Mediservices Clinics Pty Ltd & Anor v Health 24 Pty Ltd & Anor

Court of Appeal (NSW)|1999-06-01|Before: Fitzgerald JA, Santow J

New South Wales Court of Appeal CITATION : Mediservices Clinics Pty Ltd & Anor v Health 24 Pty Ltd & Anor [1999] NSWCA 198 FILE NUMBER(S) : CA 40608/97 HEARING DATE(S) : 1 June 1999 JUDGMENT DATE : 23 June 1999

Mediservices Clinics Pty Limited Mediservices Pty Limited PARTIES : v Health 24 Pty Limited as trustee of the Cenrin Unit Trust Health 24 (Properties) Pty Limited JUDGMENT OF : Fitzgerald JA; Cole AJA; Foster AJA

LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT FILE NUMBER(S) : ED 3426/95 LOWER COURT JUDICIAL OFFICER : Santow J

COUNSEL : A - DJ Fagan SC R - RW White SC; Ms S Kaur-Bains SOLICITORS : A - Deacons Graham & James, Sydney R - Thompson Eslick, Sydney CATCHWORDS : Construction of agreement ACTS CITED : Health Legislation (Powers of Investigation) Amendment Act 1994 (Cth) Health Insurance Act 1973 (Cth) Schenker & Co (Aust) Pty Ltd v Malpass Equipment and Services Pty Ltd (1990) VR 834 CASES CITED: Australian Broadcasting Commission v Australian Performing Rights Association Ltd (1973) 129 CLR 99 Lewis Construction (Engineering) Pty Ltd v Southern Cross Electric Authority of Qld (1976) 11 ALR 305 DECISION : Appeal upheld

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40608/97 ED 3426/95

FITZGERALD JA COLE AJA FOSTER AJA

MEDISERVICES CLINICS PTY LIMITED & Anor v HEALTH 24 PTY LIMITED as trustee of the CENRIN UNIT TRUST & Anor

JUDGMENT 1 FITZGERALD JA: The circumstances giving rise to this appeal are set out in the reasons for judgment of Cole AJA, which also record the critical findings and conclusions of the trial judge. Each gives persuasive reasons for his decision, although they reach opposing views. 2 Stripped to its essentials, this is a patently unmeritorious claim for damages by a purchaser of a business who knew that a particular income stream which the business was receiving at the time of the sale would terminate about 15 months later, on 30 June 1996. The income in question was an excessive rent under a sublease to a third party of part of the premises where the business was conducted. The damages awarded the purchaser were related to the difference between the excessive rent payable until 30 June 1996 and the commercial rent payable thereafter. The foundation of the purchaser's claim is the proposition that the excessive rent was, at the date of the sale, an "unusual or non-recurring item" which "affected" the "financial performance of the business". 3 Despite the forceful argument of the appellant-vendor, it seems to me beyond serious dispute that the sub-lease rent was an item which affected the financial performance of the business; it was a component of the income of the business. The issue on which the trial judge and Cole AJA differ is whether the sub-lease rent was "unusual or non-recurring". 4 Plainly, the sub-lease rent cannot actually be described as "non-recurring". At the date of sale, it was expected to recur throughout the remaining 15 months of the sub-lease. The more difficult question is whether or not the sublease rent was "unusual". 5 At least in one sense, the sub-lease rent was unusual. It was an excessive rent associated with an unorthodox transaction which had been entered into to advance a specific, special relationship between the sub-lessee and the operator of the business which centered upon their respective, related occupations. 6 In another sense, the excessive rent was not "unusual" between the vendor and the purchaser, who at all material times, both had all relevant knowledge of the details of the sub-lease including knowledge that the excessive rent would only continue to 30 June 1996. 7 The purchaser's point was even more narrowly based than what I have so far indicated. The warranty upon which the purchaser relied excluded from its operation "unusual … items" which "affected" the "financial performance of the business" which had been "disclosed" in a nominated schedule or by identified documents. There was no reference to the sub-lease rent in either the schedule or the documents in question. 8 According to the purchaser, it is entitled to take advantage of those "omissions". However, it is more consonant with commercial morality and the parties' probable intent, having in mind the extent to which the relevant information concerning the sub-lease had been disclosed, that the sub-lease rent was not referred to in the schedule or the documents because the parties to whom it was common knowledge did not consider it "unusual". 9 In other words, in my opinion, what was "unusual" for the purpose of the warranty was to be determined subjectively, not objectively. 10 Such a construction is, it seems to me, more conformable with the purpose of the warranty, which was to protect the purchaser against unexpected and unforeseeable aspects of the financial performance of the business which bore on its value. 11 I agree with orders proposed by Cole AJA. 12 COLE AJA: Health 24 Pty Limited as trustee of the Cenrin Unit Trust ("the purchaser") and Health 24 (Properties) Pty Limited ("the assignee"), which together are referred to as "the respondents", by cross-claim sued the appellants, Mediservices Clinics Pty Limited ("the vendor") and Mediservices Pty Limited ("the assignor") for damages for breach of warranty. The vendor had sold to the purchaser by an agreement dated 14 April 1995 several medical centre businesses. Included in the businesses sold was a business conducted at Frankston in Victoria. The income of the businesses comprised general practice service fees, rentals received and other revenue. 13 The agreement for sale of the business contained the following warranty: "14 Warranties 14.1 The Vendor hereby warrants, undertakes and represents to the Purchaser as an inducement to the Purchaser to enter into this Agreement and it is a condition of this Agreement that save as disclosed in Part 22 of the Schedule, each of the warranties contained in Part 23 of the Schedule is at the date hereof and will at Completion or the Effective Date as the case may be, be completely true and accurate, and not misleading in any way." 14 The schedule provided: "Part 22: Disclosures by Vendor Nil Part 23: Vendor's warranties … (vi) The financial performance of the business disclosed by the written information given by the Vendor to the Purchaser and as particularised in Annexures "D" and "E" was not affected by any unusual or non-recurring items." 15 Annexure "D" was a tabulated operating profit and loss account to 30 June 1994 in respect of the five businesses sold together with a consolidated statement of the individual profit and loss accounts for each business. Annexure "E" was a similar operating profit and loss account to 31 December 1994. Included in the item "Rent received" in annexure "D" was the sum of $156,694 in respect of the Frankston clinic, and in annexure "E" a corresponding sum of $55,579. 16 Those figures for rental received in respect of the Frankston premises included, in part, rental received under a sublease of those premises from the assignor to Gribbles Pathology (Vic) Pty Limited ("Gribbles"). Gribbles had entered into a sublease dated 18 June 1993 for the year commencing 1 July 1993 for a period of twelve months. The rental under that lease was $9,100 per month, a total of $109,200 for the year ended 30 June 1994. A second sublease was entered into by Gribbles on 30 June 1994 with a term of two years. The rental under the second sublease was $5,000 per month. The second sublease to Gribbles did not provide for any option for renewal. 17 Gribbles used the premises leased as a place to pick up pathology specimens. The premises had no independent entrance other than through the medical centre itself. It comprised a small area of approximately 9.5m². The room was not a "licensed collection centre" or an "accredited pathology laboratory" within the meaning of the Health Legislation (Powers of Investigation) Amendment Act 1994 (Cth), such centres or laboratories being licensed under the Health Insurance Act 1973 (Cth). 18 The trial Judge, Santow J, found that, absent a sublease to Gribbles, the commercial market value of the rental for the relevant space would not exceed $10,000 per annum, compared with the $60,000 per annum being paid by Gribbles. 19 The respondents contended successfully before Santow J that the high rental paid by Gribbles in comparison to a proper commercial rental, coupled with the limited nature of the use which Gribbles made of the space, made the amount of rent an "unusual item" in relation to the warranty in the agreement upon which the respondents sued. In particular, the respondents contended that as at the date of the agreement, 14 April 1995, such a sublease at such rental between the relevant parties was illegal under the Commonwealth legislation. Its continuance was said to be prohibited by virtue of s.129AAA of the Health Insurance Act 1973, and any renewal of the lease after its term expired on 30 June 1996 would have been illegal in consequence of amendments made by the Health Legislation (Powers of Investigation) Amendment Act 1994 which amendments became operative on 21 July 1994, that is, before the execution of the agreement. 20 The amendments in subss.(3A) and (4A) introduced by the Health Legislation (Powers of Investigation) Amendment Act 1994 were as follows: "(3A) An approved pathology practitioner shall not enter into an arrangement with a practitioner or medical entrepreneur for the use or occupation by an approved pathology practitioner of any premises or any particular space in a building unless: (a) a licensed collection centre or an accredited pathology laboratory is established in the premises or space at the time, or within 30 days after, the arrangement is entered into; or (b) the approved pathology practitioner renders professional services in the premises or space; and the premises or space are not used or occupied under the arrangement for any purpose other than use as a licensed collection centre or an accredited pathology laboratory, or use or occupation by the approved pathology practitioner for rendering professional services; … (4A) For the purposes of paragraph (4)(b), the normal commercial rate for sharing, or using or occupying, space in a building is the rate that would be the normal commercial rate for sharing, or using or occupying, that space in that building, being the rate: (a) that has not been adjusted to reflect any additional value that any party to the arrangement might attribute to this space because of its proximity or convenience to any source of pathology requests; and (b) that is not determined, or subject to variation, in a way that takes into account the volume of any pathology requests made between the parties to the arrangement." 21 It is to be noted that the amendments, operative from 21 July 1994, prohibited an approved pathology practitioner, as Gribbles was, from "entering into an arrangement" there specified. Those amendments did not strike down existing arrangements under existing leases. 22 Santow J held that the sub-lease entered into by Gribbles on 30 June 1994 and expiring on 30 June 1996 was not itself illegal, and the health legislation did not preclude the payment or receipt of rent under that lease. This was accepted by the respondents on appeal. However, his Honour also held that the effect of the amended health legislation was to make the prospect of there being a further lease after 30 June 1996 at the rental of $5,000 per month then being paid by Gribbles "extremely unlikely if not remote". 23 It was in contest before the trial Judge whether the circumstances relating to the Gribbles sub-lease which were said to render it an "unusual item" were known to the purchaser, and, indeed, whether such circumstances in truth rendered the rental received under the sub-lease an "unusual item" within the meaning of the warranty. Santow J found the first of those issues in favour of the appellant. His Honour found that there had been informal inspection of documents relevant to the financial performance of the business from the period 1991 onwards. He found that on 17 March 1995 officers of the purchaser had been informed that Gribbles' room was not a licensed collection centre. He also found that Dr Wenkart, the principal of the purchaser, prior to 14 April 1995, had become aware that Gribbles' room was not a licensed collection centre, and had in consequence assumed that the lease to Gribbles was an illegal one. His Honour found it probable that Dr Wenkart obtained a legal opinion regarding the legality or otherwise of the Gribbles sub-lease. It was also found that at no time prior to or subsequent to the agreement were any representations made on behalf of the vendor that the Gribbles' room was a licensed collection centre. In addition, there was evidence that a letter dated 13 July 1994 from Gribbles to the vendor, raising concerns regarding the legality of the sub-lease and the capacity of a pathology practice to rent space otherwise than for use as a licensed collection centre and otherwise than on a normal commercial basis, was given to the purchaser prior to the agreement. 24 Santow J held that Gribbles' rental payment was an "unusual" item for several reasons. First, the disparity between the amount of Gribbles' rental and what would otherwise be a commercial rental for the space. Second, because the use made by Gribbles of the room was not for "pathology" as the sub-lease specified, but merely for the collection and storage of vials and samples which were collected by Gribbles after having been obtained and left there by medical staff not employed by Gribbles. Third, because what Gribbles was paying for was not the physical utility of the space but the value of obtaining the pathology referrals from doctors in the Frankston medical centre. The "high rent" that was paid was found to be "attributable to the commercial benefit Gribbles obtained in being located in extremely close proximity to the doctors from which it hoped to obtain referrals and without the expense of having to collect samples". And finally, the sub-lease was unusual because it was made some three weeks prior to legislation which rendered the likelihood of a new lease being renegotiated on similar terms after expiration of the sub-lease on 30 June 1996 improbable. This was also found to give the Gribbles' rent a "non-recurring" character. 25 In my opinion the trial Judge's findings that "the Gribbles' rent [was of] a non-recurring character" is not correct. The item in annexures "D" and "E" for rental included the total monthly rent for the Gribbles' space for twelve months and six months respectively. At the time of the agreement, the lease had fourteen months to run. If the "item" be considered as monthly rental, it was recurring at least for the remaining fourteen months. If the "item" be considered annual or six monthly rental, it also would recur at least once. The warranty, in my view, is not to be interpreted as a warranty that the rental then obtained would, in the future and after the expiration of the lease under which it was paid, be able to be renegotiated at that same rental. Particularly is that so in circumstances where the factors which might result in the rental being diminished were known prior to the agreement to the purchaser, having been conveyed to the purchaser by the vendor. 26 I have reservations regarding whether a rental paid under an existing enforceable lease, and thus recoverable for the term of the lease, is to be regarded as an "unusual item" simply because the rental may not be able to be replicated after the expiration of the lease because the sum being paid under the existing lease is greater than that which, in any subsequent lease, another may be prepared to pay. I have reservations whether the expression "unusual" means or includes "non-commercial". However, it is unnecessary to finally determine this matter.

The parties to the agreement and the warranty: 27 At the hearing of the appeal the Court raised with the parties the issue whether the warranty in clause 14.1 was given by the vendor to the purchaser only, as distinct from the assignee, and, if so, whether the purchaser would not suffer loss on breach of that warranty because the assignee, as assignee of the head lease, was the party entitled to recover sub-lease rents. As this point had not been raised below, the parties were given time to provide to the Court written submissions regarding the point, and whether the appellant should be permitted to rely upon the point if it was upheld. 28 There were six parties to the agreement for sale of business. They were the vendor and the purchaser, the assignor and the assignee, the guarantor and the indemnified. I have identified the first four parties. The guarantor was Dr Wenkart and the indemnified were Messrs Widin and Ridden. The agreement distinguished between the rights and obligations of the various parties. 29 Recital A provided that the vendor carried on "several associated but distinct businesses … at various premises as are set out in Part 10, Section A of the Schedule currently leased by the Assignor (hereinafter called "the Premises")". It continued: "The business or businesses conducted by the Vendor at the Premises is hereinafter called 'the Businesses'." 30 Recital E provided: "The Assignor and the Assignee must each take steps to effect assignments of the Leases of the Premises. The Purchaser and the Assignee have had full copies of all Leases of the Premises supplied to them." 31 Recital M provided, in part: "(3) This Agreement requires the Assignor and the Assignee to take certain steps in respect of the Assignment of the Leases as set out in clause 6." 32 Clause 6 provided: "6 LEASES 6.1 The Assignor warrants that it will as soon as practicable after the making of this Agreement give to the Purchaser appropriate notice and other material and do such things as required by the respective Leases for the Assignee to hand on to the various Lessors of the Premises so that … 6.2 Provided that the Assignor performs in accordance with clause 6.1 hereof, all other matters in respect of the Assignment of the Leases will be the responsibility of the Purchaser and the Assignee, and the Purchaser and the Assignee shall use their best endeavours to effect and perfect the assignments. 6.3 This Agreement is conditional on all Leases (including the Broadway Lease) being assigned unless arrangements satisfactory to all parties have been made pursuant to clause 6.4 at or prior to completion. 6.4 In [the] event that the Leases have not been assigned with the consent of the Head Lessees or Lessees as appropriate to the Assignee by the Effective Date, then the Vendor or the Assignor will endeavour to make such arrangements as are possible for the Purchaser to take and remain in possession of the Businesses and Premises until assignment is achieved or the Expiry Date of each of the Leases involved, whichever is the earlier. 6.5 As from the Effective Date the Purchaser will indemnify and hold indemnified the Assignor against all monetary obligations of the Assignor as Lessee of the premises at Pymble more fully specified in Part 10, Section B of the Schedule. This indemnity shall include, but shall not necessarily be limited to rent, outgoings and other adjustments and payments properly to be made by the Lessee under that Lease." 33 The necessity for the assignor and the assignee to be parties to the agreement arose because the leases of premises on which the vendor conducted the businesses being sold were held by the assignor, not the vendor. The agreement provided for them to be assigned to the assignee, not the purchaser. Clause 6.1 contained a warranty by the assignor, implicitly in favour of the purchaser, that the assignor would do all necessary things to effect assignment of the leases to the assignee. Clause 6.2, after performance by the assignor of its obligations, imposes obligations upon the purchaser and the assignee, but not the vendor. Clause 6.4 imposes obligations on the vendor or the assignor. Clause 6.5 imposes obligations upon the purchaser in favour of the assignor. These provisions make plain that the parties were careful in determining and specifying which of each of the vendor, the purchaser, the assignor and the assignee had conferred or imposed upon them rights or obligations, and were careful in specifying which party took the benefit or detriment of the rights and obligations under distinct provisions of the agreement. 34 Clause 9 is headed "Passing of Title". Clause 9.1(i) provides: "The entitlement to the profits of the Businesses and the obligations for the outgoings of the Businesses arising or accruing after the Effective Date shall be with the Purchaser." 35 It is clear that a part of the income of the businesses being sold by the vendor to the purchaser was monies received by way of rental under sub-leases from the assignor to subtenants, such as Gribbles. Strictly construed, the entitlement to "profits" referred to in clause 9 is not an entitlement to "income" from the businesses, including rentals. I will return to this clause. Clause 9.1 is properly interpreted as being a contractual provision between the vendor and the purchaser of the businesses. 36 Clause 10 deals with the completion of the purchase and imposes obligations upon the vendor and the purchaser, as does clause 11 dealing with transfer of employees. Clause 12 deals with debtors and relates to rights and obligations as between the purchaser and the vendor. 37 Clause 13 deals with liabilities of the businesses. Clause 13.1 provides: "13.1 Subject to clause 13.2 the Purchaser shall as from the Effective Date assume the burden of the obligations of the Vendor and shall indemnify the Vendor and/or the Assignor against all liabilities arising after the Effective Date out of: 13.1.1 the Leases; …"

Thus, the parties were again careful to impose obligations on the purchaser in favour of each of the vendor and the assignor. The balance of clause 13 addresses obligations and rights as between the purchaser and the vendor. 38 Clause 14 is a warranty by the vendor in favour of the purchaser. There is no warranty by the vendor in favour of the assignee, nor is there any warranty by the assignor in favour of either the purchaser or the assignee. The words "The Vendor hereby warrants … to the Purchaser as an inducement to the Purchaser to enter into this Agreement …" are clear and unambiguous and are found in an agreement which has, with some precision, indicated in whose favour obligations are granted. Clause 14.3 contains a warranty, this time by the purchaser in favour of the vendor. Clause 14.4 provides: "14.4 The Purchaser warrants that it has (and the Guarantor as a personal warranty warrants that the Purchaser) has adequate financial capacity … to meet as and when they fall due each and every financial obligation of the Purchaser under this Agreement."

The rights conferred by clause 14.4 are for the benefit of the vendor and the obligations are imposed upon the purchaser and the guarantor. 39 Clause 14.5 provides: "14.5 The Indemnified as a personal warranty adopts and confirms the warranties expressed by the Vendor and/or the Assignor in this Agreement including but not limited to those enumerated in Part 23 of the Schedule."

This subclause imposes obligations on the indemnified, being a personal warranty of warranties expressed by the vendor or the assignor. 40 Thus, within the subclauses in clause 14, rights or obligations are granted or imposed affecting the vendor, the purchaser, the guarantor and the indemnified. The indemnified adopts warrants given by the assignor. The assignee is not referred to. 41 In these circumstances, where the parties in clause 14 have had to mind distinctions between the six parties to the agreement, mentioning in clause 14 five of them in differing circumstances, it is not possible, in my view, to read the words in clause 14.1 otherwise than in accordance with their precise terms. The warranty is given by the vendor and it is given in favour of the purchaser. It necessarily follows that the assignee is not entitled to sue for breach of warranty, and the purchaser cannot succeed in a claim for breach of warranty unless it, the purchaser, suffers loss from any such breach. 42 Subject to the effect of clause 9.1, not being the legal owner of either the head lease or the sub-lease to Gribbles, the vendor had no entitlement to receive rent pursuant to that sub-lease. It had no right to sue for recovery of such rental from the sub-lessee. Further, the purchaser has no right to claim a breach of warranty against the assignor, as the assignor gave no warranty in favour of the purchaser regarding the relevant sub-lease. 43 The import of clause 9.1 is not entirely clear. The heading of clause 9 "Passing of Title" is to be disregarded for construction purposes See clause 1.2.. Clause 9.1 provides that the "entitlement to the profits of the businesses" "shall be with the purchaser", as are the "obligations for the outgoings of the businesses". "Profits" is not a word used in the agreement except in clause 9.1 and in annexures "D" and "E" where the resultant of income and outgoings for the periods mentioned is described as "operating profit". The warranty (vi) sued upon speaks of the "financial performance" of the business "disclosed … and as particularised in Annexures "D" and "E"". The term "financial performance" must mean the "operating profit" referred to in those annexures. 44 In context, it seems to me that the expression "profits" in clause 9.1 was intended to mean "income". So interpreted, clause 9.1 conferred entitlement to income from the businesses and imposed upon the purchaser the obligation for the outgoings of the businesses. Clause 9.1(i) dealt with the operating aspect of the business and clause 9.1(ii) dealt with title to plant and equipment of the businesses. Clause 9.1 is, in my view, to be read as an acknowledgment by the vendor that notwithstanding the structure adopted for the transaction involving an assignee which held the leases being transferred by the assignor, the purchaser was entitled to the income and obliged to meet the outgoings of the businesses after completion. The purchaser was thus entitled to the profits, or obliged to meet the losses, of the businesses from that date. 45 Against this background, the warranty provided by clause 14.1, and in particular warranty (vi) in Part 22, is a warranty from the vendor to the purchaser that the "financial performance", meaning the profit or the loss, disclosed by the written information given by the vendor to the purchaser, and particularised in annexures "D" and "E" was not affected by any "unusual or non-recurring" items. If it was so affected, the purchaser was entitled to sue the vendor for breach of warranty and recover resulting loss, even though the income stream in the businesses sold was received, in the first instance, by the assignee. It follows, in my view, that the point raised by the Court with the parties should not be upheld.

The construction of the warranty clause: 46 The terms of the warranty clause, clause 14, and the terms of Parts 22 and 23 of the schedule to which that clause refers, are to be construed in the context of the agreement of which they form part. It is necessary to have regard to other provisions of the agreement which elucidate the terms of the warranty clauses. 47 The following clauses are material: "3 PAYMENT OF DEPOSIT 3.1 On the execution of this Agreement, the Purchaser shall pay, by way of a deposit, to the Vendor's Solicitors, Messrs Harris & Company the sum of $289,900.00 to be held by them as stakeholder for a period of fourteen (14) days from the date of this Agreement ("the Diligence Period"). The stakeholder shall invest the deposit in the name of the stakeholder with such bank, building society or cash management trust as shall be specified for that purpose by the Purchaser in writing. Any interest earned on the deposit monies (less bank and government charges) shall vest in the Purchaser whether or not the deposit ultimately vests in the Vendor.

3.2 On the expiration of the period of 14 days referred to in clause 3.1 (and in this respect time shall be of the essence) the deposit shall immediately be paid to the Vendor by the stakeholder and shall vest in the Vendor UNLESS: 3.2.1 the Purchaser has within the Diligence Period on reasonable grounds concluded that there is material adverse error and/or omission from or in the material pertaining to the Business which material has been given to the Purchaser on or before the signing of this Agreement and copies of which are annexed hereto and marked as Annexure "D", Annexure "E", Annexure "F" and Annexure "G", and clause 3.2.3 is complied with; OR 3.2.2 during the course of the Diligence Period a previously undisclosed matter is discovered by the Purchaser which is so adverse to the Businesses and of such materiality that it would cause a prudent commercial purchaser, objectively advised, to seek to rescind the contract, and clause 3.2.3 has been complied with; AND

3.2.3 the Purchaser has prior to the expiration of the Diligence Period (and in this respect time shall be of the essence) given a written direction ("the Direction") to the stakeholder not to account to the Vendor for the deposit;

3.3 The delivery of the Direction given on valid grounds to the Vendor's Solicitor shall constitute a notice of rescission ab initio from the Purchaser and the deposit (together with interest accrued, if any) shall be returned by the stakeholder to the Purchaser and thereafter this Agreement shall be at an end and no party shall have any obligation or be under any further liability to any other party Except That the stakeholder shall be entitled to pay the deposit and interest accrued into Court if it receives competing claims from the Vendor and Purchaser to the Deposit.

4.1 During the Diligence Period the Purchaser or its representatives may on not less than 12 hours written notice to the Indemnified during normal business hours: (a) consult either the auditor or accountant of the Businesses of the Vendor concerning the Businesses to establish whether or not the financial and statistical data provided by the Vendor to the Purchaser (copies of which are annexed hereto and marked Annexure "D" and "E") is reasonably accurate and to establish whether fair and full disclosure of all material matters pertaining to that data has been made. (b) attend in company with Ian Ridden at the Premises to conduct checks of the veracity and accuracy of the matters leading to the figures as published in Annexures "D" and "E". It is contemplated that checks of patient numbers and of the average value of patient attendances will be conducted pursuant to this right. (c) attend in company with Ian Ridden to ascertain the physical existence of furniture and effects particularised in Annexure "F" and Annexure "J". …

5.1 The Purchaser does not purchase the Businesses other than on the strength of its own inspection, test and assessment and has not relied on any warranty (other than as specifically set out in this Agreement), representation, statement or inducement of the Vendor in arriving at its decision to purchase, and after the Due Diligence to proceed with the purchase. " 48 The principal contention of the appellant was that the expression "any unusual or non-recurring items" referred to in paragraph (vi) of Part 23 excluded any item or information which had been disclosed to the purchaser prior to the agreement. It contended that, were that not so, the provisions of the agreement for due diligence inspections would have no sensible commercial purpose. Accordingly, in accordance with the principles enunciated in Schenker & Co (Aust) Pty Ltd v Malpass Equipment and Services Pty Ltd (1990) VR 834 at 844, the clause should be construed in such manner as to avoid the injustice of the respondent being entitled to recover damages for breach of warranty in respect of circumstances which were known to it prior to the agreement. See also Australian Broadcasting Commission v Australian Performing Rights Association Ltd (1973) 129 CLR 99 at 109; Lewis Construction (Engineering) Pty Ltd v Southern Cross Electric Authority of Qld (1976) 11 ALR 305 at 315, 323 49 Santow J rejected that contention. His Honour said: "Clause 14.1 of the Agreement provides that it is a condition of the Agreement, save as disclosed in Part 22, that the warranties contained in Part 23 are completely true and accurate and not misleading in any way. Given that the warranty is structured in this way, whereby it incorporates such a disclosure mechanism, it seems to me that a perfectly reasonable commercial purpose of the extended warranty would be to provide a precise formal mechanism for disclosure so as to avoid debate as to who said what to whom and whether such representation was made with relevant authority, during the due diligence period. Such debates are of the type which could easily lead the parties into litigation, and a warranty seeking to avoid this must be seen as having a sensible commercial purpose. By such a mechanism the parties therefore obtain precision by an insistence of formal disclosure in the Agreement itself of what would otherwise be breaches of warranty. Thus for example, a business may be bought and sold for a price which presupposes that the purchaser will be made good for doubtful debts, even though the purchaser in general terms at least already knows of the doubtful debts. In short the business is sold on a particular basis, even if it be fictional, and the price calculated accordingly. For this reason the extended construction of the warranty cannot be said to give the warranty an unreasonable ambit or effect. Consequently, consideration of the fact that the purchaser undertook extensive due diligence with the vendor's aid, does not lead automatically to the conclusion that the parties' objective intention was that the warranty was to exclude matters which had been disclosed to the purchaser during that due diligence period. One commercial purpose of such a process of due diligence is no doubt because in the course of that, the Purchaser may discover things which cause it not to proceed, irrespective of any warranty protection. Indeed, the absence of a phrase to the effect that such matters discovered in due diligence were to be excluded from the warranty, in addition to those listed via the disclosure mechanism in Part 22, can be said to found a strong presumption that no such exclusion was intended. Therefore while the words "any unusual or non-recurring items" may be ambiguous, consideration of surrounding circumstances or the "factual matrix" does not shed any different light on what the parties objectively intended to mean by those words, as compared to their conventional meaning: compare B & B Constructions Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227 at 236C. Consequently, the Court must construe the words of the Agreement according to that conventional or ordinary meaning. Such construction necessarily leads to the conclusion that the words "unusual or non-recurring" cannot be said to exclude those items which are unusual or non-recurring but which were known to the purchaser. As I have set out above, the way in which the Agreement is structured, with the inclusion of the disclosure provision in Part 22, reinforces this construction. As such, I am satisfied that the Plaintiff's purported construction of the warranty is not correct and hence the knowledge of the purchaser regarding the status of the Gribbles' sub-lease is not relevant in the determination of whether it is or is not included within the warranty as an unusual or non-recurring item." 50 In my view, this construction of the warranty provisions is erroneous. 51 The agreement provided for sale of the businesses to the purchaser Clause 2.1. On execution of the agreement a deposit was to be paid Clause 3.1. That deposit was held by a stakeholder for a period of fourteen days, being the "Diligence Period" Clause 3.1. On expiration of the diligence period, the deposit vested in the vendor unless the provisions of clause 3.2.1 to 3.2.3 became operative. They became operative if within the diligence period the purchaser concluded that there was a "material adverse error and/or omission from or in the material pertaining to the Business which material has been given to the purchaser on or before the signing of this Agreement". Material given to the purchaser at or prior to the signing of the agreement included the material in annexures "D" and "E" Clause 3.2.1. Thus, if the material in annexure "D" and "E" contained a material adverse error or omission, subject to compliance with clause 3.2.3, the purchaser was entitled to rescind ab initio within fourteen days of the agreement. Clause 3.2.1 addresses material made known to the purchaser prior to or at the time of the agreement. The expression "and copies of which are annexed hereto marked as Annexure D, Annexure E" indicate that the material being addressed does not include oral material previously provided. 52 Clause 3.2.2 addresses material not made known ("undisclosed matter") at or prior to the agreement. If such "undisclosed matter" was of such materiality as to cause a prudent commercial purchaser to seek to rescind, such a right was conferred upon the purchaser. 53 A clear distinction is thus drawn between disclosed and undisclosed matter. The material in annexure "D" and annexure "E" was treated by the agreement as being written disclosed matter, as plainly it was. 54 Clause 4 conferred upon the purchaser during the diligence period the right, upon notice, to consult the auditors or accountants of the businesses of the vendor concerning the businesses to permit the purchaser to establish "whether or not the financial and statistical data provided by the vendor to the purchaser in annexures "D" and "E" was reasonably accurate" and "to establish whether fair and full disclosure of all material matters pertaining to that data has been made" Clause 4.1(a). Thus, two matters are addressed: written financial and statistical data, and matters pertaining to that data. There is no suggestion that the latter was required to have been in writing. Further, the purchaser was entitled on notice to conduct checks of the veracity and accuracy of the matters leading to the figures as published in annexures "D" and "E" Clause 4.1(b). Thus, the parties draw a clear distinction between the factual accuracy of the figures in annexures "D" and "E", and "material matters pertaining to that data". A material matter pertaining to the income stream disclosed in the annexures would be whether that stream included "unusual or non-recurring items". 55 Thus, the structure of the agreement was to assume that by the date of the agreement the purchaser had been given all relevant material pertaining to the business, including details of the financial performance of the business as set out in annexures "D" and "E". If it was discovered during the diligence period of fourteen days after the agreement that there was error or omission or that there had not been "fair and full disclosure of all material matters pertaining to the data" in annexures "D" and "E", the purchaser had the right to rescind under clause 3.2. Shortly put, the parties assumed relevant material disclosure by the date of the agreement of matters pertaining to, inter alia, the rental received by the businesses. The agreement conferred upon the purchaser a period of fourteen days after the agreement to satisfy itself that all material matters pertaining to that rental had been disclosed. There was no contractual requirement that "fair and full disclosure of all material matters pertaining to the data" in annexures "D" and "E" be in writing. 56 In fact, as the trial Judge found, the matters now relied upon as constituting a breach of warranty had been disclosed prior to the agreement. Plainly, the purchaser had no grounds for exercising the right of rescission pursuant to clause 3.2, for such matters had been disclosed. 57 Of critical importance is the expression "on or before" the signing of the agreement in clause 3.2. It is plain that it was not necessary for the vendor to incorporate in the written agreement material pertaining to the business which it had disclosed to the purchaser before the signing of the agreement. Similarly, clause 4.1(a) makes plain that there may be matters material to the "financial and statistical data" in annexures "D" and "E", and the purchaser is given a facility to determine if disclose of that material "has" been made. That necessarily involves disclosure prior to the agreement. There is no requirement that the prior disclosure be in writing. 58 It is against this background that one approaches the construction of clause 14 and schedules 22 and 23. The "nil" disclosure in Part 22 means that nothing is disclosed in the written agreement to qualify the warranties given by Part 23. The subject matter of the warranty in (vi) is the "financial performance" of the businesses disclosed by the "written information given by the Vendor" "and as particularised in Annexures "D" and "E"". That is the same data referred to in clause 3.2.1 and 4.1(a) and (b). If it be that clause 3.2 denies rights to the purchaser in respect of matters material to that data disclosed to that purchaser prior to the agreement, as plainly it does, it would be odd in the extreme if the warranty in (vi) were nonetheless to confer rights on the purchaser in respect of such disclosed information. Such an unjust result is avoided by interpreting the warranty as relating only to items not disclosed which qualify the written material. 59 Further, the warranty in clause (vi) is only of the financial performance of the business as disclosed by the "written" information, including the written annexures "D" and "E". There is no warranty of oral information. Clause 3.2.1 and the first part of clause 4.1(a) address written information provided prior to or at the date of the agreement. It is that which is the subject of the warranty. However, the latter part of clause 4.1(a) recognises that there may have been fair and full disclosure of material matters pertaining to that written data, which may not have been in writing. Such material matters disclosed orally prior to the agreement might indicate that items in the written information was subjected to unusual or non-recurring circumstances. Absent disclosure prior to the agreement, at which date the warranty first speaks, the purchaser is entitled to rescind on compliance with clause 3.2, or to damages for breach of warranty. But if the written information or data was orally disclosed prior to the agreement, the purchaser has no right either to rescind or to damages. 60 This interpretation of the warranty, in my opinion, is reinforced by considering its purpose. Annexures "D" and "E" specify in respect of each medical centre the number of patient services delivered, and the income and expenses of each centre which produce the stated operating profit. Annexure "D" is in respect of the twelve month period ended 30 June 1994 and annexure "E" in respect of the six month period ended 31 December 1994. The documents thus disclose the profitability of the businesses being bought. That profitability may be affected by unusual or non-recurring items of income or expenditure. A purchaser would wish to know whether the financial performance of the businesses was affected by any such items. On one view of the expression "unusual or non-recurring items", the profitability of the business was so affected and, as the trial Judge found, the vendor made the purchaser aware prior to contract of the circumstances relating to the unusual or non-recurring items prior to the agreement. Where the parties thereafter contract, both knowing of the circumstances material to items which might be regarded as unusual or non-recurring, they must be taken to have contracted upon the basis that there is no further obligation to disclose that which has already been disclosed, or to record in writing the disclosure previously made orally. 61 As I am of the view that, on the proper construction of the warranty clause, the appellant is entitled to succeed, thus denying the respondents' right to damages, it is unnecessary to consider the various issues raised on appeal concerning damages. 62 In my view the appropriate order is that the appeal be upheld, the judgment and orders made 22 August 1997 be set aside, and in lieu thereof there be judgment on the amended cross-claim dated 26 July 1996 for the cross-defendants, with the cross-claimants being ordered to pay the cross-defendants' costs of the trial. The respondents should pay the appellants' costs of the appeal but should have, if qualified, a certificate under the Suitors Fund Act 1951. 63 FOSTER AJA: I have had the advantage of reading, in draft, the reasons for judgment of Cole, AJA. 64 I agree with his Honour that, having regard to the term of the relevant lease, the rental payments do not answer the description of "non-recurring items" in Part 23 of the Schedule to the Agreement. 65 I am also inclined to the view that the respondents' state of knowledge of the circumstances in which rental payments were made in an amount well in excess of prevailing commercial levels prevented those payments from being relevantly "unusual". I find it unnecessary to reach a concluded view on this aspect of the appeal, as I agree with the reasons advanced by Cole, AJA for holding that a proper construction of the phrase "any unusual ... items", in the context of the whole of the Agreement, results in the rental payments in question not being comprehended in that phrase. 66 I concur in the orders proposed by Cole, AJA.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

Health Legislation (Powers of Investigation) Amendment Act 1994(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (19 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (3)