Idameneo (No 123) Pty Ltd v Thomas Martin Suszko

[2015] SASC 29

SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Application)

IDAMENEO (NO 123) PTY LTD v THOMAS MARTIN SUSZKO

[2015] SASC 29

Judgment of The Honourable Justice Stanley

13 February 2015

PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - PLEADINGS

PROCEDURE - MISCELLANEOUS PROCEDURAL MATTERS - CROSS-CLAIMS: SET-OFF AND COUNTERCLAIM

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES

Application by the defendant for permission to file and serve an amended defence, set-off and counterclaim.

The plaintiff entered into two contracts with the defendant in 2007.  The defendant was a medical practitioner.  The two contracts were a Sale Deed and a Practitioner Contract.  The plaintiff alleges that pursuant to the Sale Deed the plaintiff purchased the defendant’s practice, the defendant agreed to provide medical services for a minimum period of five years from the defendant’s premises and the defendant agreed to enter into a separate agreement with the plaintiff for the provision of medical services and to provide such medical services in accordance with the Practitioner Contract.  The Sale Deed included a restraint clause.  The plaintiff alleges that the restraint operates for a period concluding in February 2016.  The restraint clause prevents the defendant during the restraint period from rendering medical services within a radius of 10 kilometres of Port Adelaide or 10 kilometres of Royal Park.  The plaintiff alleges that the defendant terminated the Practitioner Contract in February 2013 and shortly thereafter breached the restraint clause and continues to do so. The existing defence pleads, inter alia, that the Sale Deed did not involve a true sale of the defendant’s medical practice at all.  It alleges that the plaintiff did not actually acquire any goodwill in the patients of the old practice conducted by the defendant.  Rather, the goodwill remained with the defendant and what the plaintiff acquired was the exclusive right to provide management services to the defendant for a period of five years and to receive in return 50 per cent of the fees charged by the defendant to his patients.  It alleges that the restraint is void and unenforceable as a matter of public policy including because it goes further than is reasonably necessary to protect any legitimate commercial interest of the plaintiff.  That defence was filed and served in May 2013.  The trial of the action is listed to commence on 2 March 2015.  It is listed for three weeks.  It has been listed since 14 May 2014. The application seeks to make extensive amendments to the existing defence.  It now seeks to plead a cause of action in deceit and to raise defences of unconscionable conduct and equitable fraud.  The basis of this extensive plea is an allegation that the sale contract is a sham and as such illegal so that the restraint is unenforceable. 

Held:

1. The fact of substantial delay and wasted costs and their effect on the parties, the Court and other litigants and the concerns of case management assume importance on an application for permission to amend (at [2]).

2.The failure of the defendant to explain the reasons for the delay in bringing the application is significant given the evidence before the Court that the very factual and legal foundation of the proposed amendments must have been well understood by the defendant for nearly two years (at [17]).

3. I am satisfied that if the amendment was permitted the trial would have to be adjourned.  The adjournment will result in significant costs being incurred.  An adjournment will not only prejudice the plaintiff, it will have repercussions for other litigants waiting to get their action listed for trial (at [16]).

4. Application refused (at [1]).

Medical Practice Act 2004 (SA) s 39; Supreme Court Civil Rules 2006 (SA) r 3, referred to.
AON Risk Services Australia Ltd v ANU (2009) 239 CLR 175; Idameneo (No 123) Pty Ltd v Angel-Honnibal (2003) ATPR 41-918; Symbion Medical Centre Operations Pty Ltd v Alexander [2010] NSWSC 1047; Sidameneo (No 456) v Alexander [2011] NSWCA 418; Channel Seven Adelaide Pty Ltd v Manock [2010] SASCFC 59; Dawson v DCT (1984) 71 FLR 364, considered.

IDAMENEO (NO 123) PTY LTD v THOMAS MARTIN SUSZKO
[2015] SASC 29

Application

1. STANLEY J:         This is an application by the defendant for permission to file and serve an amended defence, set-off and counterclaim.  On 13 February 2015 I refused the application.  These are my reasons.

2. In AON Risk Services Australia Ltd v ANU[1] the High Court emphasised that a party did not have an entitlement to amend a pleading subject to payment of costs by way of compensation.  Any application to amend must be decided by a consideration of all matters relevant to the exercise of the power to permit amendment.  The fact of substantial delay and wasted costs and their effect on the parties, the Court and other litigants and the concerns of case management assume importance on an application for permission to amend.  Relevant matters include the nature and importance of the amendment to the party applying, the stage the litigation has reached when the amendment is sought and the explanation for any delay in applying for the amendment. 

   [1] [2009] HCA 27, (2009) 239 CLR 175.

3. In this case, the plaintiff, which is a wholly owned subsidiary of Primary Health Care Ltd (PHCL), entered into two contracts with the defendant in 2007.  The defendant is and was at the relevant time a medical practitioner.  He conducted a general practice at Port Adelaide.  The two contracts were a Sale Deed and a Practitioner Contract.  The plaintiff alleges that pursuant to the Sale Deed the plaintiff purchased the defendant’s practice, the defendant agreed to provide medical services for a minimum period of five years from the defendant’s premises at Royal Park and the defendant agreed to enter into a separate agreement with the plaintiff for the provision of medical services and to provide such medical services in accordance with the Practitioner Contract.  The Sale Deed included a restraint clause.  The plaintiff alleges that the restraint operates for a period concluding in February 2016.  The restraint clause prevents the defendant during the restraint period from rendering medical services within a radius of 10 kilometres of Port Adelaide or 10 kilometres of Royal Park.  The plaintiff alleges that the defendant terminated the Practitioner Contract in February 2013 and shortly thereafter breached the restraint clause and continues to do so.

4. The existing defence pleads, inter alia, that the Sale Deed did not involve a true sale of the defendant’s medical practice at all.  It alleges that the plaintiff did not actually acquire any goodwill in the patients of the old practice conducted by the defendant at Port Adelaide.  Rather, the goodwill remained with the defendant and what the plaintiff acquired was the exclusive right to provide management services to the defendant for a period of five years and to receive in return 50 per cent of the fees charged by the defendant to his patients.  It alleges that the restraint in clause 5 of the Deed is void and unenforceable as a matter of public policy because it goes further than is reasonably necessary to protect any legitimate commercial interest of the plaintiff and because the restraint prevents the provision of medical services in the western suburbs of Adelaide where there is a shortage of doctors, in circumstances where there is a public interest in ensuring patients have continuity of medical care and can consult a doctor of their choice instead of dealing with “large medical centres like the plaintiff’s” which do not provide a proper medical service.  That defence was filed and served in May 2013.  The trial of the action is listed to commence on 2 March 2015.  It is listed for three weeks.  It has been listed since 14 May 2014. 

5. The application seeks to make extensive amendments to the existing defence.  It now seeks to plead a cause of action in deceit and to raise defences of unconscionable conduct and equitable fraud.  The basis of this extensive plea is an allegation that the sale contract is a sham and as such illegal.  Accordingly, as submitted by Ms Powell QC, counsel for the defendant, the restraint is unenforceable. 

6. The basis of the allegation of a sham contract, as I understand it, is that the Sale Deed purports to purchase the defendant’s medical practice, including its goodwill, as a going concern.  It is alleged that this is done in order to induce the defendant to enter into the Sale Deed and the Practitioner’s Contract by representing to him that he is able to obtain favourable taxation treatment in relation to CGT and GST.  The defendant wishes to allege that he has been exposed to a contingent liability for GST and CGT and penalties by reason of this fraudulent representation made by the plaintiff.  The amendments seek to allege that the plaintiff has known since the decision of the New South Wales Supreme Court in Idameneo (No. 123) Pty Ltd v Angel-Honnibal,[2] which has been subsequently followed by further decisions of that Court in Symbion Medical Centre Operations Pty Ltd v Alexander[3] and the subsequent appeal to the New South Wales Court of Appeal in Sidameneo (No.456) v Alexander,[4] that the arrangements embodied in the Sale Deed are a sham because there has been no true sale of the medical practice of the defendant, including its goodwill, as a going concern as the Sale Deed represents. This is because there can be no acquisition of the defendant’s practice and goodwill by the plaintiff because it is not a medical practitioner within the meaning of s 39 of the Medical Practice Act 2004 (SA).

   [2] [2002] NSWSC 1214, (2003) ATPR 41 - 918.

   [3] [2010] NSWSC 1047.

   [4] [2011] NSWCA 418.

7. The allegations of deceit, unconscionable conduct and fraud are based on the proposition that the plaintiff, or its parent company, has known since the Angel-Honnibal decision in 2002 that the basis upon which it has contracted with doctors to “acquire” its practices is not legally valid, and yet it has persisted in proffering contracts in essentially the same form as have been the subject of the litigation in New South Wales.  In addition, the plaintiff has continued to proffer to doctors advice in relation to the tax treatment of those “acquisitions” which it knows to be wrong.

8. The proposed pleading seeks to traverse the manner in which the parent company of the plaintiff, PHCL, and its officers and senior management have  treated this and many like acquisitions of medical practices for accounting purposes over the period since 2002.  The defendant wishes to allege that the treatment in the accounts of goodwill booked from the purchase of medical practices evidences the fact that PHCL and its subsidiaries, including the plaintiff, have continued the “sham” of maintaining that these medical practices have been acquired as a going concern notwithstanding the judgments in Angel-Honnibal and Alexander 1 and 2.

9. The extent of the amendment sought can be illustrated in this way.  The existing defence is set out in 22 paragraphs.  It occupies eight and a quarter pages.  The proposed amended defence, set-off and counterclaim consists of 57 paragraphs occupying 20 and half pages.  Obviously, it is more than twice as long as the existing defence.

10. In deciding whether to permit a late amendment to pleadings, the Court is required to consider all matters relevant to the exercise of the power and weigh them appropriately.  Those factors are helpfully identified in the reasons of this Court in Channel Seven Adelaide Pty Ltd v Manock[5] by Bleby J as follows:[6]

    [5] [2010] SASCFC 59.

    [6] [2010] SASCFC 59 at [46].

    [T]here are a number of relevant matters that will need to be taken in to account in determining whether a late application for permission to amend should be granted.  Those matters include:

    (1)Whether there has been undue delay in making the application;

    (2)The extent to which there will be wasted public resources in granting the amendment;

    (3)Whether there will be inefficiency occasioned by the need to revisit interlocutory processes;

    (4)Whether a trial date would need to be vacated or a trial adjourned;

    (5)Whether there is any satisfactory reason for the delay in applying;

    (6)Whether the point to be raised by the amendment would be raised in any event at the trial;

    (7)The likelihood of strain and uncertainty being imposed on the litigants;

    (8)Whether any further delay would undermine confidence in the administration of civil justice;

    (9)Any other prejudice likely to be suffered by the other party;

    (10)The additional costs likely to be incurred.

    [Citations omitted].

11. Those factors are not necessarily exhaustive.

12. In my view, this is a late application.  The application to amend was formally filed on 16 January 2015.  It is supported by an affidavit of his solicitor, Mr Maidment, which was not filed until 30 January 2015.  The affidavit is opaque and unsatisfactory.  It lacks the necessary specificity to be expected in explaining the reason for the delay in bringing the application to amend.  In particular, it fails to identify precise times when it has said that the defendant either personally or by his solicitors learned of matters alleged to be relevant to the need to amend the defence and establish a right to a set-off and counterclaim.  Further, the affidavit refers to advice obtained from a solicitor and a chartered accountant without identifying either of them, when the advice was obtained or exhibiting such advice. 

13. The plaintiff’s solicitor has sworn an affidavit in opposition to the application to amend.  In his affidavit, Mr McCabe deposes to the prejudice the plaintiff would suffer if the amendment was permitted.  First, it would necessitate the adjournment of the trial which the plaintiff has been preparing for since May 2014.  Secondly, the serious allegations of fraud, deceit and unconscionable conduct extend over the period since 2002.  It involves the conduct of officers and employees of a publicly listed company.  The work required to meet the allegations sought to be pleaded would involve extensive and time consuming investigations.  If the amendment was allowed it is likely to lead to further interlocutory arguments, applications for non-party disclosure, the provision of expert reports and further pleading arguments.  All of this renders it unlikely that the plaintiff would obtain a judgment in its action prior to the expiry of the restraint period in February 2016.  Its remedy would be then confined to damages.

14. Further, the allegation of the fraudulent representations made in respect of the taxation treatment of the practice “acquisition” affected by the Sale Deed concerns representations allegedly made over seven years ago.  The evidence may turn on conversations.  There is obvious prejudice in asking any witness to recall words spoken so long ago. 

15. As both parties acknowledge, the additional allegations sought to be raised are serious.  In my view, if permitted, they would necessitate extensive additional evidence to be called from officers and employees of PHCL, and perhaps the auditors of PHCL, of limited relevance to the central issue in the trial, namely, the enforceability of the restraint clause.

16. I did not understand Ms Powell to contest the submission that the grant of permission to amend would necessitate an adjournment of the trial.  In any event, I am satisfied that if the amendment was permitted the trial would have to be adjourned.  The adjournment will result in significant costs being incurred.  An adjournment will not only prejudice the plaintiff, it will have repercussions for other litigants waiting to get their action listed for trial. 

17. The failure to explain the reasons for the delay in bringing the application is significant given the evidence before the Court that the very factual and legal foundation of the proposed amendments must have been well understood by the defendant and his advisors for nearly two years.  The defence dated 3 May 2013 expressly alleges that the Sale Deed did not involve a true sale of the medical practice at all, and that the plaintiff did not actually acquire any goodwill in the patients of the defendant’s old practice.  Rather, the goodwill remained with the defendant and the plaintiff merely acquired an exclusive right to provide management services to the defendant under certain conditions.  That plea is consistent with a letter from the defendant’s solicitor to the plaintiff’s solicitor dated 11 April 2013 which referred to the judgment of the New South Wales Court of Appeal in Alexander (No.2) and asserted that it stood for the proposition that the plaintiff did not acquire any goodwill in the medical practice of the defendant nor any proprietary interest in the patient list.  This is further reinforced by another letter from the defendant’s solicitor to the plaintiff’s solicitor on 21 May 2013 where Mr Maidment asserts that the plaintiffs so-called “goodwill” is limited and does not extend to any interest in the goodwill of any practice of a practitioner who happens for a time to conduct his or her practice from the plaintiff’s medical centre and involves no proprietary interest in the medical records and patient history of the patients attending the medical centre for treatment by the medical practitioner. 

18. On 22 August 2013 in an application for summary judgment by the defendant, his counsel submitted to this Court that the restraint provision in the Sale Deed is drafted on the fiction that the plaintiff was purchasing the “goodwill” or the “practice” of the defendant.  Referring to the judgment of the New South Wales Supreme Court in Angel-Honnibal, he submitted that the premise that there was a sale of a medical practice and the acquisition of goodwill by the plaintiff is a fiction.  Then in a position paper prepared for a mediation in November 2013 the defendant contended that the Sale Deed was a fiction and part of an illegal scheme devised by the plaintiff.  The document went on to contend that the Sale Deed is a sham document tainted with illegality and the restraint in Clause 5 is therefore void as contrary to public policy.[7] 

    [7]    Exhibit NGM 48.

19. Against this background the defendant has provided no satisfactory explanation for why the application to amend in the extensive fashion sought, raising serious allegations involving conduct by the officers and employees of a publicly listed company over many years, was brought so late after the factual and legal basis for the amendments must have been well-known to him and his advisors.  In my view, no satisfactory explanation for the delay has been provided.   

20. I am further satisfied that to grant the application for permission to amend would necessitate the adjournment of the trial with significant costs thrown away, the filing of an extensive reply, the need for considerable additional evidence, the likely provision of expert reports and the taking of expert evidence, applications for non-party discovery, and further arguments over pleadings involving significant interlocutory proceedings.  All of this would result in the incurring of considerable costs.

21. The discretion to be exercised by the Court in considering whether to permit amendment is not at large, but must be exercised in order to achieve the objects set out in 6SCR 3. A “just resolution” of the case must be understood in light of these objects. A consideration of the factors identified in Manock militates against permitting the application to amend.  In the exercise of the Court’s discretion, it is a significant factor that a trial will have to be vacated if the amendment is permitted.[8] 

    [8]    AON Risk Services Australia Ltd v ANU [2009] HCA 27 at [25], (2009) 239 CLR 175 at 189; Dawson v DCT (1984) 71 FLR 364 per King CJ at 366.

1. There has been undue delay in making the application to amend. Allowing the amendment would result in the adjournment of the trial.  That would result in the waste of public resources.  In all likelihood the pleadings will be revisited.  An extensive reply can be anticipated.  The potential for further argument at an interlocutory stage is obvious.  No satisfactory reason for the delay in applying for the amendment has been proffered.  It is likely that if the application was permitted the plaintiff would be deprived of the remedy of enforcement of the restraint and it would be confined to a remedy in damages if it succeeded at trial.  In my view there can be no doubt that to permit the amendment would result in significant additional costs being incurred.  Weighing all the matters relevant to the exercise of the power to permit amendment persuades me to refuse the application.