Specialist Diagnostic Services Pty Ltd v Healthscope Ltd
[2010] VSC 443
•1 October 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST C
No. 2011 of 2006
| SPECIALIST DIAGNOSTIC SERVICES PTY LTD (FORMERLY SYMBION PATHOLOGY PTY LTD) (ACN 007 190 043) | Plaintiff |
| v | |
| HEALTHSCOPE LTD (ACN 006 405 152) AUSTRALIAN HOSPITAL CARE (LADY DAVIDSON) PTY LTD (ACN 079 309 550) HCoA OPERATIONS (AUSTRALIA) PTY LTD (ACN 083 035 661) | Firstnamed Defendant Secondnamed Defendant Thirdnamed Defendant |
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JUDGE: | Croft J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 3, 4, 5, 6, 10, 11, 12, 13, 17, 18, 19, 20, 24, 25, 26, 27 May and 16 and 17 June 2010 | |
DATE OF JUDGMENT: | 1 October 2010 | |
CASE MAY BE CITED AS: | Specialist Diagnostic Services Pty Ltd v Healthscope Ltd & Ors | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 443 | |
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RESTRAINT OF TRADE – construction of restraint of trade provisions in a lease – no geographic limit inherent in one of the restraints – Butt v Long (1953) 88 CLR 476 – Vancouver Malt & Sake Brewing Co Ltd v Vancouver Breweries Ltd [1934] AC 181 – Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 – restraint of trade doctrine applies to the provisions – provisions fail both the “existing freedom” test and the “trading society” test – Esso Petroleum Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 – Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390 – Australian Capital Territory v Munday (2000) 99 FCR 72 – restraints unreasonable to protect any legitimate interest – duration of restraints unreasonable – benefits to convenantor do not justify restraint.
LEASES – provisions restraining competition – clauses did not touch and concern the land – Thomas v Hayward (1869) LR 4 Ex 311 – Congleton Corporation v Pattison (1808) 10 East 130 – Vyvyan v Arthur (1823) 1 B & C 410 – P & A Swift Investments v Combined English Stores Group PLC [1989] 1 AC 632 – whether landlord breached doctrine of, or implied covenant of, good faith – contractual doctrines with respect to the implication of good faith obligations apply to leases – whether relationship is unbalanced so that a good faith obligation arises – Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228 – implied obligation not to derogate from the grant – breach of implied obligation not to derogate from the grant can only occur where conduct is something more than “mere competition” – conduct must render tenant’s business “uneconomic” rather than less profitable – Port v Griffith [1938] 1 All ER 295 – Gordon v Lidcombe Developments Pty Ltd [1966] 2 NSWR 9 – Romulus Trading Co Ltd v Comet Properties Ltd [1996] 2 EGLR 70 – Oceanic Village Ltd v Sirayma Shokussan Co Ltd [2001] L & TR 35.
TRUSTS – provisions in contracts for sale of land that the purchaser will perform all vendor’s covenants and obligations under the tenancies, whether or not those covenants touch and concern the land – purchaser of land holds the land subject to all rights under the tenancies, whether or not the covenants touch and concern the land – Bahr v Nicolay (No. 2) (1988) 164 CLR 604 – vendor did not evince an intention to hold the benefit of the promises contained in the contracts of sale on trust for the tenant – Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107.
WORDS AND PHRASES – “trade, business or calling similar”.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P.W. Collinson SC with Mr A. McClelland | Freehills |
| For the Firstnamed and Secondnamed Defendants | Mr D. Collins SC with Mr R. Attiwill, Ms H. van den Heuvel and Mr J. Ross | Allens Arthur Robinson |
| For the Thirdnamed Defendant | Mr P. Solomon with Ms Z. Maud | Blake Dawson |
HIS HONOUR:
Background
The plaintiff, Specialist Diagnostic Services Pty Ltd, was formerly known as Symbion Pathology Pty Ltd and was originally known as Mayne Health Pathology Pty Ltd. For convenience, the plaintiff is referred to as “Symbion”.
In November 2003, Symbion was a wholly owned subsidiary of Mayne Group Limited. Since prior to November 2003, Mayne Group Limited provided pathology services throughout Australia through Symbion, as its subsidiary.
In 2003, Mayne Group Limited was providing hospital services throughout Australia as the owner and operator of approximately 40 private hospitals through various wholly owned subsidiaries, including the second defendant, Australian Hospital Care (Lady Davidson) Pty Ltd (“AHC (LD)”) and the third defendant, HCoA Operations (Australia) Pty Ltd (“HCoA”). These private hospitals included the John Fawkner Private Hospital (“JFP hospital”) located at Coburg in Victoria, the Hills Private Hospital (“HP hospital”) located at Baulkham Hills in New South Wales and also the Lady Davidson Private Hospital (“LDP hospital”) located at Turramurra, also in New South Wales.
Symbion provides pathology services of three main types, namely a collection service, a collection centre and a testing laboratory. Clearly, the pathology service that doctors and patients are ultimately interested in is the pathology test result or results, but the means by which blood, tissue and other specimens are obtained varies to suit particular circumstances. The Symbion pathology services are provided throughout Australia under the business names of “Dorevitch Pathology” in Victoria and “Laverty Pathology” in New South Wales and the Australian Capital Territory.
On or about 1 November 2003, Symbion entered into various leases which provided various types of accommodation for its use at three hospitals owned by a subsidiary of Mayne Group Limited, namely, the JFP hospital, the HP hospital and the LDP hospital.
Hospital leases
Symbion leased premises at the JFP hospital from HCoA as landlord of the hospital premises at 275 Moreland Road, Coburg. A written lease was entered into for an initial term of four years and eight months, commencing on 1 November 2003 and expiring on 30 June 2008. This lease provided for options to extend the term until 30 June 2023.
The pathology collection centre and laboratory operated by Symbion at the JFP hospital was established by Sacred Heart Pathology in the 1970s before it was subsequently acquired by Symbion. Prior to the written lease commencing on 1 November 2003, there was another written lease of 5 December 1994 between Hospital Corporation Australia Pty Ltd (ACN 000 935 946) as landlord and Symbion as tenant. The term was for five years, with an option for two further terms of five years each. On 23 August 1999, Symbion exercised the option for a further term of five years commencing on 1 December 1999 and concluding on 30 November 2004. By letter, on 30 November 1999, the landlord acknowledged the letter exercising the option for a further five years. There is no evidence that a written lease was entered into for this term. On 25 August 2000, solicitors for Symbion sent a proposed Deed of Renewal and Variation of Lease to the landlord, but there is no evidence that it was executed.
Symbion leased premises at the HP hospital from HCoA as landlord. A written lease was entered into for an initial term of five years and five months, commencing on 1 November 2003, and expiring on 31 March 2009. This lease provided for options to extend the term until 31 March 2024. The pathology collection centre and laboratory used by Symbion at the HP hospital was established by Hampson Pathology in 1989. Hampson Pathology was acquired by Symbion in 1996. There was a prior written lease between HCoA as landlord and Symbion as tenant with a commencement date of 2 April 1998 and a termination date of 1 April 2001. There was an option to renew for a period of three years, which was exercised on 22 January 2001. The lease was purportedly surrendered by deed of surrender, effective on 31 October 2003.[1]
[1]There is some doubt as to whether the Deed of Surrender was executed by the correct company, however, this issue is not relevant to the issues in this proceeding.
Symbion leased premises at the LDP hospital from AHC (LD) as landlord. A written lease was entered into for a term of three years and eight months, commencing on 1 November 2003 and expiring on 30 June 2007. This lease provided for options to renew the term until 30 June 2019. There was no written lease or rent paid prior to the commencement of this lease.
In mid-2003, Mayne Group Limited announced that it was selling its hospital division, including HCoA and AHC (LD). Mayne signed an agreement for the sale of its hospital division to Affinity Health (“Affinity”) on 21 October 2003. Prior to the completion of this sale, leases were entered into between Symbion and the other subsidiaries of Mayne Group Limited within its hospital division, including HCoA and AHC (LD) of premises from which Symbion conducted its pathology business. As indicated, these included the lease of premises, commencing on 1 November 2003, that Symbion occupied in the JFP hospital, the HP hospital and the LDP hospital.
Symbion’s position was that these leases were entered into with Mayne Group Limited subsidiaries in order to formalise and clarify the basis upon which Symbion occupied the various premises as a necessary pre-requisite to the sale of the Mayne Group Limited hospital division. The first and second defendants, Healthscope Limited (“Healthscope”) and AHC (LD) appeared to concede this position in general terms, but said, particularly, that it was clear that the Symbion leases were entered into in order to protect Symbion’s pathology services business by providing Symbion with security of tenure of the leased premises, together with provisions the purpose of which was to protect Symbion from competition with respect to its pathology business.[2]
[2]See, for example, clause 20.1 of the lease by Symbion of its premises at the JFP hospital.
Nature of Symbion businesses
The nature of the Symbion businesses or the services which it provided at the various hospitals was not uniform.
Pathology and associated services were provided by Symbion at the premises leased by it at the JFP hospital by way of a collection centre and a pathology testing laboratory. Pathology services from these facilities were provided to patients treated at the JFP hospital, both inpatients and outpatients, on referrals from doctors practising at the JFP hospital and also to patients on referrals from doctors practising throughout the north-western Melbourne metropolitan area.
Pathology services were also provided by competitors on referrals from doctors practising at the JFP hospital. These included St Vincent’s Pathology, which has a collection centre located next door to the hospital. In addition, pathology services were provided to both inpatients and outpatients on referrals from doctors practising at the JFP hospital to other service providers, including Gribbles and Melbourne Pathology.
Until April 2009, Symbion provided pathology and associated services from a collection centre and, until December 2007, from a testing laboratory at the HP hospital. Most pathology services at the HP hospital were for patients treated at the HP hospital referred by doctors practising at that hospital. However, the collection centre also received some specimens from patients of doctors who practised in the surrounding area who referred patients to Symbion, as well as outpatients of the HP hospital. The Symbion pathology laboratory at the HP hospital performed laboratory tests on specimens taken from approximately nine pathology collection centres which Symbion operated throughout the Nepean and North West regions of metropolitan Sydney.
Until March 2006, Symbion provided pathology services at the LDP hospital by means of a collection service which was based in the room which Symbion leased at that hospital.
Competition protection provisions of leases
Each of the leases of the Symbion premises at the JFP hospital, the HP hospital and the LDP hospital contained a provision in the following terms:
“20.1Subject to the terms of clause 20.2 the Landlord must not during the term of this lease or any extension, renewal or overholding 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 1 month (or such longer time as is reasonable in the circumstances) of the Landlord giving written notice to the Tenant of such breach.”
The development of the leases of the Symbion premises was, on the basis of the evidence of Mr Nicholas Paul Champness (“Champness”) who had been State manager for New South Wales and the Australian Capital Territory for Symbion Laverty Pathology, originally intended merely to formalise the relationship between the hospitals and the pathology divisions of Mayne Group Limited. However, in the course of the negotiation of the terms of these leases between separate “teams” within the Mayne Group, the announcement was made by Mayne Group Limited of its intention to sell its hospitals division. Consequently, the negotiation of the leases became part of the divestment and sale process whereby the hospital businesses and the land on which they were conducted by Mayne Group Limited subsidiaries would be sold and the pathology business conducted at those hospitals would be retained by Mayne Group Limited through its subsidiary, Symbion. Accordingly, Symbion submitted, at the time the leases were executed, the parties contemplated that the hospital and pathology businesses conducted from the premises of each of the three hospitals would be owned and conducted by different and unrelated entities.
The leases of the Symbion premises in the JFP hospital, the HP hospital and the LDP hospital each contained clauses in the same terms as clause 20.1, as set out. Symbion, in opening,[3] submitted that the lease of the Symbion premises in the HP hospital contained definitions of “Land” and “Premises” that left clause 20.1(b) with no proper operation. It submitted that the “Land” had been defined too narrowly as the area that Symbion was intending to lease at the HP hospital, rather than all of the land owned by the landlord at the HP hospital. “Premises” had been defined too broadly as “The Land and Building”, rather than the particular premises occupied by Symbion. Healthscope and AHC (LD), in closing, agreed that the definitions did not accord with the intention of the parties and that the definition of “Land” should be construed as the land owned by the landlord at the HP hospital and that “Premises” should be construed as the particular premises leased by Symbion. If it becomes necessary to decide this point, I would find that the definitions of “Land” and “Premises” in the lease of its premises at the HP hospital were the result of a clear error which could be corrected by the Court, without the need to establish a basis for rectification.[4]
[3]See, also, Symbion’s Fourth Further Amended Statement of Claim at [27A] and [27B].
[4]As to the correction of clear drafting or “clerical” errors of this kind, see, for example, Schloomp Pty Ltd v Carricks Ltd (1991) Q Conv R ¶54-402 where Macrossan CJ (agreeing with McPherson SPJ and Derrington J) said at [59,040]):
Sale of the hospitals and subsequent events
Affinity, which acquired the hospitals division of Mayne Group Limited in November 2003, was owned by a consortium of private investors. In 2005, Affinity sold the hospital business it had purchased from Mayne Group Limited to Ramsay Health Care Limited. In this process, however, Ramsay Health Care Limited was required by the ACCC to divest some of the hospital businesses and properties. As a result, Healthscope acquired a number of the private hospital businesses and properties either as a result of the purchase of the particular hospital business and freehold or, alternatively, the purchase of the company or companies which conducted the hospitals and owned the freehold property on which the relevant hospitals operated and conducted their business.
In particular, Healthscope purchased the hospital businesses and relevant freehold land of each of the JFP hospital and the HP hospital. In the case of the LDP hospital, Healthscope purchased all of the shares in AHC (LD) and thereby gained control of the hospital business and freehold land of that hospital.
In the case of the LDP hospital acquisition, the rights and obligations of the parties under the lease of the Symbion premises in the hospital would not change as nothing changed with respect to the ownership of the hospital business and freehold land from the perspective of Symbion as a tenant. Given the nature of Healthscope’s acquisition of its interest in the LDP hospital, it follows that no issue arises with respect to the assignment of the benefit and burden of covenants affecting the reversionary interest or the tenant’s interest under that lease. The position is, however, different with respect to the JFP hospital and the HP hospital.[5]
[5]See below, paragraphs 52 to 89.
Gribbles Group Pty Ltd (“Gribbles”) became a wholly owned subsidiary of Healthscope in December 2004. Gribbles provides pathology services in Victoria under the trading name of “Gribbles Pathology”. Davies, Campbell & de Lambert Pty Ltd (“DCL”) became a wholly owned subsidiary of Healthscope in December 2005. DCL provides pathology services in New South Wales, particularly in the Sydney metropolitan area, under the trading name “Davies, Campbell & de Lambert”.
In January 2006, Gribbles leased premises adjacent to the JFP hospital and, in early 2006, opened a pathology collection centre and laboratory operating in and from those premises. Since these facilities were opened, Gribbles has operated a pathology collection service at the JFP hospital whereby pathology specimens from patients treated at the hospital would be processed at the adjacent Gribbles collection centre and pathology laboratory. From about August 2006, Healthscope connected, or permitted Gribbles to connect, a tubular vacuum delivery system 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 has promoted Gribbles and the Gribbles facilities adjacent to the hospital in preference to the pathology and associated services provided by Symbion, which it continued to provide from its pathology collection centre and testing laboratory at its leased premises at the JFP hospital. Healthscope noted in its submissions that Symbion had exercised its option to renew the lease of its premises in the JFP hospital for a further term from 1 July 2008.
Since May 2006, DCL has operated a pathology collection centre and pathology collection service from premises located at the HP hospital which is leased from Specialist Oncology Property Pty Ltd, an entity unrelated to any of the parties. From 4 January 2007, DCL also operated a pathology testing laboratory from these premises. It did, however, cease operating from the HP hospital premises in September 2009. Symbion’s lease of its premises at the HP hospital expired on 31 March 2009 and it did not exercise its option for renewal of that lease for a further term. Symbion claimed that Healthscope promoted the DCL pathology service and the DCL centre within the HP hospital in preference to the pathology and associated services provided by Symbion.
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 operating a mobile on-site pathology collection service from part of the hospital building. Symbion’s lease of its premises at the LDP hospital expired on 30 June 2007 and it did not exercise its option to extend the lease term. Symbion claimed that AHC (LD) promoted DCL in preference to the pathology and associate services provided by Symbion at the LDP hospital.
It was conceded by Healthscope and AHC (LD) in their submissions 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) has encouraged the use of the pathology services provided by DCL at the LDP hospital. Symbion submitted 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, it 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 weekday staffing hours at the JFP hospital from 8.00am to 9.00pm in April 2007 to 8.00am to 7.00pm and reduced the number of staff at the pathology laboratory and reduced the weekday operating hours for that laboratory from 8.00am to midnight, Monday to Friday, to 8.00am to 7.00pm. Symbion no longer provides any pathology services at the LDP hospital for, it submitted, the same reasons and, consequently, the LDP hospital lease was allowed to expire on 30 June 2007.
Party claims
Symbion claims that Healthscope has breached its lease of premises at the JFP hospital by breaching:
(a)clauses 20.1(a) and (b) of that lease;
(b)an implied term of that lease 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 lease (“the good faith term”); and
(c)an obligation not to derogate from the grant of the lease (“the non-derogation term”).
The breaches of this lease were alleged to be constituted by the establishment of the Gribbles pathology collection centre and laboratory adjacent to the JFP hospital and the promotion by Healthscope of the Gribbles pathology services to doctors practising at the JFP hospital. Symbion also relied upon other conduct, such as the installation of the tubular vacuum delivery system from the JFP hospital to the Gribbles pathology laboratory, the installation of signage containing directions to the Gribbles collection centre and the installation of a blood gas analyser by Gribbles in the hospital. In terms of actual relief, Symbion sought injunctive relief in respect of the continued operation of the Gribbles centre adjacent to the JFP hospital, including the tubular vacuum delivery system.
In relation to the Symbion lease of premises in the HP hospital, Symbion alleged breaches by Healthscope of terms which correspond to the terms of the JFP hospital premises lease which are alleged to have been breached. However, Symbion did not allege any breaches of clause 20.1(b) of the lease at the HP hospital, only relying upon 20.1(a) of the restraint provisions. The breaches of the HP hospital premises lease are alleged to be constituted by the conduct of the DCL pathology collection centre and laboratory operating from the premises leased by DCL at the HP hospital and the promotion of the pathology services provided by DCL to doctors practising at that hospital. Symbion also sought rectification of the HP hospital premises lease because of the alleged errors in the definition of “Building” and “Premises” in that lease.
Symbion also alleged that the lease of its premises at the LDP hospital was breached in terms which correspond to the terms of the JFP hospital premises lease which are alleged to have been breached. The breaches were alleged to have been constituted by AHC (LD) permitting DCL collection staff to store equipment in the radiology department of the LDP hospital, by DCL offering employment to pathology collection staff employed by Symbion, and by the promotion of DCL pathology services to the doctors practising at the LDP hospital. It was conceded in submissions by Healthscope and AHC (LD) that DCL staff did store equipment at the LDP hospital for approximately one month and that DCL did offer employment to one of Symbion’s employees, Lynette Dimech, who accepted the offer.
In relation to the alleged breaches of the three leases Symbion claimed damages or equitable compensation in respect of the conduct of Healthscope and AHC (LD) relating to each of the leased premises, according to their respective ownership.
A further matter raised by Symbion was an allegation that Healthscope breached clause 8.2(a) of the contract for the sale of the freehold of the JFP hospital and clause 42.6 of the contract for the sale of the freehold of the HP hospital by HCoA to Healthscope.[6] Symbion sought to overcome its position that it is a stranger to these contracts and to overcome the consequent lack of privity by alleging a trust of which either Healthscope or HCoA is the trustee of these contractual provisions for the benefit of Symbion.
[6]See below, paragraph 68 to 89.
In relation to the position of HCoA, Symbion submitted that despite the transfer of the freehold of the JFP and HP hospitals, hence the assignment of the freehold reversion of the leases held by Symbion of premises in those hospitals from HCoA to Healthscope, HCoA remains bound in contract to Symbion by the terms of the Symbion lease at the JFP hospital and also by the terms of the Symbion lease at the HP hospital. Symbion submitted that each of those leases required HCoA to ensure that the “Landlord”, now Healthscope, did not breach clause 20.1 of those leases. Consequently, it was submitted by Symbion that HCoA is therefore liable in damages for the conduct of Healthscope in breaching the leases or, alternatively, that HCoA is liable for any conduct by the “Landlord”, now Healthscope, which is found to derogate from the grant under the leases to Symbion. The issues with respect to HCoA are discussed further below.[7]
[7]See paragraphs 185 to 200.
Claims of Healthscope and AHC (LD)
Healthscope helpfully summarised its counterclaim as follows:[8]
“Healthscope claims the unpaid rent pursuant to the HP Premises lease for the months of February 2008 to March 2009 inclusive, amounting to $59,271.49, together with interest at the rate of 2% per annum above the general commercial prime rate of interest charged by the Head Office of Westpac Banking Corporation in New South Wales in accordance with clause 15.3 of the HP Premises Lease.[9]”
Symbion admitted that is has not paid rent to Healthscope for the period February 2008 to March 2009, but sought to set off any amount owed to Healthscope against any damages claimed from Healthscope.[10]
[8]See First and Second Defendants’ Closing Submissions at [388].
[9]See paras 38H to 38K and 53 of Healthscope’s defence and counterclaim.
[10]Para 38 of Symbion’s reply and defence to counterclaim.
Defences of Healthscope and AHC (LD)
The defences relied upon by Healthscope and AHC (LD) were also helpfully summarised as follows:[11]
[11]See Outline of Opening Submissions of the First and Second Defendants dated 29 April 2010, paragraph 31.
“(a) the terms of the leases relied upon by Symbion do not ‘touch and concern’ the land leased pursuant to the leases and they are therefore not bound by them;
(b) the Court will not use a finding that HCoA holds the benefit of clause 8.2(a) of the contracts of the sale of the JFP hospital property and the HP hospital property on trust for Symbion as a device to avoid the consequences of the lack of privity of contract. HCoA did not intend to create a trust;
(c) the lack of privity of contract cannot be avoided by finding that Healthscope is a trustee pursuant to which it holds the benefit of the contractual promises made by it on trust for the benefit of Symbion – Bahr v Nicolay (No. 2)[12] has no application and can be distinguished;
(d) Symbion did not have a legitimate interest which entitled it to the benefit of terms in the leases which are in restraint of trade;
(e) clause 20.1(a) of each; of the leases is an unreasonable restraint of trade and unenforceable;
(f) clause 20.1(b) of each of the leases is an unreasonable restraint of trade and is not enforceable;
(g) clause 20.1(b) of each of the leases has not been breached;
(h) the alleged good faith term cannot be implied into the leases;
(i) the grounds for rectification of the JFP premises lease [clearly intended as a reference to the HP premises lease] are not established;
(j) there is no non derogation obligation which precludes the Healthscope defendants from being engaged in a business which competes with Symbion from premises at or in the vicinity of the hospitals, or at all.”
[12](1988) 164 CLR 604.
The defences relied upon by HCoA were, in substance, the same or similar to the defences relied upon by Healthscope and AHC (LD).[13]
[13]The position with respect to HCoA is discussed further below: see paragraphs 185 to 200.
A proper construction of clause 20.1(a) of the leases
Clause 20.1(a) of each of the leases prohibited “the Landlord” from engaging in a trade or business “similar to that conducted by the Tenant in the Premises”. Symbion submitted that a business that satisfied that description was a business that “competes with”, or “seriously competes with”, the business conducted by Symbion at the leased premises.[14] Symbion also submitted that the vice to which clause 20.1(a) was directed is the exercise by “the Landlord” of its considerable power over the management of its hospitals, including its relationship with doctors and nurses practising in or working in the hospitals to divert business away from its tenant, Symbion. Symbion submitted that this construction is to be preferred to the construction advanced by Healthscope, which was that clause 20.1(a) was intended to prohibit Healthscope from conducting a pathology services business anywhere in the world. Such a broad construction would, naturally, be more likely to be struck down as an unreasonable restraint of trade.
[14]Referring, for example, to Drew v Guy [1894] 3 Ch 25 at 29; Griffiths & Beerens Pty Ltd v Duggan [2008] VSC 2001 at [79]; or “seriously competes with”, referring to HE Randall Ltd v Somers 1919 SC 396 (Court of Session); and see Ronbar Enterprises Ltd v Green [1954] 1 WLR 815 (CA).
It was common ground that the ordinary rules of construction applicable to contracts apply to the construction of restraint of trade clauses and to leases.[15] In relation to construction of commercial contracts more generally, it is clear that the courts will favour a construction which accords with reasonable commercial expectations, but subject, ultimately, to any clear language which the parties have chosen. In this respect, it is helpful to set out the statement of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Associated Ltd:[16]
“It is trite that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, ‘even though the construction adopted is not the most obvious, or the most grammatically accurate’, to use the words from earlier authority cited in Locke v Dunlop[17], which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley’s Case[18]. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & Co Ltd v Arcos Ltd[19], that the court should construe commercial contracts ‘fairly and broadly, without being too astute or subtle in finding defects’, should not, in my opinion, be understood as limited to documents drawn by businessmen for themselves and without legal assistance (cf Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd[20]).”
[15]See Griffiths v Beerens Pty Ltd & Ors v Duggan & Ors (2008) 66 ACSR 472 at 492 (restraint of trade) and Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002 76 ALJR 436 at [10]-[12] (leases).
[16](1973) 129 CLR 99 at 109 and 110.
[17](1888) 39 Ch D 387, at p 393.
[18](1880) 16 Ch D 681, at p 686.
[19](1932) 147 LT 503, at p 514.
[20](1968) 118 CLR 429, at p 437.
Similarly, as submitted by Healthscope and AHC (LD), the construction of a restraint clause is to be determined by what a reasonable person in the position of the parties would have understood that clause to mean.[21] It follows, according to the ordinary rules of construction of contracts, that the subjective beliefs and understandings of the parties are not relevant for the process of construction.[22]
[21]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) v Alphapharm (2004) 219 CLR 165 at [40]; Masha Nominees Pty Ltd v Mobil Oil Australia Pty Ltd [2006] VSC 15 at [182]-[184]; Calliden Group Ltd v Australian Unity Ltd [2010] NSWSC 263 at [29].
[22]See Toll (FGCT) v Alphapharm (2004) 219 CLR 165 at [40]; and see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
Symbion submitted that no reasonable business person could conclude that clause 20.1(a) prevents Healthscope from conducting a pathology services business anywhere in the world, in circumstances where such a business would not effectively compete with the business conducted by Symbion at the hospitals. Further, it submitted that, to the extent that clause 20.1(a) was ambiguous, a construction which is to be preferred is one that avoids consequences which are, in the circumstances, capricious, unreasonable, unjust or not consonant with business efficacy.[23] Inherent in Symbion’s submissions was the proposition that the primary prohibition contained in clause 20.1(a) carried with it its own geographical limitation on the operation of these provisions so that no specific reference to a limitation of this kind was necessary.
[23]See Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109-10 (Gibbs J); and see Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437.
Healthscope and AHC (LD), on the other hand, submitted that a restraint provision of this kind must be interpreted to ascertain its real meaning independently of the rules prescribing the tests for reasonableness, referring to the judgment of Dixon CJ in Butt v Long.[24] It is helpful in the present context to set out the passage of the judgment of Dixon CJ to which Healthscope and AHC (LD) made reference, together with the Chief Justice’s concluding statements:[25]
“An agreement in restraint of trade, like every other agreement, is to be construed with reference to its subject matter and descriptive words may be restricted in their operation by reference to the circumstances in which the parties contract. But the agreement should be interpreted for the purpose of ascertaining its real meaning independently of the rules prescribing the tests of reasonableness for the purpose of ascertaining its validity. If an evident ambiguity appears from its text it may be proper to take into account the law relating to the validity of covenants in restraint of trade in resolving the ambiguity but a restrictive interpretation of general words is not to be adopted simply to save a covenant or agreement from invalidity. Here I think the circumstances in which the parties contracted show what they meant by the expression ‘business of a transhipping agent’. They did not have in mind transhipment for the purpose of sea carriage. Plainly they were concerned only with carriage by land. Nor did they, I think, have in mind the possibility of transhipment at some road transport terminal or depot from one motor lorry to another. The question upon which the appeal depends is therefore whether by interpretation the covenant may be confined in point of locality.
Wallangarra is not the only place in Australia where the necessity exists of transhipping goods from trucks of one gauge to trucks of another. Such a necessity exists at Albury, at Clapham Junction in Brisbane and Port Pirie and also at Kalgoorlie. The agreement was made at a border town and it is not possible by some presumption to confine it to a given State. The alternative, therefore, seems to be to give it no less than an Australia-wide operation or else to confine it by implication to Wallangarra and Jennings.
Now the words are perfectly general. There is no reference at all to place and if the operation is to be confined to the junction at Wallangarra it must be by implication. An implication of such a kind ought not to be made unless from the subject matter and the contents of the document an inference that the parties so intended arises with such force as to carry conviction to the mind. The words ‘business of a transhipping agent’ are descriptive of a character of business and in them nothing can be found limiting them to a place.
…
In the present case, if the operation of the clause is to be confined to Wallangarra, words of limitation must be introduced so as to limit quite general words containing no suggestion of locality or of identification with a specific business or thing. The necessity of doing so to effect a restriction is shown by the form of the decree which adds the words ‘at Wallangarra or Jennings’ to the words of the clause. There appears to be no sufficient ground justifying the making of such an implication. The case is in truth of the description expressed by Lord Macmillan in Vancouver Malt & Sake Brewing Co Ltd v Vancouver Breweries Ltd (1934) AC, at p 191, where it was maintained that the restrictions limited themselves by practical considerations to a particular area and that the limitation should be held to be implied as a matter of construction. The contention was answered by Lord Macmillan that it was not so nominated in the bond and that there was no reason to import a limitation that the parties had not seen fit to express.” [emphasis added]
[24](1953) 88 CLR 476 at 487.
[25](1953) 88 CLR 476 at 487-9.
In this vein, Healthscope and AHC (LD) submitted that the issue of the kind of business which a restraint of trade provision of the kind which it submitted was constituted by clause 20.1(a) restrains or prohibits is a question distinct from the question of the area in which the restraint or prohibition operates.[26] It was submitted that in relation to the second question, the question of the area to which the prohibition or restraint applies, the fact that a business was being carried on in a particular area or location cannot be used to justify reading a geographical limitation on this basis into the prohibition or restraint.[27] In relation to this issue, Healthscope and AHC (LD) emphasised that in both Butt v Long[28] and Vancouver Malt & Sake Brewing Co Ltd v Vancouver Breweries Ltd[29] it was held that words of limitation could not be introduced to limit general words containing no suggestion of the locality of the restraint.
[26]Referring to Butt v Long (1953) 88 CLR 476 at 490 (Fullagar J).
[27]Referring to Butt v Long (1953) 88 CLR 476 at 490 (Fullagar J).
[28](1953) 88 CLR 476.
[29][1934] AC 181 (PC).
Clause 20.1(a) does not contain any express limitation on the operation of its provisions with respect to a particular region. Healthscope and AHC (LD) submitted, on the basis of the authorities to which reference has been made, that the provision could and should be interpreted as a worldwide restraint on the basis that there is no means of limiting its provisions as to a particular locality. At first sight, a submission of this nature seems extreme and to produce a result which commercial parties could not have intended. However, on the basis of the statements in the judgments in Butt v Long,[30] it was submitted by Healthscope and AHC (LD) that this did not produce any relevant ambiguity of the kind referred to in cases such as Australian Broadcasting Commission v Australian Performing Right Association Ltd.[31] Rather, it was said, the lack of any geographical restraint provision cannot be cured by a departure from the ordinary meaning of the words used by the parties in their agreement, in this case the leases, in the absence of any reference to geographical limitation. The difficulties highlighted, particularly by Dixon CJ and Fullagar J in Butt v Long,[32] are clear when it is considered that any geographical limitation which could be argued for, on the basis of “commercial reality” and reasonable understanding of commercial parties, might extend to the whole of Australia or the whole of the metropolitan area of Melbourne or Sydney. Thus the process is not one of construction but, rather, an impermissible reworking of these provisions. In particular, such a process would seem to amount to using the particular metropolitan location of the hospitals to justify reading a geographical limitation of this nature into the restraint, at odds with the statements and approach of Fullagar J in Butt v Long.[33] Having regard to these matters and the authorities to which consideration has been given, I am of the opinion that words of limitation which limit the geographical operation of clause 20.1(a) cannot be introduced. Nevertheless, this is not necessarily decisive of the proper construction of clause 20.1(a) as, consistently with Butt v Long,[34] attention must also be given to the nature and extent of the primary prohibition.
[30](1953) 88 CLR 476.
[31](1973) 129 CLR 99.
[32](1953) 88 CLR 476 at 487-9 (Dixon CJ) and 490 (Fullagar J).
[33]See (1953) 88 CLR 476 at 490.
[34](1953) 88 CLR 476.
In support of its submission as to the nature and extent of the primary prohibition, Symbion placed particular reliance on the Victorian decision of Griffiths & Beerens Pty Ltd v Duggan[35] which, among other things, concerned the proper construction of a restraint provision contained in a share sale agreement. Symbion placed particular reliance on the following part of the judgment of Pagone J:[36]
“[79] The second limb of cl 13(b) requires a consideration and comparison of two businesses and, in that regard, to have an understanding of what is meant by the words ‘the same as’ and ‘substantially similar’. The words ‘same as’ appear in many contexts including in that of satisfying the continuity of business test for the purposes of a company being allowed to utilise tax losses from previous years. In that context Gibbs J held in Avondale Motors (Parts) Pty Ltd v FCT[37] that the words ‘same as’ imported ‘identity and not merely similarity’.[38] I doubt that the tax cases are of much assistance in this context because the enquiry in the tax context is about whether one business has remained the same over time rather than whether two different businesses may relevantly be regarded as being in effect competitive with each other. In other words, a requirement of identity in the context of an enquiry about whether the one business has remained the same over time is not readily applicable to determine whether two different businesses may relevantly be the same for the purpose of determining whether one competes against the other. In any event, an enquiry about whether one business is the same as another is, as it must be, a question of fact. In Spunwill Pty Ltd v BAB Pty Ltd[39] Santow J said that to determine whether something was of a similar nature to something else required a determination by reference to the effect of the particular activity on overall character, or nature, of each of two businesses taken as a whole.[40] In that regard a guiding consideration is that the purpose of the comparison is to see whether one business is so like another as seriously to compete with it. In Drew v Guy[41] Lindley LJ said:[42]
‘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.’
The court in that case concluded that the second business would seriously compete with the first and therefore that one restaurant was a ‘similar business’ to the other notwithstanding the very many substantial physical and other differences.”
[35](2008) 66 ASCR 472 (Pagone J).
[36](2008) 66 ASCR 472 at 497-8.
[37](1971) 124 CLR 97.
[38]At 105.
[39](1994) 36 NSWLR 290.
[40]Ibid at 313.
[41][1894] 3 Ch 25.
[42]Ibid at 29.
Reliance was also placed by Symbion on the English Court of Appeal decision in Drew v Guy,[43] which concerned the interpretation and operation of a lease covenant that the tenants would not “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 plaintiff’s. As to this issue, Lindley LJ (with whom Lopes LJ agreed) said:[44]
“The covenant clearly leaves the lessee at liberty to carry on the business of a restaurant; but it must not be a restaurant similar to that carried on by the tenant of the Windsor Castle public house.
…
The question, then, is whether the business of a restaurant carried on by the Defendant is similar to that carried on by Raven. There are considerable points of dissimilarity between them: the Defendant has no license to sell alcoholic drinks, and no license which enables him to keep his premises open to a late hour in the evening. Do these differences prevent the Defendant’s business from being similar to that of Raven’s? There is an important degree of similarity between the two businesses. The Defendant claims the right to carry on a business which will seriously compete with Raven’s business. 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.”
In Drew v Guy it was held that the tenant was within its rights to conduct a restaurant business as long as the restaurant was not “similar to” the restaurant of the plaintiff’s other tenant. To determine whether two restaurants were similar or not, the English Court of Appeal applied a “competition” test. The same reasoning does not necessarily apply to clause 20.1 of Symbion’s leases. Clause 20.1 does not include a phrase such as “trade or business of a pathology services provider similar to” that conducted by the Tenant in the Premises. If it did, there might be more weight to an argument that a “competition” test should be used to decide which pathology services are similar, and which are not. However, clause 20.1(a) is directed at a “trade, business or calling similar to that conducted by the Tenant in the Premises at the Commencement Date” [emphasis added]. The words “trade, business or calling”, read together, are quite broad. In my view, as discussed below,[45] a “competition” test between two pathology businesses, which provide their services through a combination of pathology laboratories, collection centres and collection services, is not required as both businesses are engaged in a similar “trade, business or calling”.
[43][1894] 3 Ch 25.
[44][1894] 3 Ch 25 at 28-9.
[45]See below, paragraphs 49 to 51.
A further case relied upon in the same vein was another English Court of Appeal decision, Ronbar Enterprises Ltd v Green.[46] The covenant considered in that case was a covenant in a partnership agreement which provided that: “The partner whose share is purchased shall not for five years from such date directly or indirectly carry on or be engaged or interested in any business similar to or competing with the business of the partnership.” [emphasis added]. The use of both the expressions “similar to” and “competing with” together in the covenant raised the inference that they carried different meanings and so, in this respect, the covenant was distinguishable from that considered in Drew v Guy.[47] As might be anticipated, the Court of Appeal took the parties to have intended the covenant to have a wider meaning than a prohibition on “competing with”. It was argued that the covenant was unreasonably wide and, not being limited as to the area of its application, would extend to similar businesses carried out anywhere in the world. The Court of Appeal accepted the trial judge’s characterisation of the covenant as a twofold covenant which was severable. In this respect, Hodson LJ said:[48]
“On the question whether the covenant was unreasonably wide, Mr Hesketh conceded that, as it stood, the covenant was unreasonably wide because the words ‘similar to or’ preceding the word ‘competing’ would be unnecessary for the protection of the plaintiff company’s interest. Recognizing that position, the judge has excised those words, and thereby severed the covenant; and the question principally argued on this appeal is whether it was legitimate to do so.
I have no doubt in my own mind that it is. It is quite clear that in a ‘vendor and purchaser case’, in so far as matters of geography are concerned – as was pointed out by this court in Goldsoll v Goldman[49] which has already been cited – it is quite legitimate to deal with the area by severance. Lord Cozens-Hardy MR referred to the judgment of Neville J in the court below in this way[50]: ‘On the question of the space covered by the covenant Neville J has held, and I entirely agree with him, that it is unnecessarily large in so far as it is intended to cover not merely the United Kingdom and the Isle of Man but also the foreign countries mentioned in the covenant. He has also held, and his decision is consistent with a long series of authorities, that the covenant can be severed as regards the space covered by it. It is clear that part of the covenant dealing with the area is reasonable, and the learned judge has limited the injunction …’.
Mr Eastham, as I understand it, accepts that, but he says that striking out the words ‘similar to or’ is not a limitation of the area. In my judgment, it is, and as my Lord pointed out, it is really the only way in which in practice the area can be limited for the protection of the plaintiff company’s business. In the case of a publication, which is said to be a rival publication, the competition of which is feared, it is, as I see it, impracticable to limit the area by drawing geographical lines upon a map; and the only way in which the area can be practically limited is in the way adopted by Roxburgh J, namely, by limiting the area to that covered by the words ‘competing with the business of the partnership.’”
[46][1954] 1 WLR 815.
[47][1894] 3 Ch 25.
[48][1954] 1 WLR 815 at 822-3.
[49][1915] 1 Ch 292.
[50]Ibid 297.
The restraint provisions of clause 20.1(a) of the leases do not contain ‘a twofold covenant’ of the kind considered in Ronbar Enterprises Ltd v Green,[51] so questions of severance do not arise here. Nevertheless I am of the opinion that the decision in Ronbar Enterprises does not, having regard to the particular features of the covenant considered, detract from the analysis in Drew v Guy,[52] a decision which was not considered in 1954. The expressions are not, in my view, necessarily mutually exclusive in the meanings which they bear and, in any event, must be read in the context of the particular covenant in which they are used. On the basis of these authorities, a combination of these expressions produces a covenant of very broad reach but the position may be otherwise where they are used separately, as in the present circumstances. Ronbar Enterprises provides little guidance in the interpretation of clause 20.1(a) as, after severance, the clause in that case was directed at a business “competing with” the business of the partnership rather than a “trade, business or calling similar to that conducted by the Tenant in the Premises”.
[51][1954] 1 WLR 815.
[52][1894] 3 Ch 25.
In Spunwill Pty Ltd v BAB Pty Ltd[53] the Court (Santow J) was required to determine the meaning of the expression “business of a similar nature” in the context of a restraint of trade clause in a contract for the sale of a hardware business. The Court’s treatment of this expression, though a cognate one and not in the same terms as the restraint provisions of clause 20.1 of the leases, is of some assistance. Santow J first made reference to dictionary definitions and, insofar as is presently relevant, said:[54]
[53](1994) 36 NSWLR 290.
[54](1994) 36 NSWLR 290 at 302.
“For the purpose of construing the words “similar nature”, counsel for the Defendant referred the Court to the old edition of the Shorter Oxford English Dictionary, which defined the word 'similar' as "Having a marked resemblance or likeness, of a like nature or kind ...”. But must resemblances necessarily be “marked” for objects to be “similar” (granted this might be required in particular circumstances)? Other dictionaries contain definitions with no such requirement. The New Shorter Oxford English Dictionary (1993) defines “similar” as “Having a resemblance or likeness; of the same nature or kind.” The Macquarie Dictionary, 2nd ed defines “similar” as “Having a likeness or resemblance, esp. in a general way”. Generally Australian dictionaries should be consulted when ascertaining the commonly accepted meaning of a word, and I am satisfied in this case that the Macquarie Dictionary should be preferred to the extent of any minor inconsistency between the definitions: John While and Sons Pty Ltd v Changleng (1985) 2 NSWLR 163.”
Santow J then referred to some of the English authorities:[55]
“There is English authority to the effect that in the context of restraint of trade clauses, in deciding whether a person is engaged in a business similar to another business, the test is whether the business is so like the other as to seriously compete with it. Thus, in Drew v Guy [1894] 3 Ch 25, the plaintiff granted a lease to the defendant containing a covenant that they would not carry on the business of a “keeper of a restaurant similar to that carried on by” another tenant. Lindley LJ, with whom Lopes LJ agreed, stated the test of similarity (at 729) as being “so alike ... as seriously to compete with”
…
This test was followed in subsequent English cases. In Castelli v Middleton (1901) 17 TLR 373, a contract for the sale of business contained a covenant that the vendor would not carry on or be interested in any business of a like or similar nature. Joyce J held that the test was whether the business complained of was a competing business, and held the personal covenant entered into by the vendor of a business ought to be construed strictly against him. In Automotive Carriage Builders Ltd v Sayers (1909) 101 LT 419, a partnership agreement contained a covenant that the manager would not, within 20 miles of Nelson’s Column, establish any business similar to the partnership for ten years after ceasing employment. Swinfen Eady J held that the whole object of the covenant was to protect the goodwill of the partnership, and the manager would be in breach of the covenant where he was carrying on a business similar to and directly competing with the plaintiff’s business.”
Care must, however, be taken in applying authorities with respect to the treatment of words and phrases in the construction of one-off contracts. Santow J noted this caution in submissions before him, with reference to a number of cases.[56]
[55](1994) 36 NSWLR 290 at 303.
[56](1994) 36 NSWLR 290 at 303, referring to Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 at 130; Foulger v Arding [1902] 1 KB 700 at 704; Jessel MR said in Aspden v Seddon (1874) LR 10 Ch App 394 at 397: “No judge objects more than I do to referring to authorities merely for the purpose of ascertaining the construction of a document; that is to say, I think it is the duty of the Judge to ascertain the construction of the instrument before him, and not to refer to the construction put by another judge upon an instrument, perhaps similar, but not the same. The only result of referring to authorities for that purpose is confusion and error...”.
As was emphasised in Spunwill Pty Ltd v BAB Pty Ltd,[57] it is necessary to consider the nature and context of a restraint provision, such as clause 20.1 of the leases. The type of covenants considered in Ronbar Enterprises Ltd v Green,[58] Drew v Guy[59] and Spunwill v BAB are, in my view, entirely different from the type of covenant considered in Vancouver Malt and Sake Brewing Company Ltd v Vancouver Breweries Ltd.[60] There the covenant, contained in an agreement for the sale and assignment of goodwill, was a covenant for 15 years not to engage in the trade or business of “manufacturing, brewing, selling or disposing of beer, ale, porter or lager beer”, with some further restrictions. These primary restraint provisions were quite specific and did not require any comparison of potentially diverse business and, consequently, did not invite resolution of a potentially difficult comparative exercise by applying a “competition” test, as applied in Drew v Guy and some of the other cases to which reference has been made. The “competition” test, as discussed below,[61] is not easily applied and the field of competition is not simple to define. The “competition” test, to the extent that it was applied in these cases, resolved the difficulty of comparison, as so vividly illustrated in the following passage from the judgment of Santow J in Spunwill v BAB:[62]
“The phrase “similar nature” does not have a single, unambiguous ordinary meaning to be applied in the circumstance, but rather has a spectrum of possible meanings. It is cognate with what the late Julius Stone termed “a category of indeterminate reference”. For example, counsel for the defendant suggested that in some circumstances it would be sensible to suggest that “a cat and a dog are similar”, because each has a head, four legs and a tail. In a different context the statement would be absurd. In some circumstances, the Brown Bros and Retravision stores might be considered to be of a “similar nature” merely because they are both profit-making enterprises operating in the retail sale of manufactured goods, while in another context they would only be considered to be of a “similar nature” if they stocked a largely synonymous range of products. Concepts such as similarity and likeness are purely relative, and rely for content on the existence of other things which are relatively dissimilar and unalike to the things being compared. The words are “chameleons, which reflect the colour of their environment,”: Commissioner of Internal Revenue v National Carbide Corp (1948) 167 F(2d) 304, at 306 per Learned Hand J.”
In the present circumstances, the same difficulties of comparison do not arise with respect to the restraint provisions of clause 20.1(a). In construing clause 20.1(a) there is no reason to resort to the “competition” test if a simpler construction is available and preferable. The clause prohibits the Landlord from engaging in “a trade, business or calling similar to that conducted by the Tenant in the Premises at the Commencement Date”. At the Commencement Date of each of the leases, Symbion was providing pathology services at the relevant hospitals. These services were provided through a combination of one or more of a pathology laboratory, collection centre and collection service. As discussed above,[63] the ultimate service that Symbion is providing is the testing of specimens in order to provide results. Consequently, a business that is providing these services, especially through pathology laboratories, collection centres and collection services, is engaged in a “trade, business or calling similar to that conducted by the Tenant in the Premises at the Commencement Date”. The components, or potential components of the relevant “trade, business or calling” are sufficiently clear. The provisions of clause 20.1 do not invite or require any evaluation of the similarity of the size, quality, location or other aspects of the relevant “trade, business or calling”. In this context, the “competition” test provides no assistance as the relevant “trade, business or calling” can be identified by considering its intrinsic nature without the need to look to its operation and whether there are competitive effects. In other words, with reference to the illustration of Santow J, if the restraint is against more cats, and cats are clearly specified, it is not necessary to consider whether any dogs that happen to be around compete in any way with cats; it is irrelevant as the prohibition is, quite simply, on more cats.
[57](1994) 36 NSWLR 290.
[58][1954] 1 WLR 815.
[59][1894] 3 Ch 25.
[60][1934] AC 181 (PC).
[61]See below, paragraph 112.
[62](1994) 36 NSWLR 290 at 302-3.
[63]See above, paragraph 4.
Consequently, the restraint provisions of clause 20.1 are, in my view, to be treated as being more similar to the type of covenant considered in Vancouver Malt and Sake Brewing Company Ltd v Vancouver Breweries Ltd[64] and Butt v Long.[65] A covenant of this nature does not, and did not, lend itself to a narrow interpretation limited in substance and scope to an area of mutual competition.[66] Its words were clear and specific and contained no express geographic limitation, and carried no limitation inherent in the primary prohibition.
[64][1934] AC 181 (PC).
[65](1953) 88 CLR 476.
[66]See particularly Vancouver Malt and Sake Brewing Company Ltd v Vancouver Breweries Ltd [1934] AC 181 at 191-2.
For these reasons, I am of the opinion that the words “similar to” are not to be construed as meaning “in competition with” (or some similar competition focused expression), with the result that clause 20.1(a) does suffer from the lack of an express provision providing for the geographical extent of the operation of the restraint of trade. Consequently, the primary restraint provision does not carry with it its own inherent geographical boundaries which would save it from the same fate of invalidity which befell the restraint provisions considered in Butt v Long.[67]
[67](1953) 88 CLR 476 at 487.
Whether Healthscope is bound by clause 20.1 of the leases
As Healthscope was not the original landlord of the Symbion leases at the JFP hospital or the HP hospital, the question arises whether the provisions of clause 20.1(a) and (b) bind Healthscope as an assignee of the freehold reversion of those leases. This issue did not arise in relation to the LDP hospital because Healthscope acquired all the shares in AHC (LD), rather than taking an assignment of the reversion.[68]
[68]See above, paragraph 22.
It was common ground that the obligations imposed on a landlord with reference to demised premises only become binding on an assignee of the reversionary estate if those obligations “touch and concern the land” or, in other words, are obligations “with reference to the subject matter of those leases”.[69]
[69]See s 142 of the Property Law Act (1958) (Vic); s 118 of the Conveyancing Act 1919 (NSW); and see, for example, Breams Property Investment Co Ltd v Stougler [1948] 2 KB 1 at 7; Kumar v Dunning [1989] 1 QB 193 (CA); P & A Swift Investments v Combined English Stores PLC [1989] 1 AC 632 (HL); Heggies Bulkhaul v Golbal Minerals Australia [2003] NSWSC 851 at [46]. In this context, it should be noted that the position at common law, unaffected by statute, is that an assignee of the reversion is not bound by any of the covenants and conditions of the lease. Statute law has, however, modified this position, as explained by Uthwatt J in In re Hunter’s Lease [1942] 1 Ch 124 at 128:
“The position, as I understand the matter, is that at common law the assignee of a reversion is not liable to the lessee in respect of any of the covenants and conditions in the lease. That appears to be the orthodox view and is so stated in Williams’s Notes to Saunders’ Reports, vol. i., p.300, note (10.) In those circumstances the statute of 32 Henry 8, passed in 1540, provided, in substance, that lessees were to have the like remedies on covenants and conditions contained in the lease against assignees of the reversion as they had against the original grantor of the lease. That Act was replaced by s.11 of the Conveyancing Act, 1881, and the provision now in force is in s.142 of the Law of Property Act, 1925. Before the passing of the Conveyancing Act, 1881, it had been decided that the burden of covenants by the lessor contained in a lease did not pass to his assignee unless those covenants touched and concerned the thing demised, and there is authority for the view that the Conveyancing Act, 1881, and the Law of Property Act, 1925, have left the law as it was before the Act of 1881.”
Symbion submitted that clause 20.1 of each of these leases “touches and concerns” the land with the consequence that Healthscope, as assignee of the reversionary interest in the JFP hospital and the HP hospital leases, is bound by that clause in each of these leases.
Healthscope, on the other hand, submitted that a covenant is only regarded as “touching and concerning” the land, hence running with the land, when it directly, as opposed to collaterally, affects the demised premises.[70] It was submitted that a covenant by a landlord not to open trade premises within a specified distance of leased premises merely affects the value of the trade conducted at the leased premises, hence the goodwill of the business, and is to be regarded as collateral to the land, not a covenant which “touches and concerns” the land, so not a covenant that runs with the land.[71]
[70]Relying particularly on Thomas v Hayward (1869) LR 4 Ex 311.
[71]See Thomas v Hayward (1869) LR 4 Ex 311.
Thomas v Hayward[72] concerned the enforceability of a landlord’s covenant contained in a lease of a public house “not to build, erect, or keep, or be interested or concerned in building, erecting, or keeping, any house for the sale of spirits or beer within the distance of half a mile from the premises thereby demised, during the continuance of the said term”. The lease also contained a tenant’s covenant requiring the demised premises to be used for “the sale of spirits” during the continuance of the lease term. All the members of the Court of Exchequer held that the covenant was not enforceable against the landlord by an assignee of the lease. Bramwell B said:[73]
“The covenant does not touch or concern the thing demised. It touches the beneficial occupation of the thing, but not the thing itself; and this becomes manifest when it is considered that, supposing the lessee’s covenant to carry on the sale of spirits on the premises to be discharged by agreement between the lessor and lessee, or that without such discharge, the lessee, in fact, discontinued the business, the defendant’s covenant would obviously in no way concern the land. This shows that the covenant relates only to the mode of occupying the land, not to the land itself. It does not, therefore, run with the land so as to enable the plaintiff to sue upon it.”
Similarly, Cleasby B concluded:[74]
“This covenant concerns, not the condition of the land itself, but only the value of trade carried on there, and is in that sense collateral to the land.”
[72](1869) LR 4 Ex 311.
[73](1869) LR 4 Ex 311 at 311-312.
[74](1869) LR 4 Ex 311 at 312; and see the judgment of Channell B to the same effect.
Symbion sought to confine the authority of Thomas v Hayward[75] to its particular facts, drew attention to the brevity of the judgments of the three members of the Court and made reference to more recent authorities in support of the view that to the extent it might be said that the case had stood for any proposition of general application this had been superseded by more recent authorities. In this respect, particular reference was made to the decision of the House of Lords in P & A Swift Investments v Combined English Stores Group PLC[76] and the working test or guide for determining whether a covenant touches and concerns the land in any given case.[77] The authority of Thomas v Hayward[78] has, however, long been accepted, both by courts at the highest level and the principal landlord and tenant law texts.[79]
[75](1869) LR 4 Ex 311.
[76][1989] 1 AC 632.
[77][1989] 1 AC 632 at 642 (Lord Oliver of Aylmerton).
[78](1869) LR 4 Ex 311.
[79]See, for example, Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390, particularly at 409-10 (Jacobs J); Kumar v Dunning [1989] 1 QB 193 (CA); P & A Swift Investments v Combined English Stores Group PLC [1989] 1 AC 632 (HL); and Hurfite Pty Ltd v Coles Myer Ltd (1990) NSW Conv R ¶55-515; and see Woodfall’s Landlord and Tenant (Sweet and Maxwell: London, loose-leaf), para 11.051; Hill and Redman’s Law of Landlord and Tenant (LexisNexis: London, loose-leaf), A [1150]-[1160]; Foa’s General Law of Landlord and Tenant (Thomas Bank Publishing Company: London, 8th ed.), para 665; Redfern and Cassidy, Australian Tenancy Practice and Precedents (LexisNexis: Sydney, loose-leaf), [1050]; and Bradbrook, Croft and Hay, Commercial Tenancy Law (LexisNexis: Sydney, 2009), [15.20]; and as to the application of the same general approach in the United States, see Friedman on Leases (Practising Law Institute: New York, 4th ed.), 1822-3, 36.3. And see EH Burn and J Cartwright, Cheshire and Burn’s Modern Law of Real Property (OUP, 17th ed, 2006).
The distinction between covenants which “touch or concern” demised land and so run with the land to bind successors or assignees of the leasehold reversion or the lease term, respectively, and those which are merely collateral and so bind only the contracting parties, between whom there is privity of contract, is firmly established and has been applied in numerous cases.[80] However, as the cases show, the distinction is not always easy to draw. An illustration of those difficulties, and also a helpful restatement of the broad underlying principle to be applied, is provided by P & A Swift Investments v Combined English Stores Group PLC[81] where Lord Oliver of Aylmerton (with whom the other members of the House of Lords agreed) said:[82]
[80]See, for example, Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390, particularly at 409-10 (Jacobs J); and see Bradbrook, Croft and Hay, Commercial Tenancy Law (LexisNexis; Sydney, 2009), [15.20] and the landlord and tenant texts referred to in the preceding footnote.
[81][1989] 1 AC 632 (HL).
[82][1989] 1 AC 632 at 640-1; and see the judgment of Sir Nicolas Browne-Wilkinson VC in Kumar v Dunning [1989] 1 QB 193 at 200 where the test adopted by Farwell J in Rogers v Hosegood [1900] 2 CL 388 at 395 (being the test formulated by Bayley J in Congleton Corporation v Pattison (1808) 10 East 130) was also applied; and also Gumland Property Holdings Pty Ltd v Duthy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 at 264-265 where the High Court approved and applied this test. A test formulated in more general terms is also encountered in various cases, a test stated by Scott LJ in Breams Property Investment Co Ltd v Stroulger [1948] 2 KB 1 at 7 in the following terms:
“The phrase ‘subject-matter of the lease’ was, as we know, substituted for the ancient expression ‘touching and concerning the land’. Professor Cheshire’s elucidation of its meaning on pp.214-5 of the 5th ed. of his book on ‘Modern Real Property’, in my respectful opinion, supplies the true test.* ‘If a simple test’, he says, ‘is desired for ascertaining into which category a covenant falls, it is suggested that the proper inquiry should be whether the covenant affects either the landlord qua landlord or the tenant qua tenant. A covenant may very well have reference to the land, but, unless it is reasonably incidental to the relation of landlord and tenant, it cannot be said to touch and concern the land so as to be capable of running therewith or with the reversion. Tested by this principle the following covenants have been held to touch and concern the land’. Of the covenants by the tenant running with the land that ‘to pay rent or taxes’ and ‘not to assign or underlet’, and by the landlord running with the reversion, ‘to renew the lease’ are the most apposite of the instances which he quotes from decided cases.”
This test was referred to by Giles J in Show Shoji Australia Pty Ltd v Oceanic Life Ltd (1994) 34 NSWLR 548 together with the tests referred to by Sir Nicolas Browne-Wilkinson in Kumar v Dunning. It is helpful as a general statement, but the test adopted by Farwell J in Rogers v Hosegood and, in turn, by the High Court in Gumland Property Holdings is more helpful in terms of application given the greater particularity of the two limbs contained within it. [*See now E H Burn and J Cartwright, Cheshire and Burn’s Modern Law of Real Property (OUP, 17th ed, 2006), 296-7].
“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 V.C. 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.’”
Although P & A Swift Investments v Combined English Stores PLC[83] was concerned with a surety’s covenant and this passage relies on cases concerned with tenant’s covenants, the broad underlying principle is that for a lease covenant to “touch and concern” the land it must affect the landlord in the capacity of landlord or the tenant in the capacity of tenant.[84] On this basis, Lord Oliver of Aylmerton formulated a “working test” to determine whether a leasehold covenant “touches and concerns” the land:[85]
[83][1989] 1 AC 632 (HL).
[84]Noting the statement by Uthwatt J in In re Hunter’s Lease [1942] 1 Ch 124 at 128-9 that: “There is less authority in the case of covenants by lessors, which are less common than covenants by lessees, but it appears to me that the principles governing the two classes of case are the same”; and see Breams Property Investment Co Ltd v Stroulger [1948] 2 KB 1 at 7 (Scott LJ).
[85][1989] 1 AC 632 at 642. This “working test” has been “much applied” in Australia: see Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 at 264-5. It has been applied with respect to both lessors’ and lessees’ covenants, see RMPL Symonds Australia Pty Ltd v Pacific Property Investments Pty Ltd (1988) 10 BPR 18,729; and Caerns Motor Services Ltd v Texaco Ltd [1994] 1 WLR 1249.
“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.”
The elements of this “working test” are to be found in various authorities, which it is not necessary to explore generally. In the present circumstances, however, reference should be made to “the acid test whether or not a benefit is collateral”.[86] This is the test repeated by Best J in Vyvyan v Arthur[87] in the following terms:
“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”.
I turn now to the LDP hospital lease. Symbion’s submissions set out the alleged effect of Healthscope’s conduct at the LDP Hospital:
“343. Symbion ceased the Lady Davidson Service in March 2006 as a result of the destruction of this business by Healthscope’s and AHC(LD)’s activities at the Lady Davidson Hospital.[361] Following the commencement of the DCL ward service in January 2006 and the strategies employed by Healthscope / AHC(LD), during February and March 2006, the number of pathology referrals that Symbion received from the Lady Davidson Service dropped from around 1,000 pathology referrals per month to practically zero[362]. As a result, Nick Champness decided that Symbion would not exercise its rights to renew the Lady Davidson Lease for a further term[363]. The Lady Davidson Lease therefore expired on 30 June 2007.”
[361]Champness, 23 April 2010 at [45], [Ex. B].
[362]Champness, 23 April 2010 at [50], [Ex. B]; Lawless, 25 February 2009 at [4] and Annexure 1,
[Ex. N].
[363]Champness, 23 April 2010 at [50], [Ex. B].
DCL begun a collection service at the LDP hospital in January 2006. The number of referrals at LDP hospital fell dramatically from 1,058 in December 2005 to 723 in January 2006 and then further to 277 in February 2006, 10 in March and, 21 in April and 9 in May.[364]
[364]Calculated from the Annexure 1 of Lawless witness statement of 25 February 2009.
Symbion alleged the following conduct by Healthscope and AHC (LD) at the LDP hospital:[365]
“341. It can be inferred that AHC(LD), as a wholly owned subsidiary of Healthscope, adopted Healthscope’s overall strategy of seeking to “integrate” its hospital and pathology businesses as formulated and discussed in the synergy meetings chaired by Vita Pepe. At the very least, it may be inferred that AHC (LD) encouraged its employed doctors and nursing staff to use or recommend DCL’s pathology services, rather than the service provided by Symbion and a [sic]. AHC (LD) also encouraged its staff to interfere with referral pads[366]. Indeed, such was the extent of Healthscope’s and AHC(LD)’s interference with Symbion’s referral pads at the Lady Davidson Hospital that Symbion had to replace pathology referral pads twice a day[367].
342. AHC(LD) admits that DCL staff were permitted to use a room at the Lady Davidson Hospital to store equipment[368] for use in their ward collection service.”
[365]Plaintiff’s closing submissions at [341] – [342]
[366]Swain, 23 April 2010 at [13] – [17], – [Exhibit K]; Moller, 5 May 2010 at [41], – [Exhibit
L]; Champness Tr. 189 lines 23-31 to Tr. 190 lines 1 – 4.
[367]Champness at Tr. 205 lines 18 to 26.
[368]Waterson, 18 May 2010 at [42], [Ex.31].
As discussed above,[369] any breach of the implied obligation must be assessed on a lease by lease basis. This means that it cannot simply be inferred that an “overall strategy” applied in other places (even assuming that one had been established, which is not a finding I have made) was adopted at the LDP hospital, or that conduct that is alleged to have occurred at the JFP hospital and the HP hospital also occurred at the LDP hospital. This is strengthened by the fact that neither Symbion nor Healthscope operated a collection centre or pathology laboratory at the LDP hospital, only a collection service. The pathology businesses conducted at the LDP hospital differs from those conducted at the JFP hospital and the HP hospital. Also, the LDP hospital is owned by AHC (LD), a different legal entity to that which owns the JFP and HP hospitals. There is no basis for drawing an inference that similar conduct occurred at different hospitals, in different states, with different types of pathology services (even if relevant conduct had been established at the other hospitals, which is not a finding I have made).
[369]See above, paragraph 160.
The main remaining allegations with respect to the LDP hospital were that Symbion’s pathology referral pads were tampered with, possibly to the extent that they needed to be replaced twice a day, and that DCL staff were allowed to store equipment in a room at the hospital. In themselves these allegations would not, if established, be sufficient to justify a finding of a breach of the implied obligation not to derogate from the grant. Even if this conduct were established, as discussed above in relation to the HP hospital, the Plaintiff has not proved, on the balance of probabilities, that any conduct other than “mere competition” actually caused the deterioration in its business. There is no evidence to establish the reason for the doctors at the LDP hospital changing their referrals to pathology services. Consequently, Symbion has not established a breach of the implied term not to derogate from the grant.
Position of HCoA
HCoA submitted that as between it and Symbion, the factual context is uncontroversial, with most factual matters not being in issue at all between them.
The obligations alleged to bind HCoA are set out in the HCoA submissions, as follows:[370]
[370]Third Defendant’s Outline of Closing Submissions (11 June 2010), paras 15 to 17.
“15.Symbion alleges that, at the relevant times, HCoA remained bound by the following:
(a) clause 20.1(a) of the JFP Hospital Lease;
(b) clause 20.1(b) of the JFP Hospital Lease;
(c) clause 20.1(a) of the HP Hospital Lease; and
(d) a non-derogation obligation, alleged to arise by implication of law, in relation to both the JFP Hospital Lease and the HP Hospital Lease. (The obligation is alleged to be “of the Landlord”.)
16.Each of the clauses and obligations is alleged to remain binding upon HCoA – notwithstanding the assignment to Healthscope of the reversion of the land demised under the JFP Hospital Lease and the HP Hospital Lease – as the “original Landlord under, and a party to”, the JFP Hospital Lease and the HP Hospital Lease.
17. For completeness:
(a) Symbion also alleges that the relevant express terms and the implied non-derogation obligation are binding upon Healthscope, and enforceable by Symbion as against Healthscope.
(b) Healthscope does not dispute that an implied non-derogation obligation went with the reversionary estate in respect of both the JFP Hospital Premises and the HP Hospital Premises so as to bind Healthscope and be enforceable by Symbion, but denies that the express terms run with the land or that it is bound by the implied obligation pleaded by Symbion.
(c) HCoA admits that each of the express terms and the non-derogation obligation runs with the land and are therefore binding upon Healthscope and enforceable by Symbion against Healthscope.” [Footnotes omitted].
As a preliminary matter with respect to claimed liability under the JFP Hospital Lease, HCoA raised the issue of the effect of renewal of that lease as a result of Symbion’s exercise, on 28 March 2008, of its option to renew that lease for a further term. There was no issue that the JFP Hospital Lease was renewed for a further term commencing on 1 July 2008 pursuant to the provisions of clause 18 of that lease, which provided for the option to renew. HCoA submitted that a lease obtained by the exercise of an option to renew is “a new lease, a new demise”, referring to Gerraty v McGavin.[371] Consequently, it was submitted that upon the exercise of an option to renew such as that provided for in clause 18 of the JFP Hospital Lease, privity of contract between the original landlord and the tenant ceased in respect of future occupation of the premises.[372] More particularly, HCoA submitted that it followed that privity of contract only existed between HCoA and Symbion until 30 June 2008, which was the Termination Date, the end of the lease term, of the JFP Hospital Lease. After that date, a new lease came into existence by virtue of Symbion’s exercise of the option to renew under clause 18 of that lease. It followed, it was said, that the parties to the new lease which resulted from the exercise of the option to renew were Healthscope and Symbion and, as a result, HCoA could have no liability for conduct occurring in relation to the JFP hospital on or after 1 July 2008.
[371](1914) 18 CLR 152 at 163 (Isaacs J).
[372]Relying on Sina Holdings Ltd v Westpac Banking Corp [1996] 1 NZLR 1 at 5.
The authorities are very clear that the exercise of an option to renew a lease creates a new lease, a new demise, not merely an “extension” of the term of the lease which has been renewed. The provisions of clause 18 of the JFP Hospital Lease are unexceptional in their content and do not provide any basis for argument that the parties have sought to achieve a different position. Consequently, it is clear, in my view, that HCoA is correct in its submission that it could have no liability for conduct occurring in relation to the JFP hospital on or after 1 July 2008, assuming it would otherwise have had any liability under the terms of the JFP Hospital Lease in light of the facts and circumstances of this case.
HCoA submitted that clause 20.1 of the leases was void and unenforceable as an unreasonable restraint of trade. This issue and these submissions have been discussed previously, and for present purposes the discussion of the proper construction of clause 20.1 of the leases with respect to HCoA proceeds on the assumption that the provisions are otherwise enforceable.
In the event that it is found that clause 20.1 of the leases is not void and unenforceable as an unreasonable restraint of trade, HCoA submitted that, properly construed, it is not directed in terms to HCoA at the time of all the impugned conduct. Rather, it was submitted, the proper construction is that clause 20.1 of the leases is addressed to the “Landlord”, from time to time.
HCoA submitted that clause 20.1 of the leases prevents a defined person, “the Landlord”, from doing two things. The first is that “the Landlord” must not carry on a business of a particular kind during the term of the relevant lease. Secondly, “the Landlord” must not grant a lease or other right to occupy a part of “the Building”, being the building in which the leased premises is situated, to a person other than “the Tenant” for the purpose of conducting a business similar to that conducted by “the Tenant” in “the Premises”, being the leased premises. On this basis, HCoA submitted that the nature of the prohibitions indicates an intent that the inhibition on conduct was to be directed to “the Landlord” from time to time and, consequently, this more limited net did not catch HCoA at any relevant time and so it was not exposed to any liability in relation to matters raised in these proceedings. Healthscope and AHC (LD) submitted that, while arguable, HCoA’s construction should not be preferred as it would have allowed a situation where HCoA could have sold the freehold soon after entering into the 1 November 2003 leases and thereby escaping obligations under the restraint provisions in 20.1 even though it was still the relevant hospital operator.
HCoA also submitted that clause 20.1 of the leases was not directed to HCoA personally. It was said that there was nothing personal to HCoA which would warrant it being subject to the prohibitions contained in clause 20.1 of each of the leases, or render it likely that it was the contracting party’s intention that this be the case. In support of its submission, HCoA made reference to the written opening submission of Symbion, where it was contended that the “vice to which clause 20.1(a) is directed … is the landlord exercising its considerable power over the management of its hospital, including its relationship with doctors and nurses, to divert business away from its tenant”.[373] It was said by HCoA that a proposition of this type identifies why the preferable construction which properly reflects the intention of the contracting parties would see clause 20.1 being construed as directed only to “the Landlord” from time to time. Consequently, it was submitted, that once the leasehold reversion was assigned to Healthscope, there was no longer any commercial or other need by the tenant from time to time to have HCoA prohibited from engaging in the conduct referred to in clause 20.1.
[373]Plaintiff’s Opening Submissions (28 April 2010), paragraph 17; and see above, paragraph 37.
In making these submissions, HCoA did not resile from the position that HCoA remained bound, in privity of contract, as the original lessor under both the JFP Hospital lease and the HP Hospital lease. Nevertheless, the position put by HCoA was that it did not follow because a relationship of privity of contract remained that the provisions of clause 20.1 necessarily continued to apply to HCoA. This issue is to be resolved on the basis of the proper construction of clause 20.1 of the leases and is not determined by the continued existence or otherwise of privity of contract. It was also HCoA’s position that the question whether clause 20.1 of the leases bound Healthscope was a separate question to the question whether HCoA remained bound by these provisions. The former, it was submitted, falls to be determined by resolution of the question whether or not clause 20.1 of the leases touches and concerns the land so as to be “annexed and incident to” and go with the reversionary estate.[374]
[374]Referring to s 142(1) of the Property Law Act 1958 (Vic) and s 118 of the Conveyancing Act 1919 (NSW).
Symbion submitted that:[375]
“8. Properly construed, the definition of “Landlord” and the terms of clause 20.1 constitute a promise by HCoA that it, and whomever it decides to assign the reversionary estate to during the term of the Leases, will not engage in the conduct proscribed by clause 20.1. That is to say, clause 20.1 imposes strict liability on HCoA, in the event that whomever owns the reversionary estate during the term of the Leases breaches that clause.”
[375]Plaintiff’s Supplementary Submissions about the Liability of HCoA at [8].
In my opinion, the approach advanced by HCoA is correct and the question whether the provisions of clause 20.1 of the leases imposed any obligation on it after the assignment of the reversion to Healthscope is a matter to be determined exclusively by reference to the proper construction of those provisions. In this context, I accept Symbion’s contention that the vice to which clause 20.1(a) is directed is one which is dependent upon the landlord being the owner and manager of the hospital so that it is in a position to divert business away from its tenant. In my view, the same “vice” also applies with respect to the provisions of clause 20.1(b). Consequently, it follows, that HCoA is not liable under the provisions of clause 20.1 of the leases with respect to any of the impugned conduct the subject of these proceedings.
As a further, or alternative, argument on construction, HCoA submitted that as clauses 20.1(a) and (b) of the JFP Hospital lease and clause 20.1(a) of the HP Hospital lease impose negative obligations on “the Landlord” not to engage in certain conduct, it follows that even if “the Landlord” meant or included HCoA at the relevant time, clause 20.1 merely prohibits the landlord itself from engaging in the prescribed conduct. HCoA noted in its opening that Symbion asserted that the provisions of the JFP Hospital lease and the HP Hospital lease “required HCoA to ensure that the ‘Landlord’ (now Healthscope) does not breach clause 20.1”.[376] HCoA submitted that clause 20.1 is a negative obligation and does not positively require the Landlord to ensure that another entity does not breach clause 20.1. To demonstrate the point, HCoA submitted that the effect of Symbion’s argument on construction would be, in effect, to rewrite the obligation created by clause 20.1 of the leases in the following terms:
“… The Landlord must not, and must ensure that its successors and assigns do not, during the term of this lease …”
HCoA submitted that the reading in of the words in bold, which it was said would be required to establish the position put by Symbion, is impermissible as a matter of construction. It was submitted that the words adopted by the parties in the drafting of clause 20.1 do not lead to an absurd result and, accordingly, there was no basis for the Court to supply words to give clause 20.1 the meaning contended for by Symbion.[377] In conclusion on this point, HCoA submitted that it could not be in breach of the provisions of clause 20.1 of the leases unless it itself engaged in the proscribed conduct. It was said that as Symbion does not allege that HCoA has itself engaged in conduct that contravenes either clause 20.1(a) of the leases or clause 20.1(b) of the JFP Hospital lease, no liability attaches to HCoA.
[376]Plaintiff’s Opening Submissions (28 April 2010), paragraph 16.
[377]Murray Goulburn Co-operative Co Ltd v Cobram Laundry Service Pty Ltd (2001) Aust Contract R 90-137; [2001] VSCA 57, [26] (Chernov JA, with whom Brooking and Batt JJA agreed); Westpac Banking Corp v Tanzone Pty Ltd (2000) 9 BPR 17,521; [2000] ANZ Conv R 354; [2000] NSWCA 25, [19]-[22].
In my opinion, the position put by HCoA with respect to this approach to the construction of clause 20.1 is correct. In particular, I accept that for the position advanced by Symbion to be established, words of the kind as indicated in the HCoA submissions would need to be read in, that is, added, to clause 20.1. In my view, the authorities indicate that this is going beyond the permissible process of construction, particularly as there is no warrant to embark upon any substantial remedial construction process on the basis that the words adopted by the parties for the purposes of clause 20.1 created any absurd or uncommercial result.
Finally, HCoA submitted that an implied covenant, such as the implied covenant of non-derogation from grant, did not survive assignment of the leasehold reversion and, consequently, would not remain binding on HCoA as assignor.[378]
[378]Ahern v LA Wilkinson (Northern) Ltd [1929] St R Qd 66, 79. Reference was also made to Butt, Land Law 6th ed, 2009, at 376 where it was said that “… The assignor is discharged, since such covenants are not the product of express agreement between the parties”.
Consequently, HCoA submitted, that even if the implied obligation not to derogate from grant alleged by Symbion did arise, which it did not admit, HCoA was discharged from that obligation upon assignment of the reversion in relation to both the JFP Hospital land (on and from 1 December 2005) and the HP Hospital land (on and from 1 May 2006). In any event, it was submitted, it was not alleged that the implied obligation not to derogate from each grant had been contravened by HCoA’s assignment of the reversion of the demised estates to Healthscope. Consequently, it was submitted, that whatever the scope of the implied obligation not to derogate from grant is found to be, HCoA has not done anything which would infringe such an obligation.
On the basis of the authorities to which reference has been made, I am of the opinion that it is clear that even if the issue of derogation from grant arose, HCoA, as assignor, was discharged on assignment of the relevant reversionary estate and, further, there is no evidence that HCoA has done or admitted to be done anything that could infringe an obligation of this kind.
Conclusions and orders
For the preceding reasons, Symbion has failed to establish its claims against the defendants. Insofar as its claims relied upon the provisions of the hospital leases, Symbion failed to establish the validity and enforceability of the restraint provisions of clause 20.1 or that those provisions were, in any event, enforceable against HCoA. Insofar as Symbion relied, not on the express terms of the leases, but on doctrines of, or implied covenants of, law in the form of good faith obligations or non-derogation from grant the claims also fail. To the extent that Symbion needed to establish that the restraint provisions bound the present reversioner, Symbion failed to establish that the relevant provisions “touched and concerned” the land and ran with the reversion or that the contracts of sale created an express trust of those covenants for the benefit of Symbion. It did, however, establish that the obligations bound the firstnamed defendant under the doctrine of Bahr v Nicolay (No. 2).[379] In any event, this did not lead to any substantive result as the relevant provisions of clause 20.1 were found to fail as provisions in restraint of trade.
[379](1988) 164 CLR 604.
For these reasons, I will order dismissal of the plaintiff’s claims against all defendants and order that there be judgment for the firstnamed defendant on its counterclaim against the plaintiff, a claim which is admitted by the plaintiff, though subject to a set-off with respect to any of the plaintiff’s successful claims. In view of the failure of the plaintiff’s claims the result is judgment for the first defendant to the full extent of its counterclaim. The question of the quantification of the counterclaim, and any interest payable, is reserved pending further submissions.
In relation to the thirdnamed defendant, the plaintiff’s claims fail as the relevant provisions of the leases sought to be enforced against HCoA were not valid and enforceable or, in any event, did not bind HCoA.
I will hear the parties in relation to the formulation of the orders and the question of costs. The question of costs is otherwise reserved.
“It is true that there are some aspects of the sub-clause and the further provisions found within the leases which favour the respondents’ interpretation that annual reviews are intended. This is the interpretation which gained acceptance below. In my view, however, the stronger argument is that the leases, properly construed, provide for biennial rent reviews.
The conclusion which I express principally results from the effect which should be attributed to the leases’ prescription for rent periods of two years duration. This specific provision would be largely, if not totally, redundant, if annual rent reviews were intended.
…
I can best express the conclusion at which I arrive by setting out in words rather different from those of CL2.02(b) the meaning which I believe the sub-clause was intended to bear in that part of the sub-clause before the proviso is encountered:
…
I am conscious that, as compared with CL2.02(b), there is a good deal of re-writing in the words I have used. No doubt there are other ways of expressing the same conception with less re-writing. Still what I am attempting to set out with, what I hope, is sufficient clarity is the interpretation to which I am led by a consideration of that part of the wording of the leases which bears upon the question and in this I am particularly influenced by the very deliberate prescription of the leases for two-year rent periods.”
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