS Q. And I took you to the question that you were asked at the meeting on the 23rd and I ask you why you told Harry and Eric that you were confident that there would be a PET surge and you said you were not lying to them and you mentioned that you were put on the spot. Then I think I was exploring the possibility that you actually came to the conclusion in your own mind at the same point in time as you answered that question? A. I really can't say. Q. When you said a few minutes ago that you were put on the spot what you meant by that is that you were asked by your superiors to tell them what your judgment was at a point in time when you actually hadn't concluded your own view as to what your judgment was, correct, that is what you meant by being put on the spot? A. I was asked to make a decision and I made a decision. Q. It was a snap judgment because you were put on the spot? A. It wasn't a snap judgment it was a judgment that I was comfortable with given the information that I had at hand. 106 Mr Paholski agreed that once he had told his superiors he was comfortable with that judgment there was no going back. He also agreed that if he had not been willing to put a figure consistent with a PET surge in the sales target for the plaintiff it would be potentially embarrassing. He agreed that the business decision to put forward a sales goal to the plaintiff in the terms that it was put forward, was based on his advice to his superiors that he was confident there would be a PET surge (tr 485). Mr Paholski was then cross-examined about his claim that Mr van Dyke had suggested that if there was to be a PET surge, Mr Paholski was to make sure that the plaintiff would take advantage of it (tr 487 – 488): Q. There is not the slightest suggestion, there wasn't the slightest suggestion in your mind as at 23 October that if there was a sales surge in PET machines in Australia in 2008, that Insight would not want to take advantage of it, was there? A. No. … Q. Well, what did you think when he said that at the time? Did you think, "Gee, I hadn't thought of that. Wouldn't that be bad if there was a sales surge and Insight didn't want to take advantage of that ". Did you think that? A. No I -- Q. What did you think? A. The context I assumed that we provide incentives and assistance to make sure it was attractive to them. Q. But why wouldn't it be attractive to them to sell more PET machines? A. In the terms of assisting with pricing and-and marketing materials and the things that we do. 107 The difference between the budget or sales target imposed on the defendant by the Asia Pacific company in Singapore and the sales goal put forward by Mr Paholski for the plaintiff was the subject of cross-examination. The reference in this part of the evidence to "NM AOP" is a reference to the Singapore budget. Mr Paholski gave evidence in his statement of 16 May 2008 that in preparing the sales goal that was to be proposed for the plaintiff he reviewed the NM AOP because it was in the defendant's interest that the proposed sales goal was greater than the NM AOP. He also said (par 210): As the Proposed Sales Goal was more than the NM AOP, I thought that the Proposed Sales Goal covered Philips' interests by proposing a target which was at the upper end of what I thought was reasonably achievable but let room for negotiation between Philips and insight so that when a sales goal for 2008 was agreed it would ideally not be less than the NM AOP. 108 The cross examination included the following (tr 515 – 517): Q. Let us just go back to this upper and lower end of negotiations. What are you talking about in relation to upper and lower end of negotiations? A. I had put together a summary of, I guess, units and in particular dollar value in total that I felt that was reasonable. Q. And you have said in paragraph 210 that you thought that was the upper end of what you thought was reasonably achievable, do you see that, about the fourth or fifth line? A. Yes. Q. Let me ask you this question: what was the lower end of what you thought was reasonably achievable? A. My recollection of the - the calculation I did was a little under $12 million in total. Q. And are you able just to focus on the amount of PET machines and tell me how many that involves? A. No. Q. You didn't think in terms of that particularity? A. I looked at - yes, but I - I can't recall the - the spreadsheet that I had in mind when I was doing that. Q. And you were leaving some room for negotiation, were you? A. Yes. Q. And then you say so that when a sales goal for 2008 was agreed, it would ideally be not less than the NM AOP? A. That's correct. Q. Are you saying you would have negotiated down to a level that was not less than the NM AOP? A. No. Q. Well, what are you saying by those words? A. Well, sorry, I am saying that I would have negotiated down but no lower than the NM AOP. Q. Now, the NM AOP was miles lower than $12 million, wasn't it? A. Yes. Q. Well, you just told us a few minutes ago that the lower end of what you thought was reasonably achievable was about $12 million, didn't you? A. That's correct. Q. But you were prepared to negotiate down to something so long as it was above the NM AOP? A. No. Q. No. Isn't that what you just said? A. I - I am sorry, I don't follow your logic. HER HONOUR Q. You are just being asked whether you said a little while ago that you were willing to negotiate down to something just above or about the NM AOP? A. I had a point which I was prepared to negotiate down to and that was above the NM AOP. NEWLINDS Q. Well, what you say in your affidavit is that that is not less than the NM AOP, don't you? A. Sorry, my logic - the way I looked at that, it's a very similar thing, if not the same thing. Q. Well, any number that is more than the NM AOP is not less than the NM AOP; that's right, isn't it? A. Yes. Q. But when you spoke of the number being not less than the NMA OP, you were seeking to define what number you were talking about by reference to the NMA OP, weren't you? A. No. Q. Well, why any reference to the NM AOP at all? A. It – it – it's a number that we - we have targeted internally and that's in particular the sales target that I wanted to achieve. Q. It was a sales target that you had to achieve? A. It's a sales target that we were tasked with achieving, yes. Q. It was your budget? A. Yes. Q. It is completely and utterly disproportionate to what you proposed for Insight, isn't it? A. The target that I was focusing on is the - the sales target so actually invoicing the equipment. Q. And that is completely and utterly disproportionate to what you proposed for Insight, isn't it? A. There is a difference between the two, yes. Q. It is a gigantic difference, isn't it? A. There is a difference yes. Q. You are not prepared to agree it is gigantic? A. That's a relative measure. 109 Mr Paholski's unwillingness to agree to the difference being more than "a difference" drove the cross-examiner to cost the difference. Mr Paholski said that he was willing to accept that the difference was "in that vicinity" of about $US 9 million (tr 518). When asked whether he would accept the proposition that the two targets were "gigantically disproportionate" he said that he accepted "that is a large difference" (tr 519). Mr Paholski was reminded that when the Asia-Pacific company in Singapore put forward a figure for the defendant's budget, he wrote to Mr Young Chun and made submissions as to why the target was too high and suggested that the situation regarding PET remained unclear. That was the e-mail, extracted earlier in this judgment, in which Mr Paholski referred to the chance that the government funding position would change but that it was "no basis to make a sales forecast". In that e-mail Mr Paholski also said that he could not see the logic behind a 42% growth in a market that had no organic growth with the current product mix. Setting the Sales Goal - 29 October to 17 December 2007 110 On 29 October 2007 Mr Paholski wrote to Mr McDonald in the following terms: As detailed in the Distributor Agreement dated 4 April 2005 and the deed of amendment dated 16th June 2006, we wish to begin the 2008 sales targets discussion process. As such the sales goal for 2008 is: Modality System Units Average Unit Price Units Average Unit Price (US$) Total (US$) PET/CT GEMINI GXL 6 1 $ 1,275,000.00 $ 1,275,000.00 GEMINI TF 16 Performance 4 $ 1,790,000.00 $ 7,160,000.00 GEMINI TF 64 Performance 2 $ 2,200,000.00 $4,400,000.00 PET/CT SPECT/CT Precedence 1 $ 750,000.00 $750,000.00 Var. Angle SPECT Bright View 7 $ 280,000.00 $1,960,000.00 Skylight 1 $ 288,000.00 $ 288,000.00 RTP Pinnacle Server 3 $ 197,000.00 $ 591,000.00 Pinnacle Client 6 $ 40,000.00 $ 240,000.00 Total $16,664,000.00 111 On 31 October 2007 Mr McDonald responded by email in the following terms: Thanks for your targets. I am glad to see you have such as ( sic ) strong belief in PET. Can you let me know some of the data behind the PET numbers as they seem a little robust? I am not sure 64 slice is going to be a strong product in ANZ due to the demand on existing system for PET patients. To date only one additional site has been funded, and at a level well below a 64 slice price point. Will talk on Friday. 112 The reference to the "talk on Friday" was to a meeting on 2 November 2007 that had been arranged to take place at the defendant's premises at which it was planned to discuss, amongst other things, the 2008 sales goal. Prior to that meeting a telephone conversation took place between Mr Paholski and Mr McDonald in which Mr Paholski advised that the sales goals in his letter of 29 October 2007 were based on the sales funnel provided by the plaintiff and that the defendant had been conservative by estimating a 40% market share. 113 On 2 November 2007 a meeting took place attended by Mr McDonald, Mr Walstab, Mr Hewlett, Mr Le Bail, Mr Prather and Mr Paholski. Mr Hewlett made a presentation using PowerPoint software which included a summary of the market position for the defendant's products and the plaintiff's sales prospects report for prospects between November 2007 and February 2009. Mr McDonald was cross-examined about some of the discussion that occurred at that meeting as follows (tr 92–93): Q. And you knew also that the sales funnel in September didn't set out all of the prospects that were in the pipeline for sales of PET CT equipment by Insight, correct? A. Correct. Q. At the meeting on the 2nd of November among other things you asked the Philips representatives "Would you consider a contingency based on conditions for PET in the sales target", do you recall that? A. Yes. Q. And Mr Paholski replied "Let's get the discussion going", do you recall that? A. In reference to, I believe it was "Let's get the meeting going". Q. Whatever you believed he was referring you to, you recall him saying "Let's get the discussion going"? A. I have just said I recall him saying "Let's get the meeting going". Q. … Do you agree that following your suggestion about a contingency based on market Mr Paholski said "Let's get the discussion going"? A. I agree to words to the effect. Q. And you said words to the effect "The PET market is uncertain, the federal election has caused some uncertainty about funding"? A. Yes. Q. … And you understood from that – in fact you didn't put forward at that meeting the kind of conditions that you were interested in negotiating for the 2008 sales goal, did you? A. No. Q. … But you understood that Philips was receptive to the idea of conditions as part of the sales goal? A. Yes. Q. … And you understood Philips to be inviting you to put forward conditions for the 2008 sales goal, correct? A. I understood that they would accept a sales goal with some market conditions. Q. … And they were looking to you to put forward what you wanted by way of conditions, correct? A. I don't believe so. Q. I see. But at any rate, you accept that you understood Philips to be receptive to the concept of conditions in the 2008 sales goal? A. Correct. Q. And specifically conditions relating to the market for PET CT products? A. Correct. 114 Mr Hewlett did not recall Mr McDonald asking whether the defendant would consider a contingency based on conditions for PET in the sales targets, nor did he recall Mr Paholski saying "Let's get the discussion going" (tr 150–151). Mr Hewlett did not accept that there was discussion about the sales goals at this meeting, although he did recall Mr McDonald saying that the "PET market is uncertain, the federal election has caused some uncertainty about funding" (tr 151). He accepted that one of the purposes of the meeting was to discuss the sales goals for 2008 but said that the meeting concluded because they "ran out of time before we got to the sales goal" (tr 151). Mr Prather agreed in his evidence that time "ran out" at this meeting and that there was no discussion of the sales target (tr 278; 328). 115 The defendant's written submissions dealt with the meeting on 2 November 2007 at which Mr Hewlett had given a presentation in circumstances where the defendant had already provided the proposed sales goal of $16,664,000 by letter of 29 October 2007. The written submissions included the following: 138 Mr Prather's view was that Mr Hewlett's presentation was being pitched to push down the sales target discussions [Prather T 260.34-37]. He did not think Insight was being straight with Philips [T 264.19]. Mr Paholski, too, thought that Insight were adopting a negotiating position [T 540.33-540.6; T 543.5]. Indeed Insight was not being straight with Philips, because the view being championed by Mr McDonald in September 2008 had suddenly disappeared in the face of the Proposed Sales Goal while, at the same time, Mr McDonald had just announced he would be dedicated to the PET/CT market. Mr Prather was alive to this tension in Insight's position [264.25-34], and viewed Insight's approach "after" 29 October 2007 with scepticism. 116 The evidence referred to in support of the claim that Mr Prather viewed the plaintiff's approach with "scepticism" was as follows: Q. When Mr Hewlett said nothing in his presentation on 2 November to suggest that he anticipated a dynamic shift in the PET market in 2008, did you think he was being honest? A. I did not believe he was being straight – I did not believe he was being straightforward with us. Q. Does that mean you thought he was being dishonest? A. I don't know. Q. Well, is there a difference between not being straightforward and being dishonest, in your mind? A. I believe if he doesn't say something or indicate what their internal strategies or decisions are, that they can tell us the truth but not disclose all the information that they are planning. Example of that was how Mr McDonald intended to stay on not as the relationship person with Philips in that capacity but purely focusing on the PET market and the PET – and as PET sales specialist for Insight. If there was not an expectation there was going to be an increase in PET, why would somebody reduce their responsibilities to focus purely on that market? Q. Is there a difference in your mind between someone not being straightforward and someone being dishonest? A. No. 117 There is an issue about what was said at the beginning of the meeting on 2 November 2007 when Mr McDonald raised the question of linking the proposed sales goal to market conditions. This was a sensible suggestion because neither party knew what, if anything, would happen in relation to possible access to the Medicare Benefits Schedule rebate for PET procedures after the Federal election on 24 November 2007. There is an issue of whether Mr Paholski responded by saying "lets get the discussion going" or "lets get the discussion started". Mr Paholski claimed that he said to Mr McDonald in relation to the proposed contingency based on the market, "what do you suggest". I do not accept that Mr McDonald was invited at this meeting to describe the sort of conditions or contingencies that should be placed on the proposed sales goal at that time. I have no doubt that the intention was to get the meeting started or get the meeting going rather than any discussion started or going in relation to contingencies. 118 The defendant emphasised the fact that Mr McDonald did not put forward any conditions. This has to be seen in the light of what was happening between the plaintiff and the defendant at this time. Both parties were very aware of the personality clash between Mr McDonald and Mr Paholski. That is why Mr Hewlett had been brought in to be the contact point between the plaintiff and the defendant. The defendant also submitted that a "striking feature" of the meeting on 2 November 2008 was that the representatives of the plaintiff did not express any "outrage" at the figure that the defendant had proposed in the sales goal. It was submitted that if the figure were so outlandish, as the plaintiff now alleges, there would have been "heated discussion". The defendant's written submissions also included the following: 152 It is also relevant to note at this point, for the purposes of assessing the reliability of Mr Hewlett's performance as a witness, that his evidence as to the 2 November 2007 meeting was that there was no discussion at all about the sales goal. He said that this was because the meeting ran out of time before they got to the sales goal [T 151.14-22] even though one of the purposes of the meeting was to discuss the sales goal [T 151.19-45]. 153 Mr Hewlett's evidence on this account cannot be accepted. First, he gave inconsistent evidence on the subject, accepting at one point that the meeting had included a reference to the 2008 sales goal [T 150.41]. Second, his evidence contradicts the evidence of every other witness (including Mr McDonald and Mr Walstab) to the effect that there was a discussion about the 2008 sales goal and the question of attaching conditions to Philips' proposal was expressly raised. Third, Mr Hewlett's evidence that a Mr Gibbon of Philips (together with someone called Tony) attended the meeting [T 150.4] was inconsistent with the other witnesses' evidence as to the attendees at the meeting. 119 I do not accept these submissions. The defendant's own witness, Mr Prather gave evidence consistently with what Mr Hewlett said. His evidence in cross-examination was as follows (tr 328): Q. No, not what they wanted for the sales target because you never had a discussion about the sales target on 2 November; remember? A. True. Q. It was a presentation as to what they expected to happen in the market? A. Yes. Q. What they wrote in the letter about the PET market was consistent with what they had said on 2 November? A. Yes. Q. And you say you didn't have time to engage them at the meeting on 2 November about that because you ran out of time? A. Correct. 120 I do not regard Mr Hewlett's evidence as referred to in the second sentence of paragraph 153 of the defendant's submissions as inconsistent, but rather demonstrative of a witness doing his best to recall honestly what occurred at the meeting. He accepted that during the 2 November meeting the discussion included "reference" to the sales goal for 2008, however he said he did not recall Mr McDonald speaking about a contingency and accepted that his memory did not enable him to deny that Mr McDonald did speak about a contingency. In any event, as I say, the defendant's own witness supports the evidence of Mr Hewlett that the parties ran out of time. 121 On 6 November 2007 Mr Hewlett wrote to Mr Paholski in terms that included the following: Subject: 2008 Sales Targets Dear Mike, Please see summary of revised 2008 sales targets as reflected by market changes discussed during our Nov 2nd meeting, referencing market changes apparent in the PWH Q1 and Q2 survey. … PET: Market summary: As we discussed in our meeting on Nov 2nd, the PET market is not expected to change. · Their (sic) has been no changes in re-imbursement for PET scanning · The government is currently in caretaker mode due to the upcoming elections, thus further delaying any chance of reimbursement · Current PET centers (sic) are in limbo as to whether their current reimbursement status will remain intack (sic) while the government is in caretaker mode, putting further uncertainty in the market place · New Zealand has NO PET rebates at all · PET is on the political agenda making future sales (post 12 months) a very likely potential, but in the short term will have no effect. o Example, Westmead was given funds for a PET center, (sic) and it took over a year to confirm where the funds were coming from, where the unit would be located, who was paying for the building works, who was going to run the facility, who was going to fund the staff…etc etc Until such changes occur we would expect the market to remain static. The only defined prospects are Mercy Ascott and RNSH. These would be for a GXL 16 and a TF16. Using the figures you have provided, approx 1.3M and $1.8M USD each that would only amount to $3.1M USD. We would love for the market to open up so we could capture the $12.8M USD proposed…but this is not even close to being on radar for sites who cannot recoup their investments. Modality Model Units Average price US$ Total (US$) PET Gemini GXL 16 1 1,275,000 1,275,000 PET Gemini TF 1 1,790,000 1,790,000 PET Total 3,065,000 … Revised 2008 Sales Targets Modality Model Units Average price US$ Total (US$) RTP Pinnacle Server 1 50,109 50,109 Corrected decimal error RTP Pinnacle Client 5 29,000 145,000 Corrected decimal error PET Gemini GXL 16 1 1,275,000 1,275,000 PET Gemini TF 1 1,790,000 1,790,000 Nuc Med—SPECT/CT Non diagnostic Low-end Non-available 0 0 0 Nuc Med—SPECT/CT Mid Range CT Non-available 0 0 0 Nuc Med, SPECT/CT High End Precedence 1 700,000 700,000 750USD is over current market tolerance DH Variable BrightView 6 280,000 1,680,000 Transfer price is virtually Siemens end user price DH Variable—High End Skylight 1 288,000 288,000 Total 5,928,109 Room drawings 0.00 122 On 27 November 2007 Mr Hewlett and Mr McDonald attended the Radiological Society of North America meeting in Chicago at which they met with Wayne Spittle. Mr McDonald gave evidence that the following conversation took place: McDonald: Wayne, I need some advice as I am not sure how to respond to PMSA's demands for sales targets in 2008. Spittle: Why, what have they asked for? Hewlett: They have increased our sales target by 250% and are demanding a ridiculous amount of PET systems to be sold. Spittle: That's ludicrous, how did they come up with that number? McDonald: We were told that they used a prospect report we sent them to generate it. From my calculations they would have had to assume that everything on it was a 100% plan to purchase. The prospect list contained a lot of accounts that want PET but have no funding. As you know every Hospital would buy a PET scanner if someone gave them the funding. Spittle: Since when is using a prospect list a valid method for generating budgets? The Australian market is a flat market in diagnostic imagining. Don't accept the budget if you fight it you would win. I probably shouldn't have said that. We would expect Australia to have an increase of about 6 to 7 per cent. That's CPI plus a little growth. McDonald: If we offered 8 to 10 per cent would that be reasonable? That is CPI plus a pretty reasonable growth? Spittle: That should be fine, they couldn't expect more than that as they are not expected to meet that even. McDonald: Thanks for your help, it is appreciated. 123 On 27 November 2007 Mr Paholski responded to Mr Hewlett's letter of 6 November 2007 in terms that included the following: SUBJECT: 2008 SALES TARGETS Dear Mr Hewlett, Thank you for response to the proposed sales targets, we note your comments and would like to address each point. … PET We note your comments of the uncertainly (sic) of the PET market. However on analysis of your sales funnel when supplied over the last 6 months I see that the funnel for PET prior to November was greater than $26 million dollars, but suddenly fell to $6 million dollars after the commencement of sales target negotiations. These prospects, also do not reflect the corporate opportunities for more than 5 PET units that where passed it Insight during meeting earlier in the year, nor several opportunities' (sic) in New Zealand We also note that the existing Medicare funding arrangement has expired but has continued in caretaker mode until the federal election is complete, however we are witnessing unprecedented interest from the corporate sector as well as the imminent release of the NHMRC report on PET. We are also informed that there have been two sales of GE systems which haven't yet appeared in the market survey data or Insights sales funnel. We understand there has been verbal commitment from Royal North Shore Hospital to purchase Philips PET at $1.8 million USD. In summary on the evidence of market size supplied, largely by Insight while the target for PET is a stretch, it is achievable. However given your anxiety I have reduced the target by one Gemini TF16 … Therefore we have revised sales the goal for 2008 to Modality System Units Average Unit Price Units Average Unit Price (US$) Total (US$) PET/CT GEMINI GXL 6 1 $ 1,275,000.00 $ 1,275,000.00 GEMINI TF 16 Performance 4 $ 1,790,000.00 $ 5,370,000.00 GEMINI TF 64 Performance 2 $ 2,200,000.00 $ 4,400,000.00 PET/CT SPECT/CT Precedence 1 $ 650,000.00 $ 650,000.00 Var. Angle SPECT Bright View 7 $ 280,000.00 $ 1,960,000.00 Skylight 1 $ 288,000.00 $ 288,000.00 RTP Pinnacle Server 3 $ 197,000.00 $ 591,000.00 Pinnacle Client 6 $ 40,000.00 $ 240,000.00 Total $14,774,000.00 124 Although this letter still listed the number of GEMINI TF 16 units as "4", it is clear that the defendant intended a reduction to "3" units, reflected in the reduction of the previous figure $7,160,000 by the price of the unit ($1,790,000) to $5,370,000. This reduced the total number of PET scanners from 7 to 6. The overall sales target was reduced by that amount and a further $100,000 in relation to SPECT/CT from $16,664,000 to $14,774,000.00. 125 On 5 December 2007 Mr Hewlett wrote to Mr Paholski in the following terms: Thank you for your letter … of 27 November 2007. With respect to accepted methodologies for creating and formulating sales budgets, we would comment that no currently accepted sales and marketing practises for budget formulation follows the methodology indicated in your recent correspondence. From our evaluation we would be happy to finalise on something approaching the following: Australian medical imaging market is considered to be a flat market. This market would experience the usual CPI growth due to normal inflationary measures. A robust estimate of 2008 inflation would be in the order of 3%. We realise that Philips, like all companies, wishes to realise market growth. In light of this we would accept that a year on year growth of 4 to 5 per cent would be above average. In light of the above we would propose that the global budget for 2008 be increased from 2007 by a factor of 7 or 8 per cent. We would feel that this be reflected in an equal effect across the Nuclear Medicine and Radiation Oncology portfolios. In order to achieve this growth we would ask that you provide us with concrete measures to mitigate the market issues highlighted in our previous meetings, specifically: Non competitive pricing of the dual head variable angle camera Lack of product in the non-diagnostic/low end SPECT/CT market segment Should you have any questions, please feel free to contact me at your convenience. I would like to conclude the 2008 sales target by the end of next week at the latest. 126 On 11 December 2007 Mr Paholski replied to Mr Hewlett's letter as follows: Thank you for your letter of 5 December 2007. We are not sure what to make of your comments about the methodology we have used. We arrived at the target set out in our letter of 27 November by identifying sales trends and market conditions and evaluating market influences. Much of the information we used for our analysis was provided by you. With respect we feel our approach is more useful and market focussed than the methodology proposed by you. Further you state that the Australian medical imaging market is considered to be a flat market. Without wishing to debate the merits of this in connection with sales of medical imaging equipment generally, data provided by PriceWaterhouse Coopers makes it clear this is definitely not the case in nuclear medicine where it is expected the market will grow substantially in 2008. If we simply look at the PET market specifically, where you claim to hold a 60% market share in Australia, if we were to ask you to simply maintain this market share your target in 2008 would be in excess of $15 million for PET alone. In SPECT, where we estimate the market will be around 55 units for 2008, we have set you a very achievable target of 9 units given you sold 8 in 2007. A major issue we have is with Insights forecasting accuracy, as evidenced by you not even being aware that 14 SPECT units were sold in New South Wales in Q3, 2007 and we expect serious efforts will be made by Insight to improve market awareness next year. Dealing with your comments concerning non-competitive pricing we have already addressed this by extending the trade-in program to the end of 2008 and the lack of low-end SPECT/CT has been addressed by release of the Volumetric SPECT CT at RSNA. We consider the targets proposed in our letter of 27 November are both fair and achievable. 127 Mr Paholski wrote to Mr Chalmers by e-mail on 12 December 2007 following terms: I have sent the 2008 sale target letter as you suggested to Insight and requested a meeting. (attached) We now have this meeting confirmed 1.30PM Friday 14 Dec. From the e-mail below it appears that only Jim Hewlett will be present. After reading the distribution agreement the target negotiation period will expire on December 15th. Do we need to give them notice at this point? Can you please confirm your availability for Friday's meeting in case we need to call on you? 128 Mr Chalmers advised Mr Paholski by e-mail of the same day that he would be at a meeting but could be called out if necessary. He also advised that he would not join the meeting unless Insight had a legal representative present. In response to the question as to whether the plaintiff needed to be given notice in respect of what was referred to as "the expiry of the negotiation period" on 15 December 2007, Mr Chalmers advised: I suggest you should make it clear at commencement of the meeting that we expect agreement will be reached during the meeting. 129 On 12 December 2007 Mr Hewlett advised Mr Paholski that he would be attending the planned meeting on Friday 14 December 2007 "solo" and that he was looking forward to "discussing the budget, market etc". 130 On 14 December 2007 Mr Hewlett met with Mr Paholski and Mr Prather at the defendant's premises. Mr Hewlett's evidence was that the following conversation took place: Hewlett: Has the budget that you've formulated for 2008 already been submitted and committed to Philips Asia Pacific? Prather: Yes. We have to submit budgets in October so that Philips can establish global budgets for each region and calculate production requirements. Hewlett: Then what can we do to change the targets? They are unrealistic and it will make both Insight and Philips look foolish at the end of 2008 unless we can change the figures now to something that is reasonably achievable. Prather: It's too late, we can't change the figures now. Hewlett: Well in that case there is no point in arguing over the budget, but you will have to help us try to achieve those figures. Prather: We calculated the sales goal based on your sales funnel. Hewlett: That is not a smart way to calculate a sales budget because the funnel only captures who is interested in the products, not who has the capacity to purchase, and some customers represented on the sales funnel have been speaking about buying the products for years but have not yet done so. It's true that some of those potential customers would have purchased from us this year if the proposed additional Medicare rebates for PET systems were introduced, but the upcoming Federal election means that, depending on the new Federal Government, rebates may not be introduced this year after all. This means that a number of potential buyers (and especially the private customers) may not be in a position to purchase this year as without the rebates they would not achieve a return on their investment. Prather: You can accept the sales goal for 2008 with some conditions. Hewlett: I will sign off on the sales goal [Philips] had proposed, providing that: (a) the market changes in 2008 as [Philips] has asserted in the correspondence; (b) Philips is able to specify accurate delivery times for the Philips BrightView with CT so that we can accurately project how long to stall the market; (c) government rebates in Medicare reimbursement to purchasers of medical imaging equipment are increased early in the year providing enough time for sites to make decisions, building works, and allow for equipment delivery times; and (d) there be some proportional changes in relation to our budget increase in sales of certain of the products to some of the large private imaging groups. Prather: Those conditions are fine. I will send you a copy of the 2008 budget on email so that you can add your comments and sign off on it. 131 Mr Prather's evidence of the discussion at that meeting included the following: Hewlett: I haven't read the contract, is there anything I should know? Prather: One thing you should know is that Insight is at least USD200,000 short of its sales goal for 2007. You should also know that Mike's preliminary sales goal numbers were based upon Andrew's September sales funnel. The contract requires you to provide this information as well as your analysis of the market including the PWC data. Mike schedules these meetings and you cancelled in October. 132 In cross-examination Mr Prather at first said that he felt that Mr Hewlett was "quite naive" not to have read the contract (tr 381). However he later said that he was "incredulous" and that he could not believe that he would not have read the contract and took the question "to be a set up question" (tr 384). There was no discussion at the meeting in relation to the 15 December deadline in clause 4.01 of the Agreement. 133 Mr Prather also recalled that the following conversation took place at the meeting on 14 December 2007: Hewlett: Has your budget for 2008 already been submitted to Philips Asia Pacific? Prather: We submitted our QxP back in August. From this all organisational budgets - head count, etc - are set in October. 134 Mr Prather agreed that in relation to the 2008 AOP, the defendant's target in relation to PET machine sales in Australia was roughly €1.9 million, or equivalent to one new PET machine and two refurbished PET machines (tr 276). Mr Prather gave the following further evidence in cross-examination (tr 277 - 282): Q. And when on 14 December 2007 Mr Hewlett asked you whether your budget with Asia Pacific had been locked in you understood in relation to PET machines he was talking about the budget or target that we have just discussed, correct? A. Yes. Q. And you told him that budget had been locked in, didn't you? A. Yes. Q. And in the context of that discussion that was a lie, wasn't it? A. No, it wasn't. Q. Let me explain to you why it was a lie, it was of course the literal truth, you had locked in your budget with Asia Pacific, you accept that, don't you? A. Yes, we had. Q. But in context it wasn't the truth, was it? A. In what way? Q. In this way; the discussions on the 14 December were entirely relating to whether or not a sales target for 2008 could be agreed upon, correct? A. Yes. Q. There was nothing else under consideration that day, correct? A. True. Q. It was unbelievably important that matter, was it not? A. We believed so. Q. Because on 15 December the time ran out? A. Yes. Q. It was of course no business of Mr Hewlett whether Philips Australia had locked in its budget with Asia or not, correct? A. No. Q. He had no contractual entitlement to be told whether you had or hadn't, correct? A. True. Q. But he asked the question and when he asked the question you knew the reason he was asking it was to work out whether it was too late for Philips Australia to alter what promise it might have made to Asia, correct? A. I believe that was his intent. Q. And the reason, and you understood this at the time, he wanted to know that is because you knew that he was making the assumption that the target you were proposing for Insight was at least in some way commensurate with the target you had locked in with Asia Pacific, correct? A. I couldn't say what he was intending. Q. Can you tell her Honour what other reason you can think of as to why Mr Hewlett would ask you this question in those discussions on 14 December? A. To understand what our requirements were. Q. Why would he want to know that in the context of discussions designed to agree, if it could be agreed, as to Insight's target? A. Because he wanted to know what, my belief was that he wanted to know what they were minimally responsible for achieving. Q. And he was assuming, as you understood it, the target you were proposing for him was about the same as the target that you had locked in with Asia Pacific, correct? A. I guess he could make that assumption. Q. Now, but you knew that was the reason he was asking you that question on that date, didn't you? A. Yes. Q. And you deliberately led him along to continue to think that that was the position, didn't you? A. No. … Q. Because he needed to know whether there was anything left that could be negotiated, correct, yes? A. Yes. Q. Because if Philips were locked in that is really the end of the negotiations, correct? A. Yes. … Q. Can you see now that he would have been left with - can you see now that your conduct in answering the question the way you did obviously left him with the false impression? A. I can see how he could get that. Q. You could see how he could get that impression on the day, couldn't you? A. No, if Mr Hewlett had asked if that was the target that was set there for him then I would have said no it's not. Q. He didn't ask that question? A. No, he didn't. Q. But you know as well as anyone knows that it is not necessary to deliberately, to expressly say something misleading, one can create a misleading impression by what one doesn't say, correct? A. It can be. … Q. You were telling the literal truth and nothing more, correct? A. He asked me if our budgets had been locked in. Q. You literally -- A. And I told him, yes. Q. Knowing full well that answer would convey to him a false impression? A. But I disagree with that, with the fact that our AOP target has to be the same as the sales target. Q. Of course it doesn't have to be the same as the sales target but you knew he was assuming that it was if not the same, close enough, correct? A. I can see how he could get that. Q. You knew on the day that and what he was assuming, correct? A. I could see how he could get that. Q. You knew on the day that is what he was assuming? A. We did not have, I did not have, I did not want to take a position on that day that there wasn't an opportunity for the PET market to take off. Q. You could see on the day that is what he was assuming, couldn't you? A. Yes, I could. 135 It seems to me that Mr Prather knew Mr Hewlett was under the impression that the targets set for the plaintiff in the defendant's letter of 27 November 2007 were roughly the same as the targets set for the defendant by the Asia-Pacific office in Singapore. I accept Mr Hewlett's evidence in relation to the conversation, in particular, that Mr Prather said that it was too late to change the budgets. I also accept that Mr Hewlett responded that in those circumstances, there was no point in arguing over the budget. 136 Mr Prather's recollection of what was said at the end of the meeting is slightly different to Mr Hewlett's recollection of what was said, although both men agreed that Mr Prather said he was going to send the target document to Mr Hewlett and that Mr Hewlett could add conditions or caveats for the defendant to consider. Mr Prather said that at the end of the meeting he said to Mr Hewlett: Either you or the person at Insight with authority needs to sign the sales target agreement and return it to Philips by close of business Monday. I will re-send the target document to you by e-mail. Either you can agree to it or you can add caveats for us to consider. 137 Mr Hewlett's note of the conversation included the following: · Phil then offered that we should accept the sales goal with some conditions. · I did agree that we would sign off on the budget, suggesting these contingencies to cover our (PMSA and InSights) butt …. specifically reflecting that to achieve these goals certain conditions within the market must change, specifically accurate delivery times of the VCT, government changes in Medicare reimbursement to PET, and proportional changes with regards to our budget increase in PET sales to some of the large private imaging groups. · Phil agreed that this would be OK, and said he would send via email a copy of the budget to me to make comments and sign. 138 After the meeting concluded Mr Prather had a discussion with Mr Chalmers and Mr Chalmers then drafted an e-mail for Mr Prather to send to Mr Hewlett. That e-mail, sent at 5.13 pm, did not reflect the agreement reached at the end of the discussions. It was in the following terms: Thanks for coming over today to discuss the issue of the Sales Targets for the Philips Nuclear Medicine products for 2008. Following our discussion, we stand firm on the targets as set forth in the attached letter sent by Mike on 27 November. If you are in agreement with this, please print a copy and have it signed and dated by way of confirmation by yourself or another within Insight with the necessary authority. We will extend the time for this to be returned to us until the close of business, Monday 17 December 2007. 139 Mr Prather was cross-examined about this e-mail. He gave the following evidence (tr 283 – 285): Q. And that e-mail was entirely inconsistent with what you had told Mr Hewlett at the end of the meeting, correct? A. It was. Q. It didn't mention caveats or conditions, did it? A. No. Q. You told him and Insight that Philips had determined it was going to stand firm on its target, correct? A. Correct. Q. Did you change your mind between what you said at the end of the meeting and writing the e-mail or did you deliberately mislead Mr Hewlett when you told him what you did at the end of the meeting? A. No, I was advised to. … Q. Somebody told you to write that e-mail? A. Yes. Q. Who was that someone? A. Ian Chalmers. Q. Ian Chalmers is a lawyer? A. Yes. Q. He is the in-house counsel for Philips? A. Yes. Q. He had been intimately involved behind the scenes in the negotiations you were conducting with Insight from at least about the middle of October, correct? A. Yes. … Q. When Mr Chalmers told you that, he told you that you should write the e-mail that you did write on the evening of 14 December did you tell him that e-mail was inconsistent with how you left the meeting with Mr Hewlett? A. Yes. Q. He told you to go ahead notwithstanding that? A. Yes. Q. At the time did you consider that to be acceptable conduct by Philips? A. I believe that he had a legal basis in which to be directing me to do that. Q. My question was, leave aside what legal lawyers think might be right or wrong, did you think it was acceptable business conduct? A. No in a sense that it did not correlate with what Jim and I had discussed. Q. It would obviously confuse him, wouldn't it? A. Yes. Q. He wouldn't know what was going on because he would remember what you told him at the end of the meeting, he agreed he would read the e-mail, he would see they were saying different things, yes? A. Yes. Q. At the very least that would leave him confused? A. Yes. 140 When Mr Prather made his file note of the meeting of 14 December 2007 it did not include the suggestion that Mr Hewlett could add caveats for the defendant to consider. Rather the file note recorded the following: o Phil told Jim that he needs to sign the Sales Target Agreement - or the person at IO who has the authority to sign at such a level (~ for $14M) and return to PMS by close of business on Monday o Phil sent email to Jim confirming this statement, as below [the email was then set out in the file note] 141 Mr Prather was also cross-examined about this file note as follows (tr 371): Q. You just agreed with me that the meeting concluded by you saying to Mr Hewlett that you will send through a clean copy of the 2008 target for him to write what conditions he wanted -- A. Yes. Q. -- and to send it back. That is how the meeting concluded, correct? A. And there were probably some niceties and things like that at the end and Jim had to run off to his other meeting, but yes. Q. Thank you very much. Now, what you have written in the third bullet point at page 102 is simply false, isn't it? A. No, I did say something to that effect because I wanted to make sure that - that the sales target was signed by somebody who had that authority. 142 Mr Prather agreed that there was a perfect consistency between the file note and the e-mail that was sent, in contrast to the inconsistency between the way the meeting actually concluded and the e-mail that was sent (tr 372). He was then asked (tr 372 – 374): Q. And does it follow from the answers you have just given that your note of how the meeting concluded on 14 December is inaccurate? A. Well, the - the note does not talk about me offering to Jim Hewlett the - the conditions by which we would accept but as far as that third bullet point, which I think that's what you were raising the issue of, that is accurate. Q. Well, it is certainly not accurate that the letter that was sent by e-mail at 5.14 confirmed how the meeting concluded, correct? A. With the discussion of potential conditions, you mean? Q. Yes? A. That is true. Q. Isn't the case that you crafted this note for the purpose of making it as supportive as it could for the case that you knew was going to happen in a court in the not too distant future? A. The file note, you mean? Q. Yes? A. I prepared the file note with accurate information of what occurred during the - the meeting. Q. You prepared it knowing full well that it would be deployed in a court case that you expected to happen in the new year, correct? A. That was the purpose of having to write it up with further detail than what was discussed. Q. And so it was to your advantage in that court case for the note to reflect as well on you as it could and as badly on Insight as it could, correct? A. It was prepared again to document and further detail what - what I had in my notes. Q. You see, it doesn't record that after Mr Hewlett left, Mr Chalmers told you to write the e-mail and that you thought that it was bad business to do that? A. No. Q. Does it? That was an important matter, wasn't it? A. In retrospect it probably would have been a good thing. Q. But, of course, it doesn't make you or Philips or Mr Chalmers look particularly good, does it? A. It - again in retrospect, it – it - I could have recorded that information here. Q. The reason it is not to be found in your note is because it reflects very poorly, especially on Mr Chalmers but also on you, doesn't it? A. I am not allowed to go against my - my internal legal counsel so if he tells me to write that, I need to write that. Q. Yes, but you would be allowed to record in a file note prepared, we would have thought, for amongst other things to record what actually happened, that you were directed by Mr Chalmers to write that e-mail even though it is not an e-mail you would have written if it was your choice, correct? A. That is true, I did not think to do that at the time. … Q. And the reason you have deliberately in the third bullet point misstated how the meeting concluded is because you thought that a conclusion to the effect that Insight either had to agree to the proposed target or not would help Philips in this Court case? A. Not at all. I - I don't deny that I offered him the ability to – to - to put forward conditions so I am not denying that I - I didn't offer him to - to put forward conditions and that we would - would review them and look to accept them. Q. I am not suggesting to you that you are denying that but what I am suggesting to you is that if we didn't have the benefit of you in the witness box and we were operating off of this file note, we would come to a completely different conclusion, wouldn't we? A. From this file note alone, yes. 143 Mr Hewlett did not open his e-mail until around the middle of the day on Monday 17 December 2007. After he read the e-mail he met with Mr Walstab who then telephoned Mr Prather at 4.30 pm in Mr Hewlett's presence. That conversation continued for approximately 45 minutes. Mr Walstab gave evidence that the conversation included the following: Walstab: Phil, we need to discuss the conditions pursuant to which Insight will accept the 2008 sales goal. Prather: As I offered to Jim Hewlett on Friday you can accept the goals with conditions but you have not presented any conditions. I am not prepared to discuss the conditions over the telephone. Walstab: Could we set up a meeting for this week in which we can discuss the 2008 Sales Goal and the conditions pursuant to which Insight will accept it? Prather: John you have three choices, one accept the sales goals, two reject the sales goals and three accept the sales goals with conditions…the choice is yours. I can't commit to a meeting to discuss it right now. 144 After the telephone conversation Mr Hewlett wrote a letter and sent it by fax to Mr Paholski. That letter was in the following terms: We formally request that Philips extend the 2008 budget proposal date to the end of business day of 21 December 2007. We believe the sales goals that are being presented to us are both unreasonable and unachievable in the current market, we have made numerous attempts in writing and verbally to negotiate the figures but to date have only been given token allowances. We can accept the 2008 sales goal with conditions based on market conditions. I request that we meet this Wednesday 19th at 3.00 pm to discuss and finalise these sales goals for 2008. We feel it's in both companies interests to reach a reasonable and achievable outcome. 145 At 5.38 pm on the same day Mr Hewlett sent an email to Mr Paholski and Mr Prather in the following terms: Please see that attached letter requesting further talks to establish reasonable and achievable sales targets. You would have received a fax by end of business today, can you please respond by our close of business day that you have received this. 18 and 19 December 2007 146 On 18 December 2007 the defendant served the 2007 Notice on the plaintiff. It was in the following terms: Re: Distributorship Agreement dated 24th November 2004 We refer to the provisions of clause 4.01 of the above agreement as amended by the Deed of Amendment between Philips Electronics Australia Limited and Insight Oceania Pty Ltd dated 16th June 2006 and advise that as the parties have not agreed in writing to a reasonably achievable SALES GOAL for calendar year 2008 Philips elects to terminate the agreement with effect 90 days from the date upon which this notice takes effect, being 18th March 2008. Until the above date we confirm that business will continue in accordance with the agreement. 147 On 19 December 2007 Mr Paholski sent a letter to, amongst others, the plaintiff's customers, in the following terms: As the owner or operator of a Philips Nuclear Medicine product you will be aware that Insight Oceania has represented Philips in Australia and New Zealand for a number of years. Philips is pleased to announce that as of 18th of March 2008 Philips Healthcare will commence marketing and supporting Nuclear Medicine and Radiotherapy Planning (RTP) products directly to customers in Australia and New Zealand. Prior to 18th of March 2008 Insight Oceania will continue to market and support all Philips Nuclear Medicine and Radiotherapy Planning (RTP) products and will honor all existing orders and warranty and service commitments as agreed at time of purchase. Customers with service agreements held with Insight Oceania will continue to be supported by Insight for the term of the contract. To ensure that there is no impact to this service Philips Healthcare will continue to provide parts and other support to Insight as well as providing second level service assistance as requested by Insight Oceania. After 18th of March 2008 Philips Healthcare will begin to offer a full range of Customer Service support options for Nuclear Medicine and Radiotherapy Planning (RTP) products. 148 After the proceedings were commenced the plaintiff sent a letter to its customers in terms that included the following: The notification sent to customers by Philips Medical Systems recently is currently in dispute and until a full resolution has been given, the court in agreement with Philips has ordered that all customer communications should continue to be with Insight. Insight regrets any confusion which may have been caused by previous correspondence and wishes to advise that Insight will continue to provide full support for sales and service of Philips Nuclear Medicine, PET and RTP products in Australia and New Zealand. 149 On 18 December 2007 Mr Young Chun from the Asia-Pacific office wrote to Mr Paholski asking him for an "update" on various projects and for the detail of any "potential sales of PET equipment in Australia" (tr 389). Mr Paholski responded to Mr Young Chun on 14 January 2008 by e-mail in which he advised that the current "timeline" for the defendant moving back into the Nuclear Medicine market was "uncertain". Mr Paholski enclosed a business plan formulated on the basis that the defendant would sell "directly into the market" around June 2008. The plaintiff relied heavily upon that business plan as evidencing Mr Paholski's true belief in respect of a PET surge in 2008. That business plan forecast only 3 sales of PET CT scanners in 2008, whereas the plaintiff's sales target was for 6 PET CT scanners. Proceedings commenced 150 These proceedings were commenced on 27 December 2007 and the parties have agreed to an interlocutory regime that maintains the commercial relationship for the time being. The matter was set down for hearing for 4 days commencing on 26 March 2008. On the first day of the hearing the plaintiff was granted leave to amend its Summons and Commercial List Statement and as a consequence, the matter was adjourned on 27 March 2007 and re-listed for hearing on 10 June 2008. The matter was finally heard on 10 to 12 and 16 to 20 June 2008 when Mr CRC Newlinds SC, leading Mr P Silver, of counsel, appeared for the plaintiff and Mr IM Jackman SC, leading Mr MR Elliott, of counsel, appeared for the defendant. The contractual relationship 151 The Agreement referred to the plaintiff as "DISTRIBUTOR" and the plaintiff accepted the appointment as the defendant's "exclusive distributor" to market and distribute the defendant's Products in the Territory, Australia and New Zealand. The defendant agreed not to sell its Products in a bundle, which included the "PRODUCTS" as defined, directly to customers in the Territory without the plaintiff's consent (cl 2.02). 152 The relationship was agreed to be that of "vendee and vendor" (cl 18). The parties expressly rejected any notion of agency, joint venture or partnership in their relationship. It was expressly agreed that the plaintiff was not appointed as the defendant's agent or representative and it was also expressly agreed that the plaintiff was not authorised to assume or create any obligation or responsibility on behalf of the defendant or in the name of the defendant (cl 18). Although the relationship is stated to be that of "vendee" (buyer) and "vendor" (seller), the parties agreed to terms that one does not usually find in commercial contracts between a buyer and a seller. This was a far more complex arrangement than that between a buyer and a seller of goods. For instance the plaintiff was obliged to give to the defendant information that would reasonably be categorised as confidential information. It was obliged to give to the defendant every four weeks, the names of third parties that it regarded as "active sales prospects". It was also required to provide to the defendant information about its competitors' products and activities. Importantly, it was also required to provide to the defendant the prices at which the plaintiff sold the products it purchased from the defendant to the end users. It was also required to provide to the defendant information relating to the volume of similar products purchased from other companies and the average selling price for those products (cl 5.07). There was no express restriction in the Agreement on the defendant on the use it could make of this information. 153 Prior to the amendment to the Agreement in June 2006, clause 3.02 provided for automatic renewal of the Agreement at the time the parties agreed in writing to the sales goal. Clause 3.02, as amended in June 2006, provided for automatic renewal unless: (a) the plaintiff failed to meet its sales goals; and (b) the defendant elected to terminate the Agreement because of the plaintiff's failure to meet its sales goal. If the defendant elected to terminate the Agreement on this basis it was required to give the plaintiff 90 days notice in writing on or before 28 February of the year following the calendar year for which the sales goal was not met. At the time the Agreement was amended in June 2006, the parties agreed to give the defendant an additional basis upon which to terminate the Agreement. That additional basis was the failure of the parties to reach an agreement in writing on a reasonably achievable sales goal for the following term by no later than 15 December. If the defendant elected to terminate the Agreement on this basis it was required to give the plaintiff 90 days written notice of that election prior to 31 December. 154 The parties were required to commence discussions by no later than 1 November, to set what was described as an "appropriate" sales goal for the following year. I have no doubt that the parties intended that the "appropriate" sales goal was one that was "reasonably achievable". There was no mechanism set out in the Agreement by or against which the parties were to measure what was reasonably achievable. Clause 5.07 of the Agreement, requiring the provision of sales reports by the plaintiff, had remained unchanged from the time the parties entered into their commercial relationship. It was not amended at the time of the Deed of amendment in June 2006. There is no evidence that the defendant required the plaintiff to produce such sales reports until Mr Paholski introduced the "sales funnel" which then only required some of the information as set out in clause 5.07(a) of the Agreement. The sales funnel did not include any of the matters referred to in clause 5.07(b), (c), (d), (e) or (f). 155 The plaintiff placed orders on the defendant and the defendant had historical data in those orders by which it could assess how much business had been transacted, the nature of the products that were sold and the entities to which the products were sold. The defendant could make some assessment of what may have been reasonably achievable in the following year by reference at least to that information. 156 The parties intended that by 15 December, they would have (or not) reached a written agreement in respect of the reasonably achievable sales goal. Implied Terms 157 The plaintiff claimed that there were a number of terms implied into clause 4.01 of the Agreement in order to give business efficacy to it and so as to enable each of the parties to have the benefit of the Agreement. Those alleged implied terms were as follows: 1. The parties are to co-operate in good faith and honestly with each other in relation to the discussions referred to in clause 4.01 so as to allow every chance for the discussions to produce an agreement within the required time; 2. The parties are required in the course of those discussions to suggest targets which they honestly and reasonably believe are reasonably achievable; 3. The defendant's right to terminate the Agreement pursuant to clause 4.01 is not exercisable in circumstances in which the defendant has not complied with implied terms 1 and 2. 4. The defendant's right to terminate the Agreement pursuant to clause 4.01 is only exercisable for the purpose of protecting the defendant's commercial interest in promoting the Products as defined in the Agreement. 5. Any purported termination of the Agreement under clause 4.01 for any purpose other than in accordance with implied terms 3 and 4 will be invalid. 158 The defendant submitted that the plaintiff's claim that there are implied terms must fail because clause 5.1 of the Agreement provides that it is the "entire agreement and understanding between the parties on everything connected with the subject matter of the Agreement". In my view clause 5.1 does not mean that there are no implied terms, rather it means that it is the entire Agreement with whatever express and/or implied terms there may be within it: Hart v MacDonald (1910) 10 CLR 417, per Griffith CJ at 421 and Isaacs J at 430. 159 Implied Term 1: The parties are to co-operate in good faith and honestly with each other in relation to the discussions referred to in clause 4.01 so as to allow every chance for the discussions to produce an agreement within the required time. This proposed term contains a number of obligations or duties. The first is a duty to co-operate. The second is a duty to act in good faith. The third is a duty to act honestly. 160 As to the implied term that the parties would co-operate with each other in the discussions in relation to the setting of the reasonably achievable sales target, Lord Blackburn's statement in Mackay v Dick (1881) 6 App. Cas. 251 at 263 is apt: As a general rule…when in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of a contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. 161 In Butt v M'Donald (1896) 7 QLJ 68, Griffiths CJ said at 70-71: It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract. 162 The duty to co-operate does not rise above the promises made by the parties to the contract and "cannot over-ride the express provisions of the contract": Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 per Sheller JA (with whom Powell and Beazley JJA agreed) at 368. 163 Mr Jackman submitted that the only thing that the parties agreed upon relevantly was that they would "commence" discussions to set the appropriate sales goal. It was submitted that clause 4.01 did not require both parties to act and that discussions can commence unilaterally with one party putting something to the other, which the other party receives. It was further submitted that the only co-operation necessary was to actually receive the document or oral expression about the sales goal. The word "discuss" is defined as: "to examine by argument; sift the considerations for and against; debate; talk over". The word "discussion" is defined as: "the act of discussing; critical examination by argument; debate": The Macquarie Dictionary Federation Edition, The Macquarie Library (2001). 164 Followers of the art of didacticism may well embrace Mr Jackman's concept of "discussion", but it was not what these parties intended. It seems to me to ignore the commercial reality of the relationship between these two parties. To simply send off a figure to the other side, without more, would not satisfy the requirements of clause 4.01 of the Agreement, irrespective of any implied duty to co-operate. The parties agreed they would commence discussions about the appropriate sales goal by no later than 1 November for the obvious purpose of trying to reach agreement by 15 December. The fact that the Agreement used the plural form of the word (discussions) suggests a process of discourse between the parties as they debated what would be "appropriate" in the circumstances. It was not simply a matter of one party wanting a figure and the other wanting a different figure. The use of the expressions "appropriate" and "reasonably achievable" provided a framework for the parties within which to hold their discussions. They had to co-operate with each other in providing their views on what each thought was reasonably achievable and in debating and considering the reasons why such goals were or were not reasonably achievable. 165 The parties did not intend that the discussions and considerations of what was "reasonably achievable" would occur in a vacuum. These parties had been in a lengthy relationship; were exquisitely aware of the restrictions placed on access to the Medicare Benefits Schedule rebates for PET procedures; were very conscious of the fact that the Federal election was to occur on 24 November 2007; were very conscious of the uncertainties in relation to what would occur in respect of funding for PET either under a returned Federal Government or a new Federal Government; and had access to the previous history of increases in the sales targets over the period of their relationship. The wording of clause 4.01 leads me to the conclusion that the parties intended that they would consider all the relevant surrounding circumstances at the time, including the matters just mentioned, in their discussions in trying to reach an "appropriate" and "reasonably achievable" sales goal. 166 Mr Newlinds submitted that it was important to observe that the parties chose to use the word "discussions" in clause 4.01 as opposed to the word "negotiations". The definition of "negotiate" includes: "to treat with another or others … in preliminaries to a business deal": The Macquarie Dictionary Federation Edition (2001), The Macquarie Library. The concept of a negotiation has a more formal character than the concept of a discussion. Indeed as Wallace JA said in Empress Towers Ltd v Bank of Nova Scotia (1991) 50 B.C.L.R 126 at 135: "In the viewpoint of some negotiators, one is expected to commence negotiations by presenting an extreme position and then, in a series of meetings, gradually withdraw to a more reasonable position". 167 The word "discussions" in clause 4.01 and in the context of the Agreement as a whole, suggests that these parties were to conduct themselves differently to parties in "negotiations". This was a commercial arrangement that allowed one of the parties, the defendant, to have access to most confidential information of the other, the plaintiff. I am satisfied that the parties intended that the process under clause 4.01 was to lack formalism and proceed co-operatively with each party providing proposals and responses as to what they believed was reasonably achievable, having regard to all the circumstances relevant to the sales goal being reasonably achievable. I do not think that it is necessary to imply a duty to co-operate in this regard, because I am of the view that it is clear from the express provisions of the Agreement that this is what the parties intended. If that is wrong then, in all the circumstances, it would be appropriate to imply a duty of co-operation on the parties in the process of their discussions for the purpose of reaching an appropriate and reasonably achievable sales goal so that each party could have the benefit of the Agreement. 168 The second aspect of this alleged implied term is the implied duty to act in good faith. The variety of opinions in both the authorities and commentaries in relation to the implication of a duty of good faith in commercial contracts has been described as "bewildering": Council of the City of Sydney v Goldspar Australia Pty Limited (2006) 230 ALR 437 at 498 par [166]. Unfortunately, Chapter 2 "Good Faith", of the most recent edition of Contract Law in Australia, 5th Ed, Lexis Nexis Butterworths, Australia (2007), now co-authored by JW Carter, Elisabeth Peden and GJ Tolhurst, exacerbates the situation. The authors have declared that [2-01]: Good faith is inherent in all common law contract principles, and any attempt to imply an independent term requiring good faith is unnecessary and a retrograde step. 169 In a section entitled "Good faith inherent in contract", the discussion moves into the area of commercial contracts as follows [2-03]: Our view is that good faith is not an independent concept so much as something which is inherent in contract law itself and therefore a concept which must be taken into account when interpreting a contract, determining the scope of contractual rights and so on. Good faith informs all of contract law and if a particular rule or principle is not producing results which are consistent with our current understanding of good faith, then there is something wrong with the rule or principle. The most important device for ensuring that good faith considerations are upheld in the application of contract rules and principles to particular contracts is 'commercial construction'. The recent cases rely heavily on the implication of a term of good faith, but in our view the better approach is to give effect to the intention of the parties. Properly applied, commercial construction will achieve a result which is consistent with the underlying requirement of good faith. It is, moreover, a technique that has been in use for some time. It usually makes recourse to term implication quite unnecessary. Although this is not simply a disagreement with methodology, the fact that the wrong methodology has been employed has led to the implication of a requirement of good faith having a content which is far too onerous and is, indeed, inconsistent with key features of contract itself. Every aspect of contract law is, or should be, consistent with good faith because good faith is the essence of contract. On that basis, illustrations of good faith in contract are infinite. One criticism of the recent cases is their failure to acknowledge the good faith element of contract rules. Although it has sometimes been recognised that many rules of contract law give expression to ideas that can only be explained in terms of good faith, the implications of this may not have been fully understood or appreciated in the recent Australian cases. 170 This extract contains a number of curious statements; for example, the reference to recent cases relying heavily on the implication of a term of good faith contrasted with the authors' "better approach" of giving effect to the intention of the parties. The authors appear to think that the implication of a term, in this instance to act in good faith, is a process that is not giving effect to the intention of the parties. Where a court implies into a contract a duty to act in good faith the court gives effect to the intention of the parties. Where courts refuse to imply such a term they are also giving effect to the intention of the parties. Another example is the suggestion that 'commercial construction' of a contract usually makes recourse to the implication of a term quite unnecessary. Elsewhere in the text 'commercial construction' is referred to as follows [12-01]: In the context of commercial contracts, whether the issue is one of meaning or leal ( sic ) effect, courts strive to give effect to the principles of 'commercial construction'. This is a convenient description of the characteristics most frequently displayed in the modern approach to the construction of commercial contracts. These include: · proper use of the context of the contract, that is, the factual (and legal) matrix; and · a preference for constructions which are reasonable or sensible and not unreasonable, absurd or inconvenient. 171 If a particular contract warrants the implication of a term then such a term will be implied irrespective of whether it is a commercial, or some other form of contract. It is true that commercial contracts have to be given a businesslike interpretation: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 per Gleeson CJ at 589 par [22]; but that does not mean that implied terms are unnecessary. Additionally the statement that, "Every aspect of contract law is, or should be, consistent with good faith because good faith is the essence of contract" does not lend itself to an easy or precise identification of what the authors were suggesting in this regard. 172 In the section on "Good faith and interpretation" the authors wrote [2-07]: The law of interpretation is at the very heart of contract law. Whatever else may be said about the modern approach of construction ('commercial construction'), it is clear that it is concerned to ensure good faith. The modern rationalisation of the established fact that interpretation is an objective process is a concern to insulate each contracting party from the other's subject (but uncommunicated) intention. No concept other than good faith itself is needed to justify this approach. 173 It is erroneous to suggest that the modern approach to the construction of contracts, whether one refers to it as commercial construction or otherwise, is driven by a concern "to ensure good faith". The courts construe contracts for the purpose of identifying the parties' intentions. The authors also wrote [2-19]: The better view is that because good faith is already inherent in contract doctrines, rules and principles, if a court implies a term of good faith the court is implying a redundant term. Alternatively it is implying a term which, by definition, must impose a more onerous requirement than the good faith requirement found in all aspects of contract law…In relation to the cases that suggest a term of good faith is implied in law, it is sufficient to say that such an implied term merely creates a default rule, and since that default rule already exists it is also an illegitimate implication. But it is also puzzling that courts should think it necessary to use the terminology of implied term in relation to something which is part of every contract. 174 The reference in the last sentence of this extract suggests that every party to every contract, commercial or otherwise, has a contractual duty to act in good faith towards the other. This is a different proposition from that stated at the beginning of the extract which speaks in terms of "contract doctrines". If the authors did intend to convey that the parties to every contract are contractually bound to act in good faith, it is not consistent with the state of the present law, albeit that there are some judges who have taken what Gyles J has referred to as the "adventurous approach" in relation to commercial contracts. In Council of the City of Sydney v Goldspar Australia Pty Limited Gyles J compared what he described as the "adventurous approach" of Finkelstein J in Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2005) Aust Contract Reports 90-213 at 88,498 par 64-65 with the "cautious approach" of Gummow J in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 117 ALR 393. In his "cautious approach" Gummow J said at 407: The implication of a term [to act in good faith] by operation of law, applicable across the whole spectrum of the law of contract, is a major step. Further, in deciding to take any such step it is now idle to speak to "the law of contract" without a real appreciation of the deep impact in Australia of various statutory regimes, one of which, of course, gives rise to a most substantial body of work in this [Federal] court, and has done so now for many years. 175 In Pacific Brands Sport & Leisure Pty Limited v Underworks Pty Ltd, Finkelstein J did not take the "major step" of the implication across the whole spectrum of the law of contract but limited it to "commercial contracts": at [64]. The appeal from his Honour's decision was dismissed (2006) 230 ALR 56. The Full Court of the Federal Court (Finn and Sundberg JJ; and Emmett J) did not deal with this point, other than Emmett J simply referring to his Honour's finding (at 105). I came to the conclusion in 2006 that commercial contracts are not a class of contracts that, as a legal incident, have an implied obligation of good faith: Australian Hotel Association (NSW) v TAB Limited [2006] NSWSC 293 at [78]. I remain of that view. As Gyles J said in Council of the City of Sydney v Goldspar Australia Pty Limited at 499 par [168]: "The best way for a single judge to travel through this thicket is to concentrate upon the particular contractual provision in question, the particular contract, in the particular circumstances of the case". 176 One matter that suggests that the parties in the present case intended that they were to act in good faith during these discussions is the fact that the plaintiff was required to provide the defendant with the confidential information pursuant to clause 5.07 of the Agreement without any express limitation on its use by the defendant. The plaintiff was dependent upon the defendant acting in good faith and not misusing the confidential information. The defendant was dependent upon the plaintiff to provide accurate information to it. The defendant did not have any entitlement to check the books and records of the plaintiff and had to accept the material provided to it by the plaintiff. The plaintiff was the only party that knew what the prospects for future sales were by reason of its dealings with third parties in the market. The plaintiff had an obligation to make an honest assessment of the likelihood of sales when it completed the sales funnel and placed the figure in the percentage column for a "win". It was obliged not to place a lower percentage in the sales funnel for the purpose of ensuring a lower sales goal. Such a practice was referred to as "sandbagging", an expression used by Mr Paholski in his e-mail to Mr Le Bail in respect of his suspicions about Mr McDonald's assessments. 177 The purpose of the provision of this information in the circumstances of commercial relationship between these parties was so that the defendant and the plaintiff could together, during their discussions, make a proper assessment of the market for the purpose of reaching an "appropriate" and "reasonably achievable" sales goal for the next year. If the parties did not act in good faith in this process the contract would lack business efficacy. It really goes without saying that in this process of discussion, with the use of the confidential information and with the very important consequences of the process, the parties were to act in good faith. Such a term is most reasonable and equitable in the circumstances, does not contradict any express term and it is capable of clear expression – that in their discussions in relation to the sales goal for the following year the parties would act in good faith: BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 282-3; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347. 178 The third concept within the alleged implied term is that the parties would act honestly. I am of the view that this aspect of the implied term is otiose. The duty to act in good faith seems to me to subsume the obligation to act honestly. 179 Implied Term 2: The parties are required in the course of those discussions to suggest targets which they honestly and reasonably believe, are reasonably achievable. I am satisfied that the parties intended that the targets they suggested were to be targets or goals that they honestly and reasonably believed were reasonably achievable for the reasons outlined in relation to Implied Term 1. The duty to co-operate and the duty to act in good faith required the parties to try to agree on a reasonably achievable sales goal. To put forward targets which they did not believe to be achievable would be to remove any business efficacy from the Agreement. This term is so obvious that it goes without saying; it is reasonable and equitable; it is capable of clear expression; and it does not contradict any express term. 180 Implied Term 3: The defendant's right to terminate the Agreement pursuant to clause 4.01 is not exercisable in circumstances in which the defendant has not complied with implied terms 1 and 2. This implied term is too wide. There could be circumstances in which the defendant failed to co-operate in some way that did not defeat the purpose of clause 4.01. In such circumstances the defendant may not be precluded from terminating the Agreement. It will depend on all the circumstances as to whether a failure to comply with the duty to co-operate and the duty to act in good faith disentitles the defendant from relying upon any relevant notice to terminate the Agreement. 181 Implied Term 4: The defendant's right to terminate the Agreement pursuant to clause 4.01 is only exercisable for the purpose of protecting the defendant's commercial interest in promoting the Products as defined in the Agreement. I am not satisfied that this term should be implied into the Agreement. It is not consistent with the express terms. There is no reason to think that the defendant should have been limited to only terminating the Agreement for the purpose identified in the term. There is nothing within the Agreement that suggests that the defendant should be limited in this way. 182 Implied Term 5: Any purported termination of the Agreement under clause 4.01 for any purpose other than in accordance with implied terms 3 and 4 will be invalid. Having regard to my findings in respect of Implied Terms 3 and 4, this Term will not be implied. 183 The plaintiff also made claims that there were implied terms in respect of clause 3.02 of the Agreement in order to give business efficacy to it and to enable the parties to each have the benefit of the Agreement. The plaintiff claimed that the following terms are to be implied by that clause: 1. The defendant would only be entitled to exercise its right to terminate the Agreement on the grounds that the plaintiff had failed to meet its sales goal for the purpose of protecting its interests under the Agreement to promote sales in the Territory, and not for an ulterior purpose; 2. The defendant's right to terminate the agreement pursuant to clause 3.02 was only exercisable for the purpose of protecting the defendant's commercial interest in promoting the Products in the Territory; and 3. Any purported termination of the Agreement under clause 3.02 for any purpose other than that set out in implied term 1 above would be invalid. 184 Term 1 seems to suggest that any purpose other than promoting sales in the Territory would be an ulterior purpose. That problem alone would prevent the implication of this term. In any event, there is no proper basis for such an implication or limitation of the defendant's right to terminate the Agreement if the plaintiff does not meet its sales goal. It is inconsistent with the express terms of the Agreement, which provide to the defendant the right to terminate if the sales goal is not achieved. For the same reasons Term 2 and Term 3 will not be implied. 185 The plaintiff claims that the defendant put forward targets that it did not honestly or reasonably believe were reasonably achievable. It claims that the defendant failed to discharge its obligation to co-operate with the plaintiff in the discussions and that it failed to discharge its obligation to act in good faith towards the plaintiff. The first of these claims requires a consideration of Mr Paholski's conduct in promoting the figure of $16,664,000 and then $14,774,000 to the plaintiff as reasonably achievable sales goals. It will then be necessary to review the events of 14 and 17 December 2007. Mr Paholski's sales goals 186 Mr Paholski claimed in his statement of 16 May 2008 that in preparing the proposed sales goal he considered information received from the plaintiff, "primarily the September 2007 sales funnel". He said that he understood that the sales funnel did not include all the prospects that were present in the market, for instance the RNSH. He gave the following evidence (par 183): Although the September sales funnel listed buy and win percentages for most entries, I did not give those figures much weight as in some instances through 2007 they had been overly conservative and therefore unreliable for forecasting sales. For example, the "Skylight" for Southern Health Dandenong was listed as a 50% buy and a 40% win in the September 2007 sales funnel but a purchase order was issued by Insight for this product on 27 September 2007. 187 In cross-examination Mr Paholski gave evidence that in this section of his statement he was saying that he did not fully trust the percentages in the sales funnel (tr 510). He gave the following further evidence in cross-examination on this topic (tr 510 – 511): Q. But the logic in relation to the Skylight situation is you are saying the sales funnel must have been wrong when it listed the sale prospect as 50 per cent and 40 per cent because, as a matter of fact, there was a sale, aren't you? A. I am pointing out an inconsistency, yes. Q. But may I suggest to you that if you just have to pause and think about it for a minute, there is no inconsistency at all, is there? A. Yes, there is. Q. To say that someone is a 50 per cent or 40 per cent prospect of a sale is to say that there is a chance that there will be a sale, correct? A. They are saying there is a chance there will be a sale, yes. Q. And just because there is a sale after the event doesn't mean that that prediction was wrong, does it? A. No. Q. All it means, because no doubt in the sales funnel other prospects with 50 per cent chances of sales don't eventuate in sales, correct? A. Correct. Q. And the sales funnel will do its job and in fact will be accurate if every second prospect rated at 50 per cent eventuates into a sale, correct? A. That's one way of measuring it, yes. Q. Well, it is the only way of measuring it, isn't it? A. No. Q. And the inconsistency which you are trying to point out in the witness box and which you have tried to explain in paragraph 183 is to your knowledge a nonsense, isn't it? A. No. Q. It is an attempt by you to try and justify why it is that you have ignored the September sales funnel, correct? Correct? A. It – I am pointing out inconsistencies in the data we are provided. 188 Although, on one view, this was a small matter, it is demonstrative of what I regard as Mr Paholski's unreasonably negative attitude towards the plaintiff. Mr Paholski's suggestion that there was an "inconsistency" in the sales funnel because a sale had eventuated when it was identified as a 40 per cent chance further exposes Mr Paholski's unreasonable attitude. The sales funnel set out earlier in this judgment identified seven prospects for 2008. The first was at Prince of Wales Hospital for a "GMN TF" with a "20%" chance of a "win". The comments in the sales funnel in relation to this prospect were "source funds, dept refurb, admin sign-off". The second 2008 prospect was the Austin in Victoria for a "GMN TF", listed as a "95%" chance of a "win" with the comments "no increase to PET rebate, no monies for new camera". The third prospect for 2008 was Alfred Hospital for "Gemini", however this purchase was in the third quarter of 2007, a fact that the defendant would obviously have known, and was therefore not a prospect for 2008. The fourth and fifth prospects for 2008 were Auckland Hospital and a private radiology group in New Zealand for "GXL 16", both listed as "33%" chances of a "win". The comments in relation to both of those prospects were ""awaitig gov't review of PET". The sixth prospect for 2008 was St George Hospital for "GMN TF" listed as a "33%" chance of a "win" with the comments "System may be provided by Cyclopharma?". The seventh prospect was BMRI for "GMN TF" listed as "33%" chance of a "win", with the comments "tender for services let, include 3T MRI, CT, Xray, U/S and PET". There was 1 prospect at a 95% chance of a win, 2 at a 20% chance of a win and 4 at a 33% chance of a win. 189 Mr Paholski advised Mr McDonald that the sales target was based on the September sales funnel. Indeed Mr Paholski claimed in his evidence that the sales goal in respect of the PET machines was based "primarily" on the September sales funnel. The original figure put forward by Mr Paholski to the plaintiff as a sales goal for 2008 was seven PET machines which he subsequently reduced to six PET machines. That target meant that all of the prospects identified in the September funnel would have to be realised, or alternatively, new prospects identified and won within 2008. It is true that the evidence discloses that there were other prospects that were not included in the sales funnel, however that is not to the point because Mr Paholski's evidence was that it was "primarily" the September sales funnel that led him to the sales goals that he promoted to the plaintiff as reasonably achievable. 190 Mr Paholski also gave the following evidence in his statement: 184. In preparing the Proposed Sales Goal, I also considered the sales goal for 2007, Insight's sale performance for 2007 as at the end of October 2007, how I thought 2008 would differ to the sales goal for 2007, and Insight's actual sales performance for 2007. 185. In preparing the Proposed Sales Goal, I also considered market intelligence obtained by me from within Philips, primarily in relation to i-Med and New Zealand, and from my general observations of developments in the nuclear medicine market in Australia and New Zealand. 191 Mr Paholski did not review any sales targets prior to the 2007 sales target. In 2005 the target was $5,945,000; in 2006 it was $4,532,000; and in 2007 it was $6,010,000, eventually reduced to $5,490,000 when the BrightView was unavailable. The number of PET machines identified in those sales targets was one for 2005 and two each for 2006 and 2007. The first sales target identified by Mr Paholski for 2008 and communicated on 29 October 2008 to the plaintiff was $16,664,000 with a requirement for seven PET scanners. That was a 177% increase on the 2007 sales target. The next offer made by the defendant was $14,774,000 with six PET machines. That was an increase of 146% over the 2007 target. 192 Mr Paholski maintained throughout his evidence that he was satisfied there would be a "PET surge" in 2008. It appears that the first time that he used the term PET "surge" was in his review document of 15 May 2007 in which he referred to a "potential surge" in the Australian PET market. That "potential surge" was linked, as he wrote it, with the end of the Commonwealth PET data collection project which he claimed "provides a positive outcome in the areas studied". 193 In May 2007 Mr Paholski met with representatives of IBA, a manufacturer of cyclotrons. At this meeting he was informed that the manufacturer was expecting three orders in Australia in 2007. After that meeting Mr Paholski sent an email to Mr Le Bail stating that the defendant could expect "some PET activity" to be associated with the orders for the three cyclotrons. 194 Mr Paholski claimed that he relied upon government announcements in forming the view that there would be a PET surge in 2008. One of the announcements was made by the then Minister for Education, Science and Training, the Honourable Julie Bishop MP on 6 July 2007. The Minister announced a $10 million "deal" between the Australian Nuclear Science and Technology Organisation (ANSTO) and Siemens Medical Solutions for the construction of a new nuclear medicine production facility, a consequence of which would be "improved access to life-saving" PET. Ms Bishop announced that two new cyclotrons would be constructed at ANSTO and would produce the short-lived radiopharmaceuticals used in PET scanning. That announcement included the following: PET is the fastest growing medical diagnostic imaging technique in the world and was recently recognised in Federal Government research as the best option for diagnosis and treatment in Australia. Its use has grown globally by 200 per cent in the last two years but there remains significant additional demand for this diagnostic test. 195 On the same day Siemens issued a media release. It had some remarkably similar statements to the Minister's press release but with some important differences. It provided: PET is the fastest growing medical diagnostic imaging technique in the world and was recently recognised in Federal Government research as the best option for diagnosis and treatment in Australia. Its use has grown globally by 200 per cent in the last two years but many Australian patients are currently missing out. The shortage of facilities is due to cost, highlighted in the current debate between Federal and State governments regarding the Medicare rebate for PET procedures which in turn affect State funding to build new PET facilities. 196 The Siemens media release announced that the two cyclotrons at ANSTO would allow ANSTO to produce other short-lived isotopes for research while ensuring a consistent supply for clinical patients. 197 Another matter that Mr Paholski said that he took into account in reaching his conclusion that there would be a PET surge was the ABC's website article which reported that the Federal Government was "considering" funding more PET machines. Another matter that Mr Paholski relied upon was an email from Mr McDonald in July 2007 confirming that Lake Imaging was considering setting up a private PET/CT service in Geelong. A further matter was the plaintiff's proposed symposium in New Zealand which had 40 people register within 24 hours. Mr Paholski also emphasised his reliance upon Mr McDonald's statement (denied by Mr McDonald) at about this time that the plaintiff was expecting a funding change for the better in Australia for PET. 198 The PET symposium held by the plaintiff in Auckland in August 2007 included a presentation by a director of strategic policy in the Commonwealth Department of Health, Alison McAuslan. That presentation was entitled "PET Funding and Implementation, The Australian Experience". The presentation included the historical context for PET funding in Australia including the funding models that had been used. Ms McAuslan made the point that in considering public funding for PET, the Government had to address two components. The first was that the indications had been assessed as safe, cost-effective and clinically effective and to determine both clinical effectiveness and cost-effectiveness it was important to assess the technology on an indication by indication basis. The second component was that it had to consider what, if any, assistance the Government should provide for the capital costs of the technology. 199 Ms McAuslan's presentation included the following: It is often cited in publications that based on the experience of a range of developed countries, between 1 and 1.5 PET scanners per million population is a reasonable benchmark. The current Australian figures indicate that there are 0.8 Australian Government-funded scanners per million population. 200 In the section entitled "What is the Future for PET?", Ms McAuslan's presentation concluded that PET/CT is an evolving technology and that over the next five to ten years the scope, effectiveness and cost of it could change enormously. The new indications for the technology were identified as breast, prostate and dementia with new uses being radiotherapy planning and monitoring the effect of treatment. The presentation included the following: All of these factors will mean the need for increasingly sophisticated – and therefore probably expensive – equipment and well trained physicians as well as an increasing number of sites. The implication may well be very significant to the Australian government if there is rapid uptake of this technology. 201 Mr Prather admitted that he and Mr Paholski informed the Asia-Pacific office that whilst there had been "some suggestions of a change in the market in Australia because of changes in government policy, it would not be safe to bet on those for the purpose of a target" (tr 323). Mr Prather sought to qualify this admission on the basis that it occurred in August 2007. This is of course prior to the meeting of 10 September 2007 at which Mr Prather alleged Mr McDonald spoke about the additional licenses, a claim which I have rejected. 202 In final written submissions the defendant carefully analysed the evidence of Mr McDonald, Mr Walstab, Mr Paholski and Mr Hewlett to submit that each held the view there was a reasonable or good prospect of changes occurring to the Medicare reimbursement arrangements. There is overwhelming evidence that everyone involved in this case was hoping there would be a change in the Medicare rebate for PET procedures. However both Mr Paholski and Mr Prather made the sensible observation that it was not appropriate to set a sales goal on such a hope or on government promises during election campaigns. 203 The defendant's written submissions also emphasised Mr Walstab's statements that the PET market is "dynamic" and there can be different perceptions as to "who buys, when they buy, and the time they buy; so it can be quite subjective as to when an actual sale will happen". This statement was relied on in support of the submission that Mr Paholski's assessment of the proposed 2008 sales goal was subjective and based on appropriate material and information. I agree that such an assessment is, in part, subjective. It is true that Mr Paholski provided detailed evidence of what his thought processes were at the time that he made the assessment of what was "appropriate" and "reasonably achievable" for the plaintiff's 2008 sales goal. However what Mr Paholski was actually saying to others at the time that he claims he believed that the proposed 2008 sales goal was reasonably achievable, in particular to Mr Young Chun in July/August 2007 and December 2007, is of significance. 204 I have no doubt that Mr Paholski wanted to terminate the defendant's relationship with the plaintiff. I also accept that his superiors were cautious in trying to temper what he was telling them on the basis that they understood that he did not like Mr McDonald and he had an aim to build his own empire. I am satisfied that the statements he made to Mr Young Chun demonstrate his true belief as opposed to one that has been constructed by way of analysis in this case. The statement in July/August 2007 is an important one because by this stage Mr Paholski had already informed his superiors of a "potential PET surge". Mr Paholski knew that the market was reasonably static when he wrote to Mr Young Chun and advised him that there was no "organic growth" in the market. This view obviously persisted because of his report to Mr Young Chun in December 2007 in which he proposed only three potential sales in the year 2008. 205 In final written submissions the defendant also dealt with the comparison between the 2007 sales goal and the proposed 2008 sales goal. It was submitted that a raw comparison of these figures was not a proper basis for finding that Mr Paholski and Mr Prather did not believe that what was being proposed for 2008 was "reasonably achievable". This was in response to some questions I asked Mr Paholski on the topic (tr 574). It was submitted that the evidence "showed that the matter is not to be judged simply by looking at the dollar figure". It is obvious that one does not deal simply with the comparison of the dollar figures. On the other hand it is a relevant factor to take into account in the circumstances when the same person who increased the plaintiff's sales goal by 177% was arguing with the company to whom the defendant was answerable that a 42% increase was not reasonably achievable and lacked logic. That is what is relevant for consideration rather than the mere dollar figures or comparative percentage increase. 206 The defendant submitted that in re-examination Mr Paholski confirmed that the defendant would have been most unhappy if a PET surge occurred in 2008 and Philips "lost market share". This submission is consistent with some of the defendant's evidence that it was concerned that if there were a PET surge the plaintiff would not go after it. I found this evidence and indeed the emphasis on Mr Paholski's re-examination in this regard at odds with the commercial reality of the defendant's position. This plaintiff has managed to put the defendant in a leading position in the PET market in Australia and New Zealand with a 60% market share. It would appear that the defendant was promoting the proposition that the plaintiff needed to have this huge increase in its sales goal to motivate it to "go after" a PET surge. Firstly it is not clear that such a mechanism would motivate rather than de-motivate anyone, especially this plaintiff. Secondly on the assumption that it may be a motivating factor, this plaintiff certainly did not need it. It had chased the market so well and indeed read the market so well that it had achieved the lead in the market share for the defendant. 207 The suggestion in paragraph 138 of the defendant's written submissions referred to above that the plaintiff was not "being straight" with the defendant is based on the difference between the contents of the sales funnel and the presentation given by Mr Hewlett on 2 November 2007. I am not satisfied that this submission should be accepted. Once the discussions commenced, there was a need to face commercial reality. That meant that any "prospects" in the sales funnel and/or additions to the sales funnel needed to be reviewed realistically for the purpose of setting a reasonably achievable sales goal. If any party is guilty of not "being straight" with the other, it is the defendant. I am satisfied that the defendant through Mr Paholski, wanted to bring the nuclear medical equipment aspect of its business "in house". The reference to the alternative mechanisms for doing that as "clean" or "hostile" is demonstrative of the defendant's mindset at the time. These were descriptions put forward by Mr Paholski after only approximately twelve weeks in his new role. The defendant kept the topic of bringing the business "in house" on the agenda from that time onwards. That culminated in Mr van Dyke's email to Mr Spittle on 9 December 2007 advising that it was time to "challenge the sense" in having the plaintiff represent the defendant. The defendant was not "straight" with the plaintiff. It did not advise it that it wished to end their relationship so that the defendant could bring the business "in house". 208 The defendant submitted that Mr McDonald's evidence that "it struck me that we should agree on some conditions" and that he thought that the defendant was receptive to the idea of a sales goal subject to conditions, were "crushing admissions". Mr McDonald also gave evidence in a statement in reply dated 2 June 2008 that he did not consider that the increase in demand reflected in the letter of 29 October 2008 from the defendant would eventuate. His evidence was that he thought it was reasonable to link the 2008 Sales Goal to the existence of factors which might give rise to increased demand; for instance linked to a condition that the PET/CT component of the sales goal would only apply on the condition that the Federal government implemented a decision to change the Eligibility Criteria, or substantially increase the number of MBS rebates early in 2008. The defendant submitted that this evidence was a concession that the defendant had adopted a reasonable approach in the 2008 sales goal discussions. 209 The defendant submitted that the plaintiff's submissions in relation to Mr Prather's response to Mr Hewlett at the meeting of 14 December 2007 in relation to the Asia Pacific budgets was an attempt to overstate the significance of that small part of the conversation. The defendant's submission suggested that the plaintiff had tried to reconfigure the sequence of the conversation for the purpose of challenging the defendant's witnesses. This submission is unfair having regard to Mr Prather's evidence that Mr Hewlett asked him this question at the commencement of the meeting. 210 Mr Paholski's file note of the meeting includes a statement that Mr Prather had said that the targets were based on the sales funnel and the targets that were submitted to the Asia Pacific company in Singapore. Importantly Mr Paholski's notes include the following: Jim hesitant about target but agreed. Phil will send a copy of target to Jim for sign off by someone with authority. 211 Mr Paholski gave the following evidence in relation to that part of his note (tr 560): Q. In any event, your clear recollection, not just aided by the notes, is that when the meeting finished, there was an agreement on target? A. It appeared to be. Q. It just had to be signed off by someone? A. Yes. 212 There is no mention in Mr Paholski's note of Mr Hewlett discussing the conditions, nor is there any mention of Mr Prather's advice to Mr Hewlett that he could write conditions or caveats on the letter that he intended to send to the plaintiff. 213 Mr Paholski was unwilling to make concessions that obviously should have been made. For instance, the difference between the targets set for the defendant by the Asia-Pacific company in Singapore and the sales goal Mr Paholski put forward for the plaintiff on 29 October 2007 for the 2008 sales goal was obviously an extremely large difference. It was in the vicinity of US$9 million. It took quite some time for Mr Paholski in cross-examination to concede that this difference was even "large". Another obvious matter that Mr Paholski refused to concede was the nature of his "vested interest" about which he wrote to his superiors when he prepared the review in May 2007. To suggest, as he did, that his only interest was the pleasure of not having to deal with the plaintiff any more, by that he meant Mr McDonald, was very unimpressive. The obvious vested interest was the likelihood that he would take charge of the nuclear medical equipment business should it come "in house". Although Mr Paholski expressed some reticence about accepting such position if it were offered to him, the evidence establishes that he was very keen for promotion and I have no doubt that such an opportunity would be seized by him. 214 Mr Paholski obviously had a personality clash with Mr McDonald which was recognised by the plaintiff in the latter part of 2007 when Mr Hewlett was identified as the person with whom Mr Paholski should deal. However it is probable that by this time the relationship was so poisoned that it would not have mattered who was to replace Mr McDonald. Mr Paholski wanted to terminate the plaintiff's role, of that I am sure. 215 Mr Paholski set out 18 items in his statement of 16 May 2008 as "market intelligence and my observations" in setting the sales goal for 2008 for the plaintiff (par 203). At first blush those items may look comprehensive, however over a third of them occurred prior to him writing to Mr Young Chun in Singapore arguing that the PET market had no organic growth and that 42% growth defied logic. Three of the items referred to government promises just prior to or during an election campaign and should be seen in the light of Mr Paholski's observation about the danger in making any prediction in respect of government promises. On the one hand Mr Paholski was advising the Asia Pacific company in Singapore that it was not "safe" to set a sales target on possible governmental changes to PET funding and on the other he was depending upon election promises to do just that in respect of the plaintiff. 216 That leaves just eight items. One of those was Mr McDonald's e-mail about the visit of Dr Karp. I regard this item as mere padding. There is no proper basis for suggesting that this was "market intelligence" that could sustain such a huge increase in the 2008 sales goal for the plaintiff. It may have been good marketing practice for the plaintiff and the defendant, but how that could reasonably be thought to translate into the huge increase in sales in the circumstances that surrounded these parties in the latter part of 2007 simply defies commercial commonsense. The other matters are closer to market intelligence in that they deal with some of the prospects that were discussed with Mr McDonald. Mr Paholski was suspicious of Mr McDonald. He had already formed the view that he did not trust the sales funnel. He had already advised his superiors that he thought that Mr McDonald was "sandbagging". These matters need to be viewed in the light of Mr Paholski's "update" of 18 December 2007 of three prospective sales of PET scanners. 217 It must be remembered that the Court is not being asked to determine what a reasonably achievable sales goal was as at the end of 2007 for 2008. Rather it is necessary to assess whether the defendant complied with its contractual obligations in the discussions pursuant to clause 4.01 of the Agreement. It is necessary to determine whether the defendant honestly believed that the sales goal was reasonably achievable. The sales goal was reliant on a PET surge in 2008 and therefore it is necessary to decide whether Mr Paholski honestly believed there was going to be a PET surge in 2008. 218 Mr Newlinds was able to expose the probable real reason for the creation of such a markedly increased sales goal for 2008 in his cross-examination of Mr Paholski. When Mr Paholski was "put on the spot" by his ultimate boss, Mr van Dyke, he told him he was "confident" that there would be a PET surge in 2008. However in cross-examination he gave evidence that as at 23 October 2007, when he told Mr van Dyke he was "confident", he was only leaning towards such a view. I have no doubt that at that time Mr Paholski was not confident that there would be such a surge, however he locked himself into a position from which he could not retreat. I am satisfied that at this time he held the view that he had published to Mr Young Chun, that there was no logical basis to increase the defendant's target by 42% in a market with no organic growth with the current product mix. I am of the view that he increased the plaintiff's target by 177% because he felt locked in after he assured the head of the defendant's Australian operations that he was confident there would be a PET surge. 219 The letter that Mr Paholski wrote to Mr Young Chun on 18 December 2007 in which he provided an "update" and the detail of any "potential sales" is also of importance in assessing Mr Paholski's true belief in respect of a PET surge. On that day Mr Paholski advised Mr Young Chun that there were only three potential sales of PET CT scanners in 2008. At this time Mr Paholski was anticipating the business coming "in house" because the notice of termination had been served that day. On one view, this would allow the defendant to increase its sales, however even taking a view that it may be more difficult with such a changeover and allowing a discount in the number of potential sales, the reduction from six to three PET scanners is certainly a very large reduction. I do not accept that Mr Paholski believed that the sales goal he set for the plaintiff was reasonably achievable without a rather drastic change in the access to the Medicare rebate. Such a change would have to occur in early 2008 to allow it to translate into sales within that year. 220 I shall now turn to the defendant's conduct on 14 and 17 December 2007. I have no doubt that Mr Prather knew that Mr Hewlett was proceeding on the basis that the defendant's sales target with the Asia-Pacific company in Singapore was in the vicinity of $14 million. I am also satisfied that Mr Prather intended Mr Hewlett to proceed on that basis. When Mr Hewlett asked Mr Prather about the defendant's targets with Singapore, Mr Prather could have advised him that it was information to which he was not entitled, however he chose to engage in the discussion and to give an answer that he knew would give an impression that the targets were similar to those that had been suggested to the plaintiff. When Mr Hewlett said that there was then no purpose in debating the figures, Mr Prather well knew that Mr Hewlett had assumed that the targets were similar. This was in circumstances in which, according to Mr Paholski's evidence referred to earlier, Mr Paholski was willing to negotiate for a lesser amount than $14 million. 221 I accept Mr Hewlett's evidence that at the end of the meeting he informed Mr Prather that the plaintiff would agree to the sales target or goal on the conditions that: the market changed in the manner asserted in Mr Paholski's correspondence; the defendant would give accurate delivery times for the Brightview CT; Government rebates in Medicare reimbursement were increased early in 2008; and there would be an adjustment to the plaintiff's target in recognition of sales to large private imaging groups. 222 It is clear that both Mr Hewlett and Mr Prather left that meeting on the understanding that they had agreed to the sales goal contained in Mr Paholski's letter of 27 November 2007 with conditions or caveats. It is also clear that Mr Paholski understood that Mr Hewlett had reluctantly agreed to the sales goal, although he did not recall the discussion about which Mr Prather gave evidence about putting the "caveats" on the document. 223 The intervention by the in-house lawyer in requiring Mr Prather to write a letter that was so inconsistent with the outcome of the meeting was, to put it neutrally, extremely unhelpful. These parties had reached consensus, albeit based on a misunderstanding by Mr Hewlett of the defendant's position with its targets with Asia-Pacific in Singapore. Mr Chalmers' intervention caused a great deal of consternation in the plaintiff's camp and the unsatisfactory conversation between Mr Walstab and Mr Prather was obviously caused by what I regard as a totally inappropriate letter to be sent in the circumstances of this case. I am also satisfied that Mr Prather's file note of the conclusion of the meeting on 14 December 2007 was crafted to convey an erroneous impression of what had occurred at the conclusion of the meeting. At least Mr Prather was willing to put forward the reality in his evidence. 224 I regard the defendant's email/letter of 14 December 2007 as a serious breach of its obligation to co-operate in the discussions and a serious breach of its obligation to act in good faith in the discussions. 225 It is true that the letter from the plaintiff dated 17 December 2007, sought a further meeting to discuss and finalise the sales goals for 2008, however the letter does include the words: "We can accept the 2008 sales goal with conditions based on market condition". On one view, the plaintiff complied with the defendant's request by its letter of 17 December 2007. It had someone with authority accept the sales goal and indicate that the conditions that the plaintiff wished to have considered were "market conditions". 226 Mr Prather was cross-examined as follows (tr 362): Q. Let me understand this: if he had written to you before 5 o'clock and said the words that are in the email that came through at 5.30 – odd that they could accept the target with conditions – to market conditions, would you have gone back and continued negotiations notwithstanding that 5 o'clock had come and gone after receipt of that fax? A. If he had sent written communication prior to 5 o'clock – it wouldn't have had to have been written. If he had and I had discussed them over the phone at that point in time, we may not be sitting here. 227 Mr Prather agreed that the plaintiff had written to him on 17 December 2007 but claimed that it could not comply with his requirements, because it arrived after what he had stipulated in his e-mail of 14 December 2007 as "close of business". Mr Prather suggested that "close of business" meant 5.00 pm because that was the time that the defendant's business closed. He also referred to the hours of 8.30am to 5pm in his contract of employment. It is clear that this multi-national group of companies, in particular the defendant, has business hours that stretch late into the evenings during the week and on the weekends when it communicates with other companies in the Group in the United States of America and in the Far East. Indeed Mr Prather's own email to Mr Hewlett in which he referred to the "close of business" was sent at 5.13 pm. The plaintiff's letter of 17 December 2007 was received by the defendant at 5.38 pm. Mr Prather's suggestion that the letter was not received by "close of business" was an unedifying aspect of his evidence. To suggest that an organisation such as the defendant would have its business closed at 5 pm is, in the circumstances of the evidence, without any foundation. If Mr Prather wanted to put a particular time frame on the plaintiff, he could have inserted an hour of the day by which the response was to be received. He did not do so and it is obvious that the receipt of the letter at 5.38 pm was not after close of business: see Jalun Pool Supplies Pty Ltd v Onga Pty Ltd [1999] SASC 20, Debelle J at [13] – [14]. 228 It is clear that there was consensus at the meeting on 14 December 2007. Mr Paholski's file note reflected that. Mr Hewlett's evidence reflected that. Mr Prather's evidence reflected that. If Mr Hewlett had been the person with "authority", he could have signed something at the meeting on 14 December 2007, however Mr Prather decided to send across the sales goal for someone "with authority" to sign off. I am satisfied that when Mr Hewlett left that meeting he thought consensus had been reached. This may explain the rather relaxed attitude he had to opening his email on 17 December 2007. 229 Once Mr Chalmers intervened with the letter that was totally inconsistent with what had been agreed, the plaintiff was put in a position where Mr Prather then demanded Mr Walstab, the person with "authority" to sign off, to do one of three things: accept the dollar figure as the sales goal; reject the dollar figure of the sales goal; or accept the dollar figure with conditions. Mr Walstab tried to discuss the conditions on the telephone. Mr Prather then adopted a position that he would not discuss the conditions on the telephone. He also refused to set a further meeting time to discuss the conditions and gave Mr Walstab a five o'clock deadline. I regard this conduct by the defendant as totally unconscionable in the circumstances. 230 The defendant submitted that the plaintiff never explained why it was that it did not propose conditions to the defendant in respect of the sales goal. It was submitted that the plaintiff knew from 2 November 2007 that the defendant was willing to consider making the sales goal contingent on market conditions. It is true that the plaintiff did not propose conditions in writing, however as I have found above, Mr Hewlett discussed the conditions at the meeting on 14 December 2007. I have no doubt that when the plaintiff received the defendant's letter of 14 December 2007 on 17 December 2007 with the defendant's markedly changed position, there was quite a deal of confusion. This was exacerbated by Mr Prather's rather combative approach in giving the plaintiff its three options and then seeking to impose a 5 o'clock deadline with a refusal to have a further meeting. 231 The letter of 17 December 2007 from the plaintiff to the defendant in which the plaintiff advised "we can accept the sales goal with conditions based on market conditions" was a confirmation in writing of the consensus that had been achieved at the meeting on 14 December 2007. Accordingly, albeit that those conditions were not written on the letter, the parties had reached agreement of a sales goal made reasonably achievable with the conditions referred to by Mr Hewlett in the meeting on 14 December 2007. Even if that is wrong I am satisfied that the defendant is not entitled to claim that the parties failed to achieve an agreement in writing. The defendant knew that the plaintiff had agreed to the third option – acceptance with conditions – but then it imposed inappropriate barriers of refusing to discuss it further on the phone and refusing to meet to discuss it further and imposing a 5 o'clock deadline. This was quite unconscionable conduct in the circumstances and was in breach of the obligation to co-operate and to act in good faith. 232 I am satisfied that the defendant is not entitled to rely upon the 2007 Notice. The 2008 Notice 233 On 8 November 2007 Mr Paholski wrote to Mr McDonald providing a "package purchase offer" for the RNSH "prospect". There were two offers within the package, the first was for a Gemini Time-of-Flight Performance 16 and Precedence 6 SPECT/CT. The second offer was for a Gemini Time-of-Flight Performance 16. That letter advised that the offer was "valid for a purchase order before December 31 2007". That reference to a "purchase order" was to an order notified to the defendant by the plaintiff. 234 The tension between the plaintiff and the defendant in respect of the availability of spare parts and the servicing of equipment had spilled over into the medical community in the RNSH. In an effort to persuade RNSH to purchase the defendant's equipment from the plaintiff the defendant agreed to provide a particular level of service directly to RNSH as a back up and/or an alternative to servicing by the plaintiff. On 20 November 2007 the plaintiff and the defendant entered into a memorandum of understanding in respect of RNSH in the following terms: The offer by PMSA to manage the service processes for Royal North Shore is once only arrangement to meet customer's requirements on placing an order for a Philips Gemini TF 64 PET scanner. As PMSA has committed to the customer to provide this service, Insight Oceania agrees; that it shall meet the service levels as agreed by Insight Oceania under the NSW period contract or as otherwise agreed by Insight Oceania with Royal North Shore in respect of the equipment in question. Should Insight Oceania fail to meet these requirements Philips reserves the right to dispatch an engineer or applications person which will be charged to Insight at the prevailing time and materials rate. 235 On the same day Mr Paholski wrote to Mr McDonald asking him to confirm that he was happy for Mr Paholski to write directly to Dr Roach at RNSH in the following terms: Philips is pleased to facilitate service support for the proposed Philips Gemini TF64 and Brightview SPECT systems offered by our distributor, Insight Oceania. Under this arrangement, all service including scheduled and remedial maintenance will be managed by Philips Customer Care in conjunction with Insight Oceania engineering and applications personnel. During the warranty period, all calls for service and maintenance would be directed by RNSH to Philips Customer Care. As part of our normal service processes it is required that any call allocated to an engineer should be "closed" by a call to Philips Customer Care by the dispatched engineer. This would include any Insight Oceania personnel. Philips would liaise with Insight, manage the response and oversee service until the issue had been totally resolved. Also as with all of our customers, any service request will be included as part of Philips Continuance Customer Satisfaction Survey to measure our service performance. Philips normal process is to escalate any downtime exceeding 8 hrs through the Philips global escalation database (VIPER). VIPER is an escalation database allowing field service to provide visibility of a customer product issue to the factory. The tool has three escalation levels, 1, 2, and 3. Any escalation triggers email alerts to relevant personnel. Level 1 being the state support and management, level 2 is to regional support and management and level 3 global support and management . Philips commits to a minimum daily email to the Nuclear Medicine Director outlining the status of any service issues and what steps are being taken to address them until resolution. This is in fact part of our normal support process. Philips and Insight Oceania agree to apply these mechanisms to other current Philips equipment in the Nuclear Medicine Department. Philips and Insight Oceania commit to meet quarterly with the Nuclear Medicine Director during the warranty period to discuss and review any service issues or concerns. 236 On 20 November 2007 Mr McDonald informed Mr Paholski that the letter to Dr Roach looked fine and he should go ahead with the response to Dr Roach to "meet his deadline". 237 Mr Paholski sent that letter to Dr Roach and on 21 November 2007, Dr Roach sent an email to Mr McDonald in terms that included the following: I am pleased to advise you that Philips will be our preferred vendor for the PET scanner at RNSH. We look forward to working with Insight/Philips with this project. Can you please email a planning guide for the TF 64 to forward to the facilities department. 238 On 21 November 2007 the principal physicist at the Department of Nuclear Medicine at RNSH, Dr Bailey, wrote an email to various recipients including the defendant and the plaintiff (Mr Hewlett) in the following terms: Dear Friends I'm pleased to be able to advise you that we have decided to purchase a Philips TF/64 time-of-flight PET/CT scanner for our centre (Royal North Shore Hospital, Sydney). This decision was not easy as all of their top-of-the-range offerings from all vendors are very good and have individual strengths. We hope to be operational within 12 months. Many of you helped us by answering questions about your systems and workflows and these were very helpful and much appreciated. Many thanks for that. Once installed you will have no excuse not to come to Sydney to visit us. 239 Mr Prather said he did not appreciate that the offer dated 8 November 2007 that the defendant made to the plaintiff was only valid until 31 December 2007 (tr 398). He suggested that Insight was trying to place an order by 31 December 2007 "purely to satisfy their sales target" (tr 398). He was cross-examined as follows (tr 398-401): Q. What about the fact that Philips had quoted Insight a price for the machine on 8 November, which price was valid up until 31 December? A. If – I'm familiar with the price we offered to Insight. I'm not familiar that that price expired on 31 December. Q. Can you look at volume 6, page 294 please? (Document produced to witness). A. Yes. Q. You saw that document on or about 8 November, didn't you? A. I was copied on it. I saw it. I do not – I did not retain that the offer was valid until 31 December. Q. That's the usual – it is perfectly usual in the way Philips Australia does business when it gives a price to Insight in relation to a particular product, or mix of products, to lock in a price for the purpose of a quote and to indicate the period under which that price would remain valid? A. Yes, that's right. Q. And there's a perfectly obvious commercial reason for that, isn't there? A. Yes, there is. Q. Because Insight needs to be able to go to their customer and quote a price – yes? A. They do. Q. Knowing that they can buy the machine for a particular price from Philips? A. Yes. Q. And if they can make a profit, good luck to them; is that right? A. Yes. Q. It would be impossible for them to conduct their business without having a locked-in price with Philips Australia? A. Yes, correct. Q. And -- A. But in the – not the configuration or the products that Insight quoted Royal North Shore. Q. Are you sure? A. Yes. This is for a Gemini Time-of-Flight Performance 16 and a Precedence 6 and what was offered to Paul Roach on 15 November was a Time-of-Flight 64 and a BrightView SPECT CT with an upgrade to the XCT when available. That's my understanding of what their offer was to Royal North Shore. Q. Let's look at this document. Do you see that Philips is offering Insight the following packages. And there is offer one, and you see that on the first page and over onto the second page, and on the third page we have offer two? A. Yes. Q. That's the configuration that has been sold to North Shore, isn't it? A. No, it's not. The product which Dr Paul Roach accepted was for a Gemini Time-of-Flight 64. This is a 16. Q. Now, Philips had provided a price for that sale, had they not? A. Again, I'm not familiar with that. I would think Mr Paholski would have done something. Q. Now, the Gemini 64 is an upgrade version of the Gemini 16, is it not? A. It is a – the CT portion of that is a completely different – well, the electronics of that system – the image-making parts of that system is completely different. It works on different CT principles. And, for instance, the coverage per rotation of the CT scanner is four times greater with the 64 than the 16, so it will scan a patient four times faster. It's not a minor upgrade. It cannot be done in field upgrades of the 16 to a 64 on our customer's premises, it requires the entire gantry to be removed and replaced, and there is a considerable cost differential given that the detectors of the system is about 50% of our total cost of our system. So, to go from a 16 to a 64 is a dramatic difference in cost to us. Q. Didn't you, yourself, agree to provide a 64 at the same price? A. We have offered to help with that – with the Royal North Shore with going up to a 64, yes. HER HONOUR Q. Does that mean you offered it at the same price? A. I believe so, your Honour. NEWLINDS Q. Didn't you say to Mr McDonald on the 2nd – sometime in mid-November that you were prepared to provide a Gemini 64 at the same price and on the same terms as the quote we are looking at? A. On the basis of a clinical research relationship in collaboration with Royal North Shore. Q. Is the answer to my question yes? A. Yes. … Q. In any event, the perfectly rational commercial justification for the order being placed on 31 December is to lock in the price, isn't it? A. If it was for – for this configuration, then yes, and if they were going on that presumption, then yes. Q. And you weren't surprised when they placed the order, were you? A. I was. Q. Because you knew that North Shore had committed to going ahead; yes? A. I knew they – they had acknowledged that, yes. Q. And you knew that delivery was expected sometime in 2008? A. Depending on building works, yes. Q. And you knew that a quote, whether it be the one we are looking at or of another verbal one, had been given by Philips to Insight relating to the particular machine? A. Yes. Q. And you knew that there was nothing unusual between the orders being placed and the time of delivery being a significant time gap? A. Yes. 240 After the defendant received the plaintiff's purchase order, Mr Chalmers wrote to the plaintiff on 3 January 2008 in terms that included the following: In order that we can determine whether Insight Oceania has achieved its Sales Goal for 2007, we request that you provide us by return, or in any event, within 24 hours with a copy of the sales contract pertaining to the Order. To the extent that the information is not contained in the sales contract, we request that you provide us with the information referred to in clause 6.06 of the Distribution Agreement entered into between Philips Medical Systems Australasia and Insight Oceania dated 24 November 2004. 241 There was a meeting in January 2008 at Royal North Shore Hospital attended by Dr Roach, Dr Bailey, Mr Paholski, Mr Hewlett and Mr Walstab. Mr Prather gave evidence that he asked Dr Roach: "Has the Hospital placed an order on Insight for the Gemini and the Brightview?" Dr Roach answered: The Hospital has not placed an order. I have recommended the purchase of the Gemini and the BrightView systems to the Hospital, but I do not have authority to place an order for the Hospital for that equipment. 242 Dr Bailey was not asked any questions at this meeting in relation to the "order" about which Mr Prather asked Dr Roach. It is not suggested by the plaintiff that RNSH sent a purchase "order" to it. 243 Mr Walstab was cross-examined about the purchase order dated 31 December 2007 that the plaintiff delivered to the defendant. Mr Jackman suggested to Mr Walstab that the reason the plaintiff sent the purchase order to the defendant for RNSH on 31 December 2007 was because the plaintiff anticipated the defendant may try to terminate the Agreement on the ground that the plaintiff did not meet the 2007 sales goal (tr 493). Mr Walstab was shown an email that he wrote to his solicitor in which he said: As we discussed last week we anticipated Philips may try to also terminate the contract on grounds that we didn't meet the 2007 Sales Goal, that is why we decided to send the RNS order through on the 31st Dec. 244 Mr Walstab agreed that it was "one of the reasons" but denied that it was the only reason (tr 493 - 494). Mr Walstab also agreed in cross-examination that he attended the meeting at RNSH in mid January 2008 at which Dr Roach confirmed that RNSH had not placed an "order" with the plaintiff in respect of a Gemini PET scanner and a BrightView SPECT system (tr 495). 245 There is an issue of whether the plaintiff was required to have a binding written commitment from the customer for the Products before it could place an order on the defendant. On the facts of this case, if that was a requirement, and if any of the communications referred to above amount to a "binding written commitment", there is no issue that the plaintiff would have achieved its 2007 Sales Goal. 246 The defendant claims that the plaintiff was not entitled to place the 31 December 2007 order because it did not have a binding written commitment from RNSH at the time it placed the order. The defendant refused to acknowledge the dollar equivalent for that order and formed the view that it was entitled to serve the 2008 Notice purporting to terminate the Agreement pursuant to clause 3.02. For ease of reference the terms of clause 3.02 are extracted again: 3.02 Subject to DISTRIBUTOR's compliance with its obligations hereunder, this AGREEMENT shall continue in full force and effect for the term set forth in Appendix A (the "Term"). This AGREEMENT shall be automatically renewed for additional one-year periods (each such 12-month period, a "Term") provided that if DISTRIBUTOR fails to meet the SALES GOAL for a Term PMSA shall be entitled to terminate this agreement by giving 90 days written notice to DISTRIBUTOR. Such notice must be given not later than 28th February in the year following the Term in which the SALES GOAL was not met. In determining whether a SALES GOAL has been met consideration will be given to the total sales target rather than the individual modality targets. 247 Clause 3.02 was amended in 2006. Between 2004 and June 2006, the clause had been in the following terms: Subject to DISTRIBUTOR's compliance with its obligations hereunder, this AGREEMENT shall continue in full force and effect for the initial term set forth in Appendix A (the "Initial Term"). This AGREEMENT shall be automatically renewed for additional one year terms (each such 12 month period, a "Term") at such time, if any, as the parties agree in writing to a SALES GOAL for such additional Term(s). If the parties fail to reach such agreement within thirty (30) days prior to the expiration of the initial Term or if the Agreement has been renewed the then current Term, this AGREEMENT shall expire automatically at the end of such Term. 248 The definition of "booking" is found in the 2004 Agreement and the Agreement (as amended by the Deed of amendment in 2006). The only place, other than in the definition, in which the term "booking" appeared was in the 2004 agreement at the top of a column in Appendix A in the expression "Booking Quantity". At that time it is clear that the parties intended that when the defendant had received a "binding written commitment" from a customer to purchase a product, it was to be counted towards the "Sales Goal". On one view of the 2004 Agreement, the measurement was of the "bookings", not of the orders placed on the defendant. However, it seems to me that the parties intended that the defendant was to be notified of the fact that the plaintiff had a "binding written commitment" for the specific products, either by way of placing an order on the defendant or notifying the defendant otherwise, for the dollar equivalent of the "booking" had to be taken into account in considering whether the plaintiff had achieved its Sales Goal. 249 When the sales goal was agreed for 2006, the letter dated 24 January 2006 confirming that agreement deleted the expression "Booking Quantity" and replaced it with "Quantity". No mention was made in that letter of the definition of "booking". Six months later when the amendment was made to the Agreement in June 2006, the expression "Booking Quantity" disappeared and was replaced with the expression "Units". However, the definition of "booking" remained at the base of the table in Appendix A, notwithstanding that there was no term "booking" to which the definition could attach. In each of the documents identifying the Sales Goals for 2005 and 2006, there was a heading, "Sales Goal for each Product Line". That heading was not included in the letter of 30 November 2006 that set the Sales Goal for 2007. That is consistent with the amendment that was made to clause 3.02 in the middle of 2006 that it was "the total sales target rather than the individual modality targets" that was to be considered in determining whether the plaintiff had achieved its Sales Goal. 250 Although the actual sales goal for 2007 still included modalities and unit numbers, the express terms of clause 3.02, as amended in 2006, make it clear that in "determining whether the SALES GOAL has been met", the total dollar figure rather than the number of units was to considered. 251 The question is whether the parties intended to continue with the measurement of the plaintiff's sales goal by reference to the number of binding written commitments the plaintiff had from its customers, or some other measurement. There is nothing within the Agreement to suggest that it was some other measurement. During their relationship, the parties had proceeded on the basis that the plaintiff would place orders on the defendant to enable it to deliver the Products to the customer in a timely fashion. The evidence does not establish that in respect of each and every order the plaintiff placed on the defendant, it had a binding written commitment from a customer. However this has not been an issue prior to the 2007 sales goal and the parties have not had to look at the nature of the transactions until the transaction relating to RNSH at the end of 2007. 252 Although the express terms of the agreement developed in a most unsatisfactory manner in respect of the term "booking", I am satisfied having regard to the history between the parties and the commercial purpose of the Agreement, that is, the distribution of the defendant's product to customers, that the intention of the parties was that the plaintiff's sales goal would be measured by the "binding written commitments" the plaintiff received from customers in the particular year that was the subject of measurement. If that were not so, all the plaintiff would have to do would be to forward orders to the defendant at any time during the year for equipment that made up the total dollar amount of the sales goal. That would mean that the plaintiff would be able to stockpile equipment, a process that I am satisfied the parties did not intend. 253 The plaintiff made a further submission that, if it is the total dollar figure that has to be considered in determining whether the plaintiff's sales goal has been met, then the amount that should be considered is the amount at which the plaintiff sold the products to the customers, rather than the amount the plaintiff was obliged to pay the defendant for the products. There is no proper foundation for such a construction of the Agreement. The purpose of the commercial arrangement between these parties was for the distribution of the defendant's products to the customer. Part of that arrangement was an agreement that the plaintiff would achieve its sales goal by obtaining binding written commitments from customers in the marketplace. The defendant had no control over the price the plaintiff sold the product to its customers. The margin the plaintiff placed on the products for sale to its customers may have varied according to the commercial exigencies of the plaintiff's business. I am not satisfied that the parties intended that such an uncertain amount would be that which was to be considered in determining whether the plaintiff had achieved its sales goal. The plaintiff's submission in this regard cannot be accepted. 254 The next question is whether the plaintiff had a "binding written commitment" for the product the subject of the order. The first issue to be considered is the meaning of the expression "binding written commitment". The use of the word "commitment" instead of the word "agreement" seems to me to be of some importance. The meaning of "commit" in the context of this Agreement is to "pledge or bind (a person or an organization) to a certain course": The New Oxford Dictionary of English, (1998) Oxford University Press; or "to bind by pledge or assurance": The Macquarie Dictionary, Federation Edition (2001) The Macquarie Library. 255 The word "binding" in the expression "binding written commitment" seems superfluous from a technical definitional point of view, however it serves to emphasise that the parties intended that the measurement of the sales goal was to take into account something in writing from the customer that bound the customer to purchase certain products. It did not have to be a written purchase order, nor did it have to be a written contract for purchase, although of course each of those documents would qualify as a binding written commitment. So long as the plaintiff had something in writing by which the customer pledged or "committed" itself to purchase the product from the plaintiff, the plaintiff was entitled to have the dollar equivalent of the products that were the subject of the commitment considered when ascertaining whether its sales goal had been achieved. 256 The context in which the word "commitment" appears satisfies me that the parties used it intentionally to accommodate the way in which the nuclear medical equipment market operates. First of all the defendant must have product available or know that it has to manufacture the product to be available for the customer who has made a commitment to purchase it. From the customer's point of view there is a need to prepare a site for the installation of a PET machine including building works to accommodate the equipment. There needs to be advance planning and there may be different time frames from the date a party commits to purchasing product to the date the party places a formal purchase order for the product. The plaintiff did not have to wait for this latter event to place its order on the defendant. 257 The defendant submitted that the evidence establishes that there was no binding written commitment because Dr Roach did not have authority to bind the hospital. Dr Roach was addressing the topic of an "order". Although the email from Dr Bailey was addressed to parties additional to the plaintiff, including the defendant, it advised the plaintiff that "we", I am satisfied meaning RNSH, "have decided to purchase" the TF/64 PET/CT. I am satisfied that this communication was a pledge or a commitment by the customer to purchase the product. In all those circumstances the plaintiff was entitled to have the dollar equivalent of the "TF/64 time-of-flight PET/CT scanner" it placed on the defendant on 31 December 2007 taken into account in considering whether it had achieved its sales goal. 258 Mr Prather agreed in the evidence extracted above that he was aware that RNSH had acknowledged that it would proceed with the purchase. The commercially rational reason for the plaintiff to submit a purchase order was to take advantage of the price that was offered on the equipment that was to expire on 31 December 2007, but in any event it had a binding written commitment to purchase the product the subject of the order on the defendant. In my view the plaintiff was entitled to have the equivalent dollar figure considered in determining whether the sales goal had been achieved. 259 I am satisfied that the defendant is not entitled to rely upon the 2008 Notice because the plaintiff had achieved its sales goal for 2007. 260 The plaintiff is entitled to declarations and consequential orders that the defendant is not entitled to rely upon the 2007 and 2008 Notices. I am very conscious of the fact that the defendant no longer wishes to have the plaintiff as its distributor and notwithstanding an earlier unsuccessful attempt at mediation I wish to hear from the parties as to whether I should refer this matter to mediation prior to making final orders. I will also hear the parties on the issue of costs if they are unable to agree on a costs order. The matter is listed in the Motions List on 1 August 2008. ****************** 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.