Arhanghelschi v Ussher
[2013] VSC 253
•16 May 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2013 01261
| IN THE MATTER OF BASE IMAGING GROUP PTY LTD (ACN 138 302 235) BETWEEN: DAN IURII ARHANGHELSCHI and CLADWYN PTY LTD | Plaintiffs |
| v | |
| RICHARD MILNE USSHER & ORS | Defendants |
| MEAGHAN LIDDLE & ORS | Plaintiffs by Counterclaim |
| v | |
| CLADWYN PTY LTD | Defendant by Counterclaim |
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JUDGE: | FERGUSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6, 7 and 9 May 2013 | |
DATE OF JUDGMENT: | 16 May 2013 | |
CASE MAY BE CITED AS: | Arhanghelschi v Ussher | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 253 | |
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CORPORATIONS – Oppression – Radiology business conducted through unit trust – Whether conduct of the affairs of trustee company oppressive to, unfairly prejudicial to or unfairly discriminatory against shareholder – Corporations Act2001 (Cth), ss 232, 233.
CONTRACT – Construction of unitholders deed – Exercise by majority of power to exclude unitholder – Whether on proper construction or by implication obligation of good faith imposed to act rationally, reasonably and fairly considering the interests of the parties – Exercise of power in self‑interest of majority of unitholders.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr M Heaton QC with Mr T Moloney | Compact Commercial Law |
| For the Defendants | Mr M D Wyles SC with Dr T McEvoy | Herbert Smith Freehills |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 2
The Radiology Business and Structure......................................................................................... 2
Steps taken by the Majority Unitholders and BIG...................................................................... 7
Did the Majority Unitholders breach clause 6.2 of the Unitholders Deed?.......................... 10
Have the affairs of BIG been conducted in an oppressive manner?...................................... 19
Conclusion......................................................................................................................................... 23
HER HONOUR:
Introduction
Dr Arhanghelschi and four of the defendants[1] are radiologists and they conduct a radiology practice in Ballarat. The defendant doctors wish to part company with Dr Arhanghelschi. Initially, Dr Arhanghelschi sought orders that would have seen him remain in the practice. However, towards the conclusion of his evidence, he acknowledged that it would be hard for the doctors to move forward together in the practice and he no longer wants to work with the other doctors. Consequently, the dispute now concerns how much Dr Arhanghelschi should be paid once he leaves. In part, that turns on first, whether the steps that were taken to force Dr Arhanghelschi to leave the practice were permissible under the terms of the contractual arrangements between the parties[2] and secondly, whether those steps constitute grounds upon which the Court may make orders under the oppression provisions, ss 232 and 233 of the Corporations Act 2001 (Cth), for the purchase of Dr Arhanghelschi’s interests.
[1]Dr Richard Milne Ussher, Dr Arthur David McKenna, Dr Paul Fred Walker, Dr Ian Alasdair Revfem.
[2]The relevant provision is clause 6.2(c) of a unitholders deed, see [5] below. At trial, the plaintiffs abandoned an argument that the defendants had exercised their powers capriciously or for an ulterior purpose. Further, the plaintiffs did not pursue at trial allegations included in their amended statement of claim that other than Dr Arhanghelschi, the directors of BIG as trustee of the Trust had breached their statutory, common law and fiduciary obligations as directors and trustees, and that there had been a breach of other provisions of the unitholders deed in addition to an alleged breach of clause 6.2. During the course of the trial, the plaintiffs amended their statement of claim to include a claim for repudiation of the unitholders deed.
For the reasons which follow, I have determined both of those matters in favour of the defendants.
The Radiology Business and Structure
In 2009, Ballarat Health Services (‘BHS’) invited tenders for the provision of radiology services to it. Dr Arhanghelschi was approached by Dr Ian Revfem to see if he was interested in being part of a team to lodge a response to the tender. Dr Arhanghelschi took up this opportunity and on 21 July 2009 he and Dr Revfem met all day with Dr Ussher and Dr Walker to discuss the tender. Many topics were discussed at the meeting including manpower, the type of services that would be included in the tender, remuneration and growth plans. The minutes of the meeting record under the heading ‘Partnership’ the following:
·Discussion regarding formation of partnership
·Will seek advice regarding structure, decision making
·Agreed to attach a nominal value to each partners share in the business
·Will seek advice regarding business structure
At the end of July 2009, the doctors submitted a tender through the company that they established, Base Imaging Group Pty Ltd (‘BIG’). Each of the doctors is a shareholder and director of BIG. [3] BIG’s tender was successful and, in March 2010, it entered into a contract to provide all radiology services required by BHS (‘BHS contract’). The term of the BHS contract is until 30 June 2015, and there is provision for that initial term to be extended until 30 June 2025. One of the requirements under the BHS contract is that an interventional radiologist be on-site at the Ballarat Base Hospital three days a week and on call 24 hours a day, seven days a week. Only Dr Arhanghelschi and Dr Ussher are interventional radiologists. In addition, to providing radiology services under the BHS contract, each of the five doctors held a radiology position at BHS.
[3]Dr McKenna was not a director or shareholder at the time of incorporation. He joined the practice sometime after the tender was submitted.
In June 2010, a unit trust was established called the Base Imaging Group Unit Trust (‘Trust’). BIG is the trustee of the Trust and performs its obligations under the BHS contract in that capacity. The trustee of the family trust of each doctor holds 20 per cent of the units in the Trust.[4] Cladwyn Pty Ltd is the trustee of Dr Arhanghelschi’s family trust. The relationship between the unitholders in the Trust is governed by a deed of July 2011 (‘Unitholders Deed’). Key to the dispute is clause 6.2 which reads as follows:
[4] Fortune Images Pty Ltd (the trustee of Dr Walker’s family trust); Tuft Investments Pty Ltd (the trustee of Dr Ussher‘s family trust); Meaghan Liddle (the trustee of Dr Ian Revfem’s family trust); McMurphy Pty Ltd (the trustee of Dr McKenna’s family trust); and Cladwyn Pty Ltd (the trustee of Dr Arhanghelschi‘s family trust). All of the doctors and trustees are parties in the proceeding.
Upon:
(a)the death or disablement of a Unitholder’s Associated Doctor;
(b)a Unitholder or its Associated Doctor giving written notice to the Company that either of them wish to cease to be involved with the Business;
(c)a majority of Unitholders giving written notice to a Unitholder that they wish the Unitholder and its Associated Doctor to cease to be involved with the Business;
(d)an Event of Default occurring in respect of a Unitholder,
the continuing Unitholders may, in their discretion:
(1)procure the Trustee to redeem, cancel or purchase the Unitholder’s Units;
(2)procure the Trustee to offer the Unitholder’s Units to the continuing Unitholders in proportion to their Unitholdings; or
(3)procure the Trustee to offer the Unitholder’s Units to an incoming Unitholder.[5]
[5]Dr Arhanghelschi is the ‘Associated Doctor’ of Cladwyn.
For the purposes of this proceeding, the ‘Business’ is the business of providing the radiology services under the BHS contract. Once clause 6.2 is activated, the outgoing unitholder must, on request, provide to BIG its Trust unit certificates, BIG share certificates and transfers of each together with the written resignation of the relevant doctor from his position as a director of BIG and his position with BHS.[6] The price to be paid to the outgoing unitholder and shareholder is $1 for each unit and share.[7]
[6]Clause 6.5.
[7]Clauses 6.3(a), 6.4.
The Unitholders Deed was prepared by Freehills.[8] During the course of that deed being finalised, the doctors received an email from Freehills with a draft form of the document. In part of the email, Freehills said:
[8]Now Herbert Smith Freehills.
Key points
As discussed, the key principle is that decision making by the directors will occur by majority rule.
What this means in practice is that a majority of directors could authorise BIG to pursue matters such as:
·new business including a new contract at Horsham, renewal of health service contracts and major variations of those contracts;
·borrowing from banks, assuming the bank would lend without the need for security from unitholders;
·sale of business or purchase of business; and
·admission of new doctors and the expulsion of existing doctors.
Are you comfortable that all of the above items could be determined by majority? Another approach is to specify a 75% majority, which is obviously less than unanimity and prevents one person from stymying a major decision. However, it is a higher test than 50.1%. In particular, should the threshold for expulsion be set at the higher rate?
In a subsequent email to the other doctors, Dr Arhanghelschi made some suggestions about the draft that had been attached to Freehills’ email:
My suggestions are as follows:
- detailed clause for conflict resolution between directors/unitholders
- outline the circumstances for dismissal of a unitholder (at the moment it is majority rules with no reason that has to be given); an ousted director under current terms would also be restricted from trading locally; note that a unitholder may be removed for an event of default occuring [sic] but there is no procedure for an independent arbiter to determine whether a true breach has been made or provide a disupute [sic] resolution process (ie back to 1st point)
- do we need to consider that certain decisions require more than just majority rule, and how do we define these decisions, and what degree of “majority” do we need (?60%, ?70%, etc)
- clause to outline what happens if one of the unitholders becomes disabled physically or mentally (what do we do if somone [sic] dies, becomes permanently disabled and can not work, becomes insane, etc.)
The most senior of the doctors, Dr Walker, responded:
I’m happy for conflict resolution to be detailed but one should consider what the future of any group holds if conflict requires any form of resolution other than consciences.
It is my very strong position that majority is just that, meaning over 50%, with David [McKenna] joining next month this would mean a three to two vote would be more than 50% actually 60%.
I am happy for independent arbitration re breaches with the party who ends up on the wrong side paying the arbitrator so long as the process is not drawn out, say one month as a maximum….
I can’t stress enough that once these mechanisms become necessary the future of the group as a whole is in great peril.
The Unitholders Deed includes a dispute resolution procedure and restraint of trade provisions aimed at preventing activity competing with the Business.[9] At its widest as written, the restraint would apply within a 50km radius of Ballarat[10] for two years[11] after a doctor leaves the practice (whether voluntarily or not).[12]
[9]Clause 5.1 is headed ‘Commitment to Business’ and reads:
(a)The Unitholders agree that the Trust will be the vehicle through which the Unitholders operate the Business.
(b)Accordingly, each Unitholder must not, and must procure that its Associated Doctor and Affiliates will not, during the Restricted Period do, or attempt to do any of the following within the Restricted Area:
(1) No competing business directly or indirectly carry on or otherwise have an interest in, or be engaged, involved, concerned with or interested in any business, activity or operation that is the same as or substantially similar to or that competes with the Business (including by providing the same or similar products or services). (2) No poaching customers or
clients
solicit or persuade any person who the Unitholder is aware is a customer or client of the Business, to cease doing such business with the Business or reduce the amount of business that the customer or client would normally do or otherwise have done with the Business. (3) No poaching employees solicit, entice or persuade, or attempt to solicit, entice or persuade any person who the Unitholder is aware is an Associated Doctor or an employee of the Trust to terminate his or her involvement with the Business. (4) No representation represent itself as being in any way connected with, interested in or associated with the Business except that he is or was as a Unitholder or Associated Doctor (as appropriate). Clause 5.4 provides that each unitholder acknowledges that the restrictions are reasonable in the circumstances, necessary to protect the goodwill of the Business, intended to operate to the maximum possible extent and damages may be an inadequate remedy with each unitholder entitled to obtain injunctive and other relief.
[10]The ‘Restricted Territory’.
[11]The ‘Restricted Period’.
[12]Clause 5.1 of the Unitholders Deed requires a unitholder (such as Cladwyn) to procure that its ‘Associated Doctor’ (Dr Arhanghelschi) comply with the restraint of trade provision.
Before Cladwyn entered into the Unitholders Deed, Dr Arhanghelschi read the document and obtained independent legal advice.
Although the radiology business was conducted through the unit trust structure described above, the doctors held what they called ‘partners’ meetings’, referred to one another as ‘partners’ and portrayed their relationship as being one of partners when dealing with third parties.
Steps taken by the Majority Unitholders and BIG
On 4 March 2013, three of the unitholders[13] wrote to Cladwyn stating that as a majority of the unitholders, they gave Cladwyn notice under clause 6.2(c) of the Unitholders Deed that they wished Cladwyn (as unitholder) and Dr Arhanghelschi (as the Associated Doctor) to cease to be involved in the Business with immediate effect. The letter went on to state that they would provide notice to BIG as trustee of the Trust requiring it:
[13]Murphy Pty Ltd, Tuft Investments Pty Ltd and Meaghan Liddle (acting through her agent, Dr Revfem).
(a)to redeem, cancel or purchase Cladwyn’s units for $1 per unit; and
(b)to request that Cladwyn deliver to BIG the unit certificates, executed transfers for the units, a written resignation from Dr Arhanghelschi as director of BIG and from his position with BHS, and the share certificates and executed share transfer form for all shares in BIG held by Dr Arhanghelschi.
The letter concluded with the following:
There is no requirement for any notice period under the Unitholders Deed. With effect from receipt of the request from the Trustee referred to above, we expect Cladwyn and Dan Arhanghelschi will cease to be involved in all respects in relation to the Business. We will ensure that clinics after the time of the request are serviced by other clinicians and assist to manage your exit from the Ballarat Base Hospital.
As a gesture of goodwill, we propose to request that the Trustee make a payment equal to the monthly distribution to which Cladwyn would have been entitled if … Cladwyn and Dan Arhanghelschi had continued to be involved in the Business until 31 March 2013. This distribution will be paid in arrears in accordance with the ordinary distribution arrangements, on or around 15 April 2013. Ongoing employment may be considered subject to further negotiation.
Cladwyn’s solicitor responded by letter the following day, stating that the notice was incapable of effecting the removal of Dr Arhanghelschi and that he would continue to perform his regular rostered duties.
On 7 March 2013, the unitholders, other than Cladwyn, (the ‘Majority Unitholders’) gave notice to BIG requiring it to do the things that had been foreshadowed in the letter of 4 March 2013. They requested that BIG convene a meeting of its directors to ensure that matters which required the approval of the directors could be determined.
On the same day, Dr Ussher gave notice of a meeting of directors to be held on 15 March 2013. The notice described the purpose of the meeting to be to consider and, if thought fit, to pass all necessary resolutions by simple majority of the directors in relation to a number of matters, including the redemption and cancellation of the units held by Cladwyn for $1 per unit, requesting Cladwyn to procure delivery to BIG of all required documentation, and requesting that Dr Arhanghelschi immediately cease performing services for the Trust and stop attending the business premises.
The meeting of directors of BIG proceeded on 15 March 2013. All of the doctors, including Dr Arhanghelschi, attended the meeting.[14] The 7 March 2013 notice from the Majority Unitholders was tabled. Among other things, the directors resolved that Cladwyn be requested to deliver to BIG the original unit certificate and executed unit transfer in favour of BIG and signed resignations from Dr Arhanghelschi as a director of BIG and from his position with BHS.
[14]Dr Walker attended by telephone.
On 19 March 2013, BIG delivered to Cladwyn a unit transfer form for execution and resignation letters to be signed by Dr Arhanghelschi. BIG requested that the documents be signed and returned by no later than 20 March 2013. Those documents have not been provided.[15]
[15]Until determination of the proceeding an interlocutory injunction is in place restraining the defendants from redeeming or cancelling any of the units of Cladwyn in the Trust.
The Majority Unitholders gave no reason for the action that they took in relation to Cladwyn and Dr Arhanghelschi. However, in the course of the trial, Dr Revfem gave evidence of a number of concerns that he had. They were that:
· Dr Arhanghelschi is unapproachable;
· Dr Arhanghelschi takes long lunches, leaves early, and arrives late to work;
· he (Dr Revfem) perceived and felt that Dr Arhanghelschi was and is less committed to the success of BIG than the other doctors;
· there were unresolved issues resulting from Dr Arhanghelschi having offered in March of 2011 to provide interventional radiology services at St John of God Hospital in Ballarat; and
· Dr Arhanghelschi was working for the Bendigo Radiology Group (‘BRG’).
I will describe a little of the background to these last two matters.
In about March 2011, Dr Arhanghelschi offered to provide interventional radiology services at St John of God Hospital in Ballarat. He did not think that this would cause any difficulties with BHS. However, BHS considered that the role placed Dr Arhanghelschi in a position of conflict of interest. Dr Arhanghelschi did not take up a position at St John of God and obtained an email from that hospital acknowledging that he could not work there. This satisfied BHS and in about mid‑April 2011, BHS confirmed that the matter was resolved with no further action being required.
A summary of the background to Dr Arhanghelschi working for BRG is as follows. Some of the doctors working in the Ballarat practice also conduct a radiology practice in Bendigo. They refer to it as the High Street practice. Dr Arhanghelschi is not involved with the High Street practice although he was invited to join that practice in early 2010, but declined to do so. At the time he (but it seems not the other doctors) was subject to a restraint of trade clause that prevented him from working in Bendigo. He also wanted to devote his full attention to BHS. However, by late December 2012, the position had changed. The Bendigo restraint of trade clause no longer operated against Dr Arhanghelschi, and the doctors had determined by majority that they would work three (rather than four) days a week in the Ballarat practice. Dr Arhanghelschi wanted to do more than three days’ work. On 7 December 2012, he began working one day a week at BRG. He did not tell the other doctors that he had taken on this position. On 19 December 2012, Dr Ussher told Dr Arhanghelschi that the High Street practice had submitted a tender for a contract to provide radiology services to Bendigo Base Hospital. BRG also tendered for that work and it was the successful tenderer.
Senior counsel for the defendants accepted that the concerns that Dr Revfem gave evidence of were based on Dr Revfem’s perception rather than fact.
Did the Majority Unitholders breach clause 6.2 of the Unitholders Deed?
Cladwyn submitted that under clause 6.2(c), the Majority Unitholders are required to act rationally, reasonably and fairly considering the interests of the parties in:
(a)giving notice that they wish another unitholder (in this case, Cladwyn) and its Associated Doctor (Dr Arhanghelschi) to cease to be involved with the Business; and
(b)exercising their discretion to procure BIG (as trustee) to redeem or cancel the unitholder’s units.
First, Cladwyn submitted that this is required on the proper construction of the words used in clause 6.2. Secondly, Cladwyn contended that it was required because there is an obligation of good faith and reasonableness to be implied into the Unitholders Deed.
Cladwyn submitted that the Majority Unitholders had breached the obligation of good faith. The nub of its submissions relating to breach was that the Majority Unitholders had acted without giving reasons and, when reasons were given, they were apparently based on nothing more than the perceptions to which Dr Revfem had referred in his evidence with his concerns never having been raised with Dr Arhanghelschi. Further, Cladwyn contended that the Majority Unitholders had failed to consider the consequences of their actions for BIG[16] and for it as their co-venturer and fellow unitholder. Cladwyn claimed damages for wrongful repudiation of the Unitholders Deed.
[16]Cladwyn contended that no contingencies were made for the fact that only one interventional radiologist would be available upon Dr Arhanghelschi’s departure leaving only Dr Ussher to be on call at all times; the ownership of BIG would change such that, without the prior written approval of BHS, BHS may be entitled to terminate the BHS contract; BIG will be deprived of a highly skilled consultant in Dr Arhanghelschi.
I will deal first with whether there is an obligation of good faith and reasonableness.
In relation to the proper construction of the clause, Cladwyn observed that the ‘discretion’ in clause 6.2 is not qualified by any epithet such as ‘sole,’ ‘exclusive’ or ‘unfettered’. Further, Cladwyn submitted that the clause must be interpreted in the context of the whole of the agreement and, in particular, taking into account the restraint of trade clauses[17] and the following clauses:
3.9 Exercise of Powers
Each Unitholder, acknowledging its commitment to the success of the Business, agrees to take all reasonable steps that are within its power and are necessary to procure that its voting rights as a Unitholder, its voting rights as Shareholder and the voting rights of a Director nominated by it to the Board, are exercised in a manner, and that it and they otherwise act, so as to ensure that:
(a)the Company acts in conformity with this deed and, so far as it is not inconsistent with this deed, the Trust Deed;
(b)the Directors nominated by it do not act inconsistently with this deed and, so far as it is not inconsistent with this deed, the Trust Deed; and
(c)the Company conducts the Business in a proper and efficient manner.
[17]See [10] above and footnotes 9, 10 and 11.
5.6 Duty to Business
(c)Each Associated Doctor must be honest and at all times give the Unitholders full information and truthful explanations of all matters relating to the affairs of the Business, and afford them every assistance in his or her power in carrying on the Business for the advantage of the Unitholders (but nothing in this clause 5.6 requires the waiver of any legal professional privilege).
Cladwyn submitted that the obligations imposed by clause 3.9 are powerful duties. It contended that the obligations under that clause, clause 5.6(c), the restraint of trade clauses (including the acknowledgment that the restraints are reasonable and necessary to protect the goodwill of the Business and that damages may be an inadequate remedy to protect the interests of the Business) and the agreement of the unitholders that the Trust would be the vehicle through which they would operate the Business[18] were all closely akin to the obligations shared between partners in a partnership. Having regard to those provisions, Cladwyn contended that clause 6.2 should only be exercised if all reasonable steps have been taken:
(a)to ensure that BIG conducts the Business in a proper and efficient manner;
(b)consistently with the Unitholders Deed; and
(c)to carry on the Business for the advantage of the unitholders.
[18]Clause 5.1(a).
Cladwyn contended that the decision to expel Dr Arhanghelschi was not taken after ‘all reasonable steps’ because steps had not been taken to ascertain the accuracy of the information upon which the defendants were acting, specifically whether in fact:
(a)Dr Arhanghelschi was not punctual;
(b)he was not at the hospital when Dr Revfem believed he should have been;
(c)he had breached the BHS contract by offering to work at St John of God Hospital;
(d)anyone had approached him and appraised him as required by the Unitholders Deed;
(e)he had any obligation to disclose whether he worked elsewhere on non‑rostered days.
The Unitholders Deed must be construed using an objective approach to ascertain the intention of the parties as they have expressed it (not their subjective intention).[19] As Mason J said in the oft quoted passage from Codelfa Construction Pty Ltd v State Rail Authority of NSW:[20]
The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.[21]
[19]Toll (FGCT) Pty Limited v Alphapharm Pty Limited and Ors (2004) 219 CLR 165 at 179; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462; Byrnes v Kendle (2011) 243 CLR 253, 284 [98]. See also Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 and Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604.
[20](1982) 149 CLR 337.
[21]Ibid 352.
The inclusion of clause 6.2 shows that the parties turned their minds to how they would part ways in all circumstances: whether through the death or disablement of a doctor, the unitholder and Associated Doctor no longer wishing to be involved in the business, where the majority no longer wished to work with one of the other unitholders, or where there was default by a unitholder. In my opinion, the words in the clause are clear and unambiguous and deal with all eventualities. Taking them in the context of the whole of the agreement, the words mean what they say. Those words do not require any reason to be given if a majority of the unitholders determines that they no longer wish another unitholder and its Associated Doctor to be involved with the Business. Once they have given such a notice, the Majority Unitholders may exercise their discretion to call on BIG to procure the cancellation or redemption of the unitholder’s units.
The lack of an adjective, such as ’absolute,’ to describe the discretion does not affect how the discretion might be exercised. Rather, if the discretionary right was to be qualified in some way, then words of limitation might have been used.
Clause 3.9 does impose obligations on the unitholders but it does not qualify how the rights in clause 6.2 are to be exercised. Clause 3.9 simply requires the unitholders to ensure that BIG conducts the Business in a proper and efficient manner and in conformity with the Unitholders Deed. That does not lead to the conclusion that words such as ‘rationally, reasonably and fairly considering the interests of the parties’ ought be read into clause 6.2.
As to clause 5.6(c), that provision would apply to the Associated Doctors if they were parties to the Unitholders Deed (which they are not). There is no express obligation of truth and honesty imposed on the unitholders either generally in the exercise of rights under the Unitholders Deed or specifically under clause 6.2. Again, it does not lead me to conclude that the proper construction of the clause is one that includes the words contended for by Cladwyn.
I will next consider whether a duty to act in good faith and reasonably ought be implied.
Cladwyn submitted that the implied obligations stem from the express terms of the contract and how the parties regarded themselves as equal partners, the nature of the relationship being that of a group of professional expert medical practitioners carrying on a radiology practice providing an essential service to a tertiary level hospital with the business having significant goodwill.
There has been much written (both in this country and elsewhere) about whether in general or in particular classes of commercial contracts there is an implied term of good faith and reasonableness.[22] Cladwyn relied on a number of Australian authorities[23] and the recent English decision of Yam Seng Pte Limited v International Trade Corporation Limited.[24]
[22]See, for example, Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228; Tote Tasmania Pty Ltd v Garrott (2008) 17 Tas R 320; Chief Justice Marilyn Warren, ‘Good Faith: Where Are We At?’ (2010) 34 Melbourne University Law Review 344. The existence and scope of any good faith doctrine has not yet been determined by the High Court. In Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45, 63 [40] the plurality observed that whilst those issues are important, that case was an inappropriate occasion to consider them.
[23]Among them, Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 and Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558.
[24][2013] EWHC 111 (QB). The case concerned termination of a distribution agreement. The plaintiff claimed that there was an implied term of the agreement that the parties would deal with each other in good faith. Leggatt J concluded that the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced. See in particular the passages at [153], [141]–[142], [144].
However, in this State, Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL,[25] (‘Esso’) is the leading authority. In that case, Buchanan JA (with whom Warren CJ and Osborn AJA agreed) noted his reluctance to imply into all commercial contracts a general term of good faith and fair dealing. His Honour said:
[25][2005] VSCA 228.
Esso’s case was advanced on the basis that an obligation of good faith qualified the power or right of assignment conferred by article 24.01(a), so that “cynical resort to the black letter” of the contractual provision was necessarily a breach of contract. At trial Esso contended that the linking of SPP and SPV as related corporations for the sole purpose of denying Esso the power of vetoing the assignment of SPP’s interest in the joint venture displayed a want of good faith. In my view the abandonment of that approach was correct. It is difficult to discern a want of good faith in the exercise of a power which can serve only the interests of the party upon whom the power is conferred. The ostensible purpose of the exercise of such a power will almost invariably be its true purpose. The power may be contrasted with a power expressed in general terms in a contract, such as a partnership agreement, which is concerned with co-operation to produce a result beneficial to all the parties to the agreement.
In Metropolitan Life Insurance Co. v. RPR Nabisco Inc. Judge Walker said:
‘In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation which would be inconsistent with other terms of the contractual relationship .... Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract’s performance or to withhold its benefits .... As a result, it thus ensures that parties to a contract perform the substantive, bargained-for terms of their agreement.’
If a contractual right or power, which is intended to advance only the interests of the party on whom it is conferred, is fettered by an implied obligation of good faith, resort to the duty may become an obstacle to the promotion of that party’s legitimate interests.
I am reluctant to conclude that commercial contracts are a class of contracts carrying an implied term of good faith as a legal incident, so that an obligation of good faith applies indiscriminately to all the rights and power conferred by a commercial contract. It may, however, be appropriate in a particular case to import such an obligation to protect a vulnerable party from exploitive conduct which subverts the original purpose for which the contract was made. Implication in this fashion is perhaps ad hoc implication meeting the tests laid down in BP Refinery (Westernport) Pty. Ltd. v. Shire of Hastings, rather than implication as a matter of law creating a legal incident of contracts of a certain type.[26]
[26]Ibid [23]–[25] [Footnotes omitted.] For a term to be implied into a contract the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; and (5) it must not contradict any express term of the contract: BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, 283.
In a similar vein is the later case of Tote Tasmania Pty Ltd v Garrott,[27] in which Tennent J, Buchanan and Mandie AJJ said:
In our opinion, an implied term of good faith is not a necessary legal incident of all commercial contracts. The obligation of good faith does not apply indiscriminately to all the rights and powers conferred by a commercial contract. Whether a term requiring the exercise of good faith is to be implied depends upon the principles of ad hoc implication.
Whether a power conferred upon a party to a contract is fettered by a duty of good faith depends upon the terms in which the power is expressed. Without purporting to compile an exhaustive list, there are at least three types of contractual powers which suggest different results. One is a provision conferring a power in an agreement, such as a partnership agreement, which is concerned with co-operation between the parties to produce a result which benefits all the parties to the contract. In such an agreement, a court might readily imply an obligation to act in good faith in that the party upon whom the power is conferred must have regard to the interest of all the parties to the agreement. Another type of provision is one which confers a power if the donee of the power considers that a certain state of affairs or condition exists. In this case, a court may well hold that the power can only be exercised by an honest decision that the state of affairs or condition does exist, but the honest exercise of the power will not be reviewed by the court. Yet another type of provision is one conferring a power that is quite unqualified. Here, a court may conclude that the power can legitimately be exercised in the interests of the party upon whom it is conferred and that party is to be the sole judge of where its interests lie and may exercise the power for any reason it sees fit.[28]
[27](2008) 17 Tas R 320.
[28]Ibid [16]–[17]. See also Specialist Diagnostic Services Pty Ltd (formerly Symbion Pathology Pty Ltd) v Healthscope Ltd [2012] VSCA 175 [86]–[87].
As Esso and Tote Tasmania make clear, what the Court must do is consider whether any obligation of good faith applies in the exercise of the particular power in the contract in question. Adopting that approach, in my opinion, no obligation of good faith (to the effect that the powers under clause 6.2(c) must only be exercised ‘fairly, reasonably and rationally’) is to be implied into the Unitholders Deed. Clause 6.2 is not a clause about how the parties would conduct the Business together. Rather, it deals with the situation where they are to part ways — whether voluntarily or not; where there has been a default by a unitholder and where there has not. So, having included clause 6.2 in the terms in which it is expressed, the parties must be taken to have given consideration to the basis upon which a unitholder and its Associated Doctor might be required to leave the Business if they simply did not all wish to continue working together. In this regard, the provision is clear in its intent that in that event a majority of unitholders may act legitimately in their own self‑interest and without disclosing any reason for doing so. It is the type of clause described by Tennent J, Buchanan and Mandie AJJ in Tote Tasmania at the conclusion of the passage set out above. In effect it allows a majority of unitholders to say to another unitholder who is not in default, “We have lost faith in you and we just don’t want to work with you any more. We want you to leave”. If an obligation of good faith in the form contended for by Cladwyn were imposed, it would impair this right and would unjustifiably erode the broad power that the unitholders chose to give to the majority. The parties expressly stated that no fiduciary obligation was imposed[29] despite the fact that they considered that they were equal partners. That is also an indicator that no obligation of good faith in the exercise of clause 6.2(c) is to be implied. Further, Dr Arhanghelschi and Cladwyn do not need the sort of protection that might found any basis for an obligation of good faith to be imposed. They were certainly not vulnerable at the time that the agreement was made. Put simply, the implied term contended for by Cladwyn does not satisfy the test laid down in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council.[30]
[29]Clause 13.11(b).
[30](1977) 180 CLR 266, 283. (See footnote 26 above.)
For completeness, I note that the obligation sought to be imposed by Cladwyn goes beyond the general rule espoused in Mackay v Dick[31] that:
where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.[32]
[31](1881) 6 App Cas 251.
[32]Ibid 263. See the reference to this principle by Warren CJ in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228 [3].
Here, the parties have expressly provided that in certain circumstances one of the parties may be removed at the behest of the majority. It would be incongruous if an obligation of co-operation were then to be imposed under clause 6.2(c). It is simply not the type of clause that envisages the co-operation of all parties and stands in contrast, for example, to the type of provision that was considered in Electronic Industries Ltd v David Jones Ltd.[33]In that case, the plaintiff contracted to install televisions in David Jones stores in July 1949. David Jones requested that the installation be postponed and ultimately no televisions were installed despite the plaintiff asking when it would suit David Jones to proceed. The plaintiff sued David Jones for breach of contract. The High Court applied the general rule of co-operation described in Mackay v Dick and held that the plaintiff was entitled to require David Jones to make its store available so that the plaintiff could perform its part of the bargain at some proper and reasonable time.[34]
[33](1954) 91 CLR 288.
[34]Ibid 298. See also Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, 358; Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104, 123–125.
In any event, I am not persuaded that the actions of the Majority Unitholders were unreasonable, irrational or unfair in the circumstances. As I have already observed, in my view, the Majority Unitholders were entitled to act in their own self-interest when taking steps under clause 6.2(c). It was not irrational, unfair nor unreasonable for them to take the steps that they did based on a perception that Dr Arhanghelschi was less committed to the Business than the other doctors. This is so even if there was no factual basis for the perception. The clause clearly anticipates that the majority may act to exclude another unitholder and having provided for this self‑interest right, there can be no breach of any obligation of good faith by the defendants having taken the steps that they have.[35] This is not a case where there has been bad faith nor one where the majority have acted for an improper or ulterior purpose. Nor did the majority act capriciously or arbitrarily without what they believed was a good reason based on their own self-interest.
[35]See South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611, 696 [394] and the cases cited in that paragraph.
Have the affairs of BIG been conducted in an oppressive manner?
Dr Arhanghelschi submitted that irrespective of whether there had been a breach of clause 6.2 by the Majority Unitholders, the actions taken by the defendants to exclude him as a member and director of BIG and Cladwyn as a unitholder of the Trust[36] constituted oppressive conduct within the meaning of s 232 of the Corporations Act such that a buy‑out order should be made under s 233 in respect of their interests in the Trust and BIG.
[36]The letters of 4 and 7 March 2013 (see [13] and[15] above), the 15 March 2013 resolutions (see [17] above) and the 19 March 2013 request (see [18] above).
What must be considered is whether BIG’s affairs (which includes the transactions and dealings of BIG as trustee of the Trust and matters concerned with the rights of the unitholders under the Trust[37]) or an act or omission of BIG, are:
(a)contrary to the interests of the shareholders (that is all the doctors) as a whole; or
(b)oppressive to, unfairly prejudicial to, or unfairly discriminatory against Dr Arhanghelschi, in his capacity as a shareholder.[38]
[37]Corporations Act2001(Cth) s 53(a), (b).
[38]Dr Arhanghelschi did not claim that the conduct affected him in some other capacity which might have formed the basis for relief under ss 232 and 233.
Dr Arhanghelschi contended that even if conduct does accord with a company’s constitution or other guiding document it can still be ‘unfairly’ prejudicial or ’unfairly’ discriminatory against a member. According to Dr Arhanghelschi, that is the position in this case. In essence, he says that he has been excluded from management of the Business, he is subject to the restraint of trade provisions, he has lost the opportunity to earn an income from the Business and BHS and the payment to be made to Cladwyn for its units and him for his shares does not recognise the true value of the Business.
The defendants contended that the only acts taken by BIG were to act on the request made by the Majority Unitholders by convening a meeting of directors, passing the resolutions and then making the requests of Cladwyn to provide the unit certificates and letters of resignation of Dr Arhanghelschi from his position with BHS and as a director of BIG. It contended that those acts could not constitute conduct within the scope of s 232. All that BIG was doing was acting in accordance with the terms of the Unitholders Deed and as the parties had determined that they would regulate their relationship primarily through that agreement, there could be no commercial unfairness in BIG complying with its terms. In circumstances where the unitholders had the right to appoint the directors of BIG and chose to set out in the Unitholders Deed various provisions about how the board of directors would operate,[39] the defendants submitted there can be no complaint if the directors act in accordance with clause 6. In this regard, the Unitholders Deed provided that that deed would prevail to the extent of any inconsistency between it and BIG’s constitution or the Trust deed.[40] The Unitholders Deed also required that the unitholders procure that the Constitution and Trust deed were consistent with it. Further, the defendants pointed to clause 3.9 which obliges the unitholders to ensure that BIG acts in conformity with the Unitholders Deed.[41]
[39]Clause 3 which is headed ‘Board of directors’ and, among other things, deals with the appointment and removal of directors, the quorum for a directors’ meeting, the election of a chairman, the notice to be given for directors’ meetings, the frequency and conduct of directors’ meetings.
[40]Clause 2.4(b).
[41]See [28] above.
The defendants also submitted that the earlier actions of the Majority Unitholders under clause 6.2 (the giving of notice to Cladwyn and the request made to BIG) were acts which were extraneous to BIG.
As a shareholder in BIG, Dr Arhanghelschi has standing to bring a claim for relief under s 233.[42] Whether conduct is ‘oppressive to, unfairly prejudicial to or unfairly discriminatory against’ a shareholder within the meaning of s 232 is assessed objectively through the eyes of a commercial bystander.[43] If the conduct is so unfair that reasonable directors would not have thought it fair, then relief will be granted.[44] The section is aimed at ‘commercial unfairness’ which must be judged in the context of the particular relationship which is in issue.[45]
[42]Corporations Act s 234(a).
[43]Joint v Stephens [2008] VSCA 210; Aqua-Max Pty Ltd and Others v MT Associates Pty Ltd and Others (2001) 3 VR 473; Wayde v NSW Rugby League Ltd (1985) 180 CLR 459; Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692.
[44]Ibid.
[45]Joint v Stephens [2008] VSCA 210 [134]–[137].
Here, in my opinion, there is nothing commercially unfair to Dr Arhanghelschi. This is not a case where equitable considerations have a role to play. [46] Whilst the doctors referred to themselves as partners, they chose to regulate their relationship primarily through the terms of the Unitholders Deed. That is a distinguishing feature of this case.[47]
[46]O’Neill v Phillips [1999] 1 WLR 1092.
[47]Compare Vigliaroni v CPS Investment Holdings Pty Ltd(2009) 74 ACSR 282 and Wain & Ors v Drapac & Ors [2012] VSC 156 in which there were no unitholders’ agreements.
In particular, Dr Arhanghelschi chose (on his own behalf and on behalf of Cladwyn) to enter into a business that was operated through a unit trust structure where the rights and obligations of the parties were governed by the Unitholders Deed. That deed specifically provided for the type of situation that has arisen where some of the unitholders no longer wish to have Dr Arhanghelschi involved in the practice. The agreement reached between the parties and reflected in clause 6.2(c) was that such decisions were to be by majority. Dr Arhanghelschi knew this. He read the Unitholders Deed before he executed it on behalf of Cladwyn. He had independent legal advice about it. He is an intelligent and educated man. He was not in a position of disadvantage vis-à-vis the other doctors. Nor was he under any undue pressure. Nor was he misled. Before the agreement was finalised, he summarised the effect of what became clause 6.2(c) accurately when he said that the majority would rule without any reason having to be given with restraint of trade provisions operating against the departing doctor.[48] Although he may have been comforted and reassured by what Dr Walker said about the future of the group in the event that they needed to resort to dispute resolution procedures, he can have been in no doubt after Dr Walker’s email that the majority would govern.[49]
[48]See [8] above.
[49]See [9] above.
The parties also had the foresight to provide that only a nominal amount of $1 per unit was to be paid for a unitholder’s interests if it was to have its units redeemed in such a situation. Indeed, clause 6.2 prescribes that nominal payment in all situations where a doctor leaves the business (whether voluntarily or not). It matters not whether the doctor no longer takes part in the business because of death, disablement, retirement, default on the part of the unitholder or because the other doctors no longer wish him to be involved. In all of those situations, the amount to be paid to the outgoing doctor would be minimal. Dr Arhanghelschi knew that the business model was such that an incoming ‘partner’ would pay nothing. Having read the agreement and obtained legal advice, it should also have been clear to him that an outgoing ‘partner’ would not receive any payment.
When considered objectively and in context, there is nothing commercially unfair in the events that have transpired. At the outset, and before there was any dispute between them, the doctors provided for how they would separate if they did not all wish to continue working together. All that has happened is that the majority has acted to implement the agreed method and, in accordance with its obligations under the Unitholders Deed, BIG has complied with the request of the Majority Unitholders and has asked Cladwyn to relinquish its units. In the circumstances I have described, I do not think that a commercial bystander would consider the steps taken by the Majority Unitholders unfair (on the assumption and for the purposes of the argument that that conduct is relevant). Moreover, I accept the defendants’ submission that a reasonable director, having full knowledge of the terms of the Unitholders Deed, would not think that the conduct of BIG in convening the meeting of directors on 15 March 2013 and passing the resolutions that Cladwyn be requested to deliver up its unit certificates and be paid $3,000 for those units, were decisions which were unfair either to Cladwyn, or to Dr Arhanghelschi in his capacity as a member of BIG. I also agree with the defendants that nor would such a reasonable director consider as unfair a resolution to the effect that upon receipt of the units and an executed transfer of them, those units be cancelled or redeemed.
Conclusion
It follows, from what I have said, that the action taken by the Majority Unitholders was not in breach of clause 6.2(c) of the Unitholders Deed and there has been no wrongful repudiation. Nor are there grounds to grant relief under s 233 of the Corporations Act. Cladwyn was therefore required to procure that Dr Arhanghelschi resign as a director of BIG and from his position with BHS.[50] A request having been made by BIG,[51] Cladwyn was also required to deliver the unit certificates, a transfer and Dr Arhanghelschi’s letters of resignation.[52] It has failed to do so. There was no fraud, misrepresentation, mistake nor any other vitiating factor affecting the operation of the Unitholders Deed. Consequently, Cladwyn is bound by its terms and cannot now seek to avoid the consequences of having entered into the agreement.[53]
[50]Clause 6.3.
[51]See [18] above.
[52]Clause 6.5(a)(1)–(3).
[53]Equuscorp Pty Ltd v Glengallon Investments Pty Ltd (2004) 218 CLR 471, 483 [33]–[35].
I will hear the parties as to the form of orders to give effect to these reasons.
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