Federal Commissioner of Taxation v Williamson [1943] HCA 24; 67 CLR 561
Geraghty v Minter [1979] HCA 42; 142 CLR 177
Health One Inc v Leu (1998) 42 OR (3d) 458
Hepples v Federal Commissioner of Taxation [1992] HCA 3; 173 CLR 492
Higgs v Olivier [1951] Ch 899
Idameneo (No 123) Pty Ltd v Angel-Honnibal [2002] NSWSC 1214; (2003) ATPR 41-918
Ingham v ABC Contract Services Ltd (English Court of Appeal, 12 November 1993)
Kearney v Crepaldi [2006] NSWSC 23
Lamson Pneumatic Tube Co v Phillips (1904) 91 LT 363
McHugh Holdings and Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; 175 IR 414
McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; 73 NSWLR 53
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535
OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1
Orton v Melman [1981] 1 NSWLR 583
Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; 205 CLR 126
Printing and Numerical Registering Company v Sampson (1875) LR 19 Eq 462
Rogers v Maddocks [1892] 3 Ch 346
Seven Network (Operations) Ltd v Warburton [2011] NSWSC 386
Short v City Bank (1912) 12 SR (NSW) 186
Short v City Bank of Sydney [1912] HCA 54; 15 CLR 148
Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607
Twenty-First Australia Inc v Shade (31 July 1998, unreported)
Whiteman Smith Motor Co Ltd v Chaplin [1934] 2 KB 35
Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317
Texts Cited: J D Heydon, The Restraint of Trade Doctrine, 3rd ed (2008)
Treitel, The Law of Contract, 12th ed (2007, ch 11) p 504
Category: Principal judgment
Parties: Sidameneo (No 456) Pty Ltd (Appellant)
Richard Spence Alexander (First Respondent)
Howard John Oxley (Second Respondent)
Nicholas Robin Smith (Third Respondent)
Mina Nakhla (Fourth Respondent)
Healthscope Medical Centres Pty Ltd (Fifth Respondent)
Representation: R R I Harper SC and G Lucarelli (Appellant)
A Moses SC and Y Shariff (First to Fourth Respondents)
J R J Lockhart SC (Fifth Respondent)
Turner Freeman (Appellant)
Morris Legal (First to Fourth Respondents)
Allens Arthur Robinson (Fifth Respondent)
File Number(s): CA 2009/287452
Decision under appeal Citation: Symbion Medical Centre v Alexander [2010] NSWSC 1047
Date of Decision: 2010-09-16 00:00:00
Before: Gzell J
File Number(s): SC 2009/287452
[2]
Judgment
1BEAZLEY JA: I agree with Young JA.
2BASTEN JA: I agree with the orders proposed by Young JA and with his reasons.
3YOUNG JA: This is an appeal from a decision of Gzell J in the Equity Division of this Court dismissing claims by the appellant that the respondents had breached provisions in their contracts of service imposing restrictive covenants preventing them working within three kilometres of the appellant's premises for one year after the termination of their contracts. His Honour's judgment is [2010] NSWSC 1047.
4The basal facts are not in dispute. On 18 January 2002, the appellant entered into an Asset Purchase Agreement with Drs Alexander, Oxley, Smith and Green whereby the four doctors or their trustee companies sold the Wyong Medical Centre to the appellant. Each doctor received $465,876.40 under the agreement. Annexed to the Asset Purchase Agreement was a form of services agreement for each of the doctors to sign: the signing of those agreements was a precondition to the operation of the Asset Purchase Agreement.
5Practitioner services agreements were executed by each of the doctors on 18 January 2002. They recited that the appellant provided administration and billing services, equipment and serviced premises for the use of medical practitioners; that the doctors wished to render medical services from the Wyong Medical Centre; that in consideration for Symbion entering into the asset purchase agreement the doctors had agreed to render medical services at the Wyong Medical Centre for five years; and that the doctors had requested the appellant to provide the services on the terms of the services agreements which the appellant had agreed to do. ("Symbion" is the former name of the appellant).
6The Asset Purchase Agreement contained restraint of trade clauses. Restraint of trade clauses were also included in the practitioner services agreements with the doctors whose assets had been acquired. The latter included post-term restraint clauses.
7There was debate before the primary judge and before us as to whether the two contracts could be read together. The primary judge did not rule on the question though he remarked that the interdependence of the agreements was clearly evident ([105]).
8Dr Green plays no part in this litigation. Drs Alexander, Oxley and Smith are the first three respondents. The fourth respondent is Dr Nakhla who joined the Wyong Medical Centre on 19 March 2004. He sold no assets to the appellant. He was paid $200,000 and entered into an agreement with the appellant which contained an almost identical restrictive covenant to that which bound the other doctors.
9The fifth respondent, Healthscope Medical Centres Pty Ltd ("Healthscope"), is a competitor of the appellant which, inter alia, conducts a medical centre known as Wyong Family Practice at Pacific Highway, Tuggerah, about 1.8 kilometres south of the Wyong Medical Centre. This has been called "the Rival Practice" and I will adopt that terminology.
10The Asset Purchase Agreement contained a cascading series of restraints of trade. It provided that, to give full effect to the sale and purchase of the sale assets, particularly the relevant practice management goodwill, each practice owner was required not to do, and was required to procure that each doctor did not do, any of a number of things in an area situated within a radius of five, four or three kilometres of the practice site for five, four or three years. These cascading restraints of trade were spent by the time of the actions of which the appellant complains: the five-year period expired in 2007.
11In due course each doctor extended his agreement, in the case of Dr Alexander the agreement was extended to 16 January 2009 and in the cases of Drs Oxley and Dr Smith, 5 November 2008. Dr Nakhla ceased rendering service on 9 June 2009 and joined the Rival Practice prior to the trial.
12The Asset Sale Agreement restricted the doctors' involvement in medical practice outside their work at the Wyong Medical Centre with specified exceptions for emergency situations and the like. It also required them not to solicit or persuade any patient to cease attending the Wyong Medical Centre when clinically required. Further, they were not to induce, or attempt to induce, any person who was at the time of completion, or who later became, an employee at the Wyong Medical Centre of the appellant or of any of its related corporations to terminate his or her employment with the appellant.
13The practitioner services agreements contained many similar provisions to the Asset Purchase Agreement.
14The services agreements also contained cascading restraint of trade clauses. However, the only part of these upon which the appellant relies is that which restricts each of the doctors practising medicine within three kilometres of the Wyong Medical Centre for one year after the termination of their services agreements.
15No-one argued before us that the cascading restraints caused the covenants to be void for uncertainty. Each party was content to assume that the only covenant of concern was a post contractual restraint for one year and three kilometres. I will consider the problem on that basis.
16There was a change of control of the appellant in April 2008 and shortly afterwards, dissatisfactions became evident. The result was that each of the doctors and several key staff left the Wyong Medical Centre and joined the Rival Practice.
17The first three respondent doctors gave notice on 16 January 2009 that they were severing their connection with the Wyong Medical Centre on 30 January 2009. They commenced working for the Rival Practice from 2 February 2009, as did key former members of the staff from the Wyong Medical Centre.
18The appellant commenced proceedings on 5 February 2009 seeking to restrain each of the doctors from operating within a prohibited radius of the Wyong Medical Centre up until specified dates in 2010 and from inducing staff to leave the appellant's medical centre.
19The proceedings were heard at first instance on 23-27 August 2010 and were decided against the appellant on 16 September. As the relevant time limits have now expired, the question on the appeal is whether the appellant should be entitled to damages or equitable compensation as a result of the doctors' conduct.
20At the forefront of the submissions before the primary judge was the analysis of Palmer J in Idameneo (No 123) Pty Ltd v Angel-Honnibal [2002] NSWSC 1214; (2003) ATPR 41-918 (hereafter "Idameneo" ) (affirmed by the Court of Appeal without dealing with the present points [2003] NSWCA 263; 59 IPR 184). Although there were distinctions between that case and this (for instance Idameneo was a case of a covenant during the term of the contract whilst the present is post term), the analysis in Idameneo does assist resolution of the present problem.
21The primary judge's reasons for rejecting the appellant's case appear from [132] et seq of his reasons. In these paragraphs, the appellant is called "Symbion", its former name.
22The primary judge said:
132 Notwithstanding that by the asset purchase agreement Symbion purported to purchase the doctors' practice management goodwill, it did not do so. Symbion could not conduct the medical practices of the doctors. That right or privilege remained with them. What Symbion got for its money were the same rights or privileges that it got for the payments it made to extend the terms of the doctors' services agreements - the exclusive right to provide management services to the doctors at the Wyong Medical Centre during the term and the right to represent that the doctors carried on their practices from the Wyong Medical Centre.
133 Symbion did not share any part of the goodwill of the doctors' medical practices. That remained with the doctors when they moved to the Wyong Family Practice although its quality was necessarily transmogrified by the move.
134 I reject the suggestion that the acquisition of patient records and patient contact not only with the doctors but also with the Symbion staff generated in Symbion some sort of goodwill in the doctors' practices.
135 If Symbion developed goodwill of its business it was of a different kind - the right to provide services to medical practitioners from the Wyong Medical Centre to attract to it the custom of other medical practitioners willing to pay a price for the provision of those services.
...
137 If the above was its nature, the post-term restraints were unreasonable.
23The primary judge also rejected the appellant's fall back position that it had a legitimate commercial interest to protect saying at [144] that the same problem of unreasonableness emerges.
24The notice of appeal puts that the primary judge was in error in concluding that the appellant did not acquire any goodwill pursuant to the Asset Purchase Agreement, that the primary judge failed to distinguish between the goodwill of the medical practice and that of the individual doctors and failed to conclude that the appellant had a legitimate protectable interest in taking the restrictive covenants.
25The appellant also pressed its claim against Healthcare for tortious interference with the contracts with the other respondents. This claim failed when the primary judge rejected the case against the case against the doctors.
26On 5 July 2011, Gzell J gave an additional set of reasons dealing with costs. For the reasons there set out involving what his Honour saw as a Calderbank letter, he ordered that the appellant pay the first three respondents' costs on the ordinary basis to 27 May and on an indemnity basis from 28 May 2009. The appellant challenges this order.
27The appeal was heard on 8, 9 and 10 November 2011, Mr Robert Harper SC and Mr George Lucarelli appearing for the appellant, Mr Arthur Moses SC and Mr Yaseen Shariff appearing for the respondent doctors and Mr James Lockhart SC for the fifth respondent, Healthscope.
28The appeal raises a number of issues with which I will deal seriatim. These are:
What interest must a person have in order to impose an enforceable restrictive covenant? In particular must that interest be of a proprietary nature?
Did the appellant possess such an interest when it imposed the relevant restrictive covenant?
The law says that a restrictive covenant is void unless reasonable. What does "reasonable" mean in this context?
Was the restrictive covenant reasonable: (a) between the parties; and (b) in the public interest?
If not, is it saved by application of the Restraints of Trade Act 1976?
6 How far, if at all, are the provisions of the Trade Practices legislation material to the questions posed in this appeal?
Did the doctors breach an enforceable restrictive covenant?
If so, has the appellant established that it suffered damage and what is the quantum of such damages?
Did Healthscope believe that the contracts between the doctors and the appellant had terminated when it entered into new agreements with them? Is it necessary for that belief to be reasonably held? If so, was it reasonably held?
Was the primary judge's ruling on the costs payable below an order which should stand?
What is the result of the appeal?
291 and 2. Virtually all discussions of the present type of cases commence with a reference to the decision of the House of Lords in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535. In that case it was ruled that a restraint of trade is prima facie invalid but may be enforced if it affords no more than reasonable protection to the party in whose favour it is imposed. Outside this area, restrictive covenants are void as against public policy.
30What are the interests which a party must possess in order to protect itself by a restrictive covenant?
31Traditionally, these were considered to be particular types of proprietary interests such as goodwill. Indeed, even recently, Brereton J said in McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; 73 NSWLR 53, 65 that "the legitimate interests which may be [the] subject of protection by covenant are in the nature of proprietary subject matter."
32Appellant's counsel say that this is an artificially limited way of describing the cases. The true rule is that the plaintiff must have some legitimate interest which equity will protect. The word "proprietary" is used in a special sense and will include legitimate commercial interests. I took this view in Twenty-First Australia Inc v Shade (31 July 1998, unreported) and again in Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607, 612-3 and continue to hold that view. This is reinforced by the way Treitel, The Law of Contract, 12th ed (2007, ch 11) p 504 puts the word "proprietary" within quotation marks.
33Alternatively, appellant's counsel put, a legitimate commercial interest will be sufficient whether it technically be proprietary or not. Alternatively again, goodwill covenants depend on proprietary interests and traders' contracts on commercial interests, Treitel [11-081].
34Treitel notes at [11-066] that there may be valid restrictive covenants outside these areas such as where an actor covenants not to appear on stage for three months after the release of his latest film (the reference is to Higgs v Olivier [1951] Ch 899 , a tax case) .
35Reference was made during argument to the recent decisions of Brereton J in McHugh Holdings and Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; 175 IR 414. However, I do not see any departure in those cases from the view that "proprietary" interests (in the wider meaning of that word) are capable of supporting restrictive covenants, but that there may be cases where other interests may also do so.
36The reports contain a number of decisions where the subject matter has been the validity of a restrictive covenant imposed by a medical centre. There have been only a few challenged on the basis that the medical centre does not have an interest which the law will consider appropriate to protect.
37The Queensland Full Court decision in Ashcoast Pty Ltd v Whillans [2000] 2 Qd R 1 is a good example. As appellant's counsel points out, at 5, McPherson JA said:
I have no doubt that the respondent had an interest in the Medical Centre sufficient to sustain a contractual restraint of trade of the kind agreed to here.
38There are a number of cases where an interest somewhat less than what would ordinarily be termed "proprietary" has been held sufficient to support a restrictive covenant; see eg Blakely and Anderson v de Lambert [1959] NZLR 356, 376; Seven Network (Operations) Ltd v Warburton [2011] NSWSC 386, [64]-[69] (Pembroke J) . Authorities in England are to the same effect, see eg Dawnay Day & Co Ltd v D'Alphen [1998] ICR 1068 .
39The primary judge proceeded on the basis that the appellant failed because the doctors had goodwill in the medical practice and the appellant was not earning its money from the practice of medicine but in a different "industry".
40In, McLennan J in the Ontario High Court denied relief in a similar case to this, saying at p 778:
The plaintiff's business is to supply office-space and equipment and the defendant's business is the practice of medicine and surgery. A covenantee is not entitled to restrain a covenantor from carrying on business other than that which the covenantee carries on...
41This statement was expressly overruled by the Court of Appeal for Ontario in Health One Inc v Leu (1998) 42 OR (3d) 458 . The Court of Appeal noted that the cases relied on by McLennan J ( Rogers v Maddocks [1892] 3 Ch 346 and Bromley v Smith [1909] 2 KB 235) were cases where, because the covenantor and covenantee were trading in different fields, the covenants in question were held to be unreasonable, but it said that those "cases do not lay down a rule that in all cases it would be unreasonable to impose a restraint simply because the two parties are in different businesses".
42Indeed, Everton v Longmore (1899) 15 TLR 356 and the Scots case of Ballachulish Slate Quarries Co Ltd v Grant (1903) 5 F (Ct of Sess) 1105 where the covenants were upheld are close to the present case.
43A point that must be made stemming from Carruthers Clinic Ltd v Herdman is that a court will fall into error in this area of the law if it fails to recognise that the decided cases are very much fact specific and that it is very dangerous to attempt to deduce a general rule from them.
44Health One Inc v Leu was not actually referred to either below or in argument in this court, but I mention it because it should be followed and puts to an end the basic thought that a restrictive covenant is not enforceable if the parties are now in different industries.
45The appellant's counsel say that whilst, traditionally, the legitimate interests which may be protected by the doctrine of restraint of trade have been limited to protection of goodwill, trade secrets and other confidential information, this has been very vague and there is really no reason why analogous interests cannot be so protected.
46In the present situation, the appellant puts that it has a legitimate protectable proprietary interest in the form of goodwill in its business or, alternatively, a sufficient commercial interest to support the restraints.
47The doctors' counsel submit that these other alleged legitimate commercial interests were never properly articulated.
48By the Asset Purchase Agreement, the appellant purchased the practice management goodwill of the Wyong Medical Centre. This was distinct from the goodwill that each doctor had with respect to his practice of medicine.
49The appellant submits that the primary judge appeared to assume that they were one and the same and thus fell into error.
50The doctors' counsel put that the primary judge did not regard the appellant's goodwill as the same as that of the doctors. Rather, he said that the appellant never acquired the goodwill of the medical practice, all it acquired was the right to provide management services to the doctors.
51It is difficult to see how this can be the proper construction of the Asset Purchase Agreement. The Agreement is complex but it clearly assigns the goodwill of the medical practice, which was vested in Armact Pty Ltd as trustee for the doctors, in the appellant as well as vesting all other assets of the Wyong Medical Centre.
52In Idameneo, Palmer J analysed the current type of transaction as follows:
37 As is clear from the Sale of Practice Contract and the Practitioner Contract themselves, the Plaintiff itself does not carry on a medical practice nor does it employ doctors. All that it does is to provide premises and administrative services whereby doctors are able to conduct their practices for their own account, paying a prescribed percentage of their fees to the Plaintiff in consideration of the premises and the services. Obviously, it is in the interests of the Plaintiff to attract doctors to its medical centres and to retain them there. It attracts doctors to its centres by offering to "purchase" the goodwill of their practices but it is a very artificial kind of purchase because the Plaintiff, as a corporation, does not, and cannot, itself carry on the medical practices the goodwill of which it has purchased.
38 In substance and effect, the purchase by the Plaintiff of a doctor's goodwill is the purchase of his or [her] promise that, in return for a substantial consideration, he or she will transfer the conduct of his or her practice to a specified medical centre of the Plaintiff, will continue to practise there for a specified minimum time and will not, for a specified time after ceasing to practise in the centre, compete with the other medical practices being conducted in the centre. All this, of course, is in aid of the enhancement of the Plaintiff's medical centres as places in which doctors will find it desirable to conduct their practices: they receive a substantial "up front payment" as an inducement to move into the medical centres; they stand to get "flow-on" patients from other doctors practising in the centre, and their own practices will not be at risk of erosion when other doctors in the centre relocate.
39 In short, the restraint of trade covenants in the Sale of Practice Contract and the Practitioner Contract are to be seen as primarily for the purpose of creating and protecting the drawing power of the centres themselves as places in which doctors wish to practise, to the commercial benefit of the Plaintiff.
40 That this is the substance underlying the form of the "purchase" of a doctor's "goodwill" is clear, in my opinion, from Clauses 4.4(b), 5.5, 7.1, 7.2, 8 and 9.1 of the Sale of Practice Contract, and from Clauses 5 and 6 of the linked Practitioner Contract.
53On the basis that the appellant did obtain the goodwill of the Wyong Medical Centre (other than the goodwill of each doctor in his professional practice), which I will term "the practice goodwill", the doctors' counsel put that a restraint on the doctors after termination could not be for the protection of the practice goodwill.
54"Goodwill" is a rather elusive concept. The best attempts at some form of definition may be found in Commissioners of Inland Revenue v Muller & Co's Margarine Ltd [1901] AC 217. At 223 Lord Macnaghten said that goodwill "is a thing very easy to describe, very difficult to define", but he stated its key features. This dictum has been oft repeated; see eg Hepples v Federal Commissioner of Taxation [1992] HCA 3; 173 CLR 492, 519 and Federal Commissioner of Taxation v Murry [1998] HCA 42; 193 CLR 605, 611 [12].
55In Whiteman Smith Motor Co Ltd v Chaplin [1934] 2 KB 35, 42, Scrutton LJ adopted a text book suggestion that types of goodwill could usefully be categorized as cat, rat and dog types. At 49-50 Maugham LJ added the rabbit and in Federal Commissioner of Taxation v Williamson [1943] HCA 24; 67 CLR 561, 564, Rich J adopted that categorization.
56This categorization differentiates cat goodwill - ie local goodwill, the customer who will prefer to deal with the shop no matter who runs it, rabbit goodwill - local goodwill of the person who will just patronise the nearest establishment, dog goodwill - ie personal goodwill where the customer prefers to deal with the same person and rat goodwill - ie casual custom.
57The High Court in Murry analysed the concept of goodwill in the modern law. The core of the analysis is at 614 [20] that:
The attraction of custom still remains central to the legal concept of goodwill. Courts will protect this source or element of goodwill.
58As Brereton J pointed out in McHugh Holdings at [43], an element of goodwill may enhance the value of the premises from which a business is carried on and other elements may attach to the proprietors and the holders of the business name.
59I can see no reason why, if the premises are owned by X, the business name by Y and Z carried out activities in the premises and in conjunction with the business, X and Y do not have a sufficient interest in Z's enterprise to prevent them taking a reasonable restrictive covenant to protect their own goodwill.
60In employee cases, it is recognized that an employer has a legitimate interest in maintaining a stable workforce: Ingham v ABC Contract Services Ltd (English Court of Appeal, 12 November 1993) quoted by Brereton J in Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; 71 NSWLR 9, 23 [45] and see Dawnay Day at 111 and Kearney v Crepaldi [2006] NSWSC 23 (McDougall J).
61The present case involves a covenant to protect a similar interest.
62As the Canadian cases discussed above show, there is sufficient connection between the goodwill of the appellant's business and the practice conducted by the doctors to support the restriction: the "attraction of custom" to the appellant's business is being protected.
63The doctors' counsel make the point that the evidence did not demonstrate any connection between the fact that named doctors were working in the practice and the goodwill of the practice.
64I accept this submission up to a point. If the evidence had shown that there was advertising that particular doctors were involved in the practice and that this attracted patients to the practice, it might have been different. However, it is probably sufficient if the community is aware that there are pleasant and competent doctors staffing the centre and that the centre is a place at which they can confidently expect good treatment.
65There is evidence that the new controllers of the appellant were giving some consideration to the possibility of closing the Wyong Medical Centre and transferring operations including the four respondent doctors, to the Wyoming Medical Centre. This again suggests that there was little valuable goodwill attached to the Wyong Medical Centre.
66It seems to me impossible to conclude that there was not at least some goodwill attaching to the Wyong Medical Centre which the appellant was entitled to protect. That goodwill was quite separate to that which each individual doctor had in respect of his own personal practice of medicine.
67Whilst there might have been some proper nexus between the appellant's commercial interests and the doctors whilst they were working at the Wyong Medical Centre, it is difficult to see how there was any protection given to the appellant's goodwill after they had left the practice. The locational aspect of goodwill would remain the same whether the respondent doctors were working there or not.
68However, the appellant says that the resignation of the doctors and their relocation 1.8 kms away meant that it was much more difficult to restaff the centre with competent doctors. As later appears, I do not consider that the alleged difficulty was made out.
693, 4 and 5. The question which I must now address is whether the covenant was reasonable and associated issues.
70The validity of a restrictive covenant is to be judged at the date of its creation: Geraghty v Minter [1979] HCA 42; 142 CLR 177,181. However, as Brereton J pointed out in Tullett Prebon at p 440, when exercising its discretion whether or not to grant relief, the Court considers matters as at the date of hearing.
71Although one judges the covenant at the date of its creation, if the parties should realise that they are dealing with a business that might be expanding, the covenant can be that which is reasonable to protect the contemplated expansion: see Lamson Pneumatic Tube Co v Phillips (1904) 91 LT 363; Cactus Imaging at 21 [37] and Treitel at [11-062].
72In BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347; 278 ALR 105, Macfarlan JA, with whom Giles JA and Sackville AJA agreed, said at [67] and [75] that the test was "whether as at the date of the Agreements reasonable people in the position of the parties would have expected that performance of the Agreements...would be likely to generate significant new goodwill... which B... could reasonably protect."
73When looking at the word "reasonable" in the present context, it must be realized that one looks to see what is reasonable to protect the legitimate interest, not just what one might think would be reasonable in the abstract.
74Again, it must be noted that the word "reasonable" in the present context has its peculiarities. In the present context, the question is one for the judge: Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; 133 CLR 288, 305.
75What needs to be considered is whether the restrictive covenant is so framed "as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public": Buckley v Tutty [1971] HCA 71; 125 CLR 353, 376.
76One way of approaching the question is to note that, as a general rule, a post contract restriction on a partner or employee for one year within three kilometres of a plaintiff's principal place of business is reasonable.
77I actually put the proposition to counsel that three kilometres and one year was unarguably reasonable. I do not believe that I got an answer.
78Whilst it is difficult to argue that such a restriction is not reasonable, I consider one actually has to put the question: "As at 18 January 2002, would reasonable people in the position of the parties have expected that there was existing goodwill attached to the Wyong Medical Centre and that the performance of the agreements would be likely to generate significant new goodwill and that this was an interest which the appellant could reasonably protect by taking a covenant to prevent the doctors working within three kilometres for one year after their contract expired?"
79When applying this test, one must assume that the parties realised that the contracts were for five years with the possibility of extension.
80Thus one must consider what at the end of five plus years would be the interest which it would be reasonable to protect.
81It would not be unreasonable for the parties to assume that in that period the doctors would attract patients and that, unless there was some restraint, some of those patients would follow the doctor (dog goodwill) and so the appellant's income would be reduced.
82One has also to bear in mind, as Palmer J said in Idameneo at [44] et seq, that when considering whether a restraint of trade is void, the Court must consider two questions: (1) is the restraint reasonable between the parties (onus on the appellant); and (2) is the restraint contrary to the public interest (onus on the respondents).
83In one sense this is odd as there are authorities which assume that there is only one question and that is whether the restriction is reasonable in the public interest.
84Mr Harper put that the sanctity of contract was a major factor in considering what was in the public interest. This was the approach in the 19 th century, an approach championed by Jessel MR who said in Printing and Numerical Registering Company v Sampson (1875) LR 19 Eq 462, 465:
...if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice.
85With respect, the approach of putting that contracts are sacred or suggesting that that is a faithful translation of pacta sunt servanda merely begs the question. The general principle is that all contracts in restraint of trade are void unless it is proved that the restraint is reasonable.
86The factor of sanctity of contract is nowadays still of significance (see eg J D Heydon, The Restraint of Trade Doctrine , 3 rd ed (2008) at p 275) though not as significant as thought in the 19 th century. Disturbingly, there are some first instance judgments in this 21 st century which seem to be over rating its significance; see eg Seven Network (Operations) Ltd v Warburton at [3] .
87The modern authorities do concede that what the parties at arms length have agreed is of some relevance to the question of what is reasonable between them because the parties must be taken to have a good knowledge of the relevant industry and are in a better position than the court to assess reasonable protection: Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, 333.
88However, evidence is admissible as to the customs of the industry concerned and as to the customary covenants. This may be vital if the covenant being examined is out of the ordinary, see Heydon p 42 .
89The key issue is whether a covenant taken at the commencement of a relationship that is intended to last for at least five years, which covenant is only to spring into effect at the end of that period, is a reasonable restriction.
90The primary judge dealt with this point in [137] et seq:
137 If the above was its nature, the post-term restraints were unreasonable. The doctors were required to obtain Symbion's services at the Wyong Medical Centre for the period specified in the asset purchase agreement and in the doctors' services agreements. But when those agreements expired the doctors were denied the opportunity of obtaining accommodation and services from some other source within the radius of three kilometres of the Wyong Medical Centre. And there were 11 medical practices within that area. The doctors were effectively tied to a continuation of their services agreements or the cessation of their practices for 12 months if they wished to remain proximate to the Wyong Medical Centre.
138 This was not a case in which the doctors were in competition with Symbion. Nor was it a case of threatened misuse of trade secrets or confidential information, although the recitals to the practitioner services agreements sought to embrace this as a basis for the post-term restraints. The doctors were customers of Symbion, bound to take its services for the term of the asset purchase agreement and the practitioner services agreements.
139 There was negotiation between solicitors acting for Symbion and solicitors acting for the doctors before the asset purchase agreement was executed. Its terms were agreed including the length of time the doctors were required to receive Symbion's services. If that period was regarded as reasonable, there is no reasonable basis to effectively compel an extension of that period in the guise of a post-term restraint of trade provision.
140 It follows, in my view, that Symbion had no interest in the goodwill of the doctors' medical practices and it was not a legitimate interest of Symbion. If it had no legitimate interest to protect, the post-term restraints must be void as against public policy.
141 It also follows that if Symbion had goodwill in its service provider business it has failed to demonstrate that the post-term restraints were no more than reasonable for the legitimate protection of that goodwill and, again, the post-term restraints are void as against public policy.
91The respondents say that the covenant must be reasonable for the protection of the interest that was acquired. That interest was the right to service the doctors for five years or for an extended period. During those five years there may have been some interest in keeping those doctors in the Centre and keeping them busy as the appellant took 50% of their fees. However, after the doctors left the Centre, there was no such interest.
92The appellant's riposte is that if the doctors leave the centre and can easily be reached by former patients, those former patients will follow the doctor so that the appellant will not be able take its 50% of the fees that that doctor would have rendered.
93I do not agree with this riposte. Under the Asset Purchase Agreement, there was no obligation on a doctor to accept the appellant's service for more than five years. Extensions were negotiated, but the doctor received a further capital fee for the extension. Restraining the doctor after this obligation to be served by the appellant ceased seems mighty like mere restraint of competition.
94If one merely looked at the custom in the "industry" one might be tempted to say that a one year, three kilometre restriction was customary and that this pointed to the present restriction being valid.
95It may be significant that in Orton v Melman [1981] 1 NSWLR 583, a covenant in a medical partnership restricting a doctor from practising for eight miles and three years from Toronto or Teralba NSW was upheld. In Ashcoast Pty Ltd v Whillans, a seven kilometre and three year covenant in a Brisbane suburb was upheld. The covenant in the present case is milder.
96I gain some insight from these cases, but I need to remember that, particularly in this area of the law, so much hinges on a complete understanding of all the facts of a case that it is unwise to seek to deduce some general principle from them.
97Another factor which the respondents say must be taken into account is the fact that we are here dealing with the availability of medical services in the Wyong area. It is in the public interest that the community have doctors in their area to whom they can resort. Thus, it is said that it is unreasonable to restrict doctors' activities.
98I do not consider that this argument has much strength. The number of doctors available to the Wyong community has little to do with a restraint on four doctors not "trading" within three kilometres of Wyong town centre.
99It could be said that, whilst a stronger restriction might have been supportable, a restriction that did not prevent mass walk out of doctors or doctors practising in the next suburb was so ineffective that it could not be classed as reasonable.
100This argument was not put. The point involved also does not appear to have been discussed in the authorities or the text books and should not be considered in the instant case.
101The primary judge in his evaluative judgment did not consider that the appellant had proved that the covenant was reasonable. This is a borderline case. However, the primary judge's evaluation was very much affected by his view that there was no sufficient interest to protect.
102My reasoning above is that the appellant had a sufficient interest to protect. This is so even though the parties reasonably considered that they were looking at an expanding enterprise and what was to be protected was the state of the enterprise in five plus years' time. Prima facie such an interest may be protected by restrictive covenant. The present covenant is about as basic as one could impose. Thus the covenant is valid.
103My conclusion means that I do not have to consider the effect, if any, of the Restraints of Trade Act 1976.
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Decision last updated: 21 December 2011
Section 4M of the Trade Practices Act 1974 (Cth) provides that that Act does not affect the general law relating to restraint of trade in so far as it is capable of operating concurrently with that Act.
105Section 51(2) of that Act protects certain restrictive covenants by employees or those associated with the preservation of goodwill in the sale of a business.
106However, the High Court in Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; 205 CLR 126, 141 [33] made it clear that a court dealing with the general law may have regard to the provisions of the Act to determine the appropriate balance of interests affected by the covenant.
107Little attention was given to this matter up to the oral hearing, but the parties were given liberty to address it in subsequent written submissions, which liberty was taken up.
108The appellant submitted that there was no obligation on a court to consider the interrelation with the Trade Practices Act and that it should not do so where, as here, no party has relied on it. In any event, it was put, it is difficult to see how the Act could assist in the present matter.
109The respondent doctors put that it had it been pleaded, it may have been open to them to put that the restraints in the practitioner services agreements offended ss 45 or 47 of the Act because they had the effect of lessening competition in the relevant market for medical services.
110They then put that, despite the lack of pleading, it is open to the Court to take that matter into account and to include in the balance the factor that there is a lessening of competition within the three kilometre exclusion area.
111I consider that the respondent doctors' submissions are correct, but, in view of my conclusion above, that it of no moment.
It follows that my view is that the doctors were in breach of a valid restrictive covenant.
I now turn to issue of damages.
114The appellant produced evidence which went to the matter of damages from Mr Thomas Bateman, Mr Robert Wheat, Ms Lynne Pezzullo and Mr Goodwin Gower.
115Mr Bateman is the General Manager of the appellant's medical centre operations. Mr Wheat is the principal officer of the appellant in charge of recruiting doctors, Ms Pezzullo is a public opinion surveyor and Mr Gower is an accountant.
116The case sought to be made, as appears from the appellant's counsels' submissions in the Orange Appeal Book para 68, is that the appellant was damnified because of the impairment to its ability to recruit replacement doctors for the Wyong Medical Centre that occurred as a result of the conduct of the doctor respondents.
117Mr Wheat gave evidence of his interview with a Dr X who appeared interested in coming to the Wyong Medical Centre. However, Dr X declined the invitation at least partly because of the four doctors who had left the Centre and moved down the road with many of their patients following them.
118I found Ms Pezzullo's evidence, assuming it was properly admitted, a matter on which I have some doubt, to be of no value at all. She despatched a woman to ask 20 people in Wyong, who looked elderly, to answer a series of questions. To be told that 10% of respondents gave a particular answer looked significant until one realized that that meant that only two people actually gave that answer. In any event, sampling only people that looked elderly was in itself a useless exercise.
119Mr Gower produced a series of complicated calculations. His principal thesis was that the appellant would have employed a replacement doctor to practice at the Wyong Medical Centre for five years. That doctor would have billed some $300,000 per year of which the appellant would have received 50%. Because it was more difficult to get a replacement doctor as a result of the respondent doctors moving only 1.8 kms away, that income was not earned. The loss was between $355,582 and $840,316 per doctor.
120The evidence was completely flawed. There was no warrant for taking the profits over a five year period: the restriction was for one year. If the figures had credibility, the loss calculated would have flowed whether the respondent doctor had gone on a world trip for a year or moved more than three kilometres away, it had no relation to the doctor practising within the three kilometre limit. Thirdly, there was no deduction for expenses saved because there were fewer doctors at the Centre. Fourthly, there was no discount for the fact that other factors may well have contributed to the alleged loss.
121Again, Mr Wheat's evidence did not go sufficiently far as to show that the appellant was inhibited by the doctors' departure from retaining a new doctor. The evidence was that the doctors left in January 2009. The appellant had put out a general circular to all NSW doctors in early 2009 seeking further doctors for its centres. However, Mr Wheat only seems to have realised in July 2009 that there was a severe shortage at the Wyong Medical Centre. To remedy that, in November 2009, he sent out a call to 59 doctors in the general area of Wyong seeking doctors, principally for the appellant's Wyoming Centre. He got five meaningful responses, but no-one took up any of the available positions. The evidence showed that, even if there had been a positive response, the doctor would not have been able to commence work until February 2010 (that is after the expiry of the one year restraint period).
122Mr Wheat also deposed as follows in para 32 of his affidavit of 18 March 2010:
Based on my experience not only with Dr X but generally, the proximity of [the respondent doctors] to the Wyong Centre is a factor that makes recruiting GPs into the Wyong Centre more difficult. I cannot say by "how much" the difficulties in recruiting for the Wyong Centre have been "increased" by their proximity...
123When one considers that there is no evidence of any attempt to extend the respondent doctors' contracts (which on past experience would have been at a substantial fee), there was little attempt made to replace the doctors during the one year period, Mr Wheat cannot say to what extent his recruitment difficulties were increased by the doctors being still in proximity to the Wyong Medical Centre and the fact that much of any loss came about merely because the doctors' contracts had come to an end rather than by where they moved their practice, the result is that a court could not be satisfied that any breach of the doctors' contracts caused the appellant any provable loss.
124Mr Harper says that as the only evidence of damages was that given by the appellant, it was credible and should be accepted. There is no rule of law requiring that evidence not challenged be accepted: Adelaide Brighton Ltd v Ostabridge Pty Ltd [2005] NSWSC 737 [61] per Campbell J. Furthermore, the evidence in question was extremely tenuous.
125There was a suggestion that, if the Court found a breach, it should remit the case to Equity for assessment of damages. I do not favour that suggestion. The plaintiff is required to place all its evidence on damages before the Court at the initial hearing. It is quite inappropriate for it to have a second chance if the Court on appeal considers that material inadequate.
126Thus, although there has been a breach of contract, the appellant still does not succeed in the litigation.
I now turn to the position of Healthscope.
128It is undisputed that knowingly interfering with a contract between other people to the detriment of one or more of the parties is an actionable tort. The sole point of dispute in the present case is whether Healthscope knew that the contract with Dr Alexander was still on foot when it offered him a contract.
129Dr Alexander's contract was initially for five years from February 2002. It was renewed (for consideration) for a further year. Then there was a second extension (apparently not for consideration) which, if valid, extended his contract to 16 January 2009. The other doctors' contracts had expired before that date.
130The primary judge did not deal with this issue because, as he held the restraints of trade void, there could be no tortious interference with valid contractual rights. Assuming that the restraints are reasonable, but no damages flow, the same practical consequence would follow. However, precedent requires me to deal briefly with this issue.
131The evidence seems clear that Healthscope did not know about the final extension to Dr Alexander's contract.
132Healthscope had made enquires and had obtained from Dr Alexander copies of his contractual documents. There was no copy in those papers of the most recent extension. Why that was the case was never explained.
133The evidence seems clear that Healthscope proceeded on the basis that the contract had expired.
134A party is not liable for interfering with another's contract if it (reasonably) believes that that contract has come to an end. I have put the word "reasonably" in brackets as there is some difference in the authorities as to whether it forms part of the principle.
135In OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1, 29, Lord Hoffmann said:
To be liable for inducing breach of contract, you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realize that it will have this effect. Nor does it matter that you ought reasonably to have done so.
136On this test, on the facts, Healthscope would not have any liability.
137However, the Australian test is different. In Short v City Bank of Sydney [1912] HCA 54; ; 15 CLR 148, 160, Isaacs J said:
But to constitute that cause of action, the defendant must have induced or procured the doing of what he knew would be a breach of contract. A bona fide belief reasonably entertained that it was not a breach of contract would be fatal to the claim. If the defendant did not know of the existence of the contract, he could not induce its breach; if he reasonably believed it did not require a certain act to be performed, his inducing a party to the contract to do something inconsistent with it could not be regarded as an inducement or procurement knowingly to break the contract; if he believed on reasonable grounds that the contract had been rescinded, or performance waived, when in fact it had not, he could not be said to knowingly procure its breach.
138The other judges were Barton and O'Connor JJ. They merely said that they agreed with the reasons of PW Street J in this Court ( Short v City Bank (1912) 12 SR (NSW) 186) who had held that the Bank did not intend to breach contractual relations and there was no foundation for "suggesting that such a breach ought to have been apparent to it as a reasonable or probable consequence of its action."
139In Carlton & United Breweries Ltd v Tooth & Co Ltd (1986) 7 IPR 581, 625, I said, after reviewing the authorities to that date:
...all the cases are consistent with the proposition that so long as the defendant has actual knowledge that there is a contract between the plaintiff and X, then if the defendant acts in such a way as to induce a breach of that contract, he is liable even though he does not know the actual terms of the contract unless he has reasonable grounds for believing that the contract did not contain the term which is relied on,* and this is a fortiori the position where (a) the term is a very common one in contracts of that type; or (b) he deliberately closes his eyes and refrains from enquiring whether the term existed or not.
[*I should have added here "and does so believe"]
Although that decision was reversed on appeal, the passage I have quoted was not considered on appeal.
140The law was considered by the Full Federal Court in Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1995) 58 FCR 26. The Court consisted of Lockhart, Lindgren and Tamberlin JJ. Lindgren J gave the leading judgment. His Honour did not focus on whether the actor's assessment of the situation was reasonable, he intimated that one must get to what the actor intended and that the surrounding circumstances were relevant as to the finding of intention to interfere. He did not appear to read the decision in Short as requiring a finding that the actor acted reasonably.
141It seems to me that, in cases where the real issue is whether the defendant says that it thought that the contract had been rescinded or terminated or that it did not contain the term allegedly breached, the defendant must show that it did believe that the contract had been terminated or as the case may be and that such belief was reasonably held. Thus I adhere to what I said in Carlton & United Breweries.
142Where the question of termination, etc does not arise, there is no need to considered reasonableness.
143Accordingly, I need to consider whether Healthscope reasonably believed that Dr Alexander's contract was at an end.
144The primary judge did not deal with this aspect of the case and so did not make any relevant factual findings.
145Healthscope carries the onus of showing that it reasonably held the belief that Dr Alexander's contract was at an end.
146Evidence was given by Mr Andrew Sando, who was the 2-I-C of the relevant division of Healthscope, that in mid 2008 he received intelligence from one Sam Galanos that some doctors connected with the Symbion (Sidameneo) centre at Wyong might be interested in working with Healthscope. About this time, he received from Mr Galanos copies of the doctors' contracts with the appellant and also a letter extending one doctor's agreement by one year. He noted that there was a restraint clause and sent an email to Healthscope's in house lawyer, Ingrid Player, for her advice.
147Subsequently, Ms Player sought advice from Mr Mark Houston of Landerer & Co solicitors.
148Mr Sando says that on the basis of the advice from Landerer & Co and from Ms Player, he formed the view that the restraints were no longer enforceable after 16 January 2009.
149He noted that Landerer & Co suggested that the advice of senior counsel be obtained to confirm the advice and that Ms Player concurred with that suggestion. Mr Sando (and Ms Vita Pepe) considered that this was unnecessary as it appeared clear to them that, so long as the Rival Practice commenced after 17 January 2009, Healthscope could proceed.
150Vita Pepe was the head of the relevant division of Healthscope. It was she who actually made the decision to enter into arrangements with the respondent doctors and to authorise the establishment of the Rival Practice. However, she acted on the information given to her by Mr Sando.
151Both Mr Sando and Ms Pepe swore affidavits in the proceedings and were cross-examined. Mr Galanos and Ms Player did not give evidence and there was criticism of this, particularly with respect to Mr Galanos, as it was he who received the doctors' contracts from the doctors. In cross-examination it appeared that Ms Player was actually present in court.
152The cross-examination of Ms Pepe and Mr Sando also focussed on the question of the notice that each doctor would have to give to the Wyong Medical Centre. The evidence tended to show that Healthscope was a bit blas about this, but whether this be so or not, it does not seem to me to reflect upon the question as to whether Healthscope reasonably believed that the restrictions were not in force after 17 January 2009.
153Mr Harper put to Mr Sando that commercial reasons meant that the decision was to press ahead with the involvement of the doctors in the Rival Practice whatever senior counsel might have said and that is why the further opinion was not obtained. Mr Sando denied this.
154Strangely, the same questions were not put to Ms Pepe, the actual decision maker.
155With no challenge to Ms Pepe and with Mr Sando denying the allegation and there being no other evidence, it is difficult not to accept their evidence that Healthscope held a reasonable belief that the doctors' contracts were at an end and that the restrictions had ceased to have effect.
156The only factor pointing away from this conclusion is that Mr Galanos, who actually received the contractual documents from the doctors, was not called. However, I do not consider that this is sufficiently strong to change the conclusion. There was no suggestion that Dr Alexander deliberately or maliciously failed to give Mr Galanos the second extension documentation (assuming it existed: the second extension seems odd as it was without consideration).
157Accordingly, the claim against Healthscope must fail.
The primary judge made an costs order after being informed that a document which was claimed to be a Calderbank offer had been served. There was debate before him as to whether that document should be regarded as a Calderbank letter.
159The primary judge ruled that the document operated as a Calderbank letter and ordered the appellant to pay the respondents' costs on the ordinary basis up until its receipt and thereafter on an indemnity basis. His reasons are in a separate judgement (uncoded) delivered on 5 July 2011 which is included as pages 1-7 of the Grey Appeal Book. The Grey Appeal Book was created after my directions at a pre-appeal directions hearing and includes the evidence and documents relating to the question of costs at first instance.
160When the appeal commenced, counsel agreed that the matter of costs should be postponed to be dealt with on the papers after the judgment on the principal issues was handed down. Accordingly, all I need do about this matter is to make an order to see to it that the issue is dealt with expeditiously.
Accordingly, I would propose the following orders:
Appeal dismissed save that the question of costs below is reserved.
Appellant to pay the respondents' costs of the appeal.
Appellant to file and serve submissions with respect to its appeal on costs issues by 20 January 2012 with respondents to file any response by 3 February 2012.
Decision on costs below to be dealt with on the papers.