Specialist Diagnostic Services Pty Ltd v Healthscope Ltd

[2012] VSCA 175

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2010 0139
SPECIALIST DIAGNOSTIC SERVICES PTY LTD (FORMERLY SYMBION PATHOLOGY PTY LTD) (ACN 007 190 043)	Appellant
v
HEALTHSCOPE LTD (ACN 006 405 152)	First Respondent
and
AUSTRALIAN HOSPITAL CARE (LADY DAVIDSON) PTY LTD (ACN 079 309 550)	Second Respondent
and
HCOA OPERATIONS (AUSTRALIA) PTY LTD (ACN 083 035 661)	Third Respondent

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JUDGES:	BUCHANAN, MANDIE and OSBORN JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	23 April 2012
DATE OF JUDGMENT:	8 August 2012
MEDIUM NEUTRAL CITATION:	[2012] VSCA 175
FIRST REVISION:	10 August 2012:  Page 43, new para 164 re LDP Hospital.  Revised Conclusion, page 61.
JUDGMENT APPEALED FROM:	[2010] VSC 443 (Croft J)

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RESTRAINT OF TRADE – Leases of premises in hospitals to pathology laboratories – Landlord forbidden to carry on a business similar to that of the tenant – Similar businesses were those which served the doctors at the hospitals – Restraint of trade doctrine applicable to lease of premises in hospitals to pathology laboratories – Reasonableness of restraint – Restraint protected a legitimate interest of the covenantee – Good faith – Ad hoc implication of term as to alteration of the physical form of the hospital – Non derogation from grant of premises leased for use as a pathology service provider – Landlord altering the form of the premises a substantial interference with the tenant’s enjoyment of the lease – Restraint of trade clause to be read down pursuant to Restraint of Trade Act 1976 (NSW) – Restraint of trade clause in lease ran with the land – Constructive trust of contractual obligation.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr N J Young QC with Mr P W Collinson SC with Mr A J McCelland	Freehills
For the First and Second Respondents	Mr D G Collins SC with Mr J M Ross	Allens Arthur Robinson
For the Third Respondent	Mr P H Solomon SC with Ms Z E Maud	Hall & Wilcox

BUCHANAN JA
MANDIE JA
OSBORN JA:

Introduction:  preliminary facts

1. This appeal is concerned with the construction and validity of a restraint of trade clause in three leases of pathology businesses in hospitals.

1. The hospitals were John Fawkner Private Hospital (‘the JFP Hospital’) at Coburg in Victoria, the Hills Private Hospital (the ‘HP Hospital’) at Baulkham Hills in New South Wales and the Lady Davidson Private Hospital (‘the LDP Hospital’) at North Turramurra in New South Wales.

1. In 2003 Mayne Group Ltd, by means of wholly owned subsidiaries, including the second named respondent (‘AHC (LD)’) and the third named respondent (‘HCoA’), owned and operated a number of private hospitals.  The hospitals included the three hospitals with which this appeal is concerned.

1. The appellant (‘Symbion’) provided pathology services consisting of a collection service, a collection centre and a testing laboratory.

1. In November 2003 Symbion leased premises in the three hospitals in order to carry on its pathology business.  At that time Symbion was a wholly owned subsidiary of Mayne Group Ltd.

1. Each of the leases contained a restraint of trade clause in the following terms:

20.1     Restriction

Subject to the terms of clause 20.2 the Landlord must not during the term of this lease or any extension, renewal or over holding of this Lease:

(a)carry on or be concerned, engaged, interested or employed directly or indirectly in a trade, business or calling similar to that conducted by the Tenant in the Premises at the Commencement Date;

(b)grant a lease, licence or any right to occupy any part of the Building to any person other than the Tenant for any trade business or calling similar to the use to which the Premises are put by the Tenant or such other trade business or calling conducted by the Tenant in the Premises,

PROVIDED THAT this undertaking by the Landlord will immediately cease in the event that the Tenant consistently fails to remedy a material breach of the Service Agreement within one month (or such longer time as is reasonable in the circumstances) of the Landlord giving written notice to the Tenant of such breach.

20.2Permitted Activity

Clause 20.1 shall not in any way restrict the Landlord from:

(a)carrying on or being concerned, engaged, interested or employed directly or indirectly in a trade, business or calling that was conducted by the Landlord in the Building at the Commencement date;  or

(b)performing a lease, licence or any right to occupy any part of the Building to a person who was, at the Commencement Date, carrying on in the Building pursuant to such lease, licence or right to occupy, a trade business or calling similar to the use to which the Premises are put by the Tenant or such other trade business or calling conducted by the Tenant in the Premises.

1. The lease of premises at the JFP Hospital was for an initial term of four years, with options which, if exercised, would extend the lease to 30 June 2023.  The lease of premises at the HP Hospital was for an overall term, including options, that would expire on 31 March 2024.  The lease of premises at the LDP Hospital was for an overall term, with options, which was due to expire on 30 June 2019.

1. The permitted use of each of the leased premises was ‘pathology services and associated administration and storage’.  The lease was conditional upon Symbion being an approved pathology authority.  Symbion was obliged to maintain relevant approvals and licences to enable it to conduct pathology services.  It was an essential term of each lease that Symbion might only use the demised premises for the permitted use unless the landlord approved another use.  Another essential term obliged Symbion to keep the demised premises open for business during usual business hours and conduct its business in a proper, efficient and reputable manner in accordance with the service agreement.  Each lease provided that the rent payable by Symbion was to be reduced if the number of licensed beds in the hospital was reduced by 50 per cent or more.  Symbion was given the right to terminate the lease if the landlord ceased to carry on the hospital business at the building in which the leased premises were situated.

1. Soon after entering into the leases, Mayne Group Ltd completed the sale of its hospital division.  The intention to sell the hospitals had been announced during the negotiation of the terms of the leases. 

1. At the JFP Hospital, Symbion conducted a collection centre and a pathology laboratory, providing pathology services to in-patients and out-patients at the hospital on referral from doctors practising at the hospital and also to patients on referral from doctors practising in the north western suburbs of Melbourne.

1. At the HP Hospital, Symbion provided pathology services from a collection centre until April 2009 and from a laboratory until December 2007.  The majority of the services were supplied to patients at the hospital, who were referred by doctors practising at the hospital, but services were also supplied to patients referred by doctors practising in the surrounding area.  In addition, the laboratory performed tests on specimens collected at nine collection centres operated by Symbion in Sydney.

1. At the LDP Hospital, Symbion conducted a collection service in one room until March 2006.

1. The first named respondent (‘Healthscope’) purchased the businesses and land of the JFP Hospital and the HP Hospital from HCoA, which in turn had purchased those hospitals from a purchaser from Mayne Group Ltd.  Healthscope purchased all the shares in AHC (LD), which owned the business and land of the LDP Hospital.

1. In December 2004 Healthscope acquired Gribbles Group Pty Ltd (‘Gribbles’), which provided pathology services in Victoria.  In the following year Healthscope acquired Davies Campbell and de Lambert Pty Ltd (‘DCL’), which provided pathology services in Sydney.

1. In January 2006, Gribbles leased premises adjacent to the JFP Hospital and opened a pathology collection centre and laboratory operating from those premises.  Gribbles then commenced to operate a pathology collection service at the JFP Hospital, collecting pathology specimens from patients treated at the hospital, which were processed at the adjacent Gribbles collection centre and pathology laboratory.  From about August 2006 a tubular vacuum delivery system was connected between the JFP Hospital building and the Gribbles premises, which enabled pathology specimens to be delivered directly from the hospital to the Gribbles premises.  Symbion claimed that from February 2006, Healthscope permitted Gribbles to keep a blood gas analyser in the hospital building.  Symbion also claimed that Healthscope promoted Gribbles and the Gribbles facilities adjacent to the hospital in preference to the pathology services provided by Symbion.

1. Since May 2006, DCL has operated a pathology collection centre and pathology collection service from premises located in consulting rooms within the same building complex but in separate ownership from the HP Hospital.  DCL leased the premises from a company that was not related to any of the parties to the proceeding.  From 4 January 2007, DCL also operated a pathology testing laboratory from those premises.  It ceased operating from the consulting room premises in 2009.  Symbion’s lease of its premises at the HP Hospital expired on 31 March 2009.  Symbion claimed that Healthscope promoted the DCL laboratory services and the DCL centre within the consulting rooms in preference to the pathology services provided by Symbion.

1. Since 21 January 2006, AHC (LD) has permitted DCL to collect pathology specimens for pathology testing from the LDP Hospital.  Symbion claimed that AHC (LD) granted a licence or right to occupy part of the LDP Hospital building to DCL for the purpose of storing equipment used by DCL in connection with its mobile collection service at the hospital and that DCL operated a mobile onsite collection service from part of the hospital building.  Symbion’s lease of its premises at the LDP Hospital expired on 30 June 2007.  Symbion claimed that AHC (LD) promoted DCL in preference to the pathology services provided by Symbion at the LDP Hospital.

1. It was conceded by the respondents that Healthscope has encouraged the use of the pathology services provided by Gribbles by doctors practising at the JFP Hospital and the pathology services provided by DCL by doctors practising at the HP Hospital.  Further, it was conceded that AHC (LD) had encouraged the use of the pathology services provided by DCL at the LDP Hospital.  Symbion claimed that Healthscope’s efforts to integrate its hospital and pathology services businesses at the JFP Hospital, the HP Hospital and the LDP Hospital was, in each case, a great success.  Symbion submitted that the number of referrals received by it from doctors practising at each hospital declined significantly.  As a result, so it was said, in December 2007 Symbion was forced to close the pathology laboratory at the HP Hospital and consequently the lease of its premises at the HP Hospital was allowed to expire on 1 April 2009.  Symbion said that it reduced the week day staffing hours at the JFP Hospital, reduced the number of staff at the pathology laboratory and reduced the week day operating hours for the laboratory.  Symbion no longer provides any pathology services at the LDP Hospital for, so it was said, the same reasons and consequently its lease of premises at the LDP Hospital was allowed to expire on 30 June 2007.

1. The service agreement referred to in the leases to Symbion was defined as any agreement in force from time to time during the term of the lease under which Symbion agreed to provide services to the operator of the hospital.  At the time the leases were entered into there was a service agreement between Mayne Group Ltd and a company related to the operator of the hospitals.  The agreement was made by that company for and on behalf of its related entities.  The agreement also contained a provision that bound Symbion as a subsidiary of Mayne Group Ltd.  Further, it will be recalled that each lease obliged the tenant to conduct its business in accordance with the service agreement.  The operator of the hospitals engaged Mayne Group Ltd to provide pathology services to patients from each hospital if and when requested by the patients’ practitioners.

1. The service agreement contained elaborate provisions describing an extensive range of pathology services to be provided by Mayne Group Ltd, such as tests, the collection of specimens and the reporting of results, and prescribing the quality of those services.  The agreement specified the times within which Mayne Group Ltd was to perform services, the accuracy of results, resources, staffing, the maintenance of equipment and more.  Mayne Group Ltd was to meet specified quality health standards and codes of practice.  The standards to be met by Mayne Group Ltd were picked up and incorporated in the leases to Symbion.  For its part, the operator of the hospitals was to provide Mayne Group Ltd with such access to the hospital premises as was reasonably necessary to allow Mayne Group Ltd to perform its obligations under the agreement and supply and maintain services, such as lighting, access to communications systems and storage facilities, and equipment to enable Mayne Group Ltd to provide the pathology services it had promised.

The decision at first instance

1. Symbion brought proceedings against the respondents, alleging that they had breached clause 20 of the leases and an implied obligation of good faith in the leases and had derogated from the grant of the leases.  The respondents for their part contended that clause 20.1 was unenforceable as it was an unreasonable restraint of trade.  In order to limit the geographic scope of the clause, Symbion contended that, properly construed, clause 20.1(a) only prohibited the landlord from carrying on or being concerned in a business that competed with that conducted by Symbion in the demised premises.

1. The trial judge declined to construe the words ‘similar to’ as meaning ‘in competition with’.  He held that clause 20.1 had no geographic boundaries.  His Honour held that the clause was invalid as the doctrine of restraint of trade applied to it and the clause was unreasonable in that the length of time for which it operated and the area it covered were more than were necessary to protect the landlord’s legitimate interest.  The trial judge also held that there could be no implied obligation of good faith ‘which would have the effect of implying a covenant in restraint of trade which would otherwise be void’.  His Honour held that there could only be a derogation from grant if the respondents’ conduct rendered Symbion’s business uneconomic, not merely less profitable.  He found that Symbion’s business was not rendered uneconomic.

1. Symbion invoked s 4(1) of the Restraints of Trade Act 1976 (NSW), which provided that a restraint of trade was valid to the extent to which it was not against public policy. The trial judge held that the provision would not save a restraint of trade clause to the extent that it offended the common law and that the section did not have the effect of curing the lack of any geographical limitation in clause 20.1(a).

1. Healthscope was not a party to the leases to Symbion and was only bound by clause 20.1 of the leases if the clause constituted a covenant which ran with the land or the promise by Healthscope to observe the provisions of the leases, which was contained in the contracts pursuant to which it purchased the JFP Hospital and the HP Hospital, was held in trust for Symbion by the vendor. 

1. The trial judge held that clause 20.1 was not a covenant that touched or concerned the land but held that Healthscope held the JFP Hospital land and the HP Hospital land subject to all of Symbion’s rights under the leases, it seems by way of a constructive trust.

1. The trial judge also held that after the assignment by HCoA to Healthscope of the reversion in the land at the JFP and HP Hospitals, HCoA was not bound by clause 20.1(a) or (b) of the JFP Hospital lease, or clause 20.1(a) of the HP Hospital lease, or any non-derogation obligation in respect of either the JFP or HP Hospitals.

The construction of clause 20.1(a)

1. In this appeal, Symbion challenged the trial judge’s construction of clause 20.1(a).  Symbion contended that businesses were ‘similar’ if they competed with each other and relied on a line of authority beginning with Drew v Guy,[1] in which provisions similar to clause 20.1 had been construed to prohibit only businesses which competed with the business of the covenantor.

   [1][1894] 3 Ch 25.

1. Drew v Guy concerned a covenant by a tenant under a lease not to ‘use, exercise, or carry on, or permit or suffer to be used, exercised or carried on, upon the premises, or any part thereof, the trade or business of a … keeper of a restaurant similar to that carried on by’ another tenant of the landlord.  The Court of Appeal resolved the question whether the defendant had breached the covenant by examining whether the defendant’s business competed with the business of the other tenant.  Lindley LJ said:

I do not think that the question of similarity is to be determined by considering whether both of the establishments sell ale, or whether the houses in which they are carried on are similar in appearance, but by the consideration whether the defendant’s restaurant is so like that of Raven as seriously to compete with it.  I think that the business of the defendant as he proposed to carry it on would seriously compete with Raven’s.[2]

[2]Above, 29.  See also Castelli v Middleton (1901) 17 TLR 373; Automotive Carriage Builders Ltd v Sayers (1909) 101 LT 419; Port v Griffith [1938] 1 All ER 295, 299.

1. The trial judge in the present case distinguished Drew v Guy.  He pointed out that clause 20.1 did not include a phrase such as ‘trade or business of a pathology services provider similar to’ that conducted by the tenant.  He said that clause 20.1(a) was directed at a ‘trade, business or calling similar to that conducted by the tenant in the premises’, emphasising the words ‘trade, business or calling similar to’.

1. The trial judge said that the competition test involved ‘a potentially difficult comparative exercise’ and said that ‘there is no reason to resort to the “competition” test if a simpler construction is available and preferable’.  His Honour thought that the components of Symbion’s business – a pathology laboratory, a collection centre and a collection service – were sufficiently clear to determine whether another business was similar to Symbion’s business without resort to the competition test.

1. In order to determine whether a business was similar to that conducted by Symbion, the trial judge ignored the facts that in the case of each lease Symbion’s business was situated in the hospital building and its principal customers were the patients of the hospital.  The hospital and pathology businesses were complementary.  Symbion depended upon the hospital to maintain its business;  the JFP and HP hospitals benefited from the presence of a laboratory which could quickly and efficiently perform the pathology tests upon which doctors practising at the hospital depended.  Symbion also benefited from a reliable collection service at the LPD Hospital.  The terms of the leases and the service agreement showed that the hospital and the pathology business were mutually dependent.

1. Accordingly, we are of the opinion that similarity is to be determined by taking into account not only the activities constituting the tenant’s business but also the salient feature of that business, namely, its customer base arising from its relationship with the landlord.  We think that a similar business is one which carried out the pathology services required by doctors practising at the hospital conducted by the landlord.  It is not necessary to resort to the competition test to limit the area in which the restraint operated.

1. Another question of construction should be mentioned.

1. Clause 7.1 of the leases provides that the Tenant may only use the Premises for the Permitted Use (namely, Pathology Services and associated administration and storage). Clause 7.2 provides that the Tenant must keep the Premises open for business and conduct that business in a proper, efficient and reputable manner. In addition, clause 21 provides that the leases are conditional upon the Tenant being an approved pathology authority under the Health Insurance Act 1973 and the Tenant and the Premises holding all approvals under any other relevant legislation in order for the Tenant to conduct a pathology service at the Premises and, further, that the Tenant must do all things necessary to maintain all approvals and licenses to allow it to conduct the pathology service at the Premises.

1. The precise terms of clause 7.1 of the leases, so far as relevant, are:

The Tenant may only use the Premises for the Permitted Use or any other hospital related purpose that the Landlord may from time to time approve, which approval must not to be unreasonably withheld or delayed provided that where in the Tenant’s reasonable opinion, the Landlord has not substantially changed the make up of the services provided at the Hospital at the Commencement Date, such other hospital related purpose, for which the Tenant seeks approval, is to be directly related to the Permitted Use (such approval not to be unreasonably withheld or delayed).

1. Although the respondents did not advance the argument, it might be said that clause 7.1 contemplates that the lessee might use the demised premises for a hospital related purpose other than that of conducting a pathology business and accordingly clause 20.1(a) is an unreasonable restraint of trade. In our opinion, however, the proper construction of clause 7.1, especially when read together with clauses 7.2 and 21, is that the lessee is required to use the premises for conducting a pathology business, whether or not any other hospital related purposes (directly related to the pathology business or not) are also permitted – in other words, ‘or any other hospital related purpose’ means ‘and any other hospital related purpose’).

1. The consequence of that construction is that it can be readily seen that clause 20.1(a) is necessarily interrelated with clause 7.1 and that clause 20.1(a) provides protection to the pathology business, being the Permitted Use which must be carried on.  Clause 20.1(b) also protects the pathology business but is in terms wide enough to protect the use of the premises for any other hospital related purposes that may be permitted from time to time.

Whether clause 20.1 is reasonable

1. If clause 20.1(a) is limited to a pathology business serving each hospital, the area covered by the restraint is no greater than is necessary to protect the lessee’s legitimate interest.  The restraint imports its own geographical limitation.  The nature of a pathology business serving a hospital requires the business to be situated in or near the hospital.  The Gribbles and DCL laboratories and collection centres were established within or immediately adjacent to the hospital they served. 

1. The trial judge observed that the restraint was to operate for the duration of each lease and that, upon the exercise of options to renew the leases, the restraint could operate for as long as 15 or 20 years.  He said that ‘The length of the restraints is unreasonably long under the provisions of clause 20.1, both paragraphs (a) and (b), and exceeds the length of time required to protect any legitimate interest’.

1. In our opinion, the fact that each restraint was tied to the term of the lease to the covenantor rendered reasonable the time for which the restraint was to operate.  Clause 20.1 prevented the landlord of each hospital undermining the tenant’s business by competing with it or granting a lease to others to compete with the tenant and conferred considerable benefits upon the landlord’s hospital business.  We think that in those circumstances it was reasonable for the restraint to operate during the term of the lease.  The same factors bearing upon the reasonableness of the restraint operated at the end of the term as at its commencement.

Clause 20.1(b)

1. The trial judge did not pause to construe or analyse clause 20.1(b) separately from clause 20.1(a).  His Honour dealt with clause 20.1(a) at some length and then concluded:

[T]he restraint conditions contained in clause 20.1(a) and 20.1(b) of the leases are restraints of trade.  Further, I am of the opinion that it has not been established by Symbion that these provisions are reasonable as between the parties and that it has not been established that they are not injurious to the public.[3]

[3]The onus of establishing that a restraint is reasonable as between the parties rests upon the covenantee but once that onus has been discharged, the onus of establishing that the restraint is contrary to the public interest is on the covenantor.  See Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269, 319 (Lord Hodson).

Clause 20.1(b) prohibited the landlord from granting a licence or any right to occupy any part of the hospital to any person other than Symbion for any trade or business similar to the use to which the premises were put by Symbion.  The geographical scope of the restraint provided by clause 20.1(b) was necessarily limited and we think that the duration of the restraint was reasonable for the reasons we have assigned in respect of clause 20.1(a).

Breach of clause 20.1

1. In our opinion, it is clear that in promoting the services of Gribbles at the JFP Hospital and the services of DCL at the HP Hospital, Healthscope breached the provisions of clause 20.1(a).  Healthscope was prohibited from being ‘concerned, engaged, interested or employed directly or indirectly’ in a business that was similar to that conducted by Symbion at the hospitals.  We think that the word ‘concerned’ is wide enough to encompass Healthscope encouraging the use of a pathology services business it owned to doctors and staff at the hospitals.  It appears that at trial Healthscope accepted that it had breached the clause if the clause was valid.  AHC (LD) is in a different position, for it did not own DCL.  For reasons that appear later, however, we consider that AHC (LD) is caught by clause 20.1(b).

1. We are also of the opinion that Healthscope breached the terms of 20.1(b).  Healthscope granted permission to Gribbles to install signs within the JFP Hospital.  Although Healthscope asserted that the vacuum tube between the JFP Hospital and the Gribbles pathology centre was paid for by Gribbles, Healthscope granted permission to use the space through which the tube entered the JFP Hospital to send samples to the Gribbles laboratory.  Although the space might have been small, the commercial advantage that the licence to use that space gave to Gribbles was significant.  Further, Gribbles had installed a blood gas analyser it owned in the accident and emergency department to ensure that the emergency department continued to refer work to Gribbles.

Whether Symbion had a legitimate interest to protect

1. Pursuant to a notice of contention, Healthscope and AHC (LD) contended that Symbion did not have a legitimate interest that it was entitled to protect from competition.  Although the issue was raised at trial, his Honour did not decide it. 

1. Counsel for the respondents submitted that covenants restraining competition are only sustainable if, to use the words of Dixon CJ in Butt v Long, ‘they are ancillary to a main transaction, contract or arrangement’.[4]  Counsel said that as Symbion was not purchasing any good will, it was simply protecting its business from competition and that was not a sufficient reason to uphold a restraint of trade.  Counsel for the respondents relied upon the finding by the trial judge that neither the terms as to rent in the lease nor the provisions of the service agreement provided any justification or quid pro quo for the restrictions contained in clause 20.1.

   [4](1953) 88 CLR 476, 486. See also Vancouver Malt and Sake Brewing Co Ltd v Vancouver Breweries Ltd [1938] AC 181.

1. In effect, the position adopted by the respondents is that, apart from contracts of employment, the only transaction which can support a restraint of trade is the sale of good will.  In our opinion, the category of transactions which can sustain a restraint of trade is not so limited.  In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, Lord Reid said:

It has often been said that a person is not entitled to be protected against mere competition.  I do not find that very helpful in a case like the present.  I think it better to ascertain what were the legitimate interests of the appellants which they were entitled to protect and then to see whether these restraints were more than adequate for that purpose.[5]

[5][1968] AC 269, 301. See also Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1972) 133 CLR 288, 295 (Menzies J).

1. In Queensland Co-Operative Milling Association v Pamag Pty Ltd,[6] a flour miller made a loan to a bakery on the footing that the bakery would covenant to buy all the flour it needed from the miller.  Notwithstanding the absence of any purchase of good will, the desire of the flour miller to increase its sales and the profitability of its operation was held to be a sufficient interest capable of being protected by a restraint of trade.  Again, in Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd[7] an ice-cream supply contract provided that the purchaser would not within a distance of five miles from certain premises manufacture, sell, serve, supply or vend ice-cream other than ice-cream manufactured or supplied by the vendor.  Latham CJ referred to ‘the protection of the plaintiff’s trade’ as a legitimate interest to be protected[8] and Williams J observed that the ‘business of the plaintiffs is that of manufacturing and selling ice-cream and ices, and it is the goodwill of that business which they are entitled to take reasonable measures to protect.’ 

   [6](1973) 133 CLR 260.

   [7](1947) 77 CLR 574.

   [8]Above, 581.

1. In the present case the legitimate interest of Symbion is to be found in the leases and the service agreement.  Those transactions supplied a commercial justification for the bargain contained in clause 20.1. 

1. The clause was negotiated on equal terms as the trial judge expressly found.  In Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd, Menzies J said:

[W]hen parties negotiate a commercial arrangement from positions where one does not have the other at an unfair advantage and do, after hard bargaining, reach an agreement which each finds in its interests to accept, the court will not readily find that their bargain is unreasonable as between themselves, notwithstanding the well established policy of the law against restraints of trade.[9]

[9]Above, 294.  See also Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, above, 324 (Lord Pearce), 300 (Lord Reid);  Queensland Co-operative Milling Association v Pamag Pty Ltd, above, 276 (Stephen J).

1. In our view, the obligations undertaken by Symbion under the service agreement, which gave the covenantee a guarantee of pathology services of a high order to support its hospital business, provided ample consideration for the restraint.

The applicability of the restraint of trade doctrine

1. Grounds 3 and 4 of the notice of appeal are as follows:

3         His Honour erred in fact and law in failing to find that, by reason of the application of the ‘trading society test’, the doctrine of restraint of trade did not apply to clause 20.1. 

4         His Honour erred in fact and law in failing to find that no possible reason of public policy would require the covenant in clause 20.1 to be invalidated in circumstances where the first respondent chose to purchase land or it is subject to the restrictive covenant contained in that clause. 

1. It is well established that there are some species of restraints of trade which do not attract the operation of the common law doctrine regulating such restraints.[10] 

   [10]Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126, 135 [15]; Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) AC 269, 332 per Wilberforce LJ.

1. Symbion submits that the restraints comprised in clause 20 of the leases fall within a category to which the doctrine does not apply.  It is submitted that, within commercial leases, exclusivity provisions of the type in issue are accepted practice and fall within the ‘trading society test’ formulated by Lord Wilberforce in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd:[11]

One may express the exemption of these transactions from the doctrine of restraint of trade in terms of saying that they merely take land out of commerce and do not fetter the liberty to trade of individuals; but I think one can only truly explain them by saying that they have become part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society. If in any individual case one finds a deviation from accepted standards, some greater restriction of an individual’s right to ‘trade,’ or some artificial use of an accepted legal technique, it is right that this should be examined in the light of public policy. An example of this process in a lease (a lessor’s covenant as to trading) may be found in Hinde v Gray, and, in a conveyance, in the Scottish case of Aberdeen Varieties Ltd v James F Donald (Aberdeen Cinemas) Ltd.[12]

[11](1968) AC 269.

[12]Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) AC 269, 335 (citations omitted).

1. In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, the judgments of the House of Lords postulated three tests of the validity of a restraint of trade: the ‘fettering of existing freedom’ test; the ‘trading society’ test; and the ‘sterilisation of capacity’ test.  In Peters (WA) Limited v Petersville Limited, the High Court rejected the sterilisation of capacity test proffered by Lord Pearce in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd.[13]  The plurality also cited with approval criticisms of the ‘fettering of existing freedom’ test which is associated with statements of Lord Reid, Lord Morris of Borth-y-Gest and Lord Hodson.[14] 

   [13]Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126 (Gleeson CJ, Gummow, Kirby and Hayne JJ) 141-3 [34]-[38]; (Callinan J) 147-8 [52]-[54] referring to Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd. 

   [14]Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126, 137-8 [22]; referring to Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) AC 269, 298, 306-9, 316-7 respectively.

1. In Maggbury Pty Ltd v Hafele Australia Pty Ltd,[15] Gleeson CJ, Gummow and Hayne JJ stated that in Peters (WA) Limited v Petersville Limited  the Court had rejected both the ‘fettering existing freedom’ and ‘sterilisation’ tests.  They further declined to express a concluded view upon the ‘trading society test’. 

   [15](2001) 210 CLR 181, 203 [55].

1. For present purposes, it is sufficient to deal with Symbion’s arguments on the assumption that the trading society test applies.  Before turning to its application, it should be noted that the trading society test removes restraints of trade from examination by reference to the common law rules in a provisional way only. 

1. This is firstly because the underlying public policy must have a protean quality which evolves as social and economic circumstances change.  In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, Lord Wilberforce stated:

How, then, can such contracts be defined or at least identified? No exhaustive test can be stated—probably no precise non-exhaustive test. But the development of the law does seem to show that judges have been able to dispense from the necessity of justification under a public policy test of reasonableness such contracts or provisions of contracts as, under contemporary conditions may be found to have passed into the accepted and normal currency of commercial or contractual or conveyancing relations. That such contracts have done so may be taken to show with at least strong prima force that, moulded under the pressures of negotiation, competition and public opinion, they have assumed a form which satisfies the test of public policy as understood by the courts at the time, or, regarding the matter from the point of view of the trade, that the trade in question has assumed such a form that for its health or expansion it requires a degree of regulation. Absolute exemption for restriction or regulation is never obtained: circumstances, social or economic, may have altered, since they obtained acceptance, in such a way as to call for a fresh examination: there may be some exorbitance or special feature in the individual contract which takes it out of the accepted category: but the court must be persuaded of this before it calls upon the relevant party to justify a contract of this kind.[16]

[16]Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) AC 269, 332-3. In Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126, 135, [17] the plurality cited with approval the observations of Lord Macmillan in Vancouver Malt and Sake Brewing Co v Vancouver Breweries Ltd [1934] AC 181 to the effect that public policy is not constant.

1. Secondly, the initial formulation of the test itself accepts that a restraint will fall to be examined if, in an individual case, there is some greater than usual restraint of an individual’s right to trade or an artificial use of an accepted technique. 

1. Subject to these underlying conceptual provisos, there is a well established line of authority for the proposition that the rules relating to restraints of trade do not ordinarily apply to restraints accepted by a party acquiring an interest in land.  In this State, in Allen v Lawson,[17] the Full Court[18] approved the statement in Williams on Vendor and Purchaser (3^rd Edition) to the following effect:

It is now settled, with regard to covenants relating to land and entered into by a tenant in fee with a former owner, from whom he purchased or with an adjoining land owner, that insofar as such covenants bind the covenantor to some forbearance restrictive of the free use of his land, or made with the object of benefitting the owners and occupiers of some other land retained by the former owner or belonging to the adjoining land owner, as the case may be, the burden thereof runs with the land in equity …[19]

[17](1926) VLR 1.

[18]Cussen, McArthur and Macfarlan JJ. 

[19](1926) VLR 1, 9.

1. In Quadramain Pty Limited v Sevastapol Investments Pty Limited,[20] Gibbs J (with whom Stephen and Mason JJ agreed) said with respect to restrictive covenants:

The conclusion that the rules relating to restraint of trade do not apply to restrictive covenants given by a person purchasing or leasing land should be accepted as correct, at least as a general rule. The doctrine of restraint of trade is based on public policy. When a purchaser, with a view to obtaining a particular piece of land, which he could not otherwise acquire, or could acquire only on paying a greater price, freely gives to the vendor a covenant, for the benefit of other land of the vendor, that he will not use the land purchased for the purpose of trade generally or for the purpose of a particular trade, there is, speaking generally, no possible reason of public policy that would require such a covenant to be invalidated. The same is true where a purchaser or lessee chooses to buy or lease land already subject to a restrictive covenant. Indeed, as Lord Pearce said in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, ‘It would be intolerable if, when a man chooses of his own free will to buy, or take a tenancy of, land which is made subject to a tie (doing so on terms more favourable to himself owing to the existence of the tie) he can then repudiate the tie while retaining the benefit’. Where the public policy has no possible operation, the rules founded on it have no application.[21] 

[20](1976) 133 CLR 390.

[21]Ibid, 402.

1. It does not follow, however, that simply because a restraint relates to land that it will not be subject to the rules governing restraint of trade.  The decisions in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd and in Amoco Australia Pty Limited v Rocca Bros Motor Engineering Co Pty Ltd[22] demonstrate this. 

   [22](1973) 133 CLR 288.

1. Nor does it follow that a landlord is necessarily to be regarded in the same way as a lessee.  In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, Lord Wilberforce stated the relevant principle in broad terms:

The working of the same principle can be seen even earlier in relation to covenants restricting trade in leases generally.  In the normal exploitation of property, covenants are entered into, by lessee or lessor, not to trade at all or not to carry on particular trades.  In 1614 (Rogers v Parrey) the issue, whether a covenant in a lease for 21 years not to exercise a particular trade was in restraint of trade, was still susceptible of debate, but Coke CJ and the judges of the King’s Bench upheld its validity.  By 1689 this seems to have become accepted doctrine, for in Thompson v Harvey Holt CJ was able to say: ‘It is usual to restrain a lessee from such a trade in the house let,’ giving as the reason ‘for I can choose whether I will let the house, or not.’ (Compare in relation to chattels, United Shoe Machinery Co of Canada v Brunet.)

The same has come to be true of dispositions of the freehold: for over 100 years it has been part of the normal technique of conveyancing to impose and to accept covenants restricting the use of land, including the use for trades or for trade generally, whether of that conveyed or of that retained. A modern example of this is Newton Abbott Co-Operative Society Ltd v Williamson & Treadgold Ltd.[23] 

[23]Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) AC 269, 334-5 (citations omitted).

1. On the other hand, Lord Hodson (applying the concept of fettering existing freedom) stated:

All dealings with land are not in the same category; the purchaser of land who promises not to deal with the land he buys in a particular way is not derogating from any right he has, but is acquiring a new right by virtue of his purchase. The same consideration may apply to a lessee who accepts restraints upon his use of land; on the other hand, if you subject yourself to restrictions as to the use to be made of your own land so that you can no longer do what you were doing before, you are restraining trade and there is no reason why the doctrine should not apply.[24]

[24]Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) AC 269, 316-7.

1. It may be accepted that, ordinarily, the alienor of part of the land may be able to bind himself or herself with respect to the use of the balance of the land retained after a partial alienation.  As Symbion submits, such provisions are common in leases of individual retail premises within shopping centres or other stand alone facilities.[25] 

   [25]D & M Pelle Holdings Pty Ltd v Cottrell Pty Ltd [2005] ACTSC 67, [1]; Village v Shirayma Shokusan Co Ltd [2001] L & TR 35, [8];  Khao Thai Pty Ltd v Coles Myer Properties Holdings Ltd [2002] ANZ ConvR 573.

1. We were not, however, referred to any persuasive authority which extends the postulated exception from the restraint of trade doctrine to all covenants in restraint of trade made by a landlord. 

1. Hinde v Gray,[26] to which Lord Wilberforce referred in the initial passage quoted from Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd above, does not support this conclusion.  In that case, the defendant leased to the plaintiffs for 10 years a brewery together with ‘the exclusive or such other privilege as the defendant then enjoyed of supplying ale’ to certain public houses ‘then the property of the defendant or then under his control, that is to say, the Punch Bowl’.  The claim failed in part because the covenant was void by reason of a lack of adequate geographical limitation.[27] 

   [26](1840) 1 Man & G 195.

   [27]Applying Ward v Byrne 5 M & W 548.

1. In the course of argument, counsel for Symbion referred to the case of Thomas v Hayward.[28]  That case (which we discuss further below) concerned the lease of a public house in which the lessor covenanted not to build or keep any house for the sale of spirits or beer within half a mile of the demised premises.  It was held that the lessor’s covenant did not run with the land so as to enable the assignee of the lease to sue him upon it.  There was no reference to the doctrine of restraint of trade in the judgments of the court but this does not demonstrate the exception for which Symbion contends.

   [28](1869) LR Ex 311. 

1. In ACT v Munday,[29] the appellant operated a rubbish dump and landfill.  The respondent was granted a licence to scavenge for abandoned goods for the purpose of resale elsewhere.  In addition to scavenging he purchased goods brought to the landfill before they were deposited by other licensees.  The appellant then gave a third party an exclusive right to salvage goods at the landfill face.  The respondent contended that this was an unlawful restraint of trade. 

   [29](2000) 99 FCR 72.

1. Heerey J (with whom Miles and O’Connor JJ agreed) held that the trading society test should be applied and that the restraint of trade doctrine had no application to the terms of licences under which the respondent and others entered the rubbish dump.  Heerey J stated:

A common, and important, way of deriving economic benefit from land is the grant of exclusive licences for the conduct of business thereon. Such licences are only of value because of the expectation that other persons will enter upon the land and be customers, but not competitors. So persons gaining admission to the Melbourne Cricket Ground who happen to be caterers would not expect to be able to set up a pie stall in competition with those who have been granted exclusive catering rights by the MCG. Nor would a television station expect to be able to send camera operators into the ground to transmit broadcasts in competition with the channel which has exclusive contractual rights.[30] 

[30]Ibid, 93 [107].

1. His Honour’s conclusions turned on the character of the transaction in issue.  They cannot be extrapolated to apply in some generic way to obligations imposed upon a landlord under a lease, particularly in circumstances where those obligations purport to extend beyond the landlord’s tenement. 

1. The trial judge in the present case was correct to conclude that ACT v Munday does not justify the conclusion that the grant of an exclusive licence to the conduct of a business on land will always satisfy the requirements of the trading society test.  It is not enough to show that the covenant is in some respects ‘like’ a type of covenant accepted as a part of the structure of a trading society. 

1. As his Honour recorded, there was no evidence before him of accepted practice relating to restraint of trade provisions in tenancy agreements concerning pathology facilities within hospitals.  Further, his Honour was correct to conclude that no simple analogy should be drawn between exclusivity provisions in shopping centre leases and the case with which he was concerned. 

1. We do not, with respect, accept that there is authority which justifies the postulation of a general exception with respect to restraints of trade comprised in a landlord’s covenant under a lease. 

1. In turn, there are, we think, at least four reasons why the restraint of trade doctrine should be applied to the covenants contained in clause 20 of the lease.

1. First, the obligation constituted by clause 20.1(a) extends beyond the land retained by the lessor.  It would be anomalous if the geographic extent of such obligation could not be examined by the Court to ascertain whether it was reasonable.  In the present case, the evidence was that Symbion conducted some 20 pathology laboratories in the Melbourne metropolitan region and other pathology laboratories elsewhere within Australia.  If clause 20.1(a) in the JFP lease were formulated in a way which created a restraint extending to the north-west region of the Melbourne metropolitan area, the whole of the metropolitan area, the State of Victoria or the whole of Australia, serious questions would arise as to its reasonableness, both as between the parties and in the public interest.  We do not accept that the fact that such a clause is contained in a lease prevents the Court from examining its reasonableness in the circumstances of the particular case. 

1. Secondly, even where a covenant contained in a lease is reasonable as between the parties, questions of the public interest might arise in respect of restraints upon the supply of essential medical services.  Changes in the practice of pathology might raise questions of the reasonableness of the duration of a restraint of trade clause.  The adequacy of supply of services in a particular area might also raise serious questions of the public interest.  We do not accept that common practice with respect to retail premises within stand alone shopping centres necessarily compels the view that the doctrine of restraint of trade will never be applicable to restraints relating to the supply of pathology services within a particular hospital. 

1. Thirdly, there is no evidence of an accepted practice relating to restraint of trade limitations in respect of covenants given by hospitals granting exclusivity to pathology providers.[31]  Indeed, it was accepted before the trial judge that a hospital owner could not compel doctors within a hospital to refer pathology requests to a particular provider.  This context does not encourage the drawing of an inference from other commercial contexts that exclusivity restraints are common practice. 

   [31]Capital Aircraft Services Pty Ltd v Brolin (2007) Aust Contract R 90-257;  Earth Force Personnel Pty Ltd v E A Negri & Anor [2010] VSC 426, 33-5.

1. Fourthly, clause 20.1(a) raises questions of whether, in any event, this particular provision goes beyond the sort of restraints of a right to trade commonly embodied in exclusivity provisions in commercial leases and as such would fall to be examined under the proviso to the trading society test. 

Good faith

1. Symbion’s statement of claim alleges with respect to each of the hospital leases that there were terms of the lease, or alternatively obligations of the parties, that the parties would cooperate and act in good faith with and towards one another and would have regard to, recognise and not undermine their respective interests under the leases.[32] 

   [32]Fourth further amended statement of claim, [13A], [30A], [42A]. 

1. The obligation was particularised in a manner which made it clear that the contention is founded upon the provisions of clause 20.1(b) of the leases. 

The JFP Hospital Good Faith Obligation arises by operation of law, alternatively to give business efficacy to the JFP Hospital lease, and is to be implied from the context and nature of the JFP Hospital lease, namely a commercial contract between the owner and operator of the JFP Hospital, on the one hand, and the sole provider of pathology and associated services to patients at the JFP Hospital from a site or location in the JFP Hospital building, on the other.[33]

[33]Emphasis added.  The particulars with respect to the HP Hospital lease and the LDP Hospital lease were in like terms.

1. The trial judge discussed the extent and nature of any good faith obligations in the present case by way of extensive reference to authority.[34]  Nevertheless, because the trial judge held that the whole of clause 20.1 was void or unenforceable as a restraint of trade he did not go on to consider whether a duty of good faith should be recognised as arising specifically in connection with the obligations created by clause 20.1(b). 

   [34][133ff].

1. Grounds 12 and 13 of the notice of appeal are:

12       His Honour erred in fact and law in finding that the first and second respondents did not have an obligation to the appellant to act in good faith (paragraph 145 of the Reasons). 

13       His Honour ought to have found that the first and second respondents had an obligation to the appellant to act in good faith and that the first and second respondents breached that obligation by seeking to divert business away from their tenant (the appellant) towards Gribbles and DCL (subsidiaries of the first respondent, and related companies of the second respondent) in the manner alleged in the fourth further amended statement of claim. 

1. Symbion submits that even if clause 20.1(a) of the leases were void, clause 20.1(b) ought survive.  In those circumstances, the benefit conferred on the tenant by clause 20.1(b) would be the competitive advantage derived from the exclusive occupation of part of the hospital building for the purpose of providing pathology services to patients from the hospital.  Although other pathology service providers were permitted to send their staff into the hospital premises to take or collect samples, the exclusive right to be the only on-site provider of pathology laboratory services was of significant value.  Each of the JFP and HP hospitals are high acuity hospitals.  As such, they require the rapid turn around of many pathology tests and, in consequence, require pathology service providers with laboratories on-site or immediately adjacent to the hospital.  Thus clause 20.1(b) gave Symbion a key competitive advantage over other pathology service providers who could only provide a visiting collection service.  It is further submitted that Healthscope set out to destroy the benefit conferred by clause 20.1(b) by a ‘cynical resort to the black letter’ of the lease provisions.[35] 

   [35]Overlook Management BV v Foxtel Management Pty Ltd (2002) Aust Contract R 90-143, [67].

1. At the JFP Hospital, a Gribbles laboratory was established at premises immediately adjacent to the hospital and connected to the hospital by means of a tubular vacuum delivery system.  In consequence, specimens could be provided from the hospital to the Gribbles centre simply by being placed within the delivery system in the hospital.  A request by Symbion for a similar tube system to be installed for its benefit was rejected because this would have damaged Gribbles’ business.  In consequence, Gribbles was placed in the same or a better position than if it had occupied premises within the JFP Hospital building. 

1. At the HP Hospital, Healthscope identified a strata title of consulting rooms within the physical structure of the hospital building, but owned by an entity other than Healthscope, on which it could locate the DCL business.  It entered into an arrangement with the owner of the strata title, enabling DCL to establish a laboratory and collection centre within the consulting rooms.  Other premises were made available to the company which owned the strata title, providing alternative consulting rooms on highly favourable terms.  Thus, Symbion was deprived of the benefit derived from exclusive occupation as a pathology services provider within the HP Hospital. 

1. We do not accept that an obligation of good faith should be implied indiscriminately into all commercial contracts.[36] 

   [36]         Tote Tasmania Pty Ltd v Garrott (2008) 17 Tas R 320, 326 [16]; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL (Receivers and Managers appointed) (Administrators appointed) [2005] VSCA 228.

1. In the case of a detailed written lease entered into between commercial entities of equivalent bargaining power, such a condition will ordinarily arise only if it meets the tests laid down in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council.[37] 

   [37](1977) 180 CLR 266;  Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.

1. In the case of the JFP Hospital, it can hardly be doubted that at the time of the lease, a reasonable onlooker would conclude that the parties did not intend the landlord to be able to exercise its powers over the building containing the leased premises so as to materially alter the physical form of the hospital to substantially deprive the tenant of the benefit of clause 20.1(b). 

1. In our view, an obligation of good faith not to undertake such an alteration should be implied.  The tenant was necessarily vulnerable to such conduct because the benefit it received from its premises depended upon a use ancillary to the use of the hospital premises as a whole. 

1. The lease specifically imposed positive obligations upon the landlord with respect to supply of services to the hospital building and maintenance of common areas.[38]  The negative obligation we would imply meets the tests laid down in the BP Refinery (Westernport) Pty Ltd v Hastings Shire Council case. 

   [38]Defined as ‘… those areas for common use by the landlord and tenants and other occupiers of the Building including, without limitation, lifts and lift lobbies, reception areas, stairwells, corridors, pathways, driveways and car parking areas.’

1. Such a term is reasonable and equitable.  It is necessary to give business efficacy to clause 20.1(b).  It is so obvious ‘it goes without saying’.  It is capable of clear expression and it does not contradict any express term of the contract. 

1. The installation of the tubular vacuum delivery system was material to the benefit received under clause 20.1(b) in the same consequential way as an alteration to the premises which prevented delivery of pathology samples from the balance of the hospital directly to Symbion’s laboratory would be.  The contemplated physical relationship between the hospital and the premises leased to Symbion was materially altered in a way which substantially affected the benefit received under clause 20.1(b). 

1. The term which we accept should be implied is necessary to give effect to the explicit terms of the lease.  As the New South Wales Court of Appeal noted in Burger King Corporation v Hungry Jacks Pty Ltd:

Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract’s performance or to withhold its benefits. … As a result, it thus ensures that parties to a contract perform the substantive, bargained for terms of their agreement.[39]

[39]Metropolitan Life Insurance Co v RJR Nabisco Inc 716 F Supp 1504 (1989), 1517, quoted in Burger King Corporation v Hungry Jacks Pty Ltd (2001) 69 NSWLR 558, 570 [173] (Sheller, Beazley and Stein JJA).

1. The trial judge rejected Symbion’s case as to an implied obligation of good faith specifically, in part,[40] on the basis that clause 20.1 was void or unenforceable as a restraint of trade and that, in those circumstances, the benefit of the leases was ‘quite constrained’.  If, however, it is accepted that clause 20.1(b) is valid, then the benefit flowing from it is plain, namely, the right to be the only provider of pathology services with premises located within the hospital building. 

   [40]Judgment, [143]. 

1. It follows that if we are wrong in our conclusion concerning clause 20.1(a), we would nevertheless hold that, from in or about August 2006, Healthscope was in breach of a duty of good faith arising out of the need to give clause 20.1(b) business efficacy. 

1. Insofar as the HP Hospital is concerned, however, the use of premises immediately adjacent to the hospital (as that concept was defined in the lease) cannot be readily said to constitute a breach of an obligation of good faith arising by necessary implication from the lease. 

1. The lease relevantly defined the term ‘Building’ to mean the building and other improvements erected on the ‘Land’.  The ‘Land’ was defined to mean:

The land in folio identifier 6/SP60520 known as The Hills Private Hospital Medical Centre, 499 Windsor Road, Baulkham Hills. 

1. As we have said, clause 20.1(b) provided the landlord must not during the terms of the lease:

(b)grant a lease, licence or any right to occupy any part of the Building to any person other than the Tenant for any trade, business or calling similar to the use to which the Premises are put by the Tenant or such other trade, business or calling conducted by the Tenant in the Premises;

1. We do not accept that it can be inferred that the parties necessarily intended to somehow extend the obligation under clause 20.1(b) to land immediately adjacent to or within the same physical structure as the ‘Building’ as defined. 

1. The tenant was always at risk that a third party could commence the provision of pathology services from the consulting rooms.  Healthscope submits that such services are provided by a third party in premises immediately adjacent to the JFP Hospital and that such cases are not exceptional. 

1. There was no special vulnerability on the part of the tenant to the conduct of the landlord with respect to adjacent premises as distinct from the conduct of third parties. 

1. This context does not encourage the implication of an obligation of general good faith extending beyond the building as defined under the lease and into areas in respect of which the landlord had no positive obligations under the lease.

1. An obligation of good faith extending to adjoining premises should not be implied into the lease.  It does not go without saying that the parties intended the obligation to extend to the case of the consulting rooms, even if those rooms were contained in the same physical structure as the building defined under the lease by reference to a stipulated title. 

Non-derogation from grant

1. Symbion makes submissions on non-derogation from grant resting upon the same factual matters as its case with respect to good faith.[41]

   [41]Written submissions, [60].

1. In the course of his discussion of the effect of the restraint of trade provisions under clause 20.1 of the lease, the trial judge recognised[42] the general principle that a person is not entitled to derogate from a thing sold to another by that person.  Reference was made to the statement of Lord Macnaghten in Trego v Hunt:[43]

A man may not derogate from his own grant; the vendor is not at liberty to destroy or depreciate the thing which he has sold; there is an implied covenant, on the sale of goodwill, that the vendor does not solicit the custom which he has parted with: it would be a fraud on the contract to do so. These, as it seems to me, are only different turns and glimpses of a proposition which I take to be elementary. It is not right to profess and to purport to sell that which you do not mean the purchaser to have; it is not an honest thing to pocket the price and then to recapture the subject of sale, to decoy it away or call it back before the purchaser has had time to attach it to himself and make it his very own.

[42][102].

[43][1896] AC 7, 25.

1. Thus a term is generally to be implied into a lease that each party is to abstain from any act which would deprive the lease of its efficacy.[44]

   [44]O’Keefe v Williams (1910) 11 CLR 171.

1. In Browne v Flower[45] Parker J expressed the principle in these terms:

… the implications usually explained by the maxim that no one can derogate from his own grant do not stop short with easements.  Under certain circumstances there will be implied on the part of the grantor or lessor obligations which restrict the user of the land retained by him further than can be explained by the implications of any easement know to the law.  Thus, if the grant or demise be made for a particular purpose, the grantor or lessor comes under an obligation not to use the land retained by him in such a way as to render the land granted or demised unfit, or materially less fit for the particular purpose for which the grant or demise was made.[46]

[45][1911] 1 Ch 219, 225.

[46]Emphasis added, cited with approval by Lord Templeman in British Leyland Motor Corporation Ltd v Armstrong Patents Co Ltd (1986) AC 577, 641.

1. The present case is one where in the circumstances of the JFP and HP Hospital leases ‘the facts imply a correlatively expressed obligation’[47] of the type contemplated by Lord Parker in Browne v Flower.  The tenant was restricted to a permitted use by the leases and was further obliged to provide pathology services pursuant to the service agreement referred to in the lease.  In turn the landlord was required to maintain the exclusive position of the tenant as a pathology service provider with facilities within the hospital.  The landlord was under an obligation not to derogate from its grant on these terms. 

   [47]Gordon v Lidcombe Developments Pty Ltd [1966] 2 NSWR 9, 14 (Street J).

1. The scope and extent of the obligation not to derogate from grant is to be determined by the surrounding circumstances and the provisions of the leases themselves.  It will vary with the purposes for which it is imposed.[48]

   [48]Gordon v Lidcombe Developments Pty Ltd[1966] 2 NSWR 9, 14 (Street J);  Harmer v Jumbil (Nigeria) Tin Areas Ltd [1921] 1 Ch 200, 209 (Eve J) and 217 (Lord Sterndale MR); Wilcox v Richardson (1997) 43 NSWLR 4, 13 (Handley JA with whom Powell JA agreed).

1. The trial judge held correctly that:[49]

In order to establish that the obligation has been breached, it must be established that the disturbance or disruption in breach of the obligation is ‘substantial’, though the law does not now insist on ‘practical frustration’ of the purpose of the lease. Further, the obligation has been applied in circumstances where there has been no direct physical impact or interference with the leased premises.[50]

[49][153].

[50]Aussie Traveller Pty Ltd v Marklea Pty Ltd [1998] 1 Qd R 1 (CA); and see Nordern v Blueport Enterprises Ltd[1996] 3 NZLR 450;  Project Blue Moon Pty Ltd v Fairway Trading Pty Ltd[2000] FCA 127 [9]-[11] (Gallop, Matthews and Sundberg JJ); Carpet Fashion Pty Ltd v Forma Holdings Pty Ltd (2005) NSW Conv R ¶56-116, [2004] NSWCA 150;  and see Mount Cook National Park Board v Mount Cook Motels Ltd[1972] NZLR 481.

1. There are two lines of authority bearing on the facts in issue in the present case.  The first relates to the circumstances in which competition alone may or may not constitute a derogation from grant.  The second relates to cases in which the landlord alters the physical circumstances of the leased premises in a manner which materially affects the benefits derived by the tenant from using the premises for the purposes for which they are let. 

1. The general rule is that, in itself, the grant of a lease of land for a particular purpose will not prevent a landlord from establishing or permitting a competing use in adjacent premises retained by it.[51] 

   [51]Port v Griffith [1938] 1 All ER 295; Romulus Trading Company Ltd v Comet Properties Ltd (1996) 2 EGLR 70.

1. It cannot be assumed that competition by reason of the clustering of uses such as retail outlets will necessarily have an adverse net effect on the tenant’s business.  Further, it cannot be inferred that the parties intended that the landlord not compete when no bargain was entered into to restrict such competition. 

1. The position may be different where a shop is leased for a particular purpose within a self-contained shopping centre.  The landlord may market the shop not just as a retail unit but as a shop in its place with a particular role in the centre.  It may be that the parties contemplate that the landlord will be subject to obligations which have not been expressly bargained for, but which are implicit in the use for which the landlord has designed the centre and for which the defendant has taken the lease of its unit.[52] 

   [52]Petra Investments Ltd v Jeffrey Rogers Plc [2000] L & T R 451, 473 (Hart J).

1. This type of case is illustrated by Oceanic Village v Shirayma Shokusan Co Ltd,[53] where a lease was granted to enable the tenant to run a gift shop within the London Aquarium building.  The Court found that the shop was intended to be the Aquarium gift shop.[54]  The tenant was required to stock and sell Aquarium related products and dress the staff in London Aquarium uniforms.  It was granted exclusive rights to operate a gift shop within the Aquarium building.  The purpose of the lease was thus intended to carry with it the exclusive right to sell Aquarium gift products.  The landlord proposed to erect kiosks adjacent to the Aquarium building and permit the sale of Aquarium related products from them.  The landlord’s conduct did not fall within the terms of the lease which restricted the landlord’s use of the building.  Nevertheless, a further term was to be implied in all the circumstances preventing the landlord from derogating from its grant of the lease by permitting the sale of Aquarium related products from the kiosks.  Nicholas Warren QC stated:

In my judgment, the fact that the parties have expressly bargained for a restriction relating to gift-shop use generally in the building does not exclude the implication of a further term relating to the sale of aquarium-related products from a gift shop not within the area of the express restriction. The scope of the express restriction – which relates to all gift shops – is substantially different from the suggested implied restriction – which relates only to aquarium products. The express provision protects future opportunity;  the latter is to protect the very business which the landlords, as well as [the tenant], intended would be carried on with an element of exclusivity.[55]

[53][2001] L & T R 35, 478 

[54]Ibid, 496. 

[55]Ibid, [53]. 

1. In Wilcox v Richardson,[56] on the other hand, the New South Court of Appeal considered the sub-lease of a shop forming part of one of two lots at Kiama harbour.  The shop was sub-let for the purpose of use as a takeaway fish and chip shop.  The shop formed part of lot 276 which, together with the adjoining lot 277, was the subject of a Crown lease to the sub-lessor.  The sub-lease prohibited the sub-lessor from selling or permitting the sale of cooked seafood or other takeaway food from lot 277.

   [56](1997) 43 NSWLR 4.

1. At the time of the sub-lease, part of lot 276, not comprised in the sub-lease, was used by the sub-lessor as a wet fish shop.  The sub-lessor subsequently commenced selling cooked fish and other takeaway food in competition with the business run by the sub-lessee from shop 1.

1. In the Court of Appeal, Meagher JA noted that the words of the restrictive covenant relating to lot 277 were clear and had been agreed on between the parties’ solicitors.  The covenant forbade the business proposed on lot 277.  There was no reason to extend the covenant to the balance of lot 276.  It was true that the commercial utility of the covenant would be ‘eviscerated’, but that was no reason to ‘mangle the words’ of the covenant.  Handley JA[57] held that the principle of non-derogation from grant did not entitle the appellants to restrain use of the balance of lot 276 for a competing business.  His Honour referred with approval to the statements of Elias J in Nordern v Blueport Enterprises Ltd[58] where her Honour noted that the principle of non-derogation from grant may be invoked where premises let for a purpose would be rendered unfit for that purpose by a particular use of adjoining premises retained by the landlord or let to another tenant.  However, such a claim has rarely succeeded and only in extreme circumstances. 

   [57]Powell JA agreed with both Meagher and Handley JJA.

   [58][1996] 3 NZLR 450.

1. In Nordern v Blueport Enterprises Ltd, the landlord of a city building let the fourth floor to an escort agency which utilised it to operate a brothel.  The evidence showed that the use caused a series of adverse impacts upon the tenant who used the third floor of the building as an office.  Elias J upheld the decision of the judge at first instance that this constituted a derogation from grant.  Her Honour held in part:

(a)       to amount to derogation from grant the interference with the use to which the premises had been let must be substantial;

(b)      derogation occurred when the leased premises were rendered ‘materially less fit’ by the inconsistent user;

(c)       in most cases a lessee who wished to restrain a landlord’s ability to use or let adjoining premises would need to make explicit provision by covenant in order to achieve this protection.[59]

[59]Ibid, 455.

1. Her Honour referred to the decision of the Supreme Court of Canada in Clark’s-Gamble of Canada Ltd v Grant Park Plaza Ltd,[60] where it was decided that there was no derogation from the grant of a lease of shop premises to one tenant by a subsequent lease of adjacent premises to a competing tenant.  In that case, as in Browne v Flower,[61] the court was influenced by the consideration that the lessee could have bargained for contractual protection.  In the absence of such protection, there was no derogation from the grant because the introduction of a competing use did not render the premises unfit for the purpose of the lease.

   [60](1967) 64 DLR (2d) 570.

   [61][1911] 1 Ch 219.

1. Wilcox v Richardson, and the authorities referred to by Handley JA, support the view that the conduct of a competing use in the consulting rooms immediately adjacent to the HP Hospital did not constitute a derogation from grant. 

1. Oceanic Village v Shirayma Shokusan Co Ltd is to be distinguished because Symbion was not granted the exclusive right to provide pathology services in the hospital, it was simply provided an exclusive occupational advantage within the hospital.  The better view is that if (contrary to the primary view we have expressed) clause 20.1(a) is void, the conduct of a competing business within the adjoining premises comprised in the consulting suite at the HP Hospital did not constitute a derogation from grant.

1. It did not disturb the benefit the tenant was entitled to under the lease, namely exclusive occupation of the premises within the landlord’s building as defined by the lease for the purpose of provision of pathology services. 

1. The tenant was still able to conduct its business on the terms contemplated in the lease.  The fact that it was the landlord, rather than a third party, that commenced a competing business in adjoining premises did not derogate from the interest granted to the tenant under the lease.  At the time of the lease the tenant was faced with the possibility that a competitor might take over the consulting rooms.  As the trial judge held,[62] mere competition without more cannot establish derogation from grant.

   [62][159].

1. His Honour also concluded that Symbion had failed to prove that Healthscope’s conduct had rendered Symbion’s operations at the HP Hospital ‘uneconomic’.  We do not accept that this is the relevant test but, for the reasons we have stated, Healthscope’s conduct is not properly characterised as constituting a derogation from grant.

1. We turn then to the cases relating to the physical alteration of the context in which the parties contemplated a use of premises for a particular purpose would be conducted pursuant to a lease.  In Gordon v Lidcombe Developments Pty Ltd, Street J considered the lease of a shop which had been entered into before construction of the arcade containing the shop had been completed.  When the plaintiff entered into possession, the shop was visible both to users of the arcade and passersby in the street.  Subsequently, the landlord erected a wall which partially obscured the visibility of the shop. 

1. Street J referred to Browne v Flower and stated in part:

In attempting to define the degree to which premises must be rendered materially less fit in order to meet Parker J’s established test, I am of the view that premises will be regarded as having been rendered unfit for the demised purpose if the facts, even though falling short of establishing absolute unfitness, are sufficient to enable the Court to conclude that the premises are for practical purposes to be fairly regarded as having been rendered unfit.  This is the same concept as that stated by Neville J, at the conclusion of his judgment in Cable v Bryant:[63]  ‘Both on principle and authority, it is clear that where a man grants a stable, even though the adjoining premises at the time may be under a lease from him to somebody else, he and any person claiming through him by subsequent grant is subject to the obligations imposed by the rule, and cannot derogate from the grant he has made by any act which shall render the subject of the grant unfit from a reasonable point of view for the purpose for which it is granted’ [emphasis of Street J].[64]

[63][1908] 1 Ch 259, 265; [1904-7] All ER Rep 937, 940, cited in Gordon v Lidcombe Developments Pty Ltd [1966] 2 NSWR 9, 16.

[64]Ibid, 15-16.

1. In turn his Honour held the erection of the wall did not render the premises unfit in the requisite sense:

It is an obligation on the defendant not to do anything on its own land which will render the plaintiffs’ shop unfit from a reasonable point of view for the purpose of use for a restaurant and coffee lounge.  The plaintiffs’ case, at its highest, is that the erection of the wall damages the trade of the shop and the goodwill, and substantially reduces its value and saleability.  But the effect of the wall is not so great as to render it uneconomic to use the shop for the purposes of a coffee lounge and restaurant; it is still practicable to carry on this business profitably, but the profit will not be so great nor will the business be so readily saleable nor so valuable as it would be if the wall were not there.  This state of facts falls short of constituting a breach by the defendant of its obligation not to derogate from the grant.[65] 

[65]Ibid, 16-17.

1. His Honour considered the surrounding circumstances of the lease and concluded that, at the time the lease was entered into, the plaintiff’s shop was not in existence as the lessor’s building lacked internal walls or doors and escalators.  In the circumstances, in the absence of an express stipulation as to how the shop was to be constructed, it could not be concluded that the parties mutually contemplated that a certain set of circumstances would continue.

1. We do not take his Honour to have held that proof of derogation from grant will always require demonstration that the use of the premises has been rendered uneconomic.  A distinction is to be drawn between cases where it cannot be concluded that the parties mutually contemplated the continuation of specific circumstances (such as Gordon v Lidcombe Developments Pty Ltd) and cases such as the present case where that conclusion may be able to be drawn.  In the latter category at least substantial interference with an aspect of the tenant’s enjoyment of occupancy may be sufficient. 

1. In Johnston & Sons Limited v Holland,[66] the lessor granted a lease of a building reserving to itself the right to erect an advertising hoarding on a flank wall.  The lessee was under an obligation not to derogate from the right granted to the lessor.  The lessee’s interest was assigned to a company which then acquired a tenancy of adjoining land.  The assignee erected a structure which obscured the lessor’s advertising hoarding from public view.  The Court of Appeal[67] overruled earlier authority[68] and held that the principle of non-derogation from grant could extend to premises which were not in the landlord’s ownership at the date of grant.  In so holding, however, the Court made clear that in applying the general principle that the grantor should not be permitted to take away with one hand what is given with the other, the critical task was to identify what obligations, if any, on the part of the grantor can fairly be regarded as necessarily implicit, having regard to the particular purpose of the transaction when considered in the light of the circumstances subsisting at the time the transaction was entered into.  Nicholls LJ further stated:[69]

1. The judge said that the authority of Thomas v Hayward had long been accepted both by courts at the highest level and the principal landlord and tenant law texts. 

1. The judge said that there was a firmly established distinction between covenants which touched and concerned demised land and those which were merely collateral and bound only the contracting parties but that the distinction was not always easy to draw. 

1. His Honour referred to ‘a helpful restatement of the broad underlying principle to be applied’ as stated by Lord Oliver of Aylmerton in P&A Swift Investments v Combined English Doors Group Plc[79] (‘P&A Swift’) – we set out the relevant passages later below.  His Honour also referred to the ‘working test’ laid down in P&A Swift in the same speech.  The judge then said that reference should also be made to ‘the acid test whether or not a benefit is collateral’.[80]  The judge then referred to the statement of the test by Best J in Vyvyan v Arthur.[81]

   [79][1989] 1 AC 632.

   [80]Citing Kumar v Dunning [1989] 1 QB 193, 204.

   [81](1823) 1 B & C 410.

1. The judge said that the difficulty in formulating and subsequently applying any general test for determining whether a covenant touched and concerned the land in any particular circumstances indicated the importance of considering cases dealing with circumstances similar to the present, especially cases in which Thomas v Hayward had been considered.  His Honour then referred to a number of such cases including Dewar v Goodman[82] and to what was said by Lord Alverstone CJ in relation to Thomas v Hayward (set out later below).

   [82][1909] AC 72.

1. The judge then said that the mere fact that a covenant may be of value to the parties to a lease does not mean that the value of the interest of that party, be it in the lease term or the reversion, is affected. 

1. His Honour concluded:

In my opinion, the present circumstance is indistinguishable from Thomas v Hayward in relevant respects. The provisions of clause 20.1, both paragraphs (a) and (b), are clearly directed at protecting the value of the trade or business which Symbion conducted at or from the leased premises at the JFP hospital and the HP hospital,[83] and as part of any broader benefit to Symbion’s business conducted at or from other locations, which the provisions of the clause 20.1 covenants might provide.

The evidence establishes that Symbion and Gribbles provided pathology testing laboratories and collection centres in a variety of locations in metropolitan Melbourne and Sydney … Consequently, it cannot be said that the provisions of clause 20.1 would only benefit Symbion for so long as it remained a tenant at the hospitals.  Additionally, these provisions do not affect the leased land as regards Symbion’s mode of occupation and neither do they increase the value of the interest of the covenantee, Symbion, in its leasehold interest other than merely from collateral circumstances ….

(His Honour then referred again to the longstanding authority of Thomas v Hayward and continued…)

Additionally, the fact that the covenant contained in clause 20.1 may be related in a broad sense to a covenant which does touch and concern the land – such as, for example, the covenant to pay rent in the sense that it may encourage or justify the payment of a higher rental than the market may otherwise attract – does not affect the position. 

[83]And similarly at the LDP hospital, though the issue of the extent to which the provisions of clause 20.1 might run with the land and bind the reversion did not arise because there was on assignment of the lease but, rather, a purchase of a controlling interest in the landlord company’s shareholding.

1. On appeal, Symbion submitted that the obligations in clause 20.1 were obligations with reference to the subject-matter of the relevant leases or the covenants contained therein ‘touched and concerned’ the land.  Symbion submitted that the applicable test was that formulated in P&A Swift and approved by the High Court in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (‘Gumland’).[84]

   [84](2008) 234 CLR 237, 264-265.

1. Symbion noted that the judge had not separately analysed paragraphs (a) and (b) of clause 20 and submitted that his Honour should have done so in relation to the question whether the covenants touched and concerned the land.

1. We interpolate here that, as formulated in P&A Swift, the test related to a lessee’s covenant but, as applicable to a lessor’s covenant, may be stated as follows.  A lessor’s covenant touches and concerns the land if (1) the covenant benefits only the lessee for the time being, and if separated from the term ceases to be of benefit to the covenantee (lessee);  (2) the covenant affects the nature, quality, mode of user or value of the demised premises;  and (3) the covenant is not expressed to be personal. 

1. Symbion submitted that the P&A Swift test was satisfied in the present case.  First, the covenants benefitted only the lessee from time to time, because if Symbion ceased to be the lessee then it would clearly no longer have the benefit of the covenants.  Second, the covenants affected the value of the demised premises.  Third, the covenants were not expressed to be personal either to the original lessor or to the original lessee. 

1. In relation to the second limb of the test, Symbion further submitted that the fact that clause 20.1 might benefit the business operated by the lessee (or the lessee’s successors in title) did not mean that it did not also increase the value of the demised premises.  In that regard, Symbion submitted that the judge was incorrect to reject the unchallenged evidence of a witness (Mr Champness) that if the leases had not included a restraint in the form of clause 20.1, then that would have reduced the rental payments that he would have been prepared to agree to on behalf of Symbion.  Thus, the insertion of clause 20.1 had the effect of producing a higher rent, thereby increasing the value of the demised premises.  Further, Symbion submitted that the covenants enhanced the value of the leasehold interest to a lessee by supporting the viability of the business that the lessee was required by the lease to conduct on the demised premises.

1. Symbion further submitted that it was significant that clause 20.1 was ‘deeply intertwined’ with Symbion’s obligation under the leases to provide pathology services to patients at the hospitals from the demised premises and that clause 20.1 could not, therefore, be described as being ‘incidental’ or ‘collateral’ to the demised premises. 

1. Symbion said that the ancient and sparsely reasoned case of Thomas v Hayward was wrongly decided and ought not to have been applied by the judge.  

1. Symbion referred to Kumar v Dunning[85] (a decision of the English Court of Appeal), in which Sir Nicolas Browne-Wilkinson V-C said[86] that the decision in Thomas v Hayward ‘was a hard one and is to be treated as authority for no more than that a covenant the value of which is wholly dependent on the use of the land for a specific business is collateral’. 

   [85][1989] 1 QB 193.

   [86]Ibid, 205.

1. Healthscope submitted that the judge was correct in deciding that clause 20.1 did not touch and concern the land and that his Honour was right to apply the authority of Thomas v Hayward.  Healthscope further submitted that clause 20.1 affected the landlord in its capacity as hospital operator rather than in its capacity as landlord. 

1. Healthscope submitted that the P&A Swift test was not definitive and, in any event, should be confined to lessee’s covenants.  Alternatively, Healthscope submitted that, applying the P&A Swift test, the judge correctly found that the restraints would benefit Symbion even after it ceased to be the lessee because Symbion conducted pathology testing centres and laboratories from a variety of other locations in Melbourne and Sydney. 

1. We turn to consider the foregoing submissions.

1. In P&A Swift, Lord Oliver of Aylmerton said:[87]

   [87][1989] 1 AC 632, 640-642.

In my opinion the question of whether a surety’s covenant in a lease touches and concerns the land falls to be determined by the same test as that applicable to the tenant’s covenant.  That test was formulated by Bayley J in Congleton Corporation v Pattison (1808) 10 East 130 and adopted by Farwell J in Rogers v Hosegood [1900] 2 Ch 388, 395:

‘the covenant must either affect the land as regards mode of occupation, or it must be such as per se, and not merely from collateral circumstances, affects the value of the land.’

The meaning of those words ‘per se, and not merely from collateral circumstances’ has been the subject matter of a certain amount of judicial consideration and the judgment of Sir Nicolas Browne-Wilkinson VC in Kumar v Dunning [1989] QB 193 (where the problem was identical to that in the instant case save that the covenant was given on an assignment and not on the grant of the lease), contains a careful and helpful review of the authorities. No useful purpose would be served by repeating this here and I am both grateful for and content to accept both his analysis and his conclusion that the correct principle was that pronounced by Best J in Vyvyan v Arthur (1823) 1 B & C 410, 417, and approved by this House in Dyson v Forster [1909] AC 98:

‘The general principle is, that if the performance of the covenant be beneficial to the reversioner, in respect of the lessor’s demand, and to no other person, his assignee may sue upon it;  but if it be beneficial to the lessor, without regard to his continuing owner of the estate, it is a mere collateral covenant, upon which the assignee cannot sue.’

The Vice-Chancellor stated his conclusion, at p 204:

‘From these authorities I collect two things.  First, that the acid test whether or not a benefit is collateral is that laid down by Best J, namely, is the covenant beneficial to the owner for the time being of the covenantee’s land, and to no one else?  Secondly, a covenant simply to pay a sum of money, whether by way of insurance premium, compensation or damages, is a covenant capable of touching and concerning the land provided that the existence of the covenant, and the right to payment thereunder, affects the value of the land in whomsoever it is vested for the time being.’

It is objected that this states the matter too broadly because, for example, it is said that it would involve the conclusion that a simple covenant to pay an annuity of £x per annum to the owner for the time being of Blackacre would then be treated as a covenant touching and concerning the land because it would enhance the value of the land.  This is, I think, to read the Vice-Chancellor’s words too literally, for it is, as it seems to me, implicit in them that he is referring to a monetary obligation related to something which issues out of or is to be done on or to the land.

…

Formulations of definitive tests are always dangerous, but it seems to me that, without claiming to expound an exhaustive guide, the following provides a satisfactory working test for whether, in any given case, a covenant touches and concerns the land:  (1) the covenant benefits only the reversioner for time being, and if separated from the reversion ceases to be of benefit to the covenantee;  (2) the covenant affects the nature, quality, mode of user or value of the land of the reversioner;  (3) the covenant is not expressed to be personal (that is to say neither being given only to a specific reversioner nor in respect of the obligations only of a specific tenant);  (4) the fact that a covenant is to pay a sum of money will not prevent it from touching and concerning the land so long as the three foregoing conditions are satisfied and the covenant is connected with something to be done on, to or in relation to the land.

1. It is now useful to refer to a number of the earlier cases, before returning to the application of the P&A Swift test. 

1. In Dewar v Goodman[88] a lessee covenanted to keep in repair all buildings erected on the demised premises.  There were 211 houses erected on the demised premises.  An underlease was granted of two of the houses and the underlessor covenanted for himself and his assigns with the underlessee and his assigns for the performance of the covenants in the head lease so far as they related to the demised premises other than those demised by the underlease.  The English Court of Appeal held that the covenant to perform the covenant in the head lease relating to the premises not demised by the underlease was not binding on the assigns of the underlessor because that covenant did not ‘touch and concern’ the land demised by the underlease.  Referring to Thomas v Hayward Lord Alverstome CJ said:

It is said that the case cannot now be considered as good law, but I cannot accept that view.  I think the judges who decided it recognised the distinction between things to be done on the land demised and things to be done on other land, although there might be the closest connection between the thing to be done and the interest of the lessee in the land demised. 

[88][1908] KB 94, 104.

1. In Dewar v Goodman, Buckley LJ said in substance that a covenant to do an act not in respect of the demised premises would not be one that touched and concerned the land merely because it would protect from forfeiture the estate of the lessee in the demised premises.  Buckley LJ added,[89] in relation to Thomas v Hayward:

I do not myself place quite so much reliance … on Thomas v Hayward.  I think it may be distinguished from this case, for the judgment there appears to have been rested on this, that a covenant to do off the land demised something which will increase the profits to be made on the land demised is a covenant affecting, not the demised land, but the profits to be derived from the business carried on on the demised land. 

[89]Ibid, 107.

1. The decision of the Court of Appeal was affirmed by the House of Lords.[90]  Lord Collins said that the covenant was collateral[91] although ‘‘instances may be imagined of covenants to do things on land other than that demised which touch and concern so nearly the land demised as to run with it.’[92]

   [90]Dewar v Goodman [1909] AC 72.

   [91]Ibid, 76.

   [92]Ibid, 77.

1. In Ricketts v Enfield Churchwardens[93] there was a covenant in the lease that the lessor and his assigns would not erect or permit to be erected any buildings in front of the building line on the land adjoining the demised premises.  The Court (Neville J), citing a number of authorities, held that the covenant touched and concerned the land, saying that ‘there is a difference in the nature of the thing demised according as it has or has not a right of outlook attached to it.’  The Court said that Dewar v Goodman was not authority for the proposition that a covenant could not run with the land unless it affected something to be done or not to be done on the demised land itself, referring to what was said by Lord Collins in that case (as quoted above).

   [93][1909] Ch 544.

1. In Bates v Casey and Milne,[94] a lessor had leased land with all erections and buildings thereon for a term of five years.  Before the commencement of the term of the lease, the lessee had at his own expense erected a building on the land.  The lease contained a covenant on the part of the lessor that he would at the expiration of the term pay to the lessee the then total value of the building and the value of any other building erected by the lessee during the term.  The Supreme Court of New Zealand (Hosking J) held that the covenant for payment of the total value of the buildings ran with the reversion so as to bind an assignee thereof.  The Court thought that, although the covenant was for payment of a sum of money, yet, as it was to be measured by the value of the buildings on the demised premises and tended to encourage building and repairs on the part of the lessee, it in some sort touched or concerned the thing demised and was not merely collateral.[95]  The Court said that in order that a covenant may run with the land it did not appear to be necessary that it must be for the performance of some act on the land leased.[96]  The Court referred to other authorities suggesting that a covenant may touch and concern the land and not be collateral even if it did not touch the land directly but was connected with and dependent on some act which the tenant might do giving value to the land and which he might have been induced to do by reason of the covenant.[97]  Hosking J then went on to say:[98]

Now, while the covenant to pay the value of buildings to be erected undoubtedly tends to encourage the tenant to build, the covenant to pay the value of existing buildings encourages him to keep such buildings in repair, for he is thereby assured of some return for money so expended, and it enters into the value created by the buildings being in repair as the result of the money expended.  And it is to be noted that the lease contains a covenant by the lessee to repair, with certain excepted cases.  Now, that is a covenant which runs with the land, and the covenant to pay valuation may be said to be connected with it and to support it.  Further, the payment of the valuation is in this case conditional on the punctual payment of the rent and the due observance and performance of the lessee’s covenants, and so may be said to operate as a security that the rent shall be punctually paid and the covenants duly observed and performed.  Therefore, as regards both existing and future buildings, there is a benefit to the reversion in the covenant for payment of their value.  These considerations appear to me sufficient to show that this covenant is not merely collateral.  They serve to differentiate it from a covenant by a lessor simply to pay a sum of money to such person as may happen to be tenant at the ending of the term. 

In my opinion, therefore, the covenant for payment in this case does run with the reversion ...

[94](1915) 34 NZLR 714.

[95](1915) 34 NZLR 714, 717, referring to Spencer’s case, Smith LC 11^th ed Vol i, p 55.

[96]Ibid, 720, referring inter alia to Ricketts v Enfield Churchwardens and Dewar v Goodman.

[97]Ibid, 721.

[98]Ibid, 722.

1. Kumar v Dunning,[99] was a case involving a covenant by sureties of a lessee’s obligations.  The English Court of Appeal held that the covenant touched and concerned the land because it was beneficial to the owner for the time being of the covenantee’s land and to no one else and the existence of the covenant and the right to payment thereunder increased the value of the reversion.  Parts of the judgment were quoted in the passages from P&A Swift set out above.[100]  Sir Nicolas Browne-Wilkinson V-C also said:

But although the test[101] is certain, its exact meaning when applied to different sets of circumstances is very obscure.  In Grant v Edmondson [1931] 1 Ch 1, 28 Romer LJ said:

‘In connection with the subject of covenants running with land, it is impossible to reason by analogy.  The established rules concerning it are purely arbitrary, and the distinctions, for the most part, quite illogical.’

[99][1989] 1 QB 193.

[100]Para 187.

[101]ie the test of whether a covenant touches and concerns land.

1. After referring to the authorities, the learned Vice-Chancellor said:

Applying the test laid down by Best J,[102] a covenant by a surety securing the performance of a tenant’s covenants in a lease satisfies it.  The surety covenant increases the value of the reversion in that the landlord can look not only to the tenant but also to the sureties for the payment of a sum equal to the rent and for damages for failure to comply with the other tenant’s covenants.  Such surety covenant is of value to no one other than the owner for the time being of the reversion since it is in support of the tenant’s covenants and the tenant’s covenants can only be enforced by the reversioner for the time being. Once the lease has been assigned, the assignor cannot enforce the tenant’s covenants in respect of breaches occurring after the date of assignment and a fortiori cannot enforce the surety covenant.  No one other than the landlord can enforce the surety covenant.

[102]In Vyvyan v Arthur (1823) 1 B & C 410.

1. In Hurlfite Pty Ltd v Coles Myer Ltd,[103] a decision of the Supreme Court of New South Wales (Hodgson J), the plaintiff was the owner of land upon which was erected a shopping complex including a car parking area.  The defendant was the lessee, by a lease granted by the plaintiff’s predecessor in title, of the supermarket in the shopping complex.  The lease contained a number of covenants by the lessor relating to the car parking facilities the effect of which was that, among other things, the lessor could not erect buildings on the car parking area without the consent of the lessee.  The plaintiff sought a declaration that it was not bound by these covenants and contended that they did not touch or concern the land.  The Court held that the provision of adjoining car parking space could be said to be ‘with reference to’ the demised premises.  Hodgson J (as he then was)said:

I accept that such provision may not be ‘with reference to’ the demised premises if it is merely of benefit to a business which a lessee happens for the time being to be carrying on in the demised premises.  However, in this case what is leased is part of a shopping centre… [t]his is a building constructed as a collection of shops so that the use of the demised premises for which car parking facilities are at least highly beneficial, if no necessary…is bound up with the very physical nature of the building itself.

For that reason it seems to me that the provision of car parking is ‘with reference to’ the demised premises, and not something either personal to the lessee or collateral.  I think this view is confirmed by the interdependence of rights and obligations concerning the car parking areas, and the other terms of the lease…

… in my view, the connection with the demised premises themselves is at least as strong as in cases such as … Ricketts and Vyvyan…

I think the case is very different from the cases relied on by the plaintiff.  In Thomas v Hayward, the lessor’s covenant was, in effect, not to compete with the business that the lessee carried on on the demised premises, and in my view that was not incidental to the demised premises in the same way as a parking area is incidental to the use of a shop.  

[103](1990) NSW ConvR 55-505.

1. The foregoing cases, when considered in relation to the present case, illustrate the difficulty of discerning any clear principle or rationale that might be applied and the further difficulty of reasoning from analogy.  These difficulties have been recognised in a number of the authorities.  The covenants by the lessor in the present case do not involve the doing of anything on or in relation to the demised premises nor do they even indirectly affect the demised premises in the ways illustrated by the facts in Ricketts v Enfield Churchwardens, Bates v Casey and Hurlfite Pty Ltd v Coles Myer Ltd. 

1. We return to the tests enunciated in P&A Swift.  These tests were applied by the High Court in Gumland. 

1. Gumland was concerned with a covenant to pay rent and associated obligations, and also guarantors’ obligations, in relation to arrears of rent and other damages.  The High Court held that these covenants and obligations touched and concerned the land.  The High Court[104] said that the lessee did not dispute the correctness of the tests in P&A Swift which had been much applied in Australia and went on to say:[105]

Applying these tests to the Lease in turn, first, the covenants in cl 3 benefit the reversioner for the time being only, and if separated from the reversion they cease to be of benefit to the covenantee.  This is because in clause 1.1 the term ‘Lessor’ is defined as meaning ‘the Lessor its successors and assigns’, and in clause 1.2 the term ‘Lessee’ is defined as meaning ‘the Lessee and the executors administrators successors and permitted assigns of the Lessee’. Further, the covenant in cl 3.1 to pay rent opens:  ‘The Lessee covenants for himself, his heirs, executors administrators and assigns with the Lessor to pay unto the Lessor, his executors, his administrators or assigns ... ‘

Secondly, while the covenant does not affect the nature, quality or mode of user of the reversioner’s land, it does affect its value.  If Diplock LJ was correct to say that the measure of damages for breach of a covenant which runs with the land is ‘the diminution in the value of the reversion consequent upon the breach’, which with respect he was, breach of a covenant to pay rent which is an essential term can diminish the value of the reversion.  However, a seller of Blackacre at a time when a tenant of Blackacre is not in breach of any covenant to pay rent should obtain the same price, as reflecting the value of the land, as the seller would if the tenant committed a breach of that covenant just before sale, but the seller had the right to sue for loss of bargain damages, and assigned that right.  Leaving aside questions of opportunity cost and of the tenant’s solvency, the recovery of damages will overcome the diminution in the value of the reversion;  if there were no right to recover damages, there would be diminution in the value of the reversion.  But if there were no assignment, and if the right to sue for loss of bargain damages were held not to touch and concern the land, so that the transferee of the reversion could not sue under s 117, the diminution in the value of the land, whether it takes place just before completion or earlier, will be uncompensated. That there is a diminution in value of the land if the covenant is not enforceable by a transferee of the freehold supports the conclusion that a covenant to pay rent which is an essential term is in truth a covenant which affects the value of the land.  Thus Lord Oliver’s second test is satisfied.

Thirdly, because of the terms of cll 1.1, 1.2 and 3.1, the covenant is not expressed to be personal: it is not given only to a specific reversioner, nor in respect of the obligations of a specific tenant.

Fourthly, although the covenant in relation to which the right to sue for loss of bargain damages arises is a covenant to pay sums of money, and although it is not connected with anything to be done with or to the land, those factors do not prevent it from touching and concerning the land, because the first three conditions are satisfied and the covenant is connected with something to be done in relation to the land.

[104]Gleeson CJ, Kirby, Heydon, Crennan and Kiefel JJ.

[105][75]-[78].

1. It is appropriate to apply the P&A Swift tests to the covenants in the present case.  We can find no justification for the contention that the tests are restricted to lessee’s covenants.  First, the covenants in clause 20.1 benefit the lessee for the time being only, and if the original lessee assigns its interest, they cease to be of benefit to it.  That is because ‘Tenant’ is defined by clause 1.1 to mean ‘the Tenant, its successors and permitted assigns’ and clause 2.1 provides that ‘[t]he Landlord leases the Premises to the Tenant … on the terms and conditions set out in this Lease.’  If Symbion ceased to be the lessee, it would no longer have the benefit of the covenants.  It is not to the point to suggest that, if Symbion were no longer a lessee, there might be some indirect benefit to it arising from the lessor’s adherence to the covenants by virtue of Symbion continuing to conduct a pathology business or businesses elsewhere in Melbourne or Sydney. 

1. Secondly, while the covenants do not directly affect the nature, quality or mode of user of the demised premises, we consider that they do so indirectly and not merely ‘collaterally’.  That is because of the integrated scheme of the leases under which, on the one hand, Symbion is required to conduct a business on the demised premises providing pathology services in accordance with the lessee’s covenants contained in clauses 7.1, 7.2 and 21 and, on the other hand, the lessor is prohibited from  carrying on or being concerned in a similar business and further prohibited from granting a right to any person to conduct a competing business in the Building as defined.  We consider that these covenants are inextricably related and the obligation of Symbion to conduct a pathology business on the demised premises cannot be divorced from the lessor’s covenants buttressing those obligations.  We would accept that this analysis is stronger in relation to clause 20.1(b) but think that it is also applicable to clause 20.1(a).  We further consider that the covenants in clause 20.1 affect the value of the demised premises, given the evidence that a lesser rental would have been paid had they not been provided.  

1. The considerations of an integrated scheme in the lease and also the effect of the covenants on the value of the demised premises were not issues considered in Thomas v Hayward.    

1. Turning to the third limb of the tests in P&A Swift, the covenants in clause 20.1 are not expressed to be personal, neither being given only to a specific lessee nor in respect to the obligations only of a specific lessor.  The fourth limb of the tests is not relevant to the present case. 

1. For the foregoing reasons, we would uphold ground 7 of the notice of appeal and conclude that Healthscope was bound by clause 20.1(a) and (b) in respect of the JFP hospital and HP hospital leases. 

1. Ground 4 of Healthscope’s notice of contention is as follows:

[Healthscope] did not hold the land at the [JFP] Hospital and the [HP] Hospital on trust for [Symbion] such that [Healthscope] was bound by clause 20.1 of those leases whether or not it touched and concerned the land (paragraph 80 of the Reasons for Judgment).

1. The learned trial judge referred to the argument advanced by Symbion at trial that Healthscope was bound by clause 20.1 of the leases because, under the provisions of the contracts of sale whereby Healthscope purchased the freehold of the JFP hospital and the HP hospital, Healthscope expressly accepted, for valuable consideration, the obligation to comply with the provisions of each lease, whether or not they touched and concerned the land.[106]  Symbion had submitted that an inference should be drawn that the contracting parties intended to create or protect an interest in a third party (namely Symbion) so that an intention to create a trust should be inferred on a similar basis as inferred in Bahr v Nicolay (No 2).[107]  Symbion had submitted that Healthscope was obliged, as trustee, to comply with the covenants and obligations given by HCoA to Symbion under the provisions of the JFP hospital and HP hospital leases as though it were a party to those leases. 

   [106]Reasons [68].

   [107](1988) 164 CLR 604, 618-9.

1. The relevant provisions of the contract of sale of the JFP hospital land were:

8.1(a)   The Property is sold subject to the Tenancies

…

8.2.(a) From Settlement the Purchaser must (and must ensure that its successors in title and assigns) perform all of the Vendor’s covenants and obligations under the Tenancies, whether or not those covenants touch and concern the Land …

1. The corresponding provisions of the contract of sale of the HP hospital land were in similar terms.[108] 

   [108]See clauses 42.2 and 42.6.

1. The judge said that Symbion submitted that an express, alternatively a constructive, trust arose whereby Healthscope held the JFP hospital land and the HP hospital land subject to all of Symbion’s rights under the respective leases.  The judge referred to a number of authorities and to what was said about them by Young CJ in Eq in The Presbyterian Church (NSW) Property Trust v Scotts Church Development Ltd.[109]    

   [109](2007) 64 ACSR 31, 40-1, [91]-[99], [114].

1. The judge said that Symbion submitted against this background of authority that it was evident that the purpose of the relevant provisions in the contracts of sale was not merely to inform Healthscope of the leases but, rather, was an express indication that it would comply with the terms thereof and that this was a stronger case than that of Bahr v Nicolay (No 2) given the express language contained in the contracts.  The judge said that Healthscope had submitted on the other hand that the contracts of sale were only consistent with HCoA intending to create a contractual relationship and that there was no objective manifestation of any intention to create a trust. 

1. The judge pointed to the specific provision in each of the contracts that Healthscope would perform the covenants whether or not they touched and concerned the land and concluded:

… I am of the opinion that Healthscope does hold the JFP hospital land and the HP hospital land subject to all of Symbion’s rights under the JFP lease and the HP lease as they arise under the terms of these leases, and whether or not the covenants contained in these leases would, as a matter of law, be regarded as touching and concerning the relevant land.  In my opinion, it is not necessary to seek to characterise the nature of this trust, as an express trust or as a constructive trust or, consequently, to consider further the two approaches evident in the judgments of the members of the Court in Bahr v Nicolay (No 2).[110]  Insofar as it may be thought necessary to characterise this trust I would, however, be inclined to treat it as a constructive trust in the absence of any express declaration or manifestation of specific intention to create a trust.

[110](1988) 164 CLR 604.

1. Healthscope submitted that the judge’s conclusion was wrong because a trust would only arise by virtue of a registered proprietor’s unconscionable conduct in acknowledging an equitable interest and subsequently denying it and that clause 20.1 did not form part of Symbion’s equitable interest in the land because that clause did not touch and concern the land.  Symbion submitted that the judge’s conclusion was correct for the reasons stated by him. 

1. In Snowlong Pty Ltd v Choe[111] a contract for the sale of land disclosed the existence of and annexed a copy of an unregistered lease agreement for part of the land for a term of five years with options for renewal.  Under the contract, the purchaser agreed to abide by the terms and conditions of the annexed lease.  The purchaser, on registration of its transfer, sought to evict the lessee as a tenant at will.  The Supreme Court of New South Wales (Wood J) held that the purchaser took title subject to a trust on the terms of the lease, applying Bahr v Nicolay (No 2).  Wood J said:

In my view, upon its proper construction, the present contract gave rise to the kind of undertaking which in Bahr v Nicolay (No 2) was treated by Mason CJ and Dawson J as going beyond evidencing the fact that the purchaser had notice of the third parties’ rights and was taking subject to them whatever they were, but rather was an agreement or undertaking to recognise the rights which had been spelled out in the original lease document.  Upon that basis it would, in accordance with their Honours’ decision, have given rise to an express trust in favour of the defendants, upon the basis that Snowlong and Farrow had intended to protect the defendant’s rights under its original lease and contracted on that assumption.

[111](1991) 23 NSWLR 198.

1. Alternatively, Wood J said that he would find that a constructive trust arose along the lines outlined in Bahr v Nicolay (No 2) by Wilson and Toohey JJ, or by Brennan J. 

1. In our opinion, the same reasoning is applicable here and, in addition, for the reasons stated by the trial judge in the present case, there was a trust as contended for by Symbion.  We would reject ground 4 of the notice of contention. 

1. Symbion had relied on an alternative trust argument at trial that was rejected by the trial judge.  That argument is covered by ground 14 of the notice of appeal which is as follows:

His Honour erred in fact and law by finding that [HCoA] did not hold the benefit of the promises contained in clause 8.2(a) of the JFP contract of sale and in clause 42.6 of the HP contract of sale on trust for [Symbion] (paragraph 89 of the reasons). 

1. The judge said:[112]

In my opinion, neither the terms of the contracts of sale nor any other evidence adduced expressly or impliedly manifests any intention that HCoA should hold the benefit of the promises contained in clause 8.2(a) of the JFP Contract of Sale or clause 42.6 of HP Contract of Sale on trust to benefit Symbion and thereby enable Symbion to enforce those rights against Healthscope;  including compliance with clause 20.1 of the relevant leases, whether or not the covenants contained in that clause touch and concern the land.  The argument by Symbion that these provisions would not have been intended to benefit HCoA if, on a proper construction of the relevant leases, it had no continuing obligations is not, in my view, persuasive.  The inclusion of provisions of this nature is readily explicable on the basis of a ‘belt and braces’ approach by HCoA and a desire to avoid, as far as possible, any argument in relation to its position and to provide a basis for recourse, in contract, against Healthscope if necessary.

[112]Reasons, [89].

1. Symbion submitted that a court ought not be slow to recognise the existence of a trust where it may be inferred that a promise given to a contracting party was intended to benefit a third party (in this case, Symbion).[113]  Symbion submitted that the judge ought to have concluded that the promises made by Healthscope in the contracts of sale were held by HCoA on trust for Symbion, which might otherwise have had difficulty in ensuring that the terms of the leases were adhered to by the new landlord (Healthscope) and that the fact that the relevant clauses in the contracts of sale might have had some benefit to HCoA did not detract from the clear inference that the principal beneficiary of the promises was Symbion.  Having regard to our previous conclusions, it is not necessary to determine this question but we would have been disposed to accept Symbion’s submissions and to uphold ground 14.

   [113]Citing Wilson v Darling Island Stevedoring (1956) 95 CLR 43 at 67; In the Matter of An Application By Police Association of South Australia (2008) 102 SASR 215;  Trident General Insurance Co Limited v McNiece Bros Proprietary Limited (1988) 165 CLR 107.

Conclusion

1. For the foregoing reasons, we are of the opinion that:

·    Clause 20.1 was a valid restraint of trade.

·    Healthscope was in breach of the provisions of clause 20.1(a) and 20.1(b) at the JFP Hospital and clause 20.1(a) at the HP Hospital.

·    AHC (LD) was in breach of the provisions of clause 20.1(b) at the LDP Hospital.

·    Healthscope breached its obligation of good faith by installing a tubular vacuum delivery system at the JFP Hospital.

·    The conduct of Healthscope at the JFP Hospital constituted a derogation from the grant of a lease of premises at the Hospital.

1. Although the appeal against HCoA fails, we would otherwise set aside the judgment and orders made in the Court below and remit the proceeding for further consideration in accordance with law.

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