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: Higgins J)

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

Court:

Judges: Isaacs J

Higgins JGavan 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:
Higgins J

Our first duty seems to be to construe the agreement of 21st July 1910 with the agreement of variation of 18th November 1910. For this purpose one has to disregard the conversations and letters which preceded the agreement-the "preliminary communings"-and even to disregard the subsequent conversations and letters and the negotiations for amalgamation. The Court is bound to give effect to the document which the parties meant to be the final and complete declaration of their relations; and it is only when that document is ambiguous that we may allow the consideration of sound business results to affect our decision. Until in the application of the written words to external facts there is shown to be some ambiguity or difficulty of identification, the evidence of conversations, letters, etc, must be ignored for purposes of construction. This is, of course, trite law: Quoties in verbis nulla est ambiguitas ibi nulla expositio contra verba fienda est; and see Shore v Wilson, ^[F50] at p. 555, per Parke B.; Charrington & Co v Wooder. ^[F51] The problem is not to find what the parties meant, but what their agreement means. I preface my judgment with these rather obvious principles because the principal difficulty of the case seems to me to arise from the effort to reconcile the contents of Exhibit G (the engrossed, signed, final agreement) with the contents of Exhibit B (a letter written by the defendant's manager to the plaintiff Company with a view to the framing of an agreement). The completed agreement contains, as the result of further negotiations between the plaintiff's agent and the defendant's manager and the solicitors of the parties, considerably more than the letter contained.  

The two recitals have to be carefully studied, especially in connection with clause 1. They show an intention to sell four things-subjects which to some extent overlap: (1) the letters patent for five States-letters patent "for certain inventions and processes of manufacture of dried milk in the form of a powder"; (2) the right to use the said inventions and processes in the six States; (3) the right to sell the products of the manufacture in all parts of the world except New Zealand; (4) all the vendor's knowledge of the processes "secret and otherwise" of the "manufacture"-that is to say, the manufacture of dried milk in the form of a powder.  

Then, under clause 1, the vendor sells: (a) the letters patent, and all provisional protection of "the said inventions and processes" (the provisional protection probably refers to a possible application for Victoria); (b) "the exclusive right to use the same" in Australia (that is to say, the exclusive right to use all the inventions and processes referred to in the recitals, including any processes "secret and otherwise" referred to in the second recital); (c) the exclusive right to sell the said powder (the "product") in Australia.  

Inasmuch as the recitals show that the purchaser is to enjoy all the vendor's knowledge of any processes not described in the patent, there seems to be no ground for rejecting the natural meaning of "the said inventions and processes" as meaning all the processes, secret or not secret, referred to in the recitals. I read the words "secret and otherwise" as applying, in the recital, to the next antecedent noun-"processes"; but even if they apply to "information and knowledge" the effect is substantially the same. There is no reason for treating any processes used in the manufacture but not described in the patents as excluded from the sale. To include them was the express object of the last words in the second recital. For instance, if in working the invention the vendor had discovered some important condition of working not claimed in the patent, or had discovered that the addition of some lactose to the milk before evaporation gave the product-the powder-the quality of a valuable and marketable infants' or invalids' food, I am of opinion that the vendor grants to the purchaser (as against himself) the exclusive right to use that discovery in Australia. This result exactly fits the case of "Glaxo"-which is in fact a dried milk powder within the description in the letters patent, although dried milk powder with an exceptional characteristic. We are at liberty to examine the letters patent with specification referred to in the agreement; and we find there that the invention claimed comprises: (1) milk solids in light conservable form obtained by drying milk according to the high temperature process hereinbefore described; (2) dried products containing milk solids obtained by drying liquid mixtures of milk and other substances according to the process of high temperature drying hereinbefore described.  

There is not one iota in these claims that does not apply to "Glaxo." I concur with the learned primary Judge that the word "exclusive" implies an absence of competition on the part of the vendor (within Australia), and, in effect, a negative covenant against use (within Australia) on the vendor's part. It also implies exclusion of others so far as the vendor can exclude them. The result is that, in my opinion, the exclusive right to manufacture "Glaxo" in Australia, and to sell "Glaxo" in Australia, passed (inter alia) to the purchaser-that is to say, the sole right now belonged to the purchaser as between the vendor and the purchaser so far as Australia was concerned. In other words, the Nathan Company sold to the Bacchus Marsh Company-or meant to sell so far as it could-not only the patent rights for the manufacture of dried milk but all its knowledge as to the processes of manufacture-whether the processes were secret or not, and even if the product by means of some addition to the processes described in the patent was calculated to subserve some special purpose. The patents, the processes, the knowledge-everything, secret or not-were to go to the purchaser so far as Australia was concerned. It is quite probable that Nathan, when making the agreement Exhibit G, had no idea that something was included in the sale which would turn out to be extremely valuable; but just as one who sells land in ignorance that it contains a coal mine is bound by his contract, so is Nathan's bound-if the meaning of the agreement is as I have stated.  

The second clause strongly confirms this view that the "processes" to be sold were not confined to the processes in the specification. In this clause the vendor covenants to impart to the purchaser all its knowledge of the "said inventions and processes of manufacture of the powder known as dried milk whether secret or otherwise possessed by it," etc, "and all information ... relative thereto." The words "whether secret or otherwise" must be read as applying here to "processes," as in the recitals, unless the context forbid; and it does not forbid. The expression "secret processes" is perfectly appropriate. That which is the subject of assignment in clause 1 - the right to exclusive use of all the processes (inter alia)-is the subject of covenant in clause 2.  

The third clause is a covenant to supply the purchaser with an expert to instruct "in the whole of the said processes of manufacture." These words also must include the processes "secret and otherwise." Instruction is peculiarly appropriate for processes not claimed in the specification.  

The fourth clause obliges the vendor to supply the purchaser at cost with all such dried milk as should be required until the purchaser should be ready to manufacture it in Australia under the said processes. The filling of this gap before the purchaser can manufacture offers some explanation of the peculiar limitation of time in clause 12, referred to hereafter. Clause 5 is a covenant for title. Clause 6 prevents the vendor from being interested in the business of "reconstituting" the dried milk, and from knowingly supplying to others any of the powder for "reconstitution." Clause 7 has been much debated; but what it means seems to be quite clear. The vendor is not to manufacture or sell or in any way use or take advantage of the inventions, processes or products in Victoria or elsewhere in Australia, and is not to be interested in any business in Australia manufacturing, selling or in any way using, trading or dealing with the said inventions, processes or products. This clause seems to me to gather up in express form the negative consequences of the sale to the purchaser of all the processes, patented and unpatented, and of the exclusive right to sell the products in Australia; and, as in other cases of absolute sale, the vendor is to be excluded from the thing sold for all time. That this exclusion was deliberately intended to be permanent is confirmed by clause 8; in which the vendor covenants that it "will not hereafter acquire or exercise any rights which may prejudice the purchaser in the sale or manufacture of dried milk in any part of the world other than New Zealand." "Hereafter" must mean for all time.  

Clauses 9, 10 and 11 deal with the consideration-PD7,500, to be applied in taking up 7,500 shares (paid up to 7s. 6d. each) in the purchasing company. Clause 12 binds the purchaser on completion of the purchase to grant to the vendor a licence "during the remainder of the term of the said patents to import into and sell in Australia (but as infants' food only) the preparation known by the trade name of 'Glaxo.' " Taking clause 12 in conjunction with clause 4, it would appear that, as the vendor was to supply dried milk to the purchaser until the purchaser was ready to manufacture it, the vendor was to be allowed to sell in Australia to others than the purchaser any of the dried milk preparation known as "Glaxo," but as infants' food only. This licence was to be limited to the term of the patents. Such a "licence" would be unnecessary and unmeaning unless the right to use the process for making "Glaxo" and for selling the product was included in the assignment to the purchaser under clause 1. It would be absurd for the purchaser to give a "licence" to sell unless the purchaser had the exclusive right to sell-exclusive as against the vendor. A licence is given by one who has the right to one who has not the right. The fact that a licence had to be given by the purchaser for the sale of "Glaxo" is, to my mind, conclusive that as between the parties the term "dried milk" had not acquired any conventional meaning of "dried milk minus 'Glaxo.' " Then, under clause 13, the vendor was to try to get for the purchaser patent rights in Victoria.  

This agreement was varied by another of 18th November 1910, after it had been discovered that the patents for South Australia and Tasmania had lapsed as well as the patent for. Victoria. Alterations were made in clauses 6, 8, 9, 10, 11, not directly bearing on the issues in this case; but it is to be noticed that no change whatever was made in the clauses as to which there is most dispute-clauses 1, 7, 12. It is my opinion, therefore, that the Nathan Company is precluded by the first agreement from manufacturing "Glaxo" in Australia and (since the expiry of the patents and of the proposed licence) from importing into and selling the food known as "Glaxo" in Australia.  

As I have intimated already, I do not think that this is a case in which we should balance probabilities for the purpose of construction. But the plaintiff appeals to probabilities; and after forming an opinion as to the construction of the document, one may, perhaps, legitimately look back and consider whether the result shocks the intelligence. I do not think it does. At the time of the agreement "Glaxo" had never yet been sold in Australia. It had been sold in England for one or two years, but the trade was rapidly growing. If "Glaxo" rights were to be excluded, why did it not occur to anyone to expressly exclude them, either in the exchanges of the draft, or in the making of the alterations in the new agreement in November? Finally, the vendor-the Nathan Company-was to get paid-up shares in the purchasing Company-was to derive profit without the labour of management.  

But it is urged for the Nathan Company that clause 7 of the agreement is void for unreasonable restraint of trade. It is difficult to appreciate this argument if it is once established that the letters patent and the exclusive right (as against the Nathan Company) to use all the processes mentioned in the recital and to sell any dried milk in the form of a powder have been sold and assigned to the Bacchus Marsh Company. If A sell a horse to B, there would be no unreasonable restraint of trade in a covenant by A not to use the horse. Such an obligation is, indeed, implied in the sale. The same principle applies to the sale of a patent or of knowledge of a process. As Lord Herschell said in the Nordenfelt Case: ^[F52]

"A covenant entered into in connection with the sale of the goodwill of a business must be valid where the full benefit of the purchase cannot be otherwise secured to the purchaser;"

and the same principle must surely apply to the sale of processes, patented and unpatented. To adopt the homely phrase made use of by Lord Macnaghten, ^[F53] the vendor "may not sell the cow and sup the milk." Freedom of contract as to sale is as valuable to the public generally as freedom of an individual to sell a specific class of commodities. No case has been cited in support of the plaintiff's argument, and in my opinion the contention ought to be rejected.  

The Nathan Company claims, however, an injunction restraining the Bacchus Marsh Company from using the registered trade mark or name "Glaxo"; and it is entitled to the injunction unless the trade mark or name was assigned by the agreement. To effect an assignment there is no need for the express word "assign"; it is sufficient if the agreement show an intention to appropriate the trade mark to the purchasing Company. But to assign a patent, or an unpatented process, is not necessarily to assign a trade mark for the product of the process. The assignee may manufacture and sell under another name or mark. He has the right to use the device; but how does it follow that he must be entitled to use the name? We have been referred to s. 58 of the Trade Marks Act 1905: "A trade mark when registered may be assigned and transmitted only in connection with the goodwill of the business concerned in the particular goods or class of goods in respect of which it has been registered and shall be determinable with that goodwill." Now, the trade mark was registered in respect of "food products"; and there are food products other than dried milk powder: so that it is doubtful whether the trade mark can be assigned except in connection with a business concerned in food products generally. But even if the word "the" could be ignored before the word "particular," it by no means follows that the goodwill of the business in "Glaxo" has been assigned. The section is negative in effect-"may be assigned only in connection with the goodwill." There can be no assignment except in connection with the goodwill; but it does not follow that if the goodwill be assigned the trade mark is assigned. Possibly, the assignment of all right to manufacture and use the dried milk products in Australia may carry the goodwill of the Nathan Company as to those products; but I can find no indication of an intention to assign the trade mark. With doubt, I have come to the conclusion that the injunction should be granted. For obvious business purposes the agreement ought to have conferred on the purchaser a right to use the trade mark; but I know of no principle which would justify me in holding that there is an assignment of the mark by implication, or any permission to use the mark.  

Par. 11 of the statement of claim is as follows:

"Alternatively and if the true interpretation of the said documents is in accordance with the claim and assertion of the defendant the No. 2 Milk Company the plaintiff says that by mutual mistake of the plaintiff and the said No. 1 Milk Company the said documents do not express the true and real agreement between the plaintiff and the No. 1 Milk Company and that the true and real agreement between the plaintiff and the said No. 1 Milk Company was and is to the effect following:

(a)

That the provisions of clause 7 of the document dated 21st July 1910 only operated and took effect during the existence of the patents mentioned in the said documents;

(b)

that the right of the plaintiff to import into to manufacture and sell in Australia its infants' food under the trade mark or name 'Glaxo' was untouched and unaffected by any agreement between the plaintiff and the said No. 1 Milk Company."

This paragraph has been the main cause of the length of the proceedings here and in the Court below. No objection was taken to it in the defence, and under this paragraph a vast mass of evidence, letters and conversations has been admitted as to negotiations before the agreement and since the agreement. This evidence would have been irrelevant but for this paragraph; and yet no case has been produced which would justify the rectification of an agreement because of a misinterpretation of the agreement, even mutual. In effect, the plaintiff says:

"This written agreement means so-and-so, and, if it does not, I want it to be rectified so that it may have that meaning."

This seems to me to be a perversion of the equitable doctrine as to rectification of instruments. If some words have been put into the instrument which were not meant to be put in, or if some words have been left out of the instrument which were meant to be there, equity relieves; but, according to the cases, it does not relieve where the mistake is as to the legal effect of certain words that the instrument contains (Powell v Smith, ^[F54] at pp. 89-90).

"If A induces B to execute a lease in the belief that the lease will have an effect different from what it really has, B may have a remedy in this Court; but not a remedy by way of rectification"

Willesford v Watson; ^[F55] and see Johnson v Donaldson). ^[F56] The same principle seems to be accepted in America:

"If the writing be exactly what the parties intended, there can be no reformation"

(see Harvard Law Review, vol. XXIII., p. 610).

If this kind of pleading be permitted, there will be no finality in written instruments meant to be final; the rule against allowing the written words to be altered or qualified by the "uncertain testimony of slippery memory" will become obsolete; and whenever there is a dispute as to the effect of an instrument Courts will have to find first what it means, and then to say what, on the balance of evidence and probabilities, was the intention hidden in the recesses of the parties' minds. It should be clearly understood that the rights of parties under agreements are to be decided according to the expressions in the agreements, and not according to the words used in "preliminary communings," but that in exceptional cases, such as when it is clearly proved that a word or words have been wrongly inserted or omitted, that the agreement as written does not truly show what the parties intended to write, a Court of equity will not refuse relief.

It was not until the end of his argument that Mr. Starke, being asked to say what was the mistake to be rectified, pointed to clause 1, and said that "Glaxo" should be expressly excluded. There is not the slightest evidence that such an express exclusion was intended to be inserted. These considerations are, in my opinion, quite sufficient, in the present state of the law, to justify the learned primary Judge in dismissing the claim for rectification. But Cussen J. has also taken the strong ground that on the facts there never was any agreement, any consensus ad idem between the parties, or even their negotiators, except this written agreement of 21st July 1910, up to that date. Exhibit B (Purbrick's letter of 18th July 1910) has been much pressed on us, but though the solicitors were given this letter as a basis to work on, there were many communings and exchanges and alterations of the draft agreement before the agreement was signed by the companies. The solicitors have not been heard; and, above all, the directors of the Companies have not been heard. It is the directors of the Bacchus Marsh Company, and not the manager, who, under the articles, have the right to make agreements on behalf of the Company.

These directors have not been shown, to have assented finally to anything but the agreement of 21st July; they "generally approved" only of the draft agreement subject to any alterations; and in exercising their discretion on behalf of the Company, they would ordinarily confine their attention to the document put before them for signature. There is not the slightest evidence that they made any mistake in not excluding "Glaxo" from the sale. We have no right to force them to carry out an agreement which they might have refused to make. This is not a claim for rescission of the agreement on the ground of any misrepresentation on the part of Purbrick; it is a claim for rectification; and for rectification there has to be shown mutual mistake of the parties to the contract. To say that the Nathan Company, under the circumstances, could not well call the solicitors who acted for them in the drawing of the agreement does not relieve that Company of the onus of proving that the two agreeing parties-the two sets of directors-made one common mistake in what they signed.  

I desire, however, not to be understood as laying down any rule that no relief of any kind can be given where both parties sign an agreement under a mistake of law. We are dealing here with a claim, not to set aside the agreement, but to rectify it, and to enforce it as rectified.

It would follow from my opinion, that the Bacchus Marsh Company under its counterclaim is entitled to a declaration substantially as sought in claim 1 of the counterclaim, and to an injunction as sought in claim 2. Claim 3 is for a "declaration" that "Glaxo" is prepared according to the processes, etc, referred to in the agreement; but a "declaration" is confined by the Courts to questions of law. My finding of fact would be that "Glaxo" is so prepared-the fact is practically admitted by the plaintiff's abandonment of par. 8 of the statement of claim. Claims 4 and 5 should be granted, but they had better be combined with claims 1 and 2. Claim 6, as to the trade marks and name "Glaxo" should be refused, as well as claim 7 for the injunction. There is no ground for declaring that the trade marks have "determined," whatever may be meant.  

The plaintiff is entitled to a declaration substantially as claimed in its claim (f) and to an injunction as claimed in claim (g).