Hospital Products Ltd v United States Surgical Corporation

156 CLR 41
55 ALR 417

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(Judgment by: Dawson J) Court:

Judges: Gibbs CJ
Mason J
Wilson J
Deane J

Dawson J

Judgment date: 25 October 1984

Canberra

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Judgment by:
Dawson J

In 1973 the fourth respondent, Alan Richard Blackman (Blackman), was employed by the first respondent, United States Surgical Corporation (USSC) as a product manager. USSC is a company, incorporated in the United States of America, which has since 1967 marketed in that country and elsewhere surgical stapling implements of its own design together with disposable loading units containing staples, also of its own design, for use with such instruments. Surgical stapling is a form of suturing during surgical operations by means of stainless steel staples rather than needle and thread. Some of the instruments also enable a cutting operation to be performed simultaneously with the application of the staples. The instruments save time, avoid trauma and minimize blood loss during operations. In some instances they enable surgical procedures to be carried out which were not possible using traditional suturing methods.

After some months Blackman ceased to be an employee of USSC and was appointed an authorized dealer of that company for a territory covering a substantial part of the City of New York. The terms of the dealership were contained in an agreement in standard form.

In 1976 Blackman formed a company in New York called The Hospital Products Corporation (HPC) which, under a new dealership agreement, replaced him as the dealer in the dealership which he held with USSC. Blackman, however, continued to carry on the actual work of the dealership.

Authorized dealers were appointed by USSC only in respect of areas within the United States. Elsewhere distributors were appointed by it to market its products. In general, these distributors carried on an established business marketing, as well as USSC products, the products of other manufacturers. There was no standard form of distributorship agreement and the arrangement between USSC and its distributors tended to be informal and loose, unlike the arrangement between USSC and its dealers. It is clear, however, that distributors, like dealers, did not sell USSC products as agents of the company; they purchased the products from USSC and resold them to customers. In 1976 a company called Downs Surgical (Australia) Pty Ltd (Downs Surgical) became USSC's distributor in Australia.

Blackman was an effective salesman who became expert in the use and sale of USSC products. Authorized dealers took part in a programme designed to make USSC products familiar to surgeons and hospital staffs in the United States. They were required to develop skills which involved a considerable degree of medical and technical knowledge. USSC established a training school where its dealers were given instruction in basic anatomy and physiology, medical and surgical terminology, operating theatre protocol, the nature of the surgical procedures in which USSC products could be used and the appropriate product for the purpose and the techniques of using USSC products. Dealers were required to provide guidance to surgeons in hospital operating theatres during actual operations. For this purpose there was a training course established by USSC which extended over some five or six weeks of study and, in addition, USSC supplied its dealers with a training manual setting out in detail the matters which they were required to know.

The founders and principal executives of USSC were a Mr Hirsch and a Miss Turi Josefsen. They were in fact husband and wife. As an employee of USSC and as a dealer Blackman developed a direct, personal relationship with Hirsch and Josefsen and they held him in high regard, recognizing his skills in demonstrating and promoting USSC products. On occasions Hirsch and Josefsen asked Blackman to monitor the performance of other dealers and to give them advice. There were occasional disagreements between Hirsch and Josefsen on the one hand and Blackman on the other but these do not appear to have resulted in any permanent impairment of the cordial relationship between them.

In August 1978, Blackman visited Australia for 12 days. At about this time he ascertained that USSC surgical stapling instruments and disposable loading units were not the subject of registered patents in Australia as they were in the United States. On 11 August 1978, he consulted an Australian expert in metallurgy, Professor Wallwork, and provided him with samples of USSC disposable loading units for the purpose of investigating the composition and physical properties of the staples in those samples and the suitability for radiation sterilization after packaging of loading units of the same kind as the samples. Later in 1978 Blackman also asked Professor Wallwork to investigate and report on the composition and physical properties of other metal components in the various sample disposable loading units and to investigate the sources of possible tool and die makers in Sydney capable of producing dies for the manufacture of such components. At Blackman's request, Professor Wallwork also referred him to a colleague for information concerning plastic components in the disposable loading units. Reports on some of these matters were made to Blackman during 1978 and the remainder in January 1979.

Also during his visit to Australia during August 1978, Blackman consulted solicitors in Sydney about his competing with USSC by marketing USSC demonstration products repackaged and sterilized in Australia and about the registration in Australia by him of USSC's trade mark "Auto Suture".

Demonstration products consisting of disposable loading units were supplied by USSC to dealers and distributors for demonstration purposes at a fraction of the cost of clinical products. They were identical with those supplied for sale for clinical use but were neither sterilized nor supplied, individually packed, in sterile packs like the clinical products. Moreover, in a number of instances each pack of the clinical products held separate components comprising a cartridge containing the staples and a pusher mechanism, an anvil to form the staples to the required shape and, in most cases, a retaining pin to secure and align the cartridge and anvil on the instrument. Each pack of the demonstration products, containing six or 12 separate cartridges, held only one anvil and, where applicable, only one retaining pin. The single anvil and pin could be used a number of times with the demonstration products but would have to have been discarded after a single use with the clinical products because of the possibility of contamination. Blackman had been aware for some years that USSC demonstration products did not differ in quality from its clinical products. Since about 1977 he had been accumulating abnormally large stocks of demonstration products in the course of HPC's New York dealership.

In November 1978, Blackman again visited Australia for 12 days. This time he consulted Mr Engel of Graham Engel and Associates Pty Ltd, consultants in pharmaceutical sciences and the regulation of pharmaceutical goods. He engaged Engel's company to advise him about the repackaging and sterilizing of USSC disposable loading units and provided it with samples. He also asked for advice about Australian requirements relating to the information required for, and the labelling of, such products.

During November 1978, Blackman telephoned Josefsen and arranged a meeting to discuss an unspecified proposal. On some date between 17 and 27 November 1978 the meeting took place between Blackman, Hirsch and Josefsen over a meal at a restaurant, either in Stamford, Connecticut, or in New York City. Blackman told Hirsch and Josefsen that he would like to emigrate to Australia and proposed that USSC appoint him as its exclusive Australian distributor in place of Downs Surgical. He said that there was a great potential market for USSC surgical stapling products in Australia which was not being tapped by the existing distributor. He pointed out that with his long experience of, and accumulated know-how in, marketing these products and with his long association with USSC he could do an outstanding job for USSC and perform better than anyone else in building up sales of USSC products. He expressed the view that this would be a great opportunity both for himself and for USSC. He said that he would set up a marketing organization with sales representatives trained in the use and demonstration of USSC products in a manner similar to that used in USSC's training programme in the United States. Blackman indicated that after he had built up the Auto Suture business -- had "got it really rolling" -- he might take on other non-competing lines and build up a broad-based surgical distributorship, but not so as to interfere with his giving proper attention to USSC products. He pointed out that the establishment of the new business would take some time and would be expensive so that he would need some financial help in the form of credit and would like to rent instruments from USSC with the option of purchasing them in the future.

Hirsch and Josefsen indicated at the meeting that they were favourably disposed to Blackman's proposal. Hirsch said "Alan we will work it out" and Blackman said "You won't regret it". It was arranged that Blackman should discuss further details of the arrangement later with Josefsen.

In the meantime, after Blackman's return from Australia to the United States, Engel was in touch with Blackman's Sydney solicitor and they "discussed the various steps needed to get the stapling business under way". On 15 November 1978, on Blackman's instructions, his solicitors lodged an application in Australia for the registration of the trademark "Auto Suture" under the Trade Marks Act 1955 (Cth), in the name of HPC in respect of, amongst other things, "instruments and apparatus for use in surgery". In December 1958, Engel made approaches to Smith and Nephew Associated Companies of Australia Pty Ltd (Smith and Nephew) in Melbourne for them to carry out for Blackman the repackaging and sterilization of certain USSC demonstration disposable loading units.

Probably in the latter half of November 1978 a further meeting took place between Blackman and Josefsen. There was a discussion about a number of matters relating to Blackman's proposal, including the training of a nurse to be employed by Blackman in Australia, the size of Downs Surgical's stock inventory and the possibility of Blackman's purchasing it and the transfer to Australia of some of the inventory of HPC's New York dealership. At that meeting the question was raised whether USSC should have a written distributorship agreement with Blackman. It had not been the usual practice of USSC to require its overseas distributors to enter into formal, written agreements. Josefsen indicated that she would prefer a written agreement with Blackman but he rejected the suggestion on the ground that it was not necessary. He said, however, that he was willing to read a draft agreement.

On 27 November 1978 Blackman wrote to Josefsen outlining a timetable of events intended to facilitate his American company's withdrawal from the market in the United States and his entry into the Australian market. He ended the letter by saying:--

A transition in this manner will benefit USSC by having improved coverage in the Australian market, as well as an orderly change here. We will provide all necessary introductions to assure the success of the salespeople who will be representing USSC, and inventories of hospitals will not be overloaded.

Turi, it has been a pleasure being associated with you for the past seven years, I look forward to many more.

On 18 December 1978, Josefsen replied to Blackman's letter. She indicated her agreement in principle with Blackman's proposals. However, she affirmed USSC's desire to have Blackman enter into a written agreement by advising him that one would be drawn up by Mr Fisher, who acted as in-house counsel for USSC and was also a director of that company. Josefsen concluded her letter by saying:--

We look forward to working with you and although personal contacts will be few and far between, we shall do our best to keep you informed and abreast of trends and new events as they happen. Alan, this is an exciting step you are taking and I wish you every success in your endeavours and happiness in your new country. May it all work out exactly the way you hope.

On 27 December 1978, USSC wrote to Downs Surgical terminating its distributorship from 31 March 1979. Also on 27 December 1978, USSC wrote to Blackman. The letter was signed by Mr Whittingham, a senior Vice-President of USSC, because Josefsen was then on vacation and it was ultimately countersigned by Blackman. It was 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 which 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 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, 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.

Blackman placed his signature on this letter on 28 December 1978. He did so, having read it in Fisher's office and in Fisher's presence. Fishser said that he might forward to Blackman a formal contract for the Australian distributorship to which Blackman replied that he did not think that one was necessary. Fisher said that nevertheless he might forward a formal agreement and Blackman said that he would read whatever Fisher sent.

In the event there was no formal written agreement, Josefsen, and apparently Hirsch, eventually accepted Blackman's view that, as Josefsen put it, "... we just do not need to have a written agreement, we are old friends, we have done business together for years, what do we need to put it in writing for?" Josefsen gave evidence that Blackman appeared to be offended by the suggestion that there ought to be a formal distributorship agreement.

Blackman arrived in Australia on 6 January 1979 and immediately set about developing his distributorship. He acquired a shelf company and changed its name to Hospital Products of Australia Pty Ltd (HPA). By novation, HPA became the distributor under the distributorship agreement in place of Blackman.

Between December 1978 and March 1979, HPC sent to Australia, at Blackman's direction, a large quantity of demonstration products. These were sent in two consignments through the New Hebrides and Hong Kong in a purported series of sales which involved companies and a trust controlled by Blackman. It is unnecessary to go into these transactions in detail. For taxation reasons and in order to provide increased security for subsequent bank advances it was advantageous that the value of the demonstration products be inflated and this result was achieved. The invoiced price of the demonstration products when first sold totalled US$19,190. The same products were eventually invoiced to HPA at prices of about $500,000.

On 14 February 1979, Blackman wrote to Smith and Nephew on behalf of HPA about quality control and packaging of "my staple cartidges". This was a reference to demonstration cartridges made by USSC. The letter also made reference to the sterilizing of the cartridges and sample checking to verify sterility. It went on to say "my current schedule indicates a shipment of 5000 cartridges to be sent to your firm April 16, 1979. I will be in need of the finished product by May 4, 1979". As it turned out, the work was not done by Smith and Nephew.

Using the services of a product engineering consultant, HPA caused retaining pins, anvils and pusher-knife assemblies identical with the USSC products to be manufactured in Australia and to be combined with USSC demonstration products which were cleaned, assembled, packaged and sterilized here in order that the combined products could be sold under an Australian label in competition with or in substitution for USSC-made clinical products. Subsequently, disposable loading units identical with the USSC products were entirely manufactured locally for the same purpose. The work was performed under contract by a firm called IRD Engineering Services and later by its successor, IRD Engineering Services Pty Ltd (IRD), which was incorporated on 1 December 1979, using in turn the services of subcontractors and of another engineering company which was expert in the field of plastics, together with the assistance and guidance of the product engineering consultant. Eventually IRD came under the control of Blackman. From about June 1979 an effort was also made to develop a plastic skin stapler similar to USSC skin staplers, which could be used and resterilized repeatedly and be fitted with detachable cartridges.

In February 1979, HPA sent a circular to numerous hospitals in Australia announcing the end of Downs Surgical's distributorship and the beginning of the new one after 31 March 1979. HPA purchased Downs Surgical's stock for more than $50,000 which was more than Blackman had anticipated. HPA paid Downs Surgical approximately $5000 and arranged for USSC to give Downs Surgical credit for the balance of about $50,000 debiting that amount to HPA. There were other sums for stock arising out of the New York dealership which Blackman or his companies owed to USSC and in the end this led to mutual releases being executed. Nothing, however, turns on that in this appeal.

After HPA replaced Downs Surgical as USSC's sole distributor in Australia, Blackman set about promoting Auto Suture products energetically. Between April and December 1979 there was a substantial increase in the usage of those products in hospitals in Australia.

By about October 1979, HPA began to defer the filling of orders which it had received for Auto Suture products in anticipation of meeting those orders with products packaged by HPA and it ceased placing any further orders with USSC. In about November 1979, HPA began to assemble the disposable loading units comprising the USSC-made demonstration products with HPA-made components added where necessary, repackaging them under HPA's label and sterilizing them. By this time Blackman had decided that the cleaning and recycling of used components of disposable loading units was not feasible.

On 13 November 1979, HPA changed its name to Hospital Products International Pty Ltd (HPI). On 25 December 1979, HPI wrote to USSC terminating its distributorship giving as its reasons USSC's growing problem with quality control, its constant back-order position and its inability to process orders efficiently. USSC replied by telex dated 10 January 1980 accepting the decision to terminate the distributorship but rejecting the reasons given for it.

After 25 December 1979, HPI began to fill the outstanding orders and those which were subsequently received, with products repackaged by it. Blackman anticipated that HPI would within a few months be able to supply products wholly manufactured by itself and until then could carry on with USSC products, repackaged and relabelled by HPI, with HPI-made components where necessary.

On 28 December 1979, HPI advised hospitals by circular that it was "currently phasing out all US manufactured goods and substituting Australian manufactured product". The trial judge, from whose findings the foregoing statement of facts is largely taken, found that, from 25 December 1979, HPI began to supply customers in Australia with HPI-labelled products, the HPI proportion of the contents of which was increasing with the passage of time, in order that the existing Australian market for USSC-made products might change into an equivalent market for HPI-made products and 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 HPI-labelled products were being manufactured by arrangement with, or under licence from, the manufacturer of United States-made Auto Suture products, namely, USSC.

During 1980, HPI experienced some difficulty with its manufacturing capacity and was forced to obtain supplies of USSC clinical products which it combined with its own components or repackaged under its own label. It obtained the USSC products by means of agents using false names or otherwise in a manner designed to conceal from USSC the identity of HPI as the purchaser. It also obtained USSC instruments by similar means for use in the promotion of products packaged by HPI.

HPI continued marketing in Australia until November 1980. Thereafter, while continuing to manufacture its products in Australia, it marketed them in the United States through Surgeons Choice Incorporated (SCI), a company which it formed there for that purpose in about October 1980. It would appear that it also marketed its products elsewhere in the world.

After the termination of HPI's distributorship, USSC did not re-enter the Australian market until August 1980 when it formed a subsidiary in Australia to resume marketing its disposable loading units here.

In about June 1981, Blackman and HPI acquired control of a listed public company which was called Aquila Investment Corporation Ltd but which changed its name to Hospital Products Limited (HPL). HPL acquired the business and assets of HPI. These transactions were described as a reverse takeover.

USSC commenced this action in the Supreme Court of New South Wales seeking the enforcement of a constructive trust which was alleged to extend to assets held by all defendants which were the companies controlled by Blackman and to Blackman himself. The constructive trust was alleged to arise from breaches of fiduciary duty by HPI as USSC's distributor, in which the other defendants participated and from which they received benefits. Alternatively, USSC sought against all defendants an account of profits or equitable compensation arising out of the alleged breaches of fiduciary duty. There were, in addition, claims against HPI and HPL for damages for breach of contract and for injunctions to restrain any continuing breach. Claims against all defendants for damages for conspiracy and for injunctions to restrain the continuation of the conspiracy were included, but were rejected by the trial judge, and it is unnecessary to have further regard to them in this appeal. Also, at one stage, USSC claimed damages against Blackman and HPI for fraudulent misrepresentations which were alleged to have induced the appointment of HPI as USSC's distributor in Australia but these claims were abandoned. Blackman's alleged fraud was, however, relied upon by USSC to the extent that it was relevant to the claim for relief based upon the breach of fiduciary duty.

There is, or has been, other litigation both in Australia and the United States between USSC and one or more of the defendants in this action and there is a claim in the United States by USSC against HPI, Blackman and SCI for relief under patents and trademarks legislation and for relief against unfair competition, including passing off. There was no claim in these proceedings based upon passing off as such, although what may have amounted to passing off was relied upon as going to the breaches of fiduciary duty.

Putting on one side the claims based upon conspiracy, these proceedings have a limited scope. It has been the choice of USSC to limit its claims to relief for breach of fiduciary duty and for breach of contract.

The trial judge found that HPI was under a fiduciary duty towards USSC because the former had been entrusted by USSC with the development and servicing of the market for USSC surgical stapling products in Australia. However, HPI's fiduciary position ended, he held, upon the termination of the distributorship on 10 January 1980. The fiduciary duty found by the trial judge was that HPI should not make a profit or take a benefit through its position as a distributor without the informed consent of USSC and that it should not act in a way in which there was a possible conflict between its own interests and those of USSC.

The breaches of that duty were, in the opinion of the trial judge, twofold. First, HPI secretly developed a capacity to manufacture copies of USSC products or components 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. Second, it deferred the 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 those products.

Taking the view, which he did, that HPI was not a fiduciary in respect of any of the assets of its distributing business or in respect of any of the profits from that business, the trial judge declined to grant relief upon the basis of a constructive trust over the assets of the manufacturing business developed by HPI and later carried on by HPL. He did, however, order an account of profits upon the basis that the breaches of fiduciary duty which he found to have been committed by HPI gave HPI a head start, or acted as a springboard for HPI, in getting is own product on the market. He concluded that all profits up to the time HPI abandoned the Australian market in November 1980 should be treated as flowing from HPI's breaches of fiduciary duty and as properly the subject of account. He held that HPI's fiduciary obligation was limited to the Australian market and that it was not accountable for profits made outside Australia. In the alternative, the trial judge found that USSC was entitled to equitable monetary compensation to be assessed if it elected to accept that remedy.

The trial judge also found a number of breaches of contract and put USSC to its election as to the acceptance of damages, to be ascertained, against HPI, in place of the equitable relief.

So far as Blackman was concerned, the trial judge found that he was liable in equity to account to USSC for any benefit which he received as a result of his participation in HPI's breaches of fiduciary duty and was jointly liable with HPI in respect of any equitable monetary compensation due to USSC as a result of those breaches.

On appeal by HPL to the Court of Appeal, that court also found that HPI was in breach of a fiduciary duty which it owed to USSC. It, however, concluded that the breaches of duty were such that it was appropriate to declare a constructive trust in favour of USSC over all the assets including the goodwill and business of HPI as at 10 January 1980 and until 30 June 1981 and to declare a constructive trust in favour of USSC over all the assets of HPL acquired by it in the reverse takeover. The consequence of these declarations was that on 1 July 1981 and thereafter HPL held in trust for USSC all its assets including its goodwill and business with the exception of those assets which were the assets of HPL before 1 July 1981. It is from the judgment of the Court of Appeal that HPL now appeals to this court. There are cross-appeals by the respondents other than USSC, namely, Ballabil Holdings Pty Ltd (which is now the name of HPI), SCI, Blackman and IRD.

The real basis of the appellant's case is that neither Blackman nor HPI was under a fiduciary duty to USSC and, of course, if that is so, then USSC would not be entitled to relief by the declaration of a constructive trust or an account of profits or equitable compensation. It was not contested, indeed it was conceded, that HPI was in breach of its distributorship agreement with USSC in deferring the filling of orders for USSC products and, to the extent that it was done during the currency of the distributorship agreement, in the sale of products under the HPI label. That would entitle USSC to damages, but that is a remedy which it clearly finds less attractive than equitable relief. Indeed, it appears that USSC has chosen to place heavy reliance upon the remedy of the constructive trust rather than other remedies which may have been open to it. It is appropriate, therefore, to turn to the question of the existence of a fiduciary relationship between USSC and Blackman in the first place and then HPI which is the basis of any entitlement to that relief.

In examining that question it is, I think, necessary to have regard first to the definition of the relationship between Blackman and USSC which is provided by the terms of the distributorship agreement. It is convenient to continue to speak of the relationship between Blackman and USSC because that is the origin of any fiduciary obligations, although, of course, after the novation which substituted HPI for Blackman as a party to the distributorship agreement those obligations were imposed upon HPI. The fact of that agreement is no necessary bar to the existence of a fiduciary relationship between the parties to it whether or not the agreement imposed obligations of a fiduciary nature, but its terms are obviously of significance in determining what their relationship was. The trial judge found that proper law of the distributorship agreement was either that of New York or Connecticut both before and after the novation. He found it unnecessary to distinguish between the law of New York and Connecticut which was, for the purposes of this case, the same and was, indeed, not significantly different from the law of New South Wales. These findings were not questioned upon this appeal. In order to put the choice of law to one side it is convenient to say at this point that the trial judge found it unnecessary to determine which law should govern the question of the existence of fiduciary obligations and entitlement to equitable relief because he found, upon the evidence, that there is no material difference upon the subject between the law of New York, the law of Connecticut and the law of New South Wales. He found that in this area of jurisprudence decisions of the courts of the United States, as well as those of other jurisdictions, are of assistance in ascertaining the law of New South Wales. This finding was also not questioned upon this appeal.

Perhaps, however, express mention should be made of the trial judge's finding that under the law of New York and of Connecticut "every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement": Restatement of the Law : Contracts (2d) s 205. This, he found, meant no more than that neither party to an agreement may do anything to impede performance of the agreement or to injure the right of the other party to receive the proposed benefit and was, in substance, an expression of the same principle enunciated by this court in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 26 ALR 567 ; 53 ALJR 745 at 749, quoting the words of Griffith CJ in Butt v M'Donald (1896) 7 QLJ 68 at 70-1: "It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract."

The trial judge rejected the contention that the letter dated 27 December 1978 was intended by the parties to constitute the whole agreement between them and found that the conversation in the restaurant early in November 1978 gave rise to express terms of that agreement which were to the following effect:--

(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.

I can see no reason to disagree with the finding that these terms formed part of the distributorship and am content to proceed upon the basis that they did. I should, perhaps, just add that even if there were no express term, as the trial judge found, that the distributor would devote its best efforts to distributing USSC products, s 2-306(2) of the Uniform Commercial Code, which forms part of the law of both New York and Connecticut, would have imposed a term with similar effect. The trial judge went further, however, and, in addition to the express terms which he found, implied a term that the distributor would not during the distributorship do anything inimical to the market in Australia for USSC surgical stapling products. He further held that an act done during the distributorship could for this purpose be considered inimical to that market, notwithstanding that it was calculated to lead to actual damage to the market only after termination of the distributorship. The development of a capacity to manufacture copies of USSC products or components of such products, and the manufacture of them, with a view to appropriating the whole or a part of the market for USSC products would, in either case, constitute an act inimical to the market.

I must confess that I am unable to see how the application of any of the recognized principles gives rise to the implication of any term such as that implied by the trial judge. Those principles were recently examined by this court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 41 ALR 367 ; 56 ALJR 459, and for present purposes it is sufficient to say that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. In my view it is plain that a distributorship agreement containing the express terms found by the judge was capable of an effective operation in a business sense without the implication of a further term, save for a term (which the trial judge found) that the agreement could be brought to an end by reasonable notice on either side. The observance of the best efforts clause may or may not have impeded Blackman during the distributorship from developing a capacity to manufacture and from manufacturing copies of USSC products, but I am unable to see that there was any necessary implication that he should not do so, having regard to his right to market copies at the conclusion of the distributorship. It is certainly not something which went without saying in the agreement. Indeed, USSC's position during the distributorship was protected by the express term found by the trial judge which precluded Blackman from dealing in products competitive with USSC products, a term which obviously included copies of USSC products sold under another name. It also needs to be remarked that USSC had not previously shown itself to be concerned to protect its Australian market and had taken no steps to take out any patents or to register its trade mark. It does not appear that its distributorship agreement with Downs Surgical contained any protection against the use of copies of its products and it is far from a necessary conclusion that USSC regarded the situation differently when it concluded its distributorship agreement with Blackman.

Indeed, the implied term as it is expressed by the trial judge has a curious effect. It is limited in its operation to the duration of the distributorship agreement. That, as the trial judge found, could be terminated upon reasonable notice. Such an implied term would do nothing to prevent Blackman from terminating the distributorship and competing upon the Australian market by manufacturing and selling copies of USSC products. Such an implied term would afford no real protection of USSC's Australian market. As the trial judge himself saw it, its effect would be limited to prohibiting activities on the part of Blackman during the currency of the distributorship which were calculated to enable him to capture the market or part of it after the determination of the distributorship. However, the agreement, as it was found, was explicit about what it required from Blackman during the distributorship agreement: it required him to devote his 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 himself. The agreement was silent about what was to happen at its conclusion and in those circumstances it seems to me impossible to decide that the distributorship could only have business efficacy if, in addition to the requirement that Blackman use his best efforts on behalf of USSC during the currency of the agreement, there was a requirement that he not do anything which would enable him to damage USSC's market after the distributorship had ended. However much the latter requirement may eventually have appeared to USSC to be desirable for its protection, the distributorship was clearly able to operate effectively without it.

No assistance is to be derived from the authorities dealing with contracts which establish what is clearly a confidential (in the sense of fiduciary) relationship -- contracts such as contracts of employment or partnership agreements. There the confidential nature of the relationship may require the implication of a term or terms in the absence of express provisions in order to protect the confidence. A distributorship agreement of the kind here does not ordinarily, and certainly does not necessarily, give rise to a confidential relationship and it would be wrong to assume such a relationship in order to read into the agreement a term protecting it. Moreover, the development by Blackman during the currency of the distributorship agreement of a capacity to manufacture copies of USSC products did not involve the use of confidential information and, except to the extent that it resulted in his failure to devote his best efforts to distributing USSC products or building up its market in Australia, involved no breach of any express term of the agreement. Nor did the possibility of such an occurrence call for the implication of a term in addition to the best efforts clause: cf Robb v Green [1895] 2 QB 1; Wessex Dairies Ltd v Smith [1935] 2 KB 80; Furs Ltd v Tomkies (1936) 54 CLR 583 ; Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169; Feiger v Iral Jewelry Ltd (1975) 382 NYS (2d) 216, 221 ; (1977) 363 NE (2d) 350.

Clearly, if it had wished to do so, there were various ways in which USSC could have protected the market which it had in Australia or which it anticipated it would have as a result of Blackman's distributorship. As I have said, it could have patented its products and registered its trade mark or at least have taken some steps to do so. It could have required Blackman to enter into a covenant in restraint of trade to the extent permitted by the law so as to restrict his activities during and after the termination of the distributorship. But to imply a term such as that implied by the learned trial judge would, in my view, be to impute to USSC a concern which had in no way been manifested by it and which, if it had existed, could have been met by appropriate contractual terms. In those circumstances, not only was the term implied by the trial judge unncessary to give the distributorship agreement business efficacy but its implication would effectively recast that agreement in a form which the parties had chosen not to adopt.

It is clear that the term implied by the trial judge and accepted by the Court of Appeal was of fundamental importance in their arrival at the conclusion that Blackman occupied a fiduciary position. There is nothing else in the contract itself which would assist in that regard. It is possible that a fiduciary relationship might arise from the circumstances surrounding the agreement, but before embarking upon an examination of those circumstances it is desirable to make some attempt to identify the characteristics of such a relationship, even if that attempt is unlikely to meet with complete success. It has been said more than once that it is not possible to define completely and with precision those matters which give rise to fiduciary obligations notwithstanding that it is possible to discern a fiduciary relationship when it exists: see Lloyds Bank v Bundy [1975] 1 QB 326 at 341.

To be sure there are relationships which are ordinarily recognized as fiduciary, at least in some of their aspects, and little trouble is experienced with them. They are all relationships which are analogous to that which exists between a trustee and his beneficiary -- the clearest of all fiduciary relationships. Without any attempt at classification, obvious examples spring to mind such as the relationship between partners, between employee and employer, between agents and their principals, between solicitors and their clients, between directors and their companies and between wards and their guardians.

Notwithstanding the existence of clear examples, no satisfactory, single test has emerged which will serve to identify a relationship which is fiduciary. It is usual -- perhaps necessary -- that in such a relationship one party should repose substantial confidence in another in acting on his behalf or in his interest in some respect. But it is not in every case where that happens that there is a fiduciary relationship. If it were, whenever there is "a job to be performed" ( Tito v Waddell (No 2 ) [1977] 1 Ch 106 at 229) and entrusting the job to someone involves reposing substantial trust and confidence in him, equity would impose fiduciary obligations. Clearly that is not the case. Nor does a fiduciary duty arise because the person to whom a job is entrusted acts in his own interest and thereby fails to perform the job properly, however useful it may appear with hindsight that such protection should have been available. As Megarry V-C put it in Tito v Waddell at p 230: "If there is a fiduciary duty, the equitable rules about self-dealing apply: but self-dealing does not impose the duty. Equity bases its rules about self-dealing upon some pre-existing fiduciary duty: it is a disregard of this pre-existing duty that subjects the self-dealer to the consequences of the self-dealing rules. I do not think that one can take a person who is subject to no pre-existing fiduciary duty and then say that because he self-deals he is thereupon subjected to a fiduciary duty."

The difficulty in identifying and classifying those qualities in individual relationships which give rise to fiduciary obligations is well recognized: see, eg, Phipps v Boardman [1967] 2 AC 46 at 125, per Lord Upjohn. There is, however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other: see Tate v Williamson (1866) 2 Ch App 55 at 60-1. From that springs the requirement that a person under a fiduciary obligation shall not put himself in a position where his interest and duty conflict or, if conflict is unavoidable, shall resolve it in favour of duty and shall not, except by special arrangement, make a profit out of his position. In terms of general principle I do not think that it is necessary to go further than that in the present case. It is sufficient, in my view, to lead to the conclusion that no fiduciary relationship arose between USSC on the one hand and Blackman or, subsequently, HPI, on the other, having regard to all the circumstances.

No doubt it was necessary to look to the contract as part of an inquiry whether the relationship between the parties was of such a kind that equity would impose fiduciary obligations in addition to those imposed by the contract. However, as I have said, I can discern no basis for the implication of a term such as was found to exist and it follows that, in my view, there is absent from the relationship between the parties any fiduciary character which may have been derived from such a term. Of course, the relationship between the parties to a contract may be defined not only by the contract itself but may also arise from the circumstances in which the contract is made. But, just as the common law does not allow the implication of a term merely to remedy the inadequacy of the parties' contractual arrangements, so too does equity decline to re-adjust the balance of a relationship which does not of its very nature place the parties in an unequal position.

I have already explained why in my view there was no implied term such as that found by the trial judge. That goes some distance in explaining why I am unable to accept the further conclusion that the relationship between the parties was sufficiently analogous to that of a trust to classify it as fiduciary. The circumstances which make it inappropriate to imply the term in question form part of those circumstances which, in my view, preclude the formation of any fiduciary relationship. But there is more to it than that.

By its very nature a distributorship agreement does not ordinarily give rise to a relationship in which any conflict between duty and interest must be eliminated. It is, if anything, an exception to the adage that a man cannot serve two masters. Whilst the parties have the common aim of exploiting a market and, no doubt, rely upon that coincidence of aim as much as any contractual provision to ensure the success of their arrangement, nevertheless their interests do not always and entirely coincide. Where there is no agreement to the contrary (and there was none here) and the distributor re-sells his supplier's products, he must determine the price at which he will market them. Whilst it may be in the supplier's interest that the products should be sold at a price which is as close as possible to the wholesale price, the distributor's interest may dictate a higher price. Whilst it is in the supplier's interest that the distributor should purchase and sell as many of the supplier's products as the market will absorb, there may be considerations which the distributor must take into account in his own interest which involve a lesser achievement. I have in mind such matters as the distributor's capacity to finance his operations, to give credit and to promote the product. All of these matters and others may require the distributor to make decisions in a situation which of its very nature makes it impossible to eliminate conflict between his interests and those of the supplier.

Nor does the existence of a best efforts or best endeavours clause, such as was found to be a term of the contract between USSC and Blackman, impose a duty upon the distributor to disregard his own interests. In speaking of a "best endeavours" clause in a licence agreement, in Transfield Pty Ltd v Arlo International Ltd (1980) 30 ALR 201 at 216 ; 54 ALJR 323 at 329 Mason J said that it went no further than to prescribe "a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract": see also Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234 at 237; B Davis Ltd v Tooth & Co Ltd [1937] 4 All ER 118 at 127; Van Valkenburgh, N & N Inc v Hayden P Co (1972) 30 NY (2d) 34 at 45. Clearly that leaves room for a balancing of interests and does not require the elimination of any conflict.

What is important is that in a distributorship agreement such as that in the present case it is assumed that the distributor will pursue his own economic interests and reliance is placed upon the fact that, in doing so, he will sufficiently serve the supplier's interests as well as his own, notwithstanding that he may on occasions follow his interests to the exclusion of those of his supplier. Apart from the considerations to which I have already referred, this of itself makes it inappropriate to imply a contractual term purporting to impose absolute obligations upon the distributor. It makes it even less appropriate to impose an equitable obligation upon the distributor in the performance of the contract to have regard to the interests of the supplier in disregard of his own.

Moreover, in considering whether any of Blackman's obligations towards USSC were of a fiduciary nature, I find no assistance in the notion that he may have occupied a fiduciary position of a limited kind in relation to the goodwill attaching to USSC products. Product goodwill as a legal concept is virtually unexplored. How and when it may exist, if at all, as something distinct from the goodwill of the business which is the origin of the product is something which has received little attention: see Pinto v Badman (1891) 8 RPC 181 at 194-5; Heublein Inc v Continental Liqueurs Pty Ltd (1960) 103 CLR 435 ; Estex Clothing Manufacturers Pty Ltd v Ellis and Goldstein Ltd (1967) 116 CLR 254 ; Commissioner of Taxes (Qld) v Ford Motor Co of Australia Pty Ltd (1942) 66 CLR 261 . Perhaps some explanation of this fact is to be found in the position at common law where a trade mark is assignable only in conjunction with the goodwill of the business in which the mark is used. That was also the position for some time with registered trade marks. It is, however, unnecessary to examine in detail in this case any meaning which the term product goodwill may have, because whatever it may be in another context, it can in the context of this case mean no more than the reputation in the market place which USSC products had in this country.

It is not possible, to my mind, to say that Blackman had a fiduciary relationship with USSC limited to its product goodwill or the reputation in the market place of USSC products. It is, I think, artificial in the extreme to regard USSC as having entrusted Blackman with the reputation of its products in Australia in the same way as one person might entrust another with property of a tangible kind to deal with it on his behalf. There were no special features of Blackman's distributorship relating to product goodwill. The only sense in which it could be said that USSC entrusted Blackman with the reputation of its products in Australia is in the sense that the reputation of those products might grow or diminish as a consequence of the manner in which he performed his function as a distributor of those products. But the same might be said of any distributor of any supplier's products. Moreover, the nature of the agreement between Blackman and USSC precluded any special obligations relating to product goodwill.

The extent of the exertions required of Blackman under the agreement is to be found in the obligation imposed upon him to devote his best efforts to distributing USSC products and building up the market for them. Any effect upon the reputation of USSC products in Australia was necessarily a consequence of Blackman's performance of or failure to perform these functions. However, in observing the requirements of the best efforts clause, Blackman was, as I have noted, not required to have regard to USSC's interests to the exclusion of his own. He was not required to resolve any conflict entirely in favour of USSC and he was, therefore, not placed by the best efforts clause in a fiduciary position. No more was or could be required of Blackman under the agreement in relation to the reputation of USSC products than was required of him by the best efforts clause.

If that clause imposed no fiduciary obligation upon Blackman, and I have already indicated that it did not, it follows ineluctably, in my view, that there was no fiduciary obligation in relation to the reputation of USSC products even if some such obligation could in other circumstances arise. It is to my mind quite impossible to say that the efforts which Blackman was required to make under the agreement were not in discharge of any fiduciary duty but that the reputation of USSC products, which could only be affected under the agreement by the way in which he discharged the duties which the agreement imposed, was somehow entrusted to Blackman in a fiduciary way.

Nor is the problem to be solved by saying that there was a limited fiduciary relationship with respect to the reputation of USSC products which was of a different kind from that normally encountered in that it recognized the possibility of conflict between the interests of Blackman and those of USSC which was not to be resolved in favour of USSC. That is the antithesis of a fiduciary relationship which demands that in any situation of conflict between duty and interest, duty must come first: see Furs Ltd v Tomkies (54 CLR) at pp 590, 592, 600. As Lord Hodson said in Phipps v Boardman ([1967] 2 AC) at p 111: "Nevertheless, even if the possibility of conflict is present between personal interest and the fiduciary position the rule of equity must be applied": see also Gillett v Peppercorne (1840) 3 Beav 78 at 83-4 ; 49 ER 31 at 33; Bray v Ford [1896] AC 44 at 51-2; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 at 137, 144-5.

The whole purpose served by the recognition of a fiduciary relationship would otherwise be thwarted, for the court would be required to examine individual transactions in order to determine whether the interests of the person to whom the fiduciary duty was owed had been sacrificed in some impermissible manner as, for example, where the person owing the duty had not acted reasonably in the circumstances. That may well be a task which "no court is equal to" and certainly is a task which has never been undertaken: see Ex parte James (1803) 8 Ves Jun 337 at 345 ; 32 ER 385 at 388.

The circumstances in which the contract between USSC and Blackman was made do not suggest any disadvantage or vulnerability on the part of USSC requiring the intervention of equity to protect its interests. Those negotiations were of a commercial nature and were at arm's length. They were conducted by persons on both sides who were experienced in the market place. The recognition by those who represented USSC that a formal, written agreement was desirable was a recognition of the possibility, at least, of a contract providing greater protection of USSC's interest than was in fact provided. Not only does the conscious choice to proceed in the absence of a formal agreement fail to provide any basis for the implication of a term affording the type of protection which the agreement might have provided, but it is also inconsistent with any need for the intervention of equity.

It may be conceded that USSC eventually accepted that there was no need for a formal agreement because of the misplaced trust which Hirsch and Josefsen had in Blackman's integrity and ability. But that is not the sort of trust or confidence which equity will protect by the imposition of fiduciary obligations. A fiduciary relationship does not arise where, because one of the parties to a relationship has wrongly assessed the trustworthiness of another, he has reposed confidence in him which he would not have done had he known the true intentions of that other. In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced. That does not make the relationship a fiduciary one: see Lloyds Bank v Bundy , supra, at p 341. A fiduciary relationship exists where one party is in a position of reliance upon the other because of the nature of the relationship and not because of a wrong assessment of character or reliability. That is to say, the relationship must be of a kind which of its nature requires one party to place reliance upon the other; it is not sufficient that he in fact does so in the particular circumstances. Of course, where a relationship is fiduciary in character it will be so whether or not the party in whose favour the fiduciary obligations are imposed actually trusts the party upon whom the obligations are imposed.

Moreover, a fiduciary relationship does not arise where one of the parties to a contract has failed to protect himself adequately by accepting terms which are insufficient to safeguard his interests. Where a relationship is such that by appropriate contractual provisions or other legal means the parties could adequately have protected themselves but have failed to do so, there is no basis without more for the imposition of fiduciary obligations in order to overcome the shortcomings in the arrangement between them.

In my view, there was no special feature of the distributorship agreement between USSC and Blackman which distinguished it from an ordinary commercial arrangement of its type. Apart from the actual terms of the contract, I do not think that the nature of the relationship which it created or the circumstances in which it was made, required USSC to put its trust and confidence in Blackman in a way which called for the imposition of fiduciary obligations to protect it from a position of vulnerability or disadvantage. That it did put its trust and confidence in Blackman is clear, but it did so of its own choice. If that placed it in an unequal position in relation to Blackman it was not due to anything inherent in the relationship but to the way in which the parties chose to establish and define it.

Too much should not, however, be made of any inequality in the position of USSC. The distributorship was, even in the absence of breach, determinable upon reasonable notice and although Blackman's activities took place unnoticed for some time in what USSC appears to have regarded as a remote corner of the globe, that company had at least the means of remedying the situation by ending its relationship with Blackman as soon as those activities could be seen to be harmful to it.

It should also be borne in mind that at the time Blackman concluded a distributorship agreement with USSC, the dealership agreement which he had previously made with USSC was in existence and continued in operation for some time thereafter. It is clear, indeed it was conceded, that the position of dealer under the latter agreement carried with it no fiduciary obligations. That agreement, which was contained in a formal document, expressly provided that it should not constitute the dealer the agent of USSC and that the relationship between USSC and Blackman should at all times be that of independent contractors: see Jirna Ltd v Mister Donut of Canada Ltd (1973) 40 DLR (3d) 303. It would have been anomalous that any fundamental change in the relationship between USSC and Blackman should have taken place during the subsistence of the dealership agreement without either party adverting to it merely because Blackman had become a distributor of USSC products in Australia in addition to his, or his company's, being a dealer for USSC in the United States. From a commercial point of view, the distributorship was, and was intended to be, a much looser arrangement than a dealership.

In the Court of Appeal considerable emphasis was placed upon Blackman's fraudulent conduct and the importance to him of obtaining the distributorship in order to effectuate his plan of capturing USSC's market for himself with copies of USSC products. For my part, I am unable to see how either of these circumstances, which are clearly established, assists in answering the question whether a fiduciary relationship existed. The law, of course, offers remedies for fraudulent misrepresentation and the fact that USSC has chosen not to pursue them is not to the point in the case which it has eventually made out. The fact that USSC was the victim of Blackman's fraud is no indication that the agreement which it induced gave rise to a relationship which called for the special protection of equity. And if such a relationship had existed, the fact that the conduct of which USSC complains was fraudulent would in the circumstances have been of limited relevance to the availability of the equitable remedies which it seeks; it would have been sufficient that Blackman allowed his duty to conflict with his interest so as to profit from his position of trust.

Even less relevant, in my view, is the importance of the distributorship to Blackman. It explains of course, his motivation in obtaining a distributorship; his whole plan to capture the Australian market was dependent upon it. It emphasizes, perhaps, the lack of judgment and the misplaced confidence on the part of those who were acting for USSC in failing to see and guard against what Blackman was doing or was about to do. But the fact that it was important to Blackman to achieve the relationship which he did with USSC did not determine the nature of that relationship any more than the failure of USSC to recognize that fact.

The undesirability of extending fiduciary duties to commercial relationships and the anomaly of imposing those duties where the parties are at arm's length from one another was referred to in Weinberger v Kendrick (1982) 698 Federal Reporter 2d 61. And in Barnes v Addy (1874) 9 Ch App 244 at 251, Lord Selborne LC said: "It is equally important to maintain the doctrine of trusts which is established in this court, and not to strain it by unreasonable construction beyond its due and proper limits. There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them."

There can be no question that the behaviour of Blackman was calculated and fraudulent. But the law provides remedies for such behaviour which are capable of a precise application. To invoke the equitable remedies sought in this case would, in my view, be to distort the doctrine and weaken the principle upon which those remedies are based. It would be to introduce confusion and uncertainty into the commercial dealings of those who occupy an equal bargaining position in place of the clear obligations which the law now imposes upon them. The remarks of Bramwell LJ in New Zealand Australian Land Co v Watson (1881) 7 QBD 374 at 382 have, I think, special application: "Now I do not desire to find fault with the various intricacies and doctrines connected with trusts, but I should be very sorry to see them introduced into commercial transactions, and an agent in a commercial case turned into a trustee with all the troubles that attend that relation."

For these reasons, I would allow the appeal and dismiss the cross-appeal of the first respondent. I would also allow the cross-appeals of the second, third, fourth and fifth respondents. I would order that the proceedings be remitted to the Supreme Court of New South Wales for an inquiry as to the damages suffered by the first respondent as the result of the breach by the third respondent of its contractual obligations and for entry of judgment in favour of the first respondent against the third respondent in the amount of the damages ascertaineby that inquiry.