Epworth Foundation v Healthcare Imaging Services (Victoria) Pty Ltd

IN THE SUPREME COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT LIST B

No. 2021 of 2008

EPWORTH FOUNDATION	Plaintiff
and
HEALTHCARE IMAGING SERVICES (VICTORIA) PTY LTD (ACN 085 350 189)	Defendant

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JUDGE:	JUDD J
WHERE HELD:	Melbourne
DATE OF HEARING:	16-19, 23-26 February 2009, 2-3 March 2009
DATE OF JUDGMENT:	31 July 2009
CASE MAY BE CITED AS:	Epworth Foundation v Healthcare Imaging Services
MEDIUM NEUTRAL CITATION:	[2009] VSC 293

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CONTRACT – Services Agreement – construction – change in control of a party – termination for change in control - election to affirm – unequivocal conduct – delay - prejudice

CONTRACT – Estoppel by conduct– assumption concerning legal position – silence - duty to warn – unconscionable conduct

TRADE PRACTICES – conduct by silence – duty to warn – s 52 Trade practices Act 1974 (Cth) and s 9 Fair Trading Act 1999 (Vic)

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr R. Brett QC Mr P. Willis	Holding Redlich
For the Defendant	Mr G. Golvan QC Mr L. Hawas	Massey Bailey Cornwall Stodart

HIS HONOUR:

Introduction

Epworth Foundation operates the Epworth Hospital in Richmond. Prior to August 2002 Healthcare Imaging Services (Victoria) Pty Ltd (“Healthcare”) provided radiology services from premises at the hospital. The premises had been leased to Medig Pty Ltd some years earlier. In 1999 Healthcare acquired the business of Medig. It sought and obtained Epworth’s consent to an assignment of the leases.

Epworth consented to the assignment on condition that Healthcare enter into a service agreement, which was executed in August 2002. At that time Healthcare occupied three sites within the hospital from which it provided the services. The sites may be conveniently described as (1) the old MRI area; (2) the second floor area; and (3) the new MRI area. Healthcare had also been granted a licence to occupy 20 car parking spaces.

The leases and licence were never assigned. Instead, in February 2007, after years of negotiations, Epworth granted three new leases and a car park licence to Healthcare.

The service agreement expressly authorised Epworth to terminate for failure to remedy a material breach and upon a change in control of Healthcare without prior written consent. Upon termination by it, Epworth was entitled to call for a surrender of the leases as defined in the agreement. The leases specifically described in the agreement were those granted to Medig, which had never been assigned.

The ultimate owner of Healthcare was Symbion Health Ltd, whose shares were listed on the stock exchange. Until 2005 Symbion Health Ltd was known as Mayne Health Ltd. In early November 2007 Primary Health Care Ltd made a conditional offer to acquire all Symbion shares. By 13 February 2008 the majority of Symbion shareholders had accepted the offer and the offer became unconditional. A compulsory acquisition of the remaining shares was completed by 28 April 2008.

Epworth contended that the takeover of Symbion by Primary brought about a change in control of Healthcare. No consent to the change had been sought or obtained. On 7 May 2008 Epworth gave notice of termination to Healthcare. Epworth claimed that, as a consequence, it was entitled to call for a surrender of the 2007 leases and did so.

Healthcare challenged Epworth’s right to terminate the service agreement or call for a surrender of the leases. It alleged that there was no relevant change in control, but even if there was, the purported termination by Epworth did not require the surrender the 2007 leases. Healthcare also alleged that Epworth was precluded from exercising any right of termination it might otherwise have had because it had elected to affirm the service agreement, or was estopped from doing so. Healthcare counterclaimed for declarations, damages and other relief under the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1999 (Vic).

Background

In about 1992 Medig commenced providing radiology services to Epworth. In July 1994 Epworth and Medig executed a lease in respect of the old MRI area. The commencement date was 1 June 1992. The lease was to end on 31 May 2002 subject to two renewal options of five years.

In February 1996 Epworth leased the second floor area to Medig. The commencement date of that lease was 25 September 1995. There was an initial term of 10 years with two renewal options of five years. At about the same time, Epworth granted a licence to Medig to occupy 20 car park spaces for a term corresponding with the term of the second floor area lease. At some time in 1996 Medig occupied the new MRI area, adjacent to the old MRI area and commenced to pay rent. A draft lease was prepared but never executed.

In about early 1999 Healthcare acquired the business of Medig. Prior to completion of its acquisition Healthcare’s parent company wrote to Epworth seeking consent to an assignment of the leases and the car park licence. Mr Hogg, then chief executive of Epworth, responded by raising concerns about competition between Mayne Group Ltd, Healthcare’s ultimate owner, and Epworth. He requested further information to enable Epworth to assess the request. Epworth also made it clear that approval to an assignment was conditional on Healthcare entering into a service agreement. Epworth expressly reserved its rights under the leases to terminate for assignment without consent.

Healthcare provided the requested information and indicated its willingness to enter into a service agreement. In subsequent correspondence Epworth made it clear that the service agreement should “be directly linked to the lease agreement …”. Eventually Epworth approved the assignment and Healthcare completed its purchase of the diagnostic imaging business from Medig.

By letter dated 2 July 1999 Mr Hogg wrote to Mr Stonehouse at Medig informing him that Epworth required the preparation of the formal assignment of lease, cross-referenced to the service agreement then under negotiation. He said that the cross-referencing must create a situation where the leases were dependent on satisfactory performance under the service agreement.

By mid 2001 negotiations for the service agreement were well advanced. On 9 July 2001 Karen Owen, director of services at Epworth, wrote to Alan McCarthy, group general manager – imaging, at Mayne and enclosed the latest revision of a draft service agreement. She identified the need to clarify the hospital’s position concerning the inter-relationship between the service agreement and the leases.

Negotiations concerning the lease arrangements were slow and the proposed arrangements changed from time to time. By 10 December 2001 the parties seem to have abandoned the concept of assignments and were negotiating three new leases, each to terminate on 25 September 2005 with two five year options. It took nearly eight years from the time consent was first given to an assignment before the parties finally executed three new leases and a licence agreement.

The draft service agreement under negotiation in early 2002 included a definition of “Leases” which referred specifically to the leases granted to Medig and a proposed new lease for the new MRI area. By cl 8.1 of the draft service agreement Epworth was entitled to terminate for change in control. Under cl 8.3 it was proposed that if the service agreement was terminated by Epworth it may require Healthcare to “surrender the Leases (or all the Leases then current) …”.

The definition of “Leases” in the service agreement continued to attract attention during the negotiations over the service agreement because of some uncertainty as to whether Epworth would require new leases or an assignment of the existing leases. Mayne sought advice from its solicitors in relation to the definition of “Leases” in June and July 2002. Some redrafting of the definition was undertaken to include additional words at the conclusion of the description of each Medig lease. These extending words attracted a great deal of attention at trial. The words were, “and any further leases entered into pursuant to that lease”.

On 4 July 2002 John Priestley, group general manager - corporate services, at Mayne recorded his understanding of the arrangements concerning the leases. He noted:

1.At the time of Mayne’s acquisition of the MDIG business, there were two leases at the Epworth Hospital (‘the Hospital’) and one lease at the Bethesda Hospital – all three leases were to be assigned to Mayne as part of the MDIG acquisition. It should be noted that Epworth acquired Bethesda Hospital before completion of the MDIG purchase by Mayne and incorporated it into the Hospital.
A further condition of the acquisition by Mayne of MDIG was that Epworth agreed to grant Mayne a further lease over part of the Hospital to enable Mayne to establish and operate a second MRI (the ‘New MRI Lease’).
2.In mid 1999, Epworth approved the assignment of the three leases to Mayne, although in January 1999 Epworth had identified the entering into of a service agreement by Mayne as being a condition to Epworth agreeing to grant the New MRI Lease. This service agreement was negotiated between Mayne and Epworth between January and July 1999 and it is believed it was in an agreed form at the time of completion of the MGIG acquisition by Mayne.
3.Soon after completion of the MDIG acquisition, the then Chief Executive of MDIG sought to re-open the negotiation of the service agreement, and this process of further negotiation has continued ever since.
4.It is understood that the Bethesda lease was surrendered in the latter part of 1999 as Epworth was redeveloping that part of its hospital complex.
Draft deeds of assignment for the other two leases have been prepared, as has a draft of the New MRI lease. However these deeds have not been executed, partly because the service agreement has not been finalised and also because Mayne Diagnostic Imaging and Epworth now want to have a single lease covering all three leasehold areas – it is understood Epworth’s solicitors (Mallesons) are currently preparing that lease.
5.The term of the two existing leases has not yet expired and Mayne and Epworth continue to perform under those leases notwithstanding they have not yet been formally assigned to Mayne. In addition, whilst the New MRI lease has not been executed, Mayne has installed a second MRI at the site and, in effect, Mayne and Epworth are continuing to act as though a lease has been executed in respect of this area of the premises.
6.The two existing leases and the draft New MRI Lease each contain exclusivity clauses which state that if Epworth, acting reasonably, determines the tenant has provided and continues to provide services ‘to an acceptable standard’, Epworth must not grant a lease or licence ‘in the Building’ to any person for a principal purpose similar to or identical with a hospital medical imaging facility. In relation to this exclusivity obligation, it should be noted that:
-‘Building’ means the Bridge Road building of the Epworth Hospital.
-The prohibition on Epworth relates to leasing and licensing only and does not preclude it from establishing its own radiology business or selling a suite to another provider.
-The prohibition on leasing and licensing only relates to the Bridge Road building.

7.The latest draft of the services agreement contains provisions which allow Epworth to terminate on the basis of a single uncorrected breach of various obligations under the proposed agreement i.e. no opportunity for Mayne to remedy or address the issue. This has potential significance if the final versions of the agreements make it clear that a termination of the service agreement also leads to termination of the lease arrangements.

Epworth’s solicitors prepared a further draft service agreement in late July 2002 which was sent to Mayne and its solicitors for their consideration. The definition of “Leases” had been amended to add the extending words in conformity with a proposal from Mayne’s solicitors. Some amendments had also been made to the termination provision, but the relevant parts remained unchanged. Having reviewed the service agreement Mayne’s solicitors wrote to Mayne drawing to its attention certain matters prior to execution of the agreement, including:

If the Services Agreement is terminated by Epworth for cause, Epworth may effectively terminate the three leases over the premises within Epworth Hospital and require HISVPL to surrender those leases.

The service agreement was executed in late August 2002. Relevant provisions of the agreement are as follows:

8.1     Termination by Epworth
Epworth may terminate this agreement if;
(a)subject to clause 8.1(b), HISV has committed a breach of a material term of this agreement and has failed to remedy that breach within 21 days or such longer period as may be reasonably necessary to remedy the breach after service of a notice upon HISV requiring it to do so. (For the purpose of this clause 8.1(a), a ‘material term’ includes clauses 3.2(a), (d), 3.3(e), and 3.6);
(b)HISV evidences:
(i)        a repeated failure to comply with clauses 3.1(a) or 3.3(a)            in respect of a majority of the indicia specified in the   Agreed Levels of Service; or
(ii)a repeated failure to comply with clauses 3.1(f), 3.1(g),                3.3(b) or 3.5(h),

(other than the extent HISV is prevented from doing so by actions of Epworth) and the Chief Executive has provided reasonable warnings to and has consulted with HISV regarding compliance with the relevant clause and the Medical Advisory Board recommends that this agreement should be terminated;
(c)The last of the Leases expires or are terminated; or
(d)The business operated by HISV at the Hospital is sold, assigned or otherwise transferred to a third party or there is a change in control of HISV without the prior written consent of Epworth.

If HISV fails to remedy any breach Epworth may arrange for the breach to be remedied by another person and HISV must indemnify Epworth for all costs incurred by Epworth as a result.
…

8.3Effect on Leases
If this agreement is terminated under clause 8.1(a), (b) (c) or (d) Epworth may by written notice to HISV require HISV to surrender the Leases (or all the Leases then current) with effect from the date of termination and without providing any further consideration to HISV for that surrender.

“Leases” is defined in cl 1.1 in the following terms:

(a)the lease dated 26 July 1994 between Epworth (as lessor) and Medig Pty Ltd (ACN 005 265 850) (as lessee) in respect of the area known as the “old MRI Area” and being part of the first floor of Epworth Hospital, 34 Erin Street, Richmond, Victoria to be assigned to HISV, and any further leases entered into pursuant to that lease;
(b)the lease dated 28 February 1996 between Epworth (as lessor) and Medig Pty Ltd (ACN 005 265 850) (as lessee) in respect of part of the second floor of the Bridge Road Building, Epworth Hospital, 89 Bridge Road, Richmond, Victoria to be assigned to HISV, and any further leases entered into pursuant to that lease; and
(c)the lease dated on or about the date of this agreement between Epworth (as lessor) and HISV (as lessee) in respect of new MRI area being an area of approximately 211.7_m² on the first floor, Epworth Hospital, 34 Erin Street, Richmond, Victoria, and any further leases entered into pursuant to that lease[1]

[1]Emphasis added.

After the service agreement was executed, negotiations over the leases continued for almost five years. Assignment documents and a draft lease of the new MRI area, prepared prior to the execution of the service agreement, had been put on hold by Epworth while it considered the form of the documents. On 19 November 2002 Mayne’s solicitors, Freehills, wrote to Mayne advising that “since the service agreement was recently finalised, we should now proceed to finalise the documentation of the leases”. Mayne was asked to review the assignments and the draft lease for the new MRI area.

In March and April 2004 Finlaysons, a firm of solicitors in Adelaide, also acting on behalf of Mayne in relation to the leases, wrote to Mallesons, Epworth’s solicitors, requesting formalisation of the landlord’s consent to the assignments and seeking some amendments to the draft lease for the new MRI area. By July 2004, however, the parties had discovered that Medig was deregistered and Mallesons considered that it was inappropriate and legally ineffective to proceed with a deed of assignment. Mallesons advised that the best way forward was to prepare a new lease between Epworth and Healthcare. The proposal to prepare a new single lease transformed into a proposal by Epworth’s solicitors to prepare three new leases. Mayne was content with that course, expressing its preference for a new lease or leases, as it would give it more scope to negotiate terms in compliance with its internal policies.

The old leases, with aligned expiry dates, were all due to expire on 24 September 2005. By mid June 2005 there had been little progress in the preparation of the new leases. In order to protect its position Mayne, on behalf of Healthcare, purported to exercise the options under the existing leases for the old MRI area, the new MRI area and the second floor area and for the car park licence. By letter dated 30 June 2005 Mr Kirkland, on behalf of Epworth, acknowledged receipt of the letters exercising the first renewal options for each lease and the car park licence. He said, omitting formal parts:

I would confirm receipt of your June 21, 2005, letters exercising your first renewal option for the following tenancies.
(i)      Part 1^st Floor 34 Erin Street
(ii)     MRI Area, Part 1^st Floor, 34 Erin Street
(iii)     Part 2^nd Floor, 89 Bridge Road
(iv)     Car Park Licence – 1 Napier Street, Richmond
I would advise that we have you registered for car park passes at our property but Epworth does not have any interest in a property at 1 Napier Street, Richmond.
Following the upgrade of your CT machines, I have permitted the install of additional chillers outside your leased area. These services will need to be covered by a licence agreement. I would ask you or your staff to contact me in this regard.
Thank you for your continued interest in Epworth.

In January 2006 Epworth engaged a new firm of solicitors, Ebsworth & Ebsworth, who commenced to provide advice to it in relation to Healthcare’s occupation of the hospital sites. Three new leases and a car park licence were prepared. The parties to each document were Epworth and Healthcare.

On 2 February 2007 Finlaysons submitted the new draft leases and the licence to Symbion, providing advice as to the effect of each document. It is common ground that the three leases and the licence were executed by the parties in February 2007. Provision was made in the documents for execution by Mr Kinkade, the newly appointed chief executive officer at Epworth. Although his signature does not appear on the documents in evidence he was no doubt familiar with and approved them.

Mr Kinkade had commenced his employment at Epworth in December 2006 and was formally appointed group chief executive in January 2007. On his second day in that position he participated in a strategic planning meeting with senior staff. One of his stated objectives was to improve the efficiency and timeliness of diagnostic services including pathology and radiology. The Healthcare service agreement was under review. Mr Kinkade conceded that from as early as February or March 2007 it was his desire to negotiate a new service agreement. He was dissatisfied with the lack of detail and specificity in the existing agreement. His objective presupposes a familiarity with the agreement.

Notice of breach

Thus by about the end of the first quarter in 2007 Mr Kinkade was well acquainted with the terms of the service agreement and the new leases. While provision was made in each document for his signature there is no evidence that he participated in the final stages of negotiations for the new leases. He must have appreciated, however, that execution of new leases placed Epworth at a significant disadvantage if it proposed to renegotiate the service agreement. Under the leases Healthcare had been granted a right to occupy premises at the hospital until 24 September 2015, subject to exercise of the options. It would be surprising if by that time Mr Kinkade was not aware that the service agreement did not refer in terms to the new leases. Whatever view Mr Kinkade took of the meaning of “Leases”, in the service agreement, the very existence of recently executed leases meant that it would be no easy task for him to impose, by negotiation or otherwise, more onerous performance obligations on Healthcare.

In April 2007 Mr Kinkade commenced to direct complaints to Healthcare about their performance under the service agreement. The complaints quickly escalated into threatened termination.

On 3 April 2007 Mr Kinkade met with Andrew Othen, state manager for Symbion, concerning proposed changes to its on-call teleradiology services. On the following day Mr Hartman of Symbion wrote to Mr Kinkade informing him of the proposed changes. The changes involved the provision of reports by radiologists from remote locations. Mr Hartmann outlined the accreditation program for the off-site service providers. The remote service became a cause for complaint by Mr Kinkade.

Attending the meeting on 3 April 2007 was Vincent Borg, divisional business manager at Epworth. On 13 April 2007 Mr Borg, wrote to Dr Rowan White, an employee of Healthcare, the director of radiology at Epworth and a member of the hospital advisory council, informing him of Epworth’s plans to increase the number of attendances through its emergency department. Mr Borg stated that it was imperative that all stakeholders respond to a proposed table of times for radiology treatment. The letter concluded:

Please note that the above proposal should be included in any comprehensive “service level agreement” between our respective organisations. However, given the immediate needs for the Emergency Department, we seek your urgent feedback on the above.

Epworth’s plan to negotiate a new comprehensive service agreement was being implemented.

On 18 April 2007 Mr Kinkade attended a meeting with other representatives of Epworth and representatives of Symbion. A number of items were discussed and tasks allocated. One matter under discussion was the development of key performance indicators. The absence of key performance indicators later became a cause of complaint by Epworth. It alleged that Healthcare had breached its obligation under cl 3.3(b) of the service agreement which required co-operation to reach agreement on appropriate key performance indicators.

In May 2007 Mr Michael Johnstone, an orthopaedic surgeon, wrote to the Epworth medical director, Mr Peter Dohrmann, expressing concern that Symbion had subcontracted the reporting of some after hours radiology advice to a teleradiology company. Mr Kinkade already knew that the service was provided remotely. He had been informed in writing of the details. In any event, Mr Johnstone’s complaint was communicated to Healthcare by a letter dated 18 May 2007 from Alan Yuen, director of emergency medicine at Epworth to Dr White.

On 24 May 2007 Mr Kinkade wrote two letters to Robert Cooke, managing director and chief executive officer of Symbion. In the first letter Mr Kinkade expressed concerns about the current service provided by Symbion at Epworth. He complained that Healthcare had not sought approval for the change in teleradiology services, even though the change had been notified to Epworth in writing more than a month earlier. Mr Kinkade also complained about the lack of progress in reaching agreement on key performance indicators. He said:

I am at a loss to understand the reluctance or incapacity of Symbion to work constructively with us to achieve appropriate standards so that we can ensure best practice in terms of the clinical service that we provide.

In his second letter Mr Kinkade brought to Mr Cooke’s attention an incident in which a patient had suffered burns during a MRI scan some months earlier.

On 1 June 2007 Mr Cooke responded to Mr Kinkade’s letter of 24 May 2007. He proposed a meeting of executive management to discuss broader strategic issues, including options for commercial arrangements, expansion of clinical services and imaging modalities. He said that Symbion was committed to addressing the current issues outlined by Mr Kinkade and to open dialogue on how best to improve on the commercial arrangements and services. He then addressed each of the issues raised by Mr Kinkade in his letter. These were – on call arrangements; remote access to soft copy images; key performance indicators; and the clinical incident mentioned in Mr Kinkade’s second letter of 24 May 2007. Mr Cooke responded as follows:

1.      On call arrangements
On call radiology arrangements are a significant issue throughout the imaging industry in Australia. Symbion Health has been planning for some time to provide an improved on-call service, which includes participation of some of Australia’s best radiologists.
It appears that there has been a breakdown in communication in the Epworth’s understanding of how this arrangement would be implemented. I understand that your office was notified by a phone call and email from Andrew Othen, Vic State Manager on 4^th April 2007. This was followed up by Wayne Hartmann’s letter which provided notification of the change on 10^th April, 2007. Our state manger met with the Epworth team including yourself on 18^th April, and from the agenda provided by the Epworth I understand that the changes to on-call were not raised as an issue.
The service commenced on 11^th May, and ran in parallel with the traditional Epworth on-call arrangements. It is apparent that the service arrangement could have been better explained to the Epworth. The arrangement provides for Australian accredited radiologists to provide written reports in a more expedient manner than ever before. Remote reporting is becoming commonplace in hospitals throughout Australia, and the issue of hospital accreditation within such a system is complex. I understand that we have asked for your advice on how the Epworth would like to engage on your requirements for accreditation. I re-iterate that we have maintained the pre-existing on‑call arrangements at the Epworth hospital.
2.      Remote access of soft copy images
There is general agreement that remote access should be available, and I understand that an interim solution has been implemented. It appears that this solution has not met with your clinicians requirements. I have asked my Chief Information Officer to directly assist in working with the Epworth to resolve this issue.
3.      Key Performance Indicators
We welcome the opportunity to work with you in developing meaningful, realistic and appropriate service key performance indicators. It appears that our current IT platform, which is commonplace throughout the industry may not automatically capture the information you require to measure some of the KPI’s. Again, we are prepared to allocate time and resources and work with our external vendors to address the issue at the Epworth.
4.      Clinical Incident
I understand that discussions continue between Ms Alexander’s legal representatives and ourselves. Without prejudice, I have requested that the attempt to resolve this matter be expedited. The issue of how clinical incidents are communicated has been discussed with Symbion Imaging managers and I have requested that they review and formalise communication protocols between themselves and your staff.
I will provide a full response on this issue under separate cover.
I trust that the above actions address your concerns, and look forward to working with you towards resolving these matters and strengthening our relationship.

Mr Cooke concluded his letter by informing Mr Kinkade of a takeover proposal by Healthscope. He said:

Finally as you would be aware, we announced this week that we have reached agreement for Healthscope to acquire Symbion Health, subject to shareholder approval, and no superior offer. I would be happy to discuss further details with you.

Epworth’s response was to send a notice of breach to Mr Cooke on 8 June 2007. The content of the notice, its preparation and purpose assumed a prominent position at trial. Epworth did not purport to terminate for any failure by Healthcare to remedy a complaint made in the notice of breach or any other failure to provide a service under the service agreement. As the case was initially pleaded by Epworth, it relied upon the notice to respond to allegations of reliance made by Healthcare. In its defence and counterclaim Healthcare alleged that it made significant capital investment, including the purchase, installation and commissioning of a 3T MRI machine, at a cost of approximately $3m, acting in reliance on assumptions that Epworth would not terminate for change in control by reason of the Primary takeover of Symbion or that Epworth would permit Healthcare to provide services for the duration of the agreement. Epworth sought to explain the investment as a response to its notice of breach which “remained on foot”.

Shortly after the trial commenced Healthcare applied for and was granted leave to amend its defence and counterclaim to rely upon the notice of breach and Epworth’s demands for performance under the service agreement, as affirmation of the agreement. Healthcare alleged that Epworth had made an election which was binding upon it. That shift in Healthcare’s case produced a corresponding shift in Epworth’s case, so that the evidence of witnesses, propounded in the form of witness statements to support their competing positions, became less palatable to the party calling the witness and in some cases embarrassing. Some of Healthcare’s witnesses were being called to give evidence that the notice of breach had been withdrawn while Epworth was contending through its witnesses that it had not.

Mr Kinkade conceded that one of his objectives in serving the notice of breach was to assist Epworth in its negotiations for a new service agreement. In my view that was his main objective. Following service of the notice of breach, the relationship between Epworth and Healthcare became strained. The allegations of breach and the responses by Healthcare were complicated by the fact that the terms of the service agreement purporting to define performance obligations were vague.

Mr Kinkade acknowledged that it was part of his responsibility to keep informed of possible mergers and takeovers affecting Healthcare. From about the time of his employment by Epworth as chief executive, Mr Kinkade had been aware of rumours circulating in the media about the possible acquisition or merger of Symbion. The Healthscope proposal was first mentioned in media reports in early May 2007. On 29 May 2007 Healthscope announced a $2.8b offer for Symbion. Mr Cooke brought the matter to the attention of Mr Kinkade in writing on 1 June 2007.

At some time after that event Mr Kinkade sought advice from Epworth’s solicitors concerning the possibility that the Healthscope proposal, if implemented, would constitute a change in control of Healthcare. The Healthscope proposal did not proceed and the advice was not produced in evidence. The only purpose for such an enquiry was to understand whether any merger or takeover would present Epworth with an opportunity to terminate the service agreement.

The first breach alleged in the notice was a complaint that the off-site radiology service providers may not be registered in Victoria and credentialed at Epworth. The notice required Symbion to provide information concerning the identity, registration, insurance and other details for each off-site practitioner. Assurances in connection with accreditation had already been given to Epworth by letter dated 4 April 2007. Moreover, the basis for the demand for information was not explained. It was by no means clear that to outsource radiology advice would involve a breach of the service agreement. While Symbion challenged the allegation, it agreed to provide the requested information.

The next category of alleged breaches related to cl 5.1 of the service agreement, which required continuing co-operation between Epworth and Healthcare, should Epworth wish to install or add a new modality or new diagnostic imaging at the hospital. The clause required negotiations in good faith. The notice of breach alleged that Healthcare “has dragged its feet in coming forward with a PACS solution and that what (it) has offered to Epworth Hospital is unfriendly for users, inadequate and inappropriate”. PACS is a reference to a picture archiving communications system. The notice of breach alleged that “the failure to provide the required level of service is unacceptable and is inconsistent with Healthcare’s obligation under cl 5.1 to ensure that it provides a level of service that is appropriate to contemporary clinical services”. The notice continued:

Accordingly, Epworth Healthcare requires Symbion Imaging to confirm within seven days of the date of this letter the date by which an alternate, user friendly, PACS system will be in place (which must not be more than one month from the date of this letter) and to specify what functionality that system will provide to its users at Epworth Hospital.

In response, Symbion agreed to place an order for the equipment, up to a total cost of $150,000, to meet Epworth’s requirement. Symbion also agreed, by letter dated 22 June 2007, to revert to the previous after hours, on-call system to replace the off-site teleradiology system. While Epworth persistently made allegations against Symbion, the party to the service agreement was Healthcare. No point was taken concerning the interchangeable references to Symbion and Healthcare.

Epworth also complained of a breach of cl 3.3(b) of the service agreement, which required Healthcare to co-operate with Epworth to develop measurement and monitoring processes in relation to the agreed levels of service. The allegation was that Symbion had been far from co-operative in developing key performance indicators. Symbion agreed to continue to address Epworth’s request for key performance indicators and nominated Dr Guerin, a medical director at Symbion and Andrew Othen, state general manager of Symbion in Victoria, to address that issue on its behalf.

The next item of complaint was “on-going issues in relation to access to image intensifiers (and to radiographers) in Epworth Hospital’s operating rooms”. This was said to be another example of Symbion’s failure to comply with its obligation under cl 5.1, which requires “co-operation and negotiations in good faith about the introduction of improvements.” Symbion responded in its letter dated 22 June 2007 by agreeing to provide an additional image intensifier before the end of the calendar year.

A further item of complaint related to an emergency department initiative mentioned by Mr Borg in his letter of 13 April 2007. The allegation was that Symbion had failed to co-operate with Epworth to ensure that it was able to provide an acceptable level of service by providing extra orderly hours to assist with the workload and turn around times during peak periods. By its letter dated 22 June 2007, Symbion agreed to partly fund an emergency department orderly and to work with the hospital in promoting the emergency department.

The final substantive item of complaint related to communication issues. Epworth identified several instances which it alleged had revealed a lack of proper and effective communication between Symbion and Epworth. No particular breach of the service agreement was alleged in relation to that complaint. In response, Symbion agreed to a regime under which regular meetings would take place with senior Symbion representatives. In the penultimate paragraph of his letter dated 22 June 2007, Mr Cooke said:

In order for Symbion Imaging to proceed with the implementation of the agreed outcomes above, Symbion Imaging requires confirmation that Epworth withdraws all the allegations contained in your letters of 24 May 2007, 8 June 2007 and 14 June 2007.

Mr Cooke’s letter of 22 June 2007, in which he responded to the allegations of breach followed a meeting on 19 June 2007 attended by Mr Cooke, Mr Othen and Dr Guerin on behalf of Symbion and Mr Kinkade, Mr Dohrmann, Mr Nowell and Mr Borg on behalf of Epworth. There is a file note of the meeting recording agreement reached on many of the alleged breaches of the service agreement.

Many of the alleged breaches in the notice give the impression of contrived grievances designed to create or strengthen a negotiating position for a new service agreement. There was no doubt that the service agreement was not an ineffective definition of Healthcare’s obligations and that a more specific agreement would have suited Epworth. Healthcare’s response to the allegations, some of which relate to broad obligations to co-operate or negotiate in good faith, was consistent with a desire on its part to maintain its relationship with Epworth.

Notwithstanding Healthcare’s request in the letter of 22 June 2007, that the notice and allegations of breach be withdrawn, Epworth steadfastly refused to do so. It responded by letter dated 29 June 2007. While acknowledging agreement in relation to a number of matters, Epworth concluded as follows:

I note in your letter of 22 June 2007 that your commitment would appear to be entirely contingent upon Epworth healthcare’s withdrawal of its notice of breach of the Service Legal Agreement (SLA) by Symbion Imaging. This is simply unacceptable at this stage based on our legal advice.
Epworth Healthcare stands by each of the material breaches identified in my letter to you dated 8 June 2007, and that letter remains as a formal notice of breach for the purposes of clause 8.1 of the SLA, such as will entitle Epworth Healthcare to exercise its entitlements under clauses 8.1 and 8.3 of the SLA should Symbion Imaging fail to rectify each of the identified breaches to the satisfaction of Epworth Healthcare.
However, in view of Symbion Imaging’s responses to date, and its commitment to redress these issues on a timely basis which would appear to indicate that Symbion Imaging is desirous of rectifying each of the identified breaches, Epworth HealthCare is prepared to extend the 21 days prescribed by clause 8.1(a) by a further period of 21 days (ie: to 20 July 2007). Hopefully by 20 July 2007 these issues will have been satisfactory resolved and we will be able to go forward on a positive basis.
I reiterate, Epworth Healthcare considers Symbion Imaging to be in material breach of its obligations under the SLA for the reasons identified in my letter of 8 June 2007. If Symbion Imaging fails to rectify each of these breaches to the satisfaction of Epworth Healthcare by the conclusion of the extended timeframe specified above, Epworth Healthcare will:
.formally terminate the SLA in accordance with its entitlement under clause 8.1 of the SLA; and
.require Symbion Imaging to surrender each of the current leases granted to Symbion Imaging by Epworth Healthcare in accordance with clause 8.3 of the SLA.

In the meantime, I look forward to seeing the tangible results of your stated commitments, and trust that when the time comes, it will not be necessary to take the foregoing steps.

Thereafter meetings were held and correspondence passed between Epworth and Symbion in relation to the issues raised in the notice of breach. In the concluding paragraphs of a letter dated 18 July 2007 to Mr Kinkade, Mr Cooke said:

I reiterate that Symbion’s approach to our recent correspondence has been to provide a pragmatic solution to each of the concerns you have raised. To this end we have not endeavoured to provide a detailed legal response and reserve our rights to respond in more detail should our practical solutions not result in an outcome which is acceptable to both parties. Our response should in no way be taken as an acceptance of any of the allegations you have raised.
However, we are unable to accept a position which requires Symbion Imaging to implement the agreed outcomes and incur considerable cost while still allowing Epworth Healthcare to allege continuing breaches of our service level agreement. We are prepared to proceed in good faith on the basis of our discussions but expect that you will in due course provide confirmation of the withdrawal of all of the allegations contained in your letters of 24 May 2007, 8 June 2007, 14 June 2007 and 29 June 2007.

No such confirmation was ever forthcoming. On the contrary, Mr Kinkade continued to insist upon performance by Symbion, to his satisfaction, of its obligations under the service agreement.

On 11 September 2007 there were media reports that Primary, which already owned about 20% of Symbion’s shares, may vote its shares in favour of the takeover of Symbion by Healthscope. As events transpired, Primary voted its shares to defeat the proposal, which required the approval of 75% of Symbion shareholders. Thereafter, various proposals for the acquisition of Symbion continued to come to the attention of Mr Kinkade through media reports. He said he thought that Healthscope would be the successful bidder and never thought that Primary would acquire Symbion.

In October 2007 there were media reports that Primary proposed acquiring an unspecified part of Symbion’s New South Wales pathology business, part of the Victorian pathology business, medical centres and certain radiology sites. Mr Kinkade was aware of the reports.

On 9 October 2007 Mr Kinkade wrote to Mr Othen in the following terms:

As you are aware, Epworth HealthCare is significantly expanding its service, particularly in areas of orthopaedic, sports medicine and cancer services at its Richmond campus.
We have an expectation that our radiology provider will provide contemporary imaging modalities as part of our provision of quality services to our clinicians. In this regard, we are conscious that currently we do not have a 3TMRI nor a PET Scanner at Richmond. As we understand, one of our competitors has already installed a 3TMRI and we are anxious to ensue we remain competitive.
In respect of the PET Scanner, we are investigating the development of a comprehensive service, including radio pharmacy.
We would appreciate your early advice as to the likelihood and timing of Symbion procuring both of these modalities. Should Symbion decide not to pursue, both of these modalities in the near future, Epworth would wish to canvass other means including joint venture arrangements to procure such services.[2]

The “expectation” to which Mr Kinkade made reference is found in cl 5.1 of the service agreement.

[2]Emphasis added.

The PET scanner, sometimes referred to as a 16 slice CT scanner, appears to have been first mentioned at a meeting in September 2007. The outcome of the meeting was recorded and confirmed in a letter dated 20 September 2007 from Melissa Carfax-Foster, the executive director at Epworth, to Mr Othen.

Mr Othen responded by letter dated 12 October 2007 in which he expressed Symbion’s interest in purchasing a 3T MRI and PET scanner. He noted that the total cost of the 3T MRI would be in excess of $3m and said that “we cannot in good faith progress an order of this magnitude whilst allegations of contract breach are in place”. Mr Othen reminded Mr Kinkade that in March 2007 Symbion had submitted a proposal to Epworth for the purchase of a PET scanner, the purchase of which was to be supported by an endowment from Epworth. The application for the endowment was unsuccessful. Mr Othen said that Symbion remained interested in purchasing a scanner in the future, estimating the cost at between $2.5 and $4m. He concluded his letter:

Symbion looks forward to a long and successful relationship with Epworth and are committed to providing quality services. We endeavour to work in partnership with Epworth towards mutually beneficial outcomes. However, we are unable to accept a position which requires Symbion Imaging to implement the agreed outcomes and incur considerable cost while still allowing Epworth HealthCare to allege continuing breach of our service level agreement.
Before we can commit to the funding of a 3 Tesla MRI or enter into discussions on a PET CT, we would expect you to provide confirmation of the withdrawal of all the allegations contained in your letters of 24 May 2007, 8 June 2007 14 June 2007 and 29 June 2007. We believe our achievements in addressing your concerns over the past six months merit our relationship moving to the next level.
I would like to sit down at your earliest convenience and discuss the opportunities and issues that face us and look for a way forward that allows us to work together, in good faith, towards mutually beneficial outcomes.

On 16 October Ms Carfax-Foster wrote to Mr Othen confirming the outcome of recent meetings at which key issues, pertinent to Epworth’s relationship with Symbion, were discussed. She concluded her letter:

A number of issues remain outstanding and of particular significance is the review of the Service Level Agreement, the agreement of service indicators, the measurement and reporting of same and the refinement of a mechanism to address operational issues that impact on the quality of service provision. As we discussed, these issues need to be addressed at an operational level through regular meetings to be held monthly. The stakeholder group however should meet quarterly, unless there is a need for increased frequency, and address issues of a strategic nature, review service issues, in particular the service indicators and operational issues with a view to improving the service delivery. I suggest that these issues be tabled at the next stakeholder meeting.
Thank you for the efforts that you and your team have made to enable us to make significant inroads into the issues of concern. I look forward to continuing to work with you into the future.

Referring to Mr Othen’s request for confirmation of the withdrawal of all allegations, Mr Kinkade said in evidence:

No such confirmation was ever provided. In each of the meetings I had with Symbion at which the breach notice was discussed I reiterated that the breach notice would remain on foot until all of the problems with Symbion services had been remedied. I also made that point in several of my letters to Mr Cooke.

On 8 November 2007 Primary announced a $2.65 billion bid for Symbion, proposing to acquire the balance of the shares in the company that it did not already own. The offer was subject to conditions. Initially, Symbion directors rejected the offer, but Primary continued to extend the deadline to declare the offer unconditional.

On 5 December 2007 Mr Kinkade reported to the group medical advisory council:

Discussions are still occurring with Symbion regarding the performance and KPI’s. In addition further discussion has been held with them in respect of the extent that the technological services they provided, for example the provision of PET scanners and 3TMRI’s. We are still awaiting a response.

In an email to Dr White on 5 December 2007, Mr Kinkade said:

In respect of the KPIs and on-calls and breach and 3TMRI, etc. I would like to talk to you about where we are at with resolving these before I issue any other correspondence. I am still concerned about resolving these issues on a timely basis and am not satisfied with the alternative proposals for on-call.

On 6 December 2007 Mr Othen again sought withdrawal of the allegations of breach.

At the Epworth board meeting held on Wednesday 19 December 2007 Mr Kinkade informed the board that Symbion had still not satisfactorily resolved the on-call arrangements, nor its KPIs for the service agreement. He told the board that Symbion had advised that they were not proceeding with the early introduction of contemporary equipment such as the PET and 3T MRI. He said that a meeting would be held with senior management in the new year. Notwithstanding Mr Kinkade’s advice to his board, by 21 December 2007 Symbion had signed an order for a 3T MRI at a cost of $2.94m. Installation was scheduled to be completed in late April 2008.

On 11 January 2008 Mr Kinkade met with Dr Guerin, Mr White, Mr Othen and Mr Polidori. At the meeting Dr Guerin informed Mr Kinkade that Primary had made a takeover bid for Symbion and were seeking to acquire a majority of its shares. Minutes of the meeting, prepared by Symbion, record “AK raised the issue of a new Service Level Agreement and lack of progress on KPIs”. Mr Kinkade said that at the time he considered Symbion to be still in breach of the service agreement in a number of respects, including its failure to co‑operate in reaching agreement regarding the development of KPIs. He was also concerned that Symbion had not complied with its obligations to install “contemporary equipment” which included the 3T MRI. In a note of the meeting prepared by Mr Kinkade and sent by email to Ms Carfax-Foster, he made mention of the installation of the 3T MRI in April and the proposal to install digital radiology in three months time. Referring to the representatives of Symbion present at the meeting he said:

They understand the need to sort this (service level agreement) out before any breach can be lifted.

In an email dated 21 January 2008 to Mr Polidori, regional general manager of Symbion Health, Mr Kinkade said:

While I believe significant progress has been made by Symbion in resolving the other breach issues, I would appreciate getting a detailed update on where Symbion sees all the issues now. Please ensure the issue is now resolved or progressing to be resolved.

The unresolved issue appeared to be the absence of agreed KPIs and a new service agreement. In the penultimate paragraph Mr Kinkade said:
In respect of the breach I will get legal advice as to what action is appropriate but I see that the comprehensive KPIs and service level agreement may still be the stumbling block as you are indicating that these will not be available until July 2008.

Throughout January 2008 the offer by Primary was extended and Symbion directors continued to advise shareholders to reject the offer. On 30 January 2008 Primary’s offer was extended to 21 February 2008. On 11 February 2008 Symbion announced to the market that if Primary received formal acceptances from its shareholders so that it achieved an interest greater than 50.1% and declared its offer unconditional, the Symbion board would recommend that the shareholders accept the offer. On 13 February 2008 Primary announced that it had received acceptances for approximately 53.81% of shares and that its offer was unconditional.

In his report to the board on 26 March 2008 Mr Kinkade said:

Ongoing discussions are occurring with Symbion regarding on-call arrangements, KPIs, service level agreement and the availability of contemporary equipment. We are also monitoring the takeover activity of this organisation and are assessing the implications for Epworth Healthcare.

The “contemporary equipment” included the new 3T MRI machine.

Under cross-examination Mr Kinkade seemed reluctant to accept that after 11 January 2008 he actively insisted upon performance by Symbion of the service agreement. His apparent reluctance was in contrast to the firm position he had adopted in his witness statement and in earlier oral evidence, that until termination in May 2008 he continued to remind Symbion of Epworth’s requirement that Symbion perform its obligations under the service agreement, including the purchase and installation of new equipment. I have no doubt that he did. It was an important part of his strategy to maintain pressure on Healthcare.

Mr Kinkade said that he had a conversation with Dr White and Stephen James on 27 March 2008, more than a month after Primary gained control of Symbion. Mr James was Primary’s general manger of diagnostic imaging. They discussed notice of breach. Mr Kinkade said that Mr James was providing him with some words of comfort in relation to the level of services that would be provided under the service agreement. Mr Kinkade said that in each meeting he had with Symbion in which the notice of breach was discussed he reiterated that the breach notice would remain on foot until all problems with Symbion’s services had been remedied.

As seems customary with large corporations, when senior management undertake the preparation of a strategic plan, it is given a project name. Thus it was that “Project Harry” was conceived. The first Project Harry meeting was held on 10 April 2008. The purpose of the meeting was to consider strategies to deal with Epworth’s response to the Primary takeover of Symbion as a breach of the change in control provision in the service agreement. It was noted that board approval would be required for termination. Minutes of the meeting stated:

If a decision to terminate the agreement is made, a short transition period would apply. This is so to minimise Primary’s ability to negatively impact the business. The transition period of 4-6 weeks is likely.
A termination notice will most likely include an offer to takeover existing equipment and staff so as to minimise the impact of the provision of services. A response from Primary would be required within a very short time frame (around 1 week). This raises questions around capital funding and staff entitlements (including Radiologists contracts and staff leave entitlements).
We need to plan for the transition period with 2 possible outcomes:
1.A fair and reasonable agreement to transfer staff and equipment to Epworth is agreed and minimal impact on the business is expected.

2. Primary decide to play hard and shut down the services.

The Project Harry committee prepared a due diligence checklist designed to plan for a changeover of control of the radiology services including capital investment requirements. Draft letters were prepared to employees to ensure a seamless transition from employment by Symbion to employment by Epworth.

A Project Harry meeting took place on 14 April. There was discussion concerning the method of giving notice of termination. The minutes of the meeting noted:

It was suggested that we meet with Primary to discuss our intention to terminate the agreement, which would potentially open the door for discussion around the sale of the business to Epworth rather than a termination of the agreement.

While those meetings were being held and strategies and plans refined, Epworth knew that work was being done to install the 3T MRI, which was scheduled to be operational by the end of April. It became operational on 5 May 2008. At the meeting on 14 April 2008 the 3T MRI was identified as being a “high margin modality”. There was discussion concerning the need to apply for new licences and the possibility to take a temporary transfer of a licence from a third party.

At the Project Harry meeting on 16 April 2008 Helen Vines, a solicitor from Holding Redlich, was in attendance. Various strategies for an anticipated meeting with Primary were discussed. Ms Vines was instructed to draft a termination notice with a notice period of one month. A paper was to be prepared for the board detailing Epworth’s legal rights and risks and advice was to be sought from a litigation specialist.

There was a further Project Harry meeting on 21 April 2008. By that time counsel had been briefed and a termination notice drafted. Work had commenced on the preparation of a board paper seeking approval to terminate the service agreement. Work had also commenced on a negotiation strategy with Primary.

At the Project Harry meeting on 22 April 2008 counsel and solicitors were in attendance and advised Epworth that they had grounds to terminate the contract due to the change in control. The committee noted that if a termination notice was issued, Primary would most likely apply for an injunction to prevent Epworth acting on the notice. There was discussion about the likely course of litigation and a meeting was proposed with Dr Batemen, the chief executive officer of Primary, as soon as possible to “discuss our relationship”. A termination notice would be “on hand”. A board paper was to be prepared detailing strategic reasons behind the proposal to terminate the agreement.

The board met on 23 April 2008 and a proposal for termination was presented to the members. The purpose of the presentation was to seek board approval to:

·Have Epworth’s CEO meet with Primary Healthcare’s CEO to discuss our relationship, to flag that Epworth definitely wishes to terminate the relationship and to ascertain whether there is any worthwhile benefit in negotiating an amicable settlement and to discuss transitional arrangements; and
·Have Epworth’s CEO issue notice of termination to Primary Healthcare (Symbion Imaging) as and when required.

The presentation to the board continued:

Notice of Breach
It should be noted that a notice of breach was issued to Symbion in June 2007 in respect of material breaches of the Service Agreement. These included, among others, alleged breaches of the National Health Act and the Hospital’s By-Laws covering on-call arrangement, use of non-credentialed providers, delays in finalised service legal agreements, etc. These breaches entitled Epworth to terminate the Service Agreement under clause 8.1(a). We have endeavoured to work with Symbion to rectify the breaches. We believe that we are still entitled to terminate the Service Agreement on the basis that Symbion has failed to rectify these material breaches within a reasonable period. There have also been issues regarding Symbion providing contemporary equipment (3T MRI and PET scanner) for Epworth and while they initially refused to provide this equipment while the breach notice was in place they have now recently installed the 3T MRI.[3]
[3]Emphasis added.
Change in Control
Clause 8.1(d) provides that Epworth may terminate the Service Agreement if “the business owned by HISV (i.e. Symbion) at the Hospital is sold, assigned or otherwise transferred to a third party or there is a change in control of HISV without the prior written consent of Epworth”.
Clause 8.3 further provides that “if this agreement is terminated under clause 8,.1(a), (b), (c) or (d) Epworth may by written notice to HISV require HISV to surrender the Leases (or all the Leases then current) with effect from the date of termination and without providing any further consideration to HISV for that surrender.’
On the basis that Symbion has not sought our consent, nor have we given it, we have the capacity to issue a notice to terminate the Service Agreement and require Symbion to surrender the three Leases.
We believe that Primary Health Care do not have sufficient experience to manage radiology practices within large hospitals such as Epworth Hospital. As such, we believe that their control of the radiology service at Richmond would be detrimental to the business. Prior to the take over of Symbion Health, Primary Health Care did not operate any free standing diagnostic imaging centres (including centres located within a hospital). Symbion Health operates 130 centres, including 41 hospital sites. Also we understand had a relatively low turnover in imaging, in the order of $10M per annum (whereas Symbion’s radiology practice is in excess of $300M per annum) this demonstrates the lack of expertise that Primary healthcare has in radiology.

…

Under the heading “Issues” in the presentation to the board it was noted:

·The cost of capital equipment for radiology is significant. The equipment currently onsite is estimated to cost in excess of $17m, including a recently installed 3T MRI. The financing of such equipment needs to be considered. We propose to negotiate the transfer of existing equipment with Symbion . Subject to Symbion’s funding arrangements, this would involve the outright purchase of the equipment or the assignment of existing leases to Epworth. Preliminary discussions have been held with the NAB to regarding funding options. A list of required equipment and indicative cost is attached (see Attachment d).[4]

[4]Emphasis added.

An extraordinary meeting of the board of Epworth was held on 29 April 2008. That meeting was attended by Epworth’s solicitors. The board approved the proposed two step strategy for dealing with Symbion. The first step was to arrange for a meeting “to flag that Epworth definitely wishes to terminate the relationship and to ascertain whether there is any worthwhile benefit in negotiating an amicable settlement and to discuss transitional arrangements”. The second step was to issue a notice of termination as and when required.

Following the board meeting Mr Kinkade made arrangements to meet with Dr Bateman on 5 May 2008 at the offices of Credit Suisse in Melbourne. Mr Kinkade took with him a prepared script. The meeting took place. The only persons present were Mr Kinkade and Dr Bateman. It seems common ground that Mr Kinkade read from the script. After drawing Dr Bateman’s attention to cl 8.1(d) and 8.3 of the service agreement Mr Kinkade continued:

Epworth has considered its position and wishes to terminate the current arrangements with Primary. While we can issue a formal notice of termination without having this meeting, we thought it was worthwhile to meet with you to advise you of our position and to allow Primary to put forward an alternative proposal.
As you would appreciate, Epworth is a not for profit organisation and as such is not subject to tax and receives no benefit in respect of depreciation of assets. Epworth will need to replace equipment and staff the service. There may be an opportunity for Primary to lease the equipment to Epworth thus avoiding removal costs and there may be some tax benefits in this for Primary. There may be opportunities to negotiate on other matters including staffing, licensing etc that may also result in a more beneficial outcome for both parties.
While continuing to reserve our right to terminate these agreements, Epworth is willing to explore with Primary, alternatives to issuing a termination notice over the next few days, however we would expect a definite and acceptable alternative for moving forward by 4:00 pm this Friday, 9 May 2008. If we do not receive advice from Primary by that time, we will issue a notice to terminate the Service Agreement and request that Primary surrender the Leases.
In terminating the agreement, Epworth will resume the space and Primary is responsible for removal of all equipment at their cost. It is our expectation that we would work towards a reasonable transition period. Epworth expects that during any transitional period, total radiology services as defined in the Service Agreement will be maintained. We reserve our rights under the Service Agreement to take action should any breach of that Agreement occur.
If Primary does suggest an acceptable alternative by that time, we expect that our organisations will meeting again early in the week beginning Monday 12 May 2008, at a time to be agreed, to discuss transitional arrangements and to develop an agreement which would be in place within two weeks from that meeting, i.e. by Monday 26 May 2008.

As Mr Kinkade was reading the script Dr Bateman interrupted him, complaining that the event was a manipulation and left the meeting. Dr Bateman said that Mr Kinkade told him the service agreement was terminated.

An issue arose as to whether the events that occurred on 5 May 2008 amounted to a wrongful repudiation of the service agreement by Epworth. On 6 May 2008 Healthcare gave notice to Epworth purporting to accept Epworth’s repudiation. The scope of the factual dispute concerning the events of 5 May 2008 is quite narrow and in my view of little or no consequence. Mr Kinkade said that he did no more than communicate Epworth’s intention to terminate which was done by written notice dated 7 May 2008. The significance of the factual contest over what was said on 5 May 2008 was that if Healthcare could establish that Epworth had not terminated under cl 8.1, Epworth would be denied the opportunity to call for the surrender of the leases under cl 8.3.

The 3T MRI machine, purchased by Symbion in December 2007 and installed at the hospital during March and April 2008, became operational on 5 May 2008. Mr Kinkade accepted that he made arrangements to meet with Dr Bateman after becoming aware that the MRI machine had been installed. He rejected, however, any connection between the completion of installation works and the timing of his meeting with Dr Bateman. Having regard to the importance Epworth attached to the 3T MRI and the risk that Symbion might “shut down the services”, the timing was not a coincidence. I reject Mr Kinkade’s evidence that the timing was coincidental. The enhanced negotiating position of Epworth, once the machine was installed and commissioned, was obvious.

Issues

Epworth’s case is relatively straightforward. It contends that there was a change in control of Symbion on and from 13 February 2008, when Primary had acquired a majority of Symbion’s shares. As it had not given prior written consent to the change in control Epworth was entitled to terminate the service agreement under cl 8.1(d).

Relying upon cl 8.3 of the service agreement, Epworth called upon Healthcare to surrender all current leases. It submitted that the definition of “Leases” in cl 1.1 of the service agreement was broad enough to include all of the current tenancy and other occupation rights of Healthcare.

Healthcare submitted that the Primary takeover of Symbion was not a change in control of Healthcare under cl 8.1(d). If, however, it was a change in control, Epworth was unable to terminate the 2007 leases for two reasons. First, any notice of termination was required by cl 10.1(a) to be in writing sent to Healthcare and addressed to the attention of the chief executive. In the absence of a written notice, Epworth could not invoke cl 8.3. Before Epworth had time to deliver a written notice on 7 May 2008, Healthcare purported to accept Mr Kinkade’s repudiation of the service agreement arising out of statements made to Dr Bateman on 5 May 2008. Clause 8.3 only gave a right to call for the surrender of leases in the event of Epworth terminating. Second, even if cl 8.3 was available to Epworth, it did not have any operation. The “Leases” as defined in clause 1.1 of the service agreement did not refer to or include the 2007 leases.

In response, Epworth presented a raft of arguments designed to capture the 2007 leases within the operation of cl 8.3 of the service agreement. They submitted first, that the real intention of the parties was not reflected in the language which they had chosen when defining “Leases” in cl 1.1. It was the parties’ intention that cl 8.3 capture all current leases. They argued that the words extending the description of each lease in the definition of “Leases” in cl 1.1 – and any further lease entered into pursuant to that lease – were sufficient to incorporate the 2007 leases. Second, Epworth sought to imply a term into the service agreement to the effect that the definition of “Leases” in cl 1.1 would extend to the 2007 leases. Third, Epworth sought to imply a term into each of the 2007 leases to the effect that they must be surrendered upon termination of the service agreement. Fourth, Epworth argued that the parties had so conducted themselves in the preparation of the 2007 leases and after the notice of breach had been served as to give rise to an estoppel by convention, precluding Healthcare from departing from a common assumption that the 2007 leases fell within the definition of “Leases” in cl 1.1 of the service agreement.

On 23 February 2009 Healthcare sought leave to further amend its defence and counterclaim to enlarge the scope of its reliance upon an election by Epworth. Until that time its case for election had been confined to an allegation that Epworth had not exercised its right to terminate for change in control immediately or within a reasonable time, which was said to be seven days after the right had accrued. Healthcare introduced paragraph 17A, without objection, in the following terms:

Further, if there was a change of control of the defendant without the prior written consent of the plaintiff (which the defendant denies) the plaintiff by its words and conduct in requiring an acquiescing to the continued performance by the defendant of the Agreement elected to continue performance of the Agreement notwithstanding that there was a change of control of the defendant without the prior written consent of the plaintiff and thereby elected not to exercise any right and entitlement that it may have had to terminate the Agreement under clause 8.1(d) and to require the surrender of the Leases under clause 8.3 and the surrender of the Licence.

To the new allegation by Healthcare, Epworth responded:
As to paragraph 17A, it says that the facts and matters referred to in the particulars thereto do not constitute conduct which is unequivocally consistent only with the affirmation or continued existence of the Agreement and thus do not constitute or evidence an election by the plaintiff not to exercise its right to terminate the Agreement under clause 8.1(d) or to require the surrender of the Leases under clause 8.3 or surrender of the Licence.

The substance of the new election case advanced by Healthcare was that Epworth refused to withdraw its notice of breach, dated 8 June 2007 and insisted that Healthcare comply with demands for performance including a demand for new equipment referred as “contemporary modalities”. One such item of equipment was the 3T MRI. Those demands continued well past the point at which all relevant facts were known to Epworth concerning the change in control. Healthcare submitted that it was only after it had spent more than $3m to purchase and install the 3T MRI, and a few days after the machine was commissioned, that Epworth purported to exercise its right to terminate the service agreement for change in control. It submitted that Epworth’s conduct was inconsistent with its right to terminate for change in control and that Epworth had unequivocally affirmed the service agreement.

Healthcare also relied upon the same facts to support an estoppel. It alleged an assumption or expectation that Epworth would not exercise any entitlement it might have had to terminate the agreement for the change in control that took place in February 2008 and would not prevent Healthcare from continuing to provide radiology services under the agreement for the full term of the agreement. Healthcare alleged that the assumption or expectation was induced by the conduct of Epworth and that it would not have purchased or installed the equipment but for the assumption or expectation.

There is a corresponding representation alleged by Healthcare, predicated on a failure by Epworth to warn Healthcare of the risk of termination for change in control.

Healthcare alleged further that the notice of termination did not provide adequate notice to vacate the premises and was invalid. It counterclaimed for declarations to support claims for conduct in contravention of the Trade Practices Act and the Fair Trading Act.

To meet the estoppel allegations of Healthcare, Epworth alleged that Healthcare could not have made or relied upon the assumption or expectation because Epworth had never withdrawn the notice of breach which remained operative until termination.

Change in control

Epworth submitted that because control is not defined in the service agreement, it was appropriate to ascertain the meaning of the words by reference to the well understood meaning of “control” found in s 50AA(1) of the Corporations Act 2001 (Cth)[5]. It submitted that when Primary acquired the majority of shares in Symbion, it acquired the ability to appoint and remove directors of all subsidiaries, including Healthcare, and thus to control it. The successful takeover amounted to a change in control of Healthcare.
[5] Section 50AA(1) of the Corporations Act 2001 (Cth) provides:

Healthcare submitted that control within the meaning of s 50AA(1) of the Corporations Act did not assist or at least did not determine the meaning of control for the purpose of cl 8.1(d). It submitted that “change in control” within the meaning of cl 8.1(d) meant a change in control of Healthcare by way of a sale, assignment or transfer of its shares to a third party. Healthcare called in aid a fact known to the parties to the service agreement at the time it was made in 2002 - that the ultimate holding company of Healthcare was a publicly listed company. It argued that if the parties had intended that a change in control of a publicly listed entity would provide a basis for termination, they would have so expressed their intention. Healthcare supported that submission by reference to the definition of “related corporation” in cl 1.1 of the service agreement, which made reference to the Corporations Act. Healthcare further submitted that the requirement for prior written consent meant that the “change in control” must be a change within the power of Healthcare to regulate.

Clause 8.1(d) describes alternative events which may be invoked as a ground for termination. The first event concerns the alienation of the business of Healthcare by way of sale, assignment, or transfer. That is what occurred in 1999 when Healthcare acquired the business of Medig. The second event is not concerned with an act of Healthcare to alienate its business, but with circumstances which bear upon the control of Healthcare.

Insofar as it is relevant, it was well understood by the parties at the time the service agreement was made that Healthcare was ultimately owned by a publicly listed company, then known as Mayne Group Ltd. That commonly understood fact does not, it seems to me, assist Healthcare in the construction of the service agreement. The purpose of a “change in control” termination provision is to protect a party from the risk that a new owner may have new priorities, competing objectives or products or bring about a disruption to an otherwise mutually beneficial relationship. A change in control which might expose a party to any such risks is not necessarily confined to a change in control of the board or the shareholders of the other party to the contract (Healthcare) but may extend to a change in control of any holding entity, or the ultimate holding entity, which is in a position to dictate the behaviour of the contracting party.

In my opinion there is no reason to read down the words “change in control” so as to confine them to a change in the direct control or ownership of Healthcare. To do so would be to ignore the obvious purpose behind the alternate ground for termination in clause 8(1)(d). A reasonable person would understand those words to include a change in the control of the ultimate holding company. It is unnecessary to apply a definition derived from the Corporations Act. In this context, “control” meant the ability to direct the behaviour of the contracting party. The successful takeover of Symbion meant that Primary had the ability to direct the behaviour of Healthcare. Control changed on 13 February 2008.

The Healthcare submission that the change must be within the control of Healthcare overlooks the opportunity that a purchaser, such as Primary, had to make its acquisition conditional, if it so wished, upon written approval. The purchase by Healthcare of the business of Medig in 1999 was conditional upon approval by Epworth of the assignment of the leases. Epworth gave its approval and Healthcare completed the purchase.

Repudiation

Healthcare submitted that Epworth lost its right to terminate under the service agreement because it repudiated the agreement on 5 May 2008 during a conversation between Mr Kinkade and Dr Bateman. Healthcare alleged that the repudiation was constituted by Mr Kinkade saying to Dr Bateman that Epworth wished to terminate the service agreement.

In my opinion the contention is without substance. Accepting the evidence of Healthcare about the conversation that took place between Mr Kinkade and Dr Bateman, which is not substantially in dispute, Epworth did no more than assert a contractual right to terminate. Such an assertion is consistent with the contract and the rights and obligations thereunder.[6]

Notice to vacate

[6]DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 432-433; Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277.

On the assumption that Epworth was otherwise entitled to terminate the service agreement, Healthcare submitted that the notice of termination dated 7 May 2008 was invalid because the period of notice given to vacate the premises was unreasonable. It submitted that there was an implied term of the service agreement to the effect that a valid termination notice must provide a reasonable period to vacate. Healthcare submitted that 30 days was not reasonable because it would be required to remove and relocate large and complex items of equipment, including the 3T MRI, which had only just been installed. It would also need to rearrange advance bookings for the use of the machine. Healthcare submitted that Epworth had recognised a need for a longer transition period, but had deliberately abridged the required time so as to minimise any negative impact of the termination on Epworth. Healthcare submitted that at least three months was reasonable and required.

This challenge to the validity of the notice of termination was designed to deny to Epworth a right it might otherwise have had under cl 8.3 to call for a surrender of the leases.

The service agreement does not prescribe a period of notice of termination for change in control. It does not deal with rights of occupation except to confer upon Epworth the right, in prescribed circumstances, to call for a surrender of leases. Clauses 12.6 and 12.7 of each of the 2007 leases expressly provide for the removal of tenant’s fixtures upon termination of the lease. If the tenant had not removed its property from the premises prior to termination of the lease the landlord may, after providing at least 14 days written notice to the tenant, remove and store a tenant’s chattels and fittings or treat the chattels and fittings as abandoned.

The implication of such a term into the service agreement is not necessary to give it business efficacy when the right of occupation is governed by leases.

Clause 8.3

Epworth submitted that once its right to terminate under cl 8.1(d) was triggered it was entitled to call for the surrender of existing leases under cl 8.3. It submitted that the leases in force at the time of termination were “Leases” within the definition of that word in cl 1.1 of the service agreement. Epworth relied upon the fact that before and after the execution of the service agreement in September 2002, the parties were in discussions as to whether the existing leases between Medig and Epworth would be assigned, or whether a single new lease should be prepared or whether three new leases should be prepared.

Epworth submitted that in June 2002 Mayne accepted cl 8.3 on the understanding that if the service agreement terminated, all leases would automatically terminate. A file note dated 27 June 2002 from Mayne’s solicitors to Debbie Howard at Mayne indicated that Mayne had conceded the point. Epworth submitted that Healthcare’s own documents were consistent with that “fundamental deal” in relation to the connection between all current leases and the right of termination. It disavowed, however, any reliance upon negotiations and internal memoranda, indicating acceptance by Mayne (and thus Healthcare) of a link between the right of termination and the surrender of the leases, to establish subjective intention. Instead, Epworth purported to rely upon that material to establish the fact that when the service agreement was executed the parties had not yet decided on how to proceed with the leases.

[18]Ibid at 646; Carr v J A Berriman Pty Ltd (1953) 89 CLR 327, 348.

[19]Ibid at 658, emphasis added.

Undue delay in the exercise of a right to terminate may, depending on the circumstances, constitute an election to continue performance even if there has been no express affirmation.[20] In such a case an election may be imputed where delay causes prejudice to the other party[21].
[20]Tropeano v Roboni [2005] VSC 229 at [121].
[21]Sargent at 656; Champtaloup v Thomas [1976] 2 NSWLR 264, 273; Scarf v Jardine (1882) 7 App Cas 345 at 360

Mr Kinkade closely followed the takeover activity in relation to Symbion during 2007 and early 2008. Healthcare also advised Epworth from time to time of the progress of various merger and takeover proposals. There is also evidence that the board was kept informed.

From soon after his appointment, Mr Kinkade was fully aware of the opportunity to terminate the service agreement for change in control. If he had not reviewed the service agreement for the purpose of a strategy meeting, held within days of taking up his new position, he had certainly done so prior to preparing the notice of breach. He obtained specific advice from Epworth’s solicitors on the question of whether the Healthscope offer, if accepted, would be a change in control. He was aware of cl 8.1(d) and had a demonstrated interest in its application during 2007.

Mr Kinkade said that his objective was to have Healthcare improve its level of performance and to negotiate a new service agreement. He employed the notice of breach to induce Healthcare to invest millions of dollars in new equipment, to revise its practices and to improve its level of performance. He did so under threat of termination. Notwithstanding Healthcare’s repeated requests to Epworth that it withdraw the notice, Mr Kinkade refused to do so, maintaining the threat of termination for specified breaches until 5 May 2008.

From 13 February 2008 Epworth, through its board and Mr Kinkade, knew the facts that brought the right to terminate for change in control into operation. I do not accept Mr Kinkade’s explanation that, by reason of his absences in early 2008, he might have been less acquainted with the detail surrounding the takeover. He remained astute to the takeover events as they unfolded in 2007 and 2008. He was well aware that a change in control would present Epworth with a strategic opportunity.

From 11 January 2008, at the very latest, Mr Kinkade knew that the 3T MRI machine had been purchased by Healthcare in December 2007, was to be delivered in March and installed in April 2008. Delivery and installation was undertaken after the change in control had occurred. Mr Kinkade stood by and allowed the work to be commenced and completed before terminating for change in control.

Epworth submitted that its silence could not be regarded as an unequivocal act of election. It also submitted that a right to terminate is not lost by inaction or by the promisee (Epworth) doing an act consistent with the continuation of the contract.

Epworth was not silent. Prior to and after 13 February 2008, Mr Kinkade expressly reaffirmed Epworth’s expectation of performance under the service agreement in discussions with Healthcare and Primary representatives. Although conduct communicating affirmation of a contract must take place after the facts establishing the right to terminate are known, prior events and circumstances should not be ignored. Epworth’s requirement that Healthcare remedy breaches and perform obligations, including investment in “new modalities”, commenced soon after Mr Kinkade arrived at Epworth and crystallised in the notice of breach. These initial demands for performance continued to echo in the correspondence and meetings Mr Kinkade had with Healthcare representatives throughout the second half of 2007 and throughout 2008 until early May when Epworth terminated.

The demands for performance by Mr Kinkade cannot be characterised as merely involving a recognition of the contract. In Champtaloup v Thomas, Mahoney JA said:

The Australian cases are, in my opinion, consistent with the view that it is not in every case in which a right has been exercised under the contract that an election will be imputed to the relevant party. Crain v Colonial Mutual Fire Insurance Co Ltd, one of the main cases upon this question, illustrates the distinction between doing things which recognise that the contract remains in force, and exercising rights under the contract adversely to the other party.[22]

The requirement that Healthcare perform under the service agreement and invest in new equipment was adverse to Healthcare in the relevant sense and unequivocal.

[22]Champtaloup v Thomas [1976] 2 NSWLR 264, at 276, emphasis added.

Healthcare relied upon the delay between the time at which Epworth was aware of the facts establishing the right to terminate and notice of termination, as an alternative basis for election. In the circumstances the delay was so unreasonable that an election is to be imputed to Epworth on that basis alone.

After Primary took control of Symbion (13 February 2008), Epworth allowed more than two months to elapse before acting to terminate. From 11 January 2008 Epworth was fully aware that installation was to take place in March and April 2008. It knew when the work commenced and was completed. Although it is not a requirement of a binding election, Epworth was also fully aware of the legal consequence of a change in control. I find that Epworth deliberately delayed exercising its right to terminate until after the 3T MRI was installed and commissioned. I reject Mr Kinkade’s evidence that the timing of the meeting with Dr Bateman, after the machine had been installed and commissioned, was a mere coincidence.

The delay by Epworth acted adversely to Healthcare.[23] I do not accept Epworth’s submission that it acted reasonably and did not unduly delay making its decision to terminate. A minimum response by Epworth would have been to immediately bring a halt to the delivery and installation of the 3T MRI machine until the legal position concerning the right to terminate for change in control could be resolved. It was not submitted by Epworth that the evidence of Dr Bateman, concerning his knowledge of a risk of termination, was relevant to whether Epworth’s conduct was adverse to Healthcare or whether the delay was unreasonable. Dr Bateman’s evidence is discussed below in connection with assumptions supporting an estoppel.
[23]Sargent at 656, 658; Tropeano v Roboni [2005] VSC 229 at [121]; Champtaloup v Thomas [1976] 2 NSWLR 264 at 273.

I do not consider Dr Bateman’s state of mind to be relevant to whether Epworth positively elected to affirm, although it may be relevant to whether an election is to be imputed because of unreasonable relay. His belief was that Epworth could not terminate for change in control – although he was pragmatic enough to accept that the advice he had been given might have been incorrect. He was not under any duty to confront Epworth with that possibility and his failure to do so does not, in my view, diminish the significance of Epworth’s conduct in standing by while the 3T MRI was delivered, installed and commissioned.

In summary, by requiring performance of the service agreement, including the installation of the 3T MRI, Epworth unequivocally affirmed the service agreement. Further, by its delay, coupled with the consequential prejudice to Healthcare, a binding election is to be imputed to Epworth.

Estoppel by conduct

While sharing a common foundation with election, much will depend upon the nature of the conduct relied upon to support an estoppel, the formulation of any assumption or representation and reliance. In the present case, Healthcare alleged that it purchased and installed the 3T MRI machine and other equipment at the hospital acting in reliance on two assumptions: (1) that the plaintiff would not exercise any entitlement it may have had to terminate the agreement for change in control; and (2) that Healthcare would not be prevented from continuing to provide radiology services at the hospital pursuant to the service agreement for its duration notwithstanding the takeover of Symbion by Primary.

Healthcare also alleged that Epworth did not disclose to Healthcare that it was considering or intended to terminate the service agreement for change in control. The failure to warn is relied upon to construct a representation by Epworth that it would not terminate for change in control. The same conduct is relied upon as part of Healthcare’s counterclaim in which it alleged contraventions of the Trade Practices Act and the Fair Trading Act.

Healthcare did not expressly allege a duty of disclosure. There is no general duty of disclosure in commercial dealings.[24] A duty may, however, arise as a matter of conscience so as to support an estoppel[25] or a failure to warn may constitute misleading or deceptive conduct in contravention of the Trade Practices Act[26]. A duty to warn, arising in such circumstances, does not depend upon the general law principles. Circumstances may be such that a failure to communicate a matter may constitute misleading or deceptive conduct because, in all the circumstances, a person was entitled to believe that a relevant matter would have been communicated and infer from silence that a relevant risk did not exist.[27]
[24]Lam v Ausintel Investments Australia Pty Ltd (1990) 97 FLR 458, 475.
[25]Commonwealth v Verwayen (1990) 170 CLR 394, 444
[26]Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, 32.
[27]Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97, 114.

Having reviewed the circumstances in which a departure from an assumption may be unconscionable, Deane J said in Commonwealth v Verwayen[28]:

Ultimately, however, the question whether departure from the assumption would be unconscionable must be resolved not by reference to some preconceived formula framed to serve as a universal yardstick but by reference to all the circumstances of the case, including the reasonableness of the conduct of the other party in acting upon the assumption and the nature and extent of the detriment which he would sustain by acting upon the assumption if departure from the assumed state of affairs were permitted.

[28](1990) 170 CLR 394, 444.

It is in its formulation of the assumptions and representation and its need to prove reliance, that Healthcare draws a distinction between its case for election on the one hand and estoppel on the other. Epworth submitted that there was no representation to or assumption made by Healthcare as alleged and that the acts said to constitute reliance cannot be so characterised. Epworth submitted that Healthcare was aware that Epworth had a right to terminate for change in control and did not ask for consent. It argued that Dr Bateman had been advised of a risk of termination but refrained from raising the matter with Epworth. Epworth submitted that Healthcare could not have assumed that Epworth would not exercise the right should the circumstances permit. It submitted that, in any event, the capital expenditure undertaken by Healthcare predated the change in control and that the installation of the 3T MRI was coincidental with the period in which Epworth began investigating whether it had the right to terminate and whether it would do so.

Dr Bateman’s knowledge and appreciation of the risk of termination for change in control is only relevant in the period after Primary took control of Symbion. By then the change had already taken place. Dr Bateman said that he had been advised that a change in control of Symbion did not equate with a change in control of Healthcare, although he acknowledged the possibility that the advice may be incorrect. He decided against raising the matter with Mr Kinkade. He said that he had also been advised that the change in control of Symbion did not affect the leases.

The evidence of Dr Bateman provides some insight into the nature of any assumption by Healthcare, whether the assumption was induced by Epworth and the issue of reliance. If after the takeover Healthcare, through Dr Bateman, believed that Epworth did not have the right to terminate the service agreement for change in control, but that if it did, the exercise of any such right could not affect the leases, the first assumption as pleaded by Healthcare seems implausible. That is because the assumption actually held from mid-February was the product of advice or a considered view about the meaning of the agreement.

The second assumption pleaded by Healthcare - that if it complied with Epworth’s demands, Healthcare would be able to provide services for the duration of the agreement – also seems implausible. The assumption is unrealistic in that it fails to accommodate the contractual right Epworth had to terminate in the future for some new unrectified breach.

While the assumptions as formulated and pleaded by Healthcare may be implausible or unrealistic, that does not mean that there was no relevant assumption made or conduct by Epworth sufficient to support an estoppel. It is often difficult to precisely formulate assumptions where the conduct relied upon is silence or inaction and the assumption relates to the existence or nature of a legal right. This is such a case.

The evidence does, however, support a more general assumption by Healthcare to the effect that it was not exposed to any risk of termination by reason of the takeover events that occurred in 2007 and 2008. Such an assumption is entirely consistent with and explains the conduct of Healthcare.

Mr Polidori said that he arranged for the purchase of the 3T MRI machine on the basis that the commercial relationship with Epworth would be on-going. It was installed under his supervision during April and early May 2008 and became operational on 5 May 2008. Dr Bateman said that had he been aware that Epworth might terminate the service agreement for change in control, he would have reviewed Healthcare’s commercial options, including the installation of the 3T MRI machine at another site where Healthcare also provided radiology services. Common sense compels the conclusion that Healthcare would not have made the investment unless it believed that to do so would repair the relationship. Had it believed that there was a risk of termination for change in control Healthcare would not have purchased, delivered or installed the 3T MRI machine without the risk being addressed.

There was no direct evidence about the basis for any assumption by Healthcare before Dr Bateman’s belief became relevant. Assumptions concerning the risk of termination, may have been made by Healthcare for a number of reasons. Healthcare may simply have overlooked the significance of cl 8.1(d) in the service agreement or formed the view that it did not apply for any one of a number of reasons. I doubt that Healthcare’s belief, prior to the takeover, was as sophisticated as that expressed by Dr Bateman. It is more likely that Healthcare’s relevant belief and assumption was influenced by the notice of breach and perhaps the prominence of the leases as the instruments defining the relationship. Had Healthcare turned its mind to the risk of a change in control it is likely to have been influenced by the terms of the 2007 leases, which specifically dealt with change in control, expressly exempting the takeover of a listed company as creating any risk to Healthcare.

Whatever the cause, Healthcare did not regard the events unfolding in and after November 2007, concerning the Primary bid for Symbion, as exposing it to any risk of termination. When called upon to make a substantial investment in new equipment and the future of the relationship, Healthcare sought to have Epworth withdraw the notice of breach. It did not raise any concern about a risk associated with the takeover activity. I have no doubt that had Healthcare perceived any such risk it would have sought to eliminate or minimise the risk before proceeding. I infer that when negotiating the purchase of the 3T MRI Healthcare assumed that it was not exposed to risk of termination for change in control.

The assumption that the takeover activity did not expose it to a risk of termination was not initially induced by Epworth, although it was not maintained in a vacuum. By the notice of breach and its conduct thereafter, in specifying its complaints and expectations, Epworth conveyed to Healthcare that if it remedied the specified defaults, the threat of termination would be withdrawn and the service relationship restored to a normal and ongoing basis. Healthcare responded to Epworth’s demands for performance on that basis. This is apparent from the efforts made by Healthcare to have the notice and allegations withdrawn.

From the time Primary made its bid for Symbion, Epworth knew that there was at least a possibility that control of Healthcare would change. I do not accept Mr Kinkade’s evidence to the effect that he had no such appreciation. Primary continued to extend the time for acceptance. The Primary offer was for a full takeover. By mid‑March 2008 Mr Kinkade was exploring new commercial opportunities for Epworth on the basis that “we are in a situation with an option to consider in respect of one of our radiology providers.” This was a reference to Healthcare and the option under consideration was termination. One possibility being explored was for Epworth to take over the provision of radiology services. Mr Kinkade was an astute observer with a keen interest in finding any opportunity that might provide leverage for Epworth. He also saw an opportunity for Epworth to take over the assets of Healthcare on a favourable basis.

Mr Kinkade was aware that Healthcare had been reluctant to order the 3T MRI machine until the notice of breach was withdrawn. He knew that Healthcare had sought to impose such a condition. Mr Kinkade refused to withdraw the notice. He was also aware that Healthcare had not sought to impose any condition that Epworth consent to the possible takeover, nor did it seek to address any such risk. The takeover activity and the purchase and installation of the 3T MRI machine were discussed at a meeting between representatives of Epworth and Healthcare held on 11 January 2008. Mr Kinkade was in attendance. From those events and circumstances I infer that from 11 January 2008, at the latest, it seems very likely that Mr Kinkade would have known that Healthcare did not regard the takeover activity as a risk to the continuation of the service relationship once the specific complaints had been resolved and the notice of breach withdrawn. Mr Kinkade may have come to that realisation much earlier. The failure of Healthcare to raise the issue as a condition for its investment in the 3T MRI should have put Mr Kinkade on notice that Healthcare did not appreciate any risk of termination arising out of the takeover events. Mr Kinkade ought to have appreciated the risk to Healthcare and yet did nothing to correct what he knew or ought to have known, to be a misunderstanding by Healthcare.

In ordinary circumstances Epworth would not have been obliged to warn a contracting party of a risk of termination. This was no ordinary circumstance. By making explicit demands for performance under the service agreement, saying nothing of the risk of termination as a consequence of the takeover activity, Epworth took advantage of Healthcare’s assumption. It took a very substantial benefit from Healthcare’s performance while reserving to itself a right to terminate for a different, undisclosed, reason. Those circumstances, in my opinion, imposed on Epworth a duty to correct Healthcare’s assumption before requiring it to purchase and install the 3T MRI machine or permitting the delivery and installation work to be undertaken. Epworth maintained its silence. It allowed the machine to be delivered and works to be completed before terminating. In the circumstances, the act of termination was unconscionable.

Epworth submitted that unless it knew that Healthcare laboured under the assumption and failed to correct the assumption when it was its duty to do so, there was no foundation for an estoppel. Mr Kinkade’s denial of knowledge of assumptions by Healthcare is confined in terms to those pleaded. He was not questioned about the more general assumption - that Healthcare did not regard the takeover activity as exposing it to any risk of termination. Having regard to his evidence a whole, I have little doubt that, had he been asked, Mr Kinkade would have denied knowledge of any such assumption.

It is difficult to accept that Mr Kinkade was not fully aware, in and from December 2007, that Healthcare did not regard itself at risk of termination from the takeover activity. Notwithstanding the compelling evidence to support his actual knowledge, I decline to make such a finding only because that assumption and the question of Mr Kinkade’s actual knowledge was not expressly raised as an issue in the proceeding. But, Mr Kinkade ought to have known of the assumption. That being so it would be unconscionable to allow Epworth to depart from the assumption under which it knew Healthcare was operating. Epworth’s conduct may also be characterised as constituting an implied representation that it would not terminate unless Healthcare failed to respond to an express demand for performance. Epworth should be estopped from departing from that implied representation.

Epworth submitted that the alleged acts of reliance by Healthcare were motivated by considerations other than any such assumption. It submitted that the capital investments and allocation of resources being made by Healthcare were motivated by desire to maintain and retain their commercial interests.

I have no doubt that Healthcare and its ultimate owner, Symbion and then Primary, were motivated to protect their commercial interests under the service agreement and the leases. Whether justified or not, Healthcare was placed under continuing pressure of termination by Epworth for failure to perform its obligations under the service agreement. Healthcare, through its various representatives at Epworth and in management positions at Symbion, exhibited a clear intention to preserve the benefit of the service agreement and leases. Such a motivation is not, however, inconsistent with reliance upon the assumption.

Accordingly, I find that Epworth is estopped from relying upon the change in control of Healthcare, as a consequence of the takeover by Primary of Symbion, as a ground for termination of the service agreement.

Minimum equity

Epworth argued that if Healthcare was entitled to relief to give effect to an estoppel, it was only entitled to the minimum relief which would prevent injustice arising by reason of the departure from the assumption or expectation which had been adduced. Epworth submitted that it should not be prevented from terminating the service agreement and the leases but, as a condition of termination, Healthcare should be given a practical period to vacate and reimbursed its additional costs of removal. I do not regard such an outcome as just or equitable. The equity invoked by Healthcare is to prevent Epworth gaining an unfair advantage from its failure to warn Healthcare that its assumption about risk of termination was incorrect. Insofar as Healthcare may rely upon estoppel in the present circumstances, I see no reason why it should be entitled to a remedy less effective than one which preserves the subject matter of the assumption – the absence of any risk of termination arising out of the takeover.

Misleading or deceptive conduct

Healthcare devoted very little attention during the trial to the issue of whether Epworth engaged in misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act or s 9 of the Fair Trading Act. It submitted, however, that Epworth’s conduct supporting the estoppel also amounted to unconscionable conduct or misleading and deceptive conduct.

Epworth’s failure to warn Healthcare of the risk of termination for change in control was conduct in contravention of s 52 of the Trade Practices Act and s 9 of the Fair Trading Act. Having failed to warn Healthcare, termination of the service agreement for change in control was unconscionable.

A claim for damages was not pursued in final submissions, although I did not take it to have been abandoned. Such a remedy is completely inadequate. The inadequacy of damages, calculated by reference to the cost of unwinding the investment made by Healthcare during the period of Epworth’s silence overlooks the real consequence of Epworth’s conduct. If Epworth had warned Healthcare of the risk of termination for change in control, all investment and other compliance activity by Healthcare would have ceased until either consent was forthcoming or the legal position clarified.

Having regard to the conclusion that Epworth elected to affirm the service agreement, it is unnecessary to make any orders consequent upon a breach of the Trade Practices Act or Fair Trading Act. The only orders I would make, if required to do so, would be under s 87 of the Trade Practices Act and s 158 of the Fair Trading Act restraining Epworth from acting upon its notice of termination dated 7 May 2008 or otherwise from terminating the service agreement by reason of the change in control of Healthcare arising out of the takeover of Symbion by Primary.

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(1)For the purposes of this Act, an entity controls a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity's financial and operating policies. (2) In determining whether the first entity has this capacity:

(a)the practical influence the first entity can exert (rather than the rights it can enforce) is the issue to be considered; and

(b)any practice or pattern of behaviour affecting the second entity's financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust).

(3)The first entity does not control the second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity's financial and operating policies. (4) If the first entity:

(a)has the capacity to influence decisions about the second entity's financial and operating policies; and

(b)is under a legal obligation to exercise that capacity for the benefit of someone other than the first entity's members;

the first entity is taken not to control the second entity.

[2009] VSC 293

31 July 2009