Hospital Products Ltd v United States Surgical Corporation

Australian Equity & Trusts

Hospital Products Ltd v United States Surgical Corporation
‘Portrait of Niccolò Machiavelli’ by Santi di Tito

In a case embroiling both arms-length and personal agreements, the unavoidable overlapping of contract and equity are held to extensive scrutiny in a suit between corporations and individuals across two jurisdictions.

After an American surgical staple manufacturer entrusted their foreign sales to a New York salesman, the man whose reputation historically rested upon a handshake eventually used his informal approach to business to establish an overseas corporation, under which he manufactured his own version of the patented staples and promoted them to an Australian market via the prolific brand name used by his new business partners.

Upon discovery his underhand scheme, the now respondents sued for damages in the New South Wales Supreme Court under § 2-306(2) of the Uniform Commercial Code, which read that:

“A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.”

While contesting that any sales accrued during the years accounted for were now held upon constructive trust for the respondents.

In the first instance, the court found that a fiduciary relationship had become evident when the respondents had entrusted their product in the appellant, therefore showing a unique vulnerability to his actions when working overseas, while under challenge before the Court of Appeal, the court supported the principle of a constructive trust and thus held accordingly.

Presented to the High Court of Australia, the question of trust relationships and contractual breach became central to the issue in hand, and so the court quickly noted that the contract rested upon verbal agreements and subsequent exchanges of correspondence, yet no legally binding agreements had been entered into; and so when examining the question of validity the court referred to Oscar Chess Ltd v Williams, in which the English Court of Appeal illustrated that a representation made during contractual negotiations could also be construed as a binding warranty, and so held that:

“The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice.”

However the court also noted that in order for any implication of a warranty to sustain judicial scrutiny it must be:

  1. Reasonable and equitable
  2. Necessary so as to show that the contract would be useless without it
  3. So obvious to the bargain that it needs no expression
  4. Capable of clear expression if called upon
  5. Wholly supportive of the contract

And so moving on to the concept of fiduciary obligations arising from the heart of the working relationship, the court noted that in Reading v The King the English Court of Appeal held how:

“[A]‘fiduciary relation’ exists (a) whenever the plaintiff entrusts to the defendant property, including intangible property as, for instance, confidential information, and relies on the defendant to deal with such property for the benefit of the plaintiff or for purposes authorized by him, and not otherwise….and (b) whenever the plaintiff entrusts to the defendant a job to be performed, for instance, the negotiation of a contract on his behalf or for his benefit, and relies on the defendant to procure for the plaintiff the best terms available….”

Yet in vol. 25 of the University of Toronto Law Journal (1975) it also reads that in commercial dealings:

“[A] mere sub-contractor is not a fiduciary. Although his work may be described loosely as work which is to be carried out in the interests of the head contractor, the sub-contractor cannot in any meaningful sense be said to exercise a power or discretion which places the head contractor in a position of vulnerability.”

Therefore with little to warrant the existence of either a trust/trustee relationship or the presence of fiduciary duty with which to underline the machiavellian behaviour of the appellant, the court remitted the case back to the New South Wales Supreme Court with a view to an assessment of damages in favour of the respondents.

Author: Neil Egan-Ronayne

Legal Consultant, Author and Foodie...

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