Hospital Products Ltd v United States Surgical Corporation

156 CLR 41
55 ALR 417

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(Judgment by: Mason CJ) Court:

Judges: Gibbs CJ

Mason JWilson J
Deane J
Dawson J

Judgment date: 25 October 1984

Canberra

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Judgment by:
Mason CJ

Introduction

This appeal, which has attracted cross-appeals, is from a decision of the New South Wales Court of Appeal allowing an appeal by the first respondent (USSC), the plaintiff in an action in the Supreme Court of New South Wales, which, though it succeeded in the action, failed to obtain relief by way of constructive trust at first instance. The case raises interesting questions as between an overseas manufacturer and its exclusive distributor in Australia. These questions concern the existence of a fiduciary relationship, the scope of the distributor's fiduciary duty and the extent of relief for breach of that duty, in particular the availability of relief by way of a constructive trust over the assets of a business commenced by the distributor in competition with that of the overseas manufacturer at a time when the distributorship was still on foot.

USSC is a manufacturer in the United States of surgical stapling devices and disposable loading units. In November-December 1978 USSC agreed with the fourth respondent, Alan Richard Blackman, to appoint him as USSC's exclusive Australian distributor as from 1 April 1979. In or about February 1979, by agreement between USSC, Blackman and Hospital Products International Pty Ltd (HPI) (then known as Hospital Products of Australia Pty Ltd), HPI was substituted for Blackman as the proposed distributor. HPI acted as the exclusive distributor in Australia of USSC's products from 1 April 1979 until 25 December 1979 when HPI terminated the distributorship. That termination was accepted by USSC by telex on 10 January 1980.

On 25 December 1979 HPI began to supply to its existing customers for USSC's products and to market generally products which were, for all relevant purposes, identical to those of USSC but which were contained in packages identifying them with HPI, not with USSC. Initially the products were of USSC manufacture and were sterilized and repackaged by HPI, in some cases with components manufactured by HPI. Gradually the components manufactured by HPI increased so that ultimately it marketed products entirely of its own manufacture.

The development by HPI of its own manufacturing capacity had been proceeding, unknown to USSC, from a time before the commencement of the distributorship, by a process known as "reverse engineering", involving the measurement and analysis of USSC components and the construction of tools, moulds and dies for the production of copies. In connection with the "reverse engineering", HPI engaged the fifth respondent, IRD Engineering Services Pty Ltd (IRD), a company which eventually came under the control of Blackman. Later, towards the end of 1980, HPI began to market its products in the United States through the second respondent, Surgeons Choice Inc (SCI), a wholly-owned subsidiary of HPI.

In June 1981 the business and assets of HPI and of IRD, including the issued capital of SCI, were acquired by the appellant. Blackman and HPI acquired control of the appellant.

I have taken this narration of the basic facts from the judgment of the primary judge, McLelland J. They reflect what was common ground between the parties in the Supreme Court. Before I examine the facts more closely I should refer to the principal conclusions reached and the relief granted by the primary judge and later by the Court of Appeal.

McLelland J made the following declarations:--

(1)

that HPI by secretly developing a capacity to manufacture copies of products manufactured by USSC or components thereof, by deferring fulfilment of orders for products manufactured by USSC in anticipation of filling those orders with products packaged or manufactured by HPI and by filling those orders with its competing products, with a view to appropriating for itself at the expense of USSC the whole or a substantial part of the Australian market for products manufactured by USSC, committed breaches of equitable and contractual obligations owed by HPI to USSC;

(2)

that Blackman knowingly participated in the breaches by HPI of its equitable obligations; and

(3)

that by reason of the breaches and the knowing participation by Blackman, USSC was entitled at its election --

(a)

as against HPI and Blackman to payment of an amount equal to the profits made by HPI by selling surgical stapling products, other than products manufactured by USSC and sold in USSC's packages, on the Australian market between 1 December 1979 and 30 November 1980 and such payment to be secured by an equitable lien over the assets held by HPI representing the proceeds of the sale by HPI of its manufacturing business to the appellant or so much of those assets as the court may think sufficient to secure the payment;

(b)

as against HPI and Blackman, to payment of equitable compensation in respect of the breaches of equitable obligations; or

(c)

as against HPI to damages for breaches of its contractual obligations.

Orders were made in accordance with these declarations, USSC having elected to pursue the first of the alternative remedies.

By way of security for the payment of the amount of profits, McLelland J further declared that USSC was entitled to an equitable lien over all the shares in the capital of the appellant held by HPI and all moneys owing by the appellant to HPI, representing or derived from any part of the consideration on the sale of its manufacturing business to the appellant. His Honour restrained the appellant until payment from (a) disposing of, charging or otherwise dealing with any such shares held by HPI in the capital of the appellant; and (b) demanding, directing or receiving payment of, or assigning, charging or otherwise dealing with any such moneys owing to HPI by the appellant.

The Court of Appeal, unlike the primary judge, concluded that USSC was entitled to relief by way of constructive trust over the assets of HPI and that the appellant acquired HPI's assets with notice of USSC's claim to those assets. The court set aside the declarations and orders of McLelland J and declared that all assets including the business and goodwill owned by the appellant on 1 July 1981 and at any time thereafter were and had been at all material times since 1 July 1981 held on trust for USSC, with the exception of those assets which were assets of the appellant prior to its acquisition of the business and assets of HPI and IRD. The court ordered the appellant to transfer those assets to USSC. Other orders consequential upon the making of those orders were also made.

The arguments presented to this court by the appellant, HPI, Blackman and IRD challenge the findings that there was a fiduciary duty owed by HPI to USSC, that there was a breach of that duty and that relief by constructive trust was appropriate relief for breach of fiduciary duty. These arguments call for a detailed examination of the facts and of the findings made by the primary judge and by the Court of Appeal.

The Facts

(a) Background

Since 1967 USSC has manufactured in the United States and marketed there and in other countries, under the name "Auto Suture", surgical stapling devices of its own design, and disposable loading units, also of its own design, for use with those devices. They enable surgeons to carry out surgical procedures, in particular suturing, using stainless steel staples applied mechanically instead of surgical needles and thread. By the end of 1978 USSC had developed and was manufacturing and marketing a range of these devices and disposable loading units for use in various types of surgical procedure. USSC had also developed and was manufacturing and marketing integrated devices and staple cartridges known as disposable skin staplers suitable for use on a single occasion, being made predominantly in plastic.

In the years 1972 and 1973 USSC began to appoint "authorized dealers" to market its products and provide instruction to users. Each dealer was allocated a defined geographical area. The relationship between USSC and each dealer was governed by a standard form "Dealership Agreement", supplemented where necessary by a "Dealer Security Agreement" regulating the financial arrangements between USSC and the dealer.

The authorized dealer was neither an employee nor an agent of USSC. The dealer was in business on his own account and purchased USSC's products for resale to customers. By 1975 USSC had approximately 80 dealers serving areas within the United States. In that year USSC began to establish its own sales staff to market its products within the United States. Thereafter the sales representatives employed by USSC replaced authorized dealers. By late 1978 there were not more than 33 dealers and by 1980 or 1981 they had been entirely eliminated.

In foreign countries USSC appointed distributors. By the end of 1978 they numbered 27. Generally speaking a foreign distributor was an established business house already engaged in the distribution of other products. The arrangements between USSC and its distributors were more informal than those regulating USSC's relationships with its dealers. There was no standard form distribution agreement, the contractual arrangements consisting of an appointment of the distributor by letter following preliminary discussions or correspondence. Foreign distributors were not agents of USSC; like dealers, they purchased USSC's products for resale to customers.

USSC supplied to its dealers and distributors disposable loading units and disposable skin staplers for demonstration purposes at a fraction of the cost charged for the clinical products. They were in general identical to those supplied for clinical use except in two respects, viz (1) unlike the clinical product, the demonstration product was not sterilized; and (2) unlike the clinical product the demonstration product was supplied in unsterile packs.

(b) Blackman's Association with USSC

Blackman first became associated with USSC early in 1973 when he was employed as product manager in relation to the marketing of an intravenous infusion set then manufactured by USSC. In August 1973 he commenced business on his own account as an authorized USSC dealer for a substantial part of the city of New York. In 1976 the dealership was taken over by The Hospital Products Corporation (HPC), a corporation formed in New York and owned and controlled by Blackman.

Blackman was a competent salesman with a high degree of expertise in USSC's products. He was highly regarded by Mr Leon Hirsch, the President of USSC, and Miss Turi Josefsen, Mr Hirsch's wife and Vice-President of USSC in charge of marketing, with each of whom he maintained a close relationship.

Despite this close relationship there had been some friction, arising principally from the substantial reduction in September 1975 of Blackman's New York distributorship area and a complaint made in December 1975 by Blackman about USSC's quality control which Hirsch believed to have been fabricated. The primary judge found that its existence did not cause "any permanent impairment of the cordial relationship" between Blackman and Hirsch and Josefsen.

(c) The Australian Distributorship

At or about the beginning of November 1978 at a meeting in a restaurant in Stamford, Connecticut, or in New York, Blackman, after informing Hirsch and Josefsen that he wished to emigrate to Australia, proposed that he be appointed USSC's exclusive Australian distributor in place of Downs Surgical (Australia) Pty Ltd (Downs Surgical), the then Australian distributor of USSC products, and that his existing New York dealership be phased out. Hirsch and Josefsen indicated that they were favourably disposed to Blackman's proposal. It was arranged that Blackman should later discuss further details of the matter with Josefsen. There was a conflict of evidence between Blackman on the one hand and Hirsch and Josefsen on the other, as to the discussions which they had. The primary judge resolved this conflict in favour of Hirsch and Josefsen, concluding that Blackman was not a credible witness.

A later discussion did take place, apparently in the latter half of November 1978 in USSC's office in Stamford. There was discussion about the training of a nurse whom Blackman proposed to employ in Australia and about the size of Downs Surgical's stock inventory and the possibility of its purchase by Blackman. It was arranged that he would consult with Mr Grimes, USSC's regional manager, in order to work out details of the termination of the New York distributorship. Although Josefsen stated that she thought a written distributorship agreement should be prepared, Blackman said that he did not think it was necessary.

Subsequently, Blackman discussed with Grimes the phasing out of the New York dealership. There followed an exchange of letters between Blackman and Josefsen beginning with a letter dated 27 November 1978 from Blackman and a reply dated 18 December 1978 from Josefsen in which she agreed in principle to proposals outlined by Blackman in his letter of 27 November for (a) the termination of his dealership; (b) the termination of the Downs Surgical distributorship on 1 December 1978 with 90 days' notice on the footing that Blackman would purchase its inventory and USSC would refrain from shipping to Downs Surgical further supplies; and (c) the terms of supply by USSC to Blackman in Australia. Josefsen stated that she had requested Mr Fisher (USSC's in-house counsel) to prepare a distributorship agreement for exeuction by USSC and Blackman.

On 27 December 1978 USSC wrote to Downs Surgical terminating its distributorship as from 31 March 1979. On the same day USSC sent to Blackman in duplicate a letter under the hand of Mr Whittingham, Senior Vice-President, Administration, which read as follows:--

We take pleasure in confirming the continuance of our relationship. You will become our Australian distributor while phasing out your dealership in accordance with the following procedures:--

1.

We have this day given notice of termination to our present Australian distributor, Downs Surgical (Australia) Pty Ltd effective March 31, 1979. A copy of the notice has been furnished to you. Upon that termination becoming effective and commencing April 1, 1979 you will be our exclusive Australian distributor. Although you have indicated that no formal agreement is necessary, we believe it is desirable and will forward to you a suggested agreement covering the distributorship.

2.

During the period through March 31, 1979 you will undertake to purchase the Downs' inventory at prices mutually agreeable to you and them and in any event use your dealership inventory whch you estimate will be approximately $100,000-$125,000, wholesale value, to provide an inventory level in Australia. Additional products purchased by you from us will be paid on a 30 day net basis. In the meantime arrangements should be made to examine your inventory books and records as per your dealership agreement at the earliest convenient date.

3.

You expect to rent from us between 20-30 sets of instruments which within 120 days you will convert to purchase from us.

4.

You will hire and train your nurse unless she is agreeable to training by us at your expense.

5.

Your dealership will continue without change through June 30, 1979. Effective July 1, 1979 your dealership shall be deemed terminated in all respects and your PAR [primary area of responsibility] will be taken over by us for servicing.

6.

By July 1, 1979 all accounts owed to us will be paid in full by you. This includes outstanding A/R [accounts receivable], inventory, demonstrations, interest, financing charges and other obligations.

If the above is your understanding of our discussions please sign and return the enclosed copy of this letter. We look forward with great pleasure to our new relationship and wish you every success in your new undertaking.

On 29 December 1978 in a discussion in Fisher's office in New York Blackman confirmed that he was satisfied with the contents of the letter. Blackman signed the letter under the words:--

Accepted and agreed The Hospital Products Corporation.

USSC took no further steps in relation to a formal distributorship agreement on the decision of Josefsen, concurred in by Hirsch, as a result of Blackman's expressed disinclination to have one.

On 6 January 1979 Blackman arrived in Australia. At or about the beginning of February he acquired HPI, then a shelf company bearing a different corporate name. It was admitted on the pleadings that at about the same time, by novation, HPI was substituted for Blackman in the distributorship agreement entered into in November and December 1978.

Having made arrangements to purchase the excess stock of Downs Surgical, HPI replaced that company as USSC's sole distributor in Australia as from 1 April 1979 and began to market Auto Suture products to Australian hospitals and surgeons. Blackman devoted himself energetically to the promotion of Auto Suture products with the result that between April and December 1979 there was a substantial increase in the use of those products in Australian hospitals.

The cost price to Downs Surgical of the stock purchased from it by HPI was $50,000 approximately, some five times more than Blackman had anticipated as a result of his discussions with Josefsen. The price at which HPI was to purchase the stock was 10 per cent over cost. HPI paid Downs Surgical $5000 approximately and it was arranged that USSC would give that company credit for the balance of $50,000 approximately and debit that amount to HPI.

In or about May 1979 HPI began to purchase further stock direct from USSC. As at 30 June 1979 HPI was indebted to USSC in the sum of US$65,000 approximately for stock purchased from USSC as well as US$54,000 approximately for stock purchased from Downs Surgical. In addition HPC was indebted to USSC in respect of the New York dealership in an amount of US$70,000 as at 30 July 1979. These debts gave rise to a further agreement between the parties which resulted later in the execution of mutual releases.

(d) Blackman's Plans to Compete with USSC

Blackman had first come to Australia in August 1978 for 12 days. He ascertained then, if not earlier, that USSC's surgical stapling devices and disposable loading units, which were the subject of patents in the United States, were not the subject of patents registered in Australia and he consulted solicitors in Sydney in relation to his competing with USSC by markeitng USSC-made demonstration products repackaged and sterilized in Australia and the possibility of his obtaining registration in Australia of the trademark " AUTOSUTURE ". On 11 August 1978 he set in train investigations by Professor Wallwork, a metallurgist in the University of New South Wales, into:--

(a)

the composition and physical properties of the wire staples in USSC disposable loading units; and

(b)

the suitability of radiation sterlization of disposable loading units after packaging.

Later in 1978 he asked Professor Wallwork to investigate and report on the composition and physical properties of other metal components in the disposable loading units and to investigate the possibility of the production of dies for the manufacture of those components.

Blackman had for some years known that USSC's demonstration product did not differ in quality from its clinical product. He had been accumulating since 1977 abnormally large stocks of demonstration product in the course of HPC's New York dealership. No doubt this was the stock to which he referred when on 2 February 1979 he told HPI's prospective banker that he had purchased stock in America at very advantageous prices in readiness for him to start on his own.

The primary judge found that by the time of the restaurant meeting at the beginning of November 1978 Blackman had, subject to his being appointed USSC's Australian distributor, formed the intention of setting up an organization in Australia:--

(a)

to manufacture components similar to USSC-made components of the types required to be used with USSC-made demonstration cartridges;

(b)

to repackage and sterilize USSC-made demonstration cartridges accompanied where necessary by components made by himself; and

(c)

to market the resulting products in competition with USSC-made clinical products.

His Honour also found that Blackman was at that stage exploring the feasibility of recovering, refurbishing, repackaging and marketing used cartridges as well as manufacturing and marketing complete copies of USSC-made disposable loading units.

On a subsequent visit to Australia in the first half of November 1978 Blackman retained Graham Engel and Associates Pty Ltd, consultants in pharmaceutical sciences and in the regulation of pharmaceutical goods, to act for him in his dealings with the Federal and State Governments in Australia and to advise in relation to the sterilization and quality control of surgical stapling cartridges and the packing of such cartridges. After Blackman's return to the United States Mr Engel, the principal of the company, entered into discussions with Blackman's Sydney solicitors with a view to taking steps "to get the stapling business underway". In December 1978 approaches were made to Smith & Nephew Associated Companies of Australia Pty Ltd with a view to carrying out the packaging and sterilization of certain USSC-made demonstration disposable loading units. This company was later retained to undertake this work, but the engagement did not proceed. On 15 November 1978 Blackman's solicitors lodged an application for the registration of the trademark " AUTOSUTURE in the name of HPI in respect of, inter alia , "instruments and apparatus for use in surgery".

Between December 1978 and February 1979 arrangements were made by Blackman for the shipping of large quantities of USSC-made demonstration product by HPC to HPI via Hong Kong. For taxation reasons each transaction was structured as a sale by HPC to Pilotte Nominees Ltd, a New Hebrides company, as a trustee for a trust called the Bellevue Trust at a price equivalent to the cost of the product to HPC, a second sale by Pilotte Nominees Ltd to Morust Ltd, a Hong Kong company, the shares in which were to be held by the Bellevue Trust, whilst Morust Ltd was intended to hold all the shares in HPI, at a price many times that under the first sale, and a third sale by Morust Ltd to HPI at a price slightly in excess of the price under the second sale. Shipments of these demonstration products were made by HPC by air on 16 February 1979 and on 29 March 1979 at invoiced prices to Pilotte Nominees Ltd of US$4490 and US$14,700 respectively. They were received by HPI at invoiced prices of the order of $500,000.

At the beginning of March 1979 HPI, through Blackman, engaged Mr L Crispe, a product engineering consultant, as project manager for HPI's proposed manufacturing activities. Under Blackman's direction Crispe immediately set about establishing a production capability for HPI involving, inter alia , as a first stage:--

(a)

the manufacture of components for disposable loading units identical to USSC-made components; and

(b)

the cleaning, assembly, packaging, labelling and sterilization of certain disposable loading units manufactured by USSC, comprising USSC-made demonstration product, combined where necessary with locally-made components;

and as a second stage:

(c)

the manufacture of all components identical with USSC-made components of certain types of disposable loading units manufactured by USSC; and

(d)

the assembly, packaging, labelling and sterilization of those types using locally-made components.

All this was with a view to marketing the disposable loading units so produced, under the name of HPI in competition with, or in substitution for, USSC-made clinical product.

Substantially all the engineering work involved in the first stage of these activities was performed for HPI under contract by a firm called IRD Engineering Services and in the second stage by that firm and its successor in business, the respondent IRD. By August 1979 a number of components for disposable loading units were being manufactured for, and supplied to HPI. And by October 1979 HPI had begun to defer fulfilment of orders received for Auto Suture products in anticipation of filling those orders with HPI packaged products. At or about the same time HPI ceased to place further orders with USSC. In or about November 1979 HPI commenced to assemble disposable loading units comprising USSC-made demonstration product with HPI-made components added where necessary, repackaging them under HPI's label and sterilizing them.

On 25 December 1979 Blackman wrote to Josefsen as follows:--

Dear Turi,

I am sorry to inform you that Hospital Products of Australia Pty Ltd shall this day on, no longer be the authorized distributor for United States Surgical Corporation's product line. This decision has been made for numerous reasons, not the least of which involves:--

(1)

USSC's growing problem with quality control.

(2)

USSC's constant back-order position.

(3)

USSC's inability to process orders efficiently.

(4)

Resulting damage to Hospital Products of Australia Pty Ltd's reputation in the marketplace.

I will be in New York City from January 25-February 15, finalizing all my affairs. I suggest we get together during this period to settle all accounts due.

The letter was received by Josefsen on 7 January 1980. On 10 January 1980 Josefsen telexed Blackman on behalf of USSC accepting HPI's decision to terminate the distributorship and suggesting that a time and place be appointed in New York for settling accounts and the outstanding debt owing to USSC.

From 25 December 1979 HPI began to supply HPI-repackaged product to fill orders then outstanding and subsequently received for Auto Suture products. Blackman anticipated that HPI would be able to supply products wholly manufactured by itself within a few months and in the meantime considered that HPI would be able to supply its labelled and repackaged USSC-made demonstration products with the addition of HPI-made components where necessary.

On 28 December 1979 HPI communicated with all hospital purchasing agents, stating that it was phasing out all the United States' manufactured goods and substituting an Australian manufactured product. Thereafter products supplied by HPI made no reference to USSC or to Auto Suture except in the words "For use with Auto Suture instrument". Each label included the words:--

Packaged and distributed by

Hospital Products International Pty Ltd

10-12 Clarke Street, Crows Nest,

Sydney, NSW 2065.

Patent pending.

The primary judge found that as from 25 December 1979 HPI began to supply customers in Australia with HPI-labelled products, the HPI-made proportion of the content of which was increasing with the passage of time, in order that the existing Australian market for USSC-made products might be converted into an equivalent market for HPI-made products. He found also that this was done in a manner which was intended to, and did in fact, mislead existing customers for USSC-made products into believing that the HPI-labelled products were being manufactured in Australia by arrangement with, or under license from, USSC.

During 1980 HPI began to supply various types of disposable loading units of its own manufacture. However, in order to maintain its ability to satisfy orders in that year, HPI obtained supplies of USSC-made clinical products which HPI repackaged under its label. HPI obtained large quantities of these products by procuring their purchase from USSC, or its distributors, by agents either using a false name or otherwise adopting methods to conceal from USSC the identity of HPI as purchaser. HPI also acquired USSC-made devices by similar means for use in the promotion of HPI-packaged products.

After the termination of HPI's distributorship, USSC did not re-enter the Australian market until August 1980 when it formed a subsidiary which resumed the marketing of USSC-made disposable loading units in Australia. HPI continued marketing its products in Australia until November 1980. Thereafter, while continuing to manufacture its product in Australia, it marketed them in the United States and elsewhere through SCI which it formed in the United States for that purpose in or about October 1980.

McLelland J found that the obtaining by Blackman of the distributorship was a condition of the implementation by him of his scheme to take over the whole or a substantial part of the market in Australia for USSC's products. The Court of Appeal concluded that his appointment as distributor conferred on him a number of opportunities without which his scheme may not have succeeded. The opportunities which the Court of Appeal identified were as follows:--

(1)

the distributorship would enable him to know or become known to purchasers of USSC's products in Australia, without labouring under the handicap of being a competitor;

(2)

the distributorship would enable him to establish surreptitiously a manufacturing capacity;

(3)

he would be able to obtain finance from USSC and other sources;

(4)

he would be able to reduce the promotion and sale of USSC's products before terminating the distributorship and satisfy outstanding orders with products containing Australian-made components; and

(5)

he could supply his own products to existing customers who might readily believe that he was acting with the authority of USSC.

As the court pointed out, Blackman and HPI took advantage of each of these opportunities.

The Court of Appeal then drew the inference: "... that in all Blackman did, and through him all that HPI did, he and with him HPI, were actuated by one design, namely to put himself, and hence HPI, in a position in which he, and it, could appropriate for himself and it at the expense of USSC, the whole or a substantial part of the Australian market for USSC products. ... Without limiting what we have said, this applied throughout the period of the actual operation of the distributorship. Even his activity, during the distributorship, of building up the market in Australia for USSC products by the use of USSC marketing techniques was done by him in order that the enhanced market could be taken over by HPI as it was by vacating it for USSC products during the distributorship and thereupon occupying it with HPI products."

Choice of Law

USSC based its claim for relief in the proceedings in the Supreme Court on the law of New South Wales. The primary judge and the Court of Appeal proceeded on the footing that choice of law was not a material issue in the case because there was a substantial identity between the law of New South Wales and the laws of New York and Connecticut, the two competing jurisdictions. Consequently choice of law is not a matter which this court need consider and I shall therefore proceed on the assumption that the relevant law is that of New South Wales.

Terms of the Distributorship Agreement

McLelland J's finding that the countersigned letter of 27 December 1978 from USSC to Blackman was not intended to record the whole of the transaction between them, was confirmed by the Court of Appeal. The appellant challenges the finding on the ground that Blackman was asked to sign beneath the words "Accepted and agreed" and that the letter purported to be a statement of USSC's understanding of the discussions between the parties. It seems that the letter did more than confirm the earlier discussions. The letter specified a different termination date for the New York dealership and a different commencement date for the Australian distributorship from those proposed in the earlier letter of 27 November and the new dates do not appear to have been mentioned in the oral discussion. The letter of 27 December actually records an appointment of Blackman as Australian distributor from 1 April 1979 and a termination of his New York dealership on 1 July 1979. Apart from these matters the letter deals with procedural matters, as McLelland J found. It indicates that USSC then contemplated the execution of a formal agreement regulating Blackman's appointment as Australian distributor.

The ultimate decision of the parties to dispense with the execution of a formal agreement does not necessarily compel the conclusion that the letter of 27 December was a complete statement of the contract between the parties. Although Hirsch and Josefsen participated in the earlier discussions with Blackman believing that a formal contract governing the Australian distributorship should be executed, it does not follow that the discussions had no contractual significance. It sometimes happens that parties arrive at an oral agreement without knowing whether the oral agreement will constitute a contract in its own right or whether it will lead to the execution of a formal written contract. If the parties then proceed on the footing that they have entered into a contract without executing a formal contract, the terms of their contract are to be found in their oral discussions. Here the problem has an extra dimension in that the oral discussions were followed by the countersigned letter which evidenced an agreement on a number of topics and contemplated the possibility of the execution of a formal contract governing the appointment of Blackman as Australian distributor.

That USSC did not insist on a formal distributorship contract was due to Blackman's insistence that it was unnecessary and possibly to the confidence which Hirsch and Josefsen, particularly Josefsen, had in Blackman, though this is not supported by any finding on the part of the primary judge. Although USSC's decision not to insist on a formal contract might suggest that it was content to rely on the contract as set out in the countersigned letter, it is equally consistent with USSC's reliance on a contract consisting of that letter and the earlier discussions between Blackman, Hirsch and Josefsen. The importance of the discussions is acknowledged in the penultimate sentence of that letter which indicates that the discussions constituted the contract. The letter itself does not purport to be a contract between the parties; it begins by confirming "the continuance of our relationship" and ends by making it clear that the object of the letter is to record USSC's "understanding" of the antecedent discussions. In those discussions USSC had agreed to appoint Blackman as its exclusive distributor in Australia and to provide financial assistance, factors which support the view that the discussions were contractual in some aspects at least.

In addition to these matters there is the conclusion reached by the primary judge, a conclusion with which I agree, that some of the matters conveyed by Blackman to Hirsch and Josefsen at the restaurant meeting were "of a promissory nature and not merely representational", amounting in substance to an offer by Blackman to USSC which was accepted by USSC by its agreement to appoint him as Australian distributor. This acceptance had the effect of incorporating these promises, subject to later modifications of them in discussion and correspondence, as express terms of the contract.

The express terms of the contract as found by McLelland J and accepted by the Court of Appeal, were:--

(1)

That the distributor would establish a marketing organization for USSC surgical stapling products in Australia having one or more sales representatives specifically trained in the use and demonstration of those products.

(2)

That the distributor would devote its best efforts to distributing USSC surgical stapling products, and building up the market for those products, in Australia, to the common benefit of USSC and itself.

(3)

That the distributor would not deal (scil in Australia) in any products competitive with USSC surgical stapling products.

(4)

That the distributor would not deal (scil in Australia) in any other products in such a manner as would diminish its efforts in distributing USSC surgical stapling products and building up the market for those products in Australia.

Each was to endure for the term of the distributorship.

The implied terms of the contract as found by McLelland J were:--

(1)

That the distributorship was not terminable unilaterally except upon reasonable notice to the other party.

(2)

That the distributor would not during the distributorship do anything inimical to the market in Australia for USSC surgical stapling products.

The Court of Appeal was in agreement with the primary judge, observing that he was using the word "inimical" in its most stringent sense. It is apparent that his Honour was using the word in a sense of "adverse or injurious in tendency or influence; harmful, hurtful", the meaning usually assigned to the word in its application to acts.

The appellant submits that the third and fourth express terms and the second implied term were not part of the contract. The appellant also submits that the obligation of the distributor to use his best efforts do not go beyond the obligation to use such efforts to promote the sale of the goods with a corresponding obligation on the part of USSC to use its best efforts to supply the goods.

To take the last point first, by including in the second express term the concluding words "to the common benefit of USSC and itself" his Honour was reflecting the emphasis which Blackman in the restaurant meeting had given to the advantages which would flow to USSC and to himself from his energetic development of the Australian market for USSC surgical stapling products, an emphasis which any person seeking appointment as a distributor would give to his proposed activities. This emphasis merely underlined the respective advantages which ordinarily flow to manufacture and distributor from active promotion by the latter of the market for the former's products.

Although McLelland J confined his use of the phrase "common benefit" to the obligation to use best efforts and to the development (and servicing) of the market for USSC's surgical stapling products in Australia -- a limitation which is repeated in his treatment of the fiduciary duty owed by HPI -- the Court of Appeal seems to have gone somewhat further. The Court of Appeal concluded that McLelland J was not referring to a shared benefit. The court regarded the phrase "common benefit" as indicating a promise to carry on the distributorship for the benefit of both parties. The court did not suggest that Blackman made an explicit promise in terms that he would work, or carry on the distributorship, for the benefit of both parties; instead the court acknowledged that the express terms found by the primary judge were no more than a distillation of what was actually said in the oral discussions. The problem, as it seems to me in this respect, is that the Court of Appeal has treated as contractual statements made by Blackman which stressed the advantages his appointment as distributor would bring to both parties -- statements not usually promissory in nature though made with the object of inducing USSC to make the appointment -- and has given them a wider significance than that attributed to them by McLelland J.

A best efforts clause is not an uncommon feature of a distributorship agreement. However, it is unusual to include in the clause a provision that the promissor will use his best efforts for the common benefit of both parties. It is a clause ordinarily inserted in a contract between parties at arm's length, designed to give protection to one party by imposing an obligation on the other to promote the sales of the first party's products. The extent of the obligation thereby imposed is governed by what is reasonable in the circumstances ( Transfield Pty Ltd v Arlo International Ltd (1980) 30 ALR 201 ; 144 CLR 83 at 100-1 and 107). In Transfield a tender by a licensee based on its use of its own product instead of the product of its licensor was held not to be a breach of a best efforts clause. However, in other cases sale of competing products has been regarded as a breach (see, for example, Randall v Peerless Motor Car Co (1912) 99 NE 221; Paige v Faure (1920) 127 NE 898). To say that the promise was to be performed to or for the common benefit of both parties is to overlook the qualification of reasonableness usually associated with a best efforts promise. The qualification itself is aimed at situations in which there would be a conflict between the obligation to use best efforts and the independent business interests of the distributor and has the object of resolving those conflicts by the standard of reasonableness. Its effect here is to modify the obligation to distribute (and service) USSC's surgical stapling products and to build up the market for them by reference to what is reasonable in the circumstances, in particular the situation of the distributor. It therefore involves a recognition that the interests of USSC could not be paramount in every case and that in some cases the interests of the distributor would prevail. This qualification of the promise, unlike the common benefit qualification, does not attribute to the distributorship the characteristics of a joint venture.

Yet, the Court of Appeal seems to have treated the promise as investing the entire distributorship with joint venture characteristics, if not the character of a joint venture agreement. The court regarded the promise as "restricting Blackman to business decisions calculated to advance the interests of both parties". It is necessary then to examine the elements of a distributorship arrangement, for that is the basic relationship which Blackman proposed, and to ascertain whether such an arrangement lends itself to a restriction of the kind suggested by the Court of Appeal.

A distributorship agreement generally, as here, contemplates that the manufacturer will sell and the distributor will purchase the manufacturer's products for resale to customers. Subject to the impact of the provisions of the contract, the distributor is entitled to set the prices payable on resale because its profit depends largely on the difference between these prices and those payable to the manufacturer. And unless the contract provides that the distributor is to make the resale as agent for the manufacturer then in making the resale the distributor resells as principal without bringing the customer into contractual relations with the manufacturer. It is scarcely necessary to add that the distributor in carrying on its business is entitled to make decisions in its own interests, subject to such restrictions on its power so to do as may be imposed by the contract.

Indeed, it is because the distributor is free to act independently in its own interests that from time to time the parties include in the contract stipulations, like the best efforts clause, the performance of which will serve to protect and benefit the manufacturer. All this is to say that a distributorship agreement is not in general a joint venture in which the parties pool their resources in an undertaking carried on for their mutual or common benefit, though it is possible that some aspects of a distributorship agreement may have joint venture characteristics. Of course, the agreement may be so structured as to impose on the distributor the responsibility of acting, in some matters at least, as agent for the manufacturer. In this event the distributor is bound in those matters to act in the interests of the manufacturer, rather than in his own interest, or for that matter in their joint interests.

The characteristics of a distributorship arrangement are all present in this case. The relationship between the parties was that of buyer and seller; HPI was entitled to set the prices to be paid by Australian customers, subject to the best efforts promise and to its promise not to injure USSC's market; and there is no suggestion that HPI was to resell as agent for USSC so as to bring it into contractual relations with the Australian customers: see Michelin Tyre Co Ltd v Macfarlane (Glasgow) Ltd (in liq ) [1916] 2 SLT 221 .

HPI was an exclusive distributor which, in the early stages at any rate, was to devote its entire efforts to the building up of the market for USSC's products. But this factor does not affect or detract from the elements of the relationship between USSC and HPI which I have mentioned. Nor does it provide a basis for finding that HPI promised to carry on its business for and on behalf of the parties jointly or for their common benefit.

The problems presented by the "common benefit" qualification are pointed up when we consider the Court of Appeal's view that the promise restricted HPI to "business decisions calculated to advance the interests of both parties" and how this restriction would operate in practice. Take, for example, the consequences to HPI of an increase in the price of USSC-made products brought about by an increase by USSC in its prices to HPI, by an increase in duties or by a change in the exchange rate. A decision by HPI to increase its prices to Australian customers might well have a tendency to affect adversely the market in Australia for USSC's products and in that sense be calculated not to advance the interests of USSC. Likewise, a decision by HPI to reduce its purchases of USSC's products by reason of USSC's increased prices or HPI's financial circumstances or a decision to restrict credit to purchasers of USSC's products due to HPI's financial circumstances might well prejudice the market for these products, notwithstanding that the decisions might be essential to HPI's financial viability and to its continuing existence as a commercial entity.

True it is that a decision which has a tendency to prejudice the interests of one of two parties may, in particular circumstances, be calculated to advance the common interests of both parties. However, in all the situations which I have mentioned there arises a situation of conflict or potential conflict between the interests of USSC and those of HPI. It is unrealistic to suggest that Blackman was promising that HPI would in these situations confine itself to decisions calculated to advance the interests of both parties. No party would be likely to sacrifice or surrender its capacity to make vital business decisions of this kind by reference to what it considers to be its own interests on matters essential to its financial viability and continuing existence as a commercial entity. The more sensible approach is to recognize that a distributor in the position of HPI would make ordinary business decisions by reference to its own interests but that in making those decisions it would need to take account of (a) the obligation imposed by the best efforts promise with the qualification of reasonableness which it imports; and (b) any implied obligation prohibiting injury to the market for USSC's products in Australia.

The appellant's challenge to the third and fourth express terms as found by the primary judge is based very largely on the effect which the appellant seeks to attach to a best efforts clause. According to the argument, such a clause ordinarily permits the promissor to compete; it is therefore inconsistent with the third and fourth express terms. No doubt the appellant goes too far in suggesting that a best efforts clause ordinarily permits the promissor to compete, as so much in each case depends on the context in which the clause is to be found and on the terms of the particular contract that it is impossible to formulate a rule of universal or general application. Here the nature and details of the conversation are such that the judge was quite entitled to conclude that Blackman was promising not to deal in competing products or in other products which would diminish his efforts in distributing USSC products and in building up the market for those products in Australia. Blackman's appointment as exclusive distributor in Australia and USSC's provision of substantial financial assistance to him are other factors which tend to support the primary judge's conclusion.

The second implied term found by McLelland J presents in a more acute form difficulties of the kind considered in connection with the qualification attached to the best efforts promise by the Court of Appeal. An undertaking to do nothing inimical to the market in Australia for USSC's surgical stapling products would be broken by any act or business decision whose tendency was to damage or injure that market, even if the act was done or the decision taken in the honest belief based on reasonable grounds that it would not damage or injure that market or that it would enhance or protect that market. The examples already given in relation to the best efforts promise have additional force here. A decision by HPI to increase prices, to reduce purchases or restrict credit in the situations already discussed would involve a breach of the second implied term if the action taken had a tendency to injure the market for USSC's surgical stapling products in Australia, notwithstanding the existence of an honest and reasonable belief that it would not have such a tendency.

The severity of the operation of the second implied term suggests that it goes beyond what was necessary to give the contract business efficacy and what was within the reasonable contemplation of the parties: see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 26 ALR 567 ; 144 CLR 596 ; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 41 ALR 367 ; 56 ALJR 459 at 463-5; BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 16 ALR 363 ; 52 ALJR 20; Prenn v Simmons [1971] 1 WLR 1381 at 1383-5. It is unnecessary and inappropriate to impose upon the distributor an obligation more onerous than the negative aspect of the positive best efforts promise, namely that the distributor would not during the distributorship do anything for the purpose of injuring or destroying the market in this country for USSC's surgical stapling products. Such an obligation to restrain deliberate acts undertaken by the distributor for that purpose sufficiently protected USSC and at the same time preserved HPI's freedom of decision in relation to its business operations. The Court of Appeal's view to the contrary is based on the proposition, which I cannot accept, that HPI was not entitled to take action by reference to its own interests in any matter pertaining to the distributorship and that in all matters it was bound to act in the interests of USSC as well as in its own interests.

Neither the express terms nor the implied terms of the contract prohibited fair competition by HPI with USSC after termination of the distributorship. Nor, in my view, did they prohibit preparations on the part of HPI during the course of the distributorship for fair competition after termination of the distributorship, so long as the preparatory acts (a) were not undertaken for the purpose of developing a market for the competing products before termination took place; or (b) did not otherwise amount to a breach of contract (see Robb v Green [1895] 2 QB 1 at 14-18; Wessex Dairies Ltd v Smith [1935] 2 KB 80 at 84-5, 87-8; Feiger v Iral Jewlry Ltd (1975) 382 NYS (3d) 216 ; (1976) 382 NYS (2d) 221 ; (1977) 363 NE (2d) 350. However, HPI, by secretly developing a capacity to manufacture copies of USSC's products or components, by deferring fulfilment of orders for USSC's products in anticipation of satisfying those orders with HPI's products and by satisfying those orders with HPI's products with a view to appropriating for itself at the expense of USSC the market or a substantial part of the market for USSC's products, committed breaches of contract, as McLelland J declared in the first declaration which he made.

Was HPI a Fiduciary?

Because distributor-manufacturer is not an established fiduciary relationship it is important in the first instance to ascertain the characteristics which, according to tradition, identify a fiduciary relationship. As the courts have declined to define the concept, preferring instead to develop the law in a case by case approach, we have to distill the essence or the characteristics of the relationship from the illustrations which the judicial decisions provide. In so doing we must recognize that the categories of fiduciary relationships are not closed ( Tufton v Sperni [1952] 2 TLR 516 at 522; English v Dedham Vale Properties Ltd [1978] 1 WLR 93 at 110).

The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman [1967] 2 AC 46 at 127), viz trustee and beneficary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions "for", "on behalf of" and "in the interests of" signify that the fiduciary acts in a "representative" character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.

It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed: see generally: Weinrib: "The Fiduciary Obligation" (1975) 25 University of Toronto Law Journal 1 at pp 4-8. Thus a mere sub-contractor is not a fiduciary. Although his work may be described loosely as work which is to be carried out in the interests of the head contractor, the sub-contractor cannot in any meaningful sense be said to exercise a power or discretion which places the head contractor in a position of vulnerability.

That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all-important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.

Because I take a different view about the terms of the contract I do not share the Court of Appeal's conclusion that HPI was under a fiduciary duty to carry on the entire distributorship business in the joint interests of USSC and HPI. That view, it seems to me, rested very heavily on the suggested promise to carry on the business for the common benefit of the parties and on the implied term that HPI would do nothing inimical to USSC's interests.

My conclusion that HPI was at liberty to make some business decisions by reference to its own interests, subject to the obligations arising under the best efforts promise and the other terms of the contract express and implied, presents an overwhelming obstacle to the existence of the comprehensive fiduciary relationship found by the Court of Appeal. This is because HPI's capacity to make decisions and take action in some matters by reference to its own interests is inconsistent with the existence of a general fiduciary relationship. However, it does not exclude the existence of a more limited fiduciary relationship for it is well settled that a person may be a fiduciary in some activities but not in others ( Kuys [1973] 1 WLR 1126 at 1130; Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 408; Phipps [1967] 2 AC at 127).

The appellant submits, mistakenly in my view, that the very existence of the best efforts promise is inconsistent with the co-existence of a fiduciary duty. True it is that a promise or a contractual term may be so precise in its regulation of what a party can do that there is no relevant area of discretion remaining and therefore no scope for the creation of a fiduciary duty ( R H Deacon & Co Ltd v Varga (1972) 30 DLR (3d) 653; affirmed ; (1973) 41 DLR (3d) 767). Here, however, HPI enjoyed a substantial area of discretion in the exercise of its responsibility to promote the market in Australia for USSC surgical stapling products. The giving of a best efforts promise to promote that market did not relevantly limit the ambit of HPI's discretion in discharging that responsibility.

In considering whether a fiduciary duty, and if so, what fiduciary duty, was generated by that responsibility we have to take account of the following factors:--

(1)

there was a valuable market for USSC's products in Australia;

(2)

USSC, by appointing HPI, entrusted HPI with the exclusive responsibility of promoting that market during the term of the distributorship which was determinable by either party on reasonable notice;

(3)

the manner in which the market was to be promoted was left to HPI's general discretion, subject to the express and implied terms of the contract;

(4)

the exercise of that discretion provided HPI with a special opportunity of acting to the detriment of the market for USSC's products, rendering USSC vulnerable to abuse by HPI of its position, USSC having no representation at all in Australia;

(5)

in selling USSC's products to Australian customers HPI was not acting as agent for USSC;

(6)

although HPI's actions would not alter or affect USSC's legal rights vis-a-vis others, its actions could and did affect adversely in a practical sense the market in Australia for USSC's products and consequently its product goodwill in this country;

(7)

in the circumstances mentioned in (1)-(6) above USSC relied on HPI to protect and promote USSC's product goodwill in Australia; and

(8)

HPI's responsibility to protect and promote USSC's product goodwill was necessarily subject to the qualification of reasonableness attached to the best efforts promise.

Paragraph (8) above presents an unusual problem. The classical illustrations of the fiduciary relationship are those in which the fiduciary is under a duty to act not in his own interests or solely in his own interests but in the interests of another or jointly in the interests of another and himself, eg a trustee and a partner. In the present case the nature of the distributorship relationship and the best efforts promise with its attendant standard of reasonableness necessarily entailed that HPI could make some business decisions by reference to its financial interests, without subordinating them to the promotion of the market for USSC's products, so long at any rate as HPI did not deliberately do something, or omit to do something, for the purpose of destroying or injuring that market. And, as we know, HPI when it entered into a contract to sell USSC's products to an Australian customer was not acting as trustee or agent for USSC. The contractual rights which arose against the customer were held by HPI in its own right and were not the subject of any trust in favour of USSC. HPI was entitled to recover and retain the purchase price for its own benefit, being under no duty to account to USSC.

But entitlement to act in one's own interests is not an answer to the existence of a fiduciary relationship, if there be an obligation to act in the interests of another. It is that obligation which is the foundation of the fiduciary relationship, even if it be subject to qualifications including the qualification that in some respects the fiduciary is entitled to act by reference to his own interests. The fiduciary duty must then accommodate itself to the relationship between the parties created by their contractual arrangements. And entitlement under the contract to act in a relevant matter solely by reference to one's own interests will constittue an answer to an alleged breach of the fiduciary duty. The difficulty of deciding under the contract when the fiduciary is entitled to act in his own interests is not in itself a reason for rejecting the existence of a fiduciary relationship, though it may be an element in arriving at the conclusion that the person asserting the relationship has not established that there is any obligation to act in the interests of another.

There has been an understandable reluctance to subject commercial transactions to the equitable doctrine of constructive trust and constructive notice. But it is altogether too simplistic, if not superficial, to suggest that commercial transactions stand outside the fiduciary regime as though in some way commercial transactions do not lend themselves to the creation of a relationship in which one person comes under an obligation to act in the interests of another. The fact that in the great majority of commercial transactions the parties stand at arms' length does not enable us to make a generalization that is universally true in relation to every commercial transaction. In truth, every such transaction must be examined on its merits with a view to ascertaining whether it manifests the characteristics of a fidiuciary relationship.

The disadvantages of introducing equitable doctrine into the field of commerce, which may be less formidable than they were, now that the techniques of commerce are far more sophisticated, must be balanced against the need in appropriate cases to do justice by making available relief in specie through the constructive trust, the fiduciary relationship being a means to that end. If, in order to make relief in specie available in appropriate cases it is necessary to allow equitable doctrine to penetrate commercial transactions, then so be it: see, for example, Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 and Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584. A preferable approach to an artificial narrowing of the fiduciary relationship -- the gateway to relief in specie -- is to define and delimit more precisely the circumstances in which the remedy by way of constructive trust will be granted.

There is a strong case for saying that because USSC entrusted HPI with the responsibility of protecting and promoting the market for USSC's products in Australia HPI was a fiduciary in protecting and promoting USSC's Australian product goodwill. In procuring orders for, making sales of and supplying USSC's products to Australian consumers HPI was acting in USSC's interests as well as its own. And by engaging in these activities HPI enhanced both USSC's local product goodwill and the goodwill of its own distributing business. By the sale of its products to its distributor here and by its sale of those products to Australian consumers under the name of "Auto Suture" in circumstances in which the products were associated by consumers with USSC as manufacturer, USSC created a local product goodwill ( Extex Clothing Manufacturers Pty Ltd v Ellis and Goldstein Ltd (1967) 116 CLR 254 at 267-8, 270-1; Imperial Tobacco Co of India Ltd v Bonnan (1924) 41 RPC 441 ). The remarks of Latham CJ and Rich J in Commissioner of Taxes (Qld) v Ford Motor Co of Australia Pty Ltd (1942) 66 CLR 261 at 272, indicate that goodwill cannot be assigned independently of the business with which it is associated, but they do not deny the existence of local product goodwill in a case such as the present. The difficulty of determining how much of the goodwill in Australia was local product goodwill of USSC and how much was goodwill of HPI's distributing business does not deny the separate existence in USSC of local product goodwill.

USSC, by entrusting HPI with a responsibility for protecting and promoting the market for USSC's products in Australia, effectively constituted HPI the custodian of its product goodwill in this country. Its responsibility in procuring orders, making sales and effecting deliveries of USSC's products in Australia armed HPI with a power and discretion to affect USSC's product goodwill. And in exercising this responsibility HPI had a special opportunity of acting to the detriment of USSC which was, accordingly, vulnerable to the abuse by HPI of its position.

HPI's position as custodian of USSC's product goodwill in Australia may be likened in a general way to that of a bailee whose duty it is to protect and preserve a chattel bailed to him. It has been well recognized, at least since the judgment of Jessel MR in Re Hallett's Estate (1880) 13 ChD 696 at 708-9, that a bailee stands in a fiduciary relationship with his bailor when the bailor entrusts to the bailee goods to be held or dealt with by him for the benefit of the bailor or for certain limited purposes stipulated by the bailor.

In engaging in the activities which I have mentioned, activities related the production and promotion of USSC's product goodwill, HPI was acting in its own interests as well as in the separate interests of USSC. Although, as we have seen, it was entitled to prefer its own interests to the interests of USSC in some situations where those interests might come into conflict, this entitlement was necessarily subject to the requirement that HPI act bona fide and reasonably with due regard to the interests of USSC. In no circumstance could it act solely in its own interests without reference to the interests of USSC. This, as it seems to me, fixed HPI with the character of a fiduciary in relation to those activities mentioned, notwithstanding that in pursuing them HPI was also acting in its own interests and that it was carrying on the distributorship business generally for its own benefit and in no sense as a trustee for USSC.

This conclusion is largely founded on the general nature of the responsibility which, according to the contract, HPI undertook to discharge in pursuing the relevant activities, though the obligation not to compete and the obligation not to deliberately injure USSC's market were significant elements in that responsibility. And it is the general nature of that responsibility which distinguishes HPI from the mortgagee who is bound to exercise his power of sale in good faith. In exercising that power the mortgagee is acting in his own interests, subject to the requirement of good faith (see Kennedy v De Trafford [1897] AC 180 at 185) and possibly that of reasonable care (see Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 19 ALR 519 ; 139 CLR 195 at 222-5). Even so, the mortgagee's duty in exercising the power is sometimes described as analogous to a fiduciary duty ( Sir Frederick Jordan : Chapters on Equity (6th ed, 1947) p 113).

The Scope of the Fiduciary Duty

The categories of fiduciary relationships are infinitely varied and the duties of the fiduciary vary with the circumstances which generate the relationship. Fiduciary relationships range from the trustee to the errand boy, the celebrated example given by Fletcher Moulton LJ in his judgment in Re Coomber [1911] 1 Ch 723, in which, after referring to the danger of trusting to verbal formulae, he pointed out (at pp 728-9) that the nature of the curial intervention which is justifiable will vary from case to case. In accordance with these comments it is now acknowledged generally that the scope of the fiduciary duty must be moulded according to the nature of the relationship and the facts of the case ( Phipps v Boardman , at 123-5; Kuys , supra, at 1129-30; Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371 at 383, 390). The often-repeated statement that the rule in Keech v Sandford (1726) Sel Cas T King 61 ; 25 ER 223, applies to fiduciaries generally tends to obscure the variable nature of the duties which they owe. The rigorous standards appropriate to a trustee will not apply to a fiduciary who is permitted by contract to pursue his own interests in some respects. Thus, in the present case the so-called rule that the fiduciary cannot allow a conflict to arise between duty and interest ( Kuys , at p 1130) cannot be usefully applied in the absolute terms in which it has been stated.

McLelland J found -- a finding with which I agree -- that, as a fiduciary having responsibility for protecting and promoting the market for USSC's products in Australia, HPI was under a duty not to make a profit or to take a benefit by virtue of its position as a fiduciary without the informed consent of USSC and that within the ambit of its fiduciary responsibility it should not act in a way in which there was a possibility of conflict between its own interests and those of USSC ( Queensland Mines Ltd v Hudson (1978) 18 ALR 1 at 4 ; 52 ALJR 399 at 401). It was accepted in that case that "possibility of conflict" needs to be understood in the sense of "real sensible possibility of conflict" as was pointed out by Lord Upjohn in Phipps v Boardman ([1967] 2 AC) at 124. The rule that a fiduciary is not entitled to make a profit without the informed consent of the person to whom the fiduciary duty is owed is not limited to profits which arise from the use of the fiduciary position or of the opportunity or knowledge gained from it for it is said that the basis of this rule is that the fiduciary may not place himself in a situation where his duty and his interest conflict ( Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 5 ALR 231 ; 132 CLR 373 at 393).

The traditional view that the profit rule is merely a corollary of the conflict rule may be traced back to the speech of Lord Herschell in Bray v Ford [1896] AC 44 at 51. The view has been severely criticised, with some justification -- see Shepherd : The Law of Fiduciaries (1981) pp 147-51. And a recognition of its shortcomings induced Sir Frederick Jordan in his Chapters on Equity, op cit , at p 115, to describe the conflict rule as a "counsel of prudence" rather than a rule of equity. Accordingly, the fiduciary's duty may be more accurately expressed by saying that he is under an obligation not to promote his personal interest by making or pursuing a gain in circumstances in which there is a conflict or a real or substantial possibility of a conflict between his personal interests and those of the persons whom he is bound to protect ( Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461 at 471). By linking the obligation not to make a profit or take a benefit to a situation of conflict or possible conflict of interest the proposition, in accordance with the authorities, (a) excludes the relevance of an inquiry into the actual motives of the fiduciary; and (b) excludes restitutionary relief when the interest of the fiduciary is remote or insubstantial: see Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 at 637-8; Phelan v Middle States Oil Corporation (1955) 220 F (2d) 593 at 602-3.

In Phelan Learned Hand J, in discussing the nature of the conflict that gives rise to the fiduciary's liability to account, said (at pp 602-3): "Was that such a conflict as invokes the doctrine? It enables the beneficiary to hold the fiduciary liable for any profits he may make, or losses he may cause, in order to deprive him of any inducement that will affect his absolute and disinterested loyalty; and there is no doubt that an expectation or hope of future advantage may do so, even though it is not secured to him as an existing legally protected interest. Therefore, if the doctrine be inexorably applied and without regard to the particular circumstances of the situation, every transaction will be condemned once it be shown that the fiduciary had such a hope or expectation, however unlikely to be realized it may be, and however trifling an inducement it will be, if it is realized. We do not understand that it is to be applied so rigidly, or to so literal an extreme. ... we have to determine the scope of the implementary rule that dispenses with the need of proving that his personal interest had any part in determining the fiduciary's conduct; indeed, with a rule that altogether forbids any inquiry whether it had any such part. We have found no decisions that have applied this rule inflexibly to every occasion in which the fiduciary has been shown to have had a personal interest that might in fact have conflicted with his loyalty. On the contrary in a number of situations courts have held that the rule does not apply, not only when the putative interest, though in itself strong enough to be an inducement, was too remote, but also when, though not too remote, it was too feeble an inducement to be a determining motive."

Breach of Fiduciary Duty

In Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66 at 82, Dixon and McTiernan JJ observed that it would be misconduct amounting to a ground justifying dismissal for a manager to take steps during his employment to prepare a position to which he could retreat with a large part of his employer's business in the event that it should become necessary or desirable to vacate the managership. And in Maryland Metals Inc v Metzner (1978) 382 A (2d) 564, the Court of Appeals of Maryland, referring to competition by an employee after termination of his employment, observed (at p 569): "The right to make arrangements to compete is by no means absolute and the exercise of the privilege may, in appropriate circumstances, rise to the level of a breach of an employee's fiduciary duty of loyalty. Thus, the privilege has not been applied to immunize employees from liability where the employee has committed some fraudulent, unfair or wrongful act in the course of preparing to compete in the future ...."

Of course, the fiduciary duty of a distributor is not necessarily to be equated with that of an employee. The employee's duty of loyalty may involve him in a breach of duty if he secretly makes arrangements during his employment to compete with his employer after termination of the employment. And the secret development by the employee of a manufacturing capacity by surreptitiously copying the manufactuer's product will certainly constitute a breach of duty. Whether either of these activities constitutes a breach of fiduciary duty on the part of a distributor is another question the answer to which depends on the terms of the contract and the ambit of the fiduciary relationship which it creates. It is possible that it would not have been a breach of duty for HPI to make secret arrangements during the distributorship for the establishment of a manufacturing capacity in order to compete with USSC after termination of the distributorship, so long as HPI did not compete and did not deliberately damage USSC's product goodwill before that time.

HPI's copying of USSC's products raises a more complex question. As we have seen, a bailee may stand in a fiduciary relationship with his bailor. A buyer who has possession of goods the subject of a contract of sale on terms that property does not pass until payment of the purchase price is a bailee of the goods until the property passes (see City Motors (1933) Pty Ltd v Southern Aerial Super Service Pty Ltd (1961) 106 CLR 477 at 490; see also Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 ; Re Bond Worth [1980] Ch 228 at 246-7; Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25). Where the buyer is an exclusive distributor and his purchase is for the purpose of supplying the local market with the manufacturer's product, it being the duty of the distributor to promote and protect the market, it may well be a breach of the fiduciary duty of the distributor as bailee to copy the manufacturer's product -- the distributor thereby putting the product to a use lying outside the scope of the bailment. But there is here nothing to indicate that HPI copied USSC's products whilst it was still a bailee, ie before property in the products passed to HPI when the bailment came to an end. Once the bailment came to an end HPI's fiduciary duty as bailee terminated and it was thereupon at liberty to deal with or use the product as it thought fit, subject to such other rights as USSC may have had, eg passing off and breach of contract.

However, HPI did more than copy USSC's products. McLelland J found that during the distributorship HPI failed to fulfil its fiduciary duty and its contractual obligations in the two ways set out in his first declaration:

"(i) by secretly developing a capacity to manufacture copies of USSC's products or components thereof with a view to appropriating for itself at the expense of USSC the whole or a substantial part of the Australian market for USSC products, and

(ii) by deferring fulfilment of orders for USSC clinical products in anticipation of filling those orders with HPI repackaged or manufactured competing products and by filling orders for USSC clinical products with such competing products, again with a view to appropriating for itself at the expense of USSC the whole or a substantial part of the Australian market for USSC products."

The two breaches described by his Honour need to be understood as involving actions taken by HPI during the term of the distributorship with a view to appropriating USSC's market for itself during that term and thereafter. Once the breaches are understood in this light, it is incontestable, as it seems to me, that his Honour was correct in finding that the relevant acts constituted breaches of fiduciary duty. HPI, though custodian of USSC's product goodwill, sought to appropriate that goodwill for itself by the means described in the declaration.

In expressing the breaches in the same terms for contractual and fiduciary purposes his Honour was not asserting that, once a fiduciary relationship is found to exist, that relationship endows breaches of contract with a fiduciary character as well. He was saying no more than that the acts described constituted breaches of each obligation. Neither breach constituted the making of a gain but rather the pursuit of a gain, the intended gain being the appropriation of USSC's local product goodwill. Each breach as described in the declaration is a description of the means by which HPI pursued the gain. Each breach, had it been discovered in time, might have been restrained in injunction ( Re Thomson [1930] 1 Ch 203).

The Court of Appeal, giving the ambit of the fiduciary relationship much wider scope than I am disposed to do, went further than the primary judge in holding that all the steps taken by HPI in relation to the development of the manufacturing capacity, the reverse engineering, the production of moulds (and dies), the entry into the relevant contracts, the raising of the necessary finance and the employment of workers, were breaches of HPI's fiduciary duty. The court also held that HPI's manufacturing activities (including the incorporation of HPI-manufactured components with those manufactured by USSC) and the promotion and sale of HPI packaged and labelled goods, constituted breaches of HPI's fiduciary duty. The court commented: "By actually manufacturing before 25 December, and by manufacturing, promoting and selling between that date and 10 January, HPI put to practical use the capacity it had developed."

I agree that HPI's manufacturing activities and the promotion and sale of HPI packaged and labelled goods constituted breaches of its fiduciary duty. I agree also with the comment in the final sentence of the preceding paragraph. But I do not find it necessary to isolate and identify every step taken by HPI in developing a manufacturing capacity so as to assign to each such step the character of a breach of HPI's fiduciary duty. This is because it is possible to ascertain the profit which HPI made in breach of its fiduciary duty by accepting the breaches of duty as McLelland J generally described them without seeking to describe them in greater detail.

Relief for Breach of Fiduciary Duty

(a) General Principle Governing Liability to Account

The principle, accepted by the courts below, is that the fiduciary cannot be permitted to retain a profit or benefit which he has obtained by reason of his breach of fiduciary duty ( Consul Development (132 CLR) at 393; Queensland Mines (18 ALR) at 4 ; (52 ALJR) at 401). A fiduciary is liable to account for a profit or benefit if it was obtained (1) in circumstances where there was a conflict, or possible conflict of interest and duty, or (2) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position.

(b) Constructive Trust

Any profit or benefit obtained by a fiduciary in either of the two situations already described is held by him as a constructive trustee ( Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 at 350). Neither principle nor authority provide any support for the proposition that relief by way of constructive trust is available only in the case where a profit or benefit obtained by the fiduciary was one which it was an incident of his duty to obtain for the person to whom he owed the fiduciary duty. Once it is established that the fiduciary is liable to account for a profit or benefit which he has obtained there can be no objection to his being held to account as a constructive trustee of that profit or benefit. It can make no difference that it was not his duty to obtain the profit or benefit for the person to whom the duty was owed. What is important is that the advantage has accrued to him in breach of his fiduciary duty or by his misuse of his fiduciary position. The consequence is that he must account for it and in equity the appropriate remedy is by means of a constructive trust.

In Beatty v Guggenheim Exploration Co (1919) 225 NY 380, Cardozo J observed (at p 386) that an agent or a partner who promised or covenanted not to engage in some other business does not, as a matter of course, become chargeable as a trustee for the profits of the forbidden venture. For this proposition he cited well-known authorities which included Dean v MacDowell (1878) 8 ChD 345, and Aas v Benham [1891] 2 Ch 244. He went on to say (at p 386): "A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." Later he said (at p 389): "A court of equity in decreeing a constructive trust is bound by no unyielding formula. The equity of the transaction must shape the measure of relief."

The decided cases provide many illustrations of the fiduciary who has been held to be accountable as a constructive trustee of a profit or benefit which he has obtained for himself, notwithstanding that it was not his duty to acquire that profit or benefit as an incident of his fiduciary duty: see, for example, Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Phipps v Boardman , supra; Prebble v Reeves [1910] VLR 88 ; Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 at 453; and Pre-Cam Exploration & Development Ltd v McTavish (1966) 57 DLR (2d) 557. The principle and the policy which underlie the cases was comprehensively expressed by Rich, Dixon and Evatt JJ in Furs Ltd v Tomkies (1936) 54 CLR 583 . Their Honours, after pointing out the rule that an undisclosed profit derived by a director from the execution of his fiduciary duties belongs in equity to the company, observed (at p 592): "It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation."

However, there is authority for the proposition that equity does not assume jurisdiction to punish a fiduciary for misconduct by making him account for more than he actually received as a result of his breach of fiduciary duty. In Vyse v Foster (1872) LR 8 Ch App 309, James LJ said (at 333): "This court is not a court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through failure of some equitable duty; but it has no power of punishing any one. In fact, it is not by way of punishment that the court ever charges a trustee with more than he actually received, or ought to have received, and the appropriate interest thereon. It is simply on the ground that the court finds that he actually made more, constituting moneys in his hands 'had and received to the use' of the cestui que trust ." The decision of the Court of Appeal was affirmed by the House of Lords ((1874) LR 7 HL 318) without their Lordships reflecting on the passage which I have quoted.

The proposition which I have stated based on the observations of James LJ needs to be modified in order to take account of the situation where the fiduciary has so mixed an indeterminate profit with his own property as to render the identification of the gain impossible. There "... the whole will be treated as trust property, except so far as he may be able to distinguish what is his own" ( Brady v Stapleton (1952) 88 CLR 322 at 336, quoting Page Wood V-C in Frith v Cartland (1865) 2 H & M 417 at 418 ; 71 ER 525 at 526). The proposition may also need to be modified to take account of a profit acquired by a fraudulent fiduciary through a combination of trust property and his own property or efforts. It may well be that equity in such circumstances will not seek to apportion the gain.

The propriety of granting relief by way of constructive trust is therefore closely associated with the answers to two questions: (1) What is the breach of fiduciary duty? and (2) What is the profit or benefit which the fiduciary has made in consequence of that breach? Before proceeding to answer the second question, which is the outstanding question, I should mention that a particular problem has arisen with respect to the declaration of a constructive trust of a competing business established and carried on by a fiduciary in breach of his duty. One approach, more favourable to the fiduciary, is that he should be held liable to account as constructive trustee not of the entire business but of the particular benefits which flowed to him in breach of his duty. Another approach, less favourable to the fiduciary, is that he should be held accountable for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that he has expended or made. In Re Jarvis [1958] 1 WLR 815 Upjohn J observed (at p 820), correctly in my opinion, that it is not possible to say that one approach is universally to be preferred to the other, for each case depends on its own facts and the form of inquiry which ought to be directed must vary according to the circumstances. In each case the form of inquiry to be directed is that which will reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty.

(c) What was the Profit or Benefit Obtained by HPI in Breach of its Fiduciary Duty

McLelland J confined the profit or benefit obtained by HPI to the profits which it made during the "headstart" period which ceased in November 1980 when HPI stopped selling on the Australian market. McLelland J found: "The development of its manufacturing capacity in breach of its [HPI's] equitable obligation to USSC prior to the termination of the distributorship gave HPI a very considerable lead-time advantage in getting its own products on the market .... The advantage represented by this headstart, which it would not have received had it not breached its fiduciary duty, provided HPI with a springboard which, together with its fraudulent conduct prior to the termination of the distributorship in filling orders for USSC clinical products with its repackaged product and creating a situation where HPI repackaged or manufactured products would be supplied in lieu of USSC clinical products in circumstances calculated to mislead consumers, enabled it to have the benefit of a market in Australia which otherwise would have been a market for USSC products."

The Court of Appeal found that the true measure of the profit or benefit was represented by all the assets of HPI as at 10 January 1980. In rejecting the view that the "headstart" was the correct yardstick, the court considered that, as at 10 January 1980, the date of termination of the distributorship, HPI would not have been able to develop a manufacturing capacity had it attempted to do so on that date, and not before. This was because the raising of very substantial finance was an essential preliminary to the establishment of manufacturing capacity and HPI's status as exclusive Australian distributor of USSC's products was a sine qua non to its ability to raise that finance. The Court of Appeal's assessment of HPI's gain was expressed as follows:--

What it had on 10 January 1980, on the termination of the distributorship, was a manufacturing capacity, the benefit of the knowledge of and by the market it had obtained or generated as a distributor of USSC goods, the benefit of deferred orders for USSC goods, and the benefit of the financial resources which it had obtained on the assumption that it was acting with USSC's approval in developing its manufacturing capacity. It was no longer USSC's distributor and it was not in the business of executing with USSC goods the orders which it had deferred or which it obained unless its own manufacturing limitations made that necessary.

The selling activities which it then had were substantially the selling, under its own name, of products containing components manufactured by itself, leading in due course to the selling of products wholly manufactured by itself.

By way of reinforcing this conclusion the Court of Appeal stated that the assets held by HPI on 10 January 1980 had been acquired, created or developed by the misuse of USSC's distributorship, for the purpose of or in the course of the commission of breaches of its fiduciary duties. The assets were not assets acquired, created or developed for use only in the event that USSC's distributorship should be terminated but were the means by which HPI intended to appropriate to itself the market for USSC's products in Australia.

This approach opened up the way to relief by way of constructive trust over the assets of HPI, an approach which McLelland J rejected. Unlike the Court of Appeal he thought that the "headstart" was an accurate measure of the profit or benefit gained by HPI. The ultimate profit or gain which HPI sought to obtain -- USSC's local product goodwill -- formed no part of the relief which he or the Court of Appeal awarded. The reason for this is that HPI did not succeed in appropriating for itself that goodwill on a permanent basis. It ceased to compete with USSC in the Australian market. Any loss of local product goodwill by USSC to HPI was on a temporary footing only. Whether it was recovered by USSC or lost to other competitors we do not know.

The Court of Appeal's reason for rejecting the "headstart" approach centred on its view that, but for its status and standing as exclusive distributor of USSC's products in Australia, HPI would not have succeeded in securing the substantial finance essential for the establishment of a manufacturing capacity on or after 10 January 1980. There is some evidence that the Bank of New Zealand, HPI's principal financier, would not have advanced finance to HPI to undertake manufacturing activities if HPI had not been USSC's distributor and if the bank had been aware that USSC had not approved the copying of its products. This direct evidence and other evidence capable of supporting an inference that HPI would have found it necessary to borrow substantially from other sources may well have justified the Court of Appeal's finding that HPI would not have been able to develop a manufacturing capacity had it attempted to do so on 10 January 1980 and not before.

However, this finding does not demonstrate that the headstart was not a correct measure of HPI's profit. First, the establishment by HPI of a manufacturing capacity or the taking of preparatory steps to that end after the termination of the distributorship would not have amounted to a breach of fiduciary duty or of contract. Secondly, it was not established that finance would not have been available to HPI from other sources to enable it to develop a manufacturing capacity. The headstart period fixed by the primary judge -- 1 December 1979 to 30 November 1980 -- covers the entire period in which HPI was selling its products to the Australian market. It therefore covers all the profits made by HPI in Australia in the course of its appropriation of USSC's product goodwill in Australia.

Whether HPI is accountable for (1) profits made from sales of its surgical stapling devices in the United States market, and (2) its assets generally, raises two separate questions. The first point to be made about sales in the United States -- one which McLelland J considered decisive -- is that the ambit of the fiduciary relationship and the contractual obligations with which it was associated, ie the promise not to compete and the promise not to damage USSC's market, was restricted to the market in Australia. However, it does not follow as a matter of principle or logic that the profits for which HPI is liable are necessarily restricted to profits made within the ambit, geographical or otherwise, of the fiduciary relationship. As a fiduciary HPI is liable for any profits made in breach of its fiduciary duty, even if they happen to be made outside the area of the fiduciary relationship.

If, for example, the responsibilities of the Victorian manager of a company with a nation-wide business are limited to Victoria, this geographical limitation on his responsibility gives him no immunity from liability to account for profits which he makes in Western Australia in competition with his employer by making use in breach of his fiduciary duty of knowledge or an opportunity gained in his fiduciary position: see Green and Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 ; McLeod and More v Sweezey [1944] 2 DLR 145 and Pre-Cam , supra. Although these are cases in which the defendant turned to his own advantage confidential information or knowledge acquired in his capacity as a fiduciary, they clearly illustrate that limitations on the ambit of the fiduciary relationship cannot be invoked as limitations on the fiduciary's liability to account for profits resulting from his breach of duty.

However, the second and decisive point to be made in connection with possible profits arising from United States sales is that what gave the secret development of manufacturing capacity during the term of the distributorship the character of a breach of fiduciary duty was HPI's intention that the capacity should be exploited for the purpose of appropriating to HPI USSC's Australian product goodwill. The development of manufacturing capacity with a view to competing with USSC in the United States market only during the distributorship would not have amounted to a breach of duty, though it would unquestionably have triggered a termination by USSC of the distributorship, had USSC been aware of the development. And it is clear from the findings of fact made in the courts below that at all material times HPI intended to use its manufacturing capacity to compete in the United States market as well as in the Australian market.

In some circumstances it may be proper to hold a fiduciary liable to account for a profit or benefit arising from the pursuit of an activity which did not amount to a breach of fiduciary duty but for the circumstance that the activity was also undertaken for the purpose of obtaining another profit of benefit which was a breach of fiduciary duty. If the breach of fiduciary duty is a sine qua non in the sense that the pursuit of the activity for the purpose of obtaining the legitimate profit or benefit could not have been undertaken as a practical business operation on its own without seeking also to obtain the forbidden profit or benefit, then there is much to be said for the view that the fiduciary's liability to account should extend to all profits and benefits. The problem seems not to have been explored in the courts below. There was no occasion to do so in the Court of Appeal because USSC obtained more extensive relief. And, although at first instance USSC sought in its statement of claim an account of profits generally, it seems not to have sought an account of profits arising from the United States sales on the footing now under discussion, preferring instead to claim, as it does in this court, a comprehensive remedy by way of constructive trust over HPI's assets. In these circumstances it is not appropriate to make any order requiring HPI to account for profits arising from sales made in the United States.

The claim for a constructive trust of all the assets of HPI as at 1 July 1981 ranges far beyond the profits and benefits obtained by HPI in breach of its fiduciary duty. In granting that relief the Court of Appeal based its finding not only on a wider view of the fiduciary relationship, but more importantly on the view that the business of the Australian distributor had been fraudulently established with the very object of operating as a vehicle for the appropriation of USSC's Australian product goodwill. Whether fraud provides an adequate additional foundation for the constructive trust is a question still to be considered. At the moment it is sufficient to mention two matters. The first is that the constructive trust sought by USSC not only extends far beyond the profits and benefits obtained by HPI in breach of its duty but fails to make any allowance for the contribution in time, effort and finance made by HPI to the acquisition and creation of the assets which it held on 1 July 1981. The second is that the consequence of upholding the claim for the constructive trust would be to debar HPI from competing with USSC in the United States market, notwithstanding that the contract between the parties contained no such embargo during the currency of the contract or after its termination.

Nevertheless there is one aspect of HPI's manufacturing capacity which merits specific mention. This capacity was developed on the basis of reverse engineering -- the copying of USSC's products. The evidence does not establish that the copying of these products constituted a breach of HPI's fiduciary duty, considered apart from the intention with which it was undertaken. As we have seen, the evidence seems to indicate that HPI acquired title to the products which it bought from USSC, including the demonstration product and that the copying or reverse engineering was carried out in relation to products of which HPI was the owner. There is no separate claim for relief by USSC based on confidential information alleging that the copying of the products amounted to an exploitation by HPI of confidential information to its own advantage to the detriment of USSC. Consequently, there is no foundation for imposing a constructive trust over the dies and moulds produced by the reverse engineering which are used in the course of HPI's manufacturing operations.

The Claim to a Constructive Trust Based on Fraud

USSC submits that the constructive trust declared by the Court of Appeal can be sustained on the footing of the findings of fraud made by that court. These findings are incontestably correct. USSC seizes on the finding that Blackman's fraudulent conduct -- conduct which HPI adopted -- in procuring the distributorship and in committing breaches of contractural and fiduciary obligations was undertaken in the execution of a dishonest scheme the object of which was to appropriate the whole or a substantial part of USSC's market.

The reasons which I have already given for rejecting the claim to a constructive trust for breach of fiduciary duty apply with equal force to the ground now under consideration. This is because common to both claims is the notion that the assets of HPI represent the material profit made or benefit taken, in one case in breach of fiduciary duty, in the other case by means of fraud. The answer in each case is that the assets of HPI do not represent, and substantially exceed, any profit or benefit obtained by HPI in breach of its duty or by means of fraud. It is not, and could not be suggested, that in equity restitutionary relief for fraud involving actual dishonesty differs in material respects from restitutionary relief in other species of equitable fraud not involving actual dishonesty. In every case the wrongdoer's underlying liability is to account for the gain that he has made.

There are cases, Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488, being a striking example, where an employee has fraudulently and in breach of his fiduciary duty diverted business from his employer to a company owned and operated by the employee and others who participated in the fraudulent breach of fiduciary duty and the court has declared that the business of the company was held on a constructive trust to the employer. The decision in Timber Engineering , rests on the proposition that the business of the company represented the measure of the profit or benefit which was obtained in breach of fiduciary duty, for relief by way of constructive trust is merely a means of giving effect to the fiduciary's basic liability to account. This is how Kearney J dealt with the matter. He was at pains (at p 496) to demonstrate that (a) every opportunity which the company received was directly attributable to resources and benefits provided by the employer, even to the extent of time and effort expended by the employees for which the employer paid, and (b) every advance made by the company was due to resources and facilities provided by the employer, leading to the conclusion that the business of the company was "carved out of the business" of the employer.

The final matter to be mentioned on this aspect of the case is that in an interlocutory judgment delivered on 11 June 1982 McLelland J ruled that in the light of the pleadings and the manner in which USSC's case had been conducted the claim in fraud could only be pursued in association with the case for relief for breach of fiduciary duty and not as an independent case for relief.

Orders

In the result I would allow the appeal and the cross-appeals of the second, third, fourth and fifth respondents, dismiss the cross-appeal of the first respondent, set aside the orders made by the Court of Appeal and restore the orders made by McLelland J.