IPN Medical Centres (NSW) Pty Limited v Idoshore Pty Limited

Federal Court of Australia (Full Court)|2008-09-09|Before: Lindgren J, Tracey JJ

The nature and history of the proceeding 1 This appeal and cross-appeal concern issues arising from the operation of a contract for the sale of a business. In particular, provisions of the contract relating to adjustments of the purchase price after the purchaser of the business had acquired control of it led to claims both by the vendor and by the purchaser and a related company which was its guarantor. At first instance, there were orders that the purchaser pay to the vendor two specific sums of money with interest, as well as damages with interest. Orders were also made with respect to the costs of the proceeding at first instance. 2 The first appellant, IPN Medical Centres (NSW) Pty Limited, is a corporation which, at the time when the contract for the sale of the business was made, was called Foundation Medical Centres (NSW) Pty Limited and was the purchaser of the business. Its related company, IPN Healthcare Pty Limited, at that time was a public company called Foundation Healthcare Pty Limited, and was guarantor of the purchaser's obligations under the contract. In line with the usage adopted at first instance, and in the documents filed in this proceeding, it is convenient to refer to those companies, or either of them as the case may be, as "Foundation". The vendor of the business was Idoshore Pty Limited ("Idoshore"). 3 By the time the proceeding at first instance came to trial, Idoshore as applicant was claiming: (a) damages for misleading and deceptive conduct under the Trade Practices Act 1974 (Cth) ("the Trade Practices Act") in respect of certain alleged representations, or damages for breach of those representations as warranties collateral to the contract of sale of the business; (b) damages for breaches of the contract of sale of the business; and (c) repayment of the sum of $85,000 and the sum of $125,000, being the balance of a deposit held by Foundation as security against a diminution of the value of the business. 4 Foundation cross-claimed on the basis that the value of the business had in fact fallen below the specified level, entitling it to recoup some of the purchase price from Idoshore and to have access to the security deposit held against that eventuality. 5 The trial was before Conti J. On 7 August 2007, his Honour delivered judgment. His Honour made a declaration that, upon the true construction of the contract and in the events that happened subsequently, the Foundation companies were severally liable to pay to Idoshore an adjustment upwards to the purchase price pursuant to the contract, to the extent appearing in his Honour's reasons for judgment. His Honour ordered that Idoshore provide written calculations to give effect to that declaratory relief. He also ordered each of the Foundation companies to pay to Idoshore the sums of $85,000 and $125,000. He gave directions for submissions on the calculation of interest. He dismissed the cross-claim and invited written submissions as to costs. See Idoshore Pty Limited v IPN Medical Centres (NSW) Pty Limited [2007] FCA 1175. 6 The outstanding issues were not resolved until after Conti J had retired as a judge of the Court. They were therefore resolved by another judge, Emmett J. On 29 October 2007, his Honour ordered that, in addition to the sums of $85,000 and $125,000, each of the Foundation companies pay to Idoshore $98,489.02, as pre-judgment interest on those two sums, the sum of $220,579, being the adjustment upwards referred to in the declaration made by Conti J, and $11,226.21 as interest on that sum. Subject to two matters, the Foundation companies were ordered to pay Idoshore's costs of the proceeding on a party-party basis. The two matters were that, for the period between 30 May 2005 and 7 August 2007, those costs were to be calculated as all reasonable costs of Idoshore of the proceeding reasonably incurred, instead of on the usual party-party basis, and that Idoshore was to pay the costs of Foundation thrown away by the amendment of the statement of claim in March 2006 and the vacation of the hearing dates by order of the Court on 3 March 2006. See Idoshore Pty Limited ACN 068 703 293 v IPN Medical Centres (NSW) Pty Limited ACN 093 560 448 [2007] FCA 2025. 7 On 28 August 2007, Foundation filed a notice of appeal, purporting to appeal against the declaration made by Conti J and against Conti J's orders in respect of the sums of $85,000 and $125,000 and the order for payment of interest to be calculated. These orders did not determine finally the rights of the parties in the proceeding at first instance. Although the orders for the payment of the specific sums of money have the appearance of finality, the amount of the adjustment upwards pursuant to the declaration and the amounts of interest, as well as questions of costs, remained outstanding. At least in part, and probably in their entirety, the orders the subject of the original notice of appeal were therefore properly classed as interlocutory. See the test referred to by the Full Court in Cubillo v Commonwealth [2001] FCA 1213 (2001) 112 FCR 455 at [182]. By s 24(1A) of the Federal Court of Australia Act 1976 (Cth), an appeal is not to be brought from an interlocutory judgment without leave. This was recognised by the filing of what was described as a "supplementary notice of appeal" on 15 November 2007, in the same terms as the original notice of appeal, with the addition of a paragraph asking that the appellants be granted leave to appeal from "the decision" of Conti J dated 7 August 2007. No application was ever made by motion on notice, in accordance with O 52 r 10(2) of the Federal Court Rules, and no application at all was made within the seven-day time limit imposed by O 52 r 10(2A)(b). Of course, by the time this Full Court came to hear the appeal, final orders had been made. In the absence of objection, the Court enlarged the time for making an application for leave to appeal, to the extent that such enlargement was necessary, and granted leave to appeal, to the extent that such leave was necessary. The appeal therefore proceeded regularly. 8 Idoshore cross-appealed in respect of the calculation of the adjustment upwards. The notice of cross-appeal was filed on 19 November 2007 and related both to the declaration made by Conti J and to the orders made by Emmett J with respect to the amount of the adjustment upwards and the amount of interest on that sum. 9 Before dealing with the grounds of appeal and cross-appeal, it is necessary to set out in some greater detail the facts, to provide some account of how the parties' claims bore on those facts, and to summarise the findings of Conti J.

The facts, the claims and the findings 10 In the course of approximately five years up to the year 2000, Idoshore established and expanded a business known as Oxford Square Medical Centre ("OSMC"). The managing director of Idoshore was Mr P G O'Shanassy, a legal practitioner who also held a Master of Business Administration degree, and who conducted a legal practice as well as being heavily involved in the administration of Idoshore. OSMC was conducted in leased premises in Oxford Square in inner Sydney. Its business was essentially that of facilitating the provision by qualified medical practitioners of medical services to those who sought them. Idoshore made available consulting rooms and employed necessary ancillary staff. It was remunerated in part by an agreed percentage of fees charged by doctors to patients whom they saw at the OSMC premises, and partly by rent paid by doctors to whom Idoshore sublet portions of its premises. In the course of its development of OSMC, Idoshore had expanded its premises and in 1999 had absorbed a practice conducted in Kings Cross by Dr Joseph Grech, who was appointed medical director of OSMC. 11 In September 2000, after an expression of interest in purchasing OSMC by Foundation, negotiations for that purchase began. Among the people involved in the negotiations on behalf of Idoshore were Mr O'Shanassy and Dr Grech, and among those involved on behalf of Foundation were a Mr Meehan and a Dr Jones. There were written heads of agreement on 31 October 2000 and a detailed contract in writing dated 14 December 2000. In the proceeding at first instance, Idoshore alleged that Mr Meehan had made a number of representations to Mr O'Shanassy in the course of negotiations, particularly as to the intentions of Foundation with respect to the future expansion of the business, on which Idoshore claimed to have relied in entering into the contract. These representations were the basis for the claims in respect of misleading and deceptive conduct or breach of collateral warranties. In his reasons for judgment, Conti J rejected those claims, on the basis that the contract of 14 December 2000 was so detailed and comprehensive that there was no room for the view that Idoshore was induced to enter into it by any prior representation, or that any such representation survived as a collateral warranty. There is no appeal from this aspect of his Honour's judgment. The only issues in dispute at the appeal stage are those relating to the terms of the contract of 14 December 2000 and to events subsequent to the making of that contract. 12 In the course of negotiations about the purchase price for OSMC, agreement emerged about the manner in which the price should be calculated. The contract contained a crucial definition in cl 1.1 of the term "EBITDA". This term was defined to mean "earnings before interest, tax, depreciation and amortisation, determined in accordance with the Accounting Standards". "Accounting Standards" was defined to mean "the Australian Accounting Standards from time to time, and where no accounting standard exists means generally accepted accounting principles for a business similar to" OSMC. After making separate calculations, the parties agreed on the "EBITDA Benchmark", as being the maintainable EBITDA of OSMC, the figure being $250,000. The purchase price was agreed at a multiple of 4.5 times the EBITDA Benchmark, ie $1,125,000. In addition, cl 3.3 of the contract made detailed provision for the adjustment of the purchase price. It is unnecessary for present purposes to set out the whole of these provisions. The effect of cl 3.3(a) was that an adjustment to the purchase price would be made 12 months after the completion date, calculated by applying the 4.5 multiple to the amount by which the EBITDA for the first year exceeded the EBITDA Benchmark. In other words, if in the first year of operation of the business by Foundation, the EBITDA was $270,000, then the first adjustment would be 4.5 times $20,000, or $90,000. By cl 3.3(d), Idoshore acknowledged that Foundation intended to undertake a relocation of OSMC. If the parties agreed to such a relocation within 18 months from the completion date, there was to be a second adjustment to the purchase price at 24 months from the date of the relocation, calculated by a different formula. The relocation never in fact occurred. 13 Clause 3.9 of the contract is crucial to the present case. It reads as follows: The Purchaser agrees that it will not make any material changes to the organisational structure, operations and strategic direction of the Business or the Centre without consulting with, and receiving consent (such consent not to be unreasonable [sic] withheld) from the directors of the Vendor acting in an advisory capacity with its primary objective to ensure that the Purchaser achieves EBITDA and GP EBIT growth (which ever [sic] is applicable). 14 By cl 3.10, Idoshore acknowledged that Foundation intended to "grow and expand" OSMC and "subject to cl 3.9, will not impede" Foundation. 15 Clause 10.1 of the contract provided as follows: The Vendor warrants and covenants to the Purchaser, to the extent that such covenants and warranties shall survive Completion, that to the best of its knowledge and belief: There followed a number of expressions of matters of concern to the parties about the preliminaries to entering into the contract. Somewhat incongruously, there was also included para (n), in the following terms: the Year one (1) EBITDA (as defined in clause 3.3(a)) will not fall below 90% of the EBITDA Benchmark, or in the alternative, where the Relocation occurs within 12 months of the Completion Date, the Year one (1) Relocation EBITDA (as defined in clause 3.3(b)) will not fall below 90% of the EBITDA Benchmark. 16 Clause 10.5 of the contract made provision for the retention by Foundation of the "Warranty Security Deposit", as security for the breach of any of the warranties Idoshore had given. The parties seem to have assumed that the security would cover any diminution in the value of the business, as contemplated by cl 10.1(n), if that should occur, without regard to any question of prior knowledge or belief on the part of Idoshore. 17 On 31 January 2001, control of OSMC passed from Idoshore to Foundation. This date was the completion date for the purposes of the contract. The EBITDA, as calculated by Foundation, for the year ending on 31 January 2002 was substantially lower than 90% of the EBITDA Benchmark of $250,000. An element of Idoshore's claim at first instance was that, in breach of cl 3.9 of the contract, Foundation had attributed to OSMC, and consequently taken into account in the calculation of the first year's EBITDA, cost items that were not comparable with anything previously incurred by Idoshore and that did not belong properly in the calculation. These were itemised as: the cost of a new layer of management, of about $80,000; part of the corporate overhead costs of the Foundation group, including costs of administration of the second appellant as a public company, in the sum of about $48,000; and costs said to be peculiar to Foundation as an employer of a much larger size than Idoshore, or than OSMC as a stand-alone enterprise, in particular group tax, of approximately $17,000. 18 With respect to these costs, Conti J said at [56] of his reasons for judgment: There is force in that assignment of significance relevantly by Idoshore concerning those so-called 'new costs'. It would be difficult to rationalise a proposition to the effect that costs of those descriptions, being personal or otherwise peculiar to Foundation, could have been objectively envisaged mutually by the contracting parties as being accommodated contextually within the costs measurement formula of EBITDA, those being costs originating on a non-arm's length basis and having no reflection correspondingly in the EBITDA components appertaining to Idoshore. 19 Further, Idoshore claimed that the bringing into account of those cost items amounted to, or evidenced, breaches of cl 3.9 of the contract, because they involved material changes to the organisational structure, operations and strategic direction of OSMC, made without consultation with or the consent of the directors of Idoshore. At [57] of Conti J's reasons for judgment, his Honour also saw force in principle in this claim. His Honour accepted that Foundation had introduced factors into its calculations which at least arguably stood outside a fair and realistic operation of cl 3.9. His Honour also accepted that, whilst Foundation could choose for its own reasons to incur costs, or have them inflicted on it because of its peculiar characteristics, Foundation could not bring those costs to account in calculating the EBITDA of OSMC after acquisition. Later in his reasons for judgment, at [89], Conti J referred to "the reasons and conclusions I have given as to Foundation's breach of clause 3.9 referrable [sic] to Foundation's effectuation of 'material changes'", and held that it followed that Idoshore was entitled in principle to payment of moneys by way of "earn-up" (ie adjustment upwards of the purchase price), at least on that basis. 20 Further, at [158], Conti J said: Foundation's endeavours to account for the post-completion financial results concerning the operations of the OSMC 'Business' per medium of its expert witness Mr Gower, were of no assistance of significance to its case as will have been already appreciated from observations I have already made. Transactions inherent in relation to what I have recorded in [56] were not explained, much less rationalised by Foundation relevantly in terms of the operation of clause 3.9, and in particular by way of rebuttal of the occurrence of '... material changes to the organisational structure, operations and strategic direction of the Business or the Centre' within clause 3.9. Conversely, Foundation's case the subject of its cross-claim based upon the operation of sub-clauses 10.1(n) and (p) has therefore not been made out at least to the extent of those outgoings. Foundation cannot in principle invoke the operation of those latter contractual provisions in circumstances referable substantially to its own breaches of the Agreement. Given the circumstances I have earlier summarised in the course of my narrative of the case advanced by Idoshore in chief, the evidentiary onus effectively passed to Foundation to demonstrate reasons contrary to, or at least at variance with, the case which Idoshore prima facie established adversely to Foundation in those aspects, being an evidentiary onus in relation to which Foundation at least fell short in adequately addressing. 21 It is clear from these passages in his Honour's judgment that Conti J made findings that Foundation had calculated EBITDA in respect of the first year after the completion date of the contract incorrectly, by introducing into the calculation elements of costs that did not belong to the proper calculation of that EBITDA in accordance with the provisions of the contract. Second, his Honour found that Foundation had acted in breach of cl 3.9 of the contract, by making changes of one or more of the kinds referred to in that clause without either consultation with or the consent of Idoshore. 22 It is also necessary to set out some facts, concerning two particular medical practitioners, relevant to the claims made by Idoshore. One of these medical practitioners was Dr David Fox, who had entered into what was described in cl 2(a) of the contract as a "Facilities and Services Contract", which was said by cl 2(a) to be "interdependent" with the contract. In the course of the first year of Foundation's control of OSMC, Dr Fox indicated to Foundation that, unless he received some financial inducement, he intended to leave OSMC. He demanded the sum of $250,000, which was described as a "key man" payment, in order to secure the continuation of his services. Foundation agreed to pay him this amount. Foundation then approached Mr O'Shanassy, with the proposition that it was in Idoshore's interests to contribute to this payment, as Dr Fox's continued presence was regarded as crucial to the success of OSMC. Following negotiations, Idoshore and Foundation entered into a deed of variation of the contract, dated 28 May 2001. In substance, they agreed that they would split the payment to Dr Fox equally between them. Foundation was able to find $40,000 of its share of the payment without resort to requesting funds from the Head Office of the Foundation group in Perth, which it did not want to do. Accordingly, by the deed of variation, it was agreed that Foundation could use $85,000 out of the Warranty Security Deposit, on the basis that it would repay $85,000 into the Warranty Security Deposit fund at a later time. The deed of variation provided that the share of the money withdrawn from the Warranty Security Deposit by Foundation would be treated as an interest-free loan by Idoshore to Foundation, to be repaid by 1 February 2002. Idoshore's contribution to the key man payment of $125,000 was also to come out of the Warranty Security Deposit. By letter dated 28 May 2001 to Foundation's solicitors, Idoshore authorised the payment out of the Warranty Security Deposit of $210,000 for use by Foundation in accordance with the agreement with Dr Fox. 23 Idoshore's claim in respect of the specific sum of $85,000, for which it was successful at first instance, was based on the simple proposition that Foundation had not repaid that amount into the Warranty Security Deposit fund as required, and that Idoshore was entitled to have the balance of the Warranty Security Deposit paid out to it, because there was no breach of any of the relevant warranties. There is no appeal from the order that Foundation pay the $85,000 to Idoshore. Idoshore's claim for the $125,000 was that it had been induced to make that payment, and to enter into the deed of variation, by representations made to it by Foundation in the course of the negotiations leading to the deed of variation. In particular, those representations concerned the intention of Foundation to move the OSMC from its Oxford Square premises into larger premises not far away, in what was described as the Commonwealth Bank of Australia ("CBA") building. This would have involved an expansion of OSMC, to which Dr Fox's continued participation was critical. A claim was made for repayment of the sum of $125,000 pursuant to s 87 of the Trade Practices Act. Alternatively, there was a claim for breach of warranty on the basis that the move did not take place and the consideration for the payment of $125,000 had therefore totally failed and Foundation had no right to retain any part of that money. At [87] of Conti J's judgment, his Honour held that "There is force in Idoshore's submission that the consideration for and purpose of the payment of the $210,000 failed, and that the totality of those warranty retention moneys should be returned to Idoshore beneficially." His Honour dealt with the matter again in his conclusions. At [165]-[166], his Honour held that Idoshore became entitled to payment of the sum of $125,000 because it was advanced on the footing of OSMC being relocated, which never occurred at the instance of Foundation. 24 The second of the medical practitioners was Dr Grech. He had entered into an agreement on 21 August 1999, obliging him to work exclusively at OSMC for 18 months, providing for a six-month period of notice of termination and imposing on him an obligation not to establish a practice within two kilometres of OSMC for 24 months after leaving OSMC. On 11 May 2001, Dr Grech gave notice of termination of this agreement. He did not work out the full term of his notice period, but left on 21 September 2001. In apparent breach of the agreement, Dr Grech then established a new medical practice on his own account within two kilometres of OSMC. Idoshore raised its concerns with Foundation about the effect of Dr Grech's departure. Idoshore suggested that Foundation should sue Dr Grech. Foundation declined to do this. Further, Foundation did not replace Dr Grech with a medical practitioner of equivalent standing and earning ability. The result was that OSMC lost the benefit of the 40% of Dr Grech's billings to which it was entitled from 21 September 2001 until 31 January 2002, when the first year after the completion date expired. This loss of the percentage of Dr Grech's billings affected the calculation of EBITDA for that year. 25 Idoshore claimed that the diminution in EBITDA from the loss of Dr Grech should be borne by Foundation, because Foundation refused to sue Dr Grech and took no step to replace him. At [98] of his reasons for judgment, Conti J expressed the view that an order for specific performance of the contract would not have been obtainable against Dr Grech and that the proof of loss actually sustained, to found an action for damages, would have practical difficulties, so as to make such an action "an imponderable if not largely unrewarding course to be undertaken in terms of outcome." At [162], his Honour said, "I am unable to identify any viable cause of action in law for the recovery of moneys by Idoshore from Foundation directly or indirectly referrable [sic] to any conduct relevantly of Foundation regarding" loss of billings by Dr Grech or consequential loss. According to Conti J, no viable cause of action for breach of contract was formulated or particularised. Nor was any cause of action in contract or tort, or for equitable damages, persuasively articulated by Idoshore. His Honour was unable to identify any sound basis for imputing an obligation to Foundation to have sought injunctive relief against Dr Grech, and the task of calculation of loss of approximately 44 working days and the cost involved in seeking relief were not subjects which could be attributed to breach of any provision of the contract by Foundation, "or at least clearly or readily so." At [163], his Honour held that Idoshore had not established "the juridical framework of a viable cause of action in relation to the Dr Grech controversy." At [164], his Honour held that, in assessing the amount of the "earn-up" to which Idoshore was entitled in respect of the first year after the completion date, a deduction was required from figures that had been advanced on Idoshore's behalf at the trial, in order to ascertain the amounts to which Idoshore was entitled. Such an adjustment was part of what his Honour directed Idoshore to provide, by way of calculations, to give effect to his Honour's declaration.

The grounds of appeal and cross-appeal 26 The first three grounds of the appeal related to the issue of breach of cl 3.9 of the contract. Foundation contended that Conti J erred in finding that Foundation bore any onus of proving the absence of breach of that clause, that his Honour erred in holding that there had in fact been breaches, and that on the basis of his Honour's conclusions as to the operation of the contract and particularly cl 3.9, his Honour erred in dismissing Foundation's cross-claim. Grounds 4 and 5 of the appeal related to the order that Foundation pay Idoshore the sum of $125,000. Foundation contended that Conti J erred in finding that Idoshore was induced to contribute $125,000 out of the Warranty Security Deposit by Foundation's promise to relocate OSMC and also that his Honour erred in holding that Foundation was liable to repay to Idoshore the sum of $125,000 as part of the Warranty Security Deposit. Save for the order that Foundation pay the specific sum of $85,000, Foundation sought to set aside the declaration and orders of Conti J, and in lieu thereof sought orders that Idoshore's claim be dismissed, there be judgment for Foundation on the cross-claim and that Idoshore pay Foundation's costs of the proceeding at first instance and the appeal. 27 Idoshore's notice of cross-appeal contained four grounds, all related to the quantification of the upward adjustment of the purchase price, ie the amounts payable to Idoshore in accordance with the orders made by Emmett J, other than the specific amounts. Idoshore contended that Conti J erred in holding that the adjustment upwards referred to in his Honour's declaration of 7 August 2007 should be made in accordance with Idoshore's expert witness's lower assessment of the quantum of damages, that his Honour ought to have held that the adjustment upwards should be made in accordance with the expert's upper assessment, that his Honour ought to have found that the income of OSMC would have increased by reason of growth of billings but for the conduct of Foundation, and that his Honour erred in finding that the assessment required revision downwards as a result of the loss of billings for Dr Grech.

The breaches of cl 3.9 issue 28 In contending that Conti J erred in casting an evidentiary onus onto Foundation in relation to the alleged breaches of cl 3.9 of the contract, counsel for Foundation relied on passages from the judgment of Barwick CJ in Katsilis v Broken Hill Pty Co Ltd (1977) 18 ALR 181 at 197, where his Honour said: No doubt in some circumstances, when a claiming party establishes that the defendant party has knowledge and information which would establish the plaintiff's case, failure to give evidence or to produce the information may in some circumstances afford sufficient evidence for the plaintiff to make a prima facie case which the defendant must then displace. It is, in my opinion, inaccurate to speak of this consequence as a shifting of the onus or burden of proof: or as raising a presumption of law or of fact in favour of the claimant party. The onus of establishing his case still rests on the claimant, though silence or non-production of information on the part of or by the defendant party may have furnished sufficient evidence to warrant a conclusion in his favour. The situation is not unlike that in which the event out of which a plaintiff's injury has arisen of its nature bespeaks fault on the part of the defendant. I have dealt elsewhere with the suggestion that in such a case the onus changes or a presumption arises. But in any case I would point out that it cannot be said with propriety in this case that the respondent knew the truth as to the origin of the invading particle. There is no justification whatever for concluding that the respondent had any such knowledge. All that the evidence established was that the respondent's expert believed that the particle came from the cutter. However much it might be said that the investigators had overlooked the possibilities of the beater pick as that source, it cannot be said that they had identified it as that source or that they had even rejected it as such, in preferring the view that the particle came from the cutter. It cannot be enough for the purposes of the proposition quoted from Halsbury to establish that the actual pick was left in the respondent's possession and that presumably it remained there, though unidentified, either as the actual pick in use or as the possible source of the invading particle. ... Ordinarily, though a case is normally better tried on the evidence which is produced than on that which is not, it can properly be said that the failure of a party to give or produce evidence which, in the circumstances of the case, that party in its own interest would be expected to give or produce, warrants the conclusion that, if given or produced, the evidence would not support that party's case. Indeed, in some circumstances it might be inferred that it would support the opponent's case; but, if so, it must depend very much on the circumstances. But, in any case, the inference would depend upon some element of conscious repression or withholding of the evidence. The warrant for the inference must depend upon the deliberation with which the evidence is withheld and the appreciation or likely appreciation of the party of its significance in the case. In my opinion, these propositions are in accord with the decided cases which I have taken occasion to examine. 29 Although Barwick CJ was dissenting as to the result in Katsilis, what his Honour said in those passages has been accepted as a correct statement of the law. There is little doubt that the present case falls within what Barwick CJ said in the first sentence of the passage quoted. Idoshore established that Foundation had brought into the calculation of EBITDA for the first year after the completion date the costs referred to in [18] above. If anybody could have explained those costs as properly part of the EBITDA calculation, or as something other than breaches of cl 3.9, it was Foundation. To the extent to which Foundation attempted to do this by its expert witness, Mr Gower, Conti J found at [158] of his reasons for judgment (quoted in [21] above) that the evidence it provided was of no assistance of significance to its case. Foundation did not call Mr Meehan, Dr Jones, or anyone else involved in its management or the management of OSMC during the relevant period, to give evidence at the trial. It was no surprise that Conti J found that Foundation did not explain or rationalise relevantly in terms of the operation of cl 3.9 the transactions inherent in what his Honour had held in [56] of his reasons for judgment to be costs not envisaged by the contracting parties as being within the formula of EBITDA. As his Honour said, Idoshore had made a prima facie case in respect of those costs. In accordance with what Barwick CJ had said, Foundation then had to displace that case. This was not a matter of casting any onus other than the evidential onus onto Foundation. It is common to speak of the practical requirement that a party must lead evidence or risk losing an issue on which there is other evidence as the evidential onus. The fact that a party other than the party carrying the overall onus of proof of the issue might have an evidential onus at a particular point does not change the incidence of the overall onus of proof. As Barwick CJ said, silence or non-production of information by the other party may furnish sufficient evidence to warrant a conclusion in favour of the party carrying the overall onus of proof. Conti J did not apply any presumption in favour of Idoshore, and did not cast onto Foundation the overall onus of proof. His Honour's analysis of the evidence in the circumstances was unexceptionable. 30 Counsel for Foundation argued that Conti J was wrong to find against Foundation in relation to cl 3.9, because there had been sufficient consultation to satisfy the requirement of that clause. This was because Dr Gesovic, who was one of the medical practitioners working at OSMC, was in constant touch with Mr O'Shanassy about what was going on at OSMC. Even if this were the case, the fact that information about the changes Foundation was making may have filtered through to Idoshore did not amount to the consultation required by cl 3.9. In addition, cl 3.9 required the consent of Idoshore to the changes to which it referred, and there was no evidence that any such consent was sought or given. 31 In any event, it is impossible to say, as counsel for Foundation attempted to argue in the appeal, that the consequence of overturning Conti J's finding as to breaches of cl 3.9 would lead to dismissal of Idoshore's claim with respect to upward adjustment of the purchase price and to judgment for Foundation on the cross-claim, on the footing that the EBITDA had fallen below 90% of the EBITDA Benchmark. Even if the costs that Conti J found were not properly taken into account in the calculation of the EBITDA did not amount to breaches of cl 3.9, they could nonetheless be found not to belong in the correct calculation of the EBITDA, as his Honour found. Counsel for Foundation was unable to demonstrate any error in his Honour's judgment in this respect. It was open to Conti J to find that, on the proper construction of the EBITDA formula, in accordance with accounting standards and the evidence of the expert witness on whom Idoshore relied, that Foundation had calculated the EBITDA incorrectly, and that the costs to which his Honour referred in [56] of his reasons for judgment should be excluded from that calculation. This is the conclusion to which his Honour came. His Honour did not assess damages separately in respect of breaches of cl 3.9, so that the conclusions to which he came about such breaches were effectively a side issue. 32 No occasion arises to overturn Conti J's conclusion that the costs to which he referred in [56] of his reasons for judgment should not have been taken into account in the calculation of the EBITDA for the first year after the completion date of the contract. The first three grounds of the notice of appeal must fail.

The specific sum of $125,000 33 Counsel for Foundation argued that, although Mr O'Shanassy's evidence that he had been induced to agree to the contribution of $125,000 towards the "key man" payment to Dr Fox by the representation or promise about moving the OSMC to other premises had not been disputed, Conti J should not have accepted it. The argument was that his Honour should have taken the same view that he took in relation to the contract, namely that the fact that the parties had legal representation in drawing up the deed of variation, and that the deed of variation contained detailed provisions, were grounds for saying that no pre-contractual representation or warranty survived. This argument must be rejected. There was no requirement for consistency of findings in this respect. Rather, the requirement was for Conti J to find the facts in accordance with the evidence. There is nothing to suggest that his Honour did not do so, either in relation to his rejection of the claim that pre-contractual representations or warranties survived the detailed and precise terms of the contract, or in his finding that a representation or promise induced Idoshore to enter into the deed of variation. The finding challenged was open to his Honour on the evidence and Foundation did not establish that his Honour made any error in making the finding. 34 There was also a suggestion that Conti J incorrectly regarded the payment of $125,000 out of the Warranty Security Deposit, being Idoshore's contribution to the key man payment, as a loan, whereas the Warranty Security Deposit was not Idoshore's to lend. At [166] of his reasons for judgment, his Honour referred to Idoshore as having "advanced" the sum of $125,000 on the footing that OSMC would be moved to the CBA site. His Honour also referred to the express agreement of Foundation to restore the sum of $85,000 to the Warranty Security Deposit, by way of "repayment" of Idoshore's "loan" to Foundation. The description of the payment of $85,000 as a loan accorded with the express terms of the deed of variation, in which that term was used with respect to that payment. His Honour did not use the word "loan" to describe the payment of $125,000. As his Honour found, in the absence of breaches of the warranties in cl 10.1 of the contract, Idoshore was entitled to receive the amount held in the Warranty Security Deposit fund (part of which had been expended by agreement between the parties for legal costs) as part of the purchase price. In the context of the express description of the payment of $85,000 out of the Warranty Security Deposit as a "loan", and the finding that Idoshore had been induced to authorise the payment of the $125,000 out of the Warranty Security Deposit by Foundation's representation or collateral warranty about the proposed move to the CBA premises, the use of the word "advanced" in relation to the payment of $125,000 cannot be regarded as an incorrect characterisation of the payment as a loan. In any event, the effect of the orders made by his Honour was to restore the entitlement of Idoshore to the balance of the Warranty Security Deposit, by disregarding the payment out of $125,000. The orders were made because Idoshore was induced to authorise the payment out by Foundation's representation about moving OSMC to the CBA premises, or because that representation was a collateral warranty, and the consideration for the payment had wholly failed because of the absence of any move of the premises. Any incorrect characterisation of the payment of $125,000 as a loan could have no effect on Idoshore's entitlement to repayment of that sum on the basis on which that repayment was ordered. 35 Grounds 4 and 5 of the notice of appeal were not made out.

The assessment of the upward adjustment 36 Counsel for Idoshore contended that Conti J had made errors in relation to the assessment of the amount, ultimately ordered to be paid by Emmett J on the basis of further calculations, in respect of the upward adjustment of the purchase price as a result of the increased EBITDA for the first year following the completion date of the contract. To resolve this issue, it is necessary to refer to what Conti J said at [105] of his reasons for judgment: Idoshore provided to the Court the following table of comparative figures relating to each such approach, which I will reproduce below: Lower Upper (i) Using the adjusted Foundation/ Gower accounts Year 1 EBITDA 441,534 Benchmark EBITDA (250,000) EBITDA Growth 191,534 x 4.5 earn up 861,903 Plus return of $225,000 security 225,000 (Total) $1,086,903 (ii) Deloitte: using fair market value Fair market value $1,400,000 $1,650,000 Purchase price actually paid by Foundation ($900,000) ($900,000) (Total) $550,000 $800,000 (iii) Deloitte: using EBITDA Earn Up $225,000 (wrongly retained by Foundation on the purchase price) $225,000 $225,000 First EBITDA $334,444 $347,475 Benchmark EBITDA (250,000) (250,000) EBITDA Growth $84,444 $97,475 x 4.5 earn up $379,998 $438,638 (Total) $604,998 $663,638 Idoshore contended that on any one of those three approaches, Idoshore should be entitled to recover at least an amount in the range of $500,000 to $1,087,000, together with any applicable interest and costs. The foregoing calculations purportedly extend to general damages for breach of the warranties and representations made collaterally to the formation of the Business Sale & Purchase Agreement and therefore to claims extending beyond the scope of operation of the Agreement and clause 3.9 thereof in particular. Moreover the calculations apparently encompass the Dr Grech issue, assuming its resolution in favour of Idoshore, contrary to my finding on that issue. It suffices for me presently to place the foregoing calculations on record, but given my findings in relation to Idoshore's more limited entitlement to damages confined to breach of clause 3.9 of the Agreement and not more broadly as it were for breach of representations and warranties collaterally made to the formation of the Agreement, and as to exclusion of Idoshore's entitlement in relation to Dr Grech, it becomes necessary for general damages to be assessed on a more restricted approach to calculation. 37 The third method of calculating the amount of the upward adjustment was based on historical figures for the first half of the year immediately following the completion date of the contract ie the six months from 1 February to 31 July 2001, as calculated by Idoshore's expert, which were then projected to have continued at the same rate during the following six months. Counsel for Idoshore contended that Conti J should have taken the actual figures, set out in the evidence of Foundation's expert witness, then adjusted them by adding in cost increases, a drop in rental and other income, and an amount in respect of failure to grow billings, producing an EBITDA for the first year of approximately $535,000. This would have resulted in the application of the multiplier of 4.5 to the excess of EBITDA calculated by this method over the EBITDA Benchmark, which was approximately $285,000. This would have led to a total payment of $1,281,753. This method was similar to method (i) appearing in [105] of Conti J's reasons for judgment, except that counsel for Idoshore contended that the figure of $441,534 given as the Year 1 EBITDA in that method of calculation was inaccurate and should have been approximately $535,000. 38 These submissions, put in the context of the cross-appeal, failed to surmount some basic hurdles. As his Honour said in [105] of his reasons, the methods of calculation he set out were provided by Idoshore. In fact, they came directly from written submissions Idoshore placed before Conti J. To the extent to which the $441,534 was erroneous, the error was that of Idoshore, not that of his Honour. In its written submissions to Conti J, Idoshore included 10 pages of what it proposed as adjustments to the accounts produced in evidence by Foundation's expert witness. In para 20 of those submissions, it was contended that EBITDA in Year 1 would have been $441,534, on the basis of the calculations that appeared in the submissions. This figure found its way into the three methods of calculation quoted by Conti J in [105] of his reasons for judgment. In Idoshore's written submissions, they were included under the heading "The Methods of Assessing the Quantum". It was clear that what Idoshore was submitting to his Honour was that it was open to him to calculate the amount of the upward adjustment to the purchase price by any of the three methods set out. The submission was not about whether his Honour should find that there had been breaches of the contract by Foundation, as counsel for Idoshore endeavoured to argue on the appeal. It was about how the calculation of what was due to Idoshore should be made if Conti J should find in its favour on the other issues in the case. Having put a particular case to Conti J, Idoshore cannot now propose a case at variance to that on appeal. It cannot establish that Conti J was in error in adopting one of the methods of calculation proposed by Idoshore. It is true that the adoption of the first method, rather than the third, would have been more generous to Idoshore, but lack of generosity is not error. Subject to the adjustment in respect of the Dr Grech issue, Idoshore was awarded what it asked for, at least in the alternative. It cannot ask for more on appeal. 39 The remaining issue on the cross-appeal was Idoshore's contention that, having adopted the third method of assessment proposed, Conti J should not have reduced the amount to which that method led by reference to the loss of Dr Grech. The argument was that the method of calculation depended not upon actual figures for the second six months of the first year after the completion date (which was the six months in which the loss of Dr Grech's services was felt), but on extrapolation of the figures for the first six months. The figure adopted for that six months should be treated as an estimate, designed to take account of all possible vicissitudes. It should not be adjusted to take account of an actual change in one respect. This argument cannot be sustained. There is no doubt that an estimate based on the projection of the figures for the first half year could be treated as taking into account the possibility of variations up or down that might be expected in the ordinary course of the operation of OSMC. It was Idoshore's case, however, that the loss of Dr Grech's services was no ordinary variation. Idoshore emphasised the importance of Dr Grech's presence in the success of OSMC and the serious effect his early departure had on its fortunes. There was no reason why, once the actual impact of the loss of Dr Grech and his billings could be calculated, it should not be taken into account in providing a figure for the calculation of the EBITDA, for the purposes of the upward adjustment of the purchase price. Idoshore could not establish error on the part of Conti J in taking it into account. 40 Nor could Idoshore's attempt to visit the financial consequences of Dr Grech's departure on Foundation be accepted. Conti J may have overstated the position by suggesting that an order for specific performance of the contract with Dr Grech would have been impossible. There can be little doubt, however, that a court, exercising its discretion properly, would not have made orders compelling Dr Grech to work out the remainder of his notice period. Conti J was correct in saying that there were serious practical difficulties in attempting to calculate loss and damage suffered by reason of Dr Grech's failure to work out his full period of notice, and by his establishment of a practice within two kilometres of OSMC. The amount of billings lost to OSMC because of Dr Grech's failure to work out his notice could be calculated, as it was. Much more problematic was a calculation of loss by reason of Dr Grech's establishment of a practice within two kilometres of OSMC. Plainly, Dr Grech was likely to have taken a significant percentage of his patients with him. How many of those would not have gone with him if he had moved a little further away, but would have been prepared to consult another doctor at OSMC, would have involved a difficult process of assessment. 41 In any event, it would have been damaging to Foundation's commercial interests as an operator of medical centres to have become involved in legal action against doctors. It would more than likely have made it more difficult for Foundation to secure the services of doctors, not only at OSMC but also at other medical centres operated by the Foundation group. There was evidence before Conti J, in an affidavit of Mr O'Shanassy, that Dr Jones on behalf of Foundation had expressed a reluctance to engage in litigation with doctors, because of damage to Foundation's reputation, in a conversation that Mr O'Shanassy and Dr Gesovic had with Dr Jones about Dr Fox's threatened departure. In the circumstances, Conti J was not in error in taking the view that it was unreasonable to expect Foundation to sue Dr Grech. 42 Idoshore also attempted to suggest that Foundation had taken no steps to replace Dr Grech and therefore should bear the responsibility for loss suffered as a result of his departure. Conti J made no finding about this issue. This was because there was no evidence before his Honour as to whether Foundation had or had not taken steps to replace Dr Grech. The only evidence was in Mr O'Shanassy's affidavit, in which he quoted Dr Jones as saying that Foundation would use its medical industry connections to find a suitable replacement for Dr Grech. In other words, Foundation expressed the intention of making attempts to find a replacement. In the absence of any evidence suggesting that it made no such attempt, no finding could be made (particularly on appeal) that it failed to make any such attempts. 43 For these reasons, Idoshore has failed to make out the grounds of its cross-appeal.

Conclusion 44 Foundation having failed to make out any of the grounds of its appeal, the appeal must be dismissed. Similarly, Idoshore having failed to make out any of the grounds of its cross-appeal, the cross-appeal must be dismissed.

Costs 45 Ordinarily, costs would be expected to follow the event. Orders that Foundation pay Idoshore's costs of the appeal and that Idoshore pay Foundation's costs of the cross-appeal would give rise to an increase in costs, because of the necessity to calculate bills of costs on a party-party basis, negotiate and, perhaps, engage in the process of taxation of costs. In the circumstances, the costs of each side are likely to be broadly similar. Foundation probably bore the costs of producing the appeal book, but Idoshore was represented by two counsel. The likelihood is that, at least substantially, the costs of the respective parties would cancel each other out. In the circumstances, and to save further expense, a fair result would be to make no order as to costs either of the appeal or of the cross-appeal, but to allow them to lie where they fall. 46 There is one exception to this. Foundation was in default in filing and serving its written outline of submissions by the due date, prior to the hearing of the appeal. As a result, Idoshore requested that the matter be listed for mention. It was so listed, before Lindgren J on Thursday, 22 May 2008. On that occasion, the parties were represented by the counsel who appeared on the hearing of the appeal and the cross-appeal. Idoshore was therefore represented by senior and junior counsel. Foundation's default was remedied, but there was no doubt that Foundation should bear the costs of the mention, because of that default. So much was conceded by counsel for Foundation, but he did argue that the costs to be paid by Foundation in respect of the mention should not include the costs of senior counsel. Lindgren J reserved the question of costs for the Full Court. Counsel for Idoshore argued that their client was entitled to be represented as they chose at the mention. There is no doubt that this is true, but it is not necessarily true that the defaulting party should pay the costs of senior counsel if the attendance of senior counsel was not warranted by the issues likely to arise at the mention. Counsel for Idoshore conceded that any issues that were likely to arise could have been handled perfectly adequately by junior counsel. This concession concludes the issue of the amount of costs. Foundation will be ordered to pay Idoshore's costs of the mention, but on the basis that no allowance should be made for the attendance of senior counsel. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Gray, Lindgren and Tracey JJ.

Associate: Dated: 9 September 2008 Counsel for the first and second appellants and the first and second cross-respondents: RK Weaver

Solicitor for the first and second appellants and the first and second cross-respondents: Watson Mangioni

Counsel for the respondent and the cross-appellant: R Forster SC and S Duggan

Solicitor for the respondent and the cross-appellant: Sagacious Legal

Trade Practices Act 1974(Cth)

At a glance

Court

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Before

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Judgment (12 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (5)

Cited By (1)