FEDERAL COURT OF AUSTRALIA

Kovan Engineering (Aust) Pty Ltd v Gold Peg International Pty Ltd

[2006] FCAFC 117

CONTRACT – agreement in 1992for production of industrial cookers between respondent inventor and appellant manufacturer – dispute as to intellectual property rights in drawings subsequently prepared by appellant in connection with manufacture of 26                                                        cookers over ten years – alleged misrepresentation by appellant as to ownership of respondent’s business

Held:

(i)             the 1992 Agreement was contractually binding and governed the parties’ rights in respect of all 26 cookers;

(ii)           the 1992 Agreement contained terms to the effect that all intellectual property rights in the appellant’s drawings or any modification or enhancement of them would be owned by the respondent;

(iii)          the appellant had contravened ss 52 and 53(a), (b) and (d) of the Trade Practices Act 1974 (Cth)

Trade Practices Act 1974 (Cth) ss 52 and 53(a), (b), (d)

Gold Peg International Pty Ltd v Kovan Engineering (Aust) Pty Ltd (2005) 225 ALR 57 affirmed

Fox v Percy (2003) 214 CLR 118 applied

CSR Ltd v Della Maddalena (2006) 224 ALR 1 applied

Expectation Pty Ltd v PRD Realty Pty Ltd (2004) 140 FCR 17 at [66]-[83] followed

Hunter v Transport Accident Commission [2005] VSCA 1 at [21] not followed

Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184 at [287]-[290] followed

Whisprun Pty Ltd v Dixon (2003) 200 ALR 447 at [62] applied

Customs and Excise Commissioners v A [2003] 2 All ER 736 at [83] followed

Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 at 619 applied

LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2001] NSWSC 886 at [35] followed

Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548 cited

Merritt v Merritt [1970] 1 WLR 1211 at 1213 cited

Taylor v Johnson (1983) 151 CLR 422 at 428 cited

Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 336 cited

Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 105-106 cited 

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2003) 56 NSWLR 662 at 675 cited

Yorke v Lucas (1985) 158 CLR 661 applied

State Rail Authority (NSW) v Earthline Constructions Pty Ltd (1999) 73 ALJR 306 at 330 [90] applied

Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at 436 [24] followed

Biogen Inc v Medeva Plc [1997] RPC 1 at 45 followed

Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd [1983] 3 NSWLR 378 at 385 applied

Tatmar Pastoral Co Pty Ltd v Housing Commission of New South Wales (1984) 58 ALJR 553 followed

Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 at 269-70, 280-81 applied

N C Seddon & M P Ellinghaus, Cheshire & Fifoot’s Law of Contract, 8^th Australian edn, LexisNexis Butterworths, pp 248-249

KOVAN ENGINEERING (AUST) PTY LTD & ORS v GOLD PEG

INTERNATIONAL PTY LTD

VID 40 of 2006

HEEREY, WEINBERG & ALLSOP JJ

14 JULY 2006

MELBOURNE

THE COURT ORDERS THAT:

1.     The appeal is dismissed;

2.     Order (15) of the orders of the primary judge is set aside;

3.    The appellants pay the costs of the respondent at first instance and of the appeal, including in both instances reserved costs. 

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

REASONS FOR JUDGMENT

HEEREY AND WEINBERG JJ

1                     Mr Robert Smith invented an industrial cooker called the Direct Steam Injection Cooking Machine (the DSI cooker).  It is used to make processed cheese and also for the cooking of meat, starch and vegetable products.  The product is propelled in a continuous process through a column into which steam is introduced by injectors.

2                     This litigation arises out of copyright and contractual disputes between Mr Smith’s Gold Peg International Pty Ltd and the first appellant Kovan Engineering (Aust) Pty Ltd which for some years was the manufacturer of the DSI cooker.  At trial Crennan J found in favour of Gold Peg: Gold Peg International Pty Ltd v Kovan Engineering (Aust) Pty Ltd (2005) 225 ALR 57.

Mr Smith’s early involvement with Alfa Laval

3                     On 29 April 1986 Mr Smith entered into a consultancy agreement with a Danish company which was a member of the Alfa Laval group.  Under this agreement Mr Smith assigned all intellectual property rights in the DSI cooker to the Danish company.

4                     The Danish company did not proceed with development of the DSI cooker in Europe but acceded to Mr Smith making arrangements with Australian companies in the Alfa Laval group.  Mr Paul Watson, an employee of Alfa Laval Engineering Pty Ltd, an Australian Alfa Laval company, authored and produced drawings (the Alfa Laval Drawings) for use in the manufacture of the DSI cooker.  Mr Smith provided technical assistance to Mr Watson, who was in “constant consultation” with Mr Smith and also used drawings (the Original Drawings) and confidential information which Mr Smith had assigned to the Danish company. 

5                     In 1987 Alfa Laval Engineering commissioned Kovan to manufacture the DSI cooker.  The directors and shareholders of Kovan were the second appellant Mr Janis Zakis and Mr John Miller.  Mr Smith met with them on numerous occasions during the development of the DSI cooker.

6                     Between 1987 and 1989 Alfa Laval sold two DSI cookers manufactured by Kovan, one to Murray Goulburn Cooperative Co Ltd and the other to Bonlac Foods Ltd.  Mr Watson supplied the Alfa Laval Drawings to Kovan, together with manufacturing specifications, for this purpose.  According to Mr Miller, Kovan did not have, and would not have sought to claim, copyright in relation to the Alfa Laval Drawings (other than, presumably, a licence to use them for the purpose of manufacturing the two cookers).

7                     However, the relationship between Mr Smith and Alfa Laval deteriorated. In December 1989 he told Alfa Laval he wanted to terminate the consultancy and recover his “assets both intellectual and physical”.  After protracted correspondence Mr Smith on 11 February 1992 wrote to Mr Peter Holmskov of Alfa-Laval Dairy Systems AB of Sweden, the parent company of the group, confirming the consultancy was to be terminated with effect from 1 June 1991.  The letter was on the letterhead of Gold Peg and addressed to “Mr Peter Holmskov, Alfa-Laval Dairy Systens AB”.  It stated that “(w)ith reference to our discussions and correspondence about our future relationship, we would like to confirm our mutual agreement” as to a number of matters, including:

 “         (C) With the mutual cessation of the Agreement and the cessation of Alfa-Laval’s involvement then all Alfa-Laval’s previously assigned rights cease and all associated information is to be returned to the inventors [sic] control without charges by either party.

            …

             (G) As we are no doubt aware, the Alfa-Laval entity originally entering into the Consultancy Agreement has been amalgamated with another unit as a result of internal reorganizations within Alfa-Laval.  For the purpose of simplification this Letter Agreement is signed on behalf of the parent company of the relevant Alfa-Laval division and the parent company is consequently taking the full responsibility for the proper fulfilment of all terms set forth herein.”

The letter was signed:

                        GOLD PEG PTY LTD

                        (sgd) R M Smith

                        Robert M Smith

                        ALFA-LAVAL DAIRY SYSTEMS

                        (sgd) Peter Holmskov

                        Peter Holmskov

Gold Peg engages Kovan as manufacturer

8                     Gold Peg and Mr Smith lacked the financial capacity to proceed directly to commercial manufacture of the DSI cooker without Alfa Laval’s support.  Consequently Mr Smith approached Messrs Zakis and Miller with a view to Kovan continuing to manufacture the DSI cooker for sale by Gold Peg.

9                     Protracted discussions took place commencing in 1990 (i.e. before the termination of Mr Smith’s consultancy with Alfa Laval had been resolved).  The central issue in this case is whether a contract (the 1992 Agreement) was entered into between Gold Peg and Kovan which had the effect that Gold Peg retained the intellectual property rights in the DSI cooker and, in particular, in the drawings subsequently created by Kovan for the manufacture of the cookers.  These drawings have been referred to in the present case as the RotaTherm Drawings, that name being a trade mark which Gold Peg had registered.  It will be necessary to analyse the evidence as to these discussions in some detail.  At this stage however it can be noted that:

·           The rights Mr Smith had assigned to Alfa Laval would have to be recovered before he and/or Gold Peg could use them for the purpose of manufacture by Kovan on Gold Peg’s account;

·           Kovan was to charge on a cost plus basis;

·           No separate charge was to be made for any design work by Kovan.

10                  The first cooker under this new regime was made for sale by Gold Peg to a Dutch firm called Vonk Foods.  Kovan’s final quote to Gold Peg for the Vonk cooker identified the items Kovan would manufacture, the labour costs, costs of material and services that allowed a margin for overheads and other expenses and a total price with a mark-up of 40 per cent, less $7000.  Any costs incurred by Kovan for design and drawing work were not itemised in the quote.  By the end of the trial Kovan conceded that Gold Peg was entitled to the drawings for the Vonk cooker.  These contained a title block naming Gold Peg.

11                  Between 1992 and 2002 Kovan manufactured 26 DSI cookers at a total cost to Gold Peg of about $9 million.  Kovan provided quotes in the same way as it did for the Vonk cooker. Throughout this time Gold Peg on a number of occasions requested Kovan to acknowledge formally its intellectual property rights.  Kovan did not give such an acknowledgment but kept fobbing off Gold Peg.  In adopting this tactic Kovan was seeking to use Gold Peg’s uncertainty as leverage for its objective of obtaining an exclusive manufacturing agreement.

12                  Some design changes were made, but never without Mr Smith’s approval, and usually at his specific direction.  Her Honour (at [118]) firmly rejected the claim in the evidence of Mr Zakis that he was the chief designer of the DSI cooker and that Mr Smith’s input was very limited.

13                  Kovan at all times acted as manufacturer of the cookers at the direction and under the control of Gold Peg, which assumed full responsibility for them in dealings with its customers.

14                  The relationship between Gold Peg and Kovan broke down in 2002 when the former advised the latter it would henceforth use a competitive tendering system.  In May of that year Kovan submitted a quote to Gold Peg which included an assertion of copyright in drawings for the RotaTherm cookers.  This was the first time Kovan had made an express written assertion to this effect.

Conclusions of the primary judge

15                  The conclusions of her Honour can be summarised as follows.

(i) Reassignment of Alfa Laval’s rights to Gold Peg

16                  Mr Holmskov had actual, or apparent, authority to assign the rights held by (i) the Danish company under the 1986 consultancy agreement and (ii) the Australian Alfa Laval companies working under licence from the Danish company.  The letter of 11 February 1992 was effective for the purposes of s 196(3) of the Copyright Act 1968 (Cth) to assign all rights, including copyright in the Alfa Laval Drawings, to Gold Peg (at [64]-[69]).

(ii) Gold Peg’s equitable rights in RotaTherm Drawings – the 1992 Agreement

17                  As to the RotaTherm Drawings, her Honour noted that Gold Peg conceded it did not have a claim to copyright on the basis of authorship under the Copyright Act.  Its claim was to be the equitable owner under the 1992 Agreement.  The issue turned on findings as to evidentiary conflicts as between Mr Smith, Mr Miller (who was called as a witness by Gold Peg) and Mr Zakis and what terms were to be implied to give business efficacy.

18                  Her Honour found (at [99]-[101]) that there were express oral terms of the 1992 Agreement that:

·           Kovan would manufacture DSI cookers to Gold Peg’s specifications using the Alfa Laval Drawings, subject to agreement on price and payment terms for each machine;

·           The cost of drafting and design work necessary to create manufacturing drawings would be incorporated into the contract price to be charged by Kovan; and

·           Kovan would not take responsibility for claims in respect of the machines, other than manufacturing or material defects.

19                  Her Honour also found (at [102]-[103]) that it was necessary as a matter of business efficacy to imply terms that:

·               Kovan would not make any use on its own behalf of, and would keep confidential, the Alfa Laval and RotaTherm Drawings; and

·               Kovan would not use the Alfa Laval or RotaTherm Drawings other than to manufacture cookers for Gold Peg.

20                  Her Honour found (at [104]) that while there was no express agreement between the parties as to the ownership of intellectual property rights in the manufacturing drawings produced by Kovan (i.e. the RotaTherm Drawings), there was a term, partly oral and partly to be implied as a matter of business efficacy, that such rights in drawings based on the Alfa Laval Drawings or any modification or enhancement of them in manufacturing drawings created by Kovan would be owned by Gold Peg. In this regard her Honour accepted Mr Smith’s evidence that he insisted on owning all intellectual property rights in the cooker and Mr Miller accepted this by shrugging his shoulders – a gesture which, her Honour found, conveyed Kovan’s acceptance of this condition.

21                  Her Honour concluded that Gold Peg was entitled to an assignment from Kovan of legal ownership in the RotaTherm Drawings (at [135]).

(iii) Estoppel against Kovan

22                  While pointing out that it was not strictly necessary to deal with Gold Peg’s estoppel case, her Honour found that Kovan, by silence and conduct, encouraged Mr Smith to believe it would make no claim to either the Alfa Laval or RotaTherm Drawings, as a consequence of which Gold Peg placed orders for manufacture with Kovan.  Estoppel was made out ([136]-[140]).

(iv) Breach of the 1992 Agreement

23                  Her Honour also found that Kovan had breached the 1992 Agreement by asserting a right to manufacture the cookers using the RotaTherm Drawings and the rights assigned from Alfa Laval without the consent of Gold Peg (at [142]-[143]).

(v) Trade Practices Act and passing off

24                  Gold Peg alleged contravention of ss 52, and 53(a), (b) and (d) of the Trade Practices Act 1974 (Cth) and passing off constituted by various representations, generally to the effect that Kovan was authorised by Gold Peg to manufacture and supply cookers substantially the same as the RotaTherm cookers and that its cooker sold under the name “Fusion” was endorsed by Gold Peg.  Kovan admitted making the representations but said it was entitled to do so.

25                  Her Honour found (at [160]-[161]) that Kovan had contravened the Trade Practices Act and also had passed off its business as and for the business of Gold Peg.

(vi) Threatened infringement of copyright in Alfa Laval Drawings

26                  Kovan argued that even if it were found that it had actually copied the Alfa Laval Drawings the components it manufactured would not be sufficiently similar to Alfa Laval’s designs and drawings to constitute a reproduction of them or a substantial part of them.

27                  Her Honour rejected the claim of Mr Zakis that he did not make reference to the Alfa Laval Drawings when he undertook further design work on the Vonk and subsequent cookers.  Whether or not he had the Alfa Laval Drawings physically at hand (he admittedly had them in his possession) he could not possibly have excluded them from his mind.  There were key similarities between, on the one hand, the Murray Goulburn and Bonlac cookers and, on the other hand, the Vonk cooker.  Cookers built by Kovan looked nothing like the prior art Mr Zakis claimed he relied on.  Knowledge of the reassignment of copyright to Gold Peg could be attributed to Kovan; thus at the time Kovan manufactured the RotaTherm cookers, there was no inhibition on Mr Zakis using the Alfa Laval Drawings and every reason for him to do so. 

28                  Her Honour found on the evidence, including her own assessment as informed by the evidence of expert witnesses, that if Kovan were to manufacture DSI cookers in accordance with the RotaTherm Drawings it would infringe the copyright held by Gold Peg in the Alfa Laval Drawings by substantially reproducing them (at [197]-[198]).

(vii) Defence of industrial application – Copyright Act s 77

29                  Her Honour noted (at [204]-[205]) the agreement of the parties that drawings of the steam injectors, motor, motor shaft and mechanical seals had been industrially applied, and that the industrial application defence at trial would be confined to the Kraft cooker rotor drawings and the Great Lakes cooker bottom elbow drawings.  Accordingly the findings on industrial application would be interlocutory only, being confined to those two components.

30                  After reviewing authorities, her Honour concluded (at [218]) that for the purposes of s 77 the products in question must have been made pursuant to “a manufacturing process for the systematic production of articles”.  On this approach, the bottom elbow fell within s 77 (at [220]) but the rotor did not (at [221]).

(viii) Personal liability of Mr and Mrs Zakis

31                  Mr Zakis was a “key participant” in the threatened infringement, which could not be determined until the industrial application defence was concluded.  Her Honour was not satisfied that Mrs Zakis was in control of the conduct which contravened the Trade Practices Act or that she authorised threatened infringements (at [223]-[224]).

(ix) Cross-claim

32                  Kovan cross-claimed for threatened infringement of the RotaTherm Drawings.  Her Honour (at [230]) dismissed this case on the basis of her finding as to Gold Peg’s equitable ownership.  Alternatively, Gold Peg had an implied licence, and in any event Kovan would not have an independent copyright, since on the evidence, Mr Smith, Gold Peg and Kovan would be joint owners. 

33                  Gold Peg could invoke s 77 in answer to the cross-claim (at [232]).

(x) Orders

34                  After declarations in accordance with the foregoing findings her Honour ordered that:

·           Kovan be restrained from making the representations found to be a contravention of the Trade Practices Act and to constitute passing off;

·           Mr Zakis be restrained from aiding, abetting, counselling or procuring such conduct;

·           Kovan execute a transfer of legal ownership in the copyright in the RotaTherm Drawings to Gold Peg;

·           Kovan deliver up all copies of the Alfa Laval and RotaTherm Drawings;

·           Kovan keep accounts of sales and profits from sales of products made in accordance with the Alfa Laval and RotaTherm Drawings, save for drawings relating to steam injectors, motor and motor shaft, mechanical seals and drawings for bottom elbows made in accordance with the Great Lakes bottom elbow drawings;

·           The cross-claim be dismissed with costs;

·           Costs otherwise be reserved; and

·           (Order (15)) the matter be adjourned before Kenny J for further directions.

Issues on the appeal

35                  At the forefront of the appeal are contractual issues, namely whether:

·           The 1992 Agreement was contractually binding;

·           If so, whether it was a continuing, overarching agreement which governed the parties’ rights in respect of all 26 cookers, or was confined to the Vonk cooker; and

·           If the former is the case, whether the 1992 Agreement contained the terms found by her Honour.

36                  If no error is shown in her Honour’s findings as to the 1992 Agreement and its terms then the estoppel issues do not arise, since they were put as an alternative to Gold Peg’s contractual case.

37                  Nor do issues as to the reassignment from Alfa Laval (e.g. authority of Mr Holmskov, whether reassignment was to Mr Smith or Gold Peg) since Gold Peg’s rights as against Kovan arise ex contractu. 

38                  Nor do most of the Trade Practices Act and passing off issues, since these turn essentially on the equitable ownership of the RotaTherm Drawings, a question  which will be resolved in favour of Gold Peg if the judgment is upheld on the contractual issues.  However, there is still an issue as to those representations which held out Gold Peg’s business as Kovan’s.

39                  Nor do issues as to infringement of Alfa Laval or RotaTherm Drawings since Gold Peg has a contractual right which extends to modification or enhancement of them in future drawings created by Kovan; see the term discussed at [104] below.

40                  Likewise the industrial application issues do not arise if Gold Peg has the contractual rights it asserts.

Appellate review

41                  Before turning to the issues we have identified we shall mention briefly two related matters: first, the approach of an appellate court, particularly in relation to the trial judge’s findings of fact when based on credibility assessments, and, secondly, the extent of the trial judge’s obligation to give reasons.

42                  As to the first matter, recent decisions of the High Court emphasise the rehearing aspect of appeals in intermediate appellate courts in Australia.  The leading cases are Fox v Percy (2003) 214 CLR 118 and CSR Ltd v Della Maddalena (2006) 224 ALR 1.  In between those cases the question has been extensively discussed by a Full Court of this Court in Expectation Pty Ltd v PRD Realty Pty Ltd (2004) 140 FCR 17 at [66]-[83] in terms which we would adopt and which it is unnecessary to repeat in this judgment.

43                  In the present case her Honour’s findings of fact are by no means confined to observations of the demeanour of the witnesses.  In Fox Gleeson CJ, Gummow and Kirby JJ (at [31]) stress the importance, both at trial and appellate level, of “contemporary materials, objectively established facts and the apparent logic of events”.  As we hope to demonstrate, both her Honour’s findings and our conclusions on appeal rest to a substantial degree on inherent probabilities.

44                  As to the second matter, the obligations of the trial judge to give adequate reasons, on the appeal Kovan relied strongly on what was said by Nettle JA (with whom Batt and Vincent JJA agreed) in Hunter v Transport Accident Commission [2005] VSCA 1 at [21].  While noting that the extent of the reasons will depend on the circumstances of the case, his Honour said that the reasons should deal with the “substantial” points which have been raised, include findings on “material” questions of fact and provide an “intelligible” explanation of the reasoning from evidence to findings to ultimate conclusion.  Reference to the evidence should not be limited to the evidence that has been accepted and acted upon, but “ordinarily” should deal with the “substantial” points made in evidence which has been rejected and explain why it has been rejected.  The judge must deal with evidence which is “relevant and cogent”, arguments which are “substantial” and issues which are “significant”.

45                  No matter how prescriptive the principles laid down, they inevitably involve disclaimers as to any universal applicability.  Moreover, the passage from Hunter would give an unbalanced view if it were not read in conjunction with the firm warnings of courts of high authority against over-lengthy judgments. These are noted by the Full Court in Expectation at [83].  Of the cases there referred to particular note should be taken of what was said by the New South Wales Court of Appeal in Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184 at [287]-[290] and the following passage from the joint judgment of Gleeson CJ, McHugh and Gummow JJ in Whisprun Pty Ltd v Dixon (2003) 200 ALR 447 at [62]:

“…it should not be accepted that Newman J failed, at least in a general way, to consider the matters to which the Court of Appeal referred.  The fact that his Honour did not refer to these matters in his judgment is not decisive.  A judge’s reasons are not required to mention every fact or argument relied on by the losing party as relevant to an issue.  Judgments of trial judges would soon become longer than they already are if a judge’s failure to mention such facts and arguments would be evidence that he or she had not properly considered the losing party’s case.”

46                  As the Full Court said in Expectation (at [71]), in the normal case statements by a trial judge of a general assertive nature can be accepted as encompassing a detailed consideration of the evidence.  As their Honours immediately go on to say, such statements should be treated with some reserve where there has been “significant” delay between trial and judgment.  After such a delay,

“…a more comprehensive statement of the relevant  evidence than would normally be required should be provided by the trial judge in order to make manifest, to the parties and the public, that the delay has not affected the decision.”

47                  The period between trial and judgment in Expectation was some 21 months.  In the present case it was about seven and a half months.  This would be well within the range of reasonable expectation for a case of this complexity.  Kovan did not complain of delay as such; cf Expectation at [61].  While the notice of appeal and written submissions were replete with complaints as to failure to give adequate reasons, on the oral hearing little, if anything was heard as to this aspect.  The reason, we think, is that the more the appeal issues were discussed, the more clearly her Honour’s reasoning emerged from her reasons.

48                  As to the suggested obligation on the trial judge to explain why evidence or argument of the losing party has been rejected, we would refer to what was said by Schiemann LJ in Customs and Excise Commissioners v A [2003] 2 All ER 736 at [82]-[83], in a passage cited with approval in Digi-Tech at [285]:

“…judges should bear in mind that the primary function of a first instance judgment is to find facts and identify the crucial legal points and to advance reasons for deciding them in a particular way.  The longer a judgment is and the more issues with which it deals the greater the likelihood that: (i) the losing party, the Court of Appeal and any future readers of the judgment will not be able to identify the crucial matters which swayed the judge; (ii) the judgment will contain something with which the unsuccessful party can legitimately take issue and attempt to launch an appeal; (iii) citation of the judgment in future cases will lengthen the hearing of those future cases because time will be taken sorting out the precise status of the judicial observation in question; and (iv) reading the judgment will occupy a considerable amount of the time of legal advisers to other parties in future cases who again will have to sort out the status of the judicial observation in question.  All this adds to the cost of obtaining legal advice.”

Often it is not possible to reconcile neatly all evidence and arguments.  Sometimes evidence or arguments of the losing party may be valid in themselves; it is just that there seem to the trial judge to be other and more persuasive items of evidence and points of argument the other way.  If the trial judge does not mention such evidence or arguments of the losing party an appellate court may take a different view.  It may reverse the decision below because it finds the appellant’s evidence or arguments persuasive.  But that will be because the appeal court took a different view of the facts or law from that of the trial judge, not because the trial judge made a legal error in the way his or her reasons were expressed – provided the minimum requirements identified by Schiemann LJ are satisfied.

The 1992 Agreement

49                  The final version of Gold Peg’s statement of claim pleads the 1992 Agreement as follows (par 11).  In 1992 Gold Peg entered into an agreement with Kovan “concerning the manufacture of cooking machines based on the Assigned Rights [previously defined in the statement of claim as the copyright in the Original Drawings and the Alfa Laval Drawings]”.  Some of the alleged terms of the 1992 Agreement have already been referred to – see [18]-[20] above.  Another term, alleged in par 11(a), is that, on order from Gold Peg, Kovan would manufacture cooking machines to Gold Peg’s specification utilising the Assigned Rights, subject to an agreement on price and payment terms in relation to each cooking machine.

50                  On the appeal Kovan argued that there was no binding agreement because essential matters such as the price and specifications of the cookers had not been agreed and thus the subject matter was uncertain.  Further, it was said there was no consideration moving from Gold Peg.

51                  There can still be a binding agreement even if the parties contemplate that future agreement will be necessary on particular matters.  As was said by Lloyd LJ, with whom the other members of the English Court of Appeal agreed, in Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 at 619:

“But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later.”

The question is how extensive, in the overall bargain context, are the elements on which the parties have done no more than agree to agree.  In LMI Australasia Pty Ltd v Baulderstone  [2001] NSWSC 886 at [35] Barrett J, after citing the statement of Gleeson CJ in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548, said:

“There is, in other words, a point beyond which ‘agreement to agree’ elements (of themselves unenforceable) cause the totality to fail.  The central question, it seems to me, is whether the elements not affected by that problem of unenforceability are sufficiently cohesive and coherent to stand as a contract in their own right.  This is probably another way of addressing the question whether elements so affected may be severed in accordance with principles discussed in cases such as Whitlock v Brew (1968) 118 CLR 445 and David Jones Ltd v Lunn (1969) 91 WN(NSW) 468.”

See also N C Seddon & M P Ellinghaus, Cheshire & Fifoot’s Law of Contract, 8^th Australian edition, at 248-249.

52                  In 1992 a sea change occurred in the production of the DSI cookers.  Instead of Kovan manufacturing cookers for Alfa Laval, with Mr Smith acting as Alfa Laval’s consultant, Kovan was to manufacture cookers for Mr Smith’s company Gold Peg.  Kovan and Gold Peg were setting out on a venture extending indefinitely into the future, involving precision engineering work with substantial financial commitments on both sides.  In fact, as things turned out, 26 cookers were constructed over 10 years at a cost to Gold Peg of $9 million.  It would have been obvious in 1992 that in the future it might not be possible to agree on price or other terms for a particular cooker order.  But there were core elements which had to be agreed upon, either expressly or by implication as a matter of business necessity, and in particular the question of intellectual property rights, especially in the light of the previous involvement of Alfa Laval.  As her Honour noted (at [94]), the Vonk order was placed on the premise that the terms alleged had been agreed to.  The order, for a total purchase price of $184,089, was placed by Kovan two days after the reassignment to Gold Peg of the Alfa Laval rights.  In light of the mutually contemplated continuing relationship, it would have been quite unreal to suggest that intellectual property rights were agreed only in respect of the Vonk cooker, leaving Kovan free thereafter to exploit those rights for its own benefit against the inventor.

53                  To adopt the language of Barrett J in LMI, the terms as alleged by Gold Peg and found by her Honour were sufficiently cohesive and coherent to stand as a contract in their own right.

54                  The placing of the Vonk order in itself was sufficient consideration.  In effect Gold Peg was saying that it would give Kovan this order on the terms that future dealings would be on the same basis.  By the same token, the 1992 Agreement is to be seen as an overarching contractual arrangement as to the terms on which Kovan was to construct DSI cookers for Gold Peg in the future.

Evidence as to terms

55                  As previously indicated, a key issue in this appeal is whether Gold Peg and Kovan entered into the 1992 Agreement, as alleged, and if so, what were the terms of that agreement.  In particular, did Gold Peg retain the intellectual property rights in the DSI cooker, as well as in the RotaTherm Drawings subsequently created by Kovan for the manufacture of other cookers?

56                  It is common ground between the parties that there was never any written agreement defining the relationship between Gold Peg and Kovan.  However, both parties accepted that protracted discussions concerning the future manufacture of the DSI cooker took place between Mr Smith on behalf of Gold Peg, and Messrs Miller and Zakis on behalf of Kovan in the period May 1990 to February 1992.  Neither Gold Peg nor Kovan produced any contemporaneous note regarding the details of these discussions.  That meant that the evidence of what was said during this critical period was based entirely upon recollection.

57                  Not surprisingly, those who participated in these discussions gave different accounts of what had transpired.  As a consequence, numerous days were taken up at trial with cross-examination of the key witnesses.

58                  Her Honour made findings of fact in relation to these discussions.  Those findings were based not merely upon her assessment of the demeanour of the various witnesses, but also upon the inherent probabilities of their accounts.  Nonetheless, she indicated (at [6]) that she had closely observed the witnesses when they gave evidence about contested matters, particularly conversations that took place in the period leading up to February 1992.  Mr Miller’s evidence is of particular significance in this regard.  It seems from her Honour’s reasons for judgment that, to the extent that there were inconsistencies between the accounts given by the various witnesses, she regarded Mr Miller’s evidence as the most accurate and reliable account of what had transpired.  She found that Mr Miller’s evidence generally accorded with that of Mr Smith, but where it did not, she preferred Mr Miller.  In relation to Mr Zakis, her position was quite plain.  Wherever his evidence conflicted with that of Mr Miller she strongly preferred Mr Miller’s evidence.  In effect, her Honour accepted the evidence of Mr Smith and Mr Miller in preference to Mr Zakis, whose evidence she rejected. 

59                  It is because her Honour regarded Mr Miller as an impressive witness, and based her findings upon his account of the discussions that had taken place, that we refer at some length to that evidence, and less extensively to the evidence given by Mr Smith and Mr Zakis.

60                  On the appeal to this Court, Kovan’s arguments were as follows.  It submitted that her Honour ought not to have accepted Mr Miller’s evidence, and ought rather to have preferred the account given by Mr Zakis.  Mr Zakis’ account was inherently more probable than that of Mr Miller, though the latter’s evidence was supported by Mr Smith.  It was hardly likely that Kovan would have entered into an agreement with Gold Peg of the type alleged without the security afforded by some sort of exclusive supply arrangement.  Gold Peg’s business was important to Kovan.  However, on Gold Peg’s case, Kovan had no ongoing arrangement with Gold Peg, and no assurance (after manufacturing the Vonk cooker) that there would be any further orders in the future.  Such an arrangement would have made no commercial sense, unless Kovan had the intellectual property in the DSI cooker, and the RotaTherm Drawings.  That might explain why Kovan would enter into the arrangement with Gold Peg without the benefit of an exclusive long-term supply agreement. 

61                  Mr Miller’s evidence regarding this issue was of considerable importance.  In cross-examination he was asked:

“MR COLLINS: …And you appreciated that, if Kovan had no rights to the drawings and it agreed that all rights were to Gold Peg, that would affect the value of Kovan because it meant Gold Peg could go and have someone else build the cookers and Kovan couldn't compete - couldn't do anything?--- Exactly.  Exactly as it was when we built the Vonk cooker.”

62                  Whether or not the arrangement between Gold Peg and Kovan made good commercial sense was not of itself a matter for her Honour to determine.  Nor is it, as such, an issue in this appeal.  A bad bargain may, nonetheless, be legally enforceable.  Of course such considerations may influence a court in determining whether a particular agreement was reached.

63                  When her Honour considered the discrepancies between the evidence of Messrs Smith and Miller on the one hand, and Mr Zakis on the other, she noted (at [93]) that “(c)redit was a central issue” in the case.  She set out succinctly the critical points upon which their evidence differed, observing (at [92]):

“Mr Zakis disputed the evidence given by both Mr Smith and Mr Miller that any discussions had taken place concerning ownership of the intellectual property rights in the DSI Cooker.  Mr Zakis did agree in the context of the Alfa Laval Drawings that Mr Smith ‘was saying that he owned everything and that he had the right to work with these things’.  However, it was submitted on behalf of (Kovan)that there had been no agreement as to any future rights arising as a consequence of the manufacture and development of the DSI Cooker.  In particular, counsel for (Kovan) claimed that there was no agreement to the effect that (Gold Peg) would be able to claim copyright in drawings done by (Kovan).”

64                  We propose to consider Mr Miller’s evidence regarding the discussions leading up to the alleged agreement between Gold Peg and Kovan under three separate headings.  Each of these headings corresponds to one of the elements of those discussions identified in [9] of these reasons for judgment .

(i) Mr Smith’s rights in the Alfa Laval Drawings and the RotaTherm Drawings

65                  According to Gold Peg, the first issue resolved in 1992 related to Mr Smith’s rights in the Alfa Laval and RotaTherm Drawings.

66                  In that regard, her Honour found (at [108]):

“Accepting (Gold Peg’s) retention of all intellectual property rights in the cooker was an essential precondition to (Kovan) being retained by (Gold Peg) to manufacture the cookers.  Mr Zakis conceded in evidence that he knew Mr Smith was claiming all rights in the Alfa Laval Drawings.”

67                  It is of some significance to note the following concession by counsel for Kovan at trial:

 “(T)here’s no dispute that everyone accepts Mr Smith always believed the principle was his, the idea was his, and we don’t argue with that even today.”

68                  Kovan contended that Mr Smith’s belief was of no legal significance.  It submitted that ownership of the intellectual property rights was to be determined not by Mr Smith’s idiosyncratic views, but rather by the terms of any agreement between Gold Peg and Kovan;  those terms were to be ascertained objectively, having regard to what the parties said and did, and not on the basis of the subjective views of any particular individual.

69                  Nevertheless, the fact that Mr Smith held the belief in question (and, one would expect, firmly, since he had managed to recover his rights following a disappointing relationship with Alfa Laval) makes it inherently likely that he would have insisted on his company retaining the rights in question.  Moreover, to revert for a moment to Kovan’s arguments summarised at [60] above, Kovan was in no position to insist on an exclusive right to manufacture Gold Peg’s DSI cookers in the future, much as Mr Zakis would have liked that to be the case.  Kovan’s case did not include any suggestion that it had some special technical expertise not available from other engineering firms in Australia.  Kovan was not contributing capital or risk to the production of the cooker.  Gold Peg could have gone elsewhere.  Kovan was going to be well paid for the Vonk cooker and, objectively considered, it would have a reasonable expectation of obtaining orders from Gold Peg in the future, as in fact happened.  There is no commercial sense in the proposition that Gold Peg, in 1992, could have only proceeded with the DSI cookers if it gave Kovan either exclusive manufacturing rights or all its intellectual property rights.

70                  Her Honour ultimately found that it was agreed between the parties that the rights Mr Smith had assigned to Alfa Laval would have to be recovered before Gold Peg could use the drawings for the purpose of manufacture by Kovan on behalf of Gold Peg.  The following exchange with Mr Miller assists in understanding how her Honour arrived at that conclusion:

“MR GOLVAN:   What was said between you on [the question of Mr Smith’s ownership of all rights which consistently arose]?---Very little.

Can you say what he said to you and what you said to him?---He says that he, Gold Peg, owned all rights in the cooker, as he had got it from Alfa Laval, of course.

HER HONOUR:   Did he show you any document from Alfa Laval?---That's an embarrassing one.  I think I saw - he had a piece of paper originally, but I don't really recall having a memory of actually physically going through it.

Very well.  You continue then with what he said and what you said on this issue?---I’m sorry.

Continue, please, then with what he said and what you said on this issue?

---He maintained the viewpoint that all rights were his and I virtually just shrugged my shoulders and let it go.  I didn’t say yes and I didn’t say no.  I did not want to commit on that issue.

MR GOLVAN:   With respect to that issue - that discussion on the question of rights - can you recall when that discussion occurred?---The final one would have been in the - that final discussion before we committed to the Vonk cooker.  The first one of course goes right back to Alfa Laval.”

71                  In cross-examination, Mr Collins put the following question and received the following answer from Mr Miller: 

“…if in 1992 you understood that you and Mr Smith proceeded on the understanding that he would have all rights in the cooker, you wouldn’t later seek to act contrary to that? --- Correct.”

72                  However, Mr Miller’s evidence suggested, and her Honour found, that Kovan was withholding acknowledgment of copyright as a lever to pressure Gold Peg to enter into an exclusive manufacturing arrangement, which Gold Peg continually refused to do. 

73                  In 1994, Mr Smith called upon Mr Miller to sign a confidentiality agreement with Gold Peg.  Under that proposal, Kovan would agree to Gold Peg’s ownership of the DSI cooker design and technology, as manufactured by Kovan on a subcontractor basis.  That agreement was never finalised. 

74                  Mr Collins put to Mr Miller:

“…the reason you didn't sign it, amongst others, was because you weren't prepared to acknowledge that Gold Peg owned the system design and technology as manufactured by Kovan Engineering on a subcontractor basis.  Do you agree with that? --- Until such time as we had a long-term agreement, if that were possible.”

75                  Kovan’s general approach towards the intellectual property rights in the drawings for the DSI cooker is illustrated by the following exchange between her Honour and Mr Miller:

“HER HONOUR:  Was the willingness to sign a document like this dependent on getting a long-term agreement for supply?---Yes.  If we had that set up - and that goes back a long way - of course, because essentially this is the way we operated and particularly as Gold Peg had paid for the drawings.  There is no question about the fundamental IP in the cooker itself.  I mean, that never changed; only the drawings changed, in minor detail.

MR COLLINS:  Do you recall what you did after you got  ‑-‑?---May I make a point?  There's no question about the IP.  The intellectual ‑-‑

HER HONOUR:  What do you mean by that, Mr Miller?---The cooker with its injectors, the heart of the machine, as I understand it, that was the intellectual property.  I do not know the legal differences between copyright patent and IP, but I do know that the essence of the machine, the cooker, as described did belong to Bob Smith and it had been that way from the beginning.  There was nothing changed to the essence of the machine - nothing.  So we could never argue that the essence of the machine did not belong to Bob Smith.  We had accepted that from the beginning, as far as I knew.”

76                  Mr Miller’s attention was drawn to legal advice that had been provided to Kovan by its solicitor, Mr Rees in mid 1998.  In that advice Mr Rees expressed the opinion that Kovan held the intellectual property rights in the RotaTherm Drawings. 

77                  Mr Miller said he had no recollection of having obtained any advice from Mr Rees about the intellectual property rights in the cookers.  He then qualified that answer, and recalled that Mr Rees had reacted to a request for general advice about Kovan’s situation by recognising Kovan’s vulnerability in its relationship with Gold Peg.  Mr Miller commented that this in essence, simply “confirmed what we [Kovan] already knew”, namely that Kovan was very vulnerable.  Mr Miller said that he could not recall having sought specific advice from Mr Rees regarding intellectual property rights.  It was then put to him that he would not have misled Mr Rees about the history of the relationship between Gold Peg and Kovan, a proposition that he accepted.  However, he did not accept that Mr Rees had been fully briefed about the history of that relationship.

78                  It is in the context of that evidence that the following exchange between her Honour and Mr Miller took place:

“HER HONOUR:   Can you help me understand what you meant when you said, ‘Mr Rees confirmed what we already knew.  We were in a very vulnerable’ - I think you said – ‘position’?---Yes.

To what is that a reference, Mr Miller?--- Well, that refers to the fact that twice Mr Smith has effectively tabled what he regarded as all rights.  The first one in 94 was pretty comprehensive.  We had not denied that.  In my experience, going back 40-odd years, when somebody presents you with a proposition in relation to a contract in particular, if you don’t deny it, by default you've accepted it.  That’s the way I operated.  I had no reason to believe that's not valid.  Certainly, from the relationship between us, that stood.

What stood?---That we had not rejected his statements in his letters.  We had not come back to him and said, ‘We don’t agree with this’.”

79                  Mr Miller’s attention was then drawn to a letter dated 17 June 1998 sent by Mr Smith to him.  That letter contained the following sentence:

“Since development costs have been amortised over sales, and ultimately paid by GP [Gold Peg], then these fall under GP’s [Gold Peg’s] ownership.” 

80                  Mr Collins’ questions regarding this letter continued as follows:

“At the time, can you recall what you thought that meant, at the time - what it was referring to?--- Just what it says, that he [Mr Smith] has paid for it; therefore, he [Mr Smith] owns them.

What was it you understood he was saying he had paid for?--- All of the drawings which Kovan had done, and for which we had amortised the costs.”

81                  In context, Mr Smith was claiming ownership of the RotaTherm Drawings in addition to the Alfa Laval Drawings.

82                  Later in his cross-examination Mr Miller was provided with copies of notes of a meeting that he had attended with Mr Rees.  Mr Collins put to Mr Miller that he would not have told Mr Rees that he believed Kovan to be entitled to the RotaTherm Drawings, and the rights to the drawings, as the notes suggested, unless at the time he believed that to be the case.  Mr Miller responded “No, I wouldn’t have told him unless I believed what I was saying”. 

83                  However, the cross-examination then continued as follows:

“Did you tell Mr Rees that Alfa had originally taken the patent - I take it that means to the cookers - but it had walked away from him?---Mm’hm.

Did you tell Mr Rees that?---Could well have done so.

Did you tell Mr Rees that despite this, Bob Smith had excellent credentials and credibility within the food industry and did believe that the generation of the idea came from him?---I would say that that’s a correct statement.  I don't recall saying it specifically.

It’s true, isn’t it, that you did believe that the generation of the idea of the cookers came from Mr Smith?---  Yes.

If Mr Rees records that you told him - that is, you told Mr Rees - that in a sense you recognised this, that would be an accurate statement of what your position was in any event, whether you can remember telling him or not?---That I believe that Mr Smith only--- 

You recognised that the generation of the idea for the cookers had come from Mr Smith?---Absolutely.

Yes.  You also told Mr Rees, didn't you, that you believed that Kovan had the rights to the drawings and you told him that you believed that Kovan owned the rights in the drawings?---Well, I have trouble with that - if I said that - because we didn’t.

But if you said it at the time - I think you’ve agreed with me you wouldn’t have said it unless you believed it to be true at the time?---I don’t think I would have but obviously there is either a misunderstanding or a misinterpretation.

But you say you didn’t tell him that you believed that Kovan had the rights in the drawings?---I find it hard to believe that I would have.

HER HONOUR:   Did you hold that belief at the time?---Pardon?

Did you hold the belief at the time that Kovan had rights in the drawings?

-- Not at all, because… Mr Smith had paid for it.

…

MR COLLINS:   Are you sure that when you say your belief at the time was that Mr Smith was entitled to the rights in the cookers because he had paid for them, that you are recalling that is what you believed at the time, or are - are you sure that’s not what you believe now?---No.  It’s what I believed--- 

After having discussed it and thought about it with a lot of people, that that’s your present belief?---That has been my consistent belief for many years, certainly going back to 94.

I am going to put to you, Mr Miller, that you are mistaken because I am putting it to you that you did tell Mr Rees that you believed that Kovan owned the rights in the drawings and that you wouldn't have said that unless you believed it?---I think there must be more words around that to explain that situation.

I will put it more positively:  you told Mr Rees, didn’t you, that Kovan’s relationship with Gold Peg was not as a simple subcontractor?---As I - I certainly could have said that.

That was your belief, wasn’t it?---Yes.  It wasn’t a simple subcontractor.

Yes.  You told Mr Rees, didn’t you, that you could not agree with the claim by Mr Smith that all rights belonged to Gold Peg?---I would have said what I’ve said before, that we don’t acknowledge it.”

84                  Her Honour plainly relied upon Mr Miller’s evidence in arriving at the following conclusion (at [108]):

“(Kovan) never insisted it owned copyright in manufacturing drawings until the commencement of this proceeding. The evidence showed that at the highest, what (Kovan) did in 1995, 1998 and later was to refuse to `acknowledge´ (Gold Peg’s) rights to copyright in the manufacturing drawings.  It received legal advice (in respect of which privilege is waived) in 1998 to the effect that it owned copyright in the manufacturing drawings it had created (the RotaTherm Drawings). The contemporaneous documents show the solicitors involved gave such advice on the premise that (Gold Peg) was a `mere distributor´ of the cooking machines. This was not a correct basis upon which to give advice on copyright ownership issues. However, it is not necessary for me to make any determination as to how the solicitors came to misunderstand the facts.”

85                  Mr Miller’s evidence provided ample justification for arriving at this conclusion.  There was nothing inherently improbable in his stance that, so far as he was concerned, Mr Smith had always retained the intellectual property rights in the Alfa Laval Drawings and the RotaTherm Drawings.  If Kovan entered into a bad bargain, that was because, as we have already noted, it had little effective bargaining power.  All that Kovan could realistically do in order to induce Gold Peg to enter into an exclusive manufacturing agreement with Kovan, and thereby provide it with some measure of security, was to preserve a degree of leverage by not, at any stage, acknowledging Gold Peg’s rights to the drawings.  However, from Mr Miller’s perspective, this was window dressing. 

(ii)  Kovan to charge on a cost plus basis

86                  Her Honour found that it was a term of the 1992 Agreement that Kovan was to charge on a cost plus basis.  With regard to the responsibility for manufacturing costs, marketing and sale of the cookers, Mr Miller had this to say:

“MR GOLVAN:  Can you recall any other discussions you had with Mr Smith at the time of which you are now talking in relation to arrangements between Kovan and Gold Peg?---In the end, there were quite a few.  One important one was that we expected to be paid under our usual terms, which is a deposit followed by progress payments followed by final payment, before the equipment left our workshop – that’s our ideal - but we would be flexible on that if he didn't have the money.  That’s the starting point.  He pays as per normal.

HER HONOUR:   What were your usual terms in relation to a deposit?

---I would have to say that I’m a bit hazy on that, but I think we would look at something like 30 or 40 per cent.  Something like that.  I couldn’t be absolutely sure, because it would vary a little on the client that you had.  I can’t be sure about what we asked for from Bob Smith, other than to say that that was part of the discussion.  There was also allied with that we only took responsibility for defects in material and workmanship.  Everything else that went wrong, once it left the workshop, was to Bob Smith’s or Gold Peg’s account.

Was there any agreement made in relation to the maintenance of confidentiality in the drawings and, if so, what was that agreement in terms of who said what and who responded?---Bob had a sheet that he had prepared with respect to his customers to preserve the confidentiality with respect to the customers and he raised that this is something that ought to exist between Kovan and Gold Peg.  I don’t really recall - to me, this was just taken as read; that this is the way it worked.  I don’t recall specifically saying that we agreed with that or that we disagreed with it, because this was normal.  Yes, that’s normal.  You do preserve confidentiality, but no big deal in that.  Not as important as the other factors.  There was another point there.  Yes, we recognise that, unlike some of our other orders, each machine would differ, which raised the fact that we would have to give a separate quotation for each order to meet the conditions or specifications that Bob Smith raised and then we would have to give a price on that - that would have to be accepted, so we would have a different price for each unit, which is pretty different to our other work, where once you had built one unit there wasn't a lot of change between that and subsequent units.” 

87                  Her Honour set out her findings regarding this issue (at [101] and [121]):

“…the parties expressly agreed orally in or around 1992 that (Kovan)would not take responsibility for claims in respect of the cooking machines, other than manufacturing or material defects.  This finding is supported by the evidence of all the relevant witnesses, Mr Smith, Mr Miller and Mr Zakis.  Furthermore, it is consonant with the respective positions of the parties, (Gold Peg) being the inventor’s company and(Kovan)being a manufacturer, on behalf of the inventor.  It should be mentioned that Mr Zakis’s attacks on the novelty of the DSI Cooker, while not strictly relevant, were not borne out by the examples of prior art which he brought forward.

…

On the totality of the evidence relevant to this issue, I find the entirety of the commercial dealings with customers of the RotaTherm machines was with (Gold Peg), which assumed complete responsibility for the manufacturing costs, marketing and sale of the machines, consistently with the agreement for manufacture which it had with (Kovan). I find (Kovan) was acting as a manufacturer of the machines working at all times at the direction and under the control of (Gold Peg), which assumed full responsibility for the machines in dealings with its customers. This accords with the terms of the 1992 agreement, oral and implied, which I had found to exist between (Gold Peg) and (Kovan).”

88                  These findings are supported by the evidence of Mr Smith and Mr Miller, which her Honour was plainly entitled to accept.  No error of any kind in relation to these findings has been demonstrated.

(iii)  No separate charge to be made for any design work by Kovan

89                  Gold Peg submitted that it was a term of the 1992 Agreement that no separate charge would be made for any design work undertaken by Kovan.  Rather, Kovan would be remunerated by an uplift in its profit margin on the future manufacture and supply of cookers on behalf of Gold Peg.

90                  Mr Smith said in his affidavit:

“Following the commencement of the manufacture of the Vonk Food Cooker by Kovan, I spoke with Janis Zakis again about Gold Peg paying for the cost of producing the drawings that Kovan had made for the Vonk Foods Cooker.  I told Janis Zakis that Gold Peg could pay for the drawings and he said that he would discuss it with Mr Miller.  I subsequently spoke with both John Miller and Janis Zakis in Mr Miller’s office, John Miller said that they would prefer to stick to the Agreement and not invoice for the preparation of the drawings but rather as had been agreed, recover the costs over the sale of future cookers and that Kovan would absorb the costs of creating drawings for Smith DSI Cookers into the extra margin they would charge on the future cookers made for Gold Peg.  I relied on these statements made to me as being consistent with and confirmation of the Agreement.”

91                  Mr Smith’s reference to “the Agreement”, in this context, meant the agreement that he believed Gold Peg and Kovan had reached in 1992 regarding the terms under which Kovan would be prepared to manufacture the DSI cooker for Gold Peg for sale by it to Vonk.

92                  Mr Zakis had a very different recollection of the discussions leading up to 1992.  He said that Kovan did not charge Gold Peg for the drawing work done for any of the DSI cookers.  That was because, to his mind, Kovan at all times, retained the intellectual property in the drawings. 

93                  His affidavit contained the following account:

“It is correct that at some time prior to building the first cooker for Gold Peg, Mr Smith told me that he was prepared to look at compensating Kovan for the drawings that I was doing.  I told him how long I was spending on doing the design work, and once I had told him this, Mr Smith did not pursue the matter.  When I told Mr Miller about the discussion I had had with Mr Smith, Mr Miller said words to the effect that he was very keen for Kovan to be paid for my design work.  I told him that I did not want to be paid because I was interested in retaining ownership of our intellectual property and wanted a long-term venture with Gold Peg.  Mr Miller said that he wanted short-term money, but he also understood what I was doing was for the best long-term outcome.”

94                  Mr Smith said that he and Mr Miller agreed that “Kovan would not invoice Gold Peg for drafting work performed by Mr Zakis”.  However, it was Mr Smith’s evidence that:

“Kovan would recover or be paid the cost of past and future design and drafting work performed by Kovan from future orders for Smith DSI Cookers placed by Gold Peg.” 

95                  Mr Miller’s evidence accorded with that of Mr Smith on this point.  According to Mr Miller, “Kovan successfully amortised the costs of initial drawing work”.  His evidence was:

“I recall that at some later stage before the first cooker was built by Kovan for Gold Peg, Janis Zakis advised me that Bob Smith had said to him that Gold Peg offered to now pay for the changes made to the drawings.  Although I recall Janis Zakis was in favour of this, I said no.  I said to Janis Zakis that it would be easier and better if Kovan absorbed them.  I said to Janis Zakis that his way Kovan could retain physical possession of the drawings, which might give Kovan more chance of retaining the business opportunity.  In a subsequent discussion with Bob Smith, he agreed to Kovan continuing to absorb these costs.  He said that Kovan could recover these costs over future units.  While there were some downside risks, such as there was no guarantee that there would be future units and that Kovan had no guarantee that Gold Peg would use Kovan to manufacture the cookers, I believed that it was an excellent business opportunity.”

96                  Mr Miller added, in evidence in-chief:

“What was said about the matter of the drawings?--- In the first instance, Mr Smith could not pay for the drawings to be modified and we said that we would perhaps do that without charging him and subsequently he came up and said that - I think I was told this by Janis actually.  He had told Janis, and Janis told me, that he thought he would pay for them and I said, ‘No, it’s much much better if Kovan does this and recovers the cost via the drawings’ - sorry, via future orders, I should say.” 

Later, in response to a question from her Honour, Mr Miller said:

“…we had recovered the costs [for the drawings] as part of the agreement that we had with Bob Smith – well and truly recovered the costs.”

97                  Mr Miller’s evidence also supports the conclusion that he had authority on behalf of Kovan to enter into an agreement with Mr Smith regarding the recovery of costs for the drawings.   He said that his responsibilities were to “manage the financial aspects of the business and that included entering into significant commercial contracts with banks, suppliers, contractors, staff and customers”.  His role “was to take ultimate responsibility for financial management and the commercial aspects of the business”.  He therefore had “authority to determine the terms under which Kovan would undertake work for Gold Peg and did in fact do so after many discussions with Mr Zakis”.   

98                  Mr Zakis, on the other hand, again, disagreed with Mr Miller on this point.  Mr Zakis said:

“Mr Miller was not in the position of being able to make business decisions about Kovan without recourse to me.  Pursuant to the partnership agreement, all business decisions had to be made jointly.”

99                  Having considered the evidence in relation to the cost of preparing the drawings and the design work in its entirety, her Honour found (at [100]):

“…there was an express oral term agreed between the parties in or around 1992 that the cost of drafting and design work necessary to create manufacturing drawings for the manufacture of the cooking machines would be incorporated into the contract price to be charged by (Kovan).”

100               She continued:

“This finding is supported by the evidence of both Mr Smith and Mr Miller.  I prefer their evidence to that of Mr Zakis on this issue.  He claimed that (Gold Peg) never paid for this work and also claimed he understood (Gold Peg) and (Kovan) were in a joint venture.  None of the contemporaneous documents supports Mr Zakis.”

101               Her Honour found (at [112]) that the payment mechanism in respect of design work undertaken by Kovan constituted valuable consideration.  She also found that the terms of the 1992 Agreement, as she found them to be, had been within the joint contemplation of, and had been jointly understood by, Mr Smith, Mr Miller and Mr Zakis.

102               Finally, on the issue of amortisation of the costs of the RotaTherm Drawings, her Honour concluded (at [114]):

“The evidence of Mr Miller, in particular, was that (Kovan) has been well remunerated by the making of its mark-ups on materials and then further mark-up on its labour and marked up costs of materials.  To the extent that Mr Zakis gives contrary evidence I prefer Mr Miller’s evidence.”

103               Once again, her Honour’s findings on this issue were fully supported by the evidence of Mr Smith and Mr Miller, which she accepted in preference to the evidence of Mr Zakis.  Where there were differences between Mr Smith and Mr Miller, her Honour preferred to rely upon the evidence of Mr Miller.  There was nothing inherently improbable about the evidence of Mr Miller.  When that evidence is considered against the background of the entire relationship between Gold Peg and Kovan, it is both cogent and plausible.  No error of any kind has been demonstrated in her Honour’s findings based upon that evidence.

Conclusions as to terms

104               It is evident from the passages of the evidence extracted above that Mr Miller believed that Kovan had entered into an agreement with Gold Peg in 1992, and that the terms of that agreement were as alleged by Gold Peg.  In other words, he was satisfied that Mr Smith owned all intellectual property rights in the DSI cooker and, in particular, in the RotaTherm Drawings subsequently created by Kovan for the manufacture of future cookers. 

105               Mr Miller’s state of mind regarding the arrangement struck with Gold Peg is a matter to which her Honour was entitled to have regard.  It is true that when considering whether a binding agreement was reached, and if so, its terms, courts do not engage in a search for the subjective intention of the parties:  Merritt v Merritt [1970] 1 WLR 1211 at 1213 per Lord Denning MR; Taylor v Johnson (1983) 151 CLR 422 at 428 per Mason ACJ, Murphy and Deane JJ; Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 336 per McHugh JA; Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 105-106 per Gaudron, McHugh, Hayne and Callinan JJ; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2003) 56 NSWLR 662 at 675 per Bryson J.  Nonetheless, the understanding of the parties as to what they had agreed upon is not irrelevant when considering what a reasonable bystander might have concluded having regard to the discussions that took place.  This aspect is discussed more fully in the separate judgment of Allsop J at [118] with which we agree.  It is not correct to say that Gold Peg’s case is built around Mr Miller’s “shrug”.  That was but one piece of the puzzle that confronted her Honour.  When she came to consider the entire history of the dealings between the parties, that shrug took on a particular meaning.  But it was not to be regarded in isolation, and her Honour did not fall into the error of viewing it that way.

106               Mr Miller’s evidence was that throughout the entire Gold Peg/Kovan relationship, he refused to acknowledge the intellectual property rights of Mr Smith in the DSI cooker.  He explained why he had taken that stance, and withstood sustained cross-examination upon that issue.

107               The only basis upon which Kovan submits that Mr Miller’s evidence ought to have been rejected is that it follows from what he said that Kovan had made a bad bargain.  Even if that were true, it would not provide a sufficient justification for overturning a carefully considered finding by a trial judge who had the very real advantage, in this case, of observing the key players give their evidence.  Mr Miller’s explanation for fobbing off Mr Smith has a ring of truth about it.  Moreover, as we have noted already, it is almost inconceivable that Mr Smith would have given up his intellectual property rights to Kovan when there were any number of alternatives available to him.  The fact is that Kovan was in a parlous position in its dealings with Gold Peg.  It did the best it could in the circumstances.  But it did not succeed in obtaining the rights to the drawings, by agreement, or by stealth.  These circumstances, combined with her Honour’s firm preference for the Gold Peg witnesses, in our view outweigh such forensic advantage as Kovan sought to make from any lateness of Gold Peg in pleading or otherwise raising some points of evidence or argument.

108               These findings provide a proper foundation for the conclusions reached.

Trade Practices Act and passing off

109               Her Honour deals with these issues at [144]-[161].  On the appeal Kovan’s attack was confined to that part of her Honour’s reasoning (at [156]) which relied on Kovan “adopt(ing) (God Peg’s) recognisable advertising style” in its advertising brochures.  This is a reference to her Honour’s finding (at [150]) that Gold Peg had acquired in Australia and many countries throughout the world a substantial, exclusive and valuable reputation and goodwill in the cookers under the trade mark “RotaTherm”.  Her Honour also found that in the promotion and marketing of the RotaTherm cookers Gold Peg had extensively used the phrases:

“If it can be pumped it can be cooked with a RotaTherm”

“If you can pump it … we can cook it …”

110               After the breakdown of its relationship with Gold Peg, Kovan produced its own cooker which it marketed under the name Fusion Cooker.  Its brochure contained the prominent heading:

“Accepted by the marketplace as the best of its kind!”

There followed the claim:

“Cookers made by KOVAN have been used Worldwide for over twelve years, and are now accepted as the best direct injection steam cookers (DISC) available.”

Later in the brochure appear the words:

“You will find direct injection steam cookers processing cheese, making pet food, cooking sauces and pickles in Asia, Australia, Europe and the USA.  If you can pump it, and it is water based, you can cook it in a Kovan Direct Injection Steam Cooker!”

111               In our view this was a blatant attempt by Kovan to take advantage of the goodwill of the business previously carried on, a business which was Gold Peg’s and not Kovan’s.  The slogans previously used by Gold Peg would, when used by Kovan, be likely to convey to potential customers that Kovan’s business was the same as, and a continuation of, Gold Peg’s.  Her Honour’s conclusion on this part of the case was inevitable.

Trade Practices Act liability of Mr Zakis

112               Her Honour found (at [222]) that Mr Zakis was in control of the conduct complained of as breaching the Trade Practices Act. 

113               On the appeal it was contended that there was no allegation, finding or evidence that Mr Zakis knew the alleged misrepresentations were misleading.

114               The accessorial liability of Mr and Mrs Zakis is clearly alleged in par 21 of the statement of claim.  The claim against Mrs Zakis was dismissed: [224].  As to Mr Zakis, he was clearly the effective controller of Kovan (indeed at the trial there was an attempt to minimise the importance of Mr Miller’s evidence on the ground that Mr Zakis was in control of the company).  It was only necessary to establish that Mr Zakis was aware of the fact that made the representations misleading, and not to demonstrate that he was aware that they were misleading: Yorke v Lucas (1985) 158 CLR 661.

Orders

115               The appeal will be dismissed.  There will be an order that Kovan pay the costs of Gold Peg at first instance and of the appeal, including in both instances reserved costs.  It will be necessary however to set aside order (15) of her Honour’s orders adjourning the matter for further orders and directions since in the light of our conclusions no further hearing is required. 

Associate:

Dated:              14 July 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

ALLSOP J

116               I have had the advantage of reading the reasons of Heerey and Weinberg JJ.  I agree with the orders that they propose and with their reasons therefor, subject to some limited comments of my own.

117               The approach to appellate review under the Federal Court of Australia Act 1976, being an appeal by way of rehearing, is to be found in Fox v Percy (2003) 214 CLR 118 at [21]-[31].  Where appropriate, the advantages of the trial judge are to be recognised.  One of those advantages is the opportunity to assess and assimilate the evidence in its entirety, presented as it unfolded at the hearing with the opportunity over the course of the hearing for reflection and mature contemporaneous consideration and assessment:  State Rail Authority (NSW) v Earthline Constructions Pty Ltd (1999) 73 ALJR 306 at 330 [90], the cases referred to in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at 436 [24] and Fox v Percy at 126 [23].

118               The relevant task of the primary judge here was to seek to resolve what the legal consequences were of words and conduct spoken and done by the parties many years before.  The ability to assess and assimilate the evidence in that regard was, no doubt, assisted by the kinds of considerations referred to above.  The conclusions reached about such evidence will often involve (and must here have involved) a degree of imprecise impression about emphasis and weight of the kind referred to by Lord Hoffmann in Biogen Inc v Medeva Plc [1997] RPC 1 at 45.  One can see this in the primary judge’s conclusions, at [104] of her reasons, that the words and conduct at the time evinced, objectively, agreement as to the intellectual property rights.  The primary judge was not, as the appellants’ submissions sought to make out, dealing with simple objective building blocks of events, such as an exchange of letters.  She was called on to assess what was revealed objectively, by words and actions in personal communications between the parties over ten years before. She saw the witnesses, heard cross-examination (including as to the nature of the “shrug”) and concluded that, objectively, what had occurred conveyed agreement with Mr Smith’s insistence on retaining all intellectual property rights.  Contrary to the submissions of the appellants, the views of Mr Smith and Mr Miller, later, about the effect of what had earlier occurred are not irrelevant.  These people spoke years before.  What they thought happened (as evidenced by their later conduct) may, in any given case, assist in understanding what did happen:  see Branir at 512 [300].  The primary judge committed no error in this respect in approaching the issue of the agreement.

119               As to the discussion of the adequacy of the reasons of the primary judge, in addition to my complete agreement with Heerey and Weinberg JJ, I would only wish to make reference to what Mahoney JA said in Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd [1983] 3 NSWLR 378 at 385 (a decision affirmed sub nom Tatmar Pastoral Co Pty Ltd v Housing Commission of New South Wales (1984) 58 ALJR 553):

[I]t is the duty of the judge to state his reasons for deciding as he does and that his failure to do so may constitute an error of law … However, such a duty does not exist in respect of every matter, of fact or of law, which was or might have been raised in the proceeding.  It is not the duty of the judge to decide every matter which is raised in argument.  He may decide a case in a way which does not require the determination of a particular submission:  In such a case he may put it aside or, as Lord Scarman said, merely salute it in passing:  R v Barnet London Borough Council; Ex parte Nilish Shah [1983] 2 AC 309, at 350.  A judge will, of course, appreciate the possibility of points being taken or decided on appeal which were not taken or decided below and for this reason he may decide, and give reasons for his decision on, matters which in strictness he need not decide.

See also Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 at 269-70 and 280-81.

120               The evidence supports a coherent and cohesive business arrangement between the parties that was plainly intended to govern their future relationship and to be binding.  Kovan wanted to ensure that Mr Smith and Gold Peg had removed any claim by Alfa Laval to the intellectual property.  Of course, it, Kovan, had made no claim to such intellectual property while manufacturing for Alfa Laval.  The interested parties were to continue manufacturing the machines amongst themselves.  The arrangement included a term whereby it was agreed that Kovan could incorporate its costs of design and drawing work into the contract price.  That agreement, together with the virtually contemporaneous engagement as to the manufacture of the Vonk cooker, supported the arrangement with consideration.  The parties intended their arrangement to cover the framework of their future business activity.  There was sufficiently certain mutual agreement (by way of mutual promises) and conduct to support it.

121               The arrangement found by the primary judge did not lack commercial sense for Kovan.  It had been a manufacturer without intellectual property rights before (when Alfa Laval was involved).  It was to remain such.  The agreement was that its prices for individual cookers would include any costs of design and drawing.  There was no commercial risk to which it was subjecting itself by continuing (without Alfa Laval) the manufacturing of the cookers.  It was to be paid for its efforts; and, on the evidence, it was paid well.

122               The submissions of the appellants repeatedly stated that there was no agreement as to reimbursement for the costs of design and drawing.  There was, certainly, no express contractual identification of such sums, whether in invoices or otherwise.  But there can be no doubt that on the evidence, which amply supported the primary judge’s findings, the parties broached that issue and provided for such costs to be incorporated as an uplift in the price.  The word “amortised” was used by Mr Miller.  That does not necessarily pre-suppose any legally bound (as opposed to commercially expected) future relationship.

123               The appeal should be dismissed in accordance with the orders proposed by Heerey and Weinberg JJ.

Associate:

Dated:              14 July 2006