Hospital Products Ltd v United States Surgical Corporation

156 CLR 41
55 ALR 417

---

(Judgment by: Deane J) Court:

Judges: Gibbs CJ
Mason J
Wilson J

Deane JDawson J

Judgment date: 25 October 1984

Canberra

---

Judgment by:
Deane J

Due largely to the accuracy and precision of the findings of the learned trial judge, the basic facts of this complicated case are no longer in dispute. They are set out in other judgments in this court and I refrain from repeating them. As I see the matter, the issues on this appeal involve three broad questions: (i) which, if any, of Mr Blackman's oral statements to the representatives of United States Surgical Corporation (USSC) constituted express terms of the contract between Blackman and USSC and, by substitution or novation, between Hospital Products International Pty Ltd (HPI) and USSC; (ii) whether any, and if so what, terms should be implied in that contract, and (iii) whether USSC is entitled to any, and if so what, relief by way of constructive trust. The discussion of those questions in the judgments of other members of the court makes it possible for me to indicate, in comparatively summary fashion, the conclusions to which I have come and my reasons for them. I shall refer indifferently to the contract between Blackman and USSC and the substituted contract between HPI and USSC as "the contract".

(i) Express Terms of the Contract

In the course of the critical restaurant conversation in November 1978 between himself and the two representatives of USSC, Blackman made a number of statements or representations which arguably constituted express terms of the contract which is agreed to have been partly oral. The test for determining whether any, and if so which, of those statements in fact constituted an express term of the contract is whether the proper inference is that the relevant statement or reprsentation was, when viewed objectively and in context, offered and accepted as, or as part of, a contractual promise. At first instance, McLelland J identified four such statements or representations which he concluded had been incorporated as express terms of the contract. That conclusion was upheld by the Court of Appeal. For the reasons given by Mason and Dawson JJ in their judgments in this court, I am of the view that his Honour's finding of those four express terms of the contract should be accepted as correct.

That being so, the express terms of the contract included a promise by the distributor (ie Blackman and, subsequently, HPI) to the effect that, during the term of the distributorship under the contract, the distributor "would devote its best efforts to distributing USSC's surgical stapling products, and building up the market for those products, in Australia, to the common benefit of USSC and itself" and that, during that term, the distributor would not deal in Australia "in any products competitive with USSC's surgical stapling products". I agree with Mason J's comments about the limited effect of the words "to the common benefit of USSC and itself" in that "best efforts" clause.

(ii) Implied Terms of the Contract

In a number of recent cases, this court has accepted the summary of the majority of the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 16 ALR 363 ; 52 ALJR 20 at 26 of the criteria which must be satisfied before a term will be implied in a contract. Those cases in this court, like the BP Refinery case itself, were concerned with the question whether a term should be implied in a formal contract which was complete upon its face and care should be taken to avoid an over-rigid application of the cumulative criteria which they specify to a case such as the present where the contract is oral or partly oral and where the parties have never attempted to reduce it to complete written form. In particular, I do not think that a rigid approach to the requirement "that it must be necessary to give business efficacy to the contract" should be adopted in the case of an informal and obviously not detailed oral contract where the term which it is sought to imply is one which satisfies the requirement of being "so obvious that it goes without saying" in that if it had been raised both parties would "testily" have replied "of course" (cf the BP Refinery case (52 ALJR) at 27). As a general rule however, the "so obvious that it goes without saying" requirement must be satisfied, even in the case of an informal oral contract, before the courts will imply a term which cannot be implied from some actual statement, from previous dealings between the parties or from established mercantile practice.

Both at first instance and in the Court of Appeal, it was held that it was an implied term of the contract that the distributor would not, during the distributorship, "do anything inimical to the market in Australia for USSC surgical stapling products". I respectfully disagree with that finding. Such a term, particularly if the word "inimical" is given the "most rigorous sense" attributed to it by the Court of Appeal, would be commercially unusual and unexpected in a distributorship arrangement. Indeed, the express "best efforts" clause of the contract appears to me to remove any basis which might otherwise be thought to exist for implying a broad unqualified term under which the distributor was contractually bound during the distributorship not to do "anything" inimical to the Australian market for the relevant product or for implying some other term having a similar but more limited operation. I would add that, subject to the foregoing and one additional qualification, I am in general agreement with what is said on this aspect of the case by the Chief Justice and by Dawson J. The additional qualification is that my acceptance of the "best efforts" clause as an express term of the contract makes it unnecessary to place reliance upon the similar provision prescribed by s 2-306(2) of the Uniform Commercial Code which is set out in the judgment of the Chief Justice.

(iii) Constructive Trust

The conclusions of the Court of Appeal on the questions of fiduciary relationship, fiduciary duty and constructive trust were, to no small extent, based on the view that it was an implied term of the contract that the distributor would not do anything inimical to the market in Australia for USSC surgical stapling products. The rejection of that implied term removes an important part of the basis of the Court of Appeal's conclusion that USSC was entitled to the benefit of the comprehensive constructive trust which it declared. While a careful reading of McLelland J's judgment leaves me in little doubt that his finding that the distributor owed a limited fiduciary duty to the manufacturer would have been the same if he had relied merely on the express "best efforts" and "no competing products" terms of the contract, he would seem partly to have based that finding of a limited fiduciary duty on the existence of the relevant implied term ("HPI's position of power and its contractual obligations": [1982] 2 NSWLR 766 at 811). In all the circumstances, the preferable course is to approach the question of constructive trust afresh on the basis of McLelland J's findings of fact.

The relationship between a manufacturer and a distributor is not, in itself, ordinarily a fiduciary one even in a case where the distributor enjoys sole rights of distribution in a particular area. Such a relationship is ordinarily that of seller and buyer. It is true that the manufacturer and distributor have a common interest in ensuring that the distributor should sell as much of the relevant product as possible. That, however, is a truism of the market place and not a legal principle. In seeking such sales, the distributor is ordinarily acting in pursuit of his own interests. It is in the pursuit of his own interests that he acts to the advantage of the manufacturer by generating more sales of the product (cf Federal Commissioner of Taxation v Cooke (1980) 29 ALR 202 at 215 ; 42 FLR 403 at 419).

The express term of the contract in the present case requiring the distributor to use its "best efforts" to build up the market for, and distribute, the products in Australia "to the common benefit" of both manufacturer and distributor did not, of itself, impose a general fiduciary duty on the distributor to seek no profit or benefit for itself or to disregard its own interests where they conflicted with the manufacturer's. In the context of the term precluding the distributor from dealing in any competing product, the reference to "the common benefit" was no more than a reflection of the commercial fact that, while the distributorship subsisted, it was in the interests of both manufacturer and distributor that, consistently with ordinary economic restraints on pricing, the market for the manufacturer's product in the relevant area be maximized. Neither that nor any other provision of the contract transformed the relationship into a partnership or joint venture. Nor was there anything in the contract which either authorized the distributor to act on behalf of the manufacturer in the sense of acting as agent for a principal or which required the distributor generally to subordinate its own interests to those of the manufacturer. The arrangement under the contract was the ordinary arrangement that a distributor would buy product from a manufacturer and sell it on its own behalf. Subject to one possible qualification, the manufacturer-distributor arrangement between USSC and HPI was not a fiduciary relationship and did not involve general fiduciary duties.

The conclusion that the overall relationship between USSC and the distributor waa not fiduciary does not preclude the possibility that, within or arising from that relationship, a more restricted fiduciary relationship might exist. Indeed, the continuing relationship of manufacturer and distributor might well provide a context in which it would be easier to imply an undertaking by one party to act as a fiduciary in relation to a particular matter than would be the case if that relationship did not exist. The possible qualification to the denial of a general fiduciary relationship is that which was accepted by McLelland J, namely, that HPI was a fiduciary in respect of "such of USSC's interests as were represented by the market for its products in Australia" or, to adopt the phraseology used in argument in this court, in respect of USSC's local products goodwill.

Under the contract, the distributor was given the exclusive opportunity of exploiting and developing the local goodwill of USSC's products. There was an established local goodwill in respect of USSC's products before HPI was appointed as the exclusive Australian distributor. Upon its appointment, HPI circularized "numerous" hospitals advising that "we currently distribute the product for the manufacturer in the United States" and "will be the exclusive distributors nationwide in Australia". The contractual right to distribute and exploit that local goodwill was not, however, uncontrolled. It was subject to the terms of the contract including the express terms that the distributor would devote its best efforts to distributing USSC's products and to building up the market for those products in Australia to the common benefit of USSC and itself and that the distributor would not deal in Australia in any other products competing with those products. Plainly, the distributor was acting in breach of those express terms of the contract when, during the currency of the distributorship, it deferred fulfilment of orders for USSC's clinical products in anticipation of filling those orders with HPI's re-packaged or manufactured competing products and filled orders for USSC's clinical products with such competing products. It is clear from the evidence that, as McLelland J found, the distributor committed those breaches of the contract "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."

In these circumstances, I agree with the conclusion reached by McLelland J at first instance and Mason J in this court that USSC was entitled to an order that HPI account, as constructive trustees, for any profits it derived from the business of distributing within Australia its own re-packaged or manufactured products up until November 1980 when it ceased to distribute in this country. The reasoning which leads me to that conclusion diverges, however, from that accepted by McLelland J at first instance and by Mason J in this court in that I am not persuaded that a "fiduciary relationship" existed between USSC and HPI in respect of the local products goodwill. Provided that it did not act in breach of the terms of the contract, HPI was, as I see the matter, entitled to exploit that local goodwill for its own benefit not only as regards its profit from sales of USSC's products but also, for example, by taking advantage of the "flow on" advantage which it might derive in marketing any non-competing products to the existing customers for USSC's products. If it had not acted in breach of its contractual obligations, it would have subsequently been free to exploit the advantage of its previous association with USSC's products to build up the goodwill of its own. In my view, the constructive trust pursuant to which HPI is liable to account for the profits arising from the sale in Australia of its own re-packaged or manufactured competing products should properly be seen as imposed as equitable relief appropriate to the particular circumstances of the case rather than as arising from a breach of some fiduciary duty flowing from an identified fiduciary relationship. HPI's business of distributing those competing products in Australia was founded upon and incorporated the appropriation to itself, by a course of conduct which involved calculated breach of its contractual obligations to USSC, of the local goodwill for USSC's products. In all the circumstances, USSC was entitled to a declaration that HPI was liable to account as a constructive trustee for the profits of that Australian business in accordance with the principles under which a constructive trust may be imposed as the appropriate form of equitable relief in circumstances where a person could not in good conscience retain for himself a benefit, or the proceeds of a benefit, which he has appropriated to himself in breach of his contractual or other legal or equitable obligations to another. Since this particular aspect of the matter was not explored in argument and a majority of the court is of the view that there is no basis for any finding of constructive trust however, it is preferable that I defer until some subsequent occasion a more precise identification of the principles governing the imposition of a constructive trust in such circumstances.

Subject to what has been said above and to my rejection of any relevant implied term in the contract, I am in general agreement with Mason J's reasoning (and the reasoning of McLelland J at first instance) leading to the conclusion that the only relief by way of constructive trust to which USSC was entitled was in respect of HPI's liability to account for the profits which it made from distributing its competing products in Australia for the limited period up until November 1980. The consequence of that conclusion is that I agree with the orders proposed by Mason J which would effectively restore the orders made at first instance.

The relief to which USSC is entitled may well appear inadequate in the light of the calculated and fraudulent conduct of which it was the victim. That is, however, at least in part, the result of the manner in which USSC has, no doubt for good commercial or other reasons, framed its claims for relief in the present proceedings rather than any inability of the law to provide adequate remedies. In that regard, it is possibly relevant to note that the evidence indicates that the present proceedings should properly be seen as but one battle in wider hostilities being waged on a multi-national scale.