FEDERAL COURT OF AUSTRALIA

Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd

[2005] FCA 288

CONTRACT – formation - novation – implied novation – assignment of chose of action – whether right of rescission of contract assignable – implied term – good faith and fair dealing

S Burton and E Anderson, Contractual Good Faith: Formation, Performance, Breach, Enforcement  (1995)

Corbin on Contracts (Interim Edition)

Farnsworth on Contracts (3rd ed, 2004)

PACIFIC BRANDS SPORT & LEISURE PTY LTD and PACIFIC BRANDS CLOTHING PTY LTD v UNDERWORKS PTY LTD; UNDERWORKS PTY LTD v SARA LEE APPAREL (AUSTRALASIA) PTY LTD and PACIFIC BRANDS SPORT & LEISURE PTY LTD

V1025 of 2003

FINKELSTEIN J

MELBOURNE

22 MARCH 2005

REASONS FOR JUDGMENT

1                     The principal claim in this action is for infringement of trade marks.  There are subsidiary claims for passing off and breach of ss 52 (misleading or deceptive conduct) and 53(c) and (d) (false or misleading conduct) of the Trade Practices Act 1974 (Cth) but they are only faintly pressed.  There is also a breach of contract plea which, as far as I can recall, only takes up a paragraph or two in the pleadings and was not mentioned at trial.  The success of each cause of action depends upon it being established that the applicants, Pacific Brands Sport & Leisure Pty Ltd and Pacific Brands Clothing Pty Ltd (collectively “Pacific Brands”), the registered proprietors respectively of what have been referred to as the “King Gee” trade marks and the “Stubbies” trade marks, have terminated the licence pursuant to which the respondent, Underworks Pty Ltd, was granted the exclusive right in Australia to use the King Gee marks in relation to men’s underwear and socks and the Stubbies marks on children’s socks and underwear.  If the licence was terminated the infringement action will succeed, for Underworks acknowledges that it is using the marks and its only justification for doing so is the right conferred by the licence.  The main dispute between the parties is whether Pacific Brands had the right to terminate the licence for breach and, if it did, whether it lawfully exercised that right.

2                     Usually in such a case, an orderly way to proceed is to ask and answer separately the following questions:  (1) Did Underworks breach the licence?; (2) If the answer is yes, was Pacific Brands entitled to terminate the licence?; and (3) Again if the answer is yes, did it do so?  Most of the evidence, including those parts which involve matters of controversy, is directed to the first question.  For reasons which will soon become apparent, I propose to deal with that question in relatively short compass and, in any event, after I have dealt with the remaining questions.  The second question is to be answered on facts which for the most part are not in dispute but on issues of law that carry some complexity.  The complexity arises in this way.  The original proprietor of the trade marks, Saramar LLC, a United States corporation, granted a licence to use the marks to Sara Lee Apparel (Australasia) Pty Ltd, a related company.  In turn Sara Lee granted Underworks a sub-licence to use the marks.  In due course Sara Lee’s rights under the sub-licence were assigned to Pacific Brands.  In its submissions Pacific Brands asserts that following the assignment it “is the entity which is now in the contractual relationship with [Underworks]” and for that reason was entitled to terminate the sub-licence for breach.  On the other hand, at least according to its pleaded case, Pacific Brands contends that it came into contractual relations with Underworks as a result of a novation, by which it means that there was a discharge of the sub-licence and the substitution of a new agreement between itself and Underworks substantially on the same terms and conditions as the sub-licence.  There being no evidence of an express novation Pacific Brands contends that the arrangement must be inferred.  If there be no novation, Pacific Brands also pleads that there is in existence an implied licence (another agreement that must be inferred from circumstances) which is co-extensive with the original sub-licence and that it is this agreement which has been terminated.  When this part of the case was opened I suggested that it was hopeless and, in the end, I do not think that it was pressed.  At any rate, I will in due course explain why there can be no such agreement and even if there were how it could not advance the applicants’ case.

3                     With that introduction I will now explain in a little more detail the facts which will enable me to dispose of the claimed termination of the licence.  I will need to say more about the facts when I deal with the issue of breach.  Underworks was established in 1999 to carry on the business of importing, distributing and supplying underwear and socks.  Its shareholders are Mr Todaro and Ausak Pty Ltd, a company controlled by Mr Goodfellow.  For many years before the establishment of Underworks Mr Todaro had been employed at Pacific Dunlop Ltd, a large clothing manufacturer, reaching the position of Marketing Manager for the Bonds Socks and Jockey Underwear division. Mr Goodfellow had also worked at Pacific Dunlop where he held senior positions including that of Group Director of Clothing and Textiles.

4                     The sub-licence to Underworks was granted on 15 November 2000.  The term of the sub-licence was five years beginning 1 January 2001 with a right of renewal for a further five years.  The sub-licence granted Underworks the exclusive right to use the King Gee trade marks and the Stubbies school wear trade marks, together with stylised versions of each mark, in connection with the manufacture, sale and distribution of men’s socks and underwear and children’s socks and underwear to “all retailer and reseller distribution channels” in Australia and New Zealand.  In the sub-licence Sara Lee is referred to as the “Sub-Licensor”, Underworks as the “Sub-Licensee” and Saramar as the “Licensor”.

5                     The following terms of the sub-licence are important.  First there are the provisions which impose obligations on Underworks.  By cl 4.4 Underworks undertakes “not to be a party to any act likely to prejudice the [trade marks]”.  By cl 4.5 Underworks undertakes “not at any time [to] do or cause to be done any act or thing contesting or in any way impairing [the trade marks]”.  Clause 5 provides for the payment by Underworks of a royalty, being 5 per cent of the net proceeds of the sale of King Gee products and 3 per cent of Stubbies’ products.  Provision is made for minimum royalty payments regardless of sales.  By cl 8.1 Underworks is required to prepare and submit annually a marketing plan containing particulars of all labels, advertising, promotional and other related material together with schedules for proposed production and sales targets, sale release dates, methods of distribution and sale, promotional expenditure and details of any other marketing programs.  The marketing plan must include a detailed explanation of the proposed manner of representation of the trademarks in the promotional advertising programs for the consideration and approval by the sub-licensor. By cl 8.2, prior to 15 June of each year, Underworks in respect of the following year must “prepare and submit a marketing plan in a similar format [as that contained in cl 8.1] for the sub-licensor’s consideration”.  By cl 8.3, the marketing material is to include a description of the advertising and promotional concepts which are not to be used pending Sara Lee’s written approval.   Clause 8.5 provides that “[i]n order to review brand positioning and ensure that the Sub-Licensor’s reputation in its products and brands is maintained, the Sub-Licensee shall at its own cost submit to the Sub-Licensor concept samples of each line of Product to be maintained or sold and to be marketed by the Sub-Licensor together with all related advertising, packaging, labels and promotional materials using the Licensed Marks for approval”.  By cl 8.6 Underworks agrees “to affix or apply to all [products] labels bearing or using the Licensed Marks strictly in accordance with the Sub-Licensor’s reasonable directions.”  By cl 8.7 Underworks covenants “only [to] use the Licensed Marks on products, packaging labels, advertising and promotional materials in the form and format approved in writing by the Sub-Licensor.”  By cl 10 Underworks acknowledges that it is “entitled to manufacture the Products in only those manufacturing facilities (third-party or owned) for which [it] ha[d] obtained the Sub-Licensor’s prior written approval.”  By cl 12 Underworks undertakes “at its own expense [to] have each facility (third party or owned) it uses to produces Products independently audited by a firm approved by (sic) Sub-Licensor, for compliance with [Sara Lee Corporation’s Global Business Standards and Supplier Selection Guidelines] or such similar Guidelines as Sara Lee Corporation may require from time to time.  Audits to ensure compliance to the Guidelines [are to] be conducted at least annually.”  By cl 13.1 the Sub-Licensor “retain[s] the right, with or without prior notice … to conduct its own or independent third-party inspection and audit of … any third-party manufacturer which manufactures the Products for compliance with the Guidelines or such similar guidelines as Licensor may establish”.

6                     The sub-licence imposes few obligations upon the Sub-Licensor.  The only obligation (if it can be called that) of any substance is found in cl 6.1.  There the Sub-Licensor is required to “furnish to [Underworks] from time to time, at [Underworks’] cost, such assistance and advice as [Underworks] shall deem helpful in [Underworks’] promotion and sale of the Products, including assistance in the design of packaging, marketing materials such as catalogues, brochures, and other advertising materials and products to support and promote the products.”

7                     Two provisions of the sub-licence contemplate an assignment of the parties’ rights.  There is an interpretation clause (cl 1.2d) which provides that  “[a] reference to a party to this Agreement or any other agreement or document includes the party’s successors and permitted substitutes or assigns.”  Then there is cl 14.1 which states that  “[t]he Sub-Licensee must not at any time without the written consent of the Sub-Licensor (which may be withheld at the Sub-Licensor’s sole discretion) assign, sell, lease, transfer or otherwise dispose of or encumber any of its rights and obligations under this [sub-licence].”

8                     Termination of the sub-licence is covered by cl 18.  Relevantly, cl 18.2 provides that the Sub-Licensor may terminate the sub-licence “immediately upon written notice to the Sub-Licensee:  (a) if the Sub-Licensee commits a breach of any term or condition of [the] Agreement and does not remedy the breach as reasonably required by the Sub-Licensor within 30 days after written notice of the breach and the required remedy has been given to it by the Sub-Licensor.” 

9                     Pacific Brands’ case is that the sub-licence was assigned to it and as a consequence it stood in the shoes of Sara Lee.  Plainly this is incorrect.  In the absence of novation it is not possible to bring about a substitution of parties to a contract.  One reason is that in the absence of consent it is not possible to transfer the burden of a contract, although in certain instances a party’s performance may be delegated to a third party:  The British Wagon Company and the Parkgate Wagon Company v Lea & Co. (1880) 5 QBD 149, 153.  On the other hand, it is usually possible to assign the benefit of a contract, although the use of the word “benefit” in this context is somewhat misleading.  Strictly speaking what is capable of assignment is a chose in action.  According to English law “all personal [property is] either in possession or in action”:  Colonial Bank v Whinney (1885) 30 Ch D 261, 285 per Fry LJ whose dissenting judgment was upheld by the House of Lords:  (1886) 11 AC 426.  A chose in action is a right of property which can only be claimed or enforced by action:  Torkington v Magee [1902] 2 KB 429, 430.  Thus, a chose in action includes a debt, a right of action on a contract and a right to damages for its breach:  Loxton v Moir (1914) 18 CLR 360, 379.  In relation to rights arising under a contract, it is sometimes helpful to keep in mind the distinction drawn by Lord Diplock between the primary obligations assumed by a party under a contract and those obligations which he referred to as the defaulting party’s substituted or secondary obligations to pay monetary compensation (for example, damages) for the non-performance of a primary obligation:  Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 848-849.  Both primary and secondary obligations are choses in action which, speaking generally, are capable of being assigned:  Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, 109.

10                  There are, however, certain rights and benefits which may not be assigned without the consent of the other party to the contract.  For example, an assignment of a chose in action will not be permitted if it will destroy a personal tie:  Tolhurst v The Associated Portland Cement Manufacturers (1900), Limited [1902] 2 KB 660, 668.  There Collins MR said that the ability to assign a chose in action is “to be confined to those cases where it can make no difference to the person on whom the obligation lies to which of two persons he is to discharge it …”.  There was no dissent from this statement on appeal to the House of Lords:  [1903] AC 414.  Nor will an assignment be permitted when the effect of it would be to place an unanticipated or additional burden on the other party:  Bruce v Tyley (1916) 21 CLR 277, 289; Kent v Baerselman [1906] 2 KB 604, 610; G Fridman, The Law of Contract in Canada, (4^th ed, 1999) at 723-724.

11                  Keeping this background in mind, I will now examine more closely the rights that were, or were purported to be, assigned to Pacific Brands.  This involves investigating two sets of transactions: first, the sale of the Sara Lee business to the Pacific Dunlop group in early 2001 and, second, the transfer of that business to the Pacific Brands group later in the year.

12                  On 26 February 2001 Sara Lee sold its Australian business operations and certain “assets” to Pacific Dunlop Ltd.  According to the sale agreement the assets included Sara Lee’s “right, title and interest in the Business Contracts” which were defined to include a number of specified contracts “and all other agreements and arrangements exclusively relating to the Business to which [Sara Lee] is a party and which are, in whole or in part, executory [including agreements] … to use know-how, technology, confidential information, data patents or other industrial or intellectual property or intangible assets”.    Subject to one qualification it is common ground that the sub-licence is a Business Contract either because it is an agreement that relates to the business that was sold or because it is an agreement that granted the right to use intellectual property (in this case, the trade marks).  The qualification is this.  Certain agreements which would otherwise fall within the definition of Business Contracts were excluded from the sale, including those described as “Excluded Assets”.  The Excluded Assets included, relevantly, Sara Lee’s “right, title and interest under any agreement pursuant to which trade marks or patents are licensed to [Sara Lee] by any member of the Sara Lee group.”  Underworks suggests that the sub-licence may fall within this definition.  But it plainly does not because it is not an agreement by which trade marks are “licensed to” Sara Lee.  To the contrary, the sub-licence is an agreement by which trade mark rights are “licensed by” Sara Lee.

13                  In recognition of the fact that difficulties will often arise when one person purports to assign a contract to another, the sale agreement made specific provision for the assignment or novation of Business Contracts.  A number of Business Contracts (but not the sub-licence) were listed in a schedule.  As to those agreements, by cl 11.1(b) and (c), Sara Lee covenanted to use its “best endeavours” to procure the agreement of the other parties to have them “novated” to Pacific Dunlop.  As to the unlisted agreements, Sara Lee covenanted to “use its best endeavours … with the co-operation of [Pacific Dunlop] to assign to [Pacific Dunlop] with effect on and from [the completion of the sale] the benefit of those [contracts] … in respect of which assignments are permitted only with the consent of the other party to such [a] contract.”  That covenant continued in force for a period of three months following the completion of the sale:  cl 11.2.  For its part Pacific Dunlop assumed the responsibility of complying with Sara Lee’s obligations under the Business Contract and promised to indemnify Sara Lee against the non-payment, non-observance or non-performance of any obligations arising under or in respect of them:  cl 11.4.

14                  The sale agreement did not dispose of the trade marks used by Sara Lee in its Australian operations.  The sale agreement did, however, contemplate that the marks, including the King Gee and Stubbies marks, would be assigned by Saramar to a Pacific Dunlop subsidiary, identified as PD Licensing Pty Ltd.  The relevant agreement was entered into on 13 March 2001.  By cl 7.1 the transfer of the trade marks was effected but the transfer was made “subject to the rights of the licensees under the Existing Licences.”  The Existing Licences were defined to include the sub-licence to Underworks.  As regards the King Gee and Stubbies marks, the combined effect of the sale agreement and the transfer of trade marks agreement was to preserve the rights of Underworks under the sub-licence while at the same time transferring to Pacific Dunlop and PD Licensing Pty Ltd whatever rights were capable of being assigned to them by Sara Lee and Saramar.

15                  The Pacific Brands group was established in November 2001.  It was established to acquire the assets that had been purchased by Pacific Dunlop from Sara Lee as well as other businesses that were being conducted by Pacific Dunlop.  By a business sale agreement dated 30 November 2001, to which a number of Pacific Dunlop companies were parties, Pacific Dunlop sold several of its assets to the Pacific Brands group.  The assets included Contracts (as defined) and Intellectual Property Rights (as defined).  Contracts were defined to mean “the agreements (including for the avoidance of doubt Intellectual Property Licences) to which [the selling company] is a party.”  Intellectual Property Rights were defined as “the rights and interests of the Seller to the extent they relate to the Business in all patents, utility models, copyrights, registered or unregistered trade marks or service marks, trade names, know-how, brand names … including but not limited to the Intellectual Property Licences and the other rights listed in [a schedule].”  The licence to Underworks was one of the licences listed in the schedule.  According to cl 8.1 (a) “Seller and Buyer must use their best endeavours to transfer the Contracts … to the Buyer”.  If the consent of a third party was required to effect a transfer then “the Buyer and Seller must use their best endeavours to obtain that consent”: cl 8.1(c).

16                  It is clear that in each of these transactions (the sale by Sara Lee to Pacific Dunlop and the sale by Pacific Dunlop to Pacific Brands) the vendor intended to assign to the purchaser only the rights under the sub-licence that were capable of being assigned without the consent of Underworks.  While the language of the sale agreements, especially the agreement with Pacific Brands, might have been clearer, this intention is manifest.  The principal issue that arises is whether the rights that were assigned (and no doubt some rights were assigned, no point being made of the absence of the requisite notice) included the right to terminate the sub-licence for breach.

17                  Subject to one possible exception it is, I think, clear that a “right” of rescission is incapable of assignment.  In Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, 26 Windeyer J said:  “Assignment means the immediate transfer of an existing property right, vested or contingent, from the assignor to the assignee.”  A chose in action is capable of assignment because it is a species of property.  It is a species of property that cannot be taken into physical possession but which, if wrongly interfered with, can be recovered by action.  On the other hand, a purely personal right, or for that matter a power or privilege, cannot be characterised as a chose in action as it is not a form of incorporeal property and it is therefore incapable of assignment:  Jack v Smail (1905) 2 CLR 684, 704.  A right to rescind or terminate a contract (whether for breach or otherwise) is a personal right or privilege (often dehors the contract) which can be exercised by the party in whom the right or privilege is vested.  It needs no curial intervention to make its exercise good or effective.  It was for this reason that the Supreme Court of the United States in Inglis  v The Trustees of The Sailor’s Snug Harbour in the City of New York 28 US 99, 180 (1830) held that a landlord’s right of entry was not a “thing in action” for it did not depend upon any right to sue, but could be enforced by a mere entry.  The exception to which I referred earlier was identified in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 915.  There the House of Lords held that a right to rescind a mortgage for misrepresentation or breach of duty is not a chose in action capable of assignment, but if the mortgaged property was itself assigned the right to rescind for an act which occurred before the assignment of the property might go with it. 

18                  The result of the application of these principles to the instant case is this.  To the extent that Pacific Brands founds its claim upon the assignment of the sub-licence giving to it the right to terminate the sub-licence, that claim must fail.  Pacific Brands did not as a result of the assignment acquire the right or power to terminate the sub-licence, a sub-licence to which it is not a party.  Put another way, while the “benefit” of the sub-licence was assigned to Pacific Brands with the result that it did acquire certain rights (such as the right to receive the royalty) the right to rescind the sub-licence for breach was not one of the “benefits” that went across.  In the view that I hold, the following powers or privileges were also incapable of assignment for much the same reason:  the power to review the marketing plan conferred by cl 8.1; to give reasonable directions in relation to the use of product labels conferred by cl 8.6; to approve packaging and the like given by cl 8.7; to approve manufacturing facilities under cl 10; to conduct audits under cl 12; and to excercise the right of inspection and quality control conferred by cl 13.

19                  Even if I were wrong and the powers or privileges which I have identified, including the right of rescission, were capable in law of assignment, I would hold, on the authority of cases such as Tolhurst v The Associated Portland Cement Manufacturers (1900), Limited  [1903] AC 414, 424 and Bruce v Tyley (1916) 21 CLR 277, 289, that, in this case, each power has an element of personal confidence about it (the exercise of the power is one which the parties assumed would be exercised personally by Sara Lee) so that, in the absence of Underworks’ consent, the ability to exercise that right or power could not be assigned to anyone else.  Not only do the covenants that I have identified (including the right of termination) involve personal confidence, if assigned to a third party such as Pacific Dunlop or Pacific Brands their exercise could prejudice Underworks in the sense that the rights or powers might be exercised differently than would be the case if they had remained with Sara Lee, which is another reason for ruling against an assignment: Restatement, Second, Contracts §317; Corbin on Contracts (Interim Edition) § 868; Farnsworth on Contracts §11.4 (3^rd ed, 2004).  [Aph1] The reason the rights or powers may be exercised differently is obvious.  An assignee, especially an assignee that is a competitor, may hold different views than Sara Lee about the essentially discretionary matters that would be taken into account in deciding both when and how the rights or powers ought be exercised.  Moreover, contrary to Pacific Brands’ submission, I do not think that consent to such an assignment can be inferred from the interpretation clause (cl 1.2(d)) by which a reference in the sub-licence to a party “includes the party’s successors and permitted substitutes or assigns”.  The reference to a “permitted” assignee indicates to me that only assignments that do not require the other party’s permission are given recognition.  Put differently, if consent to an assignment is required the assignee cannot properly be described as a “permitted” assignee until that consent has been given.

20                  The second basis upon which Pacific Brands puts its case is that it entered into a licence agreement with Underworks in substitution for the sub-licence from Sara Lee and that it is this agreement which Underworks breached and which Pacific Brands lawfully terminated.  This arrangement is often referred to as a novation.  Novation is a method employed to circumvent the non-assignability of choses in action at law yet achieve the same result:  O Marshall, The Assignment of Choses in Action (1950) at 69.  Novation involves making a new contract in place of the old.  The consideration for the new contract (for consideration is required) is usually the discharge of the old contract: Scarf  v Jardine (1882) 7 App Cas 345, 351.  Thus, for there to be a novation it will be necessary to find the existence of an agreement between Underworks and Sara Lee to discharge the sub-licence and another agreement between Underworks and Pacific Brands to enter into a new licence substantially on the same terms as the sub-licence that has been discharged.  Unless all three parties are involved in reaching the requisite agreements there can be no novation:  Southway Group Ltd v Esther Wolf and Morris Wolff (1991) 57 BLR 33, 51.  As regards the agreements, Pacific Brands says that they are to be inferred from conduct, it being conceded that the usual formalities of offer and acceptance were not present.

21                  Do the facts permit the inference that the agreements were made?  While Pacific Brands did not come into the picture until November 2001, it is necessary to go back to the sale by Sara Lee of its Australian operations and to the transfer by Saramar of the trade marks to the Pacific Dunlop group.   It is at least possible that at some point following those transactions there was an agreement between Sara Lee and Underworks that the sub-licence be discharged, perhaps to be substituted by an agreement on like terms between Pacific Dunlop and Underworks, although this is not how Pacific Brands presented its case.  Even if there were no such agreement the events that occurred during the period between the sale to Pacific Dunlop and the sale to Pacific Brands will cast light on the question (which I will come to later) whether it can be inferred that at some time after the second sale Sara Lee agreed to discharge the sub-licence.

22                  The relevant events begin with Underworks’ discovery through press reports that Pacific Dunlop had acquired the Sara Lee business.  Mr Todaro was worried about the acquisition and wrote to Sara Lee on 9 March 2001 seeking confirmation that the transaction “has no impact on our sub-licence agreement”.  Mr Todaro was told that the sub-licence had been assigned to “Pacific Dunlop”, but the actual assignee was not identified.  On 13 March Sara Lee’s general counsel, Mr Bott, informed Mr Todaro that “notice has been given [to Pacific Dunlop] of [Underworks’] pre-existing interests [under the sub-licence].”  Ten days later Mr Bott put the matter rather differently.  He wrote:  “In answer to [Underworks’] question Sara Lee did not retain any right of sub-licence in respect of the marks assigned.  Rather Pac Dun accepted the obligations arising under the existing contracts.”  Mr Bott suggested that Underworks contact Ashley Jones, the individual who was “responsible for administering [the] contract on behalf of Pac Dun.”

23                  Underworks asked its solicitors, Hall & Wilcox, to become involved.  On 30 March they wrote to Mr Bott contending that Sara Lee was not in law entitled to assign the benefit of the sub-licence.  They went on to say that Underworks would not contemplate entering into an agreement with a competitor that contained many of the clauses that were in the sub-licence.  The clauses which were of concern were identified.  They included Underworks’ obligation to disclose its sales figures (cl 5.4), its requirement to give access to books and records concerning the manufacture, promotion, sale and distribution of its property (cl 5.5) as well as cll  8.1, 8.2 and 8.3 (relating to the marketing plans); cll  8.5, 8.6, and 8.7 (approval of labels); cl 10 (approval of manufacturing facilities) and cl 13 (audit of manufacturing facilities), clauses which I have previously described.  The letter concluded with the following proposal:  “We would like to meet with you and our client to discuss how this issue is to be dealt with.  Possible solutions include a partial reversal of the transfer so that Sara Lee remains as Sub-Licensor, or amendments to the existing agreement to deal with Underworks’ concerns.  We are quite happy to meet with Pacific Dunlop as well.  However, we wish to make clear that we see this as an issue for Sara Lee.” 

24                  Hall & Wilcox repeated its request for a meeting in a follow up facsimile transmission to Mr Bott on 6 April.  In that communication the solicitors suggested that:  “One way of dealing with Underworks’ concerns is to amend the sublicence and eliminate the clauses which cause concern.”  Mr Bott failed to provide a substantive response to the first communication and ignored the second.  Presumably he was acting on instructions to remain silent. 

25                  The matter was then taken up by Mr Goodfellow.  He met Mr Bott on 29 May with the view to explaining Underworks’ concerns.  He told Mr Bott that his principal concern was the licensor’s ability to audit Underworks’ manufacturing facilities (cll 10 and 13 of the sub-licence) and that he did not want Pacific Dunlop, a major competitor, to be able to do this.  Nothing was resolved.  On the other hand, Mr Bott did say that Underworks was in breach of the sub-licence in various respects and that Sara Lee’s solicitors, Clayton Utz, had been retained to give advice.

26                  It seems that Clayton Utz advised its client to take action on the asserted breaches for on 4 June Sara Lee wrote two letters to Underworks concerning the issue. Each letter claimed that Underworks had breached an obligation under the sub-licence.  There is no need to describe the alleged breaches.  It is, however, important to note that each letter concluded with an important paragraph.  One letter reads:  “This notice is given by Sara Lee as Sub-Licensor under the Agreement on behalf of Sara Lee and PD Licensing Pty Ltd, the owner of the Licensed Marks”.  The other letter stated:  “This letter is written by Sara Lee as Sub-Licensor under the Agreement on behalf of Sara Lee and PD Licensing Pty Ltd, the owner of the King Gee mark.”  To my mind there is no doubt that these letters were sent on the instructions of Pacific Dunlop.  Following the sale of the businesses and the transfer of the marks, Sara Lee was not in a position to terminate the sub-licence without first having obtained Pacific Dunlop’s consent.

27                  The next relevant event involved Mr Audsley.  Mr Audsley had been employed by Pacific Dunlop since 1991.  For that reason he knew and had worked with both Mr Todaro and Mr Goodfellow.  For a time he reported to Mr Goodfellow.  Following the acquisition by Pacific Dunlop of the Sara Lee business, Mr Audsley had been appointed to manage the division that had taken over part of that business, reporting directly to the chief executive officer.  In early 2001 Mr Goodfellow met Mr Audsley and Mr Bott.  There is some disagreement between Mr Goodfellow and Mr Audsley (Mr Bott was not called to give evidence) about what was said at the meeting, which is hardly surprising given that the meeting occurred almost four years ago.  The gist of the discussion is as follows.  Mr Goodfellow said that in his opinion the assignment of the sub-licence to Pacific Dunlop was invalid.  Mr Bott disagreed.  Mr Goodfellow then outlined those aspects of the sub-licence which, if they were to be assigned to Pacific Dunlop, were unsatisfactory from Underworks’ point of view.  He explained that his concern arose from the fact that Pacific Dunlop was a competitor and that there were provisions in the sub-licence that would result in Pacific Dunlop acquiring information about Underworks’ business.  He referred in particular to the clauses which dealt with the marketing plans (cl  8) and the right to audit (cl 12) and inspect factories (cl 13).  According to Mr Ausdley, Mr Goodfellow said:  that “he would only consider the assignment valid if key terms were changed”.  In particular Mr Goodfellow suggested that instead of Pacific Brands being entitled to conduct audits (cl 12), Underworks would provide an annual statement that it was not using child labour in the manufacture of products and that a third party could review the marketing plan (cl 8) and provide product approval provided the third party entered into a confidentiality agreement and both Pacific Brands and Underworks agreed to operate in good faith in this respect.  Mr Audsley said that “our understanding was that the assignment was valid and the terms that Alan Goodfellow wished to be changed were not terms we were prepared to negotiate or change.”  He indicated that while no changes would be made to the sub-licence he was prepared to discuss Mr Goodfellow’s concerns with senior executives in the organisation.

28                  This meeting was followed by a letter by Hall & Wilcox to Clayton Utz responding to the allegation that its client was in breach of the sub-licence.  The breach was denied.  Hall & Wilcox then referred to the discussion that had taken place about changes to the sub-licence:

“Predictably, Pacific Dunlop, our client’s major competitor to which your client knowingly assigned the sub-licence has refused to contemplate changes to the sub-licence to meet our client’s concerns.

At the meeting held and in the telephone conversations with Stephen Bott of Sara Lee and Stephen Audsley of Pacific Dunlop, our client has given ground in an endeavour to reach a commercial resolution and remains prepared to do so.

However, the potential damage to our client is enormous.  It cannot let the matter drift.  If you cannot advance the matter our client will have no option but to exercise its rights.”

29                  Following this letter, neither Clayton Utz nor its client, Sara Lee, persisted in the allegation that Underworks had breached the sub-licence.  That matter was simply dropped.  Moreover, and this is important for present purposes, as far as I can tell there were no further dealings between Underworks and Sara Lee until the commencement of this action.

30                  As Pacific Dunlop had resolved not to instruct Sara Lee to terminate the sub-licence it decided, in Mr Audsley’s words, to formalise its “ongoing business relationship” with Underworks.  Mr Audsley entrusted this task to Mr Taylor, who was then the General Manager of the King Gee Work Wear Business Unit.  On 7 August Mr Taylor was told that he and Ms Sonia Shwabsky (nee Young), then the general manager of the Workwear, Sport, Leisure and Outerwear Division of Pacific Brands, should meet Mr Todaro to establish that relationship and deal with  “any issues they may have with the PDL purchase of KG needs to be sorted out with PDL/Sara Lee/me [that is, Mr Audsley].”  The meeting took place later in August.  The relationship between the organisations was discussed, but only in a superficial sense.  In the course of the discussion Mr Taylor said:  “[W]e need to tidy up the licence agreement and get an assignment signed to formalise the paperwork.”  Mr Todaro’s response was that he would take that up with Mr Goodfellow.

31                  Little else of importance occurred before the sale of the business and trade marks to Pacific Dunlop.  It is perhaps worth noting at this point that during the meeting between Mr Todaro and Mr Taylor, Mr Todaro produced samples of some King Gee socks and thermal underwear with mock up packaging which Underworks wished to manufacture.  Mr Taylor asked that he be given the finished samples and packaging “for approval”.  Mr Taylor also told Mr Todaro about a new range of workwear which Pacific Dunlop intended to release and was asked to provide Mr Todaro with the artwork for the packaging and logos.  In September Mr Todaro sent an email to Mr Taylor which stated:  “When we last spoke you mentioned that new artwork for the New Gees was being sent.  Also can you please confirm that we can proceed with the mens (sic) King Gee underwear.  I will organise samples upon your confirmation for approval.”  On 16 November Mr Todaro wrote to Mr Taylor saying:  “We would also like to develop a range of New Gees work socks and we are waiting for your artwork as discussed at our last meeting.  I have tried to contact you several times to discuss progress on the above and would appreciate your comments within seven days of receipt of this letter.”  Mr Taylor responded on 26 November stating that:  “At our meeting in August I gave you ‘in principle’ approval to proceed with the mens (sic) underwear and thermal product lines.  Given that the samples you presented at that time were mock ups, I expected that I would receive finished goods samples for final confirmation.  I have not seen these.”

32                  What conclusions can be drawn from these facts as regards the possibility of a novation before Pacific Brands came onto the scene?  Two propositions are beyond doubt.  The first is that there is simply no evidence upon which to found the conclusion that Sara Lee had agreed to discharge the sub-licence.  To the contrary, the uncontradicted evidence is only consistent with the position that Sara Lee regarded the sub-licence as still on foot.  What other explanation is there for the notices of breach which it sent in mid 2001?  The second proposition is that Pacific Dunlop regarded its relationship (whatever that relationship may have been) with Underworks as governed by the sub-licence, an arrangement which it wanted to “formalise”.  There is no evidence that either Pacific Dunlop or Underworks intended to enter into a new licence agreement in substitution for the sub-licence.  I do not take what passed between Mr Todaro and Mr Taylor during their meetings as evidence from which any such intention may be inferred.

33                  It is now necessary to examine the events that occurred after Pacific Brands acquired the trade marks and determine whether they establish a novation.  After all, it is upon those events that Pacific Brands bases its case.  Here the principal point which the applicants make, and it is a point which is plainly supported by the evidence, is that in addition to the negotiations which occurred during this period, Underworks dealt with Pacific Brands as if each power conferred by the sub-licence upon the sub-licensor was exercisable by Pacific Brands and that the performance of each obligation imposed upon Underworks was performance due to Pacific Brands.  For example, when a marketing plan was submitted pursuant to cl 8.1, it was submitted to Pacific Brands; if promotion or advertising material required approval under cl 8.3, that approval was sought from Pacific Brands; where approval of manufacturing facilities was required under cl 10, that approval was also sought from Pacific Brands.  Other examples include the payment of royalties to Pacific Brands  (cl 5.1); the provision of monthly statements to Pacific Brands (cl 5.8) and, (as required by cll 12 and 13 respectively) the auditing and inspecting of manufacturing facilities used by Underworks. Finally there are Underworks’ various requests for Pacific Brands’ approval of the packaging of its products.

34                  If viewed in isolation those dealings between Underworks and Pacific Brands, regular and recurring as they were for nearly 2½ years, would go a long way towards establishing the existence of the novation for which Pacific Brands contends.  There are however two hurdles which confront Pacific Brands.  First to make out its case for novation it is not sufficient for Pacific Brands to establish that there is an agreement between itself and Underworks.  It is also necessary for it to show that Sara Lee agreed to discharge the sub-licence; the problem in this connection is that apart from a single exception to which I will later refer, Sara Lee had no dealings whatsoever with Underworks so there is no foundation for an inferred discharge.  Indeed it has not even been shown that Sara Lee had any knowledge of Underworks’ dealings with Pacific Brands, though it may be assumed that Sara Lee realised that there were some such dealings if the sub-licence had remained on foot.

35                  The second hurdle arises from the negotiations for a new licence agreement which were taking place between Underworks and Pacific Brands.  The springboard for these negotiations was the earlier discussions between Underworks and Pacific Dunlop.  When Pacific Brands purchased the assets from Pacific Dunlop it also took over most of the management team and, in a sense, the discussions between the representative organisations continued as if there had been no change in ownership.

36                  At all events, Mr Goodfellow took up the issue of the assignment of the sub-licence with Mr Audsley in April 2002.  It is not clear whether at this point Underworks had received notice of the assignment of the sub-licence to Pacific Brands.  If Mr Goodfellow did not know no doubt he found out about it at this meeting.  Mr Goodfellow repeated his request that the sub-licence be amended to the effect that Underworks would not be required to provide marketing plans to Pacific Brands and that Pacific Brands would not have the right to audit and approve factories at which Underworks manufactured its products.  Mr Audsley was not helpful.  While he told Mr Goodfellow that he would see what he could do, he said little that was of comfort.  The important thing to note however is that this was a discussion about the assignment of the sub-licence, and not the establishment of a new agreement. Moreover, it is likely that Mr Audsley passed on to his superiors the content of his discussion with Mr Goodfellow.  I infer that this would have occurred because according to Mr Taylor Pacific Brands was aware that Underworks would not recognise the validity of the assignment to Pacific Brands. 

37                  Pacific Brands tried to bring about a resolution of this issue in May.  On 3 May Ms Young sent a draft deed of novation to Mr Todaro under cover of an email the subject heading of which was “Change of signatories to Licence Agreement”.   The email read:  “Just wondering if you could go through the attached document, print out and send back a signed copy.  I spoke to the lady in your office today regarding this and mentioned to her it really is the change from Sara Lee Apparel to Pacific Brands Sports & Leisure Pty Ltd which is the division of Pacific Brands King Gee is part of.”  The draft deed was a straightforward document.  It contained a substitution provision (cl 2.1) and provisions to vary the sub-licence by converting it from a sub-licence from Sara Lee to a licence granted by Pacific Dunlop.  Several weeks later an updated draft was sent to Mr Todaro.  The changes made are not material.  Each version contemplated that it would be executed by three parties: Underworks, Pacific Brands and Sara Lee.  Earlier I had mentioned that by this time and but for one exception Sara Lee had dropped out of the picture.  The exception is that Sara Lee was shown a copy of the draft deed and agreed to its terms.  No doubt it also agreed to execute the deed if requested to do so. 

38                  That is not how things turned out.  In June Mr Todaro gave a copy of each draft to Mr Goodfellow.  It was agreed that Mr Goodfellow would discuss the deed with Pacific Brands.  Mr Goodfellow spoke with Mr Taylor on 18 June to discuss the drafts, but neither of them can recall what was said.  It is clear, however, that Underworks did not agree to execute the deed.  It is a reasonable inference that Underworks did not agree to execute the deed unless the variations that Mr Goodfellow had earlier insisted upon were incorporated into the deed. 

39                  Ms Young contacted Mr Todaro on several occasions in June and July in an attempt to have the deed signed, but with no success.  She then decided to force the issue by taking provocative action.  On 22 July Mr Todaro sought permission from Pacific Brands to manufacture a men’s King Gee singlet for sale to Target.  Approval for the right to use the King Gee trade marks on a singlet fell outside the sub-licence.   Ms Young’s response was that:  “[W]e cannot approve any progress going forward until you have signed the new contract.  You have now had the contract since the 3^rd of May which is ample time to get this sorted out.”  Ms Young requested a meeting where “the signing of a new Licence agreement” was one of the topics to be discussed.  In October Underworks sought approval for the use of a particular manufacturer in China.  The request for approval for a manufacturing facility fell within cl 10.  Yet Pacific Brands refused to consider the request until the deed was signed.

40                  When this pressure did not produce the desired result, Pacific Brands raised the stakes.  In late August, at the suggestion of Ms Young and Mr Taylor, Pacific Brands decided to “shake them [Underworks] up” and see whether “there are grounds to terminate the licence”.  This was in circumstances where it had not previously been alleged, at least by Pacific Brands, that Underworks had been in breach of any obligation under the sub-licence.

41                  At this time it was clear to Underworks, if it had not been clear any earlier, that it had a problem on its hands that had to be sorted out.  Accordingly on 1 November Mr Goodfellow wrote to Mr Taylor and requested a meeting.  He wrote:  “We need a resolution of this issue”, the issue being the proposed deed of novation.  The two met on 7 November.  During the meeting Mr Goodfellow continued to insist that there had to be changes to the sub-licence before Underworks would sign the deed.  The changes he identified were to cl 8 in relation to marketing plans; to cl 9.1 in relation to confidentiality; to cl 10 in relation to the approval of manufacturing facilities; to cl 11 with respect to Global Business standards; to cl 12 in relation to audits; and to cl 13 relating to the inspection of factories.  Mr Taylor said that Pacific Brands would not agree to any changes.  Mr Goodfellow pressed the point and, to test the water, suggested that Underworks might sign the deed if Pacific Brands agreed to extend the term of the licence.  Mr Taylor refused to compromise.  There is a dispute as regards whether during this part of the conversation Mr Taylor acknowledged that the sub-licence was still in force.  It is not necessary to resolve this dispute but, for whatever it may be worth, I suspect Mr Taylor made no statement to that effect.  Be that as it may, at the end of the meeting the parties were at an impasse.  Underworks would not sign the deed unless the requested changes to the sub-licence were made and for its part Pacific Brands would not agree to those changes. 

42                  Between June and July 2003 there were some superficial attempts to get Underworks to sign the deed, but to no avail.  Matters came to a head on 15 August 2003.  That day Pacific Brands wrote to Underworks alleging that “[t]he rights and interests of Sara Lee Apparel (Australasia) Pty Ltd [had], by the conduct of the parties, been assigned to Pacific Brands Sports & Leisure Pty Ltd” and that it was in breach of the sub-licence.  The alleged breaches were identified (I will set them out later) and there was a request that they be remedied within 30 days.  Underworks took no action following the receipt of the notice and so, on 22 September 2003, Pacific Brands wrote stating that “the Agreement is terminated with immediate effect”. 

43                  Do these facts establish the novation for which the applicants contend?  As I have already said, whether there is a novation depends upon it being established that there was an agreement between Sara Lee and Underworks to discharge the sub-licence and a further agreement between Underworks and Pacific Brands on the same terms as the sub-licence, perhaps with necessary modifications in point of detail.  In relation to any agreement between Underworks and Sara Lee its existence depends upon the intention of the parties: Vickery v Woods (1952) 85 CLR 336, 345.  In this regard there is simply no evidence upon which to base a finding that either Underworks or Sara Lee intended (by inference) to release each other from their obligations under the sub-licence.

44                  In any event, it is clear beyond any doubt that there was no substitute licence agreed between Underworks and Pacific Brands.  The usual method of establishing the existence of a legally binding contract is to find an offer (which need not be expressed as such) to enter into a contract and an acceptance (which need not be called an acceptance) of that offer.  The applicants acknowledge that there is no evidence of any offer having been made nor of any acceptance of an offer.  The case they put is that the existence of a licence agreement may be inferred from the conduct of Underworks and Pacific Brands, considered in the light of the surrounding circumstances.

45                  I accept that the offer and acceptance approach is not the exclusive means by which the existence of a contract can be established.  Sometimes it is simply impossible to analyse a transaction in those terms, yet the court may reach the conclusion that an agreement has come into existence:  Brogden v Metropolitan Railway Co (1877) 2 App Cas 666; Clarke v Earl of Dunraven and Mount-Earl [1897] AC 59; Gibson v Manchester City Council [1979] 1 WLR 294, 297; Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110, 11,117; Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32, 83.  But as has been said on many occasions by both commentators and judges (see for example Farnsworth on Contracts, § 3.10 (3rd ed, 2004); Lord Brandon in Paal Wilson & Co. A/S v Partenreederei Hannah Blumenthal  [1983] 1 AC 854, 914 (an abandonment case); Bingham LJ in Blackpool and Flyde Aero Club Ltd v Blackpool Borough Council  [1990] 1 WLR 1195, 1202; and Tadgell J in Toyoto Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106, 168-169) the case for an implied contract will be rare.  It is only in a very clear case that a promise will be implied from facts which do not involve written or oral communications from which a promise appears. 

46                  The problem for the applicants here is that while I am prepared to accept that a contract might be inferred from conduct, they wish to confine that conduct to the dealings between the parties apart from their negotiations for a new licence.  In particular they wish to ignore the discussions between Mr Goodfellow and Mr Taylor concerning the draft deed. This is understandable from the applicants’ perspective.  If one thing is made clear by those discussions it is that the parties could not agree on the terms for a novation.  Mr Goodfellow consistently insisted that any agreement should amend those terms which he said (I think with some justification) would harm Underworks if it had an agreement with Pacific Brands.  Mr Taylor would have none of it.  In other words, or to put the matter into the language of contract, the parties failed to agree on what Mr Goodfellow insisted were important terms of the licence.  As a matter of law, of course, these negotiations cannot be ignored.  And the result of them makes it impossible to find that a contract came into existence.  There can be no contract when negotiations break down because of a failure to reach agreement on what one party insists are essential terms.  In some circumstances a contract may be inferred from conduct subsequent to the breakdown of negotiations.  A party may also, by his conduct, be estopped from denying the existence of a contract even if none were reached.  But these possibilities do not apply in this case, and in any event were not argued. 

47                  I should say that even if I were to ignore the negotiations and rely solely on the conduct upon which the applicants rely to establish the existence of a novation, that evidence would not suffice, in my opinion.  If the conduct in question is consistent with an intention not to contract, for example, if the conduct is referable to some other obligation, a contract by conduct will not arise:  Horrocks v Forray [1976] 1 WLR 230, 238-239; The Aramis [1989] 1 Lloyd’s Reps 213, 224.  In this case, when viewed objectively by a person in Pacific Brands’ position (as to the importance of this approach for the creation of a contract see Smith v Hughes (1871) 6 QB 597, 607), Underworks’ conduct may be explained as referable at least in part to an assignment of some of the rights under the sub-licence (for example the payment of royalties to Pacific Brands) and a belief (as asserted by Pacific Brands itself) that thereafter as a practical matter Underworks was required to deal with Pacific Brands rather than Sara Lee.  All in all, I think the applicants’ claim for novation is hopeless.

48                  I will not take up time in dealing with the final contract plea, namely that there was an implied licence agreement between Underworks and Pacific Brands regardless of whether the sub-licence granted by Sara Lee had been discharged.  I regard as fanciful the suggestion that when considered objectively, as it must be, the evidence implies that Underworks was willing to assume parallel obligations to Sara Lee and Pacific Brands.  In any case, the termination of the licence from Pacific Brands, if there was one, would still leave extant the sub-licence.

49                  What I have said to this point is sufficient to dispose of the case.  The application must be dismissed with costs.  I note that Underworks has brought a cross-claim against Pacific Brands and Sara Lee in which it seeks a declaration that the sub-licence remains in force between itself and Sara Lee.  I will hear the parties on the utility of such a declaration.  My present inclination is that it is not necessary. 

50                  It is not strictly necessary for me to deal with the issues that took up most of the written and oral evidence, as well as most of the time at trial, namely whether Underworks was in breach of the sub-licence thereby triggering the termination clause.  None the less it is appropriate to make findings on those issues and the related question whether, assuming there was a breach and Pacific Brands was entitled to act on that breach, the licence was terminated.  I do so in the event that this case goes on appeal. 

51                  Three conditions must be satisfied before the right to terminate conferred by cl 18 becomes exercisable:  (1) Underworks must be in breach of the licence; (2) Pacific Brands must serve a written notice identifying the breach and the steps that Underworks must, within 30 days of the service of the notice, take to remedy the breach; and (3) no remedial action is taken. 

52                  In its notice of default Pacific Brands alleged five breaches of the sub-licence and required each breach to be remedied within 30 days.  The notice also referred to other provisions of the sub-licence which Underworks may have breached (cl 10 and cl 5.4) but they did not form the basis for any action under cl 18.  I do not propose to go into any detail in discussing whether each condition was satisfied in relation to each alleged breach.  Rather, I will very briefly set out how I have arrived at my conclusions  that on this aspect the applicants have again failed to make out a case. 

53                  Failure to exploit the products – It is common ground that Underworks did not sell socks or underwear bearing the Stubbies trade marks.  Although Underworks made reasonable efforts to market those products it was simply unsuccessful in that regard.  If cl 4.3, which requires Underworks to “exploit the Products within the Territory” imposes an obligation upon Underworks to effect sales of products bearing the Stubbies marks, then there has been a breach of the clause.  I do not, however, believe that cl 4.3 goes that far.  The ordinary meaning of the word “exploit” when used in the present context could convey the notion of the successful exploitation of the products bearing the mark, that is turning their use (by sale) to profit.  That is not, however, the meaning I would give the word.  There are three reasons.  First, the original parties to the sub-licence were no doubt aware of the risk that the products might not find a market.  The risk is not confined to socks and underwear.  Second, the contractual obligation is to exploit the products “to the best advantage of the parties”.  The parties (or at least one of them) might not be advantaged by exploitation (sales) which result in a loss.  Third, cl 5.7 permits the sub-licensor to terminate the sub-licence if sales above a certain level (that is sales which would not produce the minimum royalty) are not achieved.  This suggests that if there were no sales or no minimum sales the parties contemplated that the sub-licence could be brought to an end, but not as a result of breach.

54                  Failure to submit a marketing plan – Ms Young made this allegation in the mistaken belief that Underworks had not submitted its marketing plan for the year 2002.  The plan had in fact been sent to Mr Taylor who had failed to inform Ms Young of its receipt.  There was a good deal of evidence about the fact that the marketing plan did not contain the required information.  That may be true.  But that is not the breach referred to in the notice. 

55                  Failure to change the new sock packaging as directed on 6 November 2002 – Of all the issues in this case, and by now it should be apparent that there are many, this is the one that has caused me the most difficulty.  The difficulty is that when I examined the dozens of documents to which I was referred on this issue, often without explanation as to their importance, it seemed to me that most were irrelevant.  The evidence of the witnesses on this point was equally unhelpful.  Having reviewed the material on a number of occasions I think that what has occurred is that a number of unrelated topics were wrongly rolled up into one.  Three unrelated issues about packaging were under discussion in 2002 and 2003.  One concerned a general “brand identity change” which was being implemented by Pacific Brands.  As one might expect, the change included a change in packaging.  Another issue was Underworks’ desire to market a new line of King Gee socks and singlets for sale to Big W.  Underworks had prepared sample packaging for the new line and submitted it to Pacific Brands for approval.  This was the topic of discussion between Mr Todaro and Mr Taylor back in 2001 to which I earlier referred.  Ms Young was also involved in this issue.  She wanted to make sure that Underworks’ new packaging would satisfy Pacific Brands’ new brand identity.  The third matter is the issue which gives rise to the alleged breach.  As regards Underworks’ existing packaging for King Gee socks, not only did it bear the King Gee trade marks, it also carried Underworks’ own logo (the word “Underworks”).  On 6 November Ms Young sent an email to Underworks asking about the progress of the new packaging.  She also said:  “[P]lease note that from my understanding of licenced product agreements and other such arrangements there is to be no other logos present on the packaging.  This means that the Underworks logo is not to be present on King Gee sock packaging.”  It is the failure to comply with this instruction which is the alleged breach referred to in the notice.

56                  The notice did not identify the particular provision of the sub-licence which it is said had been breached.  In argument reference was made to cl 8.6 by which Underworks is required to apply to all product “labels bearing or using the Licenced Marks strictly in accordance with the Sub-Licensor’s reasonable directions.”  On no view does this clause prevent the use by Underworks of its own logo.  That restriction is dealt with by cl 8.7.  There several obligations are imposed on Underworks.  First, Underworks is only permitted to use the trade marks on products, packaging, labels, advertising and promotional materials in the form and format approved in writing by the sub-licensor.  On the other hand it is permitted to use its “corporate name as manufacturer of the products with the notation that it does so under sub-licence from [Sara Lee].”  Second, apart from the use of its own name for the purpose described, Underworks is not entitled to use other trade marks or the trade marks of third parties in association with the licensed marks.  There are two answers to the claimed breach.  The first is that Underworks’ name appears on the sock packaging to indicate that Underworks is the manufacturer.  This use falls within the permission granted by cl 8.7.  Second, the packaging which Underworks was using had been approved by Sara Lee shortly after the commencement of the licence.  I do not read cl 8.7 as permitting the sub-licensor to revoke a permission previously granted and requiring new packaging to be adopted.  That is a costly and time-consuming exercise for which one would expect to find direct permission. 

57                  Failure to provide audits – It is common ground that Underworks is required to have each of its facilities audited for compliance with Sara Lee’s Global Business Standards and Supplier Selection Guidelines, that such audits be conducted annually and that a copy of the audit report be given to the sub-licensor.  That is the effect of cl 12.  It is also common ground that no audit was carried out on any facility where Underworks’ products were manufactured in the year ended 30 December 2002 (which I assume is the year in respect of which the breach is alleged), nor in any earlier year during the currency of the sub-licence.

58                  Strictly speaking, therefore, Underworks is in breach of cl 12.  I believe, however, that the breach has been waived.  Neither Sara Lee nor Pacific Dunlop required the audit to be conducted in earlier years and made no complaint when none was undertaken.  In the circumstances Sara Lee would be estopped from relying on a breach of the clause and that estoppel would also bind Pacific Brands.  Moreover, Pacific Brands in its own right would also be estopped from relying upon the breach.  It is simply not possible to sit back for one or more years after the audit should have been performed and then complain about Underwork’s failure to arrange for the audits to be conducted and thereafter submit the reports. 

59                  WRAP certification – Clause 13.2 requires Underworks to have its products produced at WRAP certified factories, that is factories who participate in the Worldwide Responsible Apparel Production Factory certification program.  The obligation only arose on 1 July 2003.  Underworks accepts that the factories where its goods were manufactured were not WRAP certified.  Strangely the notice of default does not rely on this as the alleged breach.  The relevant portion of the notice reads:  “Effective 1 July 2003 Underworks and any sublicencee (sic) of Underworks must be WRAP certified.  Please provide evidence of the required WRAP certification.”  While cl 13.2 requires Underworks to use WRAP certified factories, it imposes no obligation to provide evidence of that use to the sub-licensor.  This may be a technical answer to the notice, but I suppose that in this area those who live by the sword should suffer the consequence of such an error.

60                  So much for the alleged breaches.  There are none, or at least none that can support the termination of the sub-licence.  This brings me to another argument which I need not consider but which, in the circumstances, it is probably best that I do.  Underworks says that if it were in breach of the sub-licence thereby bringing into operation cl 18.1, Pacific Brands had not exercised the power of termination in good faith.  It follows, so the argument goes, that the sub-licence continued in force whether or not Underworks was in breach of its terms.

61                  The precise role of the doctrine of good faith and fair dealing in Australian contract law remains unsettled.  It is not unsettled in England.  Apart from importing such obligations into particular kinds of relationships (for example fiduciary relationships) the obligations are not recognised.  As Professor Goode explained in a paper entitled “The Concept of Good Faith in English Law” delivered at a conference in Rome in 1992 (Saggi, Conferenze e Seminari) the English take the view that legal rights can be exercised regardless of motive.  The reason is that according to English principles of contract law the legal outcome of a case is more important than justice, especially in a commercial setting.  The House of Lords has just reaffirmed this approach in R (European Roma Rights Centre) v Immigration Officer at Prague Airport (United Nations High Commissioner for Refugees Intervening) [2005] 2 WLR 1, 37 preferring instead, according to Lord Hope, “piecemeal solutions in response to demonstrated problems of unfairness.”

62                  The opposite view is taken in the United States.  Indeed, in Market Street Associates Limited Partnership v Dale Frey 941 F 2d 588, 595 (7^th Cir, 1991) Posner CJ said: 

“The contractual duty of good faith is thus not some newfangled bit of welfare-state paternalism or (pace Duncan Kennedy, ‘Form and Substance in Private Law Adjudication’ 89 Harv. L. Rev 1685, 1721 (1976)) the sentiment of an altruistic strain in contract law, and we are therefore not surprised to find the essentials of the modern doctrine well established in nineteenth-century cases, a few examples being Bush v Marshall 47 US (6 Hal) 284, 291, 12 L. Ed. 440 (1848); Chicago Rock Island & Pac R.R. v Howard 74 US (7 Wall) 392, 413, 19 L. Ed. 117 (1868); Marsh v Masterson, 101 N.Y. 401, 410-11; 5 N.E. 59, 63 (1886), and Uhrig v WilliamsburgCity Fire Ins Co 101 N.Y. 362; 4 NE 745 (1886).” 

63                  There are now quite a number of decisions in Australia, including one or two of my own, which indicate a preference for the position taken in the United States over the more traditional English approach.  The cases include:  Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 267-269; Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151, 191-193; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, 368-369; Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703, 43,014; Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187 at [159] and Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 at [183]-[191].

64                  For the purposes of this case it is necessary to find, as I do, that the duty of good faith is an incident (not an ad hoc implied term) of every commercial contract, unless the duty is either excluded expressly or by necessary implication.  The duty cannot override any express or unambiguous term which is to a different effect.  Further, I presently incline to the view (but not with complete conviction) that the duty is not an independent term of the contract the breach of which would give rise to a remedy, but that it operates as a fetter upon the exercise of the discretions and powers created by the contract, including the power of termination.  This has caused some jurists to refer to the duty of good faith as an “excluder”: R Summers, “The General Duty of Good Faith – Its Recognition and Conceptualization” 67 Cornell Law Review 810, 810 (1982).  The cases upon which I would rely for the purpose of making good these principles, particularly as regards a termination clause, include, but are not limited to, the following: United Roasters, Inc v Colgate-Palmolive Company 649 F 2d 985 (4^th Cir, 1981); Sons of Thunder, Inc v Borden, Inc 690 A 2d 575 (1997); Burger King Corporation v C R Weaver; M-W-M, Inc 169 F 3d 1310 (11^th Cir, 1999); United Airlines, Inc v Good Taste, Inc 982 P 2d 1259 (1999); Atlantic City Racing Association v Sonic Financial Corp 90 F Supp 2d 497 (2000); Northview Motors, Inc v Chrysler Motors Corporation 227 F 3d 78 (3^rd Cir, 2000); Richard Seidenberg v Summit Bank 791 A 2d 1068 (2002); Auto Search, Inc v Automobile Protections Corporation 2004 US Dist. Lexis 6937.  See also E Gellhorn, “Limitations on Contract Termination Rights – Franchise Cancellations” Duke Law Journal 465 (1967); S Burton and E Anderson, Contractual Good Faith: Formation, Performance, Breach, Enforcement  (1995); E Allan Farnsworth, “Good Faith in Contract Performance” in J Beaston and D Friedman (eds), Good Faith and Fault in Contract Law (1995); F Claybrook, “Good Faith in the Termination and Formation of Federal Contracts” 56 Maryland Law Review 555 (1997); T Weigand, “The Duty of Good Faith and Fair Dealing in Commercial Contracts in Massachusetts” 88  Massachusetts Law Review 174 (2004).  The position seems to be the same in Canada, as to which see Elmade Investments Ltd v Morton Myers and Forest Hill Real Estate (2001) 46 RPR (3d) 225 and Transamerica Life Canada Inc v ING Canada Inc (2003) 234 DLR (4^th) 367.  See also S O’Byrne, “Good Faith in Contractual Performance: Recent Developments” (1995) 74 Canadian Bar Review 70; J McCamus, “Abuse of Discretion, Failure to Co-operate and Evasion of Duty: Unpacking the Common Law Duty of Good Faith Contractual Performance” (2004) 29 The Advocates’ Quarterly 72.

65                  I appreciate that the standard of conduct imposed by a covenant of good faith is incapable of precise definition.  That does not produce an unworkable obligation.  There are many instances to be found in the law of contract and elsewhere of obligations that are incapable of clear definition.  Reference need only be made to the obligation of reasonableness that pervades so much of our law.  Be that as it may, a good starting point in any particular enquiry is to see whether the impugned conduct (in this case a termination) was motivated by bad faith, or was for an ulterior motive or, if it be any different, whether the defendant acted arbitrarily or capriciously. It may also be proper to investigate whether the impugned act was oppressive or unfair in its result.  If any of these things can be established then, in all probability, the obligation will be breached and the resultant act (or omission) of no effect. 

66                  What then was the reason for the termination of the sub-licence?  One thing which is absolutely clear is that the breach or arguable breach of the sub-licence did not cause Pacific Brands any harm, although a number of its witnesses suggested otherwise.  The reason Pacific Brands moved to terminate the sub-licence is clear.  Despite the pressure to which it was subjected, Underworks refused to enter into a direct licence agreement with Pacific Brands.  When that pressure failed to achieve its objective, Pacific Brands decided to get rid of Underworks at the first available opportunity.  It was willing to make life as difficult as possible for Underworks in an endeavour to lead it into a breach of the sub-licence.  It was then willing to act on any breach, however trivial.  In England such conduct would not be unacceptable.  As Professor Goode has said, there the motive for terminating an agreement is irrelevant.  Fortunately that view has now been rejected in Australia.  Pacific Brands’ conduct was reprehensible, being motivated as it was by bad faith and it would be unjust and oppressive to Underworks to permit Pacific Brands to terminate the sub-licence in the circumstances which prevailed. 

67                  The formal orders to be made are that the action be dismissed with costs.  I will hear the parties on whether those costs should be taxed on a solicitor and client basis.  There are now many cases where courts have awarded costs other than on a party and party basis.  They include Australian Guarantee Corporation Ltd v De Jager [1984] VR 483, 502 per Tadgell J: ([T]he pursuit of the action was … a high-handed presumption.”); Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, 401 per Woodward J: (“I believe that it is appropriate to consider awarding ‘solicitor and client’ or ‘indemnity’ costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success.  In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law.  Such cases are, fortunately rare.  But when they occur, the court will need to consider how it should exercise its unfettered discretion)”; J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers, Western Australian Branch (No 2) (1993) 46 IR 301, 303 per French J: (“It is sufficient, in my opinion, to enliven the discretion to award such costs that, for whatever reason, a party persists in what should on proper consideration be seen to be a hopeless case”).  Pacific Brands case against Underworks was paper thin, both in relation to novation, the implied licence and the breach arguments.  For that reason it may be appropriate to depart from the usual order.

Associate:

Dated:              22 March 2005