Dental Corporation Pty Ltd v Hungki

The Construction Issue

The first question is one of construction- what was it that Dr Lee (and Yein) promised they would not do.
In the Plaintiff's Closing Submissions ("PCS") paras 49-53, some general principles relevant to the construction of commercial contracts are set out which I summarise: 1. the need for commercial contracts to be given a business like interpretation: Electricity Generation Corp v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corp (2014) 251 CLR 640; [2014] HCA 7, 2. the Court should consider the context, that is the surrounding circumstances known to both parties and have an appreciation of the commercial purpose including the market in which parties are operating Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184, 3. where the language of a contract is open to more than one equally plausible construction the Court will prefer that construction which avoids an unreasonable or inconvenient result Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at p.109. 4. if one construction would render the contract valid and one would not the former is to be preferred: Caltex Australia Petroleum Pty Ltd v Commissioner of Taxation (2008) 173 FCR 359; [2008] FCA 1951. Mr O'Connor did not challenge any of these statements of principle and I take them into account.
DCPL also contends that there is no special rule of construction that requires restraint of trade to be construed narrowly where the restraint is imposed following the sale of a business (as opposed to cases where the restraint is imposed on an employee), Mr Heydon in his text The Restraint of Trade Doctrine (3rd ed 2008, LexisNexis Butterworths) supports this approach and in final submissions Mr O'Connor did not seek to put a contrary view.
Focusing on Dr Lee for present purposes and breaking down the restraint clause what he promised not to do, inter alia, was to not be employed, within a stated geographical area for a stated period of time in any business which: 1. was the same or similar to: 1. the dental practice conducted by him at the Ethel Street premises prior to sale (i.e. "the pre-sale practice") 2. the dental practice which was to be conducted by him at the Ethel Street premises (which became known as Eastwood Family Dental & Implant (i.e. "the Eastwood Family Dental Practice") 3. the practice of other dentists at the Ethel Street premises presumably both in the pre-sale and the Eastwood Family Dental Practice (i.e. "the Ethel Street Other Dentists' practice") and 1. was in competition with the pre-sale practice, the Eastwood Family Dental Practice or the Other Dentists' Practice.
The Acquisition Agreement makes it clear that DCPL was keen to protect the goodwill of the pre-sale practice and of the Eastwood Family Dental practice (including the Ethel Street Other Dentists' practice): see the definitions in clause 1.1 and see clause 19.7 (a).
Mr O'Connor submitted that both conditions (1) and (2) set out in [40] had to be met for Dr Lee and Yein to be in breach. Ms Cochrane submitted that the use of 'and' did not impose a second cumulative condition.
I think it is important to bear in mind what goodwill is. The High Court in Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605 at 615 ([23]-[24]) described goodwill as: "…an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes "the attractive force which brings in custom.… The goodwill of a business is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. In Federal Commissioner of Taxation v Williamson [(1943) 67 CLR 561 at 564], Rich J described the goodwill of a business as referable "in part to its locality, in part to the way in which it is conducted and the personality of those who conduct it, and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom…… …..goodwill is a quality or attribute that derives inter alia from using or applying other assets of the business." and also said at pp.608-609: "goodwill is inseparable from the conduct of a business."
Importantly, the plurality said at [36] that two fundamental premises of the law of goodwill are: "that goodwill has no existence independently of the conduct of a business and that goodwill cannot be severed from the business which created it."
In Taormina v Culicchia 355 SW 2d 569 at 573 (Texas Civ App 1962) cited by Mr Heydon (supra) at p.192 a jury were instructed that goodwill was: "….the advantage or benefit which is acquired by an establishment beyond mere value of the capital stock, funds or property employed therein, in consequence of general public patronage and encouragement which it receives from constant and habitual customers on account of its local position, or common celebrity, or reputation for skill, or influence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices "
In Idameneo (No 123) Pty Ltd v Dr Teresa Angel-Honnibal [2002] NSWSC 1214; (2003) ATPR 41-918 (Idameneo) a case concerned with the purchase of a medical practice and use of a similar structure to that used by DCPL Palmer J said: "[37] As is clear from the Sale of Practice Contract and the Practitioner Contract themselves, the Plaintiff itself does not carry on a medical practice nor does it employ doctors. All that it does is to provide premises and administrative services whereby doctors are able to conduct their practices for their own account, paying a prescribed percentage of their fees to the Plaintiff in consideration of the premises and the services. Obviously, it is in the interests of the Plaintiff to attract doctors to its medical centres and to retain them there. It attracts doctors to its centres by offering to "purchase" the goodwill of their practices but it is a very artificial kind of purchase because the Plaintiff, as a corporation, does not, and cannot, itself carry on the medical practices the goodwill of which it has purchased. [38] In substance and effect, the purchase by the Plaintiff of a doctor's goodwill is the purchase of his or [her] promise that, in return for a substantial consideration, he or she will transfer the conduct of his or her practice to a specified medical centre of the Plaintiff, will continue to practise there for a specified minimum time and will not, for a specified time after ceasing to practise in the centre, compete with the other medical practices being conducted in the centre. All this, of course, is in aid of the enhancement of the Plaintiff's medical centres as places in which doctors will find it desirable to conduct their practices: they receive a substantial "up front payment" as an inducement to move into the medical centres; they stand to get "flow-on" patients from other doctors practising in the centre, and their own practices will not be at risk of erosion when other doctors in the centre relocate. [39] In short, the restraint of trade covenants in the Sale of Practice Contract and the Practitioner Contract are to be seen as primarily for the purpose of creating and protecting the drawing power of the centres themselves as places in which doctors wish to practise, to the commercial benefit of the Plaintiff. [50] Whether a covenant in restraint of trade is no more than is reasonably necessary for the legitimate protection of the covenantee's interests is to be tested as at the time that the covenant was entered into and by reference to what the covenant requires or entitles the parties to do rather than by reference to what they intend to do or have actually done: Curro v Beyond Productions Pty Ltd at 344C. [52] Accordingly, while the Court gives weight to the fact that the parties have agreed upon the terms of a restraint, the party seeking to enforce the restraint still bears the onus of showing, by sufficiently persuasive evidence, that the protection of the covenant is no greater than is reasonably necessary between the parties. In discharging that onus, that party must do more than merely point to the existence of a bargain; it must justify the restraint by reference to the circumstances of the particular case. [53] For example, where a restraint of trade covenant is obtained to protect the goodwill of a medical practice it will be relevant to know what is the type of practice conducted and what are the characteristics of the locality in which it is conducted. If the practice having the benefit of the covenant is a general practice, a restraint wide enough in terms to prohibit the covenantor from establishing practice nearby as a neurosurgeon or as an anaesthetist may well be wider than is reasonably necessary because a specialist of that type does not see patients directly, as does a doctor, but only upon a referral from a general practitioner so that, in truth, there is no real likelihood of competition between the specialist and the general practitioner for the same patients: see e.g. Routh v Jones [1947] 1 All ER 758."
Mr Heydon (supra) at p.197, of his book makes the point that the covenants obtained on a sale of a business are for the protection of goodwill of the business sold not the goodwill of the businesses already owned by the purchaser.
Sources of goodwill in a medical and dental practice are the identity and standing of the practitioner and his associates, the business name under which the practice operates and the premises themselves which might be described as "personal goodwill," "name goodwill," and "site goodwill" see: "The meaning and nature of goodwill in the tax context" (2010) 29 AT Rev 123 p.125 by I. Tregoning. The fourth category mentioned in that article, "monopoly goodwill" which arises for example, where the business has the benefit of a statutory licence, is not relevant here.
The critical question in this case is the question of whether, with the closure of Eastwood Family Dental, the restraint had any remaining operation. Ms Cochrane emphasises the important fact that DCPL had in 2010 paid approximately $2 million to Dr Lee and Yein for goodwill. Mr O' Connor does not dispute that significant money was handed over to his clients but he submits that it was for DCPL to decide what to do with the goodwill for which it had paid. It could, for example, have continued to lease the Ethel Street premises.
Ms Cochrane referred to what she described as a 'time machine problem' in the defendants' arguments: see PCS 55-56. The defendants, it is put, contend that the Dental Practice is fixed in place and time, whereas in fact the Acquisition Agreement and the FSA contemplated the protection of goodwill of the practice to be conducted under the FSA not just the pre-sale practice.
Mr O'Connor points out that all of the definitions such as Practice, Dental Practice and Dental Endeavour are all linked to the Ethel Street premises and he contends therefore that when the lease ended there ceased to be any practice, irrespective of whether DCPL "moved" the Eastwood Family Dental practice as opposed to closed it. The restraint, he submits in effect, is to protect " the drawing power of the premises" see [39] of Idameneo cited at [46] above. Whilst the definitions clearly are linked to the Ethel Street premises, and whilst it was contemplated that DCPL could continue to licence a practice at those premises even if Dr Lee did not renew the FSA, the close linkage does not of itself necessarily mean that DCPL had not obtained a promise from Dr Lee and Yein not to compete if DCPL decided to lease premises elsewhere in Eastwood. The Acquisition Agreement and the FSA clearly intended to give protection to DCPL for the pre-sale practice goodwill and the goodwill of the practice under the FSA. In my view the Acquisition Agreement must be seen as recognising that once the FSA commenced whatever pre-sale goodwill existed would be taken up in the practice conducted under the FSA. DCPL could act to protect what might be called the conglomerated goodwill- which would also include the goodwill generated by the other dentists practicing at the Ethel Street premises.
Clause 19.7 does record that the parties have agreed that the prohibitions and restrictions in clause 19 are necessary to protect the goodwill of the practice which is defined as the practice conducted at Ethel Street.
One way of viewing clause 19 is that it identifies the practice by reference to where it has been, and where it is intended it will be conducted, rather than as limiting the practice to be protected as one that is conducted at those particular premises. On this approach if DCPL had leased premises in the next street and had moved Eastwood Family Dental practice to those new premises there is nothing in clause 19 which, in terms, ends Dr Lee's promise not to carry on practice within the geographically defined area. Having regard to the extensive payment made to the defendants and the fact that neither the Acquisition Agreement nor the FSA expressly requires the practice contemplated by the FSA to be conducted at the Ethel Street premises, I am not persuaded that termination of the lease of and by itself brings an end to Dr Lee's or Yein's obligations but the point made is nevertheless linked to the second argument.
It is not without significance that Dr Lee, and not DCPL, was operating Eastwood Family Dental. The only sources of goodwill attaching to Eastwood Family Dental were Dr Lee, probably reinforced by the goodwill generated by his earlier years in the pre-sale practice, the other dentists and staff, the premises and the name Eastwood Family Dental. When Dr Lee left the Eastwood Family Dental practice and DCPL terminated the lease without establishing or seeking to establish the Eastwood Family Dental practice in another location and advised patients that the practice was no longer operational or was closed there then ceased to be any practice. Not only did DCPL terminate the lease and advise patients that the practice had closed there is no evidence that it sought to retain or maintain use of the name Eastwood Family Dental. It sought rather to enhance the business of another practice- the Rowe Street Practice. Mr O'Connor pointed out that there were several commercial reasons why DCPL may have decided to take this course- the poor performance of the practice in the five years of the FSA being one. The fact that DCPL already had an interest in the Rowe Street Practice is another. No-one was called from DCPL to explain management's thinking on these matters.
There was, as I have mentioned, some focus on the question of whether 'and' in clause 19.2 was to be seen as requiring two conditions to be met for the restraint to be breached i.e. that the business which Dr Lee promised not to engage had to be: 1. the same or similar to the pre-sale practice or Eastwood Family Dental (or any part of them), and 1. in competition with those practices.
Ms Cochrane contended that the 'and' did not impose a second requirement- describing the issue as one of hendiadys. Hendiadys is a grammatical term to describe the expression of a single idea in two words with the conjunction 'and:' see Statutory Interpretation in Australia Pearce and Geddes (8th ed 2014, LexisNexis Butterworths) [4.44]. The term is usually applied in cases of statutory interpretation rather than contract interpretation but since it is a grammatical term it may well be apt to describe a contractual term as well.
In Airservices Australia (formerly Civil Aviation Authority) v Monarch Airlines Ltd (1998) 152 ALR 656 Beaumont J, with whom Wilcox J agreed, held that the words of s. 67 of the Civil Aviation Act 1988 (Cth): "the amount or rate of a charge shall be reasonably related to the expenses incurred or to be incurred by the Authority in relation to the matters to which the charge related and shall not be such as to amount to taxation" did not impose two requirements- one that the charge shall be reasonably related to expenses and a second that it should not amount to taxation. Beaumont J said at p.680: "In my opinion, if either limb of s 67 had stood alone, the meaning of each would, as has been seen, have been tolerably clear, notwithstanding that the application of either limb could, in some circumstances, be a difficult exercise. It could not, however, be said that compliance with either limb imposed an unreasonable burden upon the Authority. At the same time, given my interpretation of the four key concepts incorporated in s 67, I can see no inconsistency between the two limbs. Indeed, each is, in substance, saying the same thing, especially given my construction of reasonably related'', of expenses'' and of the character of taxation'' in the present context. In other words, I would read the word and'' where it appears between the two limbs to mean so that [it]"; or, to similar effect, I would read s 67 as if the word accordingly'', or something to that effect, were inserted after ``and''. That is to say, I would give the provision a purposive interpretation. It should be read so as to reflect one ultimate end, to ensure that the Authority's charges for its services are not excessive. Section 67 can achieve this object or purpose by requiring that an appropriate nexus be established between the fee and the service provided, on the footing that it will necessarily follow that, if this nexus is maintained, the payment of the fee will not amount to taxation. In my view, s 67 reflects this one, fundamental, consideration."
A similar approach was taken by Hope J (as his Honour then was) in Traders Prudent Insurance Co Ltd v The Registrar of the Workers' Compensation Commission of New South Wales [1971] 2 NSWLR 513 at p.521 ("promptly cooperate with the committee and assist it to carry out its duties under this section") and by Basten JA in De Marco v Chief Commissioner of State Revenue (2013) 83 NSWLR 445 at 449, where his Honour held that 'use and occupation' should be treated as hendiadys precluding the need to consider "use" and "occupation" separately. However in Victims Compensation Fund Corp v Brown (2003) 201 ALR 260 at 269 the High Court rejected the claim that the phrase "symptoms and disability" should be read as a "composite or portmanteau" phrase.
The learned authors of Statutory Interpretation in Australia note that it will often be difficult for a Court to determine whether or not the use of 'and' is a hendiadys.
In AirServices Beaumont J approved of what had been said in an earlier edition of Statutory Interpretation in Australia: "if one part of a provision taken by itself imposes an unreasonable obligation on a person, the provision may be construed as if it were hendiadys. But if the two parts can each reasonably stand on their own, they may be construed separately" pp.679-680.
In PCS 77 Ms Cochrane contends that both limbs of the subclause are in fact satisfied and in PCS 78 she contends that: "clause 19.2 (a) describes a concept- being similar, competing activity- to which restraint is directed." Put that way the issue of hendiadys seems to become a non-issue since if it is accepted that the activity in question must be a competing activity then there is no disagreement between the parties.
Mr O'Connor in any event resisted the contention that "in competition with" was superfluous he contended that the author of the clause had very likely been astute to include a reference to competition because of a concern that a restraint which was not designed to protect the practices purchased by Dr Lee and to be run by Dr Lee under the FSA would be offensive to the limits of reasonable protection of DCPL's interests.
If the words "in competition with" add nothing to the first limb then the first limb must carry the notion of competition within it. If they do then DCPL's argument does not assist it. If the first limb does not carry the notion of competition then the second limb does have work to do. Further I agree with Mr O'Connor that the use of the phrase "in competition with" was designed to establish the bona fides of the restraint within established principle, and I do not regard the two limbs of the clause as saying precisely the same thing.
By paragraph 45 of the PCS, DCPL submits that "the goodwill" has value to DCPL "as a means of attracting dental practice businesses to the Dental Corporation's Network. Dental Corporation markets itself to dentists" citing Mr Rendalls' affidavit Exhibit A1 p.42 and T67.49-50. If 'Dental Corporation Network' has any identity or meaning it does not appear to be or relate to a protection of the goodwill of the business sold but rather of some other claimed goodwill of DCPL. The restraint in clause 19 was a restraint to protect the business that it bought from Dr Lee not DCPL's other businesses and DCPL could not legitimately seek a restraint to stop Dr Lee from competing with the Rowe Street Practice, or protecting other businesses of DCPL and nor in my view did the Acquisition Agreement purport to do so. In accordance with what the High Court held in Murry the goodwill protected by the Acquisition Agreement could not be severed from the Eastwood Family Dental Practice and has no existence independently of it.
DCPL contended that Yein, by leasing the premises to EMG and receiving rent, was providing a service to EMG and was indirectly involved in the business as a beneficiary. There is a real question as to whether receiving rent is sufficient to meet either criterion but in any event the same arguments available to Dr Lee that I have already addressed are available to Yein as well.
I conclude that to infringe the restraint clause Dr Lee had to be employed by, or to solicit custom for, and Yein had to lease premises to, a business in competition with Eastwood Family Dental, and since Eastwood Family Dental (effectively also the successor of the pre-sale practice) had ceased to exist by reason of DCPL's conduct there was no competing practice.
I therefore conclude that neither Dr Lee not Yein have breached the Acquisition Agreement.
Given my conclusion that Dr Lee and Yein have not breached the restraint clauses it is not necessary to consider whether the clauses are reasonable, whether injunctive relief against Yein is available when EMG, the lessee, has not been joined or whether DCPL has established an entitlement to damages. Whilst strictly unnecessary to do so I will however express my views on the issue of damages.

Damages

DCPL's case on damages has these components: 1. Only 184 of the Eastwood Family Dental patients transferred to the Rowe Street Practice. 2. Dr Lee recommenced practice in the new Ethel Street practice from September 2015. 3. The dentists who had worked in the Eastwood Family Dental recommenced in the new Ethel Street practice. 4. There is evidence that normal dentistry was being practiced at the new Ethel Street practice (see evidence of Mr Streeter). 5. The Court should infer that had no surgery been run out of Ethel Street premises after June 2015 many of the patients would have migrated to the Rowe Street Practice operated by the Drs Won. I shall refer to the patients who would have migrated to the Rowe Street Practice as "the additional patients." 6. Although it is difficult for the Court to make an assessment it must do its best: Howe v Teefy (1927) 27 SR (NSW) 301 and should choose between the 10% and 40% put forward by DCPL as the likely level of additional patients. 7. Having determined the number of additional patients the Court should determine the net earnings which would have been generated for the Rowe Street Practice by the additional patients. 8. Having determined the dollar value of net earnings that the Rowe Street practice would obtain from the additional patients the Court should apply 55% to that figure to ascertain what amount DCPL would have earnt.
In Malabar RSL Sub-Branch Club Pty Ltd v RSL Custodians Pty Ltd [2014] NSWSC 1016 I made reference to NCON Australia Limited v Spotlight Pty Ltd [2012] VSC 604 and summarised the principles relevant to claims for damages in contract cases: "[79] There are some basic principles in relation to the assessment of damages to which I need refer. In NCON v Australia Ltd v Spotlight Pty Ltd [2012] VSC 604 Robson J examined these authorities in this area in a comprehensive way and I shall summarise the essential principles outlined by his Honour and relevant to the present case, none of which seems to have been in issue in this case: (1) The party who sustains a loss by reason of breach, is, so far as money can do so, to be placed in the same position with respect to damage as if the contract had been performed. (2) Damage includes the profits that the plaintiff expects from the performance of the contract as well as the costs incurred in reliance on the contract. (3) The plaintiff is not to be placed in a superior position to that which it would have been had the contract been performed. (4) Mere difficulty in estimating damage does not relieve a court from the responsibility of estimating them as best it can. (5) The plaintiff must establish that there has been an assessable loss resulting from the breach of contract complained of. (6) In Howe v Teefy (1927) 27 SR (NSW) 301 at 305-206 Street CJ said: The question in every case is: has there been any assessable loss resulting from the breach of contract complained of? There may be cases where it would be impossible to say that any assessable loss had resulted from a breach of contract, but, short of that, if a plaintiff has been deprived of something which has a monetary value, a jury is not relieved from the duty of assessing the loss merely because the calculation is a difficult one or because the circumstances do not admit of the damages being assessed with certainty. [80] After having outlined the general principles Robson J went on in [286]-[294] of his reasons for judgments to detail the cases in which a court must do its best to quantify the loss even if "a degree of speculation and guesswork" was involved, and at [295] his Honour said: In my opinion, these authorities establish that the plaintiff is obliged to call such evidence as can be reasonably expected in the circumstances to establish the damages which the plaintiff claims. The Court's obligation to estimate damage as best it can is only triggered where the circumstances are such that the plaintiff is unable to reasonably establish the damage. McGregor on Damages states that the word "reasonable" is the controlling one, and the standard of proof only demands evidence from which the existence of damage can be reasonably inferred and which provides adequate data."
There are a number of problems with DCPL's damages case: 1. There is no information to establish that any of the patients of the new World-Citi Eastwood practice are the former patients of Eastwood Family Dental. If for example none of them are, there would be no causal connection between the absence of the additional patients from the Rowe Street Practice and the existence of the World-Citi Eastwood practice at the Ethel Street premises or Dr Lee's employment there. 2. There is no evidence that the Rowe Street Practice had the capacity to meet any particular influx of patients from Eastwood Family Dental. Eastwood Family Dental had four chairs and Rowe Street three chairs. There is no evidence concerning whether the additional patients could be accommodated at the Rowe Street Practice by additional dentists and the addition of dental chairs. 3. When I raised the question of costs that might need to be expended on additional dentists to meet the additional patients Ms Cochrane explained that cost was not relevant to the calculation. That is because it was said, DCPL's claim is based on the fact that had Rowe Street earnt, say another $100,000 net of laboratory costs from the additional patients, DCPL would have been entitled to 55% of those earnings. Quite apart from the question of whether the Drs Won would have been willing to expand their business in this way there is a fundamental evidentiary hiatus because DCPL has not put in evidence the agreement between itself and the Drs Won and there is therefore no evidence as to what percentage DCPL would have earnt from whatever increase in earnings might have been obtained at the Rowe Street Practice by the influx of additional patients.

At a glance

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Judgment (6 paragraphs)

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Cases Cited (20)