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

PRP Diagnostic Imaging Pty Limited (in its capacity as trustee for the Pittwater Radiology Trust) & Ors v Pittwater Radiology Pty Limited - [2008] NSWSC 701 - NSWSC 2008 case summary — Zoe

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The Partnership (or Partners) providing Radiology services at a new clinic in any of the Restricted Areas, or under a hospital contract with a hospital in any of the Restricted Areas, where: - the Partnership first refers the new opportunity to the Company (to pursue as part of the Business); and - either: - the Company decides that the Business should not pursue the new opportunity (for these purposes, if the Company does not make a decision within 30 days of being notified by the Partnership, it will be taken to have decided not to pursue the opportunity); or - the Company decides that the Business should pursue the new opportunity but for reasons outside the parties' control (eg, ACCC restrictions), the Company cannot pursue the opportunity. · Trust or Partnership may decide what (if any) geographic restraints and client restraints should apply to Consultants. F.1. Dispute resolution - clinical matters · The following process applies where the JVA provides for a matter in relation to clinical and professional matters for Partners, Consultants or Company staff to be referred to dispute resolution (except where the JVA expressly provides otherwise). · The Practice Group Committee must use best endeavours to resolve the dispute within a reasonable period. · If the Practice Group Committee is unable to resolve the dispute, the Chairman of the Partnership and the I-MED Network CEO must meet and use their respective best endeavours to resolve the dispute both acting reasonable and in good faith. · If the Chairman of the Partnership and the I-MED Network CEO cannot resolve the dispute within 15 days of the dispute being referred to them, either party may refer the dispute to determination by a sub-committee of the I-MED Chairman's Committee (Chairman's Subcommittee). The Chairman's Subcommittee will consist of 3 members of the MED/MIA Chairman's Committee agreed by the parties and if the parties cannot agree, then chosen at random (excluding the Chairman of I-MED, the Executive Chairman and any member of the committee who is on leave at the relevant time). The Chairman's Subcommittee's decisions will be binding on both parties. F.2. Dispute resolution - general · The following process applies where the JVA provides for a matter to be referred for dispute resolution, any breach by the Company, Trust or Partnership of this JVA and any other disputes between the Company, Trust and/or Partnership (other than disputes in relation to professional and clinical matters covered by Part F.1) · The parties must use informal dispute resolution techniques (including mediation etc) to resolve the dispute). · If the parties cannot resolve the dispute within 7 days, either may refer the dispute to formal mediation by an external mediator in accordance with relevant mediation rules. F.5. Other matters · Parties will be restricted from transferring any rights or obligations under the JVA… · JVA will include standard provisions dealing with GST, giving notice, consents, governing law, enforceability, waivers, variation, parties' rights, attorneys, interpretation, etc. · The parties will use their best endeavours to complete a long form version of this JVA as soon as is practical. · By signing this JVA it will legally bind the Company, Trust and Partnership on any interim basis until the earlier of the date a long-form Joint Venture Agreement is finalised and executed by all applicable parties, and the expiry of 3 months after the JVA date… · The Company and Partnership agree to terminate the current Independent Contractor Agreement between Pittwater Radiology Pty Limited and Pittwater Radiology Partnership dated 8 March 2000 (ICA) effective from the date the long-form Joint Venture Agreement is executed by all parties, and to suspend the operation of the ICA for the period while this JVA is binding (see 'Legally binding' above). · The parties to discuss an extension for another 3 months if the long form agreement has not been completed. Construing the Agreement 21 It is important to remember that the Agreement which was entered into was intended to be replaced by a long form Joint Venture Agreement. Hence the Agreement is not as felicitously drafted as possible. 22 During the hearing both parties repeatedly focused upon the 10 bullet points which make up clause E 5 which is called "Restraint". Internal dictionary

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iii. Third, if the defendant terminates the Agreement for serious default by PRP or the Partnership there is a 6 month restraint. The third restraint is plainly not attracted. However, the third restraint demonstrates that the defendant's construction of clause E5 is inconsistent with clause E5. If there was a restraint on termination of the Agreement the third restraint would be unnecessary. 40 Hence the correct construction requires one to recognize that what I have called "the first integer" was never intended to cover the situation where either party gives to the other 24 months notice terminating the entire Agreement pursuant to Part A2. That was simply because it was totally unnecessary for the parties to regulate any restraint to obtain after the Agreement, in accordance with its terms, had been validly terminated: there were not to be any such restraints. 41 This approach reflects the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably been available to the parties in the situation in which they were at the time of the contract (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 citing Lord Hoffmann, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114; Peppers Hotel Management Pty Limited v Hotel Capital Partners Limited [2004] NSWCA 114 at [66 et seq]. The proper inference is the parties clearly contemplated there was not to be any continuance of the restraint period after the term of the Agreement had ended. 42 That there is no restraint if either party exercises the clause A2 right to terminate the Agreement by giving 24 months notice is commercially sensible. The long notice period operates in lieu of any restraint. During that period each party has time to arrange its own business so that, separately, the parties can continue on their own business affairs post termination of the Agreement. That is a commercially sensible arrangement and one the parties, which operate independent businesses which will continue post termination, are seen to have objectively intended. It is consistent with the fourth bullet point of E5 (also second bullet point of E1) which provides for the only occasion where there is neither notice of termination nor a restraint. Returning to the situation if contrary to these findings, the word "business" has the meaning for which the defendant contends 43 In that circumstance the second E5 restraint ['if a partner leaves the Business'] is not triggered by the plaintiffs termination of the Agreement under clause A2. The restraint has its natural meaning. It refers to and is triggered by a Partner leaving the Business while the Partners are working in the "Business". That is the natural meaning of the term. 44 The example adopted by the defendant during the hearing [of all but one or two Partners resigning], is not a useful example. PRP is a party to Agreement, but is not referred to in the example. Under the Agreement PRP is required to provide services to all Agreement Clinics, of which there were 39 and are now 36. If all but one or two Partners left the Business, PRP would be unable to perform the Agreement and would be in serious default: clause E1 third bullet point. The defendant could then terminate the Agreement and a 6-month restraint would apply: clause E5 third bullet point. The Agreement, on the plaintiffs' construction, provides what the defendant bargained for which is radiologists to provide services at the Agreement Clinics. 45 Further, the example is remote from these facts. Finally, the restraint is apt to apply to a series of individual Partners leaving the Partnership. Application of the restraint to the partnership? 46 During the hearing a question arose as to whether the restraint applied to the partnership. 47 The plaintiffs contended that the restraint only bound PRP. 48 The defendant contended that in relation to each of the restraints, the phrase "Trust must not, and must ensure that the Partnership and Partners do not" cannot be read to mean the Partnership is not directly bound by the restraint: the proposition was that although the expression is elliptical, it is plain that the parties intended that Partnership be directly bound [see clause E1 2nd bullet point; see clause E5 ninth bullet point]. The defendant also drew attention to other parts of the Agreement said to also make references to parties interchangeably [e.g. clause A3 (4th bullet point) with clause B5]. 49 Here again the plaintiffs' contentions are accepted as of substance. 50 The form of restraint, for example in the fifth bullet point of E5, is that PRP "must not, and must ensure the Partnership and Partners do not" engage in identified conduct. I accept that those words should be given their natural meaning, and not merely treated as infelicitous drafting. The draftsman clearly took into account the changing composition of the Partnership and adopted a form of covenant to cope with that difficulty. One simply cannot eschew the deliberate drafting technique to be found in the clause E5 restraint provisions:

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The Contractor accepts that this restraint of trade is fair and reasonable due to the high degree of strategic knowledge involved in the provision of the Services. Second issue - whether Aegis Crowne Pty Limited can take steps preparatory to carrying on a radiology business prior to 8 November 2008 66 Having established that the restraint provisions of the Agreement will come to an end on the termination of the Agreement [on 7 November 2008], it is necessary to deal with the defendant's second contention. The defendant claims that the plaintiffs have taken, and propose to take steps prior to 7 November 2008, which are in breach of various contractual obligations under the Agreement. The conduct allegedly in breach of the Agreement 67 Through the trustee of a different trust, Aegis Crowne, the second and third plaintiffs propose to carry on business providing radiology services in various locations in NSW [including within 5 kilometres of some of the Agreement Clinics] from 8 November 2008. The Dalcross Clinic 68 PRP and the Partnership admit that they have been involved in negotiations with Dalcross Holdings Pty Ltd (Dalcross), which is developing a hospital as a joint venture with Macquarie University. The opportunity being negotiated is for the Partnership, through Aegis Crowne, to provide radiology services at a radiology and nuclear medicine clinic at the new hospital (the Dalcross Clinic). 69 It is common ground that the Dalcross Clinic will not come into operation until some time after 8 November 2008. On the plaintiffs' evidence, the Clinic will be unlikely to commence operation prior to December 2009. 70 Nonetheless, the plaintiffs admit that Aegis Crowne, with the knowledge of the plaintiffs, intends to take steps preparatory to carrying on that business prior to 8 November 2008. These steps include actions such as leasing premises, installing equipment or recruiting staff, which will further the establishment of clinics, both at Dalcross and elsewhere, and potentially allow the plaintiffs to begin providing services on or shortly after 8 November 2008. The North Gosford Clinic 71 Initially, these proceedings also involved allegations that the plaintiffs were in negotiations to acquire a radiology practice at North Gosford Private Hospital ("North Gosford Clinic"). Unlike the Dalcross Clinic, this clinic was anticipated to commence operation sometime prior to November 2008. 72 These allegations were ultimately not pursued, as the parties agreed to pursue this business opportunity together. The facts surrounding this Clinic therefore did not found any freestanding allegation. The defendant sought, however, to use the circumstances relating to the North Gosford Clinic as a contextual indicator of the plaintiffs' intent [during the relevant period] to pursue business opportunities outside of the Agreement prior to 8 November 2008, and as an indirect indicator of the suitability of other, similar business opportunities for pursuit under the joint venture. The terms of the Agreement which are alleged to have been breached 73 The defendant appears to rely in its pleading on four clauses of the Agreement to support its submission that the second and third plaintiffs are liable to be restrained from engaging in conduct preparatory to carrying on a business of supplying radiology services prior to 8 November 2008. Those clauses are E5, C1, B5 and A4. 74 The defendant submits that, by being involved in negotiations to establish a competitive business, the Trust and the Partnership have breached their obligations:

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The second limb - conflict with the Trust's obligations 80 The defendant submits that negotiating to set up a rival clinic within the Restricted Area during the term of the Agreement is plainly to "engage in an activity that may give rise to a conflict to the Trust's obligations under the Agreement", and is therefore prohibited by the second limb of the restraint. 81 Ultimately, this submission is rejected. The defendant has not established that the plaintiffs' conduct is in any way likely to conflict with the Trust's obligations under the Agreement. The defendant claims that the plaintiffs' conduct gives rise to a conflict with a number of the Trust's obligations under the Agreement. Obligations which the defendant seeks to rely upon include: the obligation of good faith, the obligation to cooperate to develop suitable business opportunities and the obligation to comply with the relevant restraints during the restraint period. To the extent that such obligations are enforceable [as to which see the reasons which follow], these obligations are examined closely below. As will appear from these reasons, the plaintiffs' conduct does not give rise to a conflict with any of the applicable obligations. The third limb - conflict with I-MED Network business 82 There is no breach of the third limb of clause E5 for each of the following reasons: i. First, the meaning of the concept of engaging in an activity which may give rise to a conflict with the I-MED Network business is ambiguous. ii. Secondly, it is objectively most unlikely, and not commercially realistic, that PRP and the Partnership agreed to a restraint that prevented them from taking steps preparatory to competing with I-MED's business. A restraint to that effect would be broader than the more clearly expressed restraints in the Agreement. A restraint to that effect is of uncertain content as the I-MED Network business is unknown. iii. Thirdly, there is a textual inconsistency with the defendant's construction. The defendant's broad construction leaves the first limb of the restraint in the first bullet point of clause E5 with no operation as the second limb covers the field of potential activity. iv. Fourthly, the defendant must identify the conduct that PRP or the Partnership has or will engage in which will " conflict " with the I-MED Network business. The conduct proposed to be engaged in is that admitted in paragraph 39 of the plaintiffs' response to the cross summons. The defendant has not proved the I-MED Network business. It has not proved the conflict parameter. On the evidence, the proposed conduct is not in " conflict " with the I-MED Network business. There will be no competition prior to 8 November 2008. 83 In the alternative, if the restraint prevents the proposed conduct the restraint is void as an unreasonable restraint of trade [See discussion of the relevant principle in Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126 at [14]-[39] and Maggbury at [54]-[57]]. The construction contended for by the defendant imposes a restraint of trade on PRP and the Partnership. The clause is consequently against public policy and unenforceable unless it can be justified by the defendant as being reasonable. A restraint is void as being contrary to public policy unless it is shown by the party seeking to uphold the restraint to be reasonable. 84 The restraint is not reasonable. It is a restraint by reference to the business of I-MED, which is not a party to the Agreement. I-MED has no legitimate right to protection from competition. I-MED has not built up good will in trading together with PRP and the Partnership which it is entitled to protect. The clause, as construed by the defendant, is a bare restraint of trade for the protection of a potential competitor which is not a party to the Agreement and which has contributed nothing requiring protection. A business investment is insufficient to render a restraint enforceable [Vancouver Malt & Sake Brewing Co Limited v Vancouver Breweries Limited [1934] 1 AC 181 at 189-190; ICT Pty Limited v Sea Containers Limited (1995) 39 NSWLR 640 at 671]. The I-MED Network business restraint, if construed as the defendant contends it is to be construed, is unenforceable. The second restraint - E5 bullet point 5 85 The second restraint requires the Trust to ensure that the Partnership and Partners do not "be involved (whether as employee, investor or otherwise)" in any competitive business in any of the Restricted Areas. 86 The defendant maintains that preparatory steps to set up a rival clinic in a Restricted Area constitute involvement in a competitive business, even if this business will not commence operation prior to the termination of the Agreement. It asserts that a business may be 'competitive' before it opens its doors to begin receiving patients. It may, for instance 'compete' in trying to attract staff. 87 Here, the crucial issue involves the natural meaning of "Competitive Business" [as used in bullet point 5 of Clause E5]. 88 The natural meaning of "competitive business" is a business that competes for customers. A business which is competitive with the defendant's business is one that supplies services which are substitutable for the defendant's services. 89 Properly construed, the words the words "any competitive business" in the fifth bullet point of Clause E5 does not include the taking of steps preparatory to commencing a competitive business [whether or not when it begins in operation it will be seen to be a business that competes for resources]. 90 The proper construction is to regard the parties as having intended the relevant restraint to be a restraint from carrying on a competitive business. To do so would also be to engage in an activity that may give rise to a conflict with the Trusts relevant obligations, which [absent the consent of the company being unreasonably withheld], would constitute a breach of both the first as well as the fifth of the bullet points.

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iii. Mr Jones, the chairman of the Partnership and a director of both PRP and Aegis Crowne gave evidence that he formed the belief that the Dalcross Clinic was not a suitable project for the business for a number of reasons, including: · That the Trust/Partnership does not know what structure the Dalcross opportunity will take and there is no agreement with Dalcross; · Accordingly, the role that I-MED/PRPL would take in relation to any such structure is not clear; · The Dalcross Clinic would not be operational until after the termination of the Agreement and Dr Jones of the view that therefore there is no basis for going forth in business with PRPL in relation to the Dalcross Clinic; · Mr Carl Adams of Dalcross had taken the position that he did not want to deal with I-MED and accordingly the Trust/Partnership could not go forward to negotiate the opportunity with I-MED involved; and · Dalcross is an "exempt site" under the Agreement; iv. While it is not necessary for the Court to analyse in detail whether each of these reasons was in fact valid, the Court accepts Mr Jones' evidence that the executive committee did in fact form the subjective opinion that the Dalcross Clinic was not suitable for the business; v. Moreover, from an objective standpoint, the Court's finding is that [as the Agreement is to terminate on 7 November 2008] no opportunity which comes into operation after that date will be, or at least is likely to be, suitable for the Business. 115 The finding is that Clause B5 does not give rise to a conflict between the proposed conduct and PRP's or the Partnership's obligations under the Agreement. Obligation to provide services - clause C1 (Commercial List Cross Claim Statement paragraph 14) 116 I did not understand the defendant to press any submission by that there is a conflict between the plaintiffs' proposed conduct and PRP's obligations under clause C1. Other Restraints - clause E5 (Commercial List Cross Claim Statement paragraphs 15 and 16) 117 Aegis Crowne will only provide radiology services from 8 November 2008. Taking steps preparatory to providing those services is not a breach of any of the clause E5 restraints. The finding is that the taking of those steps does not constitute conduct competitive with the Business. Competition will only commence after 8 November 2008, which is not prohibited by the restraints. 118 Further, from 7 November 2008 the Business will have ceased and Aegis Crowne will be competing only with the defendant and whoever (if anyone) the defendant engages to provide radiology services from particular of the Agreement Clinics. Positive obligation to disclose? 119 The defendant's positive obligation case was not pleaded and may not be relied upon. It would in any event have failed. 120 The defendant relies on clause A4, the limited good faith obligation, as a basis for imposing that positive obligation of disclosure. 121 A similar argument was rejected by the West Australian Full Court in Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33. An obligation to act in good faith does not extend to an obligation of disclosure. 122 The defendant also relies on the "Permitted Activities" exception to clause E5. The exception is an exception to the restraints. It does not impose an obligation on the plaintiffs. It permits the plaintiffs, where the restraints are otherwise triggered, to in certain circumstances engage in conduct which would otherwise contravene the restraints.

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Judgment (168 paragraphs)

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Cases Cited (25)

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