Bridgestone Australia Ltd v Industry Research & Development Board A32/2001 [2002] HCATrans 179 (19 April 2002)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A32 of 2001

B e t w e e n -

BRIDGESTONE AUSTRALIA LTD

Applicant

and

INDUSTRY RESEARCH & DEVELOPMENT BOARD

Respondent

Application for special leave to appeal

GAUDRON J

KIRBY J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 19 APRIL 2002, AT 11.00 AM

Copyright in the High Court of Australia

MR R.F. EDMONDS, SC: May it please the Court, I appear for the applicant, with my learned friend, MS E.A. COLLINS. (instructed by Piper Alderman)

MR N.J. WILLIAMS, QC: May it please the Court, I appear for the respondent. (instructed by the Australian Government Solicitor.

GAUDRON J: Yes, Mr Edmonds.

MR EDMONDS: Your Honours, this case concerns the proper construction of 39C of the Industry Research and Development Act. Section 39C forms part of a scheme of legislation designed to regulate the concessional deduction granted by section 73B of the Income Tax Assessment Act 1986 to eligible companies for expenditure on research and development activities. Specifically, if the Industry Research and Development Board is of the opinion that any of the results of particular research and development activities have been exploited, for example, otherwise than on normal commercial terms, section 39M of the Industry Research and Development Act provides that:

the Board may . . . give a certificate in writing to the Commissioner:

(c) stating that it is of that opinion -

and by section 73B(33) of the Tax Act the giving of such a certificate denies the eligible company a deduction under 73B.

Now, the terms of section 39C are relatively straightforward and your Honours will find them at page 10 of the book of documents that were handed up. It provides that:

The exploitation of a particular result of any activity shall be taken for the purposes of this Part to be an exploitation otherwise than on normal commercial terms if, in the opinion of the Board, any contract or transaction relating to that exploitation would not have been entered into, or contained terms that would not have been contained or would have been different, if the contract or transaction had been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power.

GAUDRON J: That is a hypothetical question, is it not?

MR EDMONDS: It is, your Honour. It is a hypothetical question, however, it is at the heart of the real issue in this case which we say warrants a grant of special leave. The Full Court's approach to the construction, namely, that the terms of the section invoke a hypothesis which is not concerned with the actual negotiation of a contract but with hypothetical persons, not actual ones, dealing with each other at arm's length and from positions of comparable bargaining power, that approach necessitates, in our submission, a comparison between the terms of the actual contract and the terms of some hypothetical model.

The approach which we say the court should have adopted and which was adopted by the Tribunal, at first instance, was to ascertain whether the parties did in fact deal with each other at arm's length and from positions of comparable bargaining power, thus obviating the need to make such a comparison if affirmative findings of fact with respect to those matters arose.

GAUDRON J: But by what authority? That was never the question. Here we had related companies, parent and subsidiary companies, right?

MR EDMONDS: Yes, your Honour.

GAUDRON J: Parent company in possession of the relevant technology, the parent company being the only company from which the subsidiary could obtain the technology, if needed. That does not look to me like comparable bargaining power, in any event, but would you not say 39C is in the Industry Research and Development Act precisely so that a hypothetical exercise can be engaged in when there are technology exchanges between related companies?

MR EDMONDS: Your Honour, we put it this way, and I will try to put it shortly as I can. We would say that the legislative purpose of 39C was not to penalise companies, whether they be related or not, where it is found that they have dealt with each other at arm's length and from positions of comparable bargaining power. What the legislative purpose of 39C is, is to make it more difficult for those companies who do not deal in that fashion.

GAUDRON J: No, no, it is not. I should have thought it was there precisely to set up a hypothetical but, nonetheless, objective test to be applied in the case of technology transfers between related companies. I say technology transfers using that in its broader sense.

KIRBY J: It is not a question of penalisation; it is a question of the pre-condition, is it not, to the application of the section.

GAUDRON J: I mean, it would not follow that you would be penalised by such a test, because a test has not yet been applied to you.

MR EDMONDS: Your Honour, the tribunal found, in this case, after an exhaustive examination of the negotiations between the parties, that Bridgestone Australia had dealt with its parent company in relation to the negotiation of the relevant agreement, the technical assistance and licence agreement. It found firstly as a fact that it had dealt with Bridgestone Japan at arm's length.

GAUDRON J: Well I do not see how it could have.

MR EDMONDS: It was a finding of fact, your Honour

GAUDRON J: Well I know it is a finding of fact, but what does "at arm's length" mean? It is not a technical term, is it? It is not a term of art, it is not a technical term, it is a colloquialism at best, and it surely must mean, dealt with each other as though neither had any interest in advantaging or disadvantaging the other.

MR EDMONDS: It would, with respect mean, and we say that the finding, which the tribunal made, that the parties, notwithstanding the relationship between them - and it is clear that there are a number of decisions, some of which are referred to in the judgments below, and I refer to what was said by his Honour Justice Hill in the case of Furse and what has been said by other justices of the Federal Court.

KIRBY J: They were referred to by Justice Lindgren, were they not?

MR EDMONDS: And were referred to by Justice Lindgren, your Honour. That notwithstanding parties are related they can, nevertheless, deal with each other at arm's length and the learned - - -

GAUDRON J: They can deal with each other as if they were at arm's length.

MR EDMONDS: With respect, your Honour, the finding was that they dealt with each other at arm's length.

GAUDRON J: Well, yes, I could understand the finding if it were that they had dealt with each other as if they were at arm's length, but then again that is probably just a question of the meaning of at arm's length, and it does not seem to me that that question arises.

MR EDMONDS: All I can say, your Honour, is that after an exhaustive examination of the primary fact, the learned senior member came to the view that they had dealt with each other at arm's length.

GAUDRON J: But the question is, whether it was ever relevant to conduct that exhaustive examination and I would have thought that once you accept it is a hypothetical question, then the facts were irrelevant.

MR EDMONDS: Your Honour, accepting that there were two findings of fact that the parties to this agreement dealt with each other at arm's length and from positions of comparable bargaining power, it would be strange indeed if the board could nevertheless come to an opinion that the agreement would not have been entered into or would have contained the terms that would have been different, in the circumstances of the criteria, postulated by the section. In other words, it would mean that notwithstanding findings that the parties had dealt with each other in terms of the section, the board could nevertheless be of the opinion that the criteria of the section were not satisfied. That would be the consequence. If the approach that was taken by the Full Court below was that you do not look to the conduct of the parties in asking that question. What you do is you have some hypothetical model contract to which you have regard.

KIRBY J: What was Justice O'Loughlin's approach?

MR EDMONDS: Justice O'Loughlin's approach - - -

KIRBY J: Did he simply say there was no point of law?

MR EDMONDS: There was two matters. The findings of fact in the tribunal, your Honour, were not attacked.

GAUDRON J: Well, they could not be attacked, could they?

MR EDMONDS: They could not be, no, your Honour.

GAUDRON J: No. But the question was whether it was ever relevant to make those findings of fact. There might be a question of law whether the factual relationships established could satisfy the expression "at arm's length" and from positions of "comparable bargaining power", that might be a question, but the question always was whether there was an error of law in what had been done by the tribunal.

MR EDMONDS: That was an issue below, your Honour, but the real issue on which we say warrants or is deserving of a grant of special leave is the approach of the Full Court that you ignore the dealing between the parties in reaching a conclusion about whether the hypothesis of the section is satisfied. It will effectively mean that on the remittal of this case, back to the tribunal, and in every other case where the board gives a certificate to the Commissioner under 39M of the Industry Research and Development Act that the applicant, in each of those cases, in this case and every other case, is faced with an impossible task of seeking to satisfy - - -

GAUDRON J: I should have thought not. But if you go along and elect to run a case on the facts other than upon what the section directs and these consequences come about, so be it. But I would have thought it was as clear as the nose on your face, that 39C was not in the least bit concerned with the facts for the very reason that it would be expected that many of these cases would be concerned with technology transfers between related companies who did not have comparable bargaining power. Say, for example, were it the fact that the parent company were of the view that the best thing for its balance sheet would be to liquidate the subsidiary, there would be no comparable bargaining power, no matter how they bargained, would there?

MR EDMONDS: Well, on the facts of this case, your Honour, that - - -

GAUDRON J: Exactly, on the facts of this case, but now I want to ask you a question. If it is within the power of the parent company to determine that its best interests are to rid itself of a competitor, albeit that it is a subsidiary, where is the comparable bargaining power? I mean, I think one of the problems in this case is that you asserted a factual basis which probably never could have been sustained, having regard to the meaning of the words, and you were forced into the hypothetical, as would many companies be, I should have thought.

MR EDMONDS: Your Honour, all I can say in response is that there is no such thing as a single hypothetical contract, which one can have regard to, in measuring whether the actual contract fits the template.

GAUDRON J: No, but you could have a look to see whether a term is harsh, unjust or unfair, to take the old language of section 88F of the New South Wales Industrial Arbitration Act and to infer from that, that if it does fit that description it would not have come about in a situation in which the parties had negotiated at arm's length and from comparable bargaining positions, could you not?

MR EDMONDS: Yes, your Honour, but - - -

GAUDRON J: And, in fact, does not the description, "harsh, unjust or unfair" - or others like "oppressive", "unconscionable" - do they not simply indicate that somebody has exploited his, her or its superior bargaining position, in a real sense, in a practical sense?

MR EDMONDS: They may, your Honour. I can see that there could be circumstances where one would draw that conclusion. The real difference between the tribunal and the Full Court's approach was that the tribunal, as I say, looked to the conduct of the parties, whereas the Full Court invoked this hypothesis. That it was legitimate, in our submission, for the tribunal to do what it does, is exemplified, in our submission, by reference to the passage from the explanatory memorandum, which appears in the judgment of his Honour Justice Lindgren, at page 107 of the application book. At about line 30 - - -

KIRBY J: Which paragraph?

MR EDMONDS: At page 107 of the application book, your Honour.

KIRBY J: I still could not hear it.

MR EDMONDS: Page 107. The paragraph was line 30, your Honour. It is in paragraph 67 of Justice Lindgren's judgment, about the middle of the page, where the explanatory memorandum states:

"Proposed section 39C defines the expression `exploitation otherwise than on normal commercial terms'. The expression applies to the situation where the terms of a contract or transaction are different from those that would have been included if the parties -

so it is looking to the parties to see what their course of dealing is. It is not looking to some hypothesis involving hypothetical persons negotiating some hypothetical model.

GAUDRON J: Mr Edmonds, you and I went to school at a time when they still taught grammar. What you take from the words, "would have been", followed by "if", followed by the pluperfect, "had been dealing" - it is a subjunctive pluperfect, is it not, as we used to call it?

MR EDMONDS: Yes, your Honour.

GAUDRON J: And that subjunctive which, par excellence, denotes the hypothetical.

MR EDMONDS: I do not take issue with your Honour on that. If the Court pleases, they are our submissions.

GAUDRON J: Thank you, Mr Edmonds. Yes, we need not call upon you, Mr Williams.

We are of the view that no error is to be discerned in the approach of the Full Federal Court to the question whether section 39C of the Industry Research and Development Act (Cth) directs an inquiry as to the hypothetical decision that would have obtained if a contract or a transaction in question had been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power.

Accordingly, special leave is refused, and it is refused with costs.

AT 11.19 AM THE MATTER WAS CONCLUDED