FEDERAL COURT OF AUSTRALIA

Traxon Industries Pty Ltd ACN 009 318 987 v Emerson Electric Co (No 2)

[2006] FCA 630

PRACTICE AND PROCEDURE – service of originating process out of jurisdiction – causes of action in misleading and deceptive conduct in Australia – breach in the United States of contract made in Australia – breach of fiduciary duty – conduct constituting breach of fiduciary duty allegedly occurred in the United States – claim for breach of fiduciary duty renders proceeding one to which O 8 r 1 does not apply – leave to serve out of the jurisdiction further amended application and statement of claim omitting cause of action in breach of fiduciary duty

Trade Practices Act 1974 (Cth) s 52, s 86(1)

Federal Court Rules O 8

Traxon Industries Pty Ltd v Emerson Electric Co [2006] FCA 450 cited

Delco Australia Pty Ltd v Equipment Enterprises Incorporated trading as Kukla Trenchers [2000] FCA 821 cited

Distillers Co (Biochemicals) v Thompson [1971] AC 458 cited

TRAXON INDUSTRIES PTY LTD ACN 009 318 987 v EMERSON ELECTRIC CO

WAD 106 OF 2006

FRENCH J

26 MAY 2006

PERTH

THE COURT ORDERS THAT:

1.         Traxon International Ltd be joined as the second applicant.

2.         The applicant be redesignated as the first applicant.

3.         Service on the respondent out of the jurisdiction is to be effected as follows and leave is so given:

            3.1       Serving, by a private agent, upon the firm of Husch and Eppenberger LLC, Suite 600, 190 Carondelet Plaza, St Louise, Missouri in the United States of America (USA) copies of:

                        3.1.1    a further amended application in terms of the minute of further amended application dated 23 May 2006 in this action;

                        3.1.2    a further amended statement of claim in terms of the minute of further amended statement of claim dated 23 May 2006 in this action;

                        3.1.3    the affidavit of Barry Granville Waller sworn 17 February 2006 in this action;

                        3.1.4    the affidavit of Barry Granville Waller sworn 18 April 2006 in this action;

                        3.1.5    the reasons for decision delivered on 26 May 2006 in this action;

                        3.1.6    the affidavit of Barry Granville Waller sworn 15 May 2006 in this action; and

                        3.1.7    the affidavit of Barry Granville Waller sworn 17 May 2006 in this action.

            3.2       Serving the copies of documents listed in sub-paragraphs 3.1.1 to 3.1.7, by a private agent, on the respondent at 8000 W.Florissant Avenue, St Louis County, Missouri in the USA.

4.         The first directions date to be inserted in the further amended application so served is

            23 June 2006 at 9 am.

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

REASONS FOR JUDGMENT

Introduction

1                     Traxon Industries Pty Ltd (Traxon) applied to the Court by motion dated 18 April 2006 for leave to serve proceedings on Emerson Electric Co (Emerson) in the United States of America (USA).  The proceedings arose out of a dispute between Traxon and Emerson connected with the performance of a Confidentiality Agreement and a Distributorship Agreement relating to the marketing and sale, in the USA, of oil level control devices manufactured by Traxon.  Traxon’s causes of action against Emerson were for misleading or deceptive conduct in contravention of the Trade Practices Act 1974 (Cth), breach of contract, breach of duty of confidence and breach of fiduciary duty.  For reasons published on 26 April 2006 the motion was adjourned and Traxon given leave to amend its statement of claim and to file further affidavit evidence in support of its application – Traxon Industries Pty Ltd v Emerson Electric Co [2006] FCA 450.  The principal reason for the decision not to accede to Traxon’s motion was its inclusion in the application and statement of claim of the causes of action arising out of breach of confidence and breach of fiduciary duty.  These causes of action were based entirely on conduct allegedly committed by Emerson in the United States.  They did not otherwise fall within any of the categories of causes of action to which the relevant rule of Court, O 8, authorising service out of the jurisdiction, applies. 

2                     Traxon has now filed a proposed amended application and proposed amended statement of claim together with a proposed further amended application and further amended statement of claim.  It has also filed additional affidavit material.  In its proposed amended application and amended statement of claim Traxon seeks to join Traxon International Ltd (Traxon International) as a second applicant.  It abandons the claim for breach of duty of confidence but maintains the claim based on breach of fiduciary duty.  As an alternative position, it relies upon a further amended application and further amended statement of claim which would also omit the cause of action for breach of fiduciary duty. 

3                     For the reasons which I now publish, I am prepared to grant leave to serve an application and statement of claim on Emerson in the United States in the form set out in the further amended application and further amended statement of claim.  So that Emerson may also be served with a reasonably self contained set of reasons for that decision these reasons repeat elements of those published on 26 April 2006 adapted to take account of the amendments to the pleadings and the additional evidence which has been filed.

The First Decision

4                     Traxon, on 18 April 2006, commenced proceedings in this Court against Emerson.  It claimed damages for misleading or deceptive conduct in contravention of the Trade Practices Act, at common law for breach of contract and, alternatively, in equity for breach of confidence and breach of fiduciary duty.  Traxon is an Australian company which carries on the business of manufacturing, marketing and selling oil level control devices, one of which is known as the TraxOil Management System (the TraxOil Device).  Emerson is incorporated in Missouri and currently trades under the business name Emerson Climate Technologies.  It used to trade as Alco Controls.

5                     By a notice of motion filed on 18 April 2006, Traxon sought leave to serve its application, statement of claim and supporting affidavits on Emerson in the USA.  Its motion was filed pursuant to O 8 of the Federal Court Rules. 

6                     For reasons which were published on 26 April 2006, I was not satisfied that the application was one in respect of which I could make the order sought.  Before such an order can be made under O 8 the case must be shown to fall within one or more of the classes of case set out in O 8 r 1 of the Federal Court Rules.  Although I was satisfied that the cause of action in misleading or deceptive conduct and the cause of action in breach of contract were within the cases listed in O 8 r 1, I was not satisfied that the subrule applies to the causes of action for breach of duty of confidence and breach of fiduciary duty. 

7                     I also addressed the question whether the requirement in O 8 r 2 that the applicant show a ‘prima facie case for the relief sought’ was fulfilled.  I was satisfied that a prima facie case was raised in respect of the cause of action in breach of contract.  I found it questionable whether there was a prima facie case shown for misleading or deceptive conduct without more than the alleged breach of promises embodied in agreements made between the parties.  I also noted that there was a disquieting confusion about the documentation comprising the written part of a so-called ‘Distribution and Confidentiality Agreement’ made in 1998. 

8                     In the conclusion of my reasons published on 26 April 2006 I said (at [66]):

‘For the preceding reasons, I do not propose at the moment to make an order granting the leave sought.  Traxon, it seems to me, has to address the question whether all of the causes of action pleaded can be brought within O 8 r 1 and secondly, present a somewhat clearer foundation for its contention that there is a prima facie case in relation to the existence and breach of the agreements pleaded.’

At the time, I made the following orders:

‘1.        The applicant’s motion filed 18 April 2006 is adjourned to 19 May 2006 at 9.45am or such earlier date as may be fixed.

2.         The applicant has leave to amend its statement of claim and to file further affidavit material in support of the application.’

The Amended Application

9                     By a motion filed on 15 May 2006 Traxon sought leave to join Traxon International as the second applicant.  It also filed an amended application and statement of claim.  It seeks leave to serve the amended application and statement of claim on Emerson in the USA. 

10                  The motion came on for hearing on 18 May 2006.  At that time I expressed some doubt on whether the claim for damages for breach of fiduciary duty by Emerson was a cause of action to which O 8 r 1 applied.  I reserved judgment on the motion until today.  In the meantime, on 24 May 2006, Traxon filed a proposed further amended application and further amended statement of claim deleting the claim for damages based on breach of fiduciary duty.  A covering letter from the applicants’ solicitors to the Court indicated that if it were held that an application including a claim for breach of fiduciary duty could not be served out of the jurisdiction, then that claim would be omitted and reliance placed on the proposed further amended application and further amended statement of claim as a fall-back position.

11                  It is convenient to set out in summary form the allegations made in the amended statement of claim.  The overview, so set out, does not, of course, involve any findings of fact.

The Amended Statement of Claim

12                  Traxon is incorporated in Australia.  Traxon International is incorporated in the United Kingdom.  Traxon carries on the business of manufacturing, marketing and selling oil level control devices.  Traxon International carries on the business of selling the devices. 

13                  After pleading their own incorporation and the nature of their businesses and that of Emerson, Traxon and Traxon International allege that at all material times Underwriters Laboratories Inc (Underwriters) which, according to the affidavit evidence, is a non-profit organisation incorporated in the USA, performed a compliance function to certify that products offered for sale in the USA complied with safety laws in force there.  Such certification, according to the statement of claim, was at all material times a necessary precondition to the offering of the TraxOil Device for sale in the USA.

14                  The applicants say that before November 1997 Traxon had an agreement with a United States company called Sporlan Valve under which Sporlan Valve would market and sell the TraxOil Device in the USA.  During the currency of its arrangements with Sporlan Valve, Traxon ‘owned’ a file maintained by Underwriters in the name of Sporlan Valve in relation to the TraxOil Device (UL File).  The nature of the ownership of the file is not explained. The Distribution Agreement with Sporlan Valve ceased in November 1997 and in May 1998 the applicants and Emerson agreed that Emerson would be the exclusive distributor for the TraxOil Device in the USA (the 1998 Agreement).  At that time the largest single user of the device in the USA was Hussman, a company which carried on business in that country and used the TraxOil Device on Copeland compressors.  They are manufactured by Copeland, a company which also carries on business in the USA and is associated with Emerson.

15                  The 1998 Agreement is said to have been partly written and partly oral.  The oral terms were agreed during the course of a meeting between Mr Barry Waller of the applicants, Mr Wayne Cattach of Traxon and Mr Robert Kensinger of Emerson held in May 1998 at Perth in Western Australia.  The written part of the agreement comprised a document titled ‘Confidentiality Agreement’ executed by Traxon and Emerson and dated 7 May 1998 and a document titled ‘Distribution Agreement’ executed by Traxon International and Emerson in or about May 1998.

16                  The applicants allege that the 1998 Agreement contained a number of express terms including the following:

1.         Emerson would market and sell the TraxOil Device in the USA.

2.         Emerson agreed not to disclose any data or information it received from Traxon which Traxon designated as proprietary or confidential.  Nor would Emerson use that data or information for its own benefit for a period of five years after receipt of it without first obtaining written permission from Traxon. 

3.         Emerson would undertake any formalities and make any payments required to be made in relation to any necessary amendments to the UL File which flowed from the 1998 agreement.  The UL File was to be owned and maintained by Underwriters in the name of Traxon.  It is said to be an express term of the agreement that Traxon and Emerson would jointly participate in a program of further development and refinement of the TraxOil Device.  They are also said to have agreed that the 1998 Agreement would be governed and construed in accordance with the laws of the State of Western Australia. 

17                  The applicants allege that, by entering into the 1998 Agreement, Emerson represented to them, in Western Australia, that it would comply with its terms. They say that, in reliance upon that representation, they entered into the Agreement. Traxon purchased capital equipment for the production of the TraxOil Device for the purpose of selling it in the USA and, between May 1998 and November 2003, provided Emerson with confidential information about the device.  Particulars of the confidential information are given in the statement of claim.

18                  In February 2000 it is said that the applicants and Emerson agreed to vary the 1998 Agreement (the 2000 Agreement).  The 2000 Agreement was oral and made in the course of a meeting held on 2 and 3 February 2000 in St Louis.  Mr Wayne Cattach of the applicants was present as well as a number of persons from Emerson.  It was agreed under the variation that Traxon and Emerson would jointly participate in a program of further development and refinement of the TraxOil Device and would jointly participate in the development of a new model of it. 

19                  In the alternative, it is alleged that the 2000 Agreement was a substitute for the 1998 agreement and included the following express terms:

1.         Traxon and Emerson would jointly develop the TraxOil Generation 2; and

2.         The remaining terms of the 2000 Agreement would be all of the terms of the 1998 Agreement.

20                  Traxon alleges that it acted in reliance upon the representations that Emerson would comply with the terms of the 1998 Agreement and, pursuant to that Agreement, as varied, and alternatively the substituted 2000 Agreement, it provided Emerson with confidential information about the TraxOil Device and the TraxOil Generation 2.

21                  Prior to October 2003 Emerson and a third party jointly developed an oil management system device.  In the course of its development Emerson is said to have used some or all of the confidential information provided to it by Traxon. Moreover it is said to have disclosed some or all of the confidential information to the third party. It is alleged that at all material times from 2004 Emerson has marketed and sold the oil management system device in the USA in competition with the TraxOil Device.

22                  The applicants allege that sometime between May 1998 and November 2003 Emerson caused the UL File to be transferred to it and, alternatively, to Traxon and it jointly and to be maintained either in its name alone or jointly with Traxon.  Traxon says it was not able to transfer the UL File into its name alone until 29 June 2005.

23                  The applicants say that the representation pleaded was made by Emerson in trade and commerce and was misleading or deceptive or likely to mislead or deceive as Emerson did not, at the time the representation was made, intend to comply with the terms of the 1998 Agreement.  Traxon invokes, inter alia, s 51A of the Trade Practices Act.

24                  The applicants say that Traxon and/or Traxon International have suffered loss and damage of not less than $1,407,889 as a result of Emerson’s conduct.  This includes $668,646 incurred in the purchase of capital equipment and $18,396 incurred in relocating factory premises for the purpose of manufacturing the TraxOil Device and the TraxOil Generation 2 to be sold in the USA.  Loss of profits from the sale of the TraxOil Device in the USA during the period January 2004 to 29 June 2005 are said to have amounted to $70,5744.  Traxon also claims damages represented by lower profits because of diminished sales of the TraxOil Device in the USA on or after 29 June 2005 and costs of $15,103 incurred by it in relation to its application for a new file to be maintained by Underwriters. 

25                  The applicants say that Emerson breached the terms of the 1998 Agreement as varied by the 2000 Agreement and, alternatively, breached the terms of the original agreement and the terms of the substitute agreement.  They claim the same damages in respect of the alleged breach of contract as they do in respect of the contraventions of the Trade Practices Act.

26                  The applicants say that on 3 October 2003 they terminated the 1998 Agreement as varied and, alternatively, terminated the 2000 Agreement.

27                  The applicants raise a further cause of action by way of breach of fiduciary duty.  They say that the terms of the 1998 Agreement as varied by the 2000 Agreement and, alternatively, the terms of the 2000 Agreement were such as to give rise to a fiduciary relationship between Traxon and Emerson.  It is said that Emerson owed duties to Traxon to not seek to obtain a benefit in circumstances where there was a conflict between Emerson’s interests and the interests of Traxon and to not obtain or receive a benefit or gain by using Emerson’s fiduciary position or any knowledge or opportunity arising from it.  It is said that by reason of its pleaded conduct, Emerson breached its fiduciary duty.  Because of that breach the applicants say that Traxon and/or Traxon International have suffered loss and damage in the sum of not less than $1,407,889.

28                  The relief claimed is by way of damages under s 82 of the Trade Practices Act and/or compensation pursuant to s 87 of that Act, damages for breach of contract, injunctive relief and equitable compensation or an account of profits for breach of fiduciary duty.  Interest on the damages and equitable compensation and any payments made pursuant to an account of profits is also claimed.

The Affidavit Evidence in Support of the Application for Service out of the Jurisdiction

29                  The motion for leave to serve the application out of the jurisdiction was supported by  affidavits sworn on 17 February 2006 and 18 April 2006 by Barry Granville Waller, a director of Traxon and of Traxon International.    In support of the amended motion renewing the application for leave to serve Emerson in the United States, two further affidavits sworn by Mr Waller on 15 and 17 May 2006 were relied upon. 

30                  In his affidavit of 15 May 2006, Mr Waller said that the applicants have common shareholders.  Before 1998 both were part of a group of companies with common shareholders.  Traxon was responsible, within that group, for manufacturing oil level control devices.  Traxon Sales Pty Ltd  (Traxon Sales) was responsible for selling such devices within Australia.  Traxon Australia Pty Ltd (Traxon Australia) was responsible for managing sales contracts and billing customers within Australia.  Traxon International was responsible for selling the devices, managing sales contracts and billing customers outside Australia.  In the late 1990s or early 2000s the directors of those companies decided that the group structure and associated intra-group invoicing were uneconomic.  The group was restructured so that Traxon assumed the responsibilities of Traxon Sales, Traxon Australia and Traxon International.

31                  In his February affidavit Mr Waller said that Traxon manufactures and markets oil level control devices one of which is known as the TraxOil Management System or TraxOil Device. Between 1996 and 1998 the TraxOil Device was sold in the USA by Sporlan Valve, a US company pursuant to a Distribution Agreement between it and Traxon.  From 1 September 1996 Sporlan Valve as agent for Traxon, owned a file maintained by Underwriters in the name of Sporlan Valve in relation to the TraxOil Device.  Underwriters is a non-profit organisation which conducts compliance tests for products marketed in the USA to ascertain whether they comply with US safety laws.  Without the compliance function being performed the TraxOil Device could not be sold in the USA. Mr Waller explained this further in his affidavit of 15 May 2006.  He said that the compliance tests for the TraxOil Device were carried out by representatives of UL based in Australia, who inspected Traxon’s production facilities every few months.  The party who owns the file maintained by UL is the party whose products it tests for compliance.  If the products pass its compliance tests, it is the party who owns the file who is entitled to sell the products in the USA.  A party that does not own the UL File is not able to request UL to perform compliance tests on its products. 

32                  Following the expiry of its Distribution Agreement with Sporlan Valve in November 1997, Traxon sought to enter into a new distribution agreement with another entity in the USA.  Its biggest customer for US sales at the time was a company known as Hussman, whose primary use for the TraxOil Device was on Copeland compressors.  The compressors are components of refrigeration and air-conditioning machines.  According to Mr Waller Traxon approached Emerson, trading as Alco Controls, to discuss the possibility of that company distributing the TraxOil Device in the USA.  Emerson carries on business in the USA and is based in St Louis.  Copeland, which is the manufacturer of Copeland compressors and Emerson are part of the Emerson Group of Companies.  The business carried on by Emerson, formerly known as Alco Controls, now operates as Emerson Climate Technology.  Mr Waller exhibited to his February affidavit some pages from Emerson’s internet site which was downloaded on 12 February 2006.

33                  In or about April 1998 Mr Waller had a telephone conversation with Robert Kensinger, Senior Vice President of Emerson.  He said that they agreed that their two companies would enter into a Distribution Agreement under which Traxon would supply the TraxOil Device exclusively to Emerson and Emerson would market and sell the TraxOil Device in the USA.  They also agreed, according to Mr Waller, that Emerson would enter into a confidentiality agreement with Traxon under which it would undertake not to disclose any information provided to it by Traxon and designated as proprietary or confidential information or use such information for its own benefit for a period of five years after its receipt. 

34                  Following the telephone conversation Mr Waller met Mr Kensinger in Perth.  The meeting was also attended by Mr Cattach.  In the course of the meeting Mr Kensinger said that Emerson would undertake formalities and make payments necessary for the UL File to reflect the new Distribution Agreement.  He also said that Emerson accepted that the UL File was to remain the property of Traxon.  According to Mr Waller, ownership of the UL File for the TraxOil Device was important for Traxon in marketing and selling in the USA.  Without it, the company would effectively be shut out of the USA market.  He, Mr Kensinger and Mr Cattach also discussed Traxon’s plans to further develop and refine the TraxOil Device.  Mr Kensinger said that Emerson would participate in that development program. 

35                  At the conclusion of the meeting, according to Mr Waller’s February affidavit, a ‘Distribution Agreement’ and a ‘Confidentiality Agreement’ were executed. In his further affidavit of 15 May 2006, Mr Waller said that he recalled that the document entitled ‘Distribution Agreement’ was executed by Traxon International and Emerson and not by Traxon and Emerson.  At that time what he described as ‘the old group structure’ was still in operation.  The Confidentiality Agreement referred to was exhibited to his February affidavit.  It took the form of a memorandum from Traxon to Mr Kensinger as Senior Vice President of ‘Alco Controls’.  It recited the intention of Traxon and Alco Controls to discuss matters relating to refrigeration leak detection, oil level control, time delayed fluid level monitoring technology and other related inventions and in particular the manufacture of parts and or devices incorporating such technology.   The memorandum proposed that Alco Controls would agree to accept in confidence such data and/or information designated as proprietary and confidential information by Traxon and would not disclose it to a third party or use it for its own benefit for a period of five years without first obtaining written consent from Traxon.  There were some qualifications on the obligation thus proposed which would not be binding with respect to any information demonstrably known to Emerson at the time of disclosure or which became known to the public generally through no fault or other action of Emerson.  Nor would the obligation apply to information obtained lawfully from a third party who themselves were under no obligation to keep such information confidential.  It would not apply to information developed by the employees, agents or representatives of Emerson as a result of their own efforts and not as a result of the disclosure of the same information by Traxon. 

36                  There were some specific undertakings proposed, namely that Emerson would make no copies of any information disclosed to it without prior written approval of Traxon, it would disclose the information only to its employees who required it for the performance of their duties and would return all written information received from Traxon if requested to do so.  The terms and conditions contained in the confidentiality agreement were said to be governed by and construed in accordance with the laws of the State of Western Australia.  The agreement was signed by Mr Kesinger for Emerson and was dated 7 May 1998. 

37                  There was no written Distribution Agreement exhibited to Mr Waller’s February affidavit.  A document entitled ‘Distribution Agreement’ is referred to in par 9 of the statement of claim and in par 11 of the affidavit.  No explanation was offered in the February affidavit for its absence in evidence.  However, in his affidavit of 15 May 2006 Mr Waller said that neither of the applicants can currently locate a copy of the Distribution Agreement.  Documents belonging to each of them, including the documents separately entitled ‘Confidentiality Agreement’ and ‘Distribution Agreement’, have for a number of years been stored at the offices of another company, UDC Pty Ltd, of which Mr Waller is a director.  That company moved offices and in the course of doing so transferred all of the applicants’ documents which it had stored.  He has caused administrative staff employed by UDC to search all of the documents in its possession, but they were unable to locate the Distribution Agreement. 

38                  In a letter dated 17 December 2004, which is exhibited to Mr Waller’s affidavit, to Emerson from Traxon’s solicitors, Solomon Brothers, reference is made in a paragraph numbered 1 to the agreement executed on 7 May 1998  which, it is said in paragraph 2, ‘was made shortly before Alco Controls became the distributor for the Traxoil Oil Management Product’.  This suggests that the appointment of Emerson as distributor was made sometime after 7 May 1998 contrary to the suggestion in par 12 of Mr Waller’s affidavit that it was made on that day.  However according to Mr Waller’s affidavit of 15 May 2006 he recalled that the document entitled ‘Distribution Agreement’ was signed at the conclusion of the May meeting.

39                  According to Mr Waller Traxon entered into similar agreements with another company, related to Emerson, trading as Alco Europe, which carried on business in Europe.  That company was appointed as the exclusive distributor of the TraxOil Device in Europe.

40                  Between 1998 and 2000, according to Mr Waller, Traxon developed, refined and enhanced the TraxOil Device.  Matters relating to its ongoing development and refinement were discussed with representatives of Emerson and their feedback received.  There was little or no reference, in Mr Waller’s February affidavit, to the sales of TraxOil Devices effected by Emerson under its distributorship arrangements during that period. However, in his affidavit of 15 May 2006, Mr Waller deposed that between May 1998 and September 2003, ie while Emerson was distributing the TraxOil Device in the USA, the following sales of the Device occurred:

1.         1 July 1999 to 30 June 2000                 7,400 units

2.         1 July 2000 to 30 June 2001                 7,900 units

3.         1 July 2001 to 30 June 2002                 4,700 units

4.         1 July 2002 to 30 June 2003                 5,510 units

5.         1 July 2003 to September 2003            2,000 units

41                  On 2 and 3 February 2000 Mr Cattach attended a meeting in St Louis, USA with representatives of Emerson and Alco Europe.  According to Mr Waller it was agreed at the meeting that the two companies and Alco Europe would jointly undertake a program of further development and refinement of the TraxOil Device in order to create an updated version of it which is referred to in the affidavit as TraxOil Generation 2.  Annual sales of 50,000 units of the TraxOil were necessary to make the development project commercially attractive.  A copy of the minutes of the meeting were exhibited to his February affidavit.  The minutes dealt with the requirements for the TraxOil redesign, sales volume versus selling price, other items and action items.   It was also agreed following that meeting that Emerson would manufacture some of the components of the TraxOil Device.

42                  After the meeting Traxon continued to further develop and refine the TraxOil Device and in so doing had discussions with representatives of Emerson and also Alco Europe about its further development and refinement. 

43                  In November 2000 Mr Cattach received an email from Mr Al Maier of Emerson requesting an update about any findings resulting from a visit to Isval, an Italian manufacturer of brass forgings.  Mr Maier asked Mr Cattach to let him know whether Traxon was pursuing the idea of including an enclosing tube as part of a forging.  Mr Maier had reviewed the new unit with some other people at Emerson’s office in St Louis and they had some comments for Mr Cattach to consider which the email set out in detail.  On the same day Mr Cattach received an email from a Dr Tomski, which was also sent to several representatives of Emerson and contained detailed comments about aspects of the TraxOil Device’s development program and sought information about other aspects of that program.

44                  On 9 November 2000 Mr Cattach sent an email to Mr Sciuto, another representative of Emerson, with a copy to Mr Maier.  Mr Cattach asked to be provided with information regarding enclosing tubes.  Emerson was manufacturing the tubes on behalf of Traxon.

45                  Further exchanges concerned with the development of the TraxOil Device were referred to in Mr Waller’s affidavit.

46                  Through 2002 and 2003 Traxon continued its distributorship arrangements with Emerson and Alco Europe and undertook further development of the TraxOil Device together with Emerson and Alco Europe.  Various emails were exhibited concerning day-to-day matters relating to the performance of the Distribution Agreements, sales of the TraxOil Device and its further development.

47                  Traxon purchased plant and equipment for the purpose of manufacturing the TraxOil Device in 2002 and 2003.  In 2002 it relocated its factory to accommodate the new plant and equipment.  According to Mr Waller Traxon made those purchases and undertook that relocation in the belief that the TraxOil Device and its successor, the TraxOil Generation 2 would be sold in the USA market.  Traxon incurred costs of $668,646 in relation to the purchase of capital equipment and $18,396 in relation to the relocation. 

48                  In September 2003 Mr Cattach attended another meeting in St Louis with Mr Kensinger.  Mr Kensinger told him that approximately 2,000 Copeland compressors had failed because of deficiencies in the TraxOil Device.  Mr Kensinger said that Emerson would not renew its Distribution Agreement with Traxon.  He also said that Emerson had developed its own oil management system device in conjunction with Copeland and would market it in competition with Traxon.  As that device was not currently ready for sale, Emerson still wished to purchase the TraxOil Device from Traxon.  According to Mr Waller, neither he nor Mr Cattach had been informed of any Copeland compressors failing because of the TraxOil Device prior to this meeting in September 2003. 

49                  Mr Waller said that he and Mr Cattach had made numerous oral inquiries about the alleged failures of Copeland compressors because of the TraxOil Devices.  His inquiries had extended to representatives of Emerson in Europe and Hong Kong.  Neither of them had been informed of any facts supportive of Mr Kensinger’s assertion.  As a result of their inquiries it is Mr Waller’s belief that the cause of any failures of Copeland compressors was unrelated to the TraxOil Devices.

50                  He deposed to a further meeting which he and Mr Cattach had with the President of Emerson, Mr David Kirk, and other representatives of that company.  Mr Kirk told him at that meeting that Emerson would provide a full report on the alleged failures of Copeland compressors. 

51                  On 3 October 2003 Mr Waller sent Mr Kensinger a letter about the meeting.  The letter said that Traxon had always regarded Emerson as a partner and had freely shared technology and information with it, had made significant capital investments in reliance on the agreements with Emerson and had often re-organised its factory to meet fluctuating orders for the Device from Emerson.  He expressed his shock at the outcome of the meeting.  He also said that Traxon would continue to supply the TraxOil Device to Emerson on a non-exclusive basis.   The tone of the letter is indicative of the surprise with which Traxon greeted the development at the September meeting.  The letter began:

‘Our company has had a meeting of directors to discuss the news from our CEO Mr Wayne Cattach resulting from his recent visit with you in St Louis.

Mr Cattach has informed us of your advice that Alco Control no longer wishes to be an exclusive distributor of our TraxOil products in the USA as you have developed, or participated in the development, or been party to the development of another oil level control device in conjunction with Copeland USA, with another St Louis company which you intend to sell in opposition to our product.

Furthermore, as this new product, it seems, is not quite ready for the market your company wishes us to continue to supply you with our product. 

LET ME SAY WE ARE TOTALLY SHOCKED AT THIS NEWS AND CANNOT FOR AN INSTANT BELIEVE THAT ALCO CONTROL WOULD BE PARTY TO SUCH A WAY OF DOING BUSINESS.’

52                  In November 2003 Mr Cattach received an email attaching an undated letter from Mr Renda of Emerson to the Customer Services Department of Underwriters.  The letter referred to the UL File and said that the TraxOil Device had previously used components manufactured by Emerson and some manufactured by Traxon.  As from mid-January 2004 the TraxOil Device was not to be made jointly between the two companies and the letter requested that a new UL File be created for TraxOil Devices in Traxon’s name alone. 

53                  Various emails were subsequently exchanged between Mr Cattach and representatives of Underwriters between 6 and 10 September 2004.  It appeared that about one year after Emerson had informed Traxon that it was terminating their agreements, the UL File had not been transferred into Traxon’s name.  During that period therefore Traxon had been unable to market and sell the TraxOil Device in the USA.  The transfer was only affected on 29 June 2005.  Mr Waller estimated a loss of $705,744 as a direct result of the company’s inability to market and sell the TraxOil Device in the USA during that period.  It also cost some $15,103 for Traxon to re-establish its accreditation with UL. 

54                  On 18 October 2004 Mr Waller attended a meeting with Mr Cattach and representatives of Emerson in St Louis.  Mr Waller exhibited to his affidavit notes of the meeting of 18 October 2004 which he had prepared.   Mr Kirk, the President of Emerson, was present at the meeting as was Mr Maier.  The notes record allegations made by Traxon.  The first paragraph states:

‘With the understanding of Dave Kirk of Flow Controls agreeing to disagree, there must be acknowledgment by Flow Controls of the costs incurred by TraxOn, in the development of a new TraxOil Product (NG3) for the USA market, when it is now apparent that ALCO had already decided not to participate in the ongoing development this new model and failed to advise TraxOn. (sic)

Furthermore TraxOn had a right to be advised, and ALCO had a duty to advise TraxOn of Alco’s decision to be party to develop a new Oil Control System in opposition to the TraxOil product.

We are advised now that the ALCO decision was based on the failure of some very large multiple high capacity compressors racks fitted with TraxOil’s, such failures due to the TraxOil being operated outside their design specifications and limitations.

TraxOn should have been advised of these instances as it is grossly unfair and unreasonable, not to allow the TraxOil manufacturers to have the opportunity to modify the TraxOil product to address these issues.’

The note reflected that there had been a change at Alco/Flow Controls in the most senior management positions.  Mr Waller recorded that with goodwill and cooperation Flow Controls and Traxon were in agreement to develop a partnering arrangement, with mutually beneficial projects, with the object of good business and the opportunity for Traxon to recover unnecessarily incurred costs.  Any agreements between them were to be documented by their legal representatives so as to make clear the obligations of each party.  He noted that by way of conclusion that Traxon would write a draft letter of understanding for perusal and comment by those ‘in the communications loop’.  When the letter of understanding was agreed on by all, a legal document would be prepared to formalise the understandings.

55                  On 1 November 2004 Mr Waller received a letter from Mr Kirk saying that Mr Kirk had discussed the meeting with Mr Maier and Mr Maier’s recollection was that Traxon was going to work with Alco Europe on some design changes to the TraxOil Device but that Emerson was going to have to look ‘elsewhere’ if it wanted cost reduction.  The letter also stated that while Emerson had received some periodic reports by way of emails between Traxon and Alco Europe, Emerson did not respond to those emails as it had assumed they were merely for its information and that because at these times it was ‘moving in a different direction’.  The statements in the letter from Mr Kirk were said, by Mr Waller, to be contrary to Mr Cattach’s recollection of the meeting.  On 17 November 2004 he received a letter from Mr Maier stating that the cause of the delay in transferring the UL File to Traxon was because the TraxOil Device featured new components.  The letter also asserted that the failures of the Copeland compressors were due to the TraxOil Device resetting itself automatically after a trip.  However the resetting of TraxOil Devices was within the operating specifications of the TraxOil Device and the effect which it was said it had had on Copeland compressors could easily be avoided.

56                  On 17 December 2004 the solicitors for Traxon, Solomon Brothers, sent an email to Mr Kirk alleging that Emerson’s conduct constituted a breach of the Confidentiality Agreement, a breach of fiduciary duty and a breach of s 52 of the Trade Practices Act.  A response to that email was received dated 21 January 2005 essentially denying the allegations.  The letter was signed by Michael K Shannon, a Vice President and General Counsel and Secretary for Emerson.  The letter did, however conclude with a proposal that Mr Kirk and Mr Shannon meet with Mr Solomon and his client in Perth to see whether the matter could be resolved. 

57                  Although the affidavit does not refer to subsequent discussions, the fact that the current proceedings were not initiated until 18 April 2006 suggests that at least some of the time that ensued was taken up with negotiations.

58                  A second affidavit, sworn by Mr Waller on 18 April 2006, deposed that on 23 February 2006 he met with Mr Spears of Alco Europe in Brussels.  In the course of this meeting he told Mr Spears that Traxon intended to institute proceedings against Emerson in the Federal Court.  He provided Mr Spears  with a copy of the statement of claim.  Mr Spears told him that he would soon be meeting with representatives of Emerson in St Louis and would discuss the proposed proceedings with them.  Mr Spears also told him that if Traxon could supply him with the necessary information he would discuss Traxon’s dispute with his superiors and attempt to induce Emerson to settle the dispute in a sensible manner.

59                  On 4 April 2006 Traxson received a letter from Emerson enclosing a document titled ‘Notice and Acknowledgment for Service by Mail’ and a summons issued by the Circuit Court of St Louis County in Missouri in the USA.  The documents so delivered record that on 29 March 2006 Emerson instituted proceedings in Missouri seeking negative declarations against Traxon.  The declarations sought against Traxon are in the following terms:

‘a.        Flow Controls, [a reference to a division of Emerson], has performed all of its obligations under a Confidentiality Agreement dated May 7, 1998;

b.         Flow Controls has performed all of its obligations under a Distribution Agreement dated June 24, 1998;

c.         Flow Controls owes no obligations to Traxon Int’l under the Confidentiality Agreement dated May 7, 1998;

d.         Flow Controls owes no obligations to Traxon Industries under the Distribution Agreement dated June 24, 1998;

e.         The Confidentiality Agreement is the full and complete contractual relationship between Flow Controls and Traxon Industries and there is no other contractual relationship between Flow Controls and Traxon Industries;

f.          The Distribution Agreement is the full and complete contractual relationship between Flow Controls and Traxon Int’l and there is no other contractual relationship between Flow Controls and Traxon Int’l; and

g.         Flow Controls is and has been the owner of a file maintained with Underwriters’ Laboratories Pty Ltd, as UL File MP604, Volume 11 Section 1 Flow Controls has performed all of its obligations under a Confidentiality Agreement dated may 7, 1998;’

60                  Although there was nothing in Mr Waller’s February affidavit about the existence of a Distribution Agreement dated 24 June 1998, it seems there will be little dispute that there was a Distribution Agreement made between the parties at or about that time.  In that respect I have regard to what appeared in Mr Waller’s affidavit of 15 May 2006 and the terms of the declarations sought by Emerson.  However as earlier noted, the letter from Solomon Brothers of 17 December 2004 does suggest that the Distribution Agreement came into existence after 7 May 2004.  The evidence discloses virtually nothing of its terms.

61                  Mr Waller further deposed in his affidavit of 15 May 2006 to communications with Emerson and service of the proceedings in Missouri.  Nothing turns on these matters for present purposes.

The Relevant Rules

62                  The application is brought under O 8 r 1(1) of the Federal Court Rules which provides, inter alia:

‘1.        Subject to rule 2 and Divisions 2 and 3 of this Order, originating process may be served outside the Commonwealth in the following cases-

(a)       where the proceeding is founded on a cause of action arising in the Commonwealth;

…

(ab)     where the proceeding:

            (i)         is for the enforcement, rescission, dissolution, rectification or annulment of a contract; or

            (ii)        otherwise affects a contract; or

            (iii)       is for damages or other relief in respect of the breach of a contract;

            and the contract:

            (iv)       is made in the Commonwealth; or

            (v)        is made on behalf of the person to be served by through an agent carrying on business or residing in the Commonwealth; or

            (vi)       is governed by the law of the Commonwealth or of a State or Territory.

…

(b)       Where the proceeding is founded on a breach of an Act, where the breach is conducted in the Commonwealth.’

63                  Order 8 r 2 sets out the conditions to be satisfied before leave can be granted to serve an originating process outside the Commonwealth.  Relevantly it is in the following terms:

‘2(1)    Service outside the Commonwealth of originating process is not valid under this Order unless –

(a)       the service is in accordance with the prior leave of the Court given under sub-rule (2);

(b)       the Court confirms the service under sub-rule (4); or

(c)        the person served waived objection by entering an appearance.

2(2)     The Court may, by order, give leave to serve originating process outside the Commonwealth in accordance with Division 2 or 3 of this Order or, subject to subrule 2B, on such terms and conditions as it considers appropriate, if the Court is satisfied that:

(a)       the Court has jurisdiction in the proceeding; and

(b)       rule 1 applies to the proceeding; and

(c)        the party seeking leave has a prima facie case for the relief sought by the party in the proceeding.’

64                  It may be noted that the USA is not a country with which Australia is party to a Convention as to service abroad of judicial documents.  This means that Div 2 of Order 8 does not apply.  However Div 3, relating to service in non-convention countries, does apply.

Whether the Court has Jurisdiction in the Proceeding

65                  The statement of claim invokes, inter alia, a cause of action based on alleged contravention of s 52 of the Trade Practices Act.  Section 86(1) of that Act provides:

‘Jurisdiction is conferred on the Federal Court in any matter arising under this Act in respect of which a civil proceeding has, whether before or after the commencement of this section, been instituted under this Part.’

66                  The Court also obtains jurisdiction under s 39B(1A)(c) of the Judiciary Act 1903 (Cth) which provides, inter alia:

‘The original jurisdiction of the Federal Court of Australia also includes jurisdiction in any matter:

…

(c)        arising under any laws made by the Parliament, other than a matter in respect of which a criminal prosecution is instituted or any other criminal matter.’

67                  On the face of it the other causes of action which relate to breach of contract and breach of fiduciary duty are sufficiently related to the cause of action in misleading or deceptive conduct that they form part of the one matter or controversy before the Court and therefore within its accrued jurisdiction.  I conclude therefore that the Court does have jurisdiction in the matter.

Whether the Proceeding is One to which Order 8 rule 1 Applies

68                  The applicants contend that the causes of action are matters to which O 8 r 1 applies.  The misleading or deceptive conduct alleged is said to have arisen out of the making of the Distribution and Confidentiality Agreements.  This is said to have occurred in Western Australia.  Emerson’s entry into ‘the 1998 Agreement’, is said to have amounted to a representation that it would comply with the terms of that agreement.  The representation is said to have been misleading or deceptive or likely to mislead or deceive as Emerson did not intend to comply with the terms of the agreement at the time it entered into it.

69                  Failure to honour a promise is not of itself misleading or deceptive or likely to mislead or deceive as the promisor may genuinely intend to honour the promise at the time that it is made.  However, to make a promise while not intending to keep it, involves a misrepresentation by the promisor of its intention and can be misleading or deceptive within the meaning of s 52 of the Trade Practices Act. 

70                  Section 51A of the Trade Practices Act imposes a burden on the promisor in relation to representations as to  future matters thus:

‘(1)      For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.

(2)       For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.’

Subsection (3) is not material for present purposes.

71                  A promise is a representation with respect to a future matter namely, the performance of the promise and ordinarily carries the implication that reasonable grounds exist for the making of the promise including the intention and capacity to perform it.  The representation pleaded in this case was said to arise out of the entry into ‘the 1998 Agreement’.  There is no pleaded representation in relation to the variation to the Agreement and the alternatively pleaded 2000 Agreement.  However the continuing effect of the original pleaded representation is asserted in par 16 of the statement of claim. 

72                  There is sufficient in the allegations contained in the statement of claim to raise a cause of action for damages based on s 52 of the Trade Practices Act which provides:

‘(1)      A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

(2)       Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of subsection (1).’

The provisions of s 52 apply to foreign corporations and trading or financial corporations formed within Australia.  The respondent is a foreign corporation and on that basis the allegations raise a cause of action for breach of an Act of the Commonwealth which occurred in Western Australia and therefore within the Commonwealth.  Order 8 r 1(b) therefore applies to the cause of action in misleading or deceptive conduct.

73                  The contract said to have been breached is ‘the 1998 Agreement pleaded in paragraph 10 as varied by the 2000 Agreement’ and alternatively ‘the 1998 Agreement pleaded in paragraph 10 and the … 2000 Agreement pleaded in paragraph 15’.

74                  As pleaded the 1998 Agreement was made in Western Australia.  Its variation was made orally in St Louis, Missouri in the United States of America in 2000.  Alternatively, the parties substituted a new agreement for the old in St Louis, albeit it embodied all the terms of the 1998 Agreement.  The 1998 Agreement is said to have contained a term that it would be governed by and construed in accordance with the laws of Western Australia.  It may be implied from the pleading of the 2000 Agreement that the varied or substituted agreement contained the same terms.  On this basis the claim for breach of contract, as pleaded, is one to which O 8 r 1 applies.

75                  The cause of action for breach of fiduciary duty turns on the alleged disclosure by Emerson of confidential information relating to the TraxOil Device. It is not said in the statement of claim where the conduct occurred but, in context, it seems inescapable that the allegation relates to conduct by Emerson outside Australia.  Traxon submits that the matters giving rise to the duty occurred in Western Australia. 

76                  The cause of action in breach of fiduciary duty is based on conduct engaged in in the United States.  Even though the duty pleaded depends upon conduct in Australia that does not mean that its breach by acts outside Australia give rise to a cause of action ‘arising in the Commonwealth’ under O 8 r 1(a).  As von Doussa J observed in Delco Australia Pty Ltd v Equipment Enterprises Incorporated trading as Kukla Trenchers [2000] FCA 821, the authorities establish that ‘cause of action’ within the meaning of O 8 r 1(a) does not refer to all the elements of the cause of action.  It refers rather to the act on the part of the defendant which gave the plaintiff his cause for complaint.  In Distillers Co (Biochemicals) v Thompson [1971] AC 458 at 467, Lord Pearson said (at 468):

It is not the right approach to say that, because there was no complete tort until the damage occurred, therefore the cause of action arose wherever the damage happened to occur.  The right approach is, when the tort is complete, to look back over the series of events constituting it and ask the question, where in substance did this cause of action arise?

Theory no (iii) is that the cause of action arose within the jurisdiction if the act on the part of the defendant, which gives the plaintiff his cause of complaint has occurred within the jurisdiction.  That is the rule laid down in Jackson v Spittal (1870) LR 5CP 542, which is an authoritative case, and the rule is inherently reasonable, as the defendant is called upon to answer for his wrong in the courts of the country where he did the wrong.’

Counsel for the applicants contends that the cause of action for breach of fiduciary duty falls within O 8 r 1(ab)(ii).  That is to say the proceeding, in so far as it seeks relief for breach of fiduciary duty is one which ‘otherwise affects a contract’.  In my respectful opinion that contention is unsustainable.  While it may rightly be said that the fiduciary obligation, as pleaded, arises out of the asserted contractual relationship, the proceeding based upon breach of fiduciary duty does not of itself affect the contract.  In my opinion, therefore, the cause of action for breach of fiduciary duty is not one to which O 8 r 1 applies. 

77                  As I concluded in the reasons published on 26 April 2006, the fact that the causes of action in misleading or deceptive conduct and breach of contract are within O 8 r 1, would be insufficient to satisfy the requirement that the rule ‘applies to the proceeding’ within the meaning of O 8 r 2(2)(b) for so long as the claim for breach of fiduciary duty is included.  As von Doussa J said in  Delco Australia [at 35]:

‘In this Court r 1(n) makes express provision for a proceeding where a proceeding does not fall squarely within one of the heads enumerated in the earlier paragraphs.  In my opinion r 1(n) makes it clear that an originating process to be served out of the Commonwealth must be confined to causes of action that fall wholly within one or several of the heads in r 1.  An originating process that includes a claim that does not fall within one or more of the heads is not an originating process that meets the description of r 1, in that it is not one “in” any of the cases described in the rule.  It is not a “proceeding to which rule 1 applies” so as to meet the requirement of r 2(2)(c)(b).  A similar conclusion was expressed by Wilcox J in Tycoon Holdings Ltd v Tencor Jetco Inc (1992) 34 FCR 31 at 35.’

78                  In the circumstances, because of the inclusion of the claim for breach of fiduciary duty, it is not possible to conclude that ‘the proceeding’ reflected in the amended application and the amended statement of claim is one to which O 8 r 1 applies.  However the minute of further amended statement of claim which is proposed would omit the claim for breach of fiduciary duty and, on that basis, would transform the action into a proceeding to which O 8 r 1 applies.  I am therefore prepared to make an order for service on Emerson in the United States of America of an application and statement of claim in terms of the further amended application and further amended statement of claim filed on 24 May 2006.  A minute of proposed orders has been filed also to take account of that contingency.  I will make orders in terms of the minute. 

Associate:

Dated:              26 May 2006