Adelaide Community Healthcare Alliance Incorporated v Healthscope Operations Pty Ltd

[2021] SASC 120

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

ADELAIDE COMMUNITY HEALTHCARE ALLIANCE INCORPORATED & ANOR v HEALTHSCOPE OPERATIONS PTY LTD

[2021] SASC 120

Judgment of the Honourable Justice Peek  

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS

PROCEDURE - STATE AND TERRITORY COURTS: JURISDICTION, POWERS AND GENERALLY - DECLARATIONS

The first applicant, Adelaide Community Healthcare Alliance Incorporated (ACHA) is a not-for-profit incorporated association owning and operating the private hospitals Memorial Hospital, Ashford Hospital and Flinders Private Hospital (the three hospitals). It is licensed under the Health Care Act 2008 to do so. The second applicant, ACHA FPH Property Pty Ltd (ACHA FPH), is the underlessee of the land on which Flinders Private Hospital is located. The respondent, Healthscope Operations Pty Ltd (Healthscope), owns hospitals throughout Australia and has experience in managing health care facilities. As at April 2003, it was a listed public company. 

Prior to April 2003, ACHA directly operated and managed the three hospitals. On 15 April 2003, ACHA and ACHA FPH entered into management agreements with Healthscope, being the Hospital Operations Management Agreement (HOMA) and the Flinders Hospital Operations Management Agreement (FHOMA) under which ACHA would “operate” and Healthscope would “manage” the hospitals.

In about 2016, Healthscope purported to install three persons (who are Healthscope employees and not ACHA employees) as a General Manager (GM) of each of the three hospitals, with the GM of Ashford Hospital (Mr Paul Evans who is the South Australian State Manager of Healthscope) also being installed as chief executive officer (CEO) of Hospital Operations, ACHA.        

The applicants seek declarations inter alia that, on the proper construction of both the HOMA and FHOMA, the above purported installations are in continuing breach of the HOMA and the FHOMA.

Held:

1.In order to construe properly the HOMA and FHOMA, and in turn to determine whether the GMs of the three hospitals and the “CEO of Hospital Operations, ACHA” must be employees of ACHA rather than Healthscope, the terms must be construed by reference to what a reasonable businessperson would have understood them to mean. This requires consideration of inter alia the language used, the surrounding facts as at the time of drafting and execution in April 2003 and the commercial purpose of the contract.

2.Important aspects of the surrounding facts as at April 2003 included three commercial imperatives. First, the need for ACHA to comply with the then governmental licensing requirements for the running of a private hospital. Secondly, the need to retain the tax-exempt status enjoyed by ACHA. Thirdly, the need to comply with ACHA’s then constitution.

3.In order to address the three commercial imperatives, ACHA granted an exclusive agency to Healthscope to “manage” ACHA’s operations and in doing so, created an “operation/management dichotomy”. The concept of “operate” corresponded to the licensing provision operative in April 2003 (s 57B of the South Australian Health Commission Act 1976) which created a “prohibition of operating private hospitals unless licensed”. In the HOMA and FHOMA, the relationship between the concepts of operator and manager is one akin to subservience such that ACHA is to operate the three hospitals whereas Healthscope is to merely assist ACHA by providing managing services.   The identity of the employees at the top levels of administration and management are highly relevant to each of the three commercial imperatives and it could not have been the intention of the drafters that employees of Healthscope (rather than ACHA) could be installed as General Managers of the respective three hospitals.

4.Further, the positions of the three GM’s and their responsibilities are such that their work, in at least substantial part, is clearly “in respect of the Operations” of the three hospitals and therefore, on correct construction of the HOMA and FHOMA, they must be employees of ACHA (and not of Healthscope). The purported appointments are invalid.

5.The purported appointment of Mr Evans (the State Manager of Healthscope) as “CEO of Hospital Operations, ACHA” is also invalid. The correct construction of clause 3.5 of the HOMA which refers to a power of Healthscope to “appoint” is that the verb “appoint” is to be distinguished from “employ” and the appointee must be an employee of ACHA (and not of Healthscope).

6.Confirmatory of the above, it would have been obvious to the drafters that if employees of ACHA (and not of Healthscope) were to be in installed in the positions here under consideration, a number of difficulties would likely occur relating to matters such as the implied duty of fidelity of employees; and the fiduciary duties of employees in positions which, as here, involve high levels of authority, discretion and trust. Each of the three Healthscope employees is subject to discipline by Healthscope; to obey orders from Healthscope; and would look to Healthscope for increases in salary, bonuses and career advancement. The difficulties and conflicts (real and apparent) that may arise if Healthscope employees occupied such positions were so obvious as at April 2003 that it is not reasonable to conclude other than that the drafters intended that only ACHA employees could occupy such positions.  Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41.

7.      The applications for the (amended) declarations are granted.  

Associations Incorporation Act 1985 (SA); Health Care Act 2008 (SA); South Australian Health Commission Act 1976 (SA) ss 57B, 57D, 57E, 57F, referred to.

Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, discussed.

Attorney-General (NSW) v Perpetual Trustee Co (Ltd) (1952) 85 CLR 237; Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66; Byrne v Australian Airlines Ltd (1995) 185 CLR 410; Concut Pty Ltd v Worrell (2000) 75 ALJR 312; DBE17 v The Commonwealth of Australia (2019) 266 CLR 156; Koehler v Cerebos (Australia) Ltd (2005) 222 CLR 44; Malik v Bank of Credit and Commerce International SA (In Liquidation) [1998] AC 20; The Queen v Khazaal (2012) 246 CLR 601; Workers’ Compensation Board (Qld) v Technical Products Pty Ltd (1998) 165 CLR 642, considered.

ADELAIDE COMMUNITY HEALTHCARE ALLIANCE INCORPORATED & ANOR v HEALTHSCOPE OPERATIONS PTY LTD
[2021] SASC 120

Civil

PEEK J:  Application for Declarations. 

1. This application by Adelaide Community Healthcare Alliance Incorporated (ACHA) and ACHA FPH Property Pty Ltd (ACHA FPH) for certain declarations concerning the Hospital Operations Management Agreement was heard on 7 and 8 July 2021, when judgment was reserved.

   PART 1: INTRODUCTION AND OVERVIEW

2. This judgment proceeds in the following parts:

Part 1:	Introduction and overview
Part 2:	Commercial imperatives as at April 2003
Part 3:	The “operation/management dichotomy”
Part 4:	The concepts “employ” and “employees” in the HOMA
Part 5:	Contractual and fiduciary obligations – the principles
Part 6:	Contractual and fiduciary obligations – the evidence
Part 7:	The “Chief Executive Officer, ACHA” position
Part 8:	Final conclusion and orders

1. Some acronyms and abbreviations used by the parties and in the following judgment are as follows:

Acronym/ Abbreviation	In Full
ACHA	Adelaide Community Healthcare Alliance Incorporated (the First Applicant)
ACHA FPH	ACHA FPH Property Pty Ltd (the Second Applicant)
Ashford	Ashford Community Hospital
Flinders	Flinders Private Hospital
Healthscope	Healthscope Operations Pty Ltd (the Respondent)
HOMA	Hospital Operations Management Agreement
FHOMA	Flinders Hospital Operations Management Agreement
Memorial	Memorial Community Hospital

1. The broad details of the parties and their contractual arrangements (the Healthscope arrangements) are briefly summarised in ACHA’s opening submissions (and is accepted as correct by Healthscope) thus:[1]

   [1]    Footnotes are omitted.

   9. The first applicant (ACHA) is a not-for-profit incorporated association and operator of a private hospital group in South Australia.

   10. ACHA owns and operates Ashford Hospital and Memorial Hospital, and operates Flinders Private Hospital (collectively the hospitals).

   11. ACHA FPH is the underlessee of the land on which Flinders Private Hospital is located.

   12. ACHA holds a licence under the Health Care Act 2008 (SA) and is licensed to provide private health care services under that legislation and associated Health Care Regulations 2008 (SA) at each of the three hospitals.

   13. For a period of time prior to the entry into the agreements in suit in 2003, ACHA operated (and itself directly managed) the three hospitals. From 2003, ACHA has been party to agreements with the respondent.

   14. The respondent, Healthscope Operations Pty Ltd (Healthscope), is a company that owns hospitals throughout Australia and has experience in managing health care facilities. At the time of entering into the agreements relevant to this case it was a public company listed on the Australian Stock Exchange, Healthscope Ltd.

   15. The primary agreement relevant to these proceedings is known as the ‘Hospital Operations Management Agreement’ dated 15 April 2003 (HOMA) and has been varied and amended from time to time. It will be convenient to refer to a consolidated form of the HOMA (Consolidated HOMA).

   16. There is also a ‘Flinders Hospital Operations Management Agreement’ dated 15 April 2003 (FHOMA), to which the second applicant (ACHA FPH) is also a party. That document makes further and specific provision relating to the management of defined operations at the Flinders Private Hospital site. It has been varied and amended from time to time, and it is again convenient to refer to a consolidated form of the FHOMA (Consolidated FHOMA).

   17. It is common ground that the persons holding the roles or positions the subject of these proceedings are:

   (1)     in the case of Flinders Private Hospital – the General Manager, Ms Angela McCabe;

   (2)     in the case of Memorial Hospital – the General Manager, Ms Janet Jongeneel;

   (3)     in the case of Ashford Hospital – the General Manager, Mr Paul Evans.

   18. Mr Paul Evans also is employed as chief executive officer, Hospital Operations, with responsibility for all three hospitals. It is common ground that he was appointed to this position purportedly pursuant to cl 3.5 of the HOMA.

   19. The terms of the HOMA and FHOMA have been extended such that the resolution of the dispute the subject of the proceedings will regulate their ongoing commercial relationship and the operation of the hospitals for a further 12 years (though the persons employed in the relevant positions might change).

   20. It should be common ground that there was a change in control of Healthscope in 2019 and that issues have arisen between ACHA and Healthscope as to the interpretation of the agreements. [Footnotes omitted]

   An overview of ACHA’s case

2. ACHA’s opening submissions state an overview of its case thus:

   1.These proceedings raise a short but important point arising under management agreements between the applicants and the respondent in respect of the operation of Ashford Community Hospital, Memorial Community Hospital and Flinders Private Hospital.

   2.The primary question for determination is whether, under those agreements, it is permissible for the respondent as manager to appoint and employ in its own right General Managers of each of the hospitals (that is to employ persons in those positions on the basis that their employer is the respondent).

   3.The applicants contend that although the respondent as manager is entitled and required to engage and appoint persons to operational roles at and in respect of the hospitals, those persons are to be employed on the basis that their employer is the first applicant, which is the licensee of the hospitals under relevant legislation. The applicants contend that this extends to the General Managers appointed in respect of each hospital, whose roles are properly to be characterised as intimately concerned with their respective hospitals’ operations.

   4.A further question for determination relates to whether, on its proper construction, an express power to “appoint” a General Manager of the combined operations of the three hospitals entitles the respondent not merely to appoint but in its own right employ a person to that overarching role.

   5.The applicants submit that the clause confers only a power of appointment but, in the alternative, if the clause authorises the respondent to appoint a person to this role in its own right as employer (which the applicants reject), that only serves to reinforce the absence of such a power in respect of the other, hospital-specific General Manager roles.

   6.These issues turn on the proper construction of the management agreements and a characterisation of the roles in question. If the applicants’ submissions are accepted the manner in which the respondent has employed the individuals in question will have contravened the relevant agreements, and they seek declaratory relief accordingly.

   7.The point is not an idle or purely semantic one. As Mr Johnson, the Chairman of the Boards of the applicants, has deposed, the point has significant ramifications for the applicants if the General Managers see themselves as owing, and indeed in point of law owe, their essential employment and fiduciary duties to the respondent rather than the first applicant. This can lead to the General Managers preferring the interests of the respondent over those of the applicants in respect of hospital operations under an arrangement where their interests at times necessarily diverge.

   The declarations sought

3. Pursuant to the revised statement of claim, the applicants seek:

   22. Declarations that, on the proper construction of the Consolidated HOMA or, alternatively, to give effect to the Implied Term:

   22.1. [struck out]

   22.2. the Manager’s GMs in relation to Memorial Hospital and Ashford Hospital (and all Manager’s GMs generally) are properly to be ‘Employees’ of the Owner pursuant to the provisions of the Consolidated HOMA;

   22.3. the CEO appointed pursuant to clause 3.5 is properly to be an ‘Employee’ of the Owner pursuant to the provisions of the Consolidated HOMA;

   22.4. the Manager is not entitled under the Consolidated HOMA, or otherwise, to employ the CEO or any of the Manager’s GMs in its own right;

   22.5. the Manager has breached and is continuing to breach the Consolidated HOMA by employing in its own right as employer each of the:

   22.5.1.CEO;

   22.5.2.General Manager of Ashford Hospital; and

   22.5.3.General Manager of Memorial Hospital.

   23.Declarations that, on the proper construction of the Consolidated FHOMA or, alternatively, to give effect to the Implied Term:

   23.1. [struck out]

   23.2. the Manager GM appointed in relation to Flinders Private Hospital (together with the Manager’s GMs generally) is properly to be an ‘Employee’ of the Operator Owner pursuant to the provisions of the Consolidated FHOMA;

   23.3. the Managing Agent Manager is not entitled under the Consolidated FHOMA, or otherwise, to employ the Manager GM appointed in relation to Flinders Private Hospital (or any Manager’s GMs) in its own right;

   23.4. the Managing Agent Manager has breached and is continuing to breach the Consolidated FHOMA by employing the General Manager of Flinders Private Hospital in its own right.

   The two agreements: HOMA and FHOMA

4. There are two separate written contracts here under consideration: The Hospital Operations Management Agreement (HOMA) and the Flinders Hospital Operations Management Agreement (FHOMA), both of which were executed on 15 April 2003. 

5. Throughout the proceedings both sides have predominantly focussed on the HOMA and made lengthy and detailed oral submissions as to its correct construction. They each cited many authorities and provided the following sets of written submissions (additional to submissions on the hearing) both before and after reservation of judgment:

   -Applicant’s opening submissions filed 28 June 2021.

   -Respondent’s opening submissions filed 5 July 2021.

   -Applicant’s submissions in reply filed 6 July 2021.

   -Applicant’s submissions filed 16 July 2021.

   -Applicant’s and Respondent’s joint submissions filed 20 July 2021.

   -Respondent’s submissions in reply to the Applicant’s submissions filed 23 July 2021.

   -Applicant’s supplementary submissions in reply received via email on 28 July 2021.

   -Respondent’s submissions in reply to the Applicant’s supplementary submissions in reply filed 5 August 2021.

6. Both sides considered that the two agreements should very much be construed together as related documents and heavily concentrated on the HOMA when developing submissions.  However, each side made some submissions to the effect that a reference to a particular difference in the FHOMA tended to militate in favour of one of its submissions concerning the HOMA, or tended to militate against one of the submissions of its opponents concerning the HOMA.[2] I have considered those submissions.

   [2] For example, Healthscope submits in its opening written submissions at [9.6], [72] and [83] that the FHOMA expressly refers to the presence of Healthscope employees being employed at the hospital providing “Management Services” at clause 9.4(g)(v) and (vi) of the FHOMA.

   However, as ACHA points out in its Submissions in Reply at [22.1], “ACHA does not contend that Healthscope cannot deploy its own employees in respect of the provision of Management Services per se. Rather, in the context of the critical operational roles of General Manager of the Hospitals governed by the HOMA, Healthscope cannot employ persons on the basis that their employment and fiduciary duties are owed to Healthscope …”.

7. However, as to the main issues in the case and the fundamental opposing submissions of the parties, I understand the position of the sides to be that it would not be appropriate to come to different conclusions as between the correct construction of the HOMA and the FHOMA in relation to the propriety of either the Healthscope employees occupying the positions of General Manager of Ashford, Flinders and Memorial hospitals respectively or Mr Evans occupying the additional position of CEO of ACHA (or indeed whether or not to make the proposed (amended) declarations).

8. Having carefully considered all of the material before me, including the amended declarations now sought, and having come to clear conclusions as to the correct construction of both the HOMA and FHOMA, I do not find it necessary to specifically refer further to the FHOMA.

9. In my conclusions as to the correct construction of the HOMA, I will expressly refer to only a small portion of the large body of oral and written submissions and many cited authorities from both sides. Rather, I will endeavour to state my conclusions and reasons in some detail, but largely in my own words.

   The original recitals to the HOMA

10. It is clear that for a significant period prior to April 2003, ACHA had been failing to balance the hospitals’ budgets with the result that the drastic action of retaining Healthscope to assist ACHA with these financial problems had to be taken. Sufficient reference to such facts appears in the original recitals to the HOMA when entered into in April 2003 (before later amendment) as follows:

    A. Owner [ACHA] owns the Operations [as defined] and operates the Flinders Project [as defined].

    B. Manager is a public company listed on the Australian Stock Exchange which owns and/or manages psychiatric, medical/surgical and rehabilitation hospitals throughout Australia and has extensive experience in the business of managing health care facilities such as the Operations and the Flinders Project.

    C. The Operations and the Flinders Project have incurred significant and increasing annual losses in the last two full financial years, and in the current financial year to date. Owner’s financial position at the date of this Agreement has deteriorated significantly.

    D. As a result of the financial pressures referred to in Recital C and to remedy this situation, Owner has asked Manager to manage the Operations and the Flinders Project on its behalf based on its overall suitability and its proven effectiveness in hospital management.

    E. The parties have agreed that Manager will manage the Operations for and on behalf of Owner on the terms of this Agreement and the parties are entering into the Flinders Management Agreement with Ramsay Bedford Park to agree the terms on which Manager will manage the Flinders Project for and on behalf of Owner and Ramsay Bedford Park.

    The institution of these proceedings

1. There is little evidence or information before this Court as to what occurred that gave rise to the institution of these proceedings. Hence the following interchange at trial:[3]

   HIS HONOUR: Is there any evidence before me as to how it is that, at this time, concern is being felt about all of this, and as to whether something has actually [occurred] to promote that concern? In other words, it’s a little antiseptic in that, at the moment, it’s difficult to say why it is that - I’m not disputing when you say it’s an important matter, but how it comes to be appreciated to be an important [matter] at this time, if you will?

   MR WHITINGTON: There is quite a background to this, but for the purpose of this proceeding, the parties have, if you like, tried to stay out of the dust of those issues, but they are agreed that there are genuine issues which make the question of interpretation a real and live issue, and not a hypothetical one for the purpose of interpretation. Now, I think both parties have taken the view that, while if they had laid out ACHA’s concerns and the way in which they’ve come about, that would not [sic] necessarily have informed the issue of contractual construction that your Honour has to deal with. They might have perhaps enabled to see your Honour to see more clearly why ACHA is so concerned, but the contractual question would remain the same, and so in order to try and shorten these proceedings and identify a short and sharp issue of contractual construction, and not muddy these proceedings with what is a fairly complex history that has led us to this position, the parties have chosen to focus on construction strictly speaking.

   [3]    T64-65.

2. As a consequence of further comments by counsel for each side, I understand that the parties are agreed that the matters of the correct construction of the HOMA are important rather than hypothetical such that, if ACHA’s case for a declaration is made out, there is no discretionary bar to the declaration being granted.

   PART 2: COMMERCIAL IMPERATIVES AS AT APRIL 2003

3. It is clear from all of the documentation before the Court (and not contested by either party), that the HOMA must be construed against the background of the surrounding facts as at the time of drafting and execution in April 2003.

   The required objective approach to the construction of the HOMA

4. Both sides agree that an objective approach needs to be taken to the construction of the HOMA. ACHA’s opening written submission included the following passage[4] (which is accepted by the respondent as correctly stating the applicable principles[5]):

   [4]    The copious footnotes of further citations are omitted.

   [5] See below at [18].

   21.Before turning to some features of the HOMA and FHOMA, the accepted principles which inform their construction can briefly be stated.

   22. In Electricity Generation Corporation v Woodside Energy Ltd, in a passage referred to with approval in Simic v NSW Land and Housing Corporation, the plurality (French CJ, Hayne, Crennan and Kiefel JJ) observed that:

   [35]   … The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

   23. In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd, French CJ, Nettle and Gordon JJ said:

   [46]   The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

   [47]   In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

   [48]   Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.

   [49]   However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.

   [50]   Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.

   [51]   Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties ... intended to produce a commercial result”. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

   24.A contract is to be read as a whole in its commercial context, with a view to achieving a practical commonsense approach, and avoiding a commercially inconvenient outcome.

   25. Further, where contracts form part of a suite or group of arrangements intended to operate together, it is appropriate, when considering the context of each, to have regard to the provisions of the others. Instances of such an approach include Agricultural and Rural Finance Pty Ltd v Gardiner and Rocky Castle Finance Pty Ltd v Taylor. Alternatively, the matter may be approached by recognising that the documents are seen as forming part of one overall transaction. That principle can operate even where there may not be a complete identity between the parties to the different documents.

   26.The recent affirmation of the relevant principles by the High Court is consistent with the description given by Cheshire and Fifoot’s Law of Contract (references omitted):

   Issues of construction arise in some form in the majority of contractual disputes. As the rules of construction are so frequently engaged, it is particularly important to preserve them from dogmatism and excessive refinement. No narrow or pedantic approach is warranted in determining what obligations are included in a particular contract. Modern Australian courts have retreated from the literalism characteristic of an earlier stage in the development of contract doctrine. Nevertheless, they have adhered to an explicitly objective approach to the construction of contracts, particularly of written contracts signed by the parties. Both in determining what terms have been incorporated in a contract, and in interpreting those terms, the task of construction is not to ascertain the subjective intention of the parties, but rather to determine what a reasonable person in their situation would have intended or assumed.

5. To this may be added the following written submissions of Healthscope:[6]

   B.1    Contractual Construction

   16. A contract must be construed in a businesslike manner, that is, in a way that assumes that the parties intended to produce a commercial result; a contract should be construed in a manner that avoids a commercial nonsense or working commercial inconvenience.

   17. Healthscope otherwise agrees that paragraphs [21] to [25] of the Applicants’ Written Opening correctly state the applicable principles of contractual construction.

   [6]    The copious footnotes of citations are omitted.

   The three commercial imperatives

6. A very important aspect of the surrounding facts as at the time of negotiation and execution on 15 April 2003 was a group of three important commercial imperatives (the three commercial imperatives).[7]

   [7]    For convenience, I will henceforth refer to both the execution of the HOMA and the prior negotiations leading up to it by reference to the date of execution 15 April 2003.

7. The three commercial imperatives were as follows.  First, the need to comply with the then governmental licensing requirements to be satisfied by ACHA (initially and on a continuing basis while running any hospital). Secondly, the need to retain the tax-exempt status that ACHA enjoyed. Thirdly, the need to comply with other aspects of ACHA’s then constitution. I turn to each in more detail.

   The first commercial imperative: The need to adhere to the relevant licensing requirements – compliance with South Australian Health Commission Act 1976

8. ACHA is an association incorporated under the Associations Incorporation Act 1985 and presently runs three hospitals (the three hospitals): Ashford Hospital (Ashford), Memorial Hospital (Memorial) and Flinders Private Hospital (Flinders) by virtue of its continuing registration under the Health Care Act 2008 (SA) (the Health Care Act).

9. However, ACHA was originally licensed to operate private hospitals under the South Australian Health Commission Act 1976 (the Health Commission Act) which was the applicable legislation as at 15 April 2003.[8] As to the licensing of private hospitals, section 57B was headed Prohibition of operating private hospitals unless licensed. It mandated the licensing requirement for the operating of private hospitals,[9] specifying the need to be granted a licence and to comply with its conditions thus:

   [8]    On 1 July 2008, the South Australian Health Commission Act 1976 was repealed and replaced by the Health Care Act 2008. Obviously, the HOMA is to be construed by reference to the former legislation but it may be noted that, for present purposes, the corresponding provisions of the new legislation concerning private hospitals (sections 79 to 88) are similar to the former provisions.

   [9]    This appears to be the only reference to “operating” private hospitals.

   57B—Prohibition of operating private hospitals unless licensed

   (1)No health services may be provided by a private hospital except at premises in respect of which a licence is in force under this Part.

   (2)If health services are provided by a private hospital in contravention of subsection (1), the person or each person constituting the private hospital is guilty of an offence.

   Penalty: Division 5 fine.

   …

   57D—Grant of licences

   (1) Subject to this section, where application is made under this Part for a licence in respect of premises or proposed premises, the Minister must determine whether a licence should be granted or refused and, if granted, what conditions should be imposed, having regard to—

   (a)     the suitability of the applicant to be granted the licence; and

   …

   57E—Conditions of licence

   (1)A licence under this Part will be subject to such conditions as the Minister may specify by notice in writing given to the holder of the licence.

   (2)Without limiting the matters with respect to which conditions may be imposed, the Minister may impose conditions in respect of a licence under this Part—

   (a)     limiting the kinds of health services that may be provided pursuant to the licence;

   …

   (f)     requiring that the premises be in the charge of a person with specified qualifications, and otherwise regulating the staffing of the premises.

   …

   57F—Offence for licence holder to contravene Act or licence condition

   The holder of a licence under this Part must not contravene, or fail to comply with, a provision of this Act or a condition of the licence.

   Penalty: Division 5 fine.

10. As at April 2003, the drafters of the HOMA (the drafters) would have been well aware that s 57B of the Health Commission Act was couched in the wide terms: Prohibition of operating private hospitals unless licensed. The word “operating” was not defined in the Health Commission Act. However, dictionary definitions include that of the Oxford English Dictionary as follows:[10]

    The action of OPERATE; an instance of this, an operation.

    1. intransitive. To be in working, exercise force or influence, produce an effect, act, work.

    …

    5. transitive. To effect or produce by action or the exertion of force or influence; to bring about, accomplish, work.

    …

    7. transitive. To direct the working of; to manage, conduct, work (a railway, business, etc.); to carry out or through, direct to an end (a principle, an undertaking, etc.).  orig. U.S.

    [10] Oxford English Dictionary (2^nd ed, 1989) “operating”; Oxford English Dictionary (2^nd ed, 1989) “operate” (defs 1, 5, 7).

11. I also refer to the definitions in the Macquarie Dictionary as follows:[11]

    1. to work or run, as a machine does. …

    4. to perform some process of work or treatment. …

    10. to keep (a machine, apparatus, factory, industrial system, etc.) working or in operation.

    11. to bring about, effect, or produce, as by action or the exertion of force or influence.

    [11] Macquarie Dictionary (7^th ed, 2017) “operate” (defs 1,4, 10, 11).

12. There is no indication in the HOMA that the term “Operations” should be narrowly construed. Indeed, it is trite to say that the running of any private hospital is complicated and complex. Hospitals must attend to many matters, including (but not limited to) the following examples: 

    -the formulation of policy and protocols concerning the aims and aspirations of the hospitals;

    -the formulation of policy and protocols concerning specific practical matters;

    -the continuing arrangements for the attendances of Doctors and their welfare;

    -the continuing arrangements for the hiring and retaining of all necessary employees;

    -the attendance to patients’ treatment, comfort, nutrition, recuperation and physical fitness;

    -the regulating of the supply, storage and access to drugs;

    -the continuing acquisition and maintenance of all necessary plant and equipment;

    -the cleaning and sterilisation of the various rooms, spaces and all hospital equipment;

    -the continuing preparation and maintenance of all kinds of documentation including: rosters, contracts for the supply of services and goods, etc;

    -the administering of a complex billing system (to or in respect of patients including to Medicare and private insurers) and the collection of payment;

    -the creation and maintenance of the multifarious required records of all kinds necessary to be kept for the running of a modern hospital so as to satisfy not only internal organisational requirements but also legal requirements concerning the monitoring and documenting of compliance with health and safety measures and standards.

13. Of course, some examples may be resistant to analysis solely by reference to a binary division between persons carrying out “operations” and persons carrying out “management”. But it is clear that, upon being granted the required licence (well before the advent of the Healthscope arrangements on 15 April 2003), ACHA had alone attended to all such aspects (and others as well) in the process of operating the three hospitals.

    The second commercial imperative: Retention of ACHA’s tax-exempt status

14. As at April 2003, ACHA had (and still has) tax-exempt status. As to this, the definition section 1.1 in the HOMA states:

    Owner’s Not for Profit Status means that:

    (a)for income tax purposes, Owner has income tax-exempt status under section 50-5, Item 1.1 of the Income Tax Assessment Act 1997 (as a charitable institution) or Owner qualifies for exemption from income tax under section 50-30, Item 6.2 of the Income Tax Assessment Act 1997 (as a hospital carried on by a not-for-profit association) or has equivalent status under successor legislation;

    (b)for FBT purposes, Owner continues to be eligible for FBT-exempt status as an employer under section 57A(1) of the Fringe Benefits Tax Assessment Act 1986 (relating to public benevolent institutions) or is eligible for FBT-exempt status as an employer under sections 57A(4) and 65J(5) of the Fringe Benefits Tax Assessment Act 1986 (relating to hospitals carried on by not-for-profit organisations) or is eligible for FBT-exempt status as an employer under section 57A(5) of the Fringe Benefits Tax Assessment Act 1986 (relating to charitable institutions whose principal activity is to promote the prevention or the control of disease in human beings) or has equivalent status under successor legislation;

    (c)for payroll tax purposes, wages paid by Owner to Employees continue to be exempt under the South Australian Payroll Tax Act 1971; and

    (d)gifts or contributions made to Owner continue to be deductible in accordance with section 30-45, Item 4.1.1 of the Income Tax Assessment Act 1997 (as a public benevolent institution) or Owner is eligible to claim deductible gift recipient under section 30-20, Item 1.1.2 of the Income Tax Assessment Act 1997 (as a hospital carried on by a not-for-profit organisation) or has equivalent rights under successor legislation.

15. In the article “Income Tax Exemptions for Non-profit Associations”, the authors state:[12]

    Australian governments provide a wide range of taxation exemptions and benefits to non-profit associations.  Exemption from income tax is the most fundamental exemption.[13]  It has been examined recently by the courts, Australian Taxation Office (ATO) rulings and the Industry Commission. 

    Although it is not known what the actual value of the exemption is to non-profit associations, it is jealously protected by charities and other community organisations.[14]  The trend towards commercialisation of sporting clubs, the use of unrelated business ventures to cross-subsidise charitable works and “fee for service” community organisations are attracting the attention of federal and State treasurers.  The exemptions require constant justification by non-profit associations and the pressure for justification will not abate in the foreseeable future.  [Emphasis added]

    [12] By Sandra Rodman and Myles McGregor-Lowndes published in 1995 in 7(2) CCH Journal of Australian Taxation 16-24; and later included (in part) in Chapter 6 in the work Legal Issues for Non-profit Associations (The Law Book Company Limited, 1996) 121.

    [13] Income Tax Assessment Act 1936 (Cth), s 23.

    [14] Most of the written submissions to the Industry Commission inquiry into charitable organisations argued to retain taxation exemptions: Industry Commission, Report No 45, Charitable Organisations in Australia (AGPS, Melbourne, 1995), p 39.

1. It is clear that the drafters considered the protection and retention of ACHA’s valuable tax-exempt status as vital. Thus, clause 3.23 provided:

   3.23   Owner’s Constitution

   (a)Manager must ensure that the Operations are managed and operated in a manner which allows Owner to comply in all respects with Owner’s Constitution.

   (b)Owner will ensure that it maintains Owner’s Not for Profit Status and complies with any relevant obligations (including, without limitation, filing periodic returns pursuant to the Associations Incorporations Act 1985 (SA)) throughout the Term (excepting where Owner’s Not for Profit Status changes by operation of law) and, in particular Owner agrees that it will not change Owner’s Constitution in any manner that would cause or be likely to cause Owner to lose Owner’s Not for Profit Status.

2. It was contended by the applicants that if it came to be perceived that Healthscope (definitely not a not-for-profit organisation) were controlling the operations by its own employees (who owed their duty of fidelity to Healthscope rather than ACHA), at some point it is liable to be said that Healthscope is the de facto controller of the operations rather than ACHA. That would in turn mean that the de facto controller (Healthscope) is taking for itself surplus funds[15] which would not have been available but for the tax-exempt status; and accordingly, ACHA should forfeit that tax-exempt status. 

   [15] See clause 5 and 5A of the HOMA.

3. Of course, that danger of loss of tax-exempt status is a matter critical to the construction of the intention of the parties as at April 2003. The drafters would have appreciated this danger and drafted the HOMA so as to obviate the risk by requiring that it was clear and apparent to all that control rested with ACHA (and not Healthscope); and that the hospitals are to be operated by ACHA and not Healthscope.

   The third commercial imperative: Compliance with ACHA’s constitution

4. As noted above, since ACHA was (and remains) an association incorporated under the Associations Incorporation Act 1985, both its membership and its constitution were important matters to be considered by the regulatory authorities in the context of both the initial and continuing suitability of the licensee to run private hospitals.  The following portions of ACHA’s constitution are emblematic for immediate purposes:

   3.     OBJECTS

   The objects of the Association are:

   (a)To provide, procure and/or to be involved (whether directly or indirectly) in the provision of healthcare services or facilities used for the benefit of the general public.

   (b)To provide or promote a high standard of healthcare for the benefit of the general public.

   (c)To provide its services within a Christian framework, recognising the spiritual and individual needs of patients, their families and staff of the Association and to:

   (i)    provide and fund the services of at least one Uniting Church chaplain to patients and other persons within any hospital owned or operated by the Association; and

   (ii)     provide clinical pastoral education. 

   …

   12.     FUNCTIONS, POWERS AND RESPONSIBILITIES OF THE BOARD

   Subject to this Constitution the Board shall have the following functions, powers and responsibilities.

   (a)At the first meeting held following the holding of an Annual General Meeting, elect from amongst its number a Chairman and Deputy Chairman.

   (b)To determine policy with regard to and to operate and manage the Association and all facilities as are owned and operated by the Association.

   (c)To manage the affairs of the Association.

   …

   (g)To purchase take or lease or in exchange or hire or otherwise acquire and hold any real or personal property including any rights or privileges for the sole benefit of the Association.

   …

   (n)To appoint a Chief Executive who:

   (i)    shall be responsible for the day to day management of the affairs of the Association and shall undertake the powers as determined and in the manner determined by the Board;

   (ii)     may delegate responsibilities to managers and administrative officers of the Association; and

   (iii)    shall keep all books, records and other documents of the Association.

   …

   (u)To delegate the carrying out of such powers and duties of the Board as the Board may from time to time determine to such members of the staff and/or committees and/or sub-committees as the Board may determine. [Emphasis added] 

   The response in the HOMA to the three commercial imperatives in overview

5. The cumulative effect of the above three commercial imperatives upon the drafters of the HOMA would have been very substantial. The drafters would have appreciated that it was vital from the perspectives of each of the three commercial imperatives to ensure that the HOMA was seen to require (both as at April 2003 and for the future) that only ACHA and its employees (and not Healthscope) would “operate” any of the hospitals.

6. The drafters would also have been well aware that governmental regulators, when considering the continuing suitability of a licensee to hold a licence to operate a private hospital, will place great importance on the identity of the person (corporate or otherwise) who wishes to be licensed to operate a private hospital. And, most importantly, in assessing such matters, the regulators will consider the standard and behaviour of a licensee’s employees (and particularly those at the top levels of administration and management). That is necessarily so whether the licensee be a natural person(s) or a corporate entity. In the present case, the suitability of that person(s) (as judged by ACHA’s constitution and the membership of the association) would have been a primary and express consideration in the processes of both applying for, and then retaining, such a licence.

7. Equally, from the perspective of the second commercial imperative, it could put at grave risk ACHA’s “not-for-profit” status if it were the case that ACHA was in fact being run by Healthscope, a business which (with all respect) is the very antithesis of a “not-for-profit” organisation.

8. There was also the potential, from the perspective of the second commercial imperative, that such a state of affairs might constitute a breach of ACHA’s constitution

9. I consider that the parties responded in the HOMA to the three commercial imperatives by taking important and practical steps to seek to ensure that the Healthscope arrangements would not have the above consequences.  They primarily did so by propounding, as the central concept in the HOMA, a distinction between “operation” (by ACHA) and “management” (by Healthscope) to which I will refer as “the operation/management dichotomy”.

10. Of course, ACHA was referred to as the “operator”, that being the word used in s 57B of the Health Commission Act to refer to the person required to be a licensee. The operation/management dichotomy sought to emphasise that it was ACHA (and not Healthscope) that was to remain “the operator”; and that Healthscope had only what was a subservient role, to be styled as “managing”.[16]

    [16] This operation/management dichotomy is referred to above at [13] in the context of the recitals and further considered below at [54] to [67].

11. The parties also made clear in the HOMA the importance of continuing registration. Thus, clause 3.14 of the original HOMA provided:

    3.14   Registration as a Hospital

    (a)Owner and Manager agree that each of them must at all times during the Term do what each of them is required to do to:

    (i)    ensure that each of the Hospitals remains registered as a private hospital under the provisions of the South Australian Health Commission Act 1976 or under any other law or regulation which is intended to provide for registration of private hospitals in substitution for that Act (Registration); [Emphasis added]

    (ii)     comply with all terms and conditions attaching to the Registration;

    (iii)    not by any act or omission prejudice in any way the continuation of the Registration;

    (iv)    promptly advise the other of any circumstance of which either of them is aware which may prejudice the continuation of the Registration; and

    (v)     not without the consent of the other, permit a reduction in the number of beds permissible under the relevant Registrations for the relevant Building or any other variation to the Registration.

    (b)Each party must give the other party a copy of any summons, conviction or requisitions received by it in connection with the Registration as soon as reasonably possible after receipt.  [Emphasis added]

12. As to ACHA’s constitution, clause 3.23 in the HOMA provided:

    3.23   Owner’s Constitution

    (a)     Manager must ensure that the Operations are managed and operated in a manner which allows Owner to comply in all respects with Owner’s Constitution.

13. Other relevant clauses in the HOMA include the following:

    3.24   Pastoral Care

    Manager must ensure that the Operations are undertaken within a Christian framework, recognising the spiritual and individual needs of patients, their families and staff of Owner and to:

    (a)     ensure that the services of at least one Uniting Church chaplain are provided to patients and other persons within any Hospital; and

    (b)     ensure that the Operations provide clinical pastoral education.

    3.25   Volunteers

    (a)     Manager must provide volunteers of Owner with rights of access and use of the Buildings equivalent to the rights enjoyed by such volunteers immediately prior to the Commencement Date.

    (b)     Manager will supervise and be responsible for the activities of such volunteers in all respects.

14. Clauses such as 3.24 and 3.25 were obviously designed to mirror clauses in ACHA’s constitution and thus demonstrate (if such demonstration were to be later required) that the HOMA mandated that the hospitals were to be run in a way that expressly conformed to the letter and spirit of the constitution.

15. Indeed, I consider that the totality of the HOMA does make plain that ACHA was not abnegating or delegating its responsibilities under its constitution and that it was intended for ACHA to retain employer – employee relationships with all staff at the hospitals so as to preserve both the traditional duties of employees to their employer (ACHA) and the attendant ability to ensure that the constitution is complied with.

    The granting of an exclusive agency by ACHA to Healthscope

16. The formal grant by ACHA of an exclusive agency to Healthscope, and an accompanying statement of the principles governing the resultant “operating arrangement” (together with a list of the services to be provided by Healthscope) are found at clauses 2 and 3 of the HOMA. They provide as follows:

    2.1     Principles

    The operating arrangement[17] under this Agreement is founded on the following Operating Principles:

    [17] This term “operating arrangement” is not defined and not found anywhere else in the HOMA.

    (a)     the overriding objective of this Agreement is that Manager will manage the Operations for and on behalf of Owner, provide the Services to Owner and perform all its other obligations under this Agreement in a manner consistent with Owner’s Constitution in order to enable Owner to fulfil the objects set out in Owner’s Constitution;

    (b)     maintaining the financial viability of the Operations as a whole, including Owner’s debt reduction;

    (c)     striving to achieve operation of private hospital facilities in accordance with guidelines issued by ACHS; and

    (d)     open communications and disclosure of information.

    2.2     Implementation

    The parties will use reasonable endeavours to implement the Operating Principles at all levels within their organisations.

    3. Operation

    3.1     Services

    (a)     Owner appoints Manager and Manager accepts the appointment as Owner’s sole and exclusive agent to manage the Operations during the Term for and on behalf of Owner.

    (b)     Manager will, in its capacity as agent acting for and on behalf of Owner and in accordance with the terms and conditions of this Agreement:

    (i)    Use reasonable endeavours to ensure that the Hospitals:

    (A)operate profitably and in accordance with industry guidelines issued by ACHS; and

    (B)are able to provide a range of clinical services to private hospital patients; and

    (ii)     ensure each Hospital maintains its ACHS accreditation;

    (iii)use reasonable endeavours to meet the financial and service objectives set out in each Annual Budget and the Business Plan;

    (iv)ensure that the Operations comply in all material respects with all applicable laws;

    (v)collect all Debts and ensure all Debts are paid into the Operating Account;

    (vi)prepare and maintain appropriate hospital operating policies and procedures;

    (vii)pay all Creditors using funds available in the Operating Account;

    (viii)manage the Employees;

    (ix)enter into as agent for Owner as a disclosed principal and administer the Contracts;

    (x)negotiate and agree HPPAs;

    (xi)maintain the Plant and Equipment;

    (xii)ensure there is sufficient Stock from time to time throughout the Term;

    (xiii)undertake structural repairs and alterations;

    (xiv)ensure registration of Hospitals;

    (xv)co operate with Emergency and/or Step In Agents;

    (xvi)market and promote the Operations;

    (xvii)use reasonable endeavours to attract and retain qualified and experienced medical practitioners to practise at the Hospitals;

    (xviii)implement clinical risk management and clinical governance systems at the Hospitals;

    (xix)liaise with relevant government and health industry authorities and associations;

    (xx)review and, if necessary, modify the Hospitals’ operational policies;

    (xxi)manage the Hospitals’ system of clinical and admitting privileges; and

    (xxii)use reasonable endeavours to ensure that both Owner and Manager have effected appropriate types and levels of insurances for the Operations taking into account their respective roles as Owner and Manager.

    (xxiii)[Not used]

    3.2     Delegated authority and power of attorney

    (a)     Subject to this Agreement, Manager has delegated authority to act for and on behalf of Owner in connection with the Operations.

    (b)     Owner agrees that throughout the Term it will not, unless expressly permitted to do so by this Agreement, revoke or purport to revoke such authority or do any act or omit to do any act which is inconsistent with, hinders or is detrimental to the proper exercise by Manager of all of its rights, powers and authorities under this Agreement.

    (c)     Owner agrees that throughout the Term it will ensure that it responds promptly and efficiently to any request from Manager for Owner’s consent, approval or other decision in relation to the Operations.

    (d)     Promptly upon request by Manager from time to time, Owner agrees to execute and deliver to Manager a power of attorney in such form as may be reasonably required by Owner to satisfy any person as to its authority to act for and on behalf of Owner pursuant to this Agreement.[18] [Emphasis added]

    [18] One should also note here clause 3.17(b) which provides: “9(b) Wherever either Owner or Manager refers to the Operations or any Hospital in any correspondence or other document, it will ensure that the document makes explicit reference to the Operations or Hospital(s) (as the case may be) as being managed by Manager for and on behalf of Owner.”

17. Thus, clause 3.1(a) constitutes the formal appointment of Healthscope as exclusive agent of ACHA to “manage the Operations” of the hospitals. But one must also have close regard to clause 3.26 of the HOMA which provides:

    3.26 Owner to operate and Manager to manage as Owner’s agent

    It is the intention of each of the parties to this Agreement that each of the Hospitals should continue to be operated by Owner and its employees (and should not be operated by Manager) at all times during the Term and that the rights, powers and obligations conferred on Manager in respect of each of the Hospitals by this Agreement should be exercised and/or performed by Manager at all times as agent for and on behalf of Owner. [Emphasis added]

18. The applicant contended in written submissions (in reply):

    7. … (T)he HOMA assumes that Healthscope has employees (and, it may be allowed, would engage additional employees in the future) who would be involved in the provision of Services under the HOMA, and interact with ACHA Employees working in and at the Hospitals. Further, inasmuch as the provision of Services might, in particular respects, involve actually procuring the performance of the Operations, Healthscope could act, but could only act for and on behalf of ACHA as its agent.

    8. That is to say, whilst there is a large field of activities and expertise in respect of which Healthscope could and would continue to employ personnel in its own right, to maintain the expertise and infrastructure that attracted the engagement in the first place, that is distinct from the undertaking of Operations which Healthscope is to procure be done by the Employees or by contractors engaged by Healthscope within the scope of the appointment as ACHA’s agent with ACHA as disclosed principal.

    9. That distinction is intrinsic to the nature of agency. In Dal Pont’s, Law of Agency (2008, 2^nd ed), the author observes at [1.4] (references omitted): [A]gency relationships necessarily involve an agent acting in a representative capacity for the principal, whether for the purpose of creating creating contractual relations for a principal or to to represent the principal in a more restricted context. Put another way, if the right by virtue of which the alleged agent acts is an independent right he or she already possessed, then he or she is not an agent; if it is, conversely, by virtue of some authority from another, then he or she is an agent. Thus even though the words or phrases ‘for’, ‘on behalf of’, ‘for the benefit of’ or even ‘authorise’ may be used in relation to services which are done for the advantage of the person who requests them, lacking a representation of that person to third parties, there is no agency.[19]

    10. Translating those observations to the present context, the point is that in respect of an operational role such as a General Manager of a Hospital, which is plainly outward facing and representative of the Hospital (and its licensee), and, vis-à-vis the internal staff who are answerable to the General Managers, being the representative of their employer (ACHA), Healthscope’s authority is strictly in its capacity as agent, so that it can only employ a person to those roles as agent for ACHA as principal.

    [19] As it happens, this passage still appears in the same words in paragraph 1.4 of Gino E Dal Pont, Law of Agency (LexisNexis Australia, 4^th ed, 2020) 6.

19. And at trial, Mr Whitington QC further explicated: [20]

    … (HOMA) confers an agency retainer on health scope which creates an ambit of authority, and within that ambit of authority Healthscope has certain powers and certain obligations, but to do things as the disclosed agent for ACHA. It has no power under the relevant clause, 3.1, of the HOMA, to do things in pursuance of the agency or the retainer beyond the scope of the retainer. If it does things beyond the scope of the retainer it is not doing them under the agency or with the authority inferred by the HOMA. …

    [20] T67-68.

20. Mr Whitington also submitted that clauses 3.2(a) and 3.9 confirm his submissions concerning clause 3.1.

21. I generally accept the above submissions of the applicant. To express the matter in my own words, the entering into contracts (and importantly contracts of employment) is one of the specific services delineated in HOMA clause 3.1 “Services” (at placitum (b)(ix)) that Healthscope is to provide to ACHA. However, it is critical to note that clause 3.1(b) specifically provides that all of the services set out at placita (i) to (xxiii) are to be provided in Healthscope’s “capacity as agent acting for and on behalf of Owner and in accordance with the terms and conditions of this Agreement”.

1. It therefore follows that if an employee of Healthscope (such as Mr Paul Evans) offers a contract of employment with Healthscope to a “civilian”[21] and specifies that the position is at one of the three subject hospitals and involves (at least in part) the conducting of hospital operations, the making of that job offer amounts to Mr Evans providing a particular service to ACHA under clause 3.1(b)(ix). It is therefore to be construed as Mr Evans acting as agent for and on behalf of ACHA in making that job offer and it necessarily follows that if the “civilian” is to be employed, he or she must formally become an employee of ACHA, rather than of Healthscope. 

   [21] A person not then employed by either Healthscope or ACHA.

2. However, I stress that to come to that conclusion in no way amounts to finding that Healthscope cannot use a Healthscope employee to provide important services at one of the hospitals in appropriate circumstances. I will use the same example as one discussed at trial thus:[22]

   HIS HONOUR: Say Healthscope has various experts on its permanent payroll as Healthscope employees and uses those experts throughout its enterprises in Australia, indeed, elsewhere, and that one or more of those experts might be a specialist in a particular field of a problem that might arise in a hospital anywhere in the world.  And suddenly at one of these hospitals we’re talking about in South Australia, that particular problem suddenly arises and Healthscope says ‘We’ve got just the man to help you on this’ and flies him or her out to Adelaide forthwith.  And he is given rooms in the building of the hospital and secretarial help and stays for a period so long as is necessary to rectify the problem, now there would be nothing wrong with Healthscope doing that, would there?

   MR WHITINGTON: No, your Honour.

   HIS HONOUR: Why would that be acceptable under your submission?

   MR WHITINGTON: Because that would be injecting their expertise into the operations but not actually carrying out the operations themselves. …

   …

   HIS HONOUR: … In the example I’ve given you’ve got the person coming out and staying until he’s able to give sufficient direction to the local personnel to address and rectify the problem as distinct from saying “rightio, we’ve got an employee here, we’ll put him over there and he can work in Adelaide as part of the substantive delivery of services”. It might sometimes go into a grey area, as I said before. But that’s an area I probably don’t need to answer to the nth degree.

   MR WHITINGTON: With the greatest of respect, we say that’s right. The other side of that coin is that Healthscope has made an argument in its written submissions saying that our approach is commercially absurd because it says it’s practically necessary for us to have our [Healthscope’s] own employees. It says there’s a practical necessity for us [Healthscope], for example, to have the CEO and general managers. But they’ve not ever made good that point.

   If your Honour has to address that point, we’ll go back to the cross-examination of Mr Evans. The effect of that cross-examination was that every point in his affidavit where he said that services were being provided by Healthscope … he readily conceded that they were services of a very ordinary kind within the operation of a hospital and the very things that had to be done in the ordinary course of the operation of a modern hospital. So the suggestion that somehow or other the services, and someone picked out for him some of the items in clause 3.1B, the suggestion that those services have to be provided by Healthscope in its own right and are not simply services necessary for the ordinary conduct of a modern hospital can’t stand scrutiny and were, in effect, destroyed by Mr Evans’ own very frank evidence.

   [22] T133-135.

3. Healthscope repeatedly submits in various forms, including in its opening written submissions at [75] to [77], [79] and [91], that ACHA’s submission (or its consequence), is that Healthscope cannot employ anyone to perform the “Management Services”; and that if such persons were employed, they could not be based (or “step foot”) on hospital premises.

4. However, ACHA is justified in calling this a “straw man argument”. Thus, ACHA submits:

   1.5. [Healthscope’s opening submissions] misapprehend the applicants’ submissions, which do not deny that, in connection with ensuring that it discharges its essential obligations to manage the Operations, Healthscope would be presumed already to have its own employees and staff, and may even need to engage further employees and staff. The applicants say that it is critical to distinguish staff or personnel employed by Healthscope who may facilitate the provision by Healthscope of its services outside of the scope of its appointment and authority as agent, and the employment by Healthscope of individuals who are to perform operational roles within the Hospitals within the scope of its appointment and authority as agent. Healthscope must manage the Operations but that does not mean Healthscope then performs or conducts the Operations. That role must continue to be undertaken in form and substance by ACHA, such that if Healthscope is to engage employees to perform operational roles such as General Manager, it can only do so expressly as agent, ensuring that the person in the role, whilst subject to day to day direction in a manner which ensures Healthscope is not prevented from providing the Services, owes their ultimate duty of fidelity to the Operator and licensee of the Hospitals, ACHA.

   2. Healthscope repeatedly suggests that it is absurd to require Healthscope to provide the Services without the involvement of Healthscope employees, such as by providing the Services directly through its board, and without physically attending the Hospitals, but this is to attack a straw man. [Citation omitted]

   PART 3: THE “OPERATION/MANAGEMENT DICHOTOMY”

5. In order to address the three commercial imperatives, ACHA granted an exclusive agency to Healthscope to “manage” ACHA’s operations in the context of the “operation/management dichotomy” which is expressly propounded in clause 3.26 as follows:

   3.26 Owner to operate and Manager to manage as Owner’s agent

   It is the intention of each of the parties to this Agreement that each of the Hospitals should continue to be operated by Owner and its employees (and should not be operated by Manager) at all times during the Term and that the rights, powers and obligations conferred on Manager in respect of each of the Hospitals by this Agreement should be exercised and/or performed by Manager at all times as agent for and on behalf of Owner. [Emphasis added]

6. It is notable that the parties were here at pains to not only state that the owner is to “operate” (in line with the operation/management dichotomy) but also to reiterate that the hospitals “should not be operated by Manager”.

7. The position is that the words “operate” (and its parts “operating”, “operation” and “operations”) and the word “manage” (and its parts “managing”, “manager” and “management”) are used as contrasting labels. The essential contrast of meaning is that ACHA is to “operate” the hospitals and that Healthscope is merely to assist in a subordinate role by providing “managing” services (and is therefore not “operating” a hospital without a licence contrary to the contemporaneous legislation).

8. Such construction is, of course, reinforced by Clause 2.1: “The operating arrangement and the Operating Principles” which is reproduced above at [44] but it is worth again reproducing clause 2.1 as follows:

   2.1     Principles

   The operating arrangement[23] under this Agreement is founded on the following Operating Principles:

   (a)     the overriding objective of this Agreement is that Manager will manage the Operations for and on behalf of Owner, provide the Services to Owner and perform all its other obligations under this Agreement in a manner consistent with Owner’s Constitution in order to enable Owner to fulfil the objects set out in Owner’s Constitution;

   …

   [23] This term “operating arrangement” is not defined and not found anywhere else in the HOMA.

9. There are some further HOMA clauses referring to the operation/management dichotomy, but I do not need to dwell upon them.[24]

   [24] For completeness, some further clauses in the HOMA referring to the operation/management dichotomy include (in the sequential order in which they appear) the following. First, clause 3.14 of the HOMA dealing with the protection of ACHA’s licence to operate hospitals (reproduced above at [39]). Secondly, clause 3.21 of the HOMA which states: “3.21 Comply with Laws. Manager must comply with all applicable laws and with the requirements of all Authorities in relation to the provision of the Services and in relation to the Operations, the Buildings, or the Land. … . Thirdly, clause 3.23 of the HOMA which emphasises the necessity to preserve ACHA’s “Not-for-profit” status and is reproduced above at [29]. Fourthly, the two clauses 3.24 and 3.25 which were obviously designed to mirror clauses in ACHA’s constitution and are reproduced above at [41].

   The meaning of the word “manage” as used in the HOMA

10. There is no definition of “manage” or its parts in clause 1.1 or elsewhere in the HOMA.

11. If the word “manage” stood alone, and if it were unencumbered by the three commercial imperatives referred to above, it might be given a wide meaning in accordance with its dictionary definitions. Thus, the Oxford English Dictionary includes the following definitions of “manage”:[25]

    3. a. To conduct or carry on (a war, a business, an undertaking, an operation). Now with more precise notion: To carry on successfully or the contrary; to control the course of (affairs) by one’s own action.

    …

    4. transitive. To control and direct the affairs of (a household, institution, state, etc.); to take charge of, attend to (cattle, etc.).

    5. To administer, regulate the use or expenditure of (finances, provisions, etc.).

    …

    7. To control, cause to submit to one’s rule (persons, animals, etc.). 

    [25] Oxford English Dictionary (2^nd ed, 1989) “manage” (defs 3a, 4, 5, 7).

12. The Macquarie Dictionary includes the following definitions of “manage”:[26]

    1. To bring about; succeed in accomplishing.

    2. To take charge or care of.

    …

    4. To handle, direct, govern, or control in action or use.

    …

    6. To succeed in accomplishing a task, purpose, etc.

    …

    9. To conduct affairs.

    [26] Macquarie Dictionary (7^th ed, 2017) “manage” (defs 1, 2, 4, 6, 9).

13. However, in the HOMA the word “manage” appears within the phrase “manage the Operations … for and on behalf of Owner” which (having regard to the three commercial imperatives referred to above) connotes that it was ACHA (and not Healthscope) that was to remain “the operator”; and that Healthscope had only a role subservient to ACHA, which role was to be styled as “managing”.

14. Put another way, in the HOMA the relationship between the concepts of “manage” and “operate” is one of subservience such that ACHA was the operator (and therefore the true licensee) whereas Healthscope was merely assisting ACHA (and therefore did not need a licence). It is to be stressed that it is the very fact that the two concepts of “operate” and “manage” can be readily understood to be different in this way that critically enables the operation/management dichotomy to be able to satisfy the three commercial imperatives.

15. It would appear to follow inexorably that the drafters would have appreciated that any suggestion that the HOMA might permit Healthscope to install its own employees into senior positions in the workforce of the hospitals, thus effectively running those hospitals, would likely put at grave risk ACHA’s licence under the Health Commission Act. It would have been obvious that any regulator was likely to consider that such a scheme was antithetical to the regulatory regime and that ACHA would be thereby abnegating its responsibilities under the licence to an unlicensed person, namely Healthscope.

16. And, as referred to above, it could also put at grave risk ACHA’s “tax-exempt” status if it were found that ACHA was in fact being run by Healthscope. Indeed, it is interesting to note that Mr Hoffmann QC, for Healthscope, himself recognised such a danger and stated in his written opening submissions:

    87. … If all of the Employees at the Hospitals became the employees of a commercial operator providing services to make a profit for its shareholders, a real question would arise as [to] whether ACHA could continue to enjoy its tax-exempt status. It is clear that the parties intended that the Operations would continue to be undertaken by ACHA employees – the Employees – to preserve for the benefit of both parties ACHA’s tax exempt status but that Healthscope, through its own employees provide the Services / Management Services, which are very much in the nature of managerial services, over the top of ACHA’s employees engaged in the Operations. [Emphasis added]

17. As appears from what I have already said, I agree with the first underlined sentence, as far as it goes. However, in my view, it is not necessary for matters to proceed as far as all of the Employees at the Hospitals being the employees of Healthscope (and not ACHA) before the “real question arises”. If, in April 2003, one had been postulating hypothetical factual situations in which that “real question arises”, one might well have conjured up, as an extreme “hypothetical” example, a situation of the most senior officer at each of the three hospitals being an employee of Healthscope (and not ACHA) and, for good measure, one of those three Healthscope employees also being employed as “Chief Executive Officer, Hospital Operations”, with responsibility for all three hospitals. (However, I understand why counsel did not give that situation as a hypothetical example here).

18. In my view, if either of the negotiating parties to the HOMA had been asked in April 2003 whether the HOMA could be construed as permitting the present state of affairs concerning the three Healthscope employees to arise, each would have replied with a resounding “No, of course not” (or in possibly stronger language). Such a construction would have been entirely inconsistent with both parties’ concerns as to the three commercial imperatives discussed above.

19. I now turn to the concurrent matters of how those same three commercial imperatives affect the construction of the HOMA provisions dealing with the topics of “employing” and the “employees”.

    PART 4: THE CONCEPTS “EMPLOY” AND “EMPLOYEES” IN THE HOMA

20. One may readily postulate particular jobs at the three hospitals that would be difficult to classify as either “operating” or “managing” under a binary “either or approach”. As obvious examples, one may ponder whether the creating and maintaining of ongoing rosters for the attendance of doctors, nurses and other staff is part of “operating” the hospital; or is it only “managing” its operation? Similarly, is the recovery of unpaid or overdue accounts only “managing” or is it so important as to be “operating”? And so on.

21. In reality, there is no bright line that could be applied to determine in vacuo whether every particular action that could be imagined as ever being taken by someone working at the three hospitals should be labelled as “operating” or “managing”.

22. To some extent, the answering of such questions may be assisted by reference to the list of the managing services that Healthscope is to supply which is set out in clause 3.1 (and reproduced above at [44]). However, the important, indeed critical, point is that the placita in clause 3.1 are not to be construed in vacuo and expansively in line with a mantra along the lines: “If Healthscope is authorised by clause … to do “X”, surely it is only commercial sense that it can also do “Y””.

23. Rather, those placita must be construed according to the operation/management dichotomy adopted in April 2003, the purpose of which was (and still is) to protect the three commercial imperatives by postulating that the concept of “managing” in the HOMA is less than, and subservient to, “operating”. It is only by dint of that distinction that it could be asserted in April 2003, and now maintained,[27] that it is ACHA (and not Healthscope) who is operating the hospital (to match the language of the language of s 57B of the Health Commission Act which was headed Prohibition of operating private hospitals unless licensed).

    [27] Always remembering that the HOMA is to be construed by reference to the objective intention of the parties as at April 2003.

24. As referred to above, when drafting the HOMA in April 2003 so as to protect ACHA’s retention of its licence and tax-exempt status, the parties would have borne in mind that what would most concern the relevant regulatory authorities is the identity and standard of ACHA’s employees at the top levels of administration and management at the hospitals (by whatever titles or labels they may be endowed). Obviously, it is these people who formulate, administer and enforce matters of policy, standards and discipline; and they thereby determine the nature and quality of the overall enterprise to a much greater extent than any individual employee(s) carrying out operations at a much lower level in the organisation.

25. I do not wish to enter into an arid debate concerning appropriate labels to be given to the different sorts of workers that may be employed at a business. But it is difficult to ignore entirely the pachyderm quietly reposing in the Court room in the form of the age-old terminology of “management and workers” as used in the United Kingdom, Australia and elsewhere.

26. While exact connotations may differ according to particular circumstances, it is generally perceived that there is a difference between the “managerial employees” and the “non-managerial employees” of a business. The former are those employees who, as referred to in their position statements, are entrusted with managerial functions (which may include planning, policy making, strategizing, leading, controlling and so on). The latter are those employees who are not entrusted with such managerial functions but are responsible for executing or carrying out individual jobs or functions or operations. Of course, employees at different hierarchical levels of the business perform different functions and have different rights and responsibilities; and managerial employees may be found at different hierarchical levels.

27. Both classes of employees are important for the success of a business. But for present purposes, it is important to note that the difference between the two classes does not equate to a binary “operator – manager” dichotomy. It is obviously the case that “non-managerial employees” carry out business operations; but equally, “managerial employees” do also carry out business operations.

    The meaning of “employ” and “employee(s)”

28. I turn now to the topic of the meaning of the words “employ” and “employee(s)” in the HOMA. The word ‘employee’ is defined thus at clause 1.1:

    Employee means an employee of Owner in respect of the Operations or the Finders Project;[28]

    [28] The word ‘employee’ in the definition section has a capital ‘E’. That would usually be of no consequence since each word (or each member of a word group) in the alphabetical list in clause 1.1 has a commencing capital letter. However, there does appear to be some significance here, since subsequently throughout the body of the HOMA the word “Employee” (with a capital E) is generally used. This usage indicates that the word “Employee” is being used in the defined sense rather than in a more general sense of an employee of an unspecified person or entity.

    Healthscope eschews responsibility for ACHA employees

29. Before considering the process of employing (and dismissing) workers required by clause 3.8 of the HOMA, it is best to first have regard to the background provided by clause 3.8(e) (and also clause 9.9). Clause 3.8(e) provides:

    (e)     Notwithstanding any other term in this Agreement or otherwise:

    (i)    Owner remains responsible for the Employees’ entitlements;

    (ii)     the Employees shall remain employees of Owner; and

    (iii)    the Employees shall not at any time during the Term be deemed to be employees of Manager.

1. The above evidence demonstrates that Healthscope, in purported execution of rights or duties under the HOMA, has purported to install three full time Healthscope employees into positions in the workforce at the very highest levels of administration at each of the three hospitals.  ACHA challenges the validity of those purported appointments and subsequent references will not always include the word “purported” but should be understood in that sense.

2. Ms Angela McCabe has been installed as the General Manager of Flinders Private Hospital. Ms Janet Jongeneel has been installed as the General Manager of Memorial Hospital.

3. Mr Paul Evans has not only been installed as the General Manager of Ashford Hospital, but also as the chief executive officer of Hospital Operations, ACHA with ultimate responsibility for all three hospitals; he is said to have been “appointed” to this latter additional position pursuant to clause 3.5 of the HOMA (the correct interpretation of which is separately considered below at Part 8).  He also holds the position of South Australian Manager of Healthscope (in circumstances where Healthscope has an interest in only one South Australian hospital in addition to the three hospitals here under consideration).[59]

   [59] Mr Arthur Yannakou, signing as (National) Chief Operating Officer of Healthscope on Healthscope letterhead on 24 October 2019 and 9 December 2019 (Exhibit A5) “appointed” Mr Evans to the positions of South Australian State Manager of Healthscope as well as the positions of CEO of ACHA and General Manager of Ashford Hospital [all reporting to (National) Chief Operating Officer of Healthscope – Mr Arthur Yannakou].

4. There is no doubt that these three persons are, as a matter of law, employees of Healthscope. They have all the accoutrements of an employment relationship, including written contracts of service, position statements, receipt of wages from Healthscope and so on.[60]

   [60] For a detailed consideration of such accoutrements, see Ian Neil and David Chin, The Modern Contract of Employment (Thomson Reuters (Professional) Australia Limited, 2^nd ed, 2017) Chapter 1: Identifying a Contract of Employment and Chapter 2: Identifying the Employer.

5. As alluded to in the original recitals to the HOMA reproduced above at [13], the reason why ACHA originally became involved with Healthscope is that ACHA had been making losses in the running of the hospitals and the financial situation had become serious. In order to rectify that situation, and speaking broadly, it was necessary to achieve the result that, on an annual basis, the total income[61] of the hospitals would equal its total expenses; and since it would be impossible to ensure that “total income” exactly equated to “total expenditure”, for practical purposes it is necessary to “make a profit” in that sense.

   [61] Including, as examples, government grants, public donations and fees paid for hospital.

6. However, while a “profit” in the above limited sense needed to be made in order for the three hospitals to remain open, the constitution of ACHA made clear that the hospitals were not to be run for the primary purpose of making a profit. To the contrary, the constitution requires that the hospitals be run for benevolent purposes rather than for purely lucrative purposes; and the retention of the hospitals’ important “not-for-profit/charitable status” required that that situation continue.

7. Needless to say, the raison d’etre of Healthscope (from its own point of view) was, and is, entirely different. It is to make as much commercial profit as possible; and that includes the goals of charging for its services as much as is commercially viable and keeping its overheads as low as commercially viable.[62]

   [62] Such goals are unexceptionable in our capitalist system and I make no comment at all as to whether any charges by Healthscope are “fair”; ACHA undoubtedly had competent legal advice and entered into the HOMA with eyes wide open.

8. The presently relevant matter is not the amount of the fees that are actually paid but rather the way in which those fees are calculated. Under the HOMA, Healthscope does not charge a fixed cost for services but rather on the basis, broadly speaking, that Healthscope is entitled to the whole of the surplus funds (up to a capped amount) according to the formula that appears in the HOMA (for initially to 30 June 2023 and then from 1 July 2023) thus:

   5.     Fee and Distribution to 30 June 2023

   5.1     Management Fee from the Commencement Date until 30 June 2023

   (a)     In consideration for the provision to Owner of the Services and the Flinders Services, Owner agrees to pay Manager the Management Fee, which shall, in respect of any Contract Year until 30 June 2023, be equal to the Available Cash Surplus for that Contract Year until 30 June 2023 up to a maximum amount equal to 12% (plus GST) of Gross Revenue.

   …

   5A Fee and Distributions from 1 July 2023

   This clause 5A operates with effect on and from 1 July 2023.

   5A.1 Management Fee

   (a)     As from 1 July 2023, subject to clause 5A.2 of this Agreement, the Management Fee payable by the Owner to the Manager for each month in the Contract Year will be 67.5% of total ACHA EBITDA for that month (excluding GST), less the portion of the Capital Management Fee (if any) from any prior Contract Years that has been agreed between the parties as to be invoiced by the Manager to the Owner in that month.

9. In my view, the position of each of the three Healthscope “General Managers” is highly conflicted. On the one hand, they ostensibly work at the respective hospitals in an environment said to be governed by the ACHA constitution of a benevolent institution which only charges patients sufficient to cover costs. But on the other hand, they in fact work for Healthscope – not ACHA; and accordingly, their duty is to Healthscope to ensure that as much profit is made from the treating of the patients as is commercially possible.

10. It is obvious that Healthscope will be chiefly concerned to achieve the greatest possible amount of incomings and the lowest possible amount of outgoings in order that the above formula generates the highest possible dollar figure to be paid to Healthscope. Accordingly, Healthscope will be motivated to increase profitability in the running of the three hospitals and, in order to do so, may press for a greater deal of risk concerning the three commercial imperatives than ACHA itself would be prepared to take.

11. A moment’s reflection on what Healthscope has thus far done in installing the three Healthscope “General Managers” in the positions they purport to hold demonstrates such fears are not mere conjecture.

    Other imperatives bearing upon the three Healthscope General Managers

12. In addition to the profit imperative discussed above, there are other parallel imperatives also bearing upon the three Healthscope “General Managers”. They include the following matters: being disciplined by their employer; obeying orders by their employer; and the availability of career advancement.

13. As to discipline, Neil & Chin, The Modern Contract of Employment, observes:[63]

    [1.140] The right to discipline has always been regarded as a strong indication of employment, closely related as it is to the right of control.  In the same way, it is the right, and not its exercise, that is important. [Citations omitted]

    [63] Ian Neil and David Chin, The Modern Contract of Employment (Thomson Reuters (Professional) Australia Limited, 2^nd ed, 2017) 27. 

14. As to the employee’s duty to obey orders, Macken’s Law of Employment, observes:[64]

    [5.410] One of the most important obligations resting on an employee is the obligation to obey all lawful and reasonable commands given by the employer.  This is one of the characteristics of the contract of employment which distinguishes it from other types of contract.  The duty to obey orders provides a mechanism or a “governance structure” which allows adaption and change to meet the needs of the workplace.  In the industrial context, it relies on command rather than a participatory and consultative model of decision-making.  [Citations omitted]

    [64] Carolyn Sappideen, Paul M O’Grady and Joellen Riley, Macken’s Law of Employment (Thomson Reuters (Professional) Australia Limited, 8^th ed, 2016) 199-200.

15. In the present circumstances, the three Healthscope “General Managers” report to their superiors in Healthscope and are subject to their orders and discipline. They would not appear to be subject to discipline from any employee of ACHA. As to obeying orders, each of the three Healthscope “General Managers” are at the top of the command chain at their respective hospitals; although direct intervention by the Board of ACHA is a possibility, its occurrence appears highly unlikely.

16. As to career advancement, this is related to the above two matters, but in practical terms it is likely to be of greater importance in the present case. A person in the position of the three Healthscope General Managers would undoubtedly look to his/her own employer Healthscope, a business operating some 43 hospitals across Australia[65] (with many industry contacts and the ability to access many senior positions becoming available in future years) for salary increases, bonuses and general career advancement (including transfers and promotions), rather than to the smaller and parochial organisation, ACHA.[66]

    [65] Evidence of Mr Evans, T55.

    [66] Indeed, some ACHA employees worked in Healthscope hospitals as secondees. Evidence of Mr Evans, T15.

    Conclusion: The position of the three Healthscope employees is untenable

17. The inevitable cumulative result of all of the above is that persons in the position of the three Healthscope “General Managers” would hardly be human if they did not see their interests as being aligned with Healthscope rather than ACHA; and accordingly to prefer and adopt the courses of action that are identified by their employer Healthscope as favouring Healthscope (irrespective of their possible effect upon ACHA).

    PART 7: THE “CHIEF EXECUTIVE OFFICER, ACHA” POSITION

18. Clause 3.5 of the HOMA provides as follows:

    3.5     General Manager

    (a)     Manager will, subject to Owner’s consent (which may not be unreasonably withheld or delayed), appoint a person from time to time as General Manager of the Operations and the Flinders Project.

    (b)     The General Manager’s functions and responsibilities will be determined by Manager.

    The correct construction of clause 3.5

19. It will be remembered that the word “Manager” (being the first word in placitum (a) and the last word in placitum (b)) is defined at clause 1.1 of the HOMA to mean Healthscope.

20. In my view, the correct construction of clause 3.5 is that Healthscope is to appoint only a single person to the position of General Manager of all the three hospitals compendiously (subject to Owner’s consent which may not be unreasonably withheld or delayed). Of course, such power is to be exercised from time to time, whenever a single position of General Manager becomes vacant (for whatever reason).

    The present use of a title “CEO”

21. As noted above, Mr Paul Evans, a long time employee of Healthscope, describes his present position as Chief Executive Officer Hospital Operations ACHA and General Manager Ashford Hospital.

22. The parties are agreed that this title of Chief Executive Officer (CEO) purports to be the result of Healthscope having exercised a right to “appoint” a “General Manager” under clause 3.5 of the HOMA.

23. Mr Evans’ adoption of the title CEO, ACHA (and the use of that verbiage by the parties) seems to have come about because, as noted above, Healthscope had installed three of its own employees as the respective “General Managers” of the three hospitals. It appears to be the position that because Healthscope has arrogated the title of General Manager to each of those three appointees, it was thought best (in order to minimise confusion) to style Mr Evans’ additional role (said to arise as a result of an appointment pursuant to clause 3.5) “CEO, ACHA” (rather than the words actually used in clause 3.5, “General Manager of the Operations and the Flinders Project”).[67] 

    [67] It may be that someone, in a somewhat muddled way, may have thought that the three purported appointments of the three Healthscope employees McCabe, Jongeneel and Evans as separate “General Managers” of Flinders, Memorial and Ashford respectively could be said to be justified by clause 3.5; and hence the allocation to each of the title “General Manager” which is the very title referred to in clause 3.5 is no coincidence. I suppose there is no point in speculating about the matter. But, as stated above, the meaning of clause 3.5 is clearly that Healthscope will only appoint a single person to the position of General Manager of all the three hospitals compendiously. Of course, such power is to be exercised from time to time, whenever that single position of General Manager becomes vacant (for whatever reason).

    ACHA’s submissions as to validity of Mr Evans’ appointment as CEO

24. ACHA’s submissions as to invalidity of the appointment of Mr Evans as CEO largely repeat much of what has already been said in the context of the appointment of the three “General Managers” of the individual hospitals (including the three commercial imperatives and other matters), but in an a fortiori fashion. ACHA submits that the HOMA is replete with injunctions that only ACHA employees may operate the hospitals and that Healthscope may not do so.  ACHA’s position might be put in a rhetorical question: “If the person at the apex of the ACHA workforce, rejoicing in the title “CEO, ACHA”, is not taking part in the operations of the hospitals, how would one locate a person who is doing so?”

25. ACHA submits that given the above injunctions in the HOMA would obviously apply to any HOMA employee acting as a CEO of ACHA, if the drafters of clause 3.5 had intended to do the unusual thing of authorising Healthscope to install as the CEO of ACHA one of their own employees, they would have clearly and specifically said so. Instead, they eschewed using the word “employ” and used the word “appoint”.

26. ACHA submits that the meanings of those two words are very different. Thus, Black’s Law Dictionary does not define the word “appoint” by reference to the concept of employment but rather as follows:[68]

    Appoint.  To designate, ordain, prescribe, constitute, or nominate.  To allot or set apart.  To assign authority to a particular use, task, position, or office.

    Term is used where exclusive power and authority is given to one person, officer, or body to name persons to hold certain offices.  It is usually distinguished from “elect”, meaning to choose by a vote of the qualified voters of the city; though this distinction is not invariably observed.

    [68] Black’s Law Dictionary (5^th ed, 1979) “appoint”.

    Healthscope’s submissions as to validity of Mr Evans’ appointment as CEO

27. Healthscope points out that the word “appoint” is not defined in the HOMA and is only encountered in clause 3.5. Healthscope submits that the word “appoint” is synonymous with the word “employ” but cited no real support for that proposition.

28. Healthscope submitted at paragraphs [81] and [82] of its opening written submissions that there are four reasons why a General Manager appointed pursuant to clause 3.5 “is to be” a Healthscope employee. I reproduce and address those submissions separately as follows.

    81. It is apparent that the General Manager to be appointed pursuant to clause 3.5 is akin to the CEO – this person is to be responsible for all three Hospitals. It is also clear that this person is to be a Healthscope employee. This is apparent from the following.

    82. First, the obligation is on Healthscope to appoint the General Manager, not ACHA, subject to ACHA’s consent. This is in contradistinction to the Employees, which are to be employed by ACHA on the recommendation of Healthscope: see clause 3.8(f) of the HOMA. … [Citation omitted]

29. As to this first reason, the position of ACHA is that “appoint” means “designate” rather than “employ” and that the CEO must be an employee of ACHA. If that be accepted, there is no incongruity in granting Healthscope the obligation or right to designate (subject to Owner’s consent which may not be unreasonably withheld or delayed) an employee of ACHA as General Manager.

    82. … Secondly, Healthscope has complete discretion as to the functions and responsibilities of the General Manager. This is in contradistinction to the language used in clause 3.8(f)(ii)(A), which obliges ACHA to act on the recommendations of Healthscope as to when an Employee becomes redundant, and clause 3.8(g), which expressly refers to Healthscope acting “for and on behalf of [ACHA]” when reorganising the roles and responsibilities of Employees – words which do not appear in clause 3.5. …

30. As to this second reason, it is to be stressed that the respondent here asserts that “Healthscope has complete discretion as to the functions and responsibilities of the General Manager”. This assertion is presumably founded on clause 3.5(b); but that clause gives the discretion to the General Manager and not to Healthscope. Accordingly, the statement radically assumes the very matter to be established, namely that the General Manager will be a Healthscope employee; of course, ACHA’s contention is that the General Manager must be an employee of ACHA, not Healthscope.

31. It follows that if ACHA is correct in its contention that the General Manager must be an employee of ACHA, it will follow that an employee occupying that position of General Manager will be subject to the same dismissal process as any other employee of ACHA. Accordingly, there is no incongruity of the type asserted by the respondent.  

    82. … Thirdly, clause 3.5 does not refer to the General Manager being an Employee. Indeed, it makes no reference to Employees at all. …

32. As to this third reason, such omission is at best neutral for Healthscope. If ACHA is correct in its position that the correct construction of the HOMA is that all persons who take part in the operations of a hospital must be employees of ACHA it would follow that one would not expect an express statement to that effect to be found in this clause.

    82. … Fourthly, whilst the appointment of the General Manager is subject to ACHA’s consent, that consent cannot be unreasonably withheld or delayed, which reinforces the conclusion that ACHA’s ability to control the appointment of the General Manager is constrained, which in turn reinforces the conclusion that the General Manager is to be a Healthscope employee. …

33. As to this fourth reason, I am afraid I cannot see the logic here. This is merely one example of the blending and balancing of the influence of the respective parties found in different contexts throughout the HOMA.

    82. … Finally, it makes commercial sense for the person ultimately responsible for managing the Operations and ensuring the provision of the Services / Management Services, including the obligation to manage the Employees, to the standards required of Healthscope by ACHA and ACHA FPH to be a Healthscope employee. By contrast, it would be a commercial nonsense and clearly an inconvenient outcome if the person ultimately responsible for the performance of Healthscope’s obligations under the HOMA and FHOMA must be an ACHA employee. The absurdities are numerous. By way of example, if the General Manager was required to be an ACHA employee, an ACHA employee – and therefore ACHA – would be making a recommendation to Healthscope to employ or terminate the employment of an Employee, with Healthscope then making the same recommendation back to ACHA which ACHA is obliged to act upon pursuant to clause 3.8(f). In other words, ACHA is acting on its own recommendation, with Healthscope providing no input despite what is expressly provided for in clause 3.8(f), and Healthscope being paid to provide the recommendation.

34. As to this final reason, in the year 2021 it may make “commercial sense” to Healthscope to have a Healthscope employee as the General Manager and it may be “inconvenient” to Healthscope if an ACHA employee holds that position; however, as discussed above, in April 2003 the situation would have been seen quite differently by the drafters.  In any event, the example given is unpersuasive. In the example, reference is presumably being made to clause 3.8(f) under which “Manager” makes recommendations to employ or terminate.  But “Manager” is defined as Healthscope and accordingly it is Healthscope who will make such recommendations if, as ACHA submits, an ACHA employee must occupy the position of “General Manager”.  Once again, the writer of the submission appears to assume the very matter to be established, namely that the General Manager will be a Healthscope employee.

1. However, if as ACHA contend, the General Manager will necessarily be an ACHA employee, then recommendations under clause 3.8(f) as to employment or termination of employees will come from Healthscope (“Manager”) but via a Healthscope representative and not the General Manager.  The “absurdity” postulated by the respondent simply falls away.

   Conclusion as to clause 3.5

2. I accept ACHA’s submissions that a “General Manager” appointed pursuant to clause 3.5 must be an employee of ACHA.  I add that that conclusion in fact provides Healthscope with several options. 

3. First, the appointee could be an existing ACHA employee (of whom there are some 2,200).[69] While it could be any of those, three obvious candidates would be the persons occupying the three General Manager positions (provided of course they are ACHA employees; as is unfortunately not the case at present). Such a choice might well be in keeping with traditional corporate promotional precepts.

   [69] T36.15-21.

4. Secondly, the power invested in Healthscope by clause 3.5 to appoint a person as General Manager does not necessitate that Healthscope appoint someone who is already an ACHA employee (although it undoubtedly includes that option). Healthscope is quite free to search the general population to find a suitable candidate; and indeed to conduct much the same recruitment process that it might do when looking for new Healthscope employees. Having found a suitable candidate for the position of CEO, ACHA (not being a Healthscope employee), Healthscope may then (pursuant to clause 3.8) recommend to ACHA that it employ that candidate as an ACHA employee and, upon that formal employment occurring, then (pursuant to clause 3.5) Healthscope may appoint that person as “General Manager” (in the sense of CEO as the parties use the term).[70]

   [70] Pursuant to that process, ACHA would be required to employ the candidate if the recommendation is “reasonable” (in the terms set out in clause 3.8(f)); and also be required not to unreasonably withhold or delay the giving of consent to the appointment (in the terms set out in clause 3.5).

5. Additionally, it should be noted that, on the above scenario, Healthscope still maintains a high degree of control over the CEO position in that paragraph (b) of clause 3.5 provides: “The General Manager’s functions and responsibilities will be determined by Manager” (namely Healthscope). This permits Healthscope to define the functions and responsibilities of the general manager (CEO), of itself a significant degree of control. 

   PART 8: FINAL CONCLUSION AND ORDERS

6. For all of the above reasons, I accept the submissions of ACHA and reject those of Healthscope. I give judgment in favour of ACHA and grant the applications for (amended) declarations.

7. I hereby make the following orders.

   1.That there be judgment for each of the Applicants.

   2.That the following Declarations “A” and “B” are hereby made:

   A. Declarations that, on the proper construction of the Consolidated HOMA:

   1.     The Manager’s GMs in relation to Memorial Hospital and Ashford Hospital (and all Manager’s GMs generally) are properly to be ‘Employees’ of the Owner pursuant to the provisions of the Consolidated HOMA;

   2.     The CEO appointed pursuant to clause 3.5 is properly to be an ‘Employee’ of the Owner pursuant to the provisions of the Consolidated HOMA;

   3.     The Manager is not entitled under the Consolidated HOMA, or otherwise, to employ the CEO or any of the Manager’s GMs in its own right;

   4.     The Manager has breached and is continuing to breach the Consolidated HOMA by employing in its own right as employer each of the:

   4.1CEO;

   4.2General Manager of Ashford Hospital; and

   4.3General Manager of Memorial Hospital.

   B. Declarations that, on the proper construction of the Consolidated FHOMA:

   1.     The Manager GM appointed in relation to Flinders Private Hospital (together with the Manager’s GMs generally) is properly to be an “Employee” of the Operator pursuant to the provisions of the Consolidated FHOMA;

   2.     the Managing Agent is not entitled under the Consolidated FHOMA, or otherwise, to employ the Manager GM appointed in relation to Flinders Private Hospital (or any Manager’s GMs) in its own right;

   3.     the Managing Agent has breached and is continuing to breach the Consolidated FHOMA by employing the General Manager of Flinders Private Hospital in its own right.