Idoshore Pty Limited v IPN Medical Centres (NSW) Pty Limited - [2007] FCA 1175

FEDERAL COURT OF AUSTRALIA
Idoshore Pty Limited v IPN Medical Centres (NSW) Pty Limited
[2007] FCA 1175
TRADE PRACTICES – misleading and deceptive conduct – representations and warranties collateral to written contract purportedly concerning future matters
CONTRACT – sale of business – interpretation of complex written contractual arrangements settled between legal representatives of vendor and purchaser of business – whether the contract by implication excluded oral representations and warranties made antecedently to or collaterally with formation of written contract – meaning and operation of principal contract relating to disputed increase in price based on first year’s financial results of business – operation of subsequent written variation to contract of sale – directions concerning assessment of damages
Trade Practices Act 1974 (Cth) ss 51A, 52, 82
Federal Court of Australia Act 1976 (Cth)
Jones v Dunkel (1959) 101 CLR 298 cited
McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 cited
James v Australia And New Zealand Banking Group Ltd (1986) 64 ALR 347 referred to
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 referred to
Gullett v Gardner (1948) 22 ALJ 151 referred to
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 referred to
IDOSHORE PTY LIMITED v IPN MEDICAL CENTRES (NSW) PTY LIMITED, IPN HEALTHCARE PTY LIMITED
NSD 1510 OF 2004
CONTI J
7 AUGUST 2007
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 1510 OF 2004

BETWEEN:

IDOSHORE PTY LIMITED
Applicant/Cross-Respondent

AND:

IPN MEDICAL CENTRES (NSW) PTY LIMITED (formerly Foundation Medical Centres (NSW) Pty Limited)
First Respondent/First Cross-Claimant

IPN HEALTHCARE PTY LIMITED (formerly Foundation Healthcare Pty Limited)
Second Respondent/Second Cross-Claimant

JUDGE:

CONTI J

DATE OF ORDER:

7 AUGUST 2007

WHERE MADE:

SYDNEY

THE COURT DECLARES THAT:
1.Upon the true construction of the Business Sale & Purchase Agreement bearing date 14 December 2000 made between the parties to the proceedings and in the events which subsequently happened, the respondents are severally liable to pay to the applicant an adjustment upwards to the purchase price pursuant to sub-clause 3.3(a) of that Agreement to the extent appearing in the reasons for judgment of the Court.

THE COURT ORDERS THAT:
1.The applicant provide to the Court by no later than 2 pm on Friday 10 August 2007 such written calculations (inclusive of dates of computation and accompanying explanations) as are required to give effect to the foregoing declaratory relief.
2.The respondents and each of them pay to the applicant the respective sums of $85,000 and $125,000 the subject of the application.
3.Each of those amounts bear interest at such rate and computed respectively from such date or dates (as the case may be) as may be determined by the Court after receipt of written submissions to be provided by the respective parties in relation thereto by no later than 2 pm on Friday 10 August 2007.
4.The respondents’ cross-claim be dismissed.
5.Each of the parties furnish to the Court written submissions as to costs of the proceedings to be provided by no later than 2 pm on Friday 10 August 2007.
6.There be liberty to either party to apply on one day’s notice.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 1510 OF 2004

BETWEEN:

IDOSHORE PTY LIMITED
Applicant/Cross-Respondent

AND:

IPN MEDICAL CENTRES (NSW) PTY LIMITED (formerly Foundation Medical Centres (NSW) Pty Limited)
First Respondent/First Cross-Claimant

IPN HEALTHCARE PTY LIMITED (formerly Foundation Healthcare Pty Limited)
Second Respondent/Second Cross-Claimant

JUDGE:

CONTI J

DATE:

7 AUGUST 2007

PLACE:

SYDNEY

INDEX
Context to the proceedings including the sale of medical centre assets from the applicant to the first respondent – an outline of the pleadings and of the issues arising........ ........ ........ ........ ........ ........ ........ ........ ....... [1]
Idoshore’s acquisition in 1995 of the subject Oxford Square Medical Centre operations and its subsequent expansion of those operations........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [5]
The amalgamation in 1999 of the operation of the Oxford Square Medical Centre conducted by Idoshore with the Kings Cross medical practices operated by Dr Grech........ ........ ........ ........ ........ ........ ........ .... [14]
Negotiations to sell the Oxford Square Medical Centre structure and operations undertaken by Idoshore as prospective vendor with Foundation as prospective purchaser – finalisation of Heads of Agreement between Idoshore and Foundation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [19]
Securing the Facilities and Services Contracts between Idoshore and certain medical practitioners including Dr Fox – Finalisation of the Business Sale & Purchase Agreement between Idoshore as vendor and the Foundation companies respectively as purchaser and guarantor........ ........ ........ ........ ........ ........ ........ ....... [31]
Material provisions of the Business Sale & Purchase Agreement made between Idoshore as so-called ‘Vendor’ of the first part, Foundation Medical of the second part and Foundation Healthcare of the third part (except to the extent already extracted or summarised)........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [35]
The case presented by Idoshore based on the operation of the Business Sale & Purchase Agreement in the light of the events which happened in the course of the same being purportedly carried into effect by the parties [39]
Events subsequent to completion of the Business Sale & Purchase Agreement –adjustments to EBITDA circumstances and calculations made post-acquisition at the instance of Foundation – submissions of Idoshore concerning significance as to fall in revenues subsequent to Foundation’s takeover of operation of the Oxford Square Medical Centre........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [54]
Implications to Idoshore’s case concerning Foundation’s ‘key man’ payment made to Dr Fox subsequent to completion of the Business Sale & Purchase Agreement........ ........ ........ ........ ........ ........ ........ [80]
EBITDA calculations submitted by Idoshore for the purpose of computation of moneys payable by Foundation to Idoshore pursuant to the purchase price adjustment provisions of clause 3.3(a) of the Business Sale & Purchase Agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [88]
Idoshore’s claims to damages consequential upon Foundation’s conduct complained of relating to Dr Grech’s departure........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [93]
Methods of assessing the quantum of damages claimed by Idoshore........ ........ ........ ........ .... [104]
Interest on moneys claimed by Idoshore........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [106]
Foundation’s submissions in response to Idoshore’s case for misrepresentation and breach of warranty collateral to the formation of the Business Sale & Purchase Agreement........ ........ ........ ........ ........ ........ ... [108]
Idoshore’s submissions in reply and the Court’s preliminary observations on the issues arising from the respective submissions of the parties........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [142]
Summary of the proceedings and my conclusions upon the issues addressed by the parties following conclusion of the evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [151]
Foundation’s cross-claim against Idoshore........ ........ ........ ........ ........ ........ ........ ........ ........ .. [168]

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 1510 OF 2004

BETWEEN:

IDOSHORE PTY LIMITED
Applicant/Cross-Respondent

AND:

IPN MEDICAL CENTRES (NSW) PTY LIMITED (formerly Foundation Medical Centres (NSW) Pty Limited)
First Respondent/First Cross-Claimant

IPN HEALTHCARE PTY LIMITED (formerly Foundation Healthcare Pty Limited)
Second Respondent/Second Cross-Claimant

JUDGE:

CONTI J

DATE:

7 AUGUST 2007

PLACE:

SYDNEY

REASONS FOR JUDGMENT
Context to the proceedings including the sale of medical centre assets from the applicant to the first respondent – an outline of the pleadings and of the issues arising

These proceedings were commenced on 18 October 2004 by application and statement of claim filed by Idoshore Pty Limited (‘Idoshore’) against each of the respondents, being related companies of the Foundation corporate group effectively controlled in the context of the same ultimate corporate ownership. The context was the leasehold estate of a city building in Sydney and medical practices conducted in different rooms located in that building. The causes of action pleaded in chief were based principally upon and otherwise related to a comprehensive agreement in writing styled Business Sale & Purchase Agreement (‘the Agreement’) bearing date 14 December 2000, to which the parties to the proceedings were solely privy, concerning the sale to the first respondent Foundation company, then named Foundation Medical Centres (NSW) Pty Limited, of the medical centre business conducted by the applicant, Idoshore. The business involved the provision of facilities and services to medical practitioners for the conduct of their respective professional practices in consultation rooms located within that city building. The second respondent company, then named Foundation Healthcare Limited (at the time of the Agreement a public company), was a party to that Agreement as guarantor of the first respondent’s obligations under that Agreement. The cross-claim involved an issue also purportedly arising under the Agreement for monetary claims made by Foundation against Idoshore.
By an originating application, Idoshore made the following claims:
(i)damages pursuant to sections 82 and/or 87 of the Trade Practices Act 1974 (Cth) (‘the Trade Practices Act’) for losses suffered as a result of its detrimental reliance on misleading and deceptive conduct of the first and second Foundation respondents by way of representations collateral to the formation of the Agreement;
(ii)further or in the alternative, damages as a result of certain breaches of the Agreement by the first and second respondents; and
(iii)repayment of a sum of $85,000, being the balance of the deposit paid by Foundation to Idoshore pursuant to the Agreement, which was released by Idoshore by way of loan to the first Foundation respondent pursuant to a Deed of Variation made in relation to the Agreement, the repayment of which the second respondent guaranteed, and which in breach of the Agreement and the Deed of Variation was not repaid on the due date, nor since has been repaid, by the first respondent and/or second respondent.
By a comprehensively amended statement of claim later filed on 21 March 2006, claim was made by Idoshore for the additional sum of $125,000 relating to what may be described as the Dr Fox issue. A number of matters pleaded by the amended statement of claim, inclusive of certain of the alleged representations collateral to the formation of the Agreement and of certain alleged implied terms, were not ultimately pursued.
The circumstances of the case are complex, as is evident from the pleadings as subsequently amended, and also from the comprehensive written submissions provided by counsel to the Court. A defence to the amended statement of claim and an amended cross-claim were filed by the respondents on 27 April 2006. An amended defence to that amended statement of claim and the amended cross-claim were subsequently filed on 12 March 2007 by the respondents, being the first day of what was in excess of a four day final hearing conducted upon the basis of the tender of the affidavit evidence in the first instance, followed by oral evidence. Issues principally raised by the time of filing of the amended defence and amended cross-claim, additionally to joinder of issue upon the material averments of the amended statement of claim, were first, that the representations and the collateral warranties pleaded were not promissory in nature nor otherwise went to the root of the contract, secondly were not representations as to future matters within section 51A of the Trade Practices Act, and thirdly involved representations which the Foundation respondents had reasonable grounds for making. The amended cross-claim of the Foundation respondents sought remedies by way of damages from Idoshore for breach of certain warranties and/or conditions. The change to the present names of both respondent companies, whereby there was substituted the prefix IPN in the place of Foundation, apparently took effect after the commencement of the proceedings, but consistently with the extensive written submissions of the parties, the convenient course is for me to refer generally to the respondent companies, whether alone or together, as ‘Foundation’, except to the extent where otherwise necessary to the context.
Comprehensive written submissions were provided by both parties. Those provided in chief by Idoshore on 29 March 2007 extended over 39 pages, divided into seven parts and headed respectively as follows:
Part 1 – Background to the Transactions
Part 2 – The Representations and Warranties
Part 3 – Adjusted Foundation/Gower Accounts
Part 4 – Gower’s Impossible EBITDA Thesis
Part 5 – Payments to Dr Fox and Breach of the Business Relocation
Part 6 – EBITDA Calculations by Deloitte (Mr Phillps)
Part 7 – General Assessment & Comparison of Damages
Foundation responded on 17 April 2007 by 14 pages of submissions, and Idoshore replied on 24 April 2007 with 21 pages of submissions in reply. The consequences flowing from what I have therefore recorded was that the material presented to the Court for resolution is of considerable complexity, and not precisely or conveniently partitioned in presentation.
Idoshore’s acquisition in 1995 of the subject Oxford Square Medical Centre operations and its subsequent expansion of those operations
The managing director of Idoshore Pty Limited (‘Idoshore’) has been at all material times Mr P G O’Shanassy, a legal practitioner of the Supreme Court of New South Wales since 1999, and the managing director of Sagacious Legal Pty Limited (‘Sagacious Legal’), the incorporated legal practitioner for Idoshore on the record of the present proceedings. In addition to his legal qualifications, Mr O’Shanassy holds a Masters of Business Administration, having majored in what he described as ‘new business ventures’. It appears that he had engaged in commercial business affairs prior to the transactions the subject of the proceedings. He exercised personally on behalf of Idoshore the management of the subject Oxford Square Medical Centre (‘OSMC’) during times material to its operation as a modern medical centre in the usable space comprising the ground and first floor(s) or level(s) within the building complex located at Nos 10-14 Oxford Square Darlinghurst, Sydney.
That location was described in the evidence as ‘premium’ for a medical centre, by reason of its high pedestrian traffic and its close proximity to the Central Business District of Sydney. It was said to traditionally attract a demand for ‘walk in’ patient treatment. The lessor of that building complex appears to have been a member of the Meehan group of companies, being related corporately, whether directly or indirectly, to the Foundation group of companies (inclusive of the respondents), whereof Mr Graham Meehan had been at all material times chief executive officer.
It was in or about the years 1994-1995 that Mr O’Shanassy caused to be acquired by Idoshore, pursuant apparently to an assignment of the head leasehold estate, the occupation of certain level(s) in that building complex. There was by then in operation a medical centre conducted by about four or five general medical practitioners assisted by two or three employed support staff, that medical centre by then being already named the ‘Oxford Square Medical Centre’ and being located on at least the ground floor level. Medical services had been provided at the premises since about 1975 or 1976. That acquisition took place pursuant to arrangements made by Idoshore with the liquidator of the then corporate operator of that medical centre. Included within the scope of the acquisition were fixtures and fittings, and also patient medical records. At the time of that acquisition, part of the ground floor was sublet to an unrelated operator of an x-ray clinic, and part of the first floor was sublet to a beautician. As I have foreshadowed, Idoshore caused to be operated in due course on the ground and first of those levels the activities of a composite medical centre, under the continuing designation of ‘Oxford Square Medical Centre’, until the sale in December 2000 of what may be described imprecisely as the medical centre assets of that going concern to the first Foundation respondent as a corporate member of the Foundation Healthcare group of companies, being a transaction which provided the context to the disputes the subject of the present proceedings. No issue arises as to the standing of Idoshore to bring the present proceedings.
From the time of the commencement in 1995 of Idoshore’s business operations appertaining to the OSMC, the occupancy of rooms with associated facilities, inclusive of support staff, was provided for medical practitioners for the time being engaged professionally at the OSMC, in return for payment of service fees equivalent to about 50 per centum of each such resident doctor’s gross billings. I use the description ‘resident doctor’ in the particular sense just described, none of the practitioners for the time occupying any part of the OSMC in any residential sense. The occupancy/facility arrangement made with each of those medical practitioners was described by Mr O’Shanassy as ‘simply a longstanding arrangement’ whereby each doctor ‘used Oxford Square[’s] medical facilities’ at the material times for financial reward to Idoshore. I would infer that the set-up originally was that no medical practitioner had exclusive rights at all times to occupation of a particular room within the OSMC. Mr O’Shanassy explained in his comprehensive affidavit evidence that ‘[t]he ability of Oxford Square medical to retain its medical practitioners was… dependent on (in the main) its ability to provide them with quality facilities in a good location’. Mr O’Shanassy claimed to have adopted at the OSMC the objective that the size of a medical clinic accommodating discrete practices of various medical practitioners, crucially affected profitability of the clinic operator, in circumstances where each practice was thus conducted ‘within one roof’, with the attendant savings in costs and other pecuniary advantages. It may be inferred that, at least generally speaking, the patients of the OSMC practitioners were ‘bulk billed’ in respect of his or her treatment, so that the ultimate pecuniary source of each OSMC medical practitioner’s gross earnings was confined essentially to the Commonwealth Medicare funding of the patients of the practices conducted at the OSMC.

Following upon completion in or about 1995 of Idoshore’s acquisition of the occupation and conduct of the operations of the OSMC, being operations (as I have foreshadowed) extending beyond the grant of occupation of rooms to what may be described as the conduct of a clinic, Mr O’Shanassy took up occupation individually of an administrative office on level 1 of the OSMC building in order to manage those operations. He described that administrative role which he exercised as ‘supervisory’. Thus he would liaise with the medical practitioners who used the premises the subject of the OSMC for their respective practices, and arranged their attendance rosters, and resolved finance, accounting and management issues for the practitioners, inclusively of attending to bulk billed Medicare claims. Idoshore did not acquire the freehold title to the OSMC at any material time and hence found itself from time to time in negotiation with the building owner. Until certain activities and innovations took place in 1998 and 1999, which I will address in the following segment of these reasons, Mr O’Shanassy said that ‘… there was little change in… the structure or staffing of Oxford Square medical’. There were a number of important aspects to the successful operation of that business at all times, the key aspect being the retention of competent medical practitioners for regular engagement in practice at the OSMC at specified times of the day or evening. As I have foreshadowed, during Idoshore’s operation of the OSMC Mr O’Shanassy caused to be engaged for the most part general practitioners with differing specialist interests in areas such as sports medicine, sexual health, casualty and women’s health. Mr O’Shanassy testified that a further factor, significant to what he described as the success of the OSMC, was Idoshore’s retention of well-trained and experienced support staff, including a registered nurse, a centre manager (being the point of communication between the doctors and the administrative support staff and having a supervisory role in relation to other support staff) and a receptionist.
Mr O’Shanassy described the corporatisation of the medical services industry, as it emerged and evolved at least by the late 1990s, as the aggregation through purchase and/or takeover of smaller medical services businesses by larger corporate operations or infrastructures. He identified the then ‘primary players’ in that corporatisation process, apart from the Foundation Healthcare corporate group (inclusive of the respondents), as the Endeavour Healthcare and Primary Healthcare corporate groups, and he explained that ‘[c]ompetition between these entities for market share in the medical services industry involved the acquisition of medical centres and pathology labs across Australia’. The second respondent Foundation company was a public company which changed to a proprietary company in about January 2003, and thus subsequently to the sale of the OSMC assets from Idoshore to Foundation made in December 2000.
In or about 1999 Mr O’Shanassy caused to be further established and developed a complementary multidisciplinary services corporate group, which provided from time to time legal, consulting and associated services to its clients inclusive of medical practitioners, the parent company of that group being Sagacious Group Pty Limited. Throughout the submissions of the parties, the description ‘Oxford Square Medical’ was used synonymously for the expression Oxford Square Medical Centre. That corporate group was said to have retained the individual services of various professional and business employees, directly or indirectly. As managing director and major shareholder of the Sagacious Group of companies, Mr O’Shanassy caused to be offered business consulting services, as well as legal services, in the latter case in the name of Sagacious Legal. He also set about the development of retainer relationships at the OSMC with the medical specialists to whom general practitioners in practice at the OSMC could refer patients. Those specialists would attend the OSMC at pre-arranged dates and times on a weekly basis, for which they would pay an occupation fee to Idoshore. That became in time a significant source of revenue for the OSMC operations conducted by Idoshore.
At about the beginning of July 2000, Mr O’Shanassy caused to be leased additional space within the OSMC premises (that is additional to the status quo at the time of Idoshore’s original acquisition of the OSMC) in the form of consulting rooms, which additional space produced rental income of about $30,000 per annum, and thereby added in relation to the OSMC operations a so-called ‘bottom line revenue’. One such subtenant was Dr Diamond, a specialist obstetrician, and another was Dr Hakim, a specialist gynaecologist. In addition, he made an arrangement with Dr Tornya for the provision of consulting rooms on an ad hoc basis, in return for which Idoshore received one half of that consulting doctor’s revenue derived from practice at the Centre. Those additional sources of income were said to have boosted OSMC’s ‘medical profitability’, yet without any material increase in costs. Those operations did not bear directly upon the circumstances arising for present resolution.
The expanded corporatisation of medical services implemented by Idoshore from about 1999 involved an increase in the number of general practitioners from time to time engaged in individual medical practices conducted at the OSMC. I use the expression ‘individual’ in the sense that none of the general practitioners appear to have operated in partnership at the OSMC. For the purpose of advancing that professional reorganisation within the OSMC, Idoshore retained the services of Dr Peter Gesovic to secure an increase in the number of general, and also specialist, practitioners engaged professionally in practice at the OSMC. Dr Gesovic had formerly practised medicine at the subject OSMC premises, in or about 1995, being shortly prior to Mr O’Shanassy’s commencement of Idoshore’s activities. Dr Gesovic was a resident of the inner eastern suburbs, and Mr O’Shanassy explained that ‘[a]s a consequence … he knew a lot of the local doctors’, and further that ‘… unlike other professions, there is an advantage of having local doctors, as they tend to retain their patients’. Dr Gesovic continued to be retained by Idoshore until February 2002 as a liaison between Idoshore and the general practitioners engaged at the OSMC. He did not testify at the hearing of the proceedings.
The amalgamation in 1999 of the operation of the Oxford Square Medical Centre conducted by Idoshore with the Kings Cross medical practices operated by Dr Grech
It was at least by 1999, as Mr O’Shanassy further explained, that the Commonwealth Government commenced to offer financial incentives by way of lump sums for the amalgamation or so-called corporatisation of small partnerships and sole practitioner medical practices, and did so in order to improve economies of scale and efficiencies in particular in the general practitioner segment of medical service providers. It was apparently at about the time of Idoshore’s corporatisation of an increased number of general practitioners that Mr O’Shanassy set about negotiations for the amalgamation of the practices of then existing medical practitioners at the OSMC with two medical practices located at Kings Cross operated by Dr Joseph Grech in conjunction with two other medical practitioners.
Mr O’Shanassy expressed the view that ‘[t]he Commonwealth financial incentives were not the only reason why Idoshore entered into the merger with the Kings Cross practices, [since] [b]ringing in more doctors could generate more revenue and mean that Oxford Square Medical could become more profitable’, and moreover that ‘[i]f my anticipation of the impending corporatisation in this sector of the industry was correct, increased revenue and profitability would enhance the value of Oxford Square [M]edical to an incoming purchaser, and increase the purchase price which Idoshore could obtain on any sale’. It was the circumstances related to and involving the subsequent sale of the entire OSMC operations and the assets thereof from Idoshore to Foundation that gave rise to the present complex litigation.
On 21 August 1999, the amalgamation of the practices by then conducted at the OSMC on the one hand, and of the Kings Cross practices of Dr Grech on the other, was formalised upon the following basis in outline:
(i)payment of $60,000 by Idoshore to Dr Grech for the acquisition by the OSMC of his Kings Cross practices;
(ii) Dr Grech’s appointment as medical director at the OSMC;
(iii)putting in place an incentive scheme for Dr Grech based upon the financial performance of the OSMC;
(iv)provision of a remuneration rate for Dr Grech based upon sixty per centum (60%) of his patient billings;
(v)a minimum appointment term of 18 months subject to termination on six months’ notice;
(vi)a restraint of trade imposed upon Dr Grech after termination of the arrangements for a period of two years and within a two kilometre radius from Oxford Square; and
(vii)a grant of first right of refusal to Dr Grech to purchase what may be described broadly as the OSMC operational structure in the event that Idoshore might decide to sell the same.
In or about September 1999, the OSMC and Dr Grech each received the amalgamation incentives payment by then available from the Commonwealth Government as a consequence of that medical practice amalgamation. As a consequence, the Kings Cross general practitioners Drs Grech, Paull and Mackenzie continued the provision of their respective services within the auspices of the OSMC, and as part of its overall or consolidated operations with those two Kings Cross practices.
Mr O’Shanassy testified that after the amalgamation of the OSMC with the Kings Cross practices of Dr Grech, the operating costs of the OSMC practice as thus reconstituted increased temporarily, by reason of first, the costs associated with the physical merging of the practices (for example stationery, advertising and removal costs), and secondly, of the short term retention of Dr Grech’s support staff during the transition period. From about 1 July 2000, those additional costs were said by Mr O’Shanassy to have ‘fallen away’, and he testified to beginning ‘to see positive benefits’ from having these additional three doctors in operation under the OSMC administrative umbrella. That was said to be because of a significant increase in revenue coupled with a reduction in costs asserted by Mr O’Shanassy to have been achieved because of the two practices being thus assimilated, and because of Dr Grech’s support staff, after a relatively brief time, being no longer retained.
Negotiations to sell the Oxford Square Medical Centre structure and operations undertaken by Idoshore as prospective vendor with Foundation as prospective purchaser – finalisation of Heads of Agreement between Idoshore and Foundation
In September 2000, Mr O’Shanassy attended a meeting with representatives of the corporate group comprising the Foundation Healthcare companies, being Messrs Meehan and Murphy, concerning what Mr O’Shanassy described as ‘aspects of the commercial lease between Idoshore and HMP Finance Pty Limited’. As already indicated, a related or corporate member of the HMP Finance group was apparently at all material times the freehold owner of the OSMC property. The Foundation Healthcare companies included of course the respondents. Medical centres with which the Foundation corporate group was by about that time associated were located in Auburn, Edgecliff, Liverpool and Penrith, and also on the Central Coast of New South Wales. Mr Meehan informed Mr O’Shanassy as to the sale of ‘my medical centres into Foundation Healthcare Limited’ and as to his having taken up an executive position in relation thereto. Mr Meehan enquired of Mr O’Shanassy as to whether he would be interested in selling the OSMC to Foundation and Mr O’Shanassy had replied in the affirmative. By about that time, the OSMC had assembled a management team, inclusive of Mr O’Shanassy as the chief executive officer, and comprising otherwise Mr S Nijssen-Smith as the chief financial officer, Mr Laere as a director, the earlier mentioned Dr Gesovic as the administrative director, and more recently the abovementioned Dr Grech as the medical director. Those persons headed up what was described as the support and practising medical staff in administrative office in relation to the OSMC.
Either at or a short time after that meeting in September 2000, Mr O’Shanassy had given to Mr Meehan a document bearing date July 2000 and headed ‘Oxford Square Medical Centre’ and ‘Business Overview Prepared for Foundation Healthcare Limited’, explicitly for the purposes of furnishing to Foundation ‘… an accurate summation of the medical practice known as the Oxford Square Medical Centre… and thereby provide sufficient information so that Foundation Healthcare can consider the acquisition of OSMC’. Attached to that document was comprehensive financial information bearing the description ‘Maintainable Earnings Calculation’ and containing the primary subheadings mentioned in the next paragraph below, each such segment relating to the year ended 30 June 1999 together with the further quarters ended 31 March 2000, 31 December 1999 and 30 September 1999.
In addition to that extent of comprehensive historical financial information related to OSMC earnings, there was set out figures for each of those corresponding financial periods of time relating to OSMC’s ‘Costs of Sales’, ‘Gross Margin’, ‘Expenses’, ‘Other Income’, ‘Profit (Loss) before Tax’, ‘EBITD Normalisation Adjustments’, ‘Adjusted EBITDA’ and ‘Annualised EBITD’. ‘Explanatory Notes’ were additionally provided, along with other explanations and details. The expression EBITDA is the abbreviation for ‘Earnings Before Interest Taxation and Depreciation’, and thus reflected the notion for measurement of income achievement used in the proceedings. Under the sub-heading ‘5. Financials & Growth Strategy’, it was stated that ‘[b]y virtue of the… relocation and other initiatives, the revenue stream of the medical practice could be increased substantially, resulting in an EBIT of $400,000 - $500,000 per annum’. ‘EBITDA’ and the more restricted term ‘EBIT’ were both reflective of measurements of income derived from business operations, such as here in the case of the OSMC. The assets the subject of sale and purchase by the Agreement were described by the documentation subsequently entered into between the parties as ‘Business’, ‘Goodwill’ and ‘Facilities and Service Contracts’, and hence what may be described, in part, as intangible assets of the OSMC.
Mr O’Shanassy also met in September 2000 with Dr Ken Jones, the chief executive officer of Foundation Healthcare Pty Limited, Mr Meehan as chief executive officer of Foundation Medical Centres (NSW) Pty Limited (of course the previous name of the first respondent to the present proceedings), and Doctors Fox and Grech (by then of the OSMC). Each of those doctors have already been identified in these reasons. After a tour of the OSMC property, there occurred at the meeting a further discussion, in the course of which Mr Meehan was said by Mr O’Shanassy to have remarked, for what it may ultimately matter, that ‘[t]here is huge potential for this medical centre – strategically speaking, it is ideally located and has the ability to expand in sheer size by either expanding into level 1 or relocating to larger premises’, and ‘[t]o optimise the medical centres potential it would need to grow in size to benefit from the economies of scale etc’.
Thereafter Mr Meehan wrote to Mr O’Shanassy’s legal firm (Sagacious Legal) on 5 September 2000 on the letterhead of Peak Health Pty Limited, a corporation apparently related to Foundation, which stated as follows (omitting formal parts):
‘I apologise for the delay in writing to you. This was due to the pressure of completing other Medical Centre purchases.
We are prepared to purchase the above Medical Centre on a formula basis, based on 3x last year’s earnings before interest, tax, depreciation and amortisation (EBITDA) with a further payment to be made at the end of either the first year after completing the purchase of the above Medical Centre or at the end of the second year where we would be prepared to pay the multiple of 5x the difference between purchase price EBITDA and the EBITDA achieved in whatever year (first or second year) were [sic] taken as the earn out year.
The principle is that, if you are able to amalgamate the current medical centre and its doctors with other medical practices in the area and grow the business to the size required by Foundation, then they would be prepared to pay you a premium.
The EBITDA would have to increase to at least $500,000 pa before the increased EBITDA was paid. Any costs incurred in achieving the earn out would be for your account or would be deducted from the increase in purchase price.
There would be no claw back from the initial purchase price.
We would wish to see all of your doctors sign a three-year Service Contract. I enclose the standard Foundation Health Care Service Agreement for doctors. Please amend this Contract so that your doctors would be comfortable to sign. I also enclose the Standard Foundation Health Care Purchase Contract, which will need to be amended.
If you have any questions, please do not hesitate to contact me with regard to any matters relating to the purchase of the Medical Practices at the Oxford Street Medical Centre.
Representing the owners of the property (10, 12 and 14 Oxford Square, Darlinghurst), I would see no problem in you surrendering your lease of the ground and first floors, subject to you giving suitable notice to the landlords, and allowing the landlords a reasonable amount of time after you vacate the premises to get a new letting in place.
I would see this time frame as being a maximum of six months, if a tenant were in place before the six months had elapsed, we would refund to you any portion of the rent payment not needed to cover the rental shortfall.
If it assists you, we would be prepared to take a surrender of the first floor lease before the ground floor lease. Alternatively, you may prefer to sub-lease the premises yourself.
The above comments are without prejudice and would be subject to Contract.’`
Apart from the references to ‘EBITDA’ as a means of measurement of quantification of purchase price to be payable by Foundation for the OSMC, the Foundation requirement that ‘your doctors sign a three-year Service Contract’ may be observed; such service contracts were thus required to be entered into by the medical practitioners then practising at the OSMC in favour of Foundation as the incoming operator of the OSMC. Foundation’s offer was described as ‘performance based’, being made referrable to a starting base equal to OSMC’s existing performance criteria, and thereafter to OSMC’s performance criteria involving one or two years earnings etc (as the case may be) following upon completion of the takeover, being criteria in both instances related to the EBITDA formula.
A meeting occurred subsequently on 15 September 2000 between Mr O’Shanassy (of course of Idoshore) on the one hand and with Messrs Meehan and Mr Murphy together (of course of Foundation) on the other. Mr O’Shanassy stated that the Foundation offer was ‘way too low’, despite what he referred to as the ‘additional incentive of a further earn up at the times multiple of [five] but this is all too uncertain…’, and he further stated that ‘… I have a strong preference for just a competitive times multiple figure – which I believe to be 7.5’. He added ‘this is comparable, as I understand it, with the initial purchase price paid by Foundation… in recent acquisitions’. Mr Meehan was said by Mr O’Shanassy to have stated, by way of representation or warranty inter alia:
‘Based upon what I have outlined, you will be financially far better off accepting a lower initial purchase price that provides you with further earn up capacity. I can assure you that you can rely upon the underlying assumption, as I’ve just stated, because I intend to be involved in the management of Foundation and I have a vested interest in ensuring that Foundation is successful… the best I can do is increase the initial times multiple from 3 to 4.5 and give you two… further “earn ups” – the 1^st earn up at the end of the first year and a 2^nd earn up upon relocating Oxford Square medical to a larger premises… you have my assurance that it will go the way I have described to you.’
Those notions of ‘earn ups’ were of course performance based criteria. Mr Meehan was said by Mr O’Shanassy to have further added ‘I will in the meantime get Foundation to contact you for the purposes of undertaking the due diligence to establish the sustainable EBITDA’, which was of course to comprise the benchmark formula as to performance of the OSMC at the material time for the purpose of the calculation of the sale price to ultimately crystallise for payment by Foundation. In response, Mr O’Shanassy deposed to having said the following:
‘That’s a good idea, I would like to think we could enter into a sale agreement with the benchmark EBITDA having been agreed to.’

Mr O’Shanassy explained in his affidavit evidence that in relation to ‘… the determination of the purchase price, in my experience of the industry, the normal manner in which the purchase price for medical centres was determined was by applying a times multiple to the sustainable earnings of the business in question’, being ‘usually expressed as either: Earnings before Interest, Tax, Depreciation and Amortisation [abbreviated as above to ‘EBITDA’] or Earnings before Interest and Tax [abbreviated to ‘EBIT’]’. Of course the precise terms and conditions of the transaction the subject of the complex formal documentation which ensued (being essentially the subject Business Sale & Purchase Agreement later predominantly extracted in these reasons) govern the operation of the purported transaction negotiated between the parties, but the circumstances leading to the formation of that transaction assist at least to explain the circumstances attendant upon the unique nature of the ongoing contractual documentation between Idoshore and Foundation thereby formed. More than that, from the perspective of Idoshore, those circumstances provided the context to the controversial collateral warranties which Idoshore pleaded.
Following upon that meeting held on 15 September 2000, Mr O’Shanassy instructed Mr Douglas, a chartered accountant employed by the Sagacious Group of companies, to participate as that Group’s representative in the due diligence process thereafter undertaken by Foundation in respect of the OSMC annual earnings and assets. Mr Douglas subsequently prepared a three page document headed ‘Maintainable Earnings Calculation’, which purported to identify the income, cost of sales, gross margin, expenses and other income which went to make up the periodic profit or loss before tax of Idoshore’s OSMC practice and its operations, which figures were said by Mr O’Shanassy to have been then ‘normalised’ or ‘adjusted’ to remove ‘extraordinary (usually “one off”) income or expenditure’. The document contained calculations styled ‘Adjusted EBITDA’ and ‘Annualised EBITDA’, described by Mr O’Shanassy as ‘designed to determine a suitable profit figure for the business’. The material containing those calculations appears on pages 48, 49 and 50 of TAB 6 of exhibit PGO-1 attached to Mr O’Shanassy’s affidavit under the description ‘Maintainable Earnings Calculation’ of ‘Idoshore Pty Ltd t/a Oxford Square Medical Centre’. Upon the footing of that material, Mr O’Shanassy considered that ‘… an estimated EBITDA… in excess of $250,000’ was shown to be derived annually in respect of the OSMC as at November 2000.
In amplification of that estimate of ‘in excess of $250,000’, which sum was precisely reflected relevantly in the Business Sale & Purchase Agreement and denoted as the ‘EBITDA Benchmark’, it is appropriate that I reproduce pars 51 to 54 of Mr O’Shanassy’s affidavit of 20 February 2006 and the calculation exercise which Mr O’Shanassy thereby undertook, the references therein to ‘Oxford Square Medical’ being of course to the OSMC:
‘51.Whilst I did not prepare the “Maintainable Earnings Calculation”, I was and am familiar with the financial statements and records of Oxford Square medical. I agree with the estimates of “Annualised EBITDA” shown on the “Maintainable Earnings Calculation”. In particular, I consider that the adjustments made in relation to the month of November 2000 were appropriate and resulted in an estimated EBITDA for Oxford Square medical, as at November 2000, in excess of $250,000.
52.The actual reported income and expenses of the medical centre, with the annualised EBITDA calculations (as at November 2000) for the 3 months period ending 30 September 2000 was as follows:

Income Sources: $ Amount

a)        Doctors patient billings 284,090

b)        Other medical fees 13,843

c)        Subtenancies 29,195

Total income
327,128

Expenditures

d)        Direct costs Doctors commissions 142,045

e)        Medical supplies 13,402

f)         Operating expenses 123,418

Total expenses 278,865

Net profit before tax 48,263

Dedications/Additions

g)        Eliminate related party

     consulting expenses
8,000

h)        Eliminate first floor rent
           expenses 18,568

i)         Normalise salaries and wages
           expenses (1,558)

Sustainable EBITDA 73,273

Annualised sustainable EBITDA 293,092

53.To explain the figures in the above table I note as follows:

(a)The focal period for determining the benchmark or sustainable EBITDA for the purpose of the intended transaction with Foundation was the quarter ended 30 September 2000;
(b)The net profit before tax for the quarter ended 30 September 2000 was $48,263;
(c)Various adjustments were calculated to restate the net profit before tax into the format of sustainable EBITDA. The total of these adjustments had the net effect of increasing net profit before tax by $25,010 to a sustainable EBITDA of $73,273 for the quarter ended 30 September 2000;
(d)The items that comprise the net adjustment of $25,010 were:

·An adjustment of $8,000 to increase the sustainable EBITDA by eliminating consultancy expenses paid to a director related entity for services of a one-off nature;
·An adjustment of $18,568 to increase the sustainable EBITDA by eliminating rent expenses relating to the first floor of the medical centre premises – because the area was not used by the business; and
·An adjustment of $1,558 to decrease the sustainable EBITDA by normalising salaries and wages expense to the average of the previous periods;

(e)Using the adjusted EBITDA of $73,273 for the quarter ended 30 September 2000, an annualised EBITDA of $293,092 was calculated by simple multiplication.

54.The $293,092 EBITDA calculation was made using the September 2000 quarterly historical financial figures. The full financial data for the year ended June 2000 did not take into account the actual operating income and expenses after 1 July 2000 and was not, in my view, indicative of the sustainable financial performance of the business – as at November 2000. [That] was because (amongst other things), that full year encompassed a period in which the additional income from the doctors from the Kings Cross practice had not been optimised and did not reap the benefit of economies of scale inherent from this growth in revenue.’

Mr O’Shanassy recorded next that a due diligence exercise took place on or about 15 October 2000 at the instance of Foundation, and further that ‘Mr Douglas subsequently told me that Foundation’s due diligence process had determined that the sustainable or benchmark EBITDA was $269,000’. In that regard I was referred by Idoshore to document 68 in the Foundation respondents’ list of documents bearing date 27 May 2005, and in particular to pages headed ‘Due Diligence Profit & Loss Summary’ and ‘Due Diligence Normalisation of Accounts – Support Notes’, which disclosed that Foundation had calculated a sustainable EBITDA for the quarter ended 30 September 2000 of $67,331, which produced the annualised figure of $269,324 there appearing. The fact that both Idoshore and Foundation arrived independently, by way of their respective discrete calculations, at figures within not a dissimilar range, provided the inference that ‘… objectively assessed the business was capable of producing that level of income or profit’ of $250,000 per annum, as Idoshore contended, and in my opinion with justification.
On 28 October 2000, Mr O’Shanassy received draft Heads of Agreement from Foundation, which he described as having ‘encapsulated the terms of the agreement that had been discussed at our meeting held on or about 15 September 2000’. On 31 October 2000, Mr Meehan wrote on behalf of Foundation to Idoshore, the opening terms whereof reading as follows:
‘Further to your “OSMC Business Overview” dated July 2000 and our recent discussions regarding the abovementioned, we are pleased to confirm the basis upon which we are willing to purchase the assets, leasehold interests, management rights and goodwill of OSMC.
Our offer to purchase is as follows:
1.An initial purchase price of 4.5 times the maintainable EBITDA of OSMC based upon the last 6 to 12 months trading figures (‘EBITDA Benchmark’). Based upon the information provided by you and our preliminary investigations, the EBITDA Benchmark will be $250,000.
2.A one year earn up provision whereby Foundation will pay you an additional 4.5 times the incremental year 1 EBITDA above the EBITDA Benchmark (or any pro rata amount if the relocation described in Clause 3 occurs prior to the end of the first year). This calculation will take place within two months of the period and be payable to you one month after the calculation is agreed, in accordance with Clauses 4, 5 and 6 below.’
It was thereafter stipulated by condition 3 as to what would occur in the event of relocation of the OSMC practice before the expiration of 18 months from the date of purchase, namely that there would be a ‘second earn up period amount [being] 4.5 times the amount by which the GP EBIT of the second year following relocation…’, and by condition 4 that ‘20% of the initial purchase price… and any and all further purchase payments… will be held… either on deposit or in share script at the current share price of Foundation, in support of any warranty claims for the first three (3) years…’, the same to be subject to release conditions thereafter stipulated. Condition 11 stipulated that such offer was made ‘subject to Due Diligence process being completed and formal contract negotiations’ taking place. No such relocation so provided for in relation to the OSMC in fact occurred at any material time, and consequently the occasion for crystallisation of the so-called ‘second earn up’, by way of increase in the ‘Sale Price’ the subject of the Agreement, did not materialise.
Three of the further terms and conditions the subject of the Foundation offer to purchase, communicated by its said letter of 31 October 2000 to Idoshore, are reproduced below:
‘8.There will be no changes to existing structure or operations without written mutual consent (not to be unreasonably withheld) with the executives of Idoshore Pty Limited taking an advisory role with its primary objective of ensuring OSMC achieves EBITDA and GP EBIT growth (whichever is applicable) over the one (1) year post sale period.
9.Foundation will require not less than 2 of the OSMC doctors to enter into contracts for terms of not less than 3 years. We understand that the two key doctors are Dr Joseph Grech and Dr David Fox.
10.As part of the growth strategy for OSMC and as detailed in the yearly business plans, we will, when appropriate, take over the leased premises on Level 1, 10-14 Oxford Square, Darlinghurst. Idoshore will, on a pro rata rental basis, make available space as determined by OSMC. In other words, Idoshore will be responsible, independent of the sale of OSMC to Foundation, to maintain its obligations under the current lease and sublet portions of OSMC/Foundation as OSMC/ Foundation requires.’
The reference above to Drs Grech and Fox may be observed. Documentation put in place prior to that offer disclosed that there were altogether seven medical practitioners, each being described as general practitioners, by then engaged in practice at the OSMC on so-called ‘verbal arrangements’, inclusive of Drs Grech and Fox identified in Condition 9 above as ‘key doctors’. In addition there was employed at the OSMC three receptionists and two nurses. A final version of the Heads of Agreement was signed by Mr O’Shanassy on behalf of Idoshore on 31 October 2000, and forwarded on 1 November 2000 to Foundation under cover of a communication which indicated Mr O’Shanassy’s intention to convene a meeting with Drs Fox and Grech for the purposes of tabling, negotiating and ultimately executing their respective three year employment contracts above foreshadowed.
Securing the Facilities and Services Contracts between Idoshore and certain medical practitioners including Dr Fox – Finalisation of the Business Sale & Purchase Agreement between Idoshore as vendor and the Foundation companies respectively as purchaser and guarantor
Subsequently to the Heads of Agreement being mutually adopted on 31 October 2000, Idoshore entered into what were described as Facilities and Services Contracts made with each of Drs Fox and Hawkins for terms of three and four years respectively in return for payment of the respective sums of $70,000.00 and $90,000.00 per annum (called ‘key man’ payments). For what it may ultimately matter, Mr O’Shanassy testified that had Idoshore not first secured the benefit of those Heads of Agreement, he would not have caused Idoshore to enter into those Facilities and Services Contracts. On 23 November 2000, Mr O’Shanassy received a copy of an e-mail sent from Mr Douglas of Sagacious Legal (ante) to Mr Meehan attaching a copy of a document headed Practice Scheme Development. Thereafter Mr Meehan informed Mr O’Shanassy that he was ‘… welcome to use the practice development scheme that I have developed in my medical centre’.
On 14 December 2000, Mr O’Shanassy arranged for Sagacious Legal to finalise with Foundation’s lawyers the terms of the ‘Business Sale & Purchase Agreement’, which was thereupon entered into on that day between Idoshore as vendor and Foundation Medical as purchaser, with Foundation Healthcare an additional party as guarantor of Foundation Medical (they are of course respectively the first and second respondents and cross-claimants in the subject proceedings). Mr O’Shanassy testified that prior to committing Idoshore to that critical Agreement, no representative of Foundation withdrew qualified or modified any of the representations allegedly made to him on behalf of Foundation in the course of the negotiations leading to the signing of that Agreement, and in relation to which representations he asserted his placement of reliance. The difficulty however which Idoshore faced in its ascribing ongoing significance to those representations made antecedently to the formation of that Agreement is that such representations were not wholly reproduced as warranties set forth in the written Agreement. Reliance thereon by Idoshore in the present proceedings faced moreover the defence pleaded by Foundation that the same did not go to the root of the contract and were not at least substantially reproduced in the Agreement subsequently entered into between Idoshore and Foundation and settled between the legal representatives of the parties.
Mr O’Shanassy asserted to be the implications of the ‘Adjustment to Purchase Price’ provisions of clause 3.3 of the Business Sale & Purchase Agreement, duly entered into of course on 14 December 2000, as follows:
‘In accepting the pricing mechanism embodied in the Agreement, which involved a deferred payment under two potential “earn-up” provisions, the willingness and capacity of the Respondents to appropriately manage and invest in the business with a view to growing it was of central significance. In order to achieve a return on the first earn-up (clauses 3.2 and 3.3 of the Agreement), Oxford Square medical not only had to sustain its EBITDA at the EBITDA Benchmark level, but had to grow EBITDA beyond the benchmark level. In order to achieve the second earn-up, the business had to relocate and grow to achieve increases in EBITDA. The ability of Idoshore to be involved in and monitor the management of Oxford Square medical was critical in ensuring that the business was on track to meet and exceed the required EBITDA targets...’.
It is unclear as to the implications relevantly of what Mr O’Shanassy described above as ‘[t]he ability of Idoshore to be involved in and monitor the management of the [OSMC]’ following upon completion, no provisions of the Agreement in that particular regard being identified. The ability of Idoshore ‘to be relevantly involved in any management of the OSMC’ was not specifically authorised by the provisions of the Agreement, as clause 7 thereof headed ‘Possession’ makes clear.
Following upon the exchange of mutually signed copies of the Business Sale & Purchase Agreement on 14 December 2000, there was sent by Mr O’Shanassy to each of the six medical practitioners, by then in practice at the OSMC, so-called ‘practical development scheme’ correspondence in order, so he testified, to provide those doctors with an incentive to remain focused on the financial performance of the OSMC in terms of ‘patient billing’ performance. Completion of the Business Sale & Purchase Agreement took place on 1 February 2001, when Foundation paid over to Idoshore $221,576.50 representing twenty per centum (20%) of the purchase price paid by way of so-called ‘warranty deposit’ for lodgment into the trust account of Holman Webb, the balance of the purchase price remaining to be determined after quantification of the total ‘Purchase Price’ comprising (as thus defined in the Business Sale & Purchase Agreement) ‘the amounts so detailed in Item Ten of Schedule One’ to that principal Agreement. Those ‘amounts’ were specified as ‘4.5 times the EBITDA Benchmark’ and thus comprising the sum of $1,125,000.00 therein specified, and ‘Plus Consumables Less Accrued Entitlements’ by then not mathematically quantified and remaining implicitly to be quantified on ‘Completion’ of the Agreement. Foundation ‘assumed control of the operations of Oxford Square medical’, to adopt Mr O’Shanassy’s affidavit description. That ‘Purchase Price’ was stipulated by the Agreement to be partly satisfied by the issue of shares in Foundation as I will shortly explain.
Material provisions of the Business Sale & Purchase Agreement made between Idoshore as so-called ‘Vendor’ of the first part, Foundation Medical of the second part and Foundation Healthcare of the third part (except to the extent already extracted or summarised)
It is necessary or appropriate to next extract below most of the provisions of the comprehensive Business Sale & Purchase Agreement of 14 December 2000, partly because of the extent of uniqueness of certain concepts and conditions therein appearing and partly because of the extent of complexity of their content and interaction. The Agreement first set out the numerous definitions in clause 1.1 thereof, which I have reproduced below to the extent here material (being in fact virtually all); many of the definitions contain expressions further defined within that clause 1.1. As I have earlier foreshadowed, the party of the first part is of course Idoshore Pty Limited as ‘Vendor’, the party of the second part and abbreviated therein to ‘Purchaser’ is Foundation Medical Centres (NSW) Pty Limited and the party of the third part and abbreviated therein to ‘Foundation’ is Foundation Healthcare Limited.
‘ “Accounting Records” means all balance sheets, profit and loss statements, records and ledgers kept in connection with the operation of the Business and all records relating to income and expenditure of the Business;
“Accountancy Standards” means the Australian Accounting Standards from time to time, and where no accounting standard exists means generally accepted accounting principles for business similar to the Business;
“Business” means the business of providing facilities and services to medical practitioners to facilitate the conduct of their individual medical practices carried out in and from the Premises and includes:
(a)       the Goodwill;
(b)       the Telephone Numbers;
(c)       the registered business name as detailed in Item Five of Schedule One;
(d)       the Patient Files;
(e)       the right to occupy the Premises;
(f)        the Plant and Equipment;
(g)       the right to receive income from any sub-lease or license at the Premises;
but does not include:
(h)       all cash owned by the Vendor;
(i)        the Book Debts; and
(j)        Consumables.
[I would interpolate to record that such registered business name was of course ‘Oxford Square Medical Centre’, and the meanings of ‘Goodwill’, ‘Plant and Equipment’ and ‘Premises’ are respectively reproduced below; I have not however reproduced the definitions of ‘Book Debts’ and ‘Consumables’, which are sufficiently self explanatory.]
…
“Centre” means the centre as detailed in Item Six of Schedule One [referring thereby of course to the OSMC].
…
“EBIT” means earnings before interest and tax determined in accordance with the Accounting Standards;
“EBITDA” means earnings before interest, tax, depreciation and amortisation, determined in accordance with the Accounting Standards;
“EBITDA Benchmark” means the maintainable EBITDA of the Business which has been agreed by the Parties to be $250,000.00;
…
“Facilities and Services Contracts” means the contract under which the Purchaser will provide facilities and services to each of the Doctors in a form satisfactory to the Purchaser but substantially in the form of Annexure “C”;
…
“Goodwill” means the goodwill of the Vendor’s Business together with the exclusive right to provide the medical administration services to the Doctors pursuant to the Facilities and Services Contracts;
…
“GP” means the general practitioners including, Dr Joseph Grech, Dr David Fox, Dr Sarah Hawkins, Dr Ian McKenzie, Dr Andrew Paull, Dr Wei Yen and Dr William Marchione and includes any additional general practitioners replacing any of the said general practitioners or joining the Business as a part of the growth of the Business;
[I would interpolate to draw attention in particular to the inclusion of Drs Grech and Fox]
“GP EBIT” means earnings before interest and tax in accordance with the Accounting Standards attributed to the GP’s and consists of the GP Revenue and Sub-lease Income less Amortised Costs and Operating Costs;
“GP Revenue” means all the revenue generated by the GP’s including all existing sources of revenue generated from the treatment rooms at the Centre (excluding revenue derived from charges for the use of the treatment rooms and increases in the use of the treatment rooms not directly under the control of a GP) during the applicable period;
“Lease Agreement” means the contract in relation to which the Purchaser agrees to an assignment of the lease of the Premises of the Vendor…
…
“Lessor” means HMP Finance Pty Limited ACN 061 269 949
[I interpolate to observe that such company appears to have been at material times a member of the Foundation corporate group]
“Losses and Liabilities” includes all losses and liabilities of any nature, absolute, accrued, contingent, liquidated or unliquidated, known or unknown, matured or unmatured, including any Taxes and including all losses of profit or expected profit, claims, actions, damages, expenses, diminutions in value or deficiencies of any kind or character and also including all interest and other amounts payable to third parties, all legal or other expenses incurred in connection with investigating or defending any claims or actions, whether or not resulting in any liability and all amounts paid in settlement of claims or actions, prior to Completion;
…
“New Location” means a location other than the Premises under the Property Lease and includes acquiring further floor space adjoining the Premises but does not include acquiring further space on level 1 above the Premises;
“Operating Costs” means that portion of Outgoings (calculated consistently with the treatment thereof in the records made available by the Vendor to the Purchaser for the purposes of due diligence) relevant to the generation of GP Revenues to be allocated to GP EBIT on a pro rata basis to be agreed by the Parties, and applicable to the period;
“Outgoings” means periodic expenses of the Business, including but not limited to, Service Fees, any equipment (properly obtained to operate the Business) lease rental payments and Premises lease rental payments pertaining to those leases as outlined as Item 2 in Annexure E, variable outgoings, rates, taxes, charges for utility services including electricity and gas, and all other outgoings properly incurred by the Business;
…
“Patient files” means all patient files, patient records and any other material identifying patients of the Business for the period of two (2) years prior to the Completion Date;
“Plant and Equipment” means the Vendor’s owned plant and equipment, used in connection with the Business, as specified in the list attached to this Agreement…;
…
“Premises” means the ground floor of the premises from which the Business presently is conducted, namely the premises so detailed in Item Nine of Schedule One
[I interpolate to record that ‘Item Nine’ reads ‘Ground Floor, 10-14 Oxford Square, Darlinghurst, NSW 2010, more particularly described as Folio No. 2/108126, thereby indicating that the building containing the OSMC was subject to strata title];
“Property Lease” means the contract under which the Purchaser agrees to occupy the Premises from the Lessor – the Agreement is annexed…;
“Purchase Price” means the amounts so detailed in Item Ten of Schedule One [that ‘Item Ten’ in Schedule One reading ‘4.5 times the EBITDA Benchmark’, amounting to ‘$1,125,000.00’, ‘Plus Consumables Less Accrued Entitlements’];
…
“Relocation” means the relocation of the Business to a New Location not more than five (5) kilometers [sic] from the Centre. All costs (including fit out) incurred as a result of the relocation will be the responsibility of the Purchaser;
“Service Fees” means that percentage of GP fees which are payable by the GP to the Purchaser as manager of the Business specifically for the provision of services and facilities such as that contemplated in the Facilities and Services Contracts…;
“Sub-lease Income” means any payments by sub-leases [sic] at the New Location who are sub-lessees of the Vendor at the Premises;
“Taxes” means all taxes imposed by any government or authority in Australia or elsewhere including all income tax, capital gains tax, stamp duty, financial institutions duty, company tax, sales tax, gift duty, wealth tax, customs duty, excise payroll tax, land tax, metropolitan regional improvement tax, shire rates, water rates, development taxes, value added tax, consumption tax, goods and services tax, social service tax, departure tax and all other levies, rates, contributions, imposts, withholdings, duties, taxes and charges and including any penalties, fines, additions or interests relating to or arising out of any of the foregoing;
…
“Warranties” means the covenants and warranties of the Vendor as contained in Clause 10.’
The extent of the defined terms the subject of that Business Sale & Purchase Agreement exemplify the complexity of its provisions. In extracting most of those defined terms above, I do not imply that what remain may not be relevant. The care and precision afforded to the numerous defined expressions underline the mutual endeavour of the parties to anticipate future circumstances which might crystallise in the course of operation of that critical Agreement. What I have reproduced from the Agreement is intended to assist comprehension of its context to the issues arising in the proceedings and of the complexity of the anticipated future relationship between the parties. That detail is such as to render as further formidable the task sought by Idoshore of assigning legal significance to collateral terms and conditions not already incorporated explicitly therein, being a subject of controversy which I have already touched upon.

Recitals B and C to the Business Sale & Purchase Agreement may also usefully be recorded below, reflecting as they do the central importance of the ‘EBITDA Benchmark’ of $250,000:
‘B.The Purchaser has conducted due diligence of the Business in accordance with its normal practices and relying on the books and materials provided by the Vendor has satisfied itself as to the Business, the financial position of the Business, and Accounting Records and all other matters the Purchaser considers necessary and relevant to the purchase of the Business. Having completed the due diligence, the Purchaser has accepted the EBITDA Benchmark as $250,000.00.
C. The Vendor owns and carries on the Business.’
The terms and conditions of the Business Sale & Purchase Agreement, to which the parties respectively drew attention, directly or indirectly, and which pick up of course the inclusion of the defined terms largely extracted already above, are next reproduced below:
‘2.       INTERDEPENDENT CONTRACTS
Notwithstanding anything elsewhere provided, the Vendor and the Purchaser agree that it is an essential condition of this Agreement:
(a)that this Agreement and the Facilities and Services Contracts which are to be signed or executed by the Doctors are interdependent;
(b)that this Agreement, the Property Lease and Lease Agreement relating to the Centre are interdependent; and
(c)completion under this Agreement is subject to the Business Sale & Purchase Agreement and the Facilities and Service Contracts for the Doctors being executed by the parties hereto.
[the doctors there referred to were Sarah Hawkins and David Fox as per ‘Item Eight’ of Schedule One of Business Sale & Purchase Agreement].
3.SALE & PURCHASE
3.1Sale & Purchase
The Vendor agrees to sell effective as and from the Completion Date, and the Purchaser agrees to purchase the Business for the Purchase Price (and any adjustment to the Purchase Price) free of all Encumbrances and on the terms and conditions specified in this Agreement.
3.2Payment of Purchase Price
The Purchaser shall pay the Purchase Price to the Vendor as follows:
(a)The payment and release of the sum of $160,000.00 to the Vendor on execution of this Agreement as and by way of a refundable deposit (“the Deposit”), receipt of which is to be acknowledged by the Vendor;
(b)The balance of the Purchase Price on Completion, paid to the Vendor as outlined in Item Twelve of Schedule One, and in respect to the payment of any adjustments to the Purchase Price (as contemplated in clauses 3.3(a), (b) and (d)), in a manner as directed by the Vendor; and
(c)If Completion does not occur for any reason other than a breach by the Purchaser, the Vendor will immediately refund the Deposit to the Purchaser.’
I interpolate to record that Item 12 of Schedule 1 stipulates the so-called ‘Vendor’s entitlement for payment of Purchase Price by way of Foundation Shares’ as being ‘[that] number of Foundation Shares up to 30% of the Purchase Price in the discretion of the Vendor…’, and further stipulates that ‘Payment of Purchase Price by way of Foundation Shares on Completion’ be effected as to 10% of the Purchase Price by way of the issue of a number of Foundation Shares in accordance with Clause 3.3(h), the full text whereof appears below:
‘3.3     Adjustment to Purchase Price
(a)       (1^st Adjustment to Purchase Price):
Subject to clause 3.3(b), the parties will, twelve (12) months from the Completion Date (“the 1^st Adjustment Date”), calculate an adjustment to the Purchase Price for the Business (“the 1^st Adjustment to Purchase Price”). The method for calculating the 1^st Adjustment to Purchase Price will be as follows:
1^st Adjustment to Purchase Price = 4.5 x (Year one (1) EBITDA – EBITDA Benchmark).
Where:
“EBITDA Benchmark” = $250,000.00
“Year one (1) EBITDA” = the EBITDA for the period commencing from the Completion Date to the 1^st Adjustment Date.
For example, where the Year one (1) EBITDA is $270,000.00 then –
1^st Adjustment to Purchase Price      = 4.5 x ($270,000.00 - $250,000.00)
= 4.5 x $20,000.00
= $90,000.00
(b)(Relocation and 1^st Adjustment to Purchase Price):
However if the Vendor and the Purchaser agree to a Relocation prior to the 1^st Adjustment Date, the 1^st Adjustment to Purchase Price will be calculated as follows:
1^st Adjustment to Purchase Price = 4.5 x (Year one (1) Relocation EBITDA – EBITDA Benchmark)
Where:
“EBITDA Benchmark” = $250,000.00
“Year one (1) Relocation EBITDA” = an annualised EBITDA calculated as the EBITDA for the six (6) month period immediately preceding the date of Relocation multiplied by two (2)
Therefore, for example, the 1^st Adjustment to Purchase Price (where the annualised EBITDA is $304,166.00) would be:
= 4.5 x ($304,166.00 - $250,000.00)
= 4.5 x $54,166.00
= $243,746.00
Thereafter, for the purpose of clause 3.3(c), the 1^st Adjustment Date will be deemed by the parties to be the date of Relocation.
For the purposes of clauses 3.3 and 10.1, the date of Relocation will be the date the Business commences operation at the New Location.
(c)(Calculation and Payment of 1^st Adjustment to Purchase Price):
The parties will calculate and agree on the 1^st Adjustment to Purchase Price within two (2) months from the 1^st Adjustment Date. Subject to clause 10.5(a), the Purchaser will pay the Vendor the 1^st Adjustment to Purchase Price no later than three (3) months from the 1^st Adjustment Date. Any dispute between the parties in respect to the method of calculation or the amount of the 1^st Adjustment to Purchase Price will be resolved in accordance with clause 16.
(d)(Relocation and 2^nd Adjustment to Purchase Price)
The Vendor acknowledges that the Purchaser intends to undertake a Relocation of the Centre. Subject to clause 3.9, the Vendor agrees not to object to any Relocation of the Centre. If the Purchaser and the Vendor agree to a Relocation on or before the expiration of eighteen (18) months from the Completion Date, the parties will, twenty-four (24) months from the date of the Relocation (‘the 2^nd Adjustment Date), calculate an adjustment to the Purchase Price of the Business (the 2^nd Adjustment to Purchase Price) as follows:
2^nd Adjustment to Purchase Price
= 4.5 x (Year two (2) Relocation GP EBIT – Year one (1) Relocation GP EBIT)
Where:
“Year two (2) Relocation GP EBIT” = the GP EBIT for the 12 month period commencing 12 months from the date of Relocation.
“Year one (1) Relocation GP EBIT” = the GP EBIT for the 12 month period commencing from the date of Relocation.
For example:
Where
Year two (2) Relocation GP EBIT = $300,000.00
Year one (1) Relocation GP EBIT = $250,000.00
2^nd Adjustment to Purchase Price = 4.5 x ($300.000 - $250,000.00)
= 4.5 x $50,000.00
= $225,000.00
(e)(Calculation and Payment of 2^nd Adjustment to Purchase Price):
The parties will calculate and agree on the 2^nd Adjustment to Purchase Price (referred to in Clause 3.3(d) above) within two (2) months from the 2^nd Adjustment Date. Subject to clause 10.5(a), the Purchaser will pay the Vendor the 2^nd Adjustment to Purchase Price no later than three (3) months from the Adjustment Date. Any dispute between the parties in respect to the method of calculation or the amount of the 2^nd Adjustment to Purchase Price will be resolved in accordance with clause 16.
(f)(Allocation of Payment of Purchase Price): Subject to clause 10.5(a), the Payment of:
(i)the Purchase Price will be paid in cash or partly in cash and partly (up to a maximum of 30%) in Foundation Shares as stipulated in Item twelve of Schedule One;
(ii)any adjustment to the Purchase Price in accordance with clauses 3.3(a), (b) or (d) will be paid in cash or partly cash and partly (up to a maximum of 30%) of Foundation Shares as directed by the Vendor to the Purchaser in writing one (1) business day prior to the payment; and
(iii)in relation to clause 3.3(f)(ii), if the Vendor does not notify the Purchase in writing as to the cash/Foundation share apportionment prior to payment, then the apportionment will be the same as that applied in respect to the payment of the Purchase Price on Completion.
(g)(Adjustment in favour of Vendor): Adjustment under clauses 3.3(a), (b) or (d) shall only be made in favour of the Vendor. If the sum of either of the calculations required by clauses 3.3(a), (b) or (d) is negative, it shall be taken to be zero.
(h)(Determination of Foundation Shares):
For the purpose of determining the number of Foundation Shares to be issued as part of the Purchase Price, each Foundation Share shall be issued at a share price equal to the average closing price for Foundation Shares on ASX over the preceding five (5) days prior to Completion or as agreed by the Parties in writing. For the purposes of determining the number of Foundation Shares to be issued as part of the 1^st Adjustment to Purchase Price and the 2^nd Adjustment to Purchase Price, each Foundation Share shall be issued at a share price equal to the average closing price for Foundation Shares on ASX over the preceding five (5) days prior to the 1^st Adjustment Date and the 2^nd Adjustment Date respectively.
The issue of Foundation Shares as part of the Purchase Price or any subsequent adjustment is conditional upon Foundation or the Vendor satisfying all relevant requirements of the Corporations Law, the ASX Listing Rules or its Constitution in respect of the issue. If Foundation or the Vendor is unable to satisfy those requirements within thirty (30) days of the relevant due date, the adjustment shall be paid in cash.
The parties agree to do all things necessary or convenient to give effect to the provisions of this clause 3.3.
[I interpolate to observe that no such relocation in fact occurred].
3.4      Plant and Equipment
On the Completion Date, the Vendor will deliver possession and title to the Plant and Equipment to the Purchaser of the Business free from encumbrances.
…
3.8Sale of Going Concern
The Vendor and the Purchaser agree that the Business hereby sold is determined to be the supply of a going concern by the Vendor to the Purchaser.
3.9Structure, Operations and Business Direction
The Purchaser agrees that it will not make any material changes to the organisational structure, operations and strategic direction of the Business or the Centre without consulting with, and receiving consent (such consent not to be unreasonable [sic] withheld) from the directors of the Vendor acting in an advisory capacity with its primary objective to ensure that the Purchaser achieves EBITDA and GP EBIT growth (which ever is applicable).
3.10The Vendor acknowledges that the Purchaser intends to grow and expand the Business and, subject to clause 3.9, will not impede the Purchaser.
…
4.COMPLETION
…
4.2      Action on Completion
(a)… the Vendor shall take or cause to be taken all such action as is necessary to transfer the Business to the Purchaser;
…
4.4Health Insurance Commission
On Completion, the Vendor must cause the Health Insurance Commission to redirect payment of consultation fees in respect of medical services performed by the Doctors at or from the Centre to an account nominated by the Purchaser, effective on and from Completion.
5.PROFITS AND DEBTS
Profits
The Purchaser shall be entitled to all profits of the Business (except the Book Debts) as from the Completion Date.
…
6.EMPLOYEES
Position of Current Employees
The Vendor shall properly and lawfully terminate the employment of the current Employees of the Business from the Completion Date. The Vendor shall be solely responsible for all remuneration and Accrued Entitlements of such Employees up to and including the Completion Date. The Purchaser shall offer employment to all current Employees commencing on the Completion Date.
…
7.POSSESSION
The Purchaser shall be entitled to possession of the Business and to the income and profits of the Business on and from close of business on the Completion Date.
8.RISK
Notwithstanding any rule of law or equity to the contrary, the Business shall be at the risk of the Vendor until the Purchaser is entitled to or is given possession of the Business (whichever is the earlier) and thereafter the Business shall be at the risk of the Purchaser.
9.POSITION PENDING COMPLETION
For the period from the date of execution of this Agreement to the Completion Date the Vendor shall:
(a)grant to the Purchaser access to the financial accounts and other records of the Business to enable the Purchaser to inspect and review the same;
(b)so far as is reasonably practicable, ensure that the Business is conducted in accordance with normal and prudent business practice having regard to the nature of the Business and use its best endeavours to maintain the profitability and value of the Business and maintain an appropriate level of consumables; and
(c)observe and comply with the provisions of any laws governing the operation of the Business and any agreements affecting the same.
10.COVENANTS & WARRANTIES
Covenants & Warranties
The Vendor warrants and covenants to the Purchaser, to the extent that such covenants and warranties shall survive Completion, that to the best of its knowledge and belief:
(a)all information given and representations made by the Vendor in respect of the Business are true and accurate;
(b)The Vendor has good right and title to sell and assign the Business to the Purchaser;
…
(e)the Vendor has complied with and observed all covenants, conditions, agreements, statutory requirements, by-laws, orders and regulations affecting the Business;
(f)all financial information on the Business supplied by the Vendor to the Purchaser is true and accurate in all material particulars;
(g)full disclosure has been given to the Purchaser of all Losses and Liabilities of the Business;
…
(i)all the Accounting Records have been fully, properly and accurately kept and completed and will up to Completion continue to be so made up, kept and completed and that there are at the date of this Agreement, and will be up to Completion, no material inaccuracies or discrepancies of any kind contained or reflected therein and at the date of this Agreement give and reflect, and at the Completion Date will give and reflect, a true and fair view of the financial, contractual and trading position of the Business;
…
(k)from the date of this Agreement until the Completion Date, the Business will be carried on in the ordinary and usual course…
…
(n)the Year one (1) EBITDA (as defined in clause 3.3(a)) will not fall below 90% of the EBITDA Benchmark, or in the alternative, where the Relocation occurs within 12 months of the Completion Date, the Year one (1) Relocation EBITDA (as defined in clause 3.3(b)) will not fall below 90% of the EBITDA Benchmark;
(o)where the Business is relocated from the Premises to a New Location as contemplated in clause 3.3(d), the average of the GP EBIT for the first and second years from the date of the Relocation will not fall below 90% of the GP EBIT for the first year from the Completion Date; and
(p)where the parties do not elect to relocate the Business as contemplated in clause 3.3(d), the EBITDA for each of the succeeding 3 years from the Completion Date will not fall below 90% of the EBITDA Benchmark.
…
10.2     Reliance
The Vendor covenants and acknowledges that the Purchaser is entering into this Agreement in reliance on each of the Warranties and that the Purchaser may treat the same as conditions of this Agreement.
10.5     Warranty Security Deposit
(a)(Amount): The Vendor agrees that the Purchaser is entitled to withhold 20% of the Purchase Price on Completion, 20% of the 1^st Adjustment to Purchase Price upon payment in accordance with clause 3.3(c), and 20% of the 2^nd Adjustment to Purchase Price upon payment in accordance with clause 3.3(e) (‘Warranty Security Deposit’), in cash by way of security against any breach of the Warranties… .
…
(c)the Purchaser may make a claim in writing… to the Stakeholder… in respect of all or any part of the Warranty Security Deposit as is necessary to the Purchaser’s opinion (acting reasonably) to compensate the Purchaser and Foundation… for any loss or damage suffered by them… as a result of the Vendor breaching any Warranty. The Stakeholder will act on the terms of the claim notice within seven (7) days of receiving the said notice, unless the Vendor objects in writing (“objection notice”) to the terms of the claim set out in the claim notice, during the said seven (7) day period.
…
(e)Unless the Warranty Security Deposit is under dispute as per clause 10.5(d) or subject to court proceedings between the parties, the Vendor and the Purchaser agree that the Stakeholder must repay to the Vendor the Warranty Security Deposit or the balance (if any) of the Warranty Security Deposit then remaining (if the Purchaser has had recourse to the Warranty Security Deposit) within 36 months from the Completion Date, or within twenty seven (27) months and seven (7) days from the date of Relocation, which ever is the later.’
(f)Any interest (less bank fees and charges) accruing on the Warranty Security Deposit from time to time will:
(i)        form part of the Warranty Security Deposit; and
(ii)be dealt with in the same manner as the Warranty Security Deposit ie payable to the party entitled to the Warranty Security Deposit.
… .’
Clause 11 of the Business Sale & Purchase Agreement comprised a covenant on the part of Idoshore in the nature of a trade restriction for periods of time and within varying distances from the OSMC. Clause 17 thereof stipulated for ‘Foundation’ (ie the first respondent, Foundation Medical Centres (NSW) Pty Ltd, and the second respondent, being then named Foundation Healthcare Limited) to be ‘… jointly and severally liable to [Idoshore] for the due performance of all the terms on the part of [Foundation Medical Centres (NSW) Pty Limited] contained in the Agreement’. Hence of course both Foundation companies were made respondents to the present Idoshore proceedings.
The case presented by Idoshore based on the operation of the Business Sale & Purchase Agreement in the light of the events which happened in the course of the same being purportedly carried into effect by the parties
As I have foreshadowed, in arriving at the ‘EBITA Benchmark’ as defined in the Business Sale & Purchase Agreement, and thus the amount of $250,000, Idoshore submitted that ‘both Idoshore and Foundation undertook studies of the financial records and results of [OSMC] in order to form a view about the maintainable earnings of the business, normalised for revenue or expenses that would not be incurred after purchase’, and emphasised that ‘[t]he results generated were not identical but… remarkably similar…’. Idoshore pointed out that its calculations recorded ‘Maintainable Earnings’ of the OSMC for the quarter ended 30 September 2000 as having amounted to $73,273, and on an annualised basis therefore to $293,092, and the Foundation version of those calculations amounted to $67,331, and on an annualised basis therefore to $269,324. Those calculations being made of course on an EBITDA basis, no regard was paid of course by way of deductions for interest, taxation, depreciation or amortisation (see again the defined meaning of ‘EBITDA’ which I have earlier extracted from the Business Sale & Purchase Agreement).
Idoshore emphasised understandably that the circumstance that both Idoshore and Foundation had implicitly undertaken that same calculation exercise and had arrived at congruent figures for crystallisation of the Benchmark EBITDA as the sale price multiple ‘strongly suggests that objectively assessed, the business was capable of producing that level of income or profit’. Moreover Idoshore submitted that the thesis of Mr G C A Gower, chartered accountant and expert witness for Foundation, to the effect that the $250,000 EBITDA figure was a ‘flash in the pan’ result and was incapable of being achieved by Foundation subsequent to completion of the purchase by Foundation of the OSMC business, was plainly insupportable as a proposition having regard to the evidence. There is clearly objective evidentiary support inherent in that Idoshore submission.

A further emphasis of Idoshore’s case in purported reply was that Foundation had been ‘unable to offer any good explanation for the introduction of large cost items’, such as ‘wage costs, on-costs of employment and management fees’, following upon completion of the Business Sale & Purchase Agreement, despite Foundation’s assumption of control of the subject Business (as of course comprehensively defined by the Agreement) on the one hand, yet the sustaining by Foundation of ‘loss of revenue from key income sources’ on the other hand, which costs and losses were alleged by Idoshore to have caused or substantially caused ‘a post-acquisition EBITDA calculation that was lower than the EBITDA Benchmark’ of $250,000. That Idoshore submission in reply was advanced in the context of Idoshore’s complaint that no explanation or satisfactory explanation was provided, much less demonstrated, by or on the part of Foundation in relation to changes of significance, made after ‘Completion’ of the Agreement, in the operation of the OSMC, being changes having consequences as to downturn in levels of EBITDA experienced following upon ‘Completion’ of the Agreement on 31 January 2001.
Summary of the proceedings and my conclusions upon the issues addressed by the parties following conclusion of the evidence
Although the subject proceedings were originally commenced by application and statement of claim filed by Idoshore on 18 October 2004, the Idoshore case was substantially repleaded by an amended statement of claim filed on 21 March 2006. The response of Foundation by way of amended defence and amended cross-claim was filed on the first day of the hearing of the proceedings. The substantial amendments made on 21 March 2006 to the original pleadings, followed by the nature and extent of the submissions presented by Idoshore to the Court on 29 March 2007, exemplified the difficulties experienced by Idoshore in framing comprehensively its various causes of action which it has sought to pursue. I should perhaps repeat what I have indicated at the commencement of these reasons that my references throughout to ‘Foundation’ have extended as a matter of drafting convenience to either or both respondents, according to the context, though for the most part it has been the first Foundation respondent involved at least more directly in the relevant transactions and conduct otherwise, the second Foundation respondent being a guarantor relevantly of the first Foundation respondent’s contractual obligations. As I have also indicated at the outset, and consistently with the submissions and the pleadings, I have maintained reference to the Foundation designation of the respondents in these reasons, despite their recent changes of name involving the omission of reference to ‘Foundation’.
The persons who provided testimony at the hearing on behalf of Idoshore were Mr O’Shanassy and Idoshore’s expert accountancy witness Mr Phillips of Deloitte, and the persons who provided testimony on behalf of Foundation were Ms Kennedy, being Foundation’s chief financial officer, Mr Gower, being Foundation’s expert accountancy witness, and Ms Salagiannis, being the business manager/director in the employ of the second Foundation respondent since mid 2000. The evident major decision-maker of Foundation at the material times, being Mr Meehan, did not testify in the proceedings. As I have earlier recorded, he ceased at least his managerial association with Foundation prior to the hearing of the proceedings. The principal witness in the proceedings for Idoshore, being Mr O’Shanassy, was the only witness whose testimony related to the entire scope of the circumstances addressed by the evidence tendered in the proceedings. Although Ms Salagiannis of Foundation had assumed the apparent role of supervision of the operations of the OSMC at least by February 2001, that was only a ‘part-time role’. She testified unspecifically as to the absence of ‘… change in the staffing levels’ at the OSMC ‘over the period from 2001 to 2002’, and the detail and implications otherwise of her description of ‘staffing levels’ were not detailed. There was a discernible absence of comprehensive documentary material placed in evidence sourced or otherwise emanating from Foundation and relating to what I have recorded in these reasons under the heading ‘Events subsequent to completion of the Business Sale & Purchase Agreement – adjustments to EBITDA circumstances and calculations made post-acquisition at the instance of Foundation – submissions of Idoshore concerning significance as to fall in revenues subsequent to Foundation’s takeover of operation of the OSMC’. That was particularly the case in relation to the nature, scope and commercial significance of the apparently non-arm’s length transactions internally to the Foundation corporate group, which Idoshore has identified as causative of Foundation’s purported absence of at least an increase in performance since ‘Completion’ of the Business Sale & Purchase Agreement.
The hearing of the testimonial evidence in the proceedings commenced on 12 March 2007 and concluded on 15 March 2007. On 16 March 2007 there took place a brief hearing in Court for the purpose of setting the agenda for the provision of the written submissions of the parties. As foreshadowed, those written submissions subsequently provided were comprehensively articulated by counsel for both parties, except in the case of Foundation to the extent I have already indicated, and were not supplemented by oral submissions. I have found it necessary or appropriate to reproduce much of the text or the effect of the text of the respective submissions of the parties because of the complexity of the issues arising as well as the wide ranging evidentiary material placed before the Court, and also the implications of the submissions of the parties. I have frequently used the actual words and expressions used by counsel in the course of submissions and thus place the same in order to reflect contextual nuances and matters of emphasis. Similarly, given the central importance of the complex Business Sale & Purchase Agreement, I have found to be appropriate the repeated use of the actual words and expressions of the Agreement, and I have often extracted the full text thereof for identification as well as precision. A number of volumes of documentary material were provided to the Court, though the major proportion of that documentary material placed in evidence was not specifically addressed by either party in the course of the evidence or in concluding submissions.
The lengthy and comprehensive affidavit testimony of Mr O’Shanassy addressed extensively the context, as well as certain implications, of relevant aspects of the documentary materials and of events which took place before and subsequently thereto. His testimonial affidavit material alone extended over 54 pages. As I have foreshadowed, I thought that Mr O’Shanassy’s oral testimony, in the course of careful and precise cross-examination by counsel for Foundation, reflected a sound, as well as truthful, recall of empirical and otherwise relevant detail of the transactions and their controversial implementation. Generally speaking, Mr O’Shanassy refrained from uninvited embellishment of Idoshore’s case, though given the adverse view I have reached as to Idoshore’s case based on oral collateral covenants and warranties said to have been made by Foundation antecedently to and by way of inducement of the principal transactions the subject of the Agreement, I have not reproduced much of his testimonial material. Understandably there was reflected in aspects of his oral evidence, which was largely by way of responses in cross-examination, that degree of subjectivity which tends to be inevitable in the testimony of a litigant witness having a pecuniary interest directly and indirectly in the outcome of commercial litigation. I have reached the view nevertheless that his recall of evidentiary detail should be acknowledged and accepted by the Court as at least substantially accurate and credible. As I have already mentioned, his executive counterpart in office at Foundation at the time of material events, being Mr Meehan, did not testify by affidavit or orally in the proceedings.
For reasons I have already foreshadowed, I would not assign ultimate significance to Idoshore’s evidence, to the extent that it would purport to establish oral warranties and representations asserted to have been made explicitly or implicitly by or on behalf of Foundation antecedently or collaterally to the formation of the Business Sale & Purchase Agreement, and consequently to breaches of any such collateral warranties and representations, whether in terms of provisions of the Trade Practices Act, as has been pleaded, or otherwise. The contents of the complex contractual instrument were settled by and between the respective legal representatives of the respective parties, and addressed by reasonable and necessary implication the entirety of the commercial arrangements objectively put in place between the parties for the purpose of giving effect thereto. As I have already emphasised, although it would have been open to the parties to have stipulated in the Agreement explicitly to the effect that the operation of any collateral warranties and representations extrinsic to the Agreement was excluded, in the formation of the Agreement it did not do so explicitly, nevertheless, the comprehensive and detailed stipulations of the Agreement carried in my opinion an implicit operation to that effect. In other words, the Agreement by implication reasonably and necessarily to be imputed should be construed to have covered the field of the arrangements made relevantly between the parties and in relation to which contractual force and effect alone was mutually intended. Material to the basis for that finding is that each of the corporate parties to the proceedings was legally represented in relation to the preparation and execution of that very comprehensive Agreement. I prefer that approach primarily, although there is force also in Foundation’s denial of the operation in any event of s 51A of the Trade Practices Act as to future matters and the contention that such representations did not go to the root of the contract. What therefore falls for principal determination in the proceedings are the causes of action asserted by Idoshore for breach on Foundation’s part of that comprehensive Agreement and clause 3.9 thereof in particular, and the consequences of any such contractual breaches in terms of loss and damage allegedly sustained by Idoshore.
The operation of clause 3.9 of the Agreement, which must constitute the principal focus of Idoshore’s case in terms of contractual breach, unconditionally enjoined Foundation from making ‘any material changes to the organisational structure, operations and strategic direction of the Business or the Centre without consulting with and receiving consent’ from Idoshore, and did so ‘… with [the] primary objective to ensure that [Foundation] achieves EBITDA… growth…’. The explicit ‘primary objective’ of clause 3.9 was ‘to ensure that [Foundation] achieves EBITDA…’, and in that context, it was mutually agreed in particular that Idoshore, of course as vendor of the assets of the ‘Business’ (as comprehensively defined by clause 1.1 of the Agreement), would obtain the benefit of the clause 3.3(a) ‘earn-up’ to the extent that there might crystallise any such entitlement in the events which might happen. Incidentally there is no suggestion in the evidence as to Foundation having consulted Idoshore as to the grant of any consent to Foundation for the ‘mak[ing] of any material changes’ within the scope of clause 3.9, and no such consultation and consequential consent of Idoshore has been pleaded in any event. I should add for completeness that the somewhat curiously structured clause 3.10 provided no independent cause of action relevantly in favour of Idoshore, though it sheds light upon the mutually intended operation of the Agreement.
The reason why no price increment or so-called ‘earn-up’ in favour of Idoshore within clause 3.3(a) was acknowledged by Foundation to Idoshore was due to what it asserted to be the shortfall in the EBITDA of the OSMC which, according to Foundation’s case, crystallised in quantification in respect of the initial period of ‘twelve (12) months from the Completion Date’, during the whole of which period of time of course the ‘Business’ had become the subject of Foundation’s ownership and control. Idoshore pointed to the five factors enumerated in its submissions (recorded earlier at [42] of these reasons) as having caused or contributed materially to that outcome, the fourth and fifth factors being the more tangible in terms of demonstration of breach of clause 3.9 of the Agreement. The evidentiary material as to the pre-takeover earnings and otherwise of the operations of the ‘Business’ bearing upon the contractual notion of EBITDA, and appearing at [27], [39] and [61] of these reasons, when compared to the lower earnings correspondingly of the ‘Business’ under Foundation’s subsequent ownership and control, as so outlined at [60], were not explained or rationalised by Foundation, or at least adequately so, by reference to the operation of the Agreement subsequent to ‘Completion’, and in particular as here relevant, by reference to the initial year’s operation of the Business under Foundation’s control. In that regard the surprising absence of testimonial evidence of Foundation’s former chief executive officer Mr Meehan, in the course of the conduct of Foundation’s case, was not explained by Foundation. In making that observation concerning Mr Meehan, it was not sufficient that his business/ employment relationship with Foundation had ceased prior to the hearing of the proceedings.
Foundation’s endeavours to account for the post-completion financial results concerning the operations of the OSMC ‘Business’ per medium of its expert witness Mr Gower, were of no assistance of significance to its case as will have been already appreciated from observations I have already made. Transactions inherent in relation to what I have recorded in [56] were not explained, much less rationalised by Foundation relevantly in terms of the operation of clause 3.9, and in particular by way of rebuttal of the occurrence of ‘… material changes to the organisational structure, operations and strategic direction of the Business or the Centre’ within clause 3.9. Conversely, Foundation’s case the subject of its cross-claim based upon the operation of sub-clauses 10.1(n) and (p) has therefore not been made out at least to the extent of those outgoings. Foundation cannot in principle invoke the operation of those latter contractual provisions in circumstances referable substantially to its own breaches of the Agreement. Given the circumstances I have earlier summarised in the course of my narrative of the case advanced by Idoshore in chief, the evidentiary onus effectively passed to Foundation to demonstrate reasons contrary to, or at least at variance with, the case which Idoshore prima facie established adversely to Foundation in those aspects, being an evidentiary onus in relation to which Foundation at least fell short in adequately addressing.
Idoshore and Foundation stood of course at arm’s length in relation to the formation and subsequent performance of the terms and conditions of the Business Sale & Purchase Agreement, to the extent that performance duly took place. For EBITDA Benchmark adjustments to have been effectively put in place pursuant to the Agreement, either by way of increase in favour of Idoshore, or decrease in favour of Foundation, it was implicit that costs falling potentially for consideration be relevant from an objective standpoint in relation to the scope of the defined notion of ‘Business’ and of the clause 3.9 expression ‘material changes’. No exercise by way of demonstration of arm’s length cost equivalence of relevance to the ‘Business’ was undertaken by Foundation.
The non-arm’s length cost factors particularised by Idoshore in [56] above were not of course Idoshore’s only basis for its claim for clause 3.9 breaches on Foundation’s part. Other factors identified by Idoshore, and outlined generally at [59] of my reasons, were also said to involve ‘material changes to the organisational structure, operations and strategic direction of the Business or the Centre’, having the significance, especially in estimated monetary terms, particularised in [60]-[67]. Enough has been estimated to demonstrate significant monetary cost to the Business in Foundation’s hands, and hence further significance in terms of clause 3.9 and conversely sub-clauses 10.1(n) to (p).
It follows that Idoshore has established in principle an entitlement to an adjustment by way of increase to the ‘Purchase Price’ the subject of the Business Sale & Purchase Agreement based upon year one (1) EBITDA, pursuant to the operation of clause 3.3(a) thereof, described of course as the ‘first earn-up’. There remains however to be addressed with precision the calculation of the so-called ‘1^st Adjustment to Purchase Price’ pursuant to the operation of clause 3.3(a) of the Business Sale & Purchase Agreement.
I am unable to identify any viable cause of action in law for the recovery of moneys by Idoshore from Foundation directly or indirectly referrable to any conduct relevantly of Foundation regarding the so-called ‘Loss of Billings for Grech’ and the ‘Consequential loss’, upon or referrable to the operation of the Business Sale & Purchase Agreement, or otherwise by reason of any facts and circumstances in evidence in the present proceedings. No viable cause of action for breach of contract according to law was formulated by Idoshore in that regard, much less particularised for instance in [93]-[103] above. Nor has any cause of action in contract or tort, or for equitable damages, been persuasively articulated by Idoshore. I am unable to identify any sound basis for imputing an obligation to Foundation to have sought any injunctive relief against him, and the task of calculation of loss to the ‘Business’ (as of course defined) of approximately 44 working days referred to in [99] and the cost involved in seeking curial relief were not subjects which could somehow be attributed to breach of clause 3.9 or of any other contractual duty on Foundation’s part, or at least clearly or readily so.
I should record nevertheless in that regard that the amended statement of claim of Idoshore bearing date 21 March 2006 purportedly pleaded the failure of Foundation ‘to manage the business of the OSMC with a view to maintaining or increasing a profit’ by taking ‘any action to enforce contractual rights held by OSMC against Dr Joseph Grech’, upon the basis that such failure was said to be ‘contrary to the First Representation and the collateral warranties’, and whereby ‘the OSMC lost billing revenue for approximately 44 days’ and ‘[n]o doctor was recruited to replace the services of Dr Grech to OSMC’. More was required by way of demonstration of material facts and circumstances of significance in order for Idoshore to establish the juridical framework of a viable cause of action in relation to the Dr Grech controversy.
In regard to the issue of Idoshore’s entitlement to ‘earn-up’ in respect of the period of twelve months following ‘Completion’, I think Deloitte’s ‘lower’ assessment of quantum of damages, appearing at [105(iii)] of my reasons, was soundly conceived in principle, to the extent it conforms with my reasons. However any quantification of damages must have regard to my findings that:
(i)the pre-contractual representations and collateral warranties pleaded were not promissory in nature nor otherwise went to the root of the contract; and
(ii)there is no viable cause of action in law for the recovery of moneys by Idoshore from Foundation directly, or indirectly, referrable to any conduct relevantly of Foundation regarding the so-called ‘Loss of Billings for Grech’ and the ‘Consequential loss’.
The calculation of loss and damage essayed by Idoshore in [105(iii)] above requires revision downwards therefore in order to accommodate those findings. I therefore direct Idoshore to provide to the Court no later than 2 pm on Friday 10 August 2007 a revision of calculations as to general damages required to give effect to these reasons. The composition of the calculation should be provided.

The remaining principal issue falling for resolution concerns the subject of the controversial payment of $250,000 to Dr Fox. It will be recalled that clause 2 of the Business Sale & Purchase Agreement entered into of course on 14 December 2000, stipulated for its interdependency with the Facilities and Services Contract made between Idoshore and Dr Fox on 15 November 2000 for a term of three years (see generally in that regard [80] above). In the context of the circumstances recorded subsequently at [82]-[86] above, payment of that sum of $250,000 was made to Dr Fox pursuant to the terms of the Deed of Variation bearing date 28 May 2001 made between Idoshore and each of the Foundation companies, which is substantially extracted at [85] above, and which Deed took effect by way of supplement to the Business Sale & Purchase Agreement which had been completed four months earlier on 31 January 2001. As outlined in these reasons, part of that sum of $250,000 paid to Mr Fox, being $210,000, was drawn down from the retention fund comprising the ‘Warranty Security Deposit’ established by clause 10.5 of that Agreement. Of that amount of $210,000, the sum of $125,000 was constituted by a contribution made by Idoshore to Foundation said to be induced by a promise made by Foundation to relocate the OSMC to the CBA site, and the amount remaining of $85,000 was treated as a loan by Idoshore to Foundation, which Foundation expressly agreed to restore to the retention fund in accordance with the Deed of Variation. Repayment was stipulated by the Deed to be repaid by 1 February 2002 into or in favour of the ‘Warranty Security Deposit’ the subject of clause 10.5 of the Business Sale & Purchase Agreement earlier of course fully extracted, and thus not to Idoshore at least in the first place. That deposit formed part of the balance of purchase money payable by Foundation to Idoshore as indicated by that clause 10.5. The Warranty Security Deposit was constituted by ‘… an interest bearing deposit… operated by [Foundation’s] solicitor’ as a stakeholder pursuant to that clause 10.5 and paragraph (b) in particular. It appears that such sum of $85,000 has not since been paid by Foundation to Idoshore, either directly, or indirectly by relodgment into that ‘Warranty Security Deposit’.
Given those circumstances and the events which subsequently happened, Idoshore became presently entitled to payment of each of those sums of $125,000 and $85,000 from Foundation, whether per medium of Foundation’s operation of the Warranty Security Deposit or otherwise. As to the sum of $125,000, Idoshore advanced the same, as I have foreshadowed, upon the footing of the OSMC being relocated to the so-called CBA site, which has never subsequently occurred at the instance of Foundation, and as to the sum of $85,000, Foundation explicitly agreed to restore that amount to the Warranty Security Deposit, by way of repayment of what I have above referred to as Idoshore’s loan to the first respondent Foundation company (see again [84(ii)] above). In both cases, the ‘security’ purposes for the establishment of the so-called Warranty Security Deposit have been fulfilled, no claim for compensation having crystallised for any payment thereof in favour of Foundation, whether by way of any entitlement of Foundation pursuant to clause 10.1(n) and (p) in light of principal findings of the Court the subject of these reasons or otherwise.
In relation to the issue of interest on the moneys that are or have been or ought to be in the Warranty Security Deposit, according to the provisions of clause 10.5 of the Agreement, and of the interest on the ‘first earn-up’ that ought to have been received by Idoshore in regard to the first year of operation of the OSMC by Foundation, I will direct that each of the parties provide to the Court submissions on that issue in writing by 2 pm on Friday 10 August 2007.
Foundation’s cross-claim against Idoshore
The issues the subject of Foundation’s cross-claim, or more strictly it would seem, of the first Foundation respondent, remain to be addressed in the light of evidentiary material which I have already recorded in these reasons. As I have foreshadowed, it necessarily follows from the conclusions I have already reached in relation to the operation of the Agreement and of clause 3.9 in particular, and in the events which have happened relevantly to the principal issues arising for resolution in the proceedings, that Foundation’s case for breach of the ‘Covenants and Warranties’ the subject of sub-clause (n) and (p) of clause 10.1 must be dismissed.

I certify that the preceding one hundred and sixty-eight (168) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Conti.
Associate:
Dated: 7 August 2007

Counsel for the Applicant: Mr N Cotman SC

Solicitor for the Applicant: Sagacious Legal Pty Ltd

Counsel for the Respondent: Mr R K Weaver

Solicitor for the Respondent: Watson Mangioni

Date of Hearing: 12, 13, 14, 15 and 16 March 2007

Final Submissions: 24 April 2007

Date of Judgment: 7 August 2007

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1510 OF 2004

JUDGE:	CONTI J
DATE OF ORDER:	7 AUGUST 2007
WHERE MADE:	SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1510 OF 2004

JUDGE:	CONTI J
DATE:	7 AUGUST 2007
PLACE:	SYDNEY

Income Sources:	$ Amount
a) Doctors patient billings	284,090
b) Other medical fees	13,843
c) Subtenancies	29,195
Total income	327,128
Expenditures
d) Direct costs Doctors commissions	142,045
e) Medical supplies	13,402
f) Operating expenses	123,418
Total expenses	278,865
Net profit before tax	48,263
Dedications/Additions
g) Eliminate related party consulting expenses	8,000
h) Eliminate first floor rent expenses	18,568
i) Normalise salaries and wages expenses	(1,558)
Sustainable EBITDA	73,273
Annualised sustainable EBITDA	293,092

Counsel for the Applicant:	Mr N Cotman SC
Solicitor for the Applicant:	Sagacious Legal Pty Ltd
Counsel for the Respondent:	Mr R K Weaver
Solicitor for the Respondent:	Watson Mangioni
Date of Hearing:	12, 13, 14, 15 and 16 March 2007
Final Submissions:	24 April 2007
Date of Judgment:	7 August 2007