Affinity Health Pty Limited v Symbion Health Limited
[2011] VSC 210
•19 May 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 9499 of 2009
BETWEEN
| AFFINITY HEALTH PTY LIMITED (ACN 106 722 347) | First Plaintiff |
| and | |
| AUSTRALIAN HOSPITAL CARE PTY LIMITED (ACN 072 273 931) | Second Plaintiff |
| and | |
| SYMBION HEALTH LIMITED (ACN 004 073 410) | Defendant |
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JUDGE: | SIFRIS J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | Written submissions filed by the parties | |
DATE OF JUDGMENT: | 19 May 2011 | |
CASE MAY BE CITED AS: | Affinity Health Pty Limited & Anor v Symbion Health Limited | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 210 | |
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CONTRACT – Construction – Terms of Umbrella Deed – Whether first plaintiff entitled to specific performance of indemnity from defendant for liability incurred by second plaintiff to third party.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr N Evans | Blake Dawson |
| For the Defendant | Mr A K Panna SC | Herbert Geer |
HIS HONOUR:
A. Introduction
On 7 April 2011, I published reasons for my decision in proceeding no. 9962 of 2008 (“the related proceeding”).[1] I have not made orders in the related proceeding.
[1]Healthscope (Tasmania) Pty Ltd & Anor v Australian Hospital Care Pty Ltd & Anor [2011] VSC 132.
This proceeding was to be heard at the same time as the related proceeding, but for various reasons the parties agreed to wait until the related proceeding was determined.
The parties have filed written submissions, including submissions in reply. Neither party has indicated a desire to have an oral hearing.
In the related proceeding, I found that Australian Hospital Care Limited (“AHC”) is liable to indemnify Australian Hospital Care (HPH) Pty Ltd (now Healthscope (Tasmania) Pty Ltd) (“AHC(HPH)”) for a liability that AHC(HPH) incurred in the sum of $311,687.80.[2]
[2]For ease of reference I have, as far as possible, used the same names, definitions and abbreviations as those in the related proceeding. It should also be noted that evidence in the related proceeding is evidence in this proceeding.
In this proceeding Affinity Health Pty Ltd (“Affinity”) and AHC effectively seek indemnity from Mayne Group Limited (now Symbion Health Limited) (“Mayne”) in relation to such liability. They also seek indemnity for any costs or interest AHC is ordered to pay and the costs AHC incurred in defending the related proceeding.
Prior to commencing this proceeding, Affinity requested that Mayne indemnify it and conduct its defence of the related proceeding. Mayne refused.
B. The related proceeding
The earlier background facts giving rise to the dispute are set out in detail in the published reasons in the related proceeding.
In summary, AHC (at the time controlled by Mayne) disposed of various shares (in subsidiary and related companies) and assets to Healthscope Ltd (“Healthscope”) under a Share Sale Agreement made on 2 February 2003 (“the Share Sale Agreement”).
Pursuant to the Share Sale Agreement AHC disposed of its interest in AHC(HPH), which operated and managed various hospitals in Hobart (“the Private Hospital”) under documented contractual agreements as referred to in my reasons in the related proceeding.
Settlement of the Share Sale Agreement took place on 13 April 2003.
On that day, certain parties entered into a Novation and Amending Deed (“the Novation Deed”). Pursuant to the Novation Deed, Healthscope, which was in effect the new ultimate controller of AHC(HPH), replaced AHC as guarantor of AHC(HPH)’s obligations under one of the other contractual documents, the Operating and Management Agreement (“O & M Agreement”). Significantly, under clause 2.3 of the Novation Deed, AHC (as the outgoing controller) undertook to be liable to various parties, including AHC(HPH), for all claims and debts which AHC(HPH) paid, suffered, incurred or was liable for in respect of the O & M Agreement prior to the completion date, being 13 April 2003. The ambit and construction of this clause was a central issue in the related proceeding, which was brought by AHC(HPH) against AHC. The next paragraph explains how the claim arose.
After settlement on 13 April 2003, the State of Tasmania issued tax invoices demanding payment from HPH Developments Pty Ltd (“HPHD”) of $282,557.05 for Reticulation Services (as defined) under a lease entered into by those parties and $29,130.75 for Services (as defined) under a Services Agreement entered into by those parties (“the Amounts”). HPHD was entitled to indemnity from AHC(HPH) under the O & M Agreement and accordingly, referred the tax invoices to that party. As the tax invoices related to the period prior to completion, AHC(HPH) took the view that they were properly the liability of AHC pursuant to clause 2.3 of the Novation Deed. Following some at times acrimonious correspondence between the parties, AHC declined to pay the Amounts. As a consequence and in response to increased pressure from the State of Tasmania, the Amounts were paid, not by AHC(HPH) (a beneficiary of the undertaking in clause 2.3 of the Novation Deed), but by the ultimate controller, Healthscope. AHC(HPH) claimed against AHC for the Amounts on the basis of clause 2.3 of the Novation Deed, even though payment was actually made by Healthscope.
In the related proceeding, I held that clause 2.3 was clear and unambiguous and that AHC(HPH) did incur a liability in respect of the Amounts for which it was entitled to indemnity from AHC.
C. This proceeding
There is a symmetry in the two proceedings. Just as AHC(HPH) claimed indemnity from AHC for liabilities incurred during the period when Mayne and AHC controlled AHC(HPH) and therefore the Private Hospital, AHC (now under the control of Affinity) in turn claims indemnity for a liability incurred by it while under the control of Mayne. The matter arises in the following way.
On 21 October 2003, Affinity (then named Australian Newco Holdings) entered into various agreements to purchase the corporate entities, assets, property and businesses comprising Mayne’s Australian Hospital Business (as defined).[3] As a consequence of the previous sale to Healthscope, as at 21 October 2003 Mayne’s Australian Hospital Business did not include AHC(HPH) and therefore the Private Hospital. The Australian Hospital Business did however include AHC.
[3]The relevant agreements are a Share and Asset Sale Deed – Hospitals dated 21 October 2003 between Mayne, Affinity and others (“Share and Asset Sale Deed”) and an Umbrella Deed – Hospitals of the same date between Mayne, Affinity and others (“Umbrella Deed”).
Thus from 21 October 2003, Affinity had agreed to and did subsequently complete the purchase of Mayne’s Australian Hospital Business which included AHC, but did not include the Private Hospital business. Following completion, AHC’s parent company therefore changed from Mayne to Affinity.
Affinity and Mayne are part of large corporate groups in the health sector. Following the sale to Affinity of the corporate entities, assets, property and businesses comprising Mayne’s Australian Hospital Business, Mayne continued to operate its remaining businesses.
For completeness, it should be noted that on 13 April 2005, Ramsay Health Care Limited acquired Affinity and thus became the ultimate holding company of AHC.
D. Is AHC entitled to indemnity?
As outlined above, Affinity entered a series of agreements with Mayne to purchase Mayne’s Australian Hospital Business. Those agreements included a Share and Asset Sale Deed and an Umbrella Deed.
Clause 8.10(a) of the Umbrella Deed provides as follows:
“[Mayne] indemnifies each Buyer Group Member against all Liabilities incurred or suffered by any Buyer Group Member in connection with any of the Divestment Businesses, any Retained Businesses or any Retained Companies (whether or not as a result of any transaction the subject of the Transaction Agreements or otherwise)” (emphasis added).
Mr N Evans of counsel, who appeared for the plaintiffs, submitted by reference to the various definitions that AHC’s liability for the Amounts, costs and interest in the related proceeding falls within the indemnity. He submitted that in context, clause 8.10(a) reads as follows:
“Mayne indemnifies Affinity and AHC against all liabilities (including interest and costs) incurred or suffered by Affinity or AHC in connection with the business of operating the Hobart Private Hospital.”
The substance of his submission is set out in detail below.
Mr A K Panna SC, who appeared for Mayne, submitted that AHC was not a party to the Umbrella Deed and presumably therefore, was not entitled to enforce the indemnity. The real question is however, whether it is entitled to be indemnified irrespective of whether or not it is a party. A party may be the beneficiary of an indemnity without being a party to a contract. In any event, Affinity is a party to the Umbrella Deed and it seeks specific performance of the indemnity in clause 8.10(a) provided for the benefit of its subsidiary, AHC.
It is therefore necessary to consider, by reference to the definitions in the Umbrella Deed, whether the construction of clause 8.10(a) proposed by Mr Evans is correct and therefore whether Affinity and AHC can invoke the indemnity in the present case.
Buyer Group Member
The Umbrella Deed defines a Buyer Group Member as any one or more of the bodies and companies defined as the Buyer Group. Buyer Group includes Affinity and, from Umbrella Completion, the Group.
Umbrella Completion means Completion as defined in the Share and Asset Sale Deed. Completion pursuant to that Deed means “completion of [the Share and Asset Sale] Deed and the sale and purchase of the Assets – Seller Group and Sale Shares in accordance with the terms of this Deed”. Completion occurred not long after 21 October 2003 and in any event, prior to Ramsay Health Care Limited’s acquisition of Affinity on 13 April 2005.
The Umbrella Deed defines Group as the Hospital Companies and the Subsidiaries. Subsidiaries has the meaning given in the Share and Asset Sale Deed and pursuant to that Deed means the companies set out in Part 2 of Schedule 1 to the Share and Asset Sale Deed. AHC is a company listed at number 4 in Part 2 of Schedule 1.
Accordingly, the plaintiffs submitted the definition of Buyer Group Member includes AHC. Mayne does not dispute this and in fact, appears to concede the point.
In my opinion, it is clear that AHC is a Buyer Group Member. This follows unarguably from the definitions used.
Liabilities
The term ‘Liability’ is very broadly defined in the Umbrella Deed. The plaintiffs submitted that it extends to:
(a)the Amounts (totalling $311,687.80) which AHC will be ordered to pay AHC(HPH) in the related proceeding because the definition of Liability in the Umbrella Deed extends to “any debt or monetary liability”;
(b)any interest AHC is required to pay AHC(HPH) by reason of the words “any debt or monetary liability” in the definition of Liability and the words irrespective of whether the liability is a “legal obligation” ((a)(iii)) or “owed, incurred or imposed as interest” ((a)(ix));
(c)any costs AHC is required to pay AHC(HPH) in the related proceeding because the definition of Liability in the Umbrella Deed uses the words “any debt or monetary liability” and the words irrespective of whether the liability is a “legal obligation” ((a)(iii)) or “owed, incurred or imposed as compensation or damages, whether for breach of contract or tort or on any other basis, or as losses, costs or expenses or on any other account” ((a)(x)); and
(d)AHC’s costs incurred in defending the related proceeding by reason of the words “any cost, charge or expense on any account and in any capacity” in the definition of Liability.
In my opinion, it is clear that each of these expenses constitutes a liability incurred by AHC for the purposes of the Umbrella Deed.
Divestment Businesses
In the Umbrella Deed, the following definition appears for Divestment Businesses:
“’Divestment Businesses’ means the businesses of operating the following hospitals previously conducted by the Group Members:
(a)Hobart Private Hospital…”
Mr Panna SC submitted that the liability of AHC for the Amounts was not incurred in connection with any Divestment Businesses because the Hobart Private Hospital was not a Divestment Business as AHC had divested itself of the Hobart Private Hospital many months prior to October 2003 when the Umbrella Deed was executed.
However, as submitted by Mr Evans, the definition of Divestment Businesses specifically includes the Hobart Private Hospital previously conducted (but not operated) by AHC. This definition was inserted well knowing that the divestment had already taken place. It is clear that the indemnity relates not only to those assets and shares divested pursuant to the Share and Asset Sale Deed but also prior divestments. Otherwise, there would be no need to include the Hobart Private Hospital.
Next, Mr Panna SC submitted that to fall within the definition of Divestment Businesses a Buyer Group Member had to have actually operated the business of the relevant hospital in the past. He noted that the operator of the Hobart Private Hospital, namely AHC(HPH) was specifically not included as a Buyer Group Member and that AHC and Affinity never operated that Hospital. However, the use of the word conducted undermines this submission. The definition refers to “the business of operating the following hospitals” being “hospitals previously conducted by the Group Members.” The contrasting use of the word operating suggests that what was embraced by the definition of Divestment Businesses was not only hospitals that were previously directly operated by Group Members, but also those that were conducted by Group Members. Conducted is a broader term and in the context of a group of companies, contemplates a more remote member of the group conducting such an operation. Further, the word ‘business’ in conjunction with the phrase ‘operating the following hospitals’ also supports this conclusion.
Clearly, in my opinion, the business of operating the Hobart Private Hospital is a Divestment Business. Not only is it expressly listed in the definition of Divestment Business, but AHC, which from Umbrella Completion was a Group Member, previously conducted the Hobart Private Hospital in the sense that it conducted the business through its subsidiary AHC(HPH). In my opinion it is pedantic, and unnecessary to resort to artificial and fine distinctions between operate and conduct. The Hobart Private Hospital is clearly a Divestment Business for the purpose of the Umbrella Deed.
The remaining issue is whether the Amounts and other liabilities claimed by AHC were incurred “in connection with” “the business of operating the [Hobart Private Hospital] previously conducted by [AHC]”.
In connection with
If AHC’s obligation to pay the Amounts to AHC(HPH) (together with interest and costs and AHC’s costs of defending the proceeding) was incurred or suffered in connection with the business of operating the Hobart Private Hospital (previously conducted by the Group Member) then Mayne must indemnify AHC for that payment.
Mr Evans referred me to a number of authorities which indicate that:
“The phrase ‘in connection with’ has on many occasions been said to be of considerable width, satisfied by a link or an association or a relationship and summed up in the phrase ‘having to do with’” (citations omitted).[4]
[4]Elkateb v Lawindi (1997) 42 NSWLR 396 at 402 (Giles CJ) cited with approval in JP Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3 at [42] (Macfarlan JA with whom Campbell JA and Young JA agree at [1] and [124] respectively).
Further, Mr Evans submitted that the words “in connection with” do not necessarily require a causal relationship between the two things.[5]
[5]Our Town FM Pty Ltd v Australian Broadcasting Tribunal (1987) 16 FCR 465 at 479 cited in Claremont Petroleum NL v Cummings (1992) 110 ALR 239 at 280 cited with approval in JP Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3 at [41] (Macfarlan JA with whom Campbell JA and Young JA agree at [1] and [124] respectively).
He contended that the Amounts (which were the subject matter of the related proceeding) were clearly incurred in the business of operating the Hobart Private Hospital. The expenses were for Reticulation Services and other Services directly related to the operation of the Hobart Private Hospital. Thus AHC’s liability to pay AHC(HPH) the Amounts and the costs associated with the related proceeding had to do with the business of operating the Hobart Private Hospital and there is an association or relationship that is sufficient to attract the operation of clause 8.10(a).
As a consequence, Mr Evans submitted that Mayne is liable, pursuant to clause 8.10(a) of the Umbrella Deed, to indemnify AHC for:
(a)the $311,687.80 AHC will be ordered to pay AHC(HPH) in the related proceeding;
(b)any order for interest and costs in the related proceeding; and
(c)the costs incurred by AHC in defending the related proceeding.
Mr Panna SC submitted that the Amounts were not incurred in connection with the business of operating the Hobart Private Hospital. He contended that the phrase “in connection with” requires a relevant nexus with the subject matter and such nexus is not provided merely by AHC being the holding company of AHC(HPH), which operated the Hobart Private Hospital. Further, Mr Panna SC submitted that the Amounts were incurred “in connection with [AHC] being the seller of shares and the contractual obligations imposed through the Share Sale Agreement on 2 February 2003” rather than in connection with operating the Hobart Private Hospital business. This argument is, in my opinion, misconceived.
To contend that the liability of AHC in the related proceeding was in connection with obligations under the Share Sale Agreement and Novation Deed merely explains how the obligation to indemnify arose and misses the critical point, which is the substance of the indemnity. As a matter of substance, the liability was clearly in connection with the operation of the Hobart Private Hospital, even though AHC did not directly operate the hospital.
The clear and obvious purpose of clause 8.10 of the Umbrella Deed was to ensure Affinity did not assume liability for businesses not under its control or that related to a period prior to its acquisition. Affinity did not purchase the Hobart Private Hospital business. Clause 8.10 was necessary to ensure Affinity did not take over any liability for a business it did not own and would receive no benefit from.
According to Mr Evans, clause 8.10 is designed to avoid that very outcome. Mr Evans submitted that Affinity did not purchase the Hobart Private Hospital so there was no sensible commercial reason for Affinity to have accepted liabilities connected with the Hobart Private Hospital. The parties had clearly contemplated and provided for apportionment of any legacy issues from businesses previously conducted by Mayne that were sold to other companies prior to the sale of the remainder of the Australian Hospital Business to Affinity.
Clause 2.9 of the Umbrella Deed provides for any payment, received by a Buyer Group Member after completion, of the proceeds from the sale of the Divestment Businesses to be paid to Mayne. Clause 2.9 makes it clear that Buyer Group Members were not entitled to retain any benefit derived from the sale of the Divestment Businesses. Clause 8.10 is the corollary to clause 2.9. The Buyer Group Members do not get the upside nor do they accept responsibility for the downside for any legacy issues relating to the Divestment Businesses. I accept this submission.
Accordingly, in my opinion, the only sensible commercial construction of clause 8.10(a), a construction consistent with the ordinary meaning of the words used, is that Mayne agreed to indemnify AHC for any liability in connection with operating the Hobart Private Hospital. The clear and obvious purpose of clause 8.10(a) was to ensure Affinity did not acquire the legacy issues for businesses it was not buying. Affinity did not purchase the business of operating the Hobart Private Hospital. Clause 8.10(a) was expressly included to ensure Affinity did not purchase any liabilities for a business it did not own.
In my opinion, this construction accords with what a reasonable person would have understood the clause to mean.[6] Contrary to Mr Panna SC’s submission, the clause is not ambiguous and therefore it is not necessary to have regard to the specific principles concerning construction of indemnity clauses.
[6]Pacific Carriers Ltd v BNP Paribus (2004) 218 CLR 451 at 462.
In summary, the effect of clause 8.10 is clearly that Mayne agrees to indemnify AHC in certain circumstances. Further, AHC has clearly incurred a liability in the sense required by clause 8.10. The business of operating the Hobart Private Hospital is a Divestment Business. The only real question therefore, is whether the liability was incurred in connection with operating the business of the Hobart Private Hospital. For the reasons outlined above, it clearly was.
E. Disposition
Accordingly, AHC is entitled to indemnity from Mayne in respect of the Amounts being the debt incurred by AHC together with other amounts required to be paid by AHC in the related proceeding. It is also entitled to be indemnified for its costs of defending the related proceeding.
I will hear from the parties as to the precise form of order and costs.
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