Distilling An Agreement

by FPA Patent Attorneys
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Neobev Pty Ltd v Bacchus Distillery Pty Ltd (Administrators Appointed) (No 3) [2014] FCA 4

Nothing is so good as it seems beforehand — George Eliot

Sometimes, despite the best intentions, a business venture will fail. In such circumstances, agreements relating to the ownership of business property will be duly scrutinised, and perhaps, challenged in court.

This recent decision of the Federal Court emphasises the importance of enforceable business agreements, particularly those agreements relating to the commercialisation of an invention.

In an ideal world, business partners would define boundaries and create formal agreements before undertaking any business venture. However, in the real world, this may seldom happen, or may not seem as important (or exciting) as developing a business plan for realising the potential of an inventive idea. Moreover, in some circumstances, deliberating a formal agreement can be seen as a hindrance or a distraction to the creative process, and therefore, is often not a priority. Most commonly, business partners will operate their venture according to informal agreements derived through negotiation. However, such informal agreements, whilst often expedient and practicable, may not be legally enforceable.

The present Federal Court decision details a dispute regarding, amongst other things, the ownership of a patented invention (AU 2006201593) directed to a process for developing an improved clean wine spirit. Mr Max Scott had substantially developed the clean wine spirit process whilst employed by Mr Damien Hajdinjak at Bacchus Distillery Pty. Ltd. The facts of this case are comprehensive and are worthwhile viewing in detail (see the hyperlink at the end of this article). The facts show that matters of particular significance need not appear so at the time.

Scott and Hajdinjak were amicable business partners. They commercialised the clean wine spirit invention according to a range of agreements established over a number of years. These agreements were challenged when Bacchus was placed into voluntary administration in 2013. The administrators of Bacchus proposed to sell the relevant patent in light of their obligations to Bacchus’ creditors. Therefore, a determination of the ownership share of the patent was sought before the Federal Court.

Ownership

During the patent application process, Scott and Hajdinjak spent some time negotiating the ownership share of the relevant patent. However, they never formalised any agreement. For example, Scott and Hajdinjak considered the following proposals:

  • Ownership 60% to Bacchus and 40% to Scott;
  • Ownership 50% to Bacchus and 50% to Scott; or
  • Ownership to Bacchus outright and the profits from products manufactured by the patented process split 60% to Bacchus and 40% to Scott.

Ultimately, Scott and Hajdinjak verbally agreed that Bacchus and Scott would jointly own the patent, however, the patent application would be filed only in the name of Bacchus Distillery Pty. Ltd.

Royalties

Scott and Hajdinjak also discussed a royalty agreement. Scott attempted to draft a formal royalty agreement, albeit he was somewhat unsophisticated in legal matters. The royalty agreement was subsequently signed by Hajdinjak on behalf of Bacchus. The royalty agreement stipulated, amongst other things, that Bacchus would continue to honour the royalty agreement should it change its name, or sell to another company.

Decision

The Court found that the informal verbal ownership agreement gave rise to an express trust, whereby Bacchus held ownership of the relevant patent on trust for itself and Scott as co-owners in equity. The Court further held that the abovementioned provision of the supposedly formal royalty agreement was void for being vague and uncertain.

Although Scott and Hajdinjak had relative success in commercialising the clean wine spirit invention, they did not foresee the consequences of their relaxed approach to business agreements. Moreover, when Scott and Hajdinjak did attempt to formalise an agreement, the relevant provision of that agreement was found to be vague, and therefore, unenforceable.

In hindsight, it is straightforward to suggest that Scott and Hajdinjak should have turned their minds to the potential consequences of their informal business approach. Perhaps they did not foresee or expect that Bacchus would decline, and as such, did not plan accordingly. In any case, neither Scott nor Hajdinjak benefited from having to resolve this dispute in the Federal Court. It is always true that the cost of preparing a formal agreement will be less than the cost of a Federal Court proceeding!

Tips for businesses

  • Follow-up business negotiations with formal agreements;
  • Have formal agreements prepared by a professional; or
  • Seek the advice of a professional regarding the enforceability of any business agreement that you have prepared.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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