Idameneo (No 123) Pty Ltd v Dr Teresa Angel-Honnibal

Idameneo (No 123) Pty Ltd v Dr Teresa Angel-Honnibal - [2002] NSWSC 1214 - NSWSC 2002 case summary — Zoe

[4]

COUNSEL : R.R.I. Harper - Plaintiff Ms J. Baxter - Defendant SOLICITORS : Minter Ellison - Plaintiff Bolzan & Princi - Defendant CATCHWORDS : TRADE AND COMMERCE - RESTRAINT OF TRADE - GOODWILL - Plaintiff purchases Defendant's medical practice and requires Defendant to conduct practice from Plaintiff's medical centre - covenant against competition - onus of proof where Restraints of Trade Act invoked - whether restraint a "brass plate covenant" - EVIDENCE - WHAT EVIDENCE IS REQUIRED TO PROVE RESTRAINT OF TRADE IS REASONABLE - LIQUIDATED DAMAGES - Onus of proof. Health Insurance Act 1973 (Cth) LEGISLATION CITED : Restraints of Trade Act, 1976 (NSW) - s.4(1) Supreme Court Act 1970 (NSW) - s.94 Trade Practices Act 1974 (Cth) - s.51AC - AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 - Blomley v Ryan (1956) 99 CLR 362 - Bridge Pump Co Pty Ltd v Myles Southwest Fuel Supplies Pty Ltd (unrep.) WA Full Court, 22 October 1997 - Brown & Krippner Pty Ltd v Hanlon (1995) ATPR 41-386 - Buckley v Tutty (1971) 125 CLR 353 - The Commercial Bank of Australia Limited v Amadio and Anor (1983) 151 CLR 447 - Curro and Anor v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 - Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 - Esanda Finance Corporation Ltd v Plessnig (1989) 63 ALJR 238 - Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269 CASES CITED : - Herbert Morris Ltd v Saxelby [1916] 1 AC 688 - Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157 - IRAF Pty Ltd v Graham [1982] 1 NSWLR 419 - Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 - Lu v Lim (1993) 30 NSWLR 332 - Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 - Orton v Melman [1981] 1 NSWLR 583 - Papastravou v Gavan [1968] 2 NSWR 286 - Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 - Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 - Routh v Jones [1947] 1 All ER 758 DECISION : Restraint too wide in terms; restraint read down, injunction granted; liquidated damages clause upheld; other relief refused.

[10]

4 The Plaintiff owns and operates a number of medical centres in the Sydney metropolitan area and elsewhere in New South Wales. It provides doctors and other allied health practitioners with the use of its premises and with various administrative services, in return for which it charges a fixed percentage of the gross fees received by the doctors and others. 5 In order to attract doctors to conduct their practices from the Plaintiff's medical centres, the Plaintiff usually enters into agreements to buy their medical practices, paying a substantial sum for the goodwill. Interdependent with the agreements for purchase are agreements between the Plaintiff and the doctors whereby the doctors are required to conduct their practices from a particular medical centre of the Plaintiff for a specified period of time. There are covenants in the agreements for purchase and in the service agreements with the doctors restricting the right of the doctors to practise in competition with the Plaintiff's medical centres. 6 The Plaintiff and the Defendant entered into such agreements on 25 May 2001. Under an agreement called the "Sale of Practice Contract" the Plaintiff agreed to purchase the Defendant's medical practice conducted at 214 Parramatta Road, Burwood ("the Burwood Premises") for the price of $240,000, $239,000 of which was apportioned to the purchase of the goodwill of the practice and $1,000 of which was apportioned to the purchase of various chattels. The Contract provided that the purchase price was payable as to $100,000 on completion and as to the balance of $140,000 upon the commencement by the Defendant of practice at the Plaintiff's new medical centre at Leichhardt ("the Leichhardt Premises"), which was to open in early 2002. 7 At the time of execution of the Sale of Practice Contract, the Plaintiff paid to the Defendant $100,000 so that completion of the Contract was contemporaneous with its execution. 8 The Sale of Practice Contract provided, in so far as is relevant, as follows. By Clause 5.1 title to the goodwill of the Defendant's medical practice and to the chattels sold pursuant to the Contract passed to the Plaintiff upon completion, i.e. 25 May 2001. By Clause 7.1 the Defendant covenanted to execute what is called the "Practitioner Contract". By Clause 7.2 the Defendant agreed that she would, pursuant to the Practitioner Contract, render medical services exclusively from the Leichhardt Premises for at least five years from the commencement date of the Practitioner Contract. 9 Clause 10 provided: " RESTRAINT

[32]

19 Unfortunately, in about August 2001 the Defendant began to self-administer Pethidine in order to alleviate pain from a condition from which she was suffering and she became addicted to the drug. In early 2002 the NSW Medical Board discovered her addiction and suspended her from practice. 20 On 14 February 2002 the Defendant admitted herself on a voluntary basis to the Northside Clinic at Greenwich. The Plaintiff's Leichhardt Premises opened for business on 18 February 2002, but the Defendant did not then present herself for work. On 20 February, Mr Thomas Bateman, in-house counsel of the Plaintiff, made enquiries and on 21 February he learned that the Defendant was in hospital due to drug dependency. A few days later the Defendant rang Mr Bateman and told him that she was in the Northside Clinic and had admitted herself on a voluntary basis. She says that she told Mr Bateman that she would be unable to work until the middle of April, if the Medical Board gave her permission. 21 Mr Bateman discussed the matter with his father, Dr E. Bateman, who is the Managing Director of the Plaintiff. Dr Bateman says, and I accept, that he was persuaded to agree to a means by which the Plaintiff could assist the Defendant by continuing the relationship on varied terms. He was concerned that, because of the Defendant's problem, she might not be able to perform her obligations under the Sale of Practice Contract and the Practitioner Contract to practise at the Plaintiff's Leichhardt Premises for a full five years. Accordingly, he gave instructions to his son to put an offer to the Defendant for variation of the Practitioner Contract to provide that the Defendant would receive the balance of consideration for the Plaintiff's purchase of her goodwill, not when she commenced practice at the Leichhardt Premises, but rather when she had completed five years of practice at those premises. Further, rather than being charged 50% of her fees for the Plaintiff's administrative services, she would be charged 60%, provided that the extra 10% would be rebated to her when she completed her term of practice in accordance with the Practitioner Contract. 22 Accordingly, in late February 2002 Mr T. Bateman rang the Defendant and put this proposal to her. He says that he rang her at a contact number that had been given to him, that the telephone was answered directly by the Defendant, and that he did not know that she was then still in the Northside Clinic. The Defendant says that Mr Bateman was well aware that she was still at the Northside Clinic when he made the telephone call. I do not think that anything significant turns on this conflict in the evidence because the Defendant did not agree to the variations until some six weeks later. 23 In the telephone call, Mr Bateman put the proposed variations to the Defendant. There is no dispute that he told the Defendant that if she did not wish to agree to the variations, she could repay the $100,000 part consideration for the purchase of her goodwill and the parties could go their separate ways; that the Defendant said that she could not live on 40% of her fees and that she could not repay the $100,000 as she had spent it; and that Mr Bateman said that if she did not repay the money and did not agree to work under the varied Contracts, then the Plaintiff would commence legal proceedings to recover its money. The discussion ended on that note. 24 A few days later, on 5 March 2002, the Defendant was discharged from the Northside Clinic and went home to recuperate. During March, Mr Bateman rang her twice at her home and asked what she was going to do. On each occasion a conversation to the effect recounted above occurred, with no decision being made by the Defendant. 25 In early April 2002, the Plaintiff posted to the Defendant a letter containing the terms of the proposed variations to the Contracts. The Defendant did not ring to discuss the issue. 26 On 12 April 2002, at a hearing before the Impaired Registrants Panel of the NSW Medical Board, the Defendant agreed to a number of restraints being imposed on her registration as a medical practitioner. The suspension on her entitlement to practise was then lifted, so that she was again entitled to practise subject to the restraints. 27 On 15 April 2002, the Defendant went to the Leichhardt Premises and had a discussion with Mr Bateman about the terms of the letter varying her Contracts with the Plaintiff. She wished to delete some of the terms and she had struck them out of the letter. Mr Bateman agreed to some of the deletions but not to others. The Defendant then signed the letter, which was dated that day. The variations as to time for payment of the balance of the consideration for goodwill and as to the percentage of fees to be charged by the Plaintiff, subject to a rebate, remained unaltered. 28 On 17 April 2002, the Defendant commenced practice at the Leichhardt Premises. On 4 June 2002, she tendered her resignation notice, effective from 9 June, on the ground that she had not been paid any of the fees to which she was entitled. In fact, this was not correct, as she had been paid $5,360.80 on the previous day. 29 On 11 June 2002, the Defendant commenced practice in a medical centre in Concord. The distance 'as the crow flies' between the Concord Medical Centre and the Leichhardt Premises is 5.7km and between the Concord Medical Centre and the Burwood Premises is 1.5km, give or take 200 metres.

[38]

A declaration that the defendant, in rendering medical services from Concord Medical Centre, is in breach of clause 5.5 of the Provision of Services to Medical Practitioners Deed entered into between the plaintiff and the defendant on 25 May 2001." 31 It will be observed at once that the terms of the injunctions sought in paragraphs 1 and 2 of the Relief differ significantly from the terms of the restraints imposed by Clause 10.1(a) and (b) of the Sale of Practice Contract and Clause 5.5(a) of the Practitioner Contract. Those clauses prohibit the Defendant from rendering medical services "at any place" within the defined areas, whereas paragraphs 1 and 2 of the Relief omit those words. 32 The difference in wording is important. Do the restrictive trade covenants prohibit the Defendant only from establishing her surgery within the proscribed area, or do they also prohibit her from providing any sort of medical service, such as making house calls or attending patients in hospitals or nursing homes, anywhere within the proscribed area? The former type of restraint has been called in the authorities a "brass plate covenant", after the brass name plate which, in a bygone age, adorned the entry to the professional rooms of doctors, solicitors, architects and the like. Whether a restraint covenant is a "brass plate covenant" or not can make a considerable difference to whether the restraint is reasonable and whether it is contrary to the public interest. 33 The way in which the Courts identify restraint of trade covenants as "brass plate covenants" or not has been authoritatively explained by Young J (as his Honour then was) in Lu v Lim (1993) 30 NSWLR 332 and in Brown & Krippner Pty Ltd v Hanlon (1995) ATPR 41-386. In Lu v Lim the restrictive covenant prevented the retiring partner in a medical practice from carrying on or being interested in "any medical practice within the radius of five (5) kilometres from the said address where the present Partnership is carrying on business" . At p.335, his Honour came to the conclusion that the covenant should be construed as protecting the goodwill of the medical practice which had been carried out at the surgery at a particular address so that the particular restraint was a "brass plate covenant" and restrained the defendant only from establishing another surgery within the proscribed distance from that address. 34 The words of each particular restraint covenant must, of course, be given their own proper effect. But it is relevant to point out, as Young J did in Lu v Lim at 335, that if a covenant prohibiting the provision of professional services within a defined area is construed, not as a "brass plate covenant" but as prohibiting the performance within that area of any activity associated with or incidental to the provision of the relevant professional services, then there will often be no way in which the covenantor will know if he or she is in breach of the covenant or of an injunction expressed in the terms of the covenant. 35 For example, in the present case, will the Defendant be in breach of Clause 10.1(a) of the Sale of Practice Contract if, while driving in her car, she receives a telephone call from a patient on her mobile phone, stops by the roadside at a place which, unknown to her, happens to be within the proscribed area, and gives medical advice to that patient? Will the Defendant be in breach of the covenant if her surgery is outside the proscribed area but, in making a house call, she unwittingly crosses over the boundary line into the proscribed area? The unreasonable burdens which can be placed on covenantors in situations such as these militate in favour of construing a restraint of trade covenant as a "brass plate covenant" if the particular words of the covenant reasonably permit such a construction. 36 In the present case, I am of the view that Clauses 10.1(a) and (b) of the Sale of Practice Contract and Clause 5.5(a) of the Practitioner Contract are, on their true construction, "brass plate covenants" and prohibit the Defendant only from rendering medical services at premises within the proscribed area from which she conducts her practice: medical services which she may perform outside those premises and incidentally to her practice conducted in those premises are not within the proscription. My reasons are as follows. 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 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. 40 That this is the substance underlying the form of the "purchase" of a doctor's "goodwill" is clear, in my opinion, from Clauses 4.4(b), 5.5, 7.1, 7.2, 8 and 9.1 of the Sale of Practice Contract, and from Clauses 5 and 6 of the linked Practitioner Contract. 41 Accordingly, Clause 10.1(a) and (b) of the Sale of Practice Contract and Clause 5.5(a) of the Practitioner Contract, in prohibiting the Defendant from rendering medical services "at any place" within the proscribed area, are to be read, in my view, as protecting the Plaintiff's Leichhardt Premises from competition from another place at which medical services are provided, such as a surgery established by the Defendant in her own premises or in another medical centre operated by a competitor of the Plaintiff. 42 For these reasons, I regard the restraint of trade covenants in the Sale of Practice Contract and the Practitioner Contract as prohibiting only the rendering of medical services by the Defendant within the premises in which she has established her practice. If the Plaintiff is entitled to an injunction, it cannot be granted in the terms of paragraphs 1 and 2 of the Relief as those terms are too wide.

[40]

That passage was expressly approved as stating the common law in Australia in Buckley v Tutty (1971) 125 CLR 353, at 376. 44 As was recognised in Lord Macnaghten's speech, the common law has developed the principle that in determining whether a restraint of trade is void as a matter of public policy, the Court has to consider two questions: first, is the restraint reasonable as between the parties and, second, is the restraint contrary to the public interest? 45 In Herbert Morris Ltd v Saxelby [1916] 1 AC 688, it was held by Lord Atkinson (at 700) and by Lord Parker (at 707-8) that the onus of establishing that the restraint is reasonable as between the parties lies on the person seeking to enforce the restraint, while the onus of establishing that the restraint is contrary to the public interest lies on the person seeking to invalidate the restraint. That proposition has been widely accepted although it has been observed that the reason for apportioning onus in this way is somewhat obscure: see per Lord Hodson in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269, at 319E. The proposition seems to have been accepted without the necessity for comment by the High Court in Buckley v Tutty at 337. 46 These cases, however, were concerned with common law principles, unaffected by statute. In New South Wales, whether or not a restraint of trade is valid in any particular case is now determined by reference to the common law principles as modified by the operation of s.4(1) of the Restraints of Trade Act, 1976 (NSW). That subsection is in the following terms: "4(1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not." 47 Formerly, the common law required that the questions whether the restraint of trade was reasonable as between the parties and whether it was contrary to the public interest be determined by reference to all possible breaches of the restraint which could occur. Often, where the restraint was not divisible into severable components, it was held invalid although the particular breach by the defendant deprived the plaintiff of a protection which was reasonable in the circumstances. Section 4(1) of the Restraints of Trade Act had the effect of requiring the Court to consider the two tests of validity posed by the common law, not by reference to all possible breaches which could occur, but only by reference to the particular breach complained of in the case before it: see Orton v Melman [1981] 1 NSWLR 583, at 586-587; IRAF Pty Ltd v Graham [1982] 1 NSWLR 419, at 425; Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564, at 43,833. 48 Other than to enable the Court to "read down" the restraint of trade covenant to the particular breach alleged, s.4(1) adds nothing to the common law rules as to the validity of a restraint of trade clause. In particular, the section says nothing about who is to bear the onus of establishing reasonableness as between the parties and as to whether the restraint is in the public interest. I can see no reason why the apportionment of the onus of proof on these two issues, as laid down in Herbert Morris Ltd v Saxelby , should be regarded as altered in any way by the Restraints of Trade Act . This seems to have been accepted by the majority of the Full Court in Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157, at 181, where the majority acted on a concession from Counsel to this effect; it seems also to have been accepted by the Court of Appeal in Curro and Anor v Beyond Productions Pty Ltd (1993) 30 NSWLR 337, at 344C. 49 In the present case, therefore, I hold that the Plaintiff bears the onus of establishing that the restraint imposed in Clause 10.1 and 10.2 of the Sale of Practice Contract and in Clause 5.5(a) of the Practitioner Contract is reasonable as between the parties, and that the Defendant bears the onus of establishing that the restraint is contrary to the public interest.

[42]

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. 51 A factor to which the Court has regard is whether the parties have, as a result of negotiation on equal terms, freely made a bargain in which the particular restraint has been sought by one and given by the other. It is often said that in such a case the parties must be taken to know what is in their interests and what is reasonable: see e.g. per Lord Pearce in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd at 323. But although the Court will give considerable weight to the fact that the parties have negotiated and agreed upon the covenant, it cannot regard that fact as conclusive: see e.g. Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260, at 268, per Walsh J. In this regard, the position of the covenantee is not improved even if, as here, the contract contains an express acknowledgment by the covenantor that the restraint is reasonable: Sale of Practice Contract, Clause 10.1. This must be so because the ultimate consideration for the Court is whether public policy has been served in striking down restraints of trade which go further than is reasonably necessary to protect the legitimate interests of those seeking to benefit from them or which are otherwise contrary to the public interest. 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. 54 Again, a restraint protecting the goodwill of a general practice from competition within a radius of twenty kilometres of the surgery may be no greater than is necessary if the practice is the only practice in a small country town, so that established patients of a retiring partner may be quite willing to drive twenty kilometres to the nearest town if the retiring partner sets up practice there. However, such a covenant might well be completely unreasonable if the practice happens to be conducted in the demographic centre of Sydney. 55 In the present case, I have come to the conclusion that the restraints imposed in Clause 10.1(a) and (b) of the Sale of Practice Contract are greater than are reasonably necessary for the protection of the goodwill purchased by the Plaintiff, for the following reasons. 56 I give weight to the fact that the restraints were agreed to by the Defendant and that the Defendant was to be paid a substantial consideration in return. I do not accept the Defendant's submissions that she was in a position of commercial weakness in relation to the Plaintiff in the negotiation of the Contracts and that the Plaintiff has taken advantage of this inequality of bargaining position. 57 In my opinion, there is no evidence to support this submission. There is no evidence that the Defendant was suffering from Pethidine addiction at the time that she agreed to enter into the Contracts and she certainly did not inform the Plaintiff that she was in any difficulty in any respect at that time. There is no evidence that the Defendant was in any financial need or that she was subjected to any pressure by the Plaintiff. All that the evidence reveals is that, having considered the Plaintiff's offer for some time, the Defendant sought and obtained some variations to the terms and then decided to enter into the Contracts as a matter of her own free choice. 58 However, I take into account that there is no evidence that the Plaintiff and the Defendant actually negotiated the area and duration of the restraints. Dr Bateman's evidence is that the Sale of Practice Contract and the Practitioner Contract are examples of similar contracts that the Plaintiff has entered into with many doctors providing medical services at the Plaintiff's numerous medical centres. He says, however, that there is no standard contract and that each contract is drafted for each medical practitioner individually. 59 I do not think that the last statement is meant to be taken literally as the Contracts are obviously drawn by a lawyer and contain many clauses which would be described as "boiler plate". I take Dr Bateman to mean that terms such as the amount of consideration to be paid for the purchase of goodwill, the particular medical centre which is to be the site of the doctor's practice, holidays and the rate of remuneration for the Plaintiff's services would be negotiated with each doctor individually, but other clauses would be standard. 60 Elsewhere in his evidence describing the Plaintiff's operations generally, Dr Bateman says that the Plaintiff needs to be able to restrict doctors who cease practising from its medical centres within and area of eight kilometres. Since there is no evidence of negotiation with the Defendant of this particular term, I am prepared to infer that it was one of the standard terms in the Plaintiff's Sale of Practice Contract. 61 The evidence given by the Plaintiff in support of the reasonableness of a restraint extending for a radius of eight kilometres from the Leichhardt and Burwood Premises may be summarised thus. 62 First, Dr Bateman states that his involvement with the running and operation of the Plaintiff's medical centres for approximately twenty years shows that the majority of patients who attend the centres live within a radius of approximately ten kilometres. 63 I can give little weight to this evidence. It was not supported by any particulars or other detail which could make such a generalisation meaningful. The Plaintiff has fourteen medical centres in Sydney, some in densely populated areas such as George Street Sydney, Darlinghurst Road Darlinghurst, and Short Street Leichhardt, and others in much less densely populated areas as Ingleburn, Campbelltown, Mt Druitt and Castle Hill. The Plaintiff also has medical centres outside Sydney in Dubbo and Dapto. Is this evidence of Dr Bateman intended to reflect an averaging of patient domiciles within all the areas in which its medical centres are located? If so, that sort of averaging does not assist in determining what protection is necessary for the goodwill of the Plaintiff's Leichhardt Premises, which is the only subject of concern in the present case. What might be an entirely reasonable protection for the goodwill of a practice conducted at the Mt Druitt centre or the Dapto centre, having regard to their particular demographics, might be seen as completely unreasonable when the demographics relevant to the Leichhardt Premises are known. 64 Second, Dr Bateman states: "The plaintiff needs to be able to restrict doctors who cease practicing from its medical centres within an area of 8 kilometres in order to protect its legitimate business interests and to ensure that it gets the benefit of the particular doctor's goodwill on the purchase of the doctor's practice."

[44]

In relation to the Idameneo premises known as the Leichhardt Medical & Dental Centre, 30-38 Short Street, Leichhardt ( the Leichhardt Medical Centre ), the Leichhardt Medical Centre is easily accessed by both City West Link and Parramatta Road. It accordingly draws patients from a significant surrounding area." 66 Again, no particulars are given as to the "significant surrounding area" referred to. Further, no particulars are given of what sort of practice Dr Bateman was conducting at Mona Vale, how long ago he conducted it, how many patients followed him to Warringah, or why that experience is useful in assessing what, as at May 2001, was a reasonable protection for the goodwill of a medical practice conducted in Sydney's inner western suburbs. 67 Fourth, there was no evidence tendered by the Plaintiff which identified, by reference to a map or otherwise, the boundaries of the area the subject of the restraint. It must be appreciated that a radius of eight kilometres from the Leichhardt Premises describes a circle with a diameter of 16km and an area of 200.96km2. No evidence was tendered showing the suburbs within that area, any demographic information as to that area, how many other doctors were practising in that area, or whether the Defendant's practice had ever drawn patients from any suburbs within that area other than Fivedock, Burwood, Concord and Leichhardt. Indeed, Mr T. Bateman was unsure whether the proscribed area included Homebush, Strathfield, Annandale, Potts Point or Lewisham. Dr Bateman was unsure whether the proscribed area included Lidcombe, Homebush, Croydon, Annandale, Lewisham, the Sydney central business district or Darlinghurst. The only evidence which was tendered in this regard was as to the distances between the Concord Medical Centre, the Burwood Premises and the Leichhardt Premises. 68 In my view, where a restraint protecting the goodwill of a business or practice within a defined area is concerned, it is impossible to form a sensible view as to the reasonableness of the restraint unless one knows where are the boundaries of that area, what have been the activities conducted within that area by the covenantor and the covenantee, and what are the demographic characteristics of that area in so far as they may be relevant to the protection sought by the covenantee: see, for example, the nature of the evidence referred to in Papastravou v Gavan [1968] 2 NSWR 286. 69 For these reasons, I have concluded that the Plaintiff has failed to discharge the onus which it bears of proving that the restraints contained in Clause 10.1(a) and (b) are, in their terms, reasonable as between the parties. The orders sought in paragraph 1 and 2 of the Relief in the Amended Statement of Claim must, therefore, be refused. 70 That, of course, is not the end of the matter. The Plaintiff seeks relief in paragraphs 3 to 6 of the Relief confined to the Defendant's activities at the Concord Medical Centre. As I have noted, s.4(1) of the Restraints of Trade Act enables the Court to determine the validity of a restraint of trade by reference to the particular breach alleged. That is what the Plaintiff really seeks in the alternative to paragraphs 1 and 2 of the Relief. 71 I am satisfied that the Plaintiff has discharged the onus of proving that the restraints in Clause 10.1, in so far as they apply to the Defendant's conduct of a medical practice at the Concord Medical Centre, are no more than are reasonably necessary for the legitimate protection of its interests. My reasons are as follows. 72 The Defendant's evidence shows that she commenced her own medical practice in Fivedock, an inner western Sydney suburb, in 1983. In 1992 she moved her practice to an address in Burwood Road, Burwood, and in the late 1990s she relocated to the Burwood Premises. Accordingly, as at the time that the Defendant entered into the Sale of Practice Contract with the Plaintiff, she had been in practice for about eighteen years in the middle of what might loosely be called Sydney's inner western suburbs and, as she concedes, she had drawn her patients during that time from suburbs such as Concord, Leichhardt and Burwood. 73 The Defendant says that she has a special rapport with Italian, Spanish and Greek patients because she is fluent in their languages and she understands their problems with more sympathy, perhaps, than others might. 74 These circumstances demonstrate, in my opinion, that as at the time that the Defendant entered into the Sale of Practice Contract, she had a goodwill drawn from treating patients in suburbs including Burwood, Concord and Leichhardt, and that if she were to sell that goodwill to the Plaintiff, it would be no more than a reasonable protection for the Plaintiff to require, as a condition of the sale, a covenant restraining the Defendant from re-establishing her practice in those suburbs for a specified and reasonable period. 75 As I have recorded, the Concord Medical Centre is about 1.5km from the Burwood Premises and about 5.7km from the Leichhardt Premises. Bearing in mind that the Defendant has conceded that she has drawn patients from Concord while she was practising in Burwood, and that Concord would be within a convenient distance for many of her established patients living in and around Burwood, Leichhardt and Fivedock, I am of the view that Clause 10.1 of the Sale of Practice Contract, read down to restrain the Defendant from practising in the Concord Medical Centre is entirely reasonable in terms of the area the subject of the restraint. 76 Clause 10.2 of the Sale of Practice Contract provides that the relevant period of the restraint is five years from the date of completion, i.e. five years from 25 May 2001. The relationship between doctor and patient often becomes established and of long duration, particularly if the patient has a history of medical problems or regards the doctor as 'the family doctor'. Such a relationship is not easily broken. To protect the sale of a goodwill based upon such relationships a restraint may have to be for a substantial period. In this case, bearing in mind that the goodwill of the Defendant sold to the Plaintiff had been built up by about eighteen years of medical practice as at the date of the Sale of Practice Contract, a restraint for five years from completion of that contract was, in my opinion, no more than was reasonable to protect the Plaintiff's interest in the goodwill purchased from the Defendant against competition from the Defendant in a medical practice established in Concord. 77 The Defendant submits that the restraint is void because it would be contrary to the public interest that the Defendant be deprived thereby of the ability to provide her services to the public generally and to her established patients in particular, and that the public be deprived of its freedom of choice of doctors. 78 In my opinion, the Defendant has not discharged her onus of making good this submission on the evidence. To restrain the Defendant from carrying on her medical practice at the Concord Medical Centre would not prevent her from conducting a practice elsewhere, as long as she did not thereby breach the covenants in Clause 10 of the Sale of Practice Contract. There is no evidence that her services are irreplaceable as far as any of her existing patients are concerned, and that they will be at risk in some way if their needs are attended to by some other doctor at the Concord Medical Centre or elsewhere. 79 In the result, the provisions of Clauses 10.1 and 10.2 of the Sale of Practice Contract validly prohibit the Defendant from continuing to practise at the Concord Medical Centre for a period of five years from 25 May 2001.

[46]

80 The restraint of trade in Clause 5.5(a) of the Practitioner Contract is valid only if it is no greater than is reasonably necessary to protect the Plaintiff's legitimate interest. The question immediately arises: what is the legitimate interest of the Plaintiff which requires protection under the Practitioner Contract? It cannot be the goodwill of the Defendant's medical practice purchased under the Sale of Practice Contract because Clause 10.1 of the Sale of Practice Contract already provides that protection. 81 Although the Practitioner Contract is linked to the Sale of Practice Contract in that Clause 7.1(a) of the Sale of Practice Contract requires the Defendant to enter into the Practitioner Contract, the Practitioner Contract is nevertheless a different contract and is concerned with a different subject matter. It is, in essence, an agreement between the Plaintiff and the Defendant in which the Plaintiff agrees to supply services to the Defendant, and the Defendant agrees to take and pay for those services for a period of years. 82 Clause 10 of the Practitioner Contract expressly provides that there is no partnership or relationship of employer and employee between the parties and, by way of reinforcement, Clause 5.2 prevents the Plaintiff from giving directions to the Defendant as to the manner in which she conducts her practice. By Clause 4 the Defendant appoints the Plaintiff as her agent and attorney for the purpose of collecting the Defendant's fees. By Clause 7.1 the Defendant is liable for any claim arising from the conduct of her practice and she indemnifies the Plaintiff in respect of any such liability. 83 Nevertheless, despite the fact that the Practitioner Contract is an agreement for the supply of services to the Defendant, not by the Defendant, it endeavours to incorporate obligations on the part of the Defendant which would typically be found in a partnership or in a contract of service between the Plaintiff as employer and the Defendant as employee. Clause 5.3 requires the Defendant to use her best endeavours to protect the interests and welfare of the Plaintiff's business. Clause 5.4 requires the Defendant to support by referrals or otherwise the other medical practices in the Leichhardt Premises. Clause 5.7 provides that the Defendant's patient records are the property of the Plaintiff and are to remain so after termination of the Practitioner Contract. Clause 7.4 requires the Defendant to pursue appropriate continuing medical education and to conduct herself in a way which ethically and professionally enhances the quality and image of the services provided by the Leichhardt Premises. 84 The Defendant has given these promises in the Practitioner Contract and they may be enforced if breached, but that does not in itself give the Plaintiff a legitimate interest to protect by the restraint of trade covenant contained in Clause 5.5(a) of the Practitioner Contract. The Defendant is neither a partner nor an employee nor an agent of the Plaintiff and she plays no part in the conduct of the Plaintiff's business. I cannot see any other circumstance which would place her in a fiduciary relationship with the Plaintiff so that she is bound by any duty of exclusive loyalty to the Plaintiff. 85 In those circumstances, it seems to me that the Defendant's covenant in Clause 5.5(a) of the Practitioner Contract not to conduct her practice elsewhere within the proscribed area is a naked restraint of trade. It is as if the lessor of a building agreed to grant a lease to a high-profile tenant upon ordinary commercial terms but with the inclusion of a covenant that during the tenancy the tenant would not conduct any part of its business in another building. The lessor might have an interest in exacting such a covenant so as to enhance the market image of, and therefore the price for space in, its own building. But that is not the kind of interest that the law will protect by upholding a restraint of trade covenant. One does not have an interest sufficient to support a restraint of trade covenant simply because one has given consideration for the covenant. If that were so, no restraint of trade covenant supported by consideration would ever be struck down as unreasonable and contrary to the public interest. 86 In my opinion, the Plaintiff has not established that the restraint of trade imposed by Clause 5.5(a) of the Practitioner Contract is for the protection of any legitimate interest which it has. Clause 5.5(a) is, therefore, wholly void as contrary to public policy.

[47]

87 The Defendant contends that the Sale of Practice Contract and the Practitioner Contract were validly rescinded by her for various breaches by the Plaintiff. Even if that were so, it would make no difference to the Plaintiff's right to an injunction restraining the Defendant from continuing to practise in contravention of Clauses 10.1 and 10.2 of the Sale of Practice Contract because those clauses clearly enure for the benefit of the Plaintiff even after termination of both Contracts. In this circumstance, I may deal rather briefly with this submission. 88 The Defendant's main point is that she was entitled to terminate the Practitioner Contract for breach of the Plaintiff's covenant under Clause 6.2 to remit to her the balance of fees received. The Plaintiff's financial officer has given evidence, which I accept, as to how the Plaintiff's payment system operated. In accordance with that system, the Defendant received $5,360.80 on 3 June 2002, which was the amount then owing to her. The next day, 4 June, the Defendant gave notice terminating her services under the Practitioner Contract, effective on 9 June, on the incorrect basis that she had then been paid nothing at all. 89 Even if there had been a breach of Clause 6.2 by the Plaintiff, the Defendant's letter of 4 June was not a seven day notice in writing which is required by Clauses 9.1 and 13.1 of the Practitioner Contract in order to terminate that contract, so that the Defendant was not entitled to terminate that contract on the ground of this alleged breach. 90 The Defendant relies on various other alleged breaches by the Plaintiff of terms of the Practitioner Contract relating to the cleanliness of the Leichhardt Premises and its suitability for the conduct of the Defendant's medical practice. I think it fair to say that this aspect of the case was only faintly pressed. Doubtless this was so because, even if the allegations of breach had been proved, the breaches could not entitle the Defendant to rescind because she had failed to give the requisite prior written notice under Clauses 9.1 and 13.1. 91 For these reasons, I conclude that the Plaintiff did not validly terminate the Practitioner Contract. Even if she had done so, such termination would not have brought the Sale of Practice Contract containing the restraint of trade to an end because none of the alleged breaches were breaches of the terms of that contract.

[51]

the Defendant did not receive legal advice about the proposed variations. 94 As to the Defendant's financial situation, Mr T. Bateman agrees that the Defendant told him that she could not repay the $100,000 which she had received and that she had spent the money. The Defendant says, and I accept as highly probable, that she also told Mr Bateman that she had to support herself and her family and that she was in a particularly difficult situation at the moment because she had not been able to work for a while due to her suspension by the Medical Board. 95 However, there is no evidence which indicates any further than this what the Defendant's financial position really was. There is no evidence as to what assets she owned, as to whether she might have been able to sell any asset or use it as security for a loan in order to repay the $100,000, or as to what her other liabilities were. There is certainly no evidence that the Plaintiff had any knowledge of what the Defendant's financial situation was in any of these respects. 96 In the absence of any detailed information about the Defendant's financial position, I am unable to conclude that it was indeed precarious as at 15 April 2002 and that the Plaintiff knew it to be so. 97 As to the Defendant's alleged special vulnerability or inability to protect her own interests due to the effects of Pethidine addiction, Mr Bateman readily admits that he knew that the Defendant had been treated in the Northside Clinic for that addiction. The Defendant says that she remained for three weeks at the Northside Clinic in order to detoxify. When she was discharged on 5 March 2002 she was, it seems, no longer dependent on Pethidine but she says, and I accept, that she was weak and ill. She went home to recuperate and she was looked after by her family. 98 At a hearing before the Impaired Registrants Panel of the NSW Medical Board on 12 April 2002, the Defendant presented herself and obviously persuaded the panel that she was fit enough in all respects to resume medical practice, subject only to certain restrictions as to the right to prescribe certain drugs and to practise on her own. 99 On 15 April, when the Defendant met Mr T. Bateman at the Leichhardt Premises, she must have told him that her suspension had been lifted by the Medical Board and that she was now able to resume practice or there would have been no point to the meeting. The Defendant does not say that she told Mr Bateman during the course of the meeting that she was still sick, unfit for work or that she felt unable to think clearly enough to make decisions. Indeed, she negotiated successfully with Mr Bateman for the removal of some paragraphs of the 15 April letter which she found objectionable. 100 As to the Defendant's lack of legal advice, she does not say that she told Mr Bateman at or prior to the 15 April meeting that she had not sought legal advice about the variations or that she was signing the variation letter against her will because she felt pressured and had no choice. 101 In short, the evidence discloses that as far as the Plaintiff was aware on 15 April, the Defendant had been discharged some time previously from the Northside Clinic, presumably because she was cured of her Pethidine addiction, she had been recuperating since then, she had been assessed by the Medical Board as fit to resume medical practice, and she was now presenting as willing to work at the Leichhardt Premises on the terms proposed in the variation letter. If the Defendant was indeed under some disability or disadvantage in dealing with the Plaintiff as at 15 April, I cannot find that the Plaintiff was aware, or ought reasonably to have been aware, of that circumstance and that it unconscientiously took advantage of the Defendant's position. 102 It follows that the Plaintiff must fail on the evidence in her claim to set aside the variations, both under the general law and under s.51AC TPA. The consequence is that the Sale of Practice Contract has validly been varied in accordance with the letter of 15 April 2002 by the insertion of Clause 4.6, which is in the following terms: "the balance of the purchase price, namely $140,000, is payable if and only if completion of this sale has occurred and the Practitioner contract remains on foot from completion to at least the 5th anniversary of completion. If such balance becomes payable, it must be paid by the purchaser to the Doctor on such 5th anniversary." 103 By variation to Clause 4.1(a), completion of the Sale of Practice Contract was to occur on 29 April 2002 but time was not made of the essence. Clause 4.3 entitled either party to rescind the Sale of Practice Contract ab initio if completion did not occur in accordance with the Contract. There is no evidence that either party has exercised this right of rescission so that I must assume either that completion has duly occurred or that, if it did not, both parties have elected not to rescind so that completion is deemed to have occurred at some time or other for the purposes of amended Clause 4.6. 104 Under amended Clause 4.6, the Defendant is entitled to the balance of the consideration for the sale of her practice, i.e. $140,000, if the Practitioner Contract "remains on foot from completion to at least the 5th anniversary of completion" . I have held that the Defendant has not validly rescinded the Practitioner Contract; her purported rescission, therefore, constitutes a wrongful repudiation of the Practitioner Contract. However, there is no evidence that the Plaintiff has accepted that wrongful repudiation and has itself rescinded. The position at the present time is, accordingly, that if the Practitioner Contract continues to remain on foot for the whole of the period referred in amended Clause 4.6, the Defendant will be entitled to $140,000.

[52]

105 The Plaintiff contends that under Clause 10.4 of the Sale of Practice Contract it is entitled by way of liquidated damages to 50% of the gross fees paid for medical services rendered by the Defendant from 11 June 2002, when she commenced practice at the Concord Medical Centre, to the date when she ceases her continuing breaches of Clause 10.1, either voluntarily or in accordance with an injunction. The Defendant contends that Clause 10.4 is unenforceable as a penalty. 106 The essence of a penalty is a payment of money stipulated as in terrorem of the party in breach; the essence of liquidated damages is that the stipulated amount is a genuine pre-estimate of the loss which would be occasioned by the breach: Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, at 86 per Lord Dunedin. Whether a stipulation for payment upon breach of contract is a penalty or liquidated damages is a question of construction of the contract to be decided upon its terms and the inherent circumstances of each particular contract as at the time when the contract was made, not at the time when the breach occurred: ibid. The party asserting the invalidity of a contractual provision as being a penalty rather than liquidated damages bears the onus of making good that assertion: Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, at 1447; applied: Bridge Pump Co Pty Ltd v Myles Southwest Fuel Supplies Pty Ltd (unrep.) WA Full Court, 22 October 1997. 107 In order to show that Clause 10.4 of the Sale of Practice Contract is a penalty the Defendant would have to demonstrate that 50% of the gross fees paid to the Defendant for medical services rendered by her in breach of Clause 10.1 was out of all proportion to, or extravagant or unconscionable in comparison with, the greatest loss that could conceivably be proved to have flowed from the breaches: Dunlop Pneumatic Tyre Co at 87; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170; Esanda Finance Corporation Ltd v Plessnig (1989) 63 ALJR 238. The Defendant has made no attempt, either by evidence or in submissions, to discharge the onus of making good such a proposition; the Defendant has done no more than assert that Clause 10.4 is a penalty. 108 On the other hand, the Plaintiff points out that as at the time that the Sale of Practice Contract was entered into the Plaintiff had agreed to pay $239,000 for the goodwill of the Defendant's practice in consideration, inter alia, of the Defendant entering into the Practitioner Contract whereunder the Plaintiff would receive 50% of all fees received by the Defendant from her practice in the Leichhardt Premises for a period of five years. The Plaintiff says that there is, therefore, a demonstrated co-relation between the payment stipulated for liquidated damages in Clause 10.4 of the Sale of Practice Contract and the amount paid by the Plaintiff for the purchase of the Defendant's goodwill. As I have said, the Defendant has not endeavoured to demonstrate that this is not correct. 109 Accordingly, I am of the view that the Defendant fails in her claim that Clause 104. of the Sale of Practice Contract is unenforceable as a penalty.

[53]

110 The Plaintiff seeks an order for the return of the sum of $100,000 paid to the Defendant on 25 May 2001 under the Sale of Practice Contract as money had and received for the Plaintiff's use or on the basis of the Defendant's unjust enrichment, on the ground that the consideration for the payment has failed completely. Dr Bateman has given evidence that because the Defendant worked in the Leichhardt Premises only from 17 April to 9 June 2002 the value of the goodwill acquired by the Plaintiff under the Sale of Practice Contract was nil. 111 I am unable to accept this submission. There has been no total failure of the consideration to be provided by the Defendant under the Sale of Practice Contract. The Defendant has entered into the Practitioner Contract in accordance with Clause 7.1 of the Sale of Practice Contract and has delivered the relevant records to the Plaintiff in accordance with Clause 5. The Defendant has commenced practice at the Leichhardt Premises pursuant to Clause 7.2(a) of the Sale of Practice Contract although she breached that term shortly afterwards. The property and the goodwill of the Defendant's practice has passed to the Plaintiff and that is the only basis upon which the Plaintiff is now entitled to sustain its right to the restraint of trade imposed by Clause 10.1. Property in the Defendant's chattels used in the conduct of her practice has also passed to the Plaintiff. In those circumstances, it cannot be said that the consideration to be provided by the Defendant under the Sale of Practice Contract has failed totally. What has happened is that the Plaintiff has not obtained the whole of the consideration for which it contracted; for that disappointment it has its remedy in damages under Clause 10.4. It would be most unjust if the Plaintiff were to have an injunction for five years to protect the goodwill which it has purchased, liquidated damages for the Defendant's injury to that goodwill and, in addition, the return by the Defendant of the moneys which were paid for the goodwill. 112 For these reasons, the Plaintiff's claims for money had and received and for unjust enrichment fail.

[54]

113 The Plaintiff is not entitled to the orders sought in paragraphs 1 and 2 of the Relief claimed in the Amended Statement of Claim because the restraints of trade imposed in Clauses 10.1 and 10.2 of the Sale of Practice Contract are wider than is reasonably necessary to protect the Plaintiff's interests. 114 However, the Defendant is in breach of Clauses 10.1 and 10.2 of the Sale of Practice Contract, read down in accordance with s.4(1) of the Restraints of Trade Act , in conducting a medical practice at the Concord Medical Centre. The Plaintiff is, therefore, entitled to the order and the declarations sought in paragraphs 3, 4 and 5 of the Relief. 115 The covenant in restraint of trade imposed in Clause 5.5(a) of the Practitioner Contract does not protect any legitimate interest of the Plaintiff and is void as contrary to public policy. The declaration sought in paragraph 6 of the Relief is refused. 116 The provision for liquidated damages in Clause 10.4 of the Sale of Practice Contract is not unenforceable as a penalty. The Plaintiff is entitled to an order in terms of paragraph 10 of the Relief in respect of all breaches by the Defendant of Clause 10.1 of the Sale of Practice Contract up to the date of entry of judgment. 117 The Plaintiff is not entitled to the return of $100,000 as money had and received or on the ground of unjust enrichment. The orders sought in paragraphs 7 and 8 of the Relief are refused. 118 The Defendant is entitled to an order in terms of paragraph 20 of the Amended Cross Claim, the amount therein to be taken into account in calculating the amount for which judgment is to be entered for the Plaintiff on its Amended Statement of Claim. Otherwise, the Amended Cross Claim is dismissed. 119 I will stand the proceedings over to enable the parties to calculate the amount of liquidated damages to which the Plaintiff is entitled, and to bring in Short Minutes of Order reflecting these reasons for judgment. If there is a dispute about the calculation of liquidated damages, I will refer that matter to the Master for enquiry. 120 When the matter is brought back I will hear argument as to whether interest under s.94 of the Supreme Court Act 1970 (NSW) should be awarded and as to costs. - oOo -

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (55 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (9)

Cited By (17)