(d) An order varying the consultancy agreement to provide that AHI and Mr McGrath pay to CAA and PHL a sum to compensate for the loss suffered by them as a result of the breaches of the consultancy agreement by AHI.
158 Certain orders were sought by CAA and PHL in relation to the option agreement but in light of the undertaking by CAA and PHL that AHI's shareholdings would remain unaffected by the termination of the consultancy agreement, the application for these orders would now seem to be redundant.
159 The jurisdiction of the Commission in Court Session in these matters is not questioned by any of the parties; it was agreed that jurisdiction exists and clearly, on the facts and the law, that must be the case.
160 AHI and Mr McGrath contended that the agreements and deed of covenant (or arrangement within the meaning of s 106 of the Industrial Relations Act 1996) were unfair and, in a tightly argued case, set about attempting to show how this was so. The manner in which CAA and PHL terminated the consultancy agreement and the close analysis questioning the validity of each of the grounds used by CAA and PHL as supporting termination, were pivotal features of the case put on behalf of AHI and Mr McGrath.
161 The case pressed on behalf of CAA and PHL, in effect, invited me to take a global view of the facts in determining whether Mr McGrath and AHI had conducted themselves unfairly. Important features of Mr Hatcher's case were what he regarded as Mr McGrath's almost contemptuous treatment of the body of doctors, regarding them as little more than rubber stamps; Mr McGrath's attitude that CAA was his personal fiefdom and that he was accountable to no one; his reckless and irresponsible approach to expenditure; his failure to properly disclose information and his activities to the Board of CAA and its major shareholder. This conduct, Mr Hatcher submitted, was unfair against CAA and PHL and was more than sufficient justification for terminating the consultancy agreement between AHI and CAA.
162 A contract may be an unfair contract within the meaning of s 106 of the Industrial Relations Act 1996 either because of what it provides or fails to provide or because of surrounding circumstances and/or from the manner of performance or operation of the contract: Barry v Incitec Ltd (1991) 45 IR 143 at 146; Incitec Ltd v Industrial Court (NSW) (1992) 45 IR 155 at 157 (Gleeson CJ, Kirby P and Priestley JA); Walker v Industrial Court of New South Wales (1994) 53 IR 121 at 148; Port Macquarie Golf Club Ltd v Stead (1996) 64 IR 53 at 59; Beahan v Bush Boake Allen Australia Ltd (1999) 93 IR 1 at 32; Reich v Client Server Professionals of Australia Pty Ltd (Administrator Appointed) (2000) 99 IR 69 at 83 per Wright J, President, Walton J, Vice President, Hungerford J.
163 These authorities confirm that the approach I am to take in these matters, in determining whether there was unfairness, is to consider the operation of the contract - which necessarily means looking at the conduct of the parties, how the terms of the contract operated at the time of termination and the terms of the contract itself. In doing so, it is convenient to start by examining the evidence in relation to each of the matters which CAA and PHL alleged constituted unfairness on the part of Mr McGrath. In weighing up the evidence I am assisted by the longstanding observation of Sheldon J in Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 at 374 that unfairness of a contract or arrangement is to be determined according to "the common sense approach characteristic of the ordinary juryman … It is a plain matter of morals not law".
The Doctors and Mr McGrath
164 In its further amended summons for relief, CAA claimed that Mr McGrath committed CAA to consult with the doctors in its subsidiary companies prior to embarking on substantial expenditure or important decisions but that, far from consulting, Mr McGrath refused to inform the doctors of decisions affecting them and their interest in CAA. As a consequence, it was claimed that CAA suffered loss and damage. It was claimed that the failure to consult breached cll 7.1, 7.2 and 13 of the consultancy agreement.
165 There was, as I have already noted, extensive material before me regarding the dissatisfaction of the doctors with Mr McGrath. Their dissatisfaction fell into three categories: 1) Mr McGrath's failure to consult with them about the business; 2) Mr McGrath's management style which the doctors regarded as too autocratic and his treatment of them as mere rubber stamps; 3) the doctors' increasing concern and anxiety that, under Mr McGrath's leadership, CAA was getting into serious financial difficulties, the business was suffering as a consequence and their reputations were being damaged.
166 Mr McGrath denied the doctors' complaints about his conduct towards them. As I noted earlier, it was part of his case that despite the fact that the doctors had sold their majority interests to CAA, they still wanted a say in the management of the business, a say which Mr McGrath was not prepared to give them beyond what the doctors' minority interests permitted; this was a source of frustration for the doctors who could not come to terms with the fact they no longer had ownership and control of their practices.
167 I have noted the manner in which Mr McGrath in his written correspondence with the doctors in his letters of 25 November 1999 and 8 February 2000, carefully and with precision, addresses each of their complaints and seeks to show why they are wrong and he is right. Mr McGrath is an articulate and highly intelligent man; he has considerable skills and experience in the business of healthcare and he is an accountant by profession. Nevertheless, I am unable to accept there were no grounds for the doctors' complaints against him. The weight and quality of the evidence from the doctors cannot be dismissed on the basis that they simply did not like Mr McGrath and were "out to get him", or that they could not come to terms with their minority role in the running of the business. To come to that conclusion I would have to accept there was a massive conspiracy by the doctors and other players against Mr McGrath and I simply do not consider that to have been the case. Moreover, there was far too much denial on Mr McGrath's part in relation to specific evidence by the various doctors and other witnesses, of words spoken or actions taken so as to lessen the credibility of parts of Mr McGrath's evidence.
168 I consider there was substance in Dr Gale's evidence that Rayscan management meetings chaired by Mr McGrath were held in the style of briefing sessions and the doctors were not provided with an opportunity to make real input into decisions. Further, if it did not suit his purposes Mr McGrath ignored sound advice given in good faith from doctors - the Canterbury acquisition is a good example of this. The decision to set up a practice at Dubbo was taken before any proper consultation with the Rayscan doctors; Mr McGrath had made up his mind before the management committee meeting on 22 March 1999 and he was deaf to any concerns expressed by the doctors about being able to employ a radiologist at Dubbo.
169 I consider that the doctors had good grounds to be concerned about the financial circumstances of CAA, especially from October onwards and that they were not being properly advised or consulted about expenditure. Clearly, the provision of budgets and monthly management accounts to the doctors were not sufficient to allay their concerns in the face of suppliers' complaints about not being paid and rent not being paid. The actions of the Rayscan doctors in February 2000 in seeking independent advice about the current financial position of the group underlined the genuine concern they held.
170 The role of the doctors, while in a minority in terms of the control of the business was, nevertheless, an important one. In fact, it was vital to the success of CAA. And although their interest in the business was in the minority it was still of the order of 40 per cent. Mr McGrath's attitude towards them, described on one occasion as patronising and as being treated as mere rubber stamps, left them feeling alienated and hostile. As the managing director and chief executive of CAA Mr McGrath should have recognised and acknowledged the importance of the role the doctors played in the business and treated them accordingly, especially in respect of the level and quality of his consultation with them.
171 I acknowledge that during 1999 Mr McGrath was extraordinarily busy, not only in developing and expanding the new business of CAA but also in his involvement in preparing for the public float of the business. This needs to be taken into account in assessing Mr McGrath's culpability in failing to properly consult with the doctors. The doctors themselves are not entirely free of blame either when it comes to assessing their relationship with Mr McGrath. It does seem that, from time to time, cooperation with Mr McGrath was less than ideal and that information from him was not always adequately disseminated to all the doctors by those responsible for doing so. Nevertheless, in weighing up the competing evidence, I find the weight of the blame falls on Mr McGrath.
172 Was the conduct by Mr McGrath towards the doctors grounds for summarily terminating the consultancy agreement pursuant to cl 14.2(5)? There are two important considerations here: The first is whether the punishment fitted the crime. The consequences for Mr McGrath of summary termination of the consultancy agreement, putting aside for the moment the concessions subsequently made by CAA and PHL in relation to shareholdings and restraint of trade, were quite devastating. Under the consultancy agreement he would have received no notice or payment in lieu, he would have been restrained from engaging in competition with CAA until 1 July 2004, all of AHI's termination shares would have been acquired by PHL under cl 3.3 of the option agreement and there was the prospect of CAA redeeming the convertible shares held by AHI in CAA. Secondly, it was never put to Mr McGrath, either by CAA's Board or the major shareholder until after a decision had been made to terminate the consultancy agreement, that his conduct towards the doctors was unacceptable. Furthermore, no opportunity was given to Mr McGrath to take steps to improve his relations with the doctors.
173 Mr McGuinness, a Board member of CAA and a representative of PHL, knew of the doctors' dissatisfaction with Mr McGrath by November 1999 at the latest, yet he chose to do nothing about it, including discussing it with Mr McGrath or calling a Board meeting to air the issue. Mr Bruck became aware of the doctors' concerns in late November but other than speak to Mr McGuinness about it, he also chose a course of non-action. Messrs Beckwith and Johnson were made aware by Mr McGuinness in his memorandum of 3 December 1999 that the doctors had lost confidence in Mr McGrath and this was subsequently reinforced to Mr Beckwith by the doctors in their correspondence and in face to face meetings with Mr Beckwith. But neither Mr Johnson nor Mr Beckwith took any action to have Mr McGrath modify his conduct towards the doctors, let alone provide him with an opportunity to explain himself and offer a defence to his conduct.
174 It may have been the case that had Mr McGrath been given the opportunity to mend his ways over a period of six to 12 months, that he did not take advantage of the opportunity. In those circumstances, there may have existed cause to terminate the agreement. But the state of relations between Mr McGrath and the doctors as at 29 February 2000 did not justify the application of cl 14.2(5) of the consultancy agreement and the consequences that flowed from it.
The Dubbo Issue
175 In early 1999 Mr McGrath conceived and proceeded to implement, the setting up of the Dubbo practice without first consulting with the Board of CAA or the major shareholder in CAA and without input from the Rayscan doctors. There was some disagreement about the extent of the liability that Mr McGrath created for CAA in respect of Dubbo but it was either about $5.5 million or $8 million, depending upon whether one includes the cost of an MRI machine relocated from Campbelltown and the associated cost of cabling.
176 There was no conclusive evidence that, at the time he commenced to implement his plans to set up a practice at Dubbo, Mr McGrath was aware of a requirement to obtain Board approval or the consent of the major shareholder before committing CAA to such a level of expenditure. And, indeed, Mr McGrath denied there was any such requirement. I must say, however, I find it odd that, at the very least, a person in Mr McGrath's position would not inform the Board of his company of his intentions to commit the Company to a very significant liability and/or discuss it with the main financial backer of the business. Of course, Mr McGrath maintained that he did inform relevant persons through the Rayscan management committee and the May 1999 management budget, but it must be observed that at the Rayscan management committee meeting on 22 March, Dubbo was effectively presented by Mr McGrath as a fait accompli. This is consistent with Dr Gale's evidence that these management committee meetings were little more than briefing sessions. Further, the process for setting up Dubbo was well in train by the time the May 1999 management budget was distributed.
177 CAA submitted that expenditure of the kind associated with setting up the Dubbo practice had to be approved and the process for this was through the submission of budgets reflecting the proposed expenditure. Mr McGrath submitted that is precisely what he did in the May 1999 management budget and subsequent updates of that budget. He also pointed to the budget prepared in relation to the prospectus and evidence was adduced as to who had access to this information. One of the persons who did have access was Mr McGuinness. There was some disagreement about when Mr McGuinness had at his disposal information that may have alerted him to CAA's liability in respect of Dubbo, but it is my view it was about late August. However, it seems to me that it was not readily apparent from the May management budget, including the site by site material, that Mr McGrath had committed CAA to a liability in respect of Dubbo of $8 million. In this respect I am prepared to accept Mr Beckwith's evidence. It may have been the case that an accountant, on close examination and after making relevant inquiries, would have discovered the full extent of the liability. Mr McGuinness was an accountant but I am not convinced it was his role to pursue a line by line inquiry into the accounts in the nature of an audit. Why Mr McGrath or Mr Boulos did not simply make it clear in a note to the accounts that a significant liability in respect of Dubbo had been created of $5.5 million or $8 million - whichever is the appropriate figure - is something that has escaped satisfactory explanation.
178 Mr McGuinness said in his evidence that he first became aware of the $8 million figure in respect of Dubbo during the finalisation of the prospectus, in preparation for the public float in early October 1999 when he received a copy of the "penultimate final draft of the prospectus". The prospectus was lodged with ASIC on 11 October 1999 but an error was discovered and a revised version was lodged on 13 October 1999. I consider it is safe to assume that Mr McGuinness was aware of the $8 million figure in respect of Dubbo before 12 October, when the consultancy agreement between AHI and CAA was executed.
179 Even before this, however, Mr McGuinness said he formed the view (in early September 1999) that the Dubbo acquisition constituted unauthorised conduct on the part of Mr McGrath. This view seems to have been formed about the time Mr McGuinness realised that Dubbo was forecast to lose substantial money in its first year. After he realised this, Mr McGuinness spoke with Mr Johnson and as a consequence Mr McGrath was requested to produce a business plan in respect of Dubbo. This was done and Mr McGuinness received it, he said, about a week or ten days prior to the Board meeting on 3 November 1999.
180 Dubbo was the subject of discussion at the CAA Board meeting on 3 November 1999. While there was a difference of view about what the Board decided in respect of Dubbo, it is apparent that the Board felt there was little that could be done to retrieve the situation in light of the commitments made by Mr McGrath and in fact the official opening of Dubbo went ahead as planned. Despite the Board having every opportunity, it did not admonish Mr McGrath for not having obtained Board approval or warn him about the consequences of doing so again. Mr Beckwith was critical of Mr McGrath but he was not a member of CAA's Board and the criticism was not made in the context of the Board meeting. Mr Beckwith had no authority, per se, to dismiss Mr McGrath.
181 I have mentioned Mr McGuinness' role in relation to Dubbo. Mr Hatcher pressed the view that it was not Mr McGuinness' role to be constantly looking over the shoulder of Mr McGrath or monitoring McGrath's management of CAA and, therefore, he had no responsibility to intervene in Mr McGrath's management of CAA. I agree with this to a certain extent and, as I have said, I do not consider it was Mr McGuinness' role to analyse the monthly accounts line by line. I can understand, therefore, that he would not have picked up from the May management budget the full extent of CAA's liability in respect of Dubbo and, similarly, would not have done so from the prospectus budget which he had access to by late August 1999. On the other hand, however, it was not Mr McGuinness' role to sit mute in the face of what ultimately he alleged on behalf of CAA was serious misconduct on the part of Mr McGrath. Having formed the view in September 1999 that Mr McGrath had exceeded his authority in relation to Dubbo, Mr McGuinness had a duty to protect PHL's investments and a duty as a director of CAA to act to protect CAA's interests in the face of what he perceived to be misconduct by its managing director.
182 Mr McGuinness was alert to the prospect of a significant financial commitment in respect of Dubbo by late August to mid September and formed a view that Mr McGrath had exceeded his authority in making this commitment. He requested a business plan from Mr McGrath that appears to have been constituted by the Dubbo Feasibility Study that Mr McGuinness received a week or so prior to the Board meeting on 3 November 1999. Mr McGuinness knew about the $8 million figure in respect of Dubbo before the consultancy agreement was executed on 12 October 1999. Despite this, he took no action at or before the Board meeting against Mr McGrath and his conduct in relation to Dubbo. But in the 'please explain' letter from CAA to AHI signed by Mr McGuinness on 15 February 2000 he alleged that AHI had breached the consultancy agreement by committing CAA to leasing liabilities at Dubbo for amounts in excess of $5 million.
183 In his subsequent letter on 29 February 2000 terminating the consultancy agreement, and after having given "careful consideration" to Mr McGrath's letter of 22 February, Mr McGuinness did not refer to Dubbo as a reason for terminating the consultancy agreement. A reasonable inference to be drawn from this is that CAA accepted at the time it terminated the agreement that it could not sustain the position that AHI had breached the agreement in relation to Dubbo. I seems to me that Mr West was correct in submitting that having relied on Dubbo as a ground for terminating the agreement on 15 February 2000 and then having abandoned it on 29 February 2000, CAA cannot now rely on it as a ground for summary termination of the agreement.
184 In any event, I do not think it can be said that AHI (or Mr McGrath) did breach the consultancy agreement in relation to Dubbo. CAA claimed in its further amended summons that Mr McGrath's failure to obtain CAA Board approval in relation to the Dubbo practice was a breach of clauses 7.1, 7.2 and 13 of the consultancy agreement. Clause 7.1 of the agreement dealt with AHI's obligations in providing services to CAA. The obligations included the performance of duties vested in or assigned to AHI by the CAA Board and using best endeavours to promote the interests and welfare of CAA. Clause 7.2 was quoted earlier in this judgment and provided, subject to certain exceptions, that AHI was not to enter into any contract or agreement on behalf of CAA without the prior approval of the Board. Clause 13 referred to the requirement for AHI to act in good faith and, amongst other responsibilities, to furnish a full and correct explanation of all transactions to CAA and to disclose to CAA all information or knowledge which AHI possessed in relation to the affairs, business and activities of CAA.
185 The evidence shows that the consultancy agreement was executed by Mr McGrath on 12 October 1999 and backdated to 1 July 1999. The evidence about when Mr McGrath would have first seen the obligations referred to in clauses 7.1, 7.2 and 13 was not conclusive. Mr McGrath insisted he did not see a draft agreement until 1 October 1999. Messrs Watkin and McGuinness said that Mr McGrath was provided with a draft in September. In any event, the financial commitments made by Mr McGrath on behalf of CAA in respect of Dubbo were made well before September 1999 and I do not see how the consultancy agreement could create obligations concerning the authority of Mr McGrath in respect of events that had already passed. Moreover, Mr McGuinness knew about the Dubbo liabilities at the time the consultancy agreement was executed and, indeed, had by then formed a view that Mr McGrath had exceeded his authority in respect of Dubbo. Mr McGuinness took no action against Mr McGrath and neither did the CAA Board prior to or at its meeting on 3 November 1999.
186 In all the circumstances, despite my opinion that Mr McGrath acted in a manner that might be considered less than proper for a managing director in failing to provide, in a timely manner, full and frank disclosure of his activities in relation to Dubbo, I am unable to find that in the context of the consultancy agreement, he acted without the authority of the CAA Board. It follows, in my view, that the Dubbo issue did not constitute a ground for terminating the consultancy agreement under cl 14.2(5) of that agreement.
The Hazan Issue
187 CAA claimed in its further amended summons that the contract to employ Dr Hazan, dated 7 October 1999, as a radiologist at the Dubbo clinic with a remote rural site allowance of $300,000 per annum, was a breach of the consultancy agreement because it was made without Board approval. Reliance was placed on clauses 7.1, 7.2 and 13 of the consultancy agreement. The Hazan issue was also one of the grounds expressed in CAA's letter to AHI on 29 February 2000 for terminating the agreement.
188 The allowance of $300,000 payable to Dr Hazan was well in excess of what was generally paid to other doctors within Rayscan. The reason it was paid to Dr Hazan was because of the difficulty of attracting a radiologist to a remote location such as Dubbo - a problem Mr McGrath was adequately warned about but failed to heed. By August 1999, CAA were becoming somewhat desperate to attract a radiologist to Dubbo because the practice was to open on 25 October 1999.
189 It would appear that the reason why CAA relied on the Hazan issue, as opposed to the Dubbo issue, to terminate the consultancy agreement in the letter of 29 February 2000, was that the contract between Dr Hazan and CAA, which provided for the allowance, was executed on 7 October 1999 - reasonably proximate to when McGrath executed his consultancy agreement on 12 October 1999. As I understand CAA's position, in executing the Hazan contract Mr McGrath would have been aware of his obligations under clauses 7.1, 7.2 and 13 of the consultancy agreement because he had a copy of the draft of that agreement at the latest, by 1 October 1999. Despite being aware of these obligations on him Mr McGrath did not fulfil them in respect of the contract he had entered into with Dr Hazan on behalf of CAA.
190 Given Mr McGrath's apparent view that it was unnecessary for him to first seek Board approval before embarking on an expenditure of some millions of dollars in respect of the Dubbo practice, it was unlikely that he regarded the expenditure of an extra $300,000, to be paid to the Dubbo doctor as a bonus, as warranting prior Board approval. And, indeed, he did not seek it at the time he negotiated the arrangement with Dr Hazan in August 1999. Of course, Mr McGrath's obligation under the consultancy agreement to obtain Board approval in respect of the allowance payable to Dr Hazan was not in existence when he negotiated the arrangement. The question is whether Mr McGrath should have sought Board approval prior to executing the contract with Dr Hazan on 7 October 1999 knowing his forthcoming obligation to do so under the consultancy agreement?
191 There are three things to be said about this: Firstly, at the time the agreement was executed with Dr Hazan the provisions of the consultancy agreement did not apply and given that the grand opening for Dubbo was scheduled for 16 October there would have been some urgency in finalising Dr Hazan's contract of employment. Secondly, the deal with Dr Hazan had been done; execution was a formality. It was unlikely that even if Mr McGrath had sought Board approval before execution that the Board would have disapproved, given the imminent opening of Dubbo and the prospect of being sued by Dr Hazan. Thirdly, unlike the leasing liabilities in respect of Dubbo, the doctor's bonus and doctor's drawings at Dubbo are readily apparent from the May 1999 management budget and the prospectus budget. A glance at the Dubbo sheet in these budget papers shows what was proposed. Mr McGuinness had access to the May management budget from about July and to the prospectus budget from late August. It was reasonable for Mr McGrath to assume that Mr McGuinness knew of the proposed allowance for Dr Hazan and given that Mr McGuinness had made no complaint about it up to the time the contract with Dr Hazan was executed, it was reasonable for him to assume the allowance was not an issue. Indeed, Mr McGuinness was a member of the due diligence committee that approved the prospectus budget. If Mr McGuinness did not know about the proposed allowance he should have, because it was evident from the relevant budget papers of which Mr McGuinness had copies.
192 Mr McGuinness said in his evidence he did not become aware of the allowance payable to Dr Hazan until after he saw the Dubbo feasibility study just prior to the 3 November Board meeting. It was open to Mr McGuinness to raise the issue of the allowance at the Board meeting in the context of the failure of Mr McGrath to obtain prior Board approval. He did not do so.
193 The Hazan issue did not constitute a ground for terminating the consultancy agreement under s 14.2(5) of that agreement.
The Ruut Issue
194 CAA claimed in the further amended summons that the contract to employ Dr Ruut as the radiologist at the Canterbury practice dated 6 October 1999 was made without the prior approval of the CAA Board and was in breach of the consultancy agreement (clauses 7.1, 7.2 and 13). This claim was also one of the two grounds referred to in CAA's letter to AHI on 29 February 2000, terminating the consultancy agreement. In the letter of 29 February, however, the breach referred to included the agreement to purchase the Canterbury practice, whereas in the summons the claim was confined to the employment contract with Dr Ruut.
195 The agreement to assign the Canterbury lease to CAA and the terms of Dr Ruut's employment were negotiated by Mr McGrath on 6 July 1999. A term sheet relating to the purchase was signed by Mr McGrath and Dr Ruut on 23 July 1999. Once again, Mr McGrath embarked on the purchase of Canterbury and the employment of Dr Ruut without first seeking Board approval and in the absence of any discussion with a Board member or the major shareholder. Mr McGrath was advised by Dr Gale not to proceed with the purchase for reasons which I consider were quite sound. Nevertheless, Mr McGrath went ahead with the purchase. Mr McGrath maintained there was no specific requirement for him to first seek Board approval for a purchase such as Canterbury, or for entering into an employment agreement such as that with Dr Ruut. Be that as it may, as at July 1999, the purchase of Canterbury and the employment agreement with Dr Ruut were additional examples of Mr McGrath's lack of regard for paying his Board or the major shareholder the common courtesy of informing them, beforehand, of his intentions. His failure to do so underlined his generally poor attitude to consultation with stakeholders in the business and in that limited sense Mr McGrath contributed to the situation that ultimately befell him.
196 The question is, however, whether Mr McGrath's actions in relation to Canterbury and Dr Ruut were of such a nature as to justify terminating the consultancy agreement under cl 14.2(5). Mr McGrath stated in his evidence that he sent a copy of the term sheet, signed by him and Dr Ruut, to Mr McGuinness as well as to Mr Watkin. Mr McGrath's evidence was that at a meeting in September Mr Watkin handed to him execution copies of the Canterbury purchase agreement and Dr Ruut's employment contract. These were executed on 6 October 1999 and refer to CAA's obligation in respect of the two payments of $25,000.
197 Mr McGuinness said he did not recall receiving the term sheet and that it was unlikely he would have received it and not read it. Whether or not Mr McGuinness received a copy of the term sheet, it was clear from the evidence that he was aware of the Canterbury purchase from about August onwards, although the evidence suggested he was not aware at this time, of the detail of the two $25,000 payments to Dr Ruut negotiated by Mr McGrath as part of the employment agreement. It was clear from the evidence that there were reservations about the advisability of proceeding with the purchase of Canterbury, based on the concerns expressed by Dr Gale. Mr McGuinness shared these concerns but the advice from Mr Watkin was that any attempt to avoid the purchase might endanger the prospects of floating CAA if Dr Ruut sued for breach of promise and so nothing was done, arising out of that meeting, to stop the purchase going ahead.
198 Mr McGuinness said that after becoming aware of the terms of the employment contract with Dr Ruut, he had a conversation in early December 1999 with Mr McGrath and asked why he had agreed to the two payments of $25,000 when the business was virtually bankrupt and Dr Ruut was in no position to demand such payments.
199 Both the purchase agreement and the employment contract were negotiated in July 1999 and executed on 6 October 1999. Mr McGuinness was well aware of the purchase proposal prior to Mr McGrath executing the consultancy agreement on 12 October but, it seems, not the two payments of $25,000 in the employment agreement until late November or early December. This appears to be the reason why CAA's complaint in its summons was limited to the employment agreement and not both that agreement and the purchase agreement. This was despite the fact that, if it could be said prior Board approval had not been obtained in respect of the employment agreement, it had also not been obtained in respect of the purchase agreement.
200 In any event, the agreement to assign the Canterbury lease to CAA and the employment agreement with Dr Ruut were made in July. The execution of those agreements was a formality. Accordingly, the obligation on Mr McGrath to obtain prior Board approval was not in existence either at the time the agreements were negotiated or, for that matter, at the time of execution. However, Mr McGrath may be taken to have been aware, from drafts of the consultancy agreement received before 6 October, of his impending obligations under clauses 7.1, 7.2 and 13. As I understand it, CAA relied on this fact to submit that Mr McGrath should have sought Board approval and should have disclosed to CAA the details of the employment agreement before executing the agreements on 6 October.
201 In this respect, I think it was reasonable for Mr McGrath to assume that Mr McGuinness as a director of the CAA Board, was aware of the purchase agreement and the employment agreement in respect of Canterbury. Mr McGrath was of the belief that he had sent a copy of the term sheet to Mr McGuinness in July; Mr McGuinness acknowledged that Mr McGrath was of this belief as a consequence of the discussion he had with Mr McGrath about Canterbury in December. There was no attempt on Mr McGrath's part to hide the arrangement with Dr Ruut. If that was the case, Mr Watkin, presumably, would not have been given a copy of the term sheet to enable his firm to draft formal agreements. Further, Mr McGuinness participated in the due diligence committee meetings where Canterbury was discussed, including whether CAA should proceed with the purchase, although there is no direct evidence that the two $25,000 payments were the subject of specific consideration at those meetings.
202 Believing that Mr McGuinness was fully aware of the purchase agreement in respect of Canterbury and knowing that cancellation of the agreement had already been considered and rejected, Mr McGrath had no reason to think that prior to executing the purchase agreement on 6 October 1999 there was such a level of concern within CAA that he should obtain Board approval before executing the agreement. In my view the same goes for the employment agreement with Dr Ruut. In these circumstances, I consider that any summary termination of the consultancy agreement on the grounds that Mr McGrath did not seek prior approval of the CAA Board in accordance with cl 7.2 of the consultancy agreement, and did not disclose the details of Dr Ruut's employment agreement to CAA in accordance with cl 13 of the consultancy agreement, was harsh and unwarranted.
The Moodliar Issue
203 CAA claimed in its further amended summons that in negotiating an agreement on 6 September 1999 with Mr Siva Moodliar, which increased potential bonus payments to Mr Moodliar by up to approximately $50,000 without the prior approval of the CAA Board, Mr McGrath breached the terms of clauses 7.1, 7.2 and 13 of the consultancy agreement.
204 The Moodliar issue was not one of the grounds referred to in the letter of 29 February terminating the consultancy agreement between AHI and CAA but it was referred to in the letter of 15 February.
205 The complaint by CAA was that while CAA, through Mr McGuinness, had accepted the fact that Mr Moodliar was to be paid a bonus according to the term sheet given to Mr Moodliar by Mr McGrath in June 1999, the letter signed by Mr Moodliar and Mr McGrath on 6 September materially changed the term sheet. The term sheet provided for an annual bonus calculated as one per cent of gross revenue of all new business identified to accrue from the Campsie practice and any approved new locations opened and initiated by Mr Moodliar subject to at least $1,000,000 gross receipts being generated. The letter of 6 September provided that Mr Moodliar would receive one per cent of gross receipts for Campsie and Canterbury and that this would apply whether Mr Moodliar worked full time or part time. The limitation that at least $1,000,000 of gross receipts had to be generated before a bonus was payable was not included in the 6 September letter.
206 Mr McGuinness claimed that he was not made aware of the terms of the 6 September letter until late December 1999 or early January 2000 and that Mr McGrath was not authorised to make such an agreement.
207 There was an argument by Mr West that the difference between the June 1999 term sheet and the 6 September amounted to no more than $10,000 and not $50,000. However, I think the point here is this: That Mr McGrath entered into an agreement with Mr Moodliar in June 1999 as expressed in the term sheet and he entered into a somewhat different arrangement in September. On both occasions he did it without Board approval. Thus, it appears that Mr McGuinness accepted the term sheet and took no objection to the fact that there was no prior Board approval, but did not accept the 6 September letter because he was not aware of it and objected on the grounds that there was no prior Board approval.
208 I think this selective approach to Mr McGrath's transgressions tends to reinforce Mr West's argument that "the relationship between the Applicants [AHI and Mr McGrath] and the First Respondent [CAA] broke down and then (and only then) the First Respondent reviewed the history of the relationship seeking to locate breaches".
209 In any event, the agreement between CAA and Mr Moodliar in the letter of 6 September 1999, which was executed on 25 September occurred before it could be said that any obligation existed for AHI to obtain prior Board approval under the consultancy agreement. Moreover, I agree with Mr West's submission that CAA is precluded from relying on the Moodliar issue at this stage to support a breach of the consultancy agreement, given its decision not to rely upon it at the time of termination of the consultancy agreement.
The Mansberg Issue
210 CAA claimed in its further amended summons that AHI had breached the consultancy agreement by instructing solicitors to commence proceedings for breach of contract on behalf of a wholly owned subsidiary of CAA, namely, Sydney and South Coast, against Dr Mansberg, without the prior approval of the Board of CAA. Further, that AHI had exposed CAA to an inability to engage further doctors by causing Sydney and South Coast to bring proceedings against Dr Mansberg.
211 There was an issue in the proceedings about when Mr McGrath instructed DGJ to institute proceedings against Dr Mansberg for breach of contract - whether it was shortly before 12 October 1999 when Mr McGrath signed the consultancy agreement or shortly after it and before the meeting with doctors on 14 October. Mr McGrath maintained that it was prior to 12 October and that he had informed Mr McGuinness at the time. Mr McGuinness said that while he was aware of the Mansberg issue in mid-September he did not become aware that actual proceedings had been instituted by CAA until the meeting with doctors on 14 October.
212 Clearly, Mr McGuinness was aware of the proceedings against Dr Mansberg by mid-October at the latest. Mr McGuinness chose to take no action in this respect against Mr McGrath for breach of the consultancy agreement, despite the fact that he had every opportunity to raise the matter in the CAA Board meeting on 3 November. At no time was Mr McGrath asked to refrain from instituting the proceedings or to withdraw the proceedings. I consider that summary termination of the consultancy agreement on the basis of the Mansberg issue was unfair.
The Schenk Issue
213 CAA claimed in its further amended summons that AHI had breached the consultancy agreement by entering into a contract with Michael Schenk where Mr McGrath had agreed to payments to Mr Schenk that were not first approved by CAA's Board.
214 The evidence in relation to this issue is in direct conflict. Mr McGrath maintained that the Schenk issue was a matter for discussion at the CAA Board meeting on 3 November and at that meeting he referred to the terms of the offer to Mr Schenk. In the course of doing so, Mr McGrath explained that Mr Schenk had proposed a number of amendments but that his main problem was tax parity. Mr McGrath said to the Board that it was necessary to obtain advice on the tax parity issue for Mr Schenk. It was Mr McGuinness' evidence that Mr McGrath merely informed the Board of the offer made to Mr Schenk in August and definitely did not mention the tax parity issue. Mr McGuinness also said in his evidence that the offer to Mr Schenk was approved subject to reviewing and approving the final contract. In this respect, the Board minutes state: "All Board members reviewed Mr Schenk's agreement. It was agreed that this was a critical role and to ensure his commitment a draft contract will be available in December 1999 for review prior to his appointment in February 2000".
215 Whether or not Mr McGrath did, in fact, raise the tax parity issue at the Board meeting is simply not clear to me. I note that he did subsequently seek advice from PriceWaterhouseCoopers regarding the issue and received a letter of advice on 11 February 2000. That letter of advice appears to suggest that the US equivalent of an Australian salary of $150,000 was $96,000. If superannuation payments were added and US tax was deducted the figure became $US 78,397 which was equivalent to $A122,495. How the salary of $195,000 came to be paid to Mr Schenk was not clear from the evidence.
216 While the minute of the 3 November Board meeting in relation to Mr Schenk could have been drafted with more precision, I am inclined to the view that the intention was that any final contract with Mr Schenk was to be reviewed and approved by the Board before it was executed. Mr McGrath did not do that and it could, therefore, be argued he was in breach of the consultancy agreement. However, the matter is not clear cut. It is one person's word against another and I note that CAA and PHL did not call any other member of the CAA Board who was present at the meeting to corroborate the evidence of Mr McGuinness, despite there being no apparent impediment to doing so. In those circumstances, I am not prepared to find that CAA was justified in summarily terminating the consultancy agreement between AHI and CAA on the ground of the Schenk issue.
The Annual Leave Issue
217 In its further amended summons CAA claimed that AHI had breached the consultancy agreement by not providing services and not ensuring that Mr McGrath attended to the business of CAA during the period 24 December 1999 to 14 January 2000 without Board approval. It was claimed that this was a breach of clauses 7.1, 8 and 13 of the consultancy agreement.
218 Mr McGrath said in his evidence that he had advised the chairman of CAA, Mr Cutbush that he would take leave over Christmas. Mr Cutbush was not called by CAA in relation to this matter. Mr McGrath also said in his evidence that he informed Mr McGuinness of his intention to take leave over Christmas. Mr McGuinness acknowledged that Mr McGrath did mention he would be taking leave but had the impression it would only be over the period between Christmas and New Year. In his affidavit, Mr Boulos expressed some consternation at Mr McGrath being absent during a critical period when CAA was in the depths of a cash flow crisis and being uncontactable. However, under cross examination, Mr Boulos conceded that at the time Mr McGrath had taken leave there was little he could have done about the crisis.
219 I must say, it does surprise me that Mr McGrath would have been virtually incommunicado for a period of three weeks when CAA was experiencing a serious cash flow crisis which left CAA in the situation of "surviving day to day" according to Mr Boulos. Nevertheless, in the absence of any evidence contradicting that of Mr McGrath in relation to his conversation with CAA's chairman and Mr Boulos' evidence that even if Mr McGrath was present there was little he could have done about the cash flow crisis, I am left with Mr McGrath's version of events. In those circumstances I am unable to find that Mr McGrath's absence on leave was unauthorised. Consequently, it was not a ground supporting summary termination of the consultancy agreement.
The Expenses Issue
220 In its further amended summons CAA claimed that the direction by Mr McGrath to CAA to pay into his account an amount of $US40,000 in August 1999 as reimbursement of expenses without providing supporting documentation and without providing CAA with the opportunity to review and reject the claim, breached Mr McGrath's fiduciary duty to CAA.
221 The action of McGrath in directing payment into his account of a very substantial amount for reimbursement of expenses, without any supporting documentation, and his subsequent dismissal of his failure for six months to provide support for his claim by saying the task was "too laborious", could hardly be described as a responsible and proper practice on the part of a senior executive. Nevertheless, the payment was treated as an 'employee receivable' and presumably Mr McGrath would have been required to account for the claimed expenditure by the end of the fiscal year, 30 June 2000. In other words, at year end CAA would have had the opportunity to review and, if necessary, reject the claim. Until that occurred, and depending on the outcome, I cannot see how it could be said there was a breach of fiduciary duty on Mr McGrath's part.
The Cash Flow Crisis
222 It was not alleged by CAA and PHL that AHI and Mr McGrath had caused the cash flow crisis and it was not claimed in their further amended summons for relief that the consultancy agreement was unfair by reason of the cash flow crisis. However, there was a substantial amount of material presented about the cash flow crisis and Mr McGrath's contribution to its making. The crisis, it seems to me, came about for a number of reasons to which I referred to earlier in my judgment. A very significant cause was the MRI issue and, of course, this was well outside the control of CAA and its managing director.
223 Considering the whole of the evidence relating to the cash flow crisis, I have come to the view that Mr McGrath's role in managing it and protecting the interests of CAA and its shareholders, was less than satisfactory. Mr Boulos' evidence, which I accept, and which is corroborated by evidence of the doctors, indicates that despite the cash flow crisis Mr McGrath pressed ahead with all his plans, including the taking out of new leases of premises that CAA could not really afford "based on a premise that there was money going to come from somewhere". I have taken this into account in weighing up the competing contentions of unfairness in the agreement between the parties.
Termination of the Consultancy Agreement
224 It is clear from the evidence relating to the termination of the consultancy agreement that it was terminated in what Mr West described as a "thoroughly unprincipled" manner. Messrs Beckwith, Johnson and McGuinness had made up their minds to terminate the agreement when the letter of 15 February was handed to Mr McGrath and whatever Mr McGrath's response was to be to the allegations in the letter it would have made no difference to the decision to terminate. To add insult to injury, before CAA had received Mr McGrath's response to the allegations in the letter of 15 February, CAA's staff were informed that Mr McGrath "was no longer with the company".
225 There was no proper inquiry into the allegations by the doctors against Mr McGrath, their complaints being taken virtually on face value; Mr McGrath was given no genuine opportunity to defend his position; there was no attempt to constitute a meeting of CAA's Board, which was the proper venue for the allegations against Mr McGrath to be aired and determined; there was no attempt by Messrs McGuinness, Beckwith and Johnson to engage in any dialogue with Mr McGrath about his perceived shortcomings and provide him with any opportunity, within a reasonable period of time, to rectify them.
226 In light of the manner in which the consultancy agreement was terminated it is difficult to resist the inference that Mr West would have me draw, namely, that the decision to terminate was made before any consideration was given to whether there were proper grounds and, further, that the termination was sought to be achieved without any cost to CAA.
227 The letter of 29 February 2000 from CAA to AHI terminating the consultancy agreement did so pursuant to cl 14.2(5), which provided for termination for cause without notice and without any payment instead of notice. Clause 14.5 provided that CAA may terminate the agreement without cause and without prior notice of termination if it paid to AHI the balance of the unpaid fee as if the consultancy had run for the full term of the agreement. Mr West argued that because CAA had no cause to terminate the agreement, it could only be terminated under cl 14.5 because although cl 14.1 allowed either party to terminate the agreement at any time by giving at least six month's written notice to the other party, or payment, or forfeiture instead, cl 14.1 was subject to cll 14.2-14.5 inclusive.
228 I have earlier referred to the evidence relating to the negotiation of the consultancy agreement and the proposals to amend it. As I noted earlier, no amendment was made to cl 14.1 as to the period of notice. Consequently, at the time of termination of the agreement, the agreement provided, by virtue of cl 14.1, that AHI could terminate the agreement by six months notice or forfeiture in lieu and AHI would be restrained from competing against CAA for a period of 24 months. Moreover, the agreement provided that in circumstances of termination by CAA for cause under 14.2, the non-compete period was the balance of the term of the agreement or two years which ever was the longer.
CONCLUSIONS
229 I find that the consultancy agreement between AHI and CAA, made on 12 October 1999 was a contract whereby work was performed in an industry; the option agreement made between PHL and Mr McGrath on the same date was a contract whereby work was performed in an industry; the deed of covenant between CAA and AHI made on the same date was an arrangement, or alternatively, collateral arrangement to the consultancy agreement, whereby work was performed in an industry. These transactions were, therefore, contracts within the meaning of s 106 of the Industrial Relations Act 1996.
230 Having regard to the evidence in Matter No. IRC 908 of 2000 and the analysis in this judgment of the issues upon which CAA and PHL relied to summarily terminate the consultancy agreement, I have come to the conclusion that the consultancy agreement and the deed of covenant were unfair within the meaning of s 106 of the Industrial Relations Act 1996 for the following reasons:
(1) The consultancy agreement and deed of covenant restrained AHI and Mr McGrath from engaging in competition with CAA for a period of the balance of the term of the consultancy agreement or two years, whichever was the longer, in circumstances where the consultancy agreement was terminated for cause by CAA without notice or payment instead of notice.
(2) The consultancy agreement did not make any provision for CAA to investigate properly any allegation of breach of the agreement by AHI before CAA exercised its right under cl 14.2(5).