PRP Diagnostic Imaging Pty Limited (in its capacity as trustee for the Pittwater Radiology Trust) & Ors v Pittwater Radiology Pty Limited

Supreme Court of NSW|2008-05-20|Before: Einstein J, Mr J

CITATION : PRP Diagnostic Imaging Pty Limited (in its capacity as trustee for the Pittwater Radiology Trust) & Ors v Pittwater Radiology Pty Limited [2008] NSWSC 482

JURISDICTION : Equity Division Commercial List

DECISION : No leave granted to obtain further contested discovery categories

CATCHWORDS : Practice and Procedure - Discovery - Unpleaded prospective loss - Pleadings

PRP Diagnostic Imaging Pty Limited (First Plaintiff) PARTIES : The partners of the Pittwater Radiology Partnership as set out in Schedule 1 (Second Plaintiff) The partners of the Pittwater Radiology Partnership as set out in Schedule 2 (Third Plaintiff) Pittwater Radiology Pty Limited (Defendant)

COUNSEL : Mr TM Jucovic QC, Mr J Giles (Plaintiffs) Mr I M Jackman SC, Ms K Richardson (Defendant)

SOLICITORS : Deacons (Plaintiffs) Freehills (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50027/08 PRP Diagnostic Imaging Pty Ltd & Ors v Pittwater Radiology Pty Ltd JUDGMENT

The notice of motion 1 There is before the court a notice of motion under cover of which the defendant/cross claimant seeks discovery of particular documents, the proceedings being fixed for final hearing on all issues on 25 June 2008. The nature of the proceedings 2 The nature of the proceedings as identified in the Commercial List Statement is as follows:

i. The first plaintiff, the defendant and the then partners of the Pittwater Radiology Partnership (Partnership) entered into an undated written agreement entitled "Pittwater Radiology Joint Venture Agreement" which is expressed to commence on 1 July 2005 (agreement).

ii. On or about 8 November 2006, pursuant to Part A.2 of the agreement, the first plaintiff and the Partnership gave two years' notice of their intention to terminate the agreement (Notice).

iii. The agreement provides that the first plaintiff is restrained from engaging in certain competitive conduct during a "Restraint Period" and further provides that the first plaintiff is also required to ensure that the Partners do not engage in that competitive conduct during a "Restraint Period".

iv. The Restraint Period is defined in Part E.5 of the agreement to be, among other things, the period while the Partners are working in the Business (as defined in the agreement) and, if a Partner leaves the Business, up to 6 months after the Partner leaves the Business.

v. The defendant contends that the agreement operates to prohibit all of the plaintiffs from engaging in the specified conduct for a period of 6 months following the termination of the agreement pursuant to a notice given under Part A.2 of the agreement.

vi. The plaintiffs contend that on the proper construction of the agreement the restraints contained in Part E.5 of the agreement which are expressed to operate during a Restraint Period come to an end on the day the agreement is terminated pursuant to the Notice.

vii. The plaintiffs intend to engage in activities, from the termination of the agreement pursuant to the Notice, which would be a breach of the restraints in Part E.5 of the agreement which are expressed to operate during a Restraint Period if those restraints continue after termination. 3 Hence the issues to arise include in important measure whether, on the proper construction of the agreement, in circumstances where the agreement will terminate by reason of a notice given under Part A.2 of the agreement, the restraints contained in Part E.5 of the agreement which are expressed to operate during a Restraint Period will continue to operate from the termination of the agreement. Other issues 4 The cross summons claims inter alia that:

i. the cross-defendants breached the joint-venture agreement by entering into negotiations with two identified competitive businesses within a 5 km radius of the joint venture's clinics;

[I interpolate to note that during argument the cross claimant conceded that the pleaded claim concerning North Gosford Private Hospital was no longer being pressed : Hence leaving only the allegations concerning Dalcross Clinic]

ii. the cross-defendant had stated their intention to continue to be involved in competitive businesses located within a 5 km radius of clinics operated by the Business both while the agreement is still on foot and during the restraint period provided for in the agreement. 5 The cross summons seeks declarations in terms of the cross-defendants alleged breaches of the joint-venture agreement by being involved in the above described negotiations; a declaration as to the period of time following the date of termination of the agreement in respect of which the cross-defendants are subject to the restraints to be found in the agreement; injunctive relief restraining the cross-defendants until 8 April 2008 from being involved in negotiations concerning, or taking any preparatory steps to establish, any competitive business within a 5 km radius of any of the clinics; an injunction restraining each of the cross-defendants until 8 April 2008 from providing services to any competitive businesses within a 5 km radius of any of the clinics; damages and costs. 6 In so far as the defendant alleges that the plaintiffs have breached the agreement by pursuing two opportunities which the plaintiffs were required by the agreement to bring to the defendant:

i. no remedy is claimed in relation to the first alleged breach;

ii. the plaintiffs admit the conduct but deny that the conduct was a breach of the agreement;

iii. no further discovery is sought in relation to the two breaches alleged in the cross claim. 7 Insofar as the defendant by its cross-claim alleges that the plaintiffs "intend" to take, or "be involved in", steps preparatory to carrying on business as radiologists it seems clear that this allegation constitutes an anticipated breach in relation to which quia timet relief is sought. 8 There are admissions of the steps intended to be taken by the radiologists, by another company, prior to 8 November 2008, with the intention of carrying on business as radiologists from 8 November 2008. The plaintiffs also admit that, if the defendant's construction of the agreement is correct, injunctive relief is appropriate. 9 The defendant claims it has suffered, or is "likely" to suffer, loss and damage. The plaintiffs deny that loss will be suffered prior to 8 November 2008, or if injunctions are granted. The categories of discovery now sought 10 The relevant categories of discovery now sought may now be identified:

" Agreement " means the written joint venture agreement between the defendant / cross-claimant and the plaintiffs / cross-defendants which is expressed to commence on 1 July 2005.

" Clinic " means any clinic referred to in Schedule 1.

" document " has the meaning set out in Parts 1 and 2 of the Dictionary in the Evidence Act 1995 (NSW).

" Partnership Agreement " means the Pittwater Radiology Partnership Agreement exhibited behind Tab 1 of Exhibit MWJ-1 to the affidavit of Michael William Jones sworn 18 April 2008.

" Radiology Business " means a business of providing radiology, nuclear medicine and/or related medical services.

" Radiology Services " means radiology, nuclear medicine and/or related medical services.

All documents (other than documents referred to in paragraph 11 below) created since 8 November 2006 recording, referring to or relating to the intention of any of the plaintiffs/cross-defendants, either by themselves or through any body corporate (including but not limited to Aegis Crowne Pty Limited) to: a. establish or be involved in the establishment of a Radiology Business, within a 5 kilometre radius of any Clinic; or

b. provide Radiology Services to or at any Radiology Business within a 5 kilometre radius of any Clinic, including but not limited to any proposals, business plans or draft business plans, but not including documents relating to proposals or options with which the plaintiffs / cross-defendants have determined not to proceed or otherwise will not proceed.

All documents (other than documents referred to in paragraph 11 below) created since 8 November 2006 recording, referring to or relating to any consideration by any of the plaintiffs/cross-defendants, either by themselves or through any body corporate (including but not limited to Aegis Crowne Pty Limited) of: a. establishing or being involved in the establishment of a Radiology Business within a 5 kilometre radius of any Clinic; or

b. providing Radiology Services to or at any Radiology Business within a 5 kilometre radius of any Clinic, including but not limited to any proposals, business plans or draft business plans, but not including documents relating to proposals or options with which the plaintiffs / cross-defendants have determined not to proceed or otherwise will not proceed.

All documents (other than documents referred to in paragraph 11 below) created since 8 November 2006 recording, referring to or relating to discussions, negotiations or communications between:

a. the plaintiffs/cross-defendants or Aegis Crowne Pty Limited or any other body corporate incorporated by or on behalf of any of the plaintiffs/cross-defendants or their advisers or representatives; and

relating to the establishment of a Radiology Business within a 5 kilometre radius of any Clinic, but not including documents relating to proposals or options with which the plaintiffs/cross-defendants have determined not to proceed or otherwise will not proceed. 4. All documents (other than documents referred to in paragraph 11 below) created since 8 November 2006 recording, referring to or relating to discussions, negotiations or communications between:

relating to the provision of Radiology Services to or at a Radiology Business within a 5 kilometre radius of any Clinic, but not including documents relating to proposals or options with which the plaintiffs/cross-defendants have determined not to proceed or otherwise will not proceed." Communications between the respective solicitors 11 By letter dated 13 May 2008 the solicitors for the defendants contended that categories one to four of the amended list of categories of documents for discovery required to be discovered as relevant to the questions of:

i. whether the conduct referred to in paragraphs 37 - 42 of the defendants Commercial List Cross Claim Statement constitutes the full extent of the plaintiff's actual or threatened conduct which, assuming the defendant's interpretation of the agreement was correct, constitutes or would constitute a breach of the agreement;

ii. whether the defendant has suffered or was likely to suffer loss and damage as alleged in paragraph 56 of its Commercial List Cross Claim Statement, even if orders were made in accordance with paragraphs 3 and 4 of its Amended Cross Summons, by reason of conduct on the part of the plaintiffs that had deprived the defendant of the opportunity to pursue and obtain new business. 12 By letter dated 15 May 2008 [to which no response was received] the solicitors for the plaintiffs wrote to the solicitors for the defendant making the following observations and asking the following questions:

2.1 In your letter of 13 May 2008 you state that documents in categories 1-4 are relevant to the determination of two questions. The first of these questions is expressed to be "whether the conduct referred to in paragraphs 37 to 42 of [your] client's Commercial List Cross Claim Statement constitutes the full extent of [our] client's actual or threatened conduct".

2.2 Our clients have admitted, in paragraphs 29 to 36 of their Amended Commercial List Response, the conduct on which your client relies to allege the breaches pleaded in paragraphs 37 and 38 of its Commercial List Cross Claim Statement.

2.3 Further, our clients have admitted, at paragraphs 39 to 41 of their Amended Commercial List Response, conduct we understand to be alleged by your client in paragraphs 39-41 of its Commercial List Cross Claim Statement. Your client's pleading does not expressly alleged any proposed conduct which is not admitted.

2.4 Accordingly, we invite you to inform us what conduct (being conduct alleged in paragraphs 37 to 42 of your client's Commercial List Cross Claim Statement) your client considers our clients to have denied. 13 As one may anticipate, during the hearing of the motion Mr Jackman SC appearing for the defendant adumbrated the suggested basis for an entitlement to the above discovery. 14 The essential contention was as follows:

i. the items sought in the discovery would establish the intentions of the plaintiffs to establish competing businesses;

ii. the discovery was necessary in order to permit the defendant to prove its damages claims pursued in the cross summons [at 56];

iii. the discovery would establish loss up until the grant of any injunction;

iv. the defendant sought to prove that the plaintiff was engaged in equipping and setting up clinics, the establishment of which clinics caused loss to the defendant;

v. that loss required to be quantified prior to trial which quantification could only be proven with knowledge of the preparatory steps taken by the plaintiffs. 15 Mr Jackman SC drew attention to the fact that whilst there were some differences in the wording of the discovery categories sought in paragraphs 1, 2, 3, and 4, the essential differences simply concerned slightly different parameters along the same axis:

i. paragraph 1 focused upon intention of the plaintiffs/cross-defendants [from an 'in-house' point of view];

ii. paragraph 2 focused upon consideration given by the plaintiff/cross-defendants [from an 'in-house' point of view];

iii. paragraph 3 focused upon documents passing inter alia between the plaintiff/cross-defendants or Aegis Crowne Pty Ltd and external persons relating to the establishment of a radiology Business within a 5 km radius of any Clinic;

iv. paragraph 4 focused upon documents referring to or relating to discussions, negotiations or communications between the plaintiff/cross-defendants or Aegis Crowne Pty Ltd and external persons relating to the provision of radiology services to or at a radiology business within a 5 km radius of any clinic. The allegation that the defendant by the application is attempting to achieve a collateral benefit 16 In a letter dated 9 May 2008 from the Chief Executive Officer of I Med Network sent to …. the following paragraphs appear:

In my meetings with the executive, I indicated that negotiations have been progressing for over a year, but that these cannot continue indefinitely because CVC and the company Board have obligations and responsibilities to all I-MED staff and doctors as well as referrers, patients and investors. I-MED is fully committed to actively growing the business in the region and will compete vigorously to maintain its position in the market. In the current financial environment, access to capital is more difficult and expensive than in the past and I trust that you have fully considered the potential financial strain and risk of setting up in competition to I-MED.

Consequently I must bring to your attention the ramifications of the failure to reach agreement.

The company is proceeding with the tenders to organize radiologists to replace the Pittwater doctors to ensure continuity of services and staff employment.

As you may be aware, the Pittwater executive initiated legal action against the company in regard to the six months restraint period which we consider starts in November 2008. The company has been obliged to respond within a court specified time frame with a cross claim which has led to it seeking discovery of potential activities by Pittwater that are restricted under the contract. This legal action is necessary to protect the substantial investment by the company in Pittwater practice Group over the past 8 years. A proven breach of the contract could lead to Pittwater partners being ordered not to engage in competitive conduct during the restraint period. It could also lead to the Pittwater partners being liable for significant damages and for legal costs. 17 Counsel for the plaintiff contended that the application for discovery constituted a fishing expedition in an attempt to locate unpleaded claims and was brought in the circumstance where there are on ongoing commercial dealings between the parties. The contention was that the defendant, by the discovery application, is attempting to achieve a collateral benefit of exerting pressure in those dealings. 18 During argument the plaintiffs conceded that they proposed to give further discovery in relation to Dalcross Clinic and the matter was left for the parties to agree to the formulation of an appropriate category. Hence no further attention is given to the discovery sought in relation to Dalcross Clinic. Dealing with the issue 19 The proceedings are at least unusual in that there is a pleaded acceptance by the plaintiff of the proposition that [with the exception of the questions concerning the Dalcross Clinic issues], insofar as the cross claimant is otherwise entitled to the injunctions claimed in paragraphs 3 and 4 of the cross summons, the cross-defendants:

i. admit that damages are not an adequate remedy in lieu of those injunctions and

ii. do not contend that there are any other discretionary reasons for withholding injunctive relief.

[cf Amended Commercial List Response to cross summons paragraph 53] 20 The resulting situation appears to be as follows:

i. the defendant's asserted grounds of relevance cover both past conduct and conduct the defendant asserts the plaintiffs intend to engage in;

ii. as to past conduct, the defendant only alleges two prior breaches and claims no relief in relation to the first;

iii. as to proposed conduct, paragraphs 39 and 40 of the plaintiff's response contain detailed admissions of the conduct in which the radiologists propose to engage. 21 Mr Jackman contended that as the final hearing now fixed is to deal with all issues, his clients were concerned to obtain discovery of the four named categories because the very taking of steps by the plaintiff in advance of 7 November 2008 [not to mention 8 May 2009] may well throw up opportunities which would have been available to the joint-venture and/or circumstances [such as the establishment of relationships and the setting up of premises] which may operate to the disadvantage of the joint-venture parties. These were matters which he contended permitted the discovery now sought. 22 In my view the discovery sought is not justified either in relation to admitted proposed conduct or in relation to pleaded proposed conduct. The proceedings can only be litigated on the pleadings, which do not throw up an allegation that the plaintiffs may, at some prospective occasion, [having by then set up new clinics], enter into some form of commercial arrangement by which those prospective clinics would be sold to some other enterprise. The very notion of dealing with prospective damages throws up its own difficulties in the context of the pleaded case. However it must be recalled that even as late as the occasion when the matter is before the Court at final hearing, the Court's case management procedures are still alive to cope with recent events and, if necessary, even to quarantine for further hearing some new or different parameter of damages which, for whatever reason, may not have been able to be litigated at the trial. These are all matters for the trial judge. 23 It is unnecessary to deal with the suggestion that the defendant is shown by the application to be attempting to achieve an improper collateral benefit by way of exerting pressure in the ongoing commercial dealings between the parties. That matter constitutes a grave allegation and the above-described letter is insufficient, on its own, to make good that allegation. 24 Nor is it necessary to deal with the respective contentions put from the bar table as to the proper construction of the subject joint venture agreement, save perhaps to note that both parties accept that the joint venture relationship expressly provided [clause A4] that neither party to the joint-venture owed fiduciary duties to the other. Short minutes of order 25 The parties are to bring in short minutes of order by forwarding their draft short minutes to my Associate by 21 May 2008 at 4pm in soft copy. Costs may be the subject of written submissions to be exchanged and furnished to my Associate by 4pm on 21 May 2008 in soft copy. ************

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