Bacchus Marsh Concentrated Milk Co Ltd (in liq) v Joseph Nathan & Co Ltd

26 CLR 410
1919 - 0512B - HCA

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(Judgment by: Isaacs J)

Between: Bacchus Marsh Concentrated Milk Co Ltd (in liq)
And: Joseph Nathan & Co Ltd

Court:

Judges:
Isaacs JHiggins J
Gavan Duffy J

Subject References:
Contract
Construction of
Trade mark
Assignment
Rectification
Evidence

Hearing date: 12 March 1919; 13 March 1919; 14 March 1919; 17 March 1919; 18 March 1919; 19 March 1919; 20 March 1919
Judgment date: 12 May 1919

MELBOURNE

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Judgment by:
Isaacs J

This case, which has been ably argued on both sides, presents several features of importance and difficulty. The subject of the litigation between the parties may be very shortly expressed. The respondent Company (which I shall call "Nathan's," for brevity) claims to be entitled to make or sell in Australia dry milk powder, and especially a particular sort of dry milk powder for infants' food, and sold under the trade name of "Glaxo," and also to be entitled exclusively to the registered trade mark "Glaxo." The appellants deny these claims, and set up in turn a claim to the exclusive right of the same registered trade mark. The matter turns on the effect of an agreement made between Nathan's and one of the appellant Companies in 1910. The second appellant Company is a reconstruction of the first, was promoted and created by the first; and, from the terms of its constitution, and of the transfer of the property of the first, and from the original personnel and interests of the corporators of the second, the relation of the two Companies is such that for the purposes of this case they are substantially identical, and no distinction can be made. I shall therefore treat them as one, and refer to the appellants indiscriminately as the "Bacchus Marsh Company."  

An agreement was arrived at in July 1910, and modified in November 1910. On 21st July 1910, and subsequently on 18th November 1910, formal documents were executed as embodying the agreement arrived at, including its modification. The rights of the parties depend on

(1)

the construction,

(2)

the rectification,

(3)

the validity, and

(4)

the effect on a trade mark,

of those original instruments.  

A considerable body of evidence was given on both sides as to the circumstances in which the bargain was made, and as to the terms of the negotiations leading up to the execution of the formal documents. Nathan's relies upon this evidence as assisting it both with regard to the construction of the documents as they stand and with regard to the issue of rectification if it fails on construction. It also relies upon that evidence, together with the formal instruments, as supporting its claim that clause 7 of the contract is invalid. It is extremely convenient to look at the evidence.  

1. Construction

Approaching the extrinsic evidence first with a view only to construing the documents, it is important to bear in mind how far it is legitimate to regard that evidence. The law is not doubtful. It is not legitimate to refer to such evidence either for the purpose of adding a term to the written agreement or of altering its ordinary legal construction, and therefore it is not legitimate to show that it was intended to use words bearing a different sense from that which the words used express when applied to the circumstances. But it is legitimate to adduce extrinsic evidence of the surrounding circumstances in order to prove that words susceptible of more than one meaning are applicable to one only of those meanings-that is, not to alter the contract but to identify its subject. Further, for the purpose of identifying the subject of the contract, prior negotiations are available just as any other circumstance would be.

But the prior negotiations cannot be used for the purpose of importing additional or different terms-that is, terms other than the words actually used express when the subject matter is fully identified. These propositions are enunciated in and enforced by cases of the highest authority, as Inglis v Buttery, ^[F1] at pp. 572, 577; Mercantile Bank of Sydney v Taylor, ^[F2] at p. 321; Bank of New Zealand v Simpson, ^[F3] at p. 188; Gordon-Cumming v Houldsworth, ^[F4] at pp. 541, 548, and Charrington & Co v Wooder. ^[F5] For the purpose of rectification, the position is quite different. The jurisdiction of equity to re-form instruments so as to make them accord with what the parties actually agreed to, or with what one party intended and the other party knew the first intended, is for the very purpose of overcoming in a proper case, by the ordinary rules of evidence, the obstacle presented, since equity construes contracts just as law does. And, further, for the purpose of determining whether or not the contract, or any particular provision in it, is invalid as being an unreasonable restraint upon trade, every material extrinsic fact may be proved (Mumford v Gething; ^[F6] North-Western Salt Co v Electrolytic Alkali Co). ^[F7]  

Now, the question is: Do the words "the said powder" in clause 1 of the agreement as it stands include what is termed for brevity "Glaxo" or not? These words are referable back to the expression "dried milk in the form of a powder," and ultimately depend on what "dried milk" means in this contract. "Dried milk" is not a legal phrase, nor had it in 1910 any fixed connotation; it was vague, and commercially would rather refer to the substance sold by the ton as "dried milk" than to the substance sold in small tins and labelled "Glaxo." It was susceptible of just such meaning as the parties mutually attached to it in their communings, or as one party to the knowledge of the other attached to it (Smith v Hughes, ^[F8] per Blackburn and Hannen JJ.).  

The facts material to construction are these:In 1910 Nathan's had considerable trade in Australia in ordinary dried milk. It was manufactured in New Zealand, exported to Australia, and there sold wholesale by the ton, for use by various manufacturers, and not sold retail to the public. Nathan's also manufactured in New Zealand a special preparation for invalids' and infants' food-I gather, principally infants' food. Milk is reinforced with lactose or sugar of milk to bring it into close approximation to human milk, and then the drying process applicable to ordinary milk is applied so as to produce the powder sold under the trade name of "Glaxo." It was never sold by the ton, but in tins of about two lbs. weight. It was and is essentially intended for retail trade, and as put on the market is and always was commercially distinct from ordinary dried milk. In 1910 Nathan's had no Australian trade in "Glaxo." The Bacchus Marsh Company, doing a considerable trade in condensed and concentrated milk, was necessarily perturbed by the prospect of having preservatives prohibited.

There was a manifest danger that dried milk, if reconstituted, that is, reconverted into milk, might supplant their milk. Apart from this danger of reconstitution, the Bacchus Marsh Company-as its manager, Purbrick, said during the negotiations-cared nothing for dried milk. Nathan's held, or was supposed to hold, patent rights for the dried milk throughout Australia. But the practical question was how long would reconstituted milk keep. The test at Hay's Station demonstrated that it would keep well. There had been much verbal negotiation before the test, but the test decided the matter, and there quickly followed the definite offer written by the Bacchus Marsh Company of 18th July 1910. Nathan is positive that throughout the whole verbal negotiations prior to the letter he was very distinct in insisting that, while willing to sell his Company's patent rights as to "dried milk," he always drew a distinction between "dried milk" and what he called "Glaxo," and that he stipulated that his Company should have the right to import into and to sell in Australia "Glaxo." Purbrick's testimony as to this may be best gathered from certain questions and answers. In answer to the learned presiding Judge, Purbrick says only that "he" (Nathan) "never said so to me as far as I can remember." He also says that when he and Nathan took the letter of 18th July to Mr. Butler he (Purbrick) or Butler suggested the restriction of clause 12 relating to "Glaxo" to infants' food, "so that it could not be sold as dried milk." The letter, it will be observed, refers to the sale of patent rights and supplementary information, to a total exclusion of imported "Glaxo"-there being no intention on the part of Nathan's to manufacture in Australia-and also to a restraint as to Nathan's entering into the reconstituting business. Contemporaneously, proposals were made with respect to New Zealand. But there the proposals took wider form and embraced "factories, business and patent rights in dried milk, excluding 'Glaxo.'"

It appears, from statements at the Bar, that there were separate factories for "Glaxo." So that-although these proposals fell through-two points are to be noted. First, "Glaxo" was excluded entirely, and, next, it was excluded not simply from the expression "dried milk" but from the subjects of sale, namely, "factories, business and patent rights in dried milk." If the New Zealand option had been given, there would manifestly have been a licence as to "Glaxo" during the term of the patents, and the specific factories would have been identified. The documents B, C, D and E were taken to Mr. Brett, whose firm of Blake & Riggall at that time was acting for Nathan's, and to Mr. Butler, whose firm of Madden & Butler then acted for the Bacchus Marsh Company. There is nothing to indicate any change of intention as to subject matter as between the parties except as to the PD100 fee. Purbrick's account of his directors' meeting shows this. The directors simply approved of the solicitor's draft subject to any alterations approved by the solicitors.  

Up to the execution of the contract, then, it is established that the parties in referring to "dried milk," which means the "powder," meant the ordinary form of dried milk sold as such in the market; and definitely excluded from its specification, as far as their bargain was concerned, the special article up to that time sold elsewhere as "Glaxo."  

I wish to state with a little more precision what I gather the parties mutually understood by "Glaxo" as outside the connotation of "dried milk powder." It must be remembered that whatever we now know as to its composition, and whatever the appellant Company knows of its composition since Nathan's sent orders for its manufacture, the elements of "Glaxo" were in 1910 unknown to Purbrick and his Company. They knew, of course, that milk was its basis, and that it was dried under the patent process. But they did not know its manufacturing differentia. They knew it was put on the market in New Zealand and elsewhere, and sold and regarded as another "line," as it is termed in the evidence, and they knew how it was put up and sold, and that its get-up was inseparable from its commercial identity. This is the important feature to remember in limiting the exclusion of "Glaxo" from "dried milk." As business men, that is the discrimen, including always the existence of some actual or assumed difference in manufacture. "Glaxo," therefore, for the purposes of exclusion presented itself to the minds of the parties as an infants' food (suitable also for invalids) produced in the form of dried milk from a special preparation of milk which was treated by a process known only to Nathan's, the product being put up and sold, as the exhibits show, only in tins of about one or two pounds weight, as infants' or invalids' food and under the trade name of "Glaxo." That is all that the parties assented to regard as standing commercially outside the expression "dried milk" or "dried milk powder" in their negotiations, and consequently all that they found necessary to exclude from the operation of the patents during the assigned term of their existence, a matter again to be referred to. That being their conventional meaning of the terms, the contract must be taken to refer to those when "dried milk" and "Glaxo" are spoken of. That such was in fact the mental state of both parties is shown by the circumstance that when the Bacchus Marsh Company first began to manufacture infants' food, stimulated, no doubt, by Nathan's success in "Glaxo," that Company called it "Lactogen." It never demanded the "Glaxo" formula, indeed on 7th December 1911, in writing to Nathan's, it referred to "your Glaxo formula," and as late as February 1916 and April 1916 correspondence was conducted on the basis of "Glaxo" still belonging wholly to Nathan's. It is true the expression "dried milk" occurs in the patent specifications, but Purbrick did not read them till long after the contract was executed, and apparently he attached no importance to the terminology of the specifications. The parties knew and understood what they were bargaining about.  

Reliance was placed by the appellants on clause 12. They argued that if the terminology was limited as suggested by the respondent, there would either be no necessity for clause 12 or else there would have been no limitation of time of the licence to the term of the patents. But the answer is that clause 12 is necessary because the patents themselves were sold, and, assuming "Glaxo" excluded, clause 12 was necessary for that purpose in view of the assignment of the patents, but as; apart from patents, the rights to manufacture and sell ordinary "dried milk powder," which itself excluded "Glaxo," was all that was sold, there was no necessity to say anything more. One practical consideration-and in case of ambiguity practical considerations have weight-is that it would be extraordinary if Nathan's were contemplating, or if Purbrick thought that Nathan's was contemplating, commencing a "Glaxo" business, and not only creating but pushing it for seven years, and then handing it over to the Bacchus Marsh Company. It would also be extraordinary if during the patent period the Bacchus Marsh Company could have also put on the market and sold "Glaxo" in competition with Nathan's. But that is the necessary result if the appellants are right. The parties never at any time before the expiry of the patents said or did anything to show that they thought these extraordinary results were in the contemplation of either of them.  

On the question of construction, therefore, I read the words "the said powder" in clause 1 as meaning "ordinary dried milk powder," and not as including the special preparation of infants' food put up and sold under the trade name of "Glaxo."  

2. Rectification

If, however, for any reason the words of the contract as they stand are too stubborn, even in the circumstances, to bear the meaning I have stated, the next question is: Should the document be so re-formed as to bring it into conformity with the intention of the parties to exclude "Glaxo" as an infants' food?  

The question on this issue is, of course, what was the intention of the parties at the moment of executing the documents. Usually one would expect to have the solicitors called to explain how the various clauses took their actual form. It is true that Mr. Brett has not been called by Nathan's. But it must be remembered that Brett's firm of Blake & Riggall are now acting for the Bacchus Marsh Company. It is hardly likely, therefore, that Nathan's could call into consultation, or interview for precognition, the opposing solicitor. Besides, this view is accentuated by an incident at the trial. Nathan was cross-examined, indirectly it is true, but apparently none the less effectively, by the aid of a bill of costs-apparently the bill of costs rendered to him by the solicitors now opposing him. The learned presiding Judge happened to observe it, and properly felt bound to call attention to the fact. I therefore think it only natural for the respondent to omit calling Brett. On the other hand, the appellants were under no such difficulty with regard to their own solicitor, Butler, and yet did not call him. Nor did they call any of their directors except Purbrick, the managing director. The inference I draw is that they are bound by whatever Purbrick did and advised. He must be taken to have told them the mutual intention so far as he knew it, and according to Nathan's evidence and Purbrick's later conduct Purbrick was not in any kind of doubt about that. Indeed, they expressly left alterations of the draft in the hands of the solicitors.  

The standard of proof required by a Court of equity in the case of rectification is stated in two cases. In Mortimer v Shortall, ^[F9] at p. 371 Lord Sugden L.C. says:"Now is the evidence conclusive? I must be certain that there has been a mistake, and that the mistake is such as ought to be corrected. I do not mean to say, that the evidence must be all one way, or that there must not be any conflict: there must, however, be such a preponderance, as will satisfy my mind." The other case is Bentley v Mackay, ^[F10] at p. 287, where Turner L.J. says: "Very strong and clear proof is required." The evidence of Nathan and Purbrick's written documents and conduct prior to the expiry of the patents (see Watcham v Attorney-General) ^[F11] afford all the proof required, if we believe both parties honest. His explanations of his letters in the witness-box are far from satisfactory, and show in any case that his statements are to be accepted cautiously.

Borrowing Lord Sugden's words, the evidence is such as to "satisfy my mind." I have no reasonable doubt. And I may add, the evidence is sufficiently definite to enable the Court to make the proper correction.  

3. Invalidity

I have now to deal with the third objection which the respondent raises to the appellants' claim, namely, invalidity. The part of the agreement relied on by the appellants as shutting out the respondent since May 1917, when the patents expired, is clause 7. They treat clause 1 as transferring property which clause 7 is designed to protect. It is said by respondent to be invalid. I should observe that the evidence shows that Nathan's did not raise this objection except to defend itself against the contention that, whatever was the actual intention respecting "Glaxo," it has lost it on strict construction, and that rectification is not obtainable. To the objection of invalidity it is answered: "If the scope of clause 7 is no wider than the thing sold, it is not invalid; and the thing sold being the exclusive right to use the inventions and processes, secret and otherwise, and to sell the powder, the scope of the clause is no wider than is necessary for its protection."  

If a secret process were the subject of the sale, no doubt Leather Cloth Co v Lorsont, ^[F12] approved in Herbert Morris Ltd v Saxelby, ^[F13] at p. 701, would cover it, at all events to a very great extent. I have serious doubts whether the extensive restriction as to "use" of the "products," which literally includes the use of the products that have been manufactured and sold by the Bacchus Marsh Company, and the restriction as to being concerned in any business using such products, are not too wide in any aspect of the case. The conversion of ordinary milk into "dry milk powder" is a distinct business; the use of the powder in any other manufacturing business, such as confectionery, is another business, and if I thought the clause indivisible or that this case turned on those restrictions I should need to further consider them. But the clause is divisible (see Baker v Hedgecock, ^[F14] at p. 522), and the "manufacture" and "sale" of the "products" of the inventions and processes would stand if there were really, as argued, a secret process sold which required to be protected by a clause so wide. I think Lorsont's Case ^[F15] would govern the matter; see also Fowle v Park. ^[F16]  

It becomes very important, for the purposes of determining both the validity of clause 7 and the right to the trade mark "Glaxo," to ascertain what really was the subject of sale and purchase. First of all, the document of 21st July 1910, when carefully read, refers to Nathan's "business" in one place only, namely, at Wellington, New Zealand. There is no suggestion that its Australian "business" is the subject of sale, or was ever considered as the subject of sale. The appellants did not go so far as to contend that they claimed Nathan's business in the sense of the actual going concern, but they did claim that the business in an abstract sense of selling milk powder did pass by the contract. Still, I have to consider this question for myself as a matter of law. The document states by recital what property the vendor is possessed of, namely, " certain letters patent " for " certain inventions and processes of manufacture of dried milk in the form of a powder in all the States ... of Australia (except the State of Victoria)." I italicize the words indicating the subjects of property, properly so understood.

Then comes a recital of what the parties wish to make the subject of a sale and purchase, namely,

(1)

the said inventions, and the right

(a)

to use the same and the said processes as well in Victoria as in other States, and

(b)

to sell the products of the same in all parts of the world except New Zealand.

I stop there to observe that down to that point no invention or process is in question except the inventions and processes mentioned in the patents, and the "products" to be sold are the products of those inventions and processes only. Then comes the second item desired to be sold and bought, introduced by the words "and also," namely,

(2)

"the said letters patent and all the information and knowledge of the vendor and its officers of the processes secret and otherwise of such manufacture."

The word "and" introducing the "information and knowledge" clause is equivalent to "with." It is not "and also," which precede the letters patent and seem intended to indicate the final main subject of the intended sale. The concluding words "of such manufacture" relate back to the patent processes.  

One thing is very evident: the words in the final clause do not indicate the intended sale of any independent "secret process"; they refer only to "information and knowledge," and, whether "secret" is attached to "information and knowledge" or to "processes," the governing words are "information and knowledge" and not "processes." But the better construction, to my mind, is not to separate the "information and knowledge" from letters patent so as to introduce some separate and independent secret process which no one apparently ever heard of, but to regard the former as supplementary to the latter, the fruit of experience, and the word "secret" as being inserted by way of caution to cover any possible secret way of performing the invented process. The information and knowledge is, on the fair construction of the document, for the purpose of helping out the best way of working the patent, even though the information and knowledge may be such as have been acquired by the vendor and its employees themselves in the course of experience and not from any other person. The Bacchus Marsh Company was buying along with the patents the benefits of the whole experience of Nathan's in operating them.  

This view is confirmed not only by the frame of the operative part of the agreement, but by the evidence. The evidence discloses no secret process whatever in existence. The "Glaxo" private formula was not a "secret process" within the meaning of the agreement, however the clause is construed, because the formula was in the preparation of the substance to be dried and not in the drying process . And in carrying out the agreement the "information" clause was worked by "details" of the manufacture being obtained at the New Zealand factory. In case of ambiguity mutual conduct showing how the parties construed the agreement may be considered Forbes v Watt, ^[F17] at p. 216 and Watcham's Case). ^[F18]  

Then we come to the operative clauses:

(Clause 1) The vendor sells

(a)

the letters patent and all provisional protection of the said inventions and processes ;

(b)

the exclusive right to use the same ;

(c)

(the exclusive right) to sell the said powder in all parts of Australia.

It is argued that (a) and (b) include the "secret processes," and so attract the decision in Lorsont's Case. ^[F19] For determining the validity of the restrictive clause No. 7, it would be sufficient answer that no secret process is shown to have existed , and that the evidence as to the information regarding details already referred to shows that no secret process in fact existed. For purposes of construction, in my opinion no "secret process" is included in clause 1. It is certainly not in "letters patent"; it is not in "the said inventions and processes," because that phrase in clause 1 is intended to carry out by operative words the recited intention to sell certain inventions and processes, and they are the said inventions and processes; and, further, it is not to be expected that the vendor sells the "provisional protection" of a secret process, since provisional protection assumes publication. The "provisional protection" clause has reference to the intended resuscitation of the Victorian patent. And, lastly, because, not only is there an omission from clause 1 of all reference to "information" etc, but clause 2 specifically deals with the clause in the recital as to "information and knowledge" by way of covenant.

So that the "exclusive right"-which I agree means the right to exclude the vendor-applies only to the patented inventions and processes , including, of course, Victoria, where they had been patented, and to the "powder" produced according to those inventions and processes. Further, when reading the whole document, as we must do in order to make sure of the meaning of each part of it, we find that the phrase "said inventions and processes" used elsewhere, as in clauses 5, 7, 8, 11, 12, is clearly limited to the patent inventions and processes. I conclude that clause 1 of the agreement does not comprehend any secret process as the intended subject of sale. And on the facts there was no secret process, and no information or knowledge of any secret process. There was expert knowledge as to the patented inventions and processes, the result of practice, and the information as to that was the subject of sale, but only as supplementary to the "letters patent" and the inventions and processes contained therein. What was sold by clause 1 - apart from the patents and the potential statutory rights of provisional protection of the inventions and processes already patented, and any possible improvements which might be thought of-was " the exclusive right ," apart from patents, of using the same inventions and processes, and of selling the "powder" produced by them, whatever "powder" includes.  

But what is meant by the "exclusive right" to do these things? As Nathan said in his evidence, he could not sell what he had not got. The reply was not, "But you have a secret process"; it was, "As between your Company and the Bacchus Marsh Company, were they not to have the exclusive right?"-A.: "Yes." We get the true meaning of "exclusive right" in such a case from its meaning as applied to patents, except that, being contractual here, it applies only between the parties. In Steers v Rogers, ^[F20] at p. 235 Lord Herschell L.C. says:"What is the right which a patentee has or patentees have? It has been spoken of as though a patent were a chattel, or analogous to a chattel. The truth is that letters patent do not give the patentee any right to use the invention -they do not confer upon him a right to manufacture according to his invention. That is a right which he would have equally effectually if there were no letters patent at all; only in that case all the world would equally have the right. What the letters patent confer is the right to exclude others from manufacturing in a particular way, and using a particular invention."  

What has been done here has been an attempt by contract to create in Victoria, where it was known there was no patent-and subsequently also in South Australia and Tasmania, where it was discovered the patents had also lapsed-a right as between the parties, as near as contract can make it, of the same nature as existed where patents were of force, and also, if the clause is unlimited in point of time, to extend that same kind of right to the whole of Australia after the patents had expired. But, applying Lord Herschell's words to this case, the substantial right of the Bacchus Marsh Company to trade where there was no patent, or after patents had ceased, existed independently of the contract, and could not be created by the contract.  

All that the "exclusive right" stipulated for could give was a personal right to exclude Nathan's from further carrying on its business of selling dried milk in Australia . It is not, and does not purport to be, a transfer of a business, with goodwill; where that is intended, the common form is to say so expressly. Nor is the ordinary form of selling a secret process followed where covenants of non-disclosure past and future are inserted. Nor is it a right to represent the Bacchus Marsh Company as the successor of Nathan's in the particular business then carried on by Nathan's. Goodwill is property, but, as such, is inseparable from a particular "business" in the sense of a particular going concern. It is an asset of that business, and enhances its value. (See Commissioners of Inland Revenue v Muller & Co 's Margarine Ltd.) ^[F21] In Hill v Fearis ^[F22] Warrington J. says: "The goodwill of a business is the advantage, whatever it may be, which a person gets by continuing to carry on and being entitled to represent to the outside world that he is carrying on a business which has been carried on for some time previously." The identity of the concern is essential to the conception of goodwill. You cannot attach the goodwill of an old business to a new business. "Destroy the business," says Lord Macnaghten in Muller's Case, ^[F23] "and the goodwill perishes with it."  

In the present case, that the agreement so stringently drawn from the Bacchus Marsh Company's side should entirely omit all mention of "business" and "goodwill," if they were intended to pass, is beyond comprehension. At all events, the words do not include them. The Bacchus Marsh Company could not represent itself in any way as successor of Nathan's, that the "maison" was the same. (See Thynne v Shove, ^[F24] at p. 580.) The retirement of Nathan's did not transfer its business or goodwill. In Gray v Smith, ^[F25] at p. 221 Cotton L.J. says: "A contract to retire from the firm has not the same effect as a contract expressly bargaining for the assignment of the goodwill."  

The appellants' minute of 20th July has importance from its language as indicating the view taken by that Company of the matter. It says: "Resolved that this Company enter into the manufacture and sale of dried milk," and refers to the agreement as one for the acquirement of "certain rights." Nathan's was not engaged in the "manufacture" of dried milk in Australia.  

It is clear to me that, whatever business the Bacchus Marsh Company intended to do in dried milk, it intended to do as part of its own independent business , and not in any way as the successor to the old business of Nathan's. Further, Purbrick in his evidence states that there was no intention whatever in 1910 of entering into the infants' food trade, so that "Glaxo" was not then considered of any importance to it, and it did not in fact manufacture infants' food until 1914. Nathan's may have thought the right to "Eclipse" trade mark passed, on the ground, and as the appellants' counsel have argued, that the trade mark indicated the method of manufacture, but unless the goodwill passed, the right to the trade mark did not, and unless "the business"-the definite particular commercial undertaking or enterprise, which Nathan's was in fact carrying on-was sold and passed, the goodwill did not pass (Ullmann & Co v Cesar Leuba, ^[F26] at p. 446). There is no trace of any evidence of any intention to pass the "business," or to include it or the goodwill in the subjects of sale. What the parties negotiated about for Australia were "rights"; for New Zealand, it was rights and business and plant. The reservation of "Glaxo" even during the pendency of the patent term-and throughout Australia-that is, for seven years, shows that the "business" and "goodwill" did not pass. If, then, all that was substantially contracted for, independently of the patents and the exclusive rights they afforded, was the exclusive right to trade, what is the legal nature of that subject? It seems to me that it is just an instance of what Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co, ^[F27] at p. 565, and Lord Parker in Saxelby's Case, ^[F28] call "restraints of trade" (where) "there is nothing more."  

Clause 7, which is invoked as a restraint that is only reasonable to protect clause 1, is, at best, after the patents expired, simply an enlarged version of clause 1. It is the same thing written at length. Now, then, can clause 7 be relied on as a reasonably restrictive provision necessary to protect something already granted? To answer that question the law as to the validity of contracts of this class in restraint of trade as developed up to the present time has to be considered.  

When stated in the form of propositions and applied to the facts of this case as above narrated, the result follows almost automatically. The propositions are:

(1)

Freedom of trade cannot, without sufficient legal justification, be restricted by agreement simply on the principle of freedom of contract (Trego v Hunt, ^[F29] at p. 24; Saxelby's Case). ^[F30]

(2)

No person has an abstract right to be protected against competition per se in his trade or business (Trego v Hunt; ^[F31] Saxelby's Case). ^[F32]

(3)

If there is something which he is entitled to be protected against, then a reasonable protection for that purpose contracted for will be upheld as far as the personal interests of the parties themselves are concerned, and subject to public interests (Saxelby's Case). ^[F33]

(4)

Reasonableness is a question of law to be determined by the Court on the special circumstances of the case (Saxelby's Case). ^[F34]

(5)

The onus of proving the special circumstances justifying the restriction as reasonable between the parties lies on the person alleging it to be so; the onus of proving injury to the public is on the person alleging it (Salt Company's Case; ^[F35] Saxelby's Case). ^[F36]

(6)

When a man sells anything he may preclude himself from lessening by competition the value of what he sells, provided the restriction is not unreasonable, having regard to the subject matter of the contract (Lorsont's Case, ^[F37] approved in Saxelby's Case). ^[F38]

(7)

Therefore, when the goodwill of a business is sold, a reasonable covenant on the part of the vendor against competition is valid in order to protect what is bought and sold (Saxelby's Case). ^[F39]

(8)

But the business the goodwill of which is to be protected is a specific business, transferred by the covenantor to the covenantee (Saxelby's Case). ^[F40]

(9)

Similarly, if what are properly called "trade secrets" are sold, they are regarded as property, and may be similarly protected (Lorsont's Case; ^[F41] Saxelby's Case). ^[F42]

(10)

But general skill and knowledge which a person of ability necessarily acquires in his business or calling is not a trade secret, and is not knowledge which can be regarded as property (Saxelby's Case). ^[F43]  

The rules as I have stated them (and the same may be said of the rules specially applicable to cases of employer and employee) are, as I understand the law, only particular rules of a larger principle. That principle is that true freedom of trade is not to be restricted, but that a provision which, taken by itself, would amount to such restriction may, when considered in conjunction with and as qualified by the surrounding circumstances, prove to be not really a restriction but merely part of a larger transaction which, regarded as a whole, does not restrict, but may even assist, freedom of trade. To employ a simile, expenditure is per se a loss, but expenditure which secures a greater benefit is not.  

Applying the unquestionable rules I have specifically formulated to the agreement and the circumstances of the case, I think it clear that the promise of Nathan's in clause 1 to give up its business in Australia and to exclude itself from business here-assuming the exclusion to extend beyond the patent period-is not valid, and, not being a sale or transfer of property, could not support the attempted protection of clause 7. As to any secret process, the onus of showing that there is one and, if there is, what is its nature and how far it requires the all-embracing protection of even the first part of clause 7, has not been satisfied (see also Ropeways Ltd v Hoyle, ^[F44] at p. 288). So far as the matter rests on inference, I infer that there was no secret process, or none requiring the protection given. That protection, in my opinion, is not only not shown to be reasonable, but is on the evidence unreasonable. Further, I think that clause 2, for the reason given, is similarly incapable of justifying clause 7. If clause 2 gives any support at all to such a clause as clause 7, the latter would certainly be too wide for any legitimate protection of clause 2.  

4. Trade Mark "Glaxo"

There remains the question as to the trade mark "Glaxo." In A.G. Spalding & Bros. v A.W. Gamage Ltd, ^[F45] at pp. 284-285 Lord Parker emphasized the necessity of a trade mark being distinctive. That is conceded by the appellants, but they say the trade mark "Glaxo" is distinctive only of the "manufacture," and not of the particular manufacturer. The answer to that has been often given, and it is necessary to cite only the latest case which is of really controlling authority. In Bowden Wire Ltd v Bowden Brake Co ^[F46] the same proposition was advanced, and held by the House of Lords to be wrong (see particularly the judgment of Lord Shaw).  

The Bacchus Marsh Company certainly has no right to use the trade mark "Glaxo," and would not have such right even if it had been expressly assigned to it (s. 58 of the Trade Mark Act 1905-1912 and the Bowden Wire Case) ^[F47]  

As to the appellants' claim that at any rate Nathan's has abandoned the mark by abandoning the business in which it was used. Section 58 of the Act, already referred to, says (inter alia) that a trade mark when registered shall be determinable with the goodwill of the business concerned in the goods in respect of which the mark is registered. But the business of Nathan's in the infants' food, to which alone "Glaxo" was applied, was never abandoned. Abandonment is a question of intention (In re Hart's Registered Trade Mark). ^[F48] Nathan's admittedly continued it until the expiry of the patents, and it has claimed to continue that trade ever since. The action is practically based on that claim. Further, as to abandonment, and apart from contractual obligation, so far as the claim of the Bacchus Marsh Company extends to the use by it of the mark, s. 51 of the Act, so long as the registration stands, presents a formidable obstacle.  

Summarizing my conclusions, I am of opinion that the appeal fails, and that the respondent succeeds on its notice in lieu of cross-appeal. I think that the respondent is entitled to a declaration that it is now, since the expiry of the patents, entitled to import into and sell in Australia all dried milk generically so called, and, even if not entitled to all dried milk, it is entitled to import and sell the particular kind sold under the trade name "Glaxo." I think that it is also entitled to a declaration of the invalidity of clause 7 of the agreement. And lastly, if my construction of the agreement is too wide, I think that it is entitled to a rectification of the agreement so as to exclude "Glaxo" from the words "said powder" in clause 1.  

I am of opinion that, as a matter of fact, the preparation known as "Glaxo" and referred to in the said agreements is prepared according to the patented invention and processes so far as relate to the drying of the milk. The formal declaration as to that is not thought to be necessary.  

Judicially those are my conclusions. I think, however, I should add something further. I entertain no doubt that, until its right to "Glaxo" was denied, Nathan's thought it was legally bound by clause 7 as to ordinary dried milk, and would not have questioned its validity except to defend itself from what it considered an injustice. On the other hand, I entertain no doubt that the Bacchus Marsh Company thought Nathan's entitled to continue to sell "Glaxo," and would not have raised a claim to it had it not relied on what it thought the unexpectedly strict form of the contract in its favour. I think from the standpoint of sound business ethics and apart from legal intricacies and technicalities an effort might yet well be made to settle matters as the men of business thought they stood.