Sportzcom Australia Pty Ltd v Ekera Dental Pty Ltd
[2018] VCC 398
•10 April 2018
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
EXPEDITED LIST
Case No. CI-17-02360
| SPORTZCOM AUSTRALIA PTY LTD (ACN 106 963 115) | Plaintiff |
| V | |
| EKERA DENTAL PTY LTD (ACN 163 686 146) | Defendant |
---
JUDGE: | HER HONOUR JUDGE A RYAN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 4, 5, 6 and 8 December 2017 | |
DATE OF JUDGMENT: | 10 April 2018 | |
CASE MAY BE CITED AS: | Sportzcom Australia Pty Ltd v Ekera Dental Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2018] VCC 398 | |
REASONS FOR JUDGMENT
---
Subject: CONTRACT
Catchwords: Breach of contract – consultancy agreement for fixed term of three years – whether termination wrongful – period of notice required – entitlement to claim debt in lieu of notice – alternatively, whether damages recoverable for loss of opportunity to renew agreement or enter into a new agreement.
Cases Cited:Australian Broadcasting Commission v Australasian Performing Rights Association (1973) 129 CLR 99;
Blakeley v CGU Insurance Ltd [2017] VSCA 378;
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64;
Guthrie v News Limited [2010] 27 VR 196;
Hadley v Baxendale (1854) 9 Exch 341;
Martin v Tasmania Development & Resources (1999) 163 ALR 79; Masters Home Improvement Australia Pty Ltd v North East Solutions Pty Ltd [2017] VSCA 88;
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd & Anor (2015) 325 ALR 188;
Patterson v Middle Harbour Yacht Club & Anor (1996) 32 ATR 603; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332;
Victoria v Tatts Group Ltd [2016] HCA 5
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr L Wirth | Behan Legal Pty Ltd |
| For the Defendant | Mr A M J Meagher | Hassett Lee & Co |
HER HONOUR:
1 The plaintiff (“Sportzcom”) entered into a consultancy agreement (“the agreement”) with the defendant (“Ekera”) on 24 January 2014. Pursuant to the agreement, Sportzcom provided professional consultancy services which were performed by Dr Peter Hughes. The agreement was terminated by Ekera in early 2017. The actual date of termination is disputed, as are the consequences that flow from the termination. Sportzcom alleges Ekera acted in breach of the agreement and is owed monies as a result.
2 Sportzcom claims it is entitled to either:
(a) the balance of a payment due in lieu of 12 months’ notice of termination as a debt, being $165,354.84 if the termination date is 16 January 2017 or $189,357.15 if the termination date is 17 February 2017; or
(b) damages for wrongful termination of the agreement representing a loss of opportunity, being:
(i)a loss of opportunity for Sportzcom to rectify an alleged shortfall of EBITDA;[1] and
(ii)in circumstances when the grounds relied upon by Ekera for termination could have been rectified or did not exist, the agreement would have been renewed or alternatively, Sportzcom had an opportunity to enter into a new agreement. The damages claimed for loss of opportunity is capped at $492,000.
[1]EBITDA means earnings before interest, taxes, depreciation and amortisation.
3 For the following reasons, I find the debt claim is not proved. Sportzcom was paid up until 30 June 2017 when the agreement expired and is not entitled to be paid beyond that date. I am not satisfied the alternative loss of opportunity claim is established, as the evidence clearly demonstrates Ekera would not have renewed the agreement or entered into a new agreement with Sportzcom.
Background
4 Dr Hughes was one of four founders named in a Shareholders Deed of EDG Bidco Pty Ltd (“Bidco”) dated 24 January 2014.[2] The founders had worked together in a business venture known as Ekera Medical Pty Ltd (“Ekera Medical”) which was founded in 2007. Ekera was a subsidiary of Ekera Medical. Ekera is engaged in the business of acquiring and running dental practices. Ekera Medical resolved to sell Ekera to Dr Hughes and another founder, Dr Coulepis. They acquired the shares in Ekera in August 2013.
[2]Plaintiff’s Court Book (“PCB”) tab 12
5 In early 2014, Ekera obtained funding from a private equity group, then known as Archer Capital, which subsequently became known as The Growth Fund. Although all the shares in Ekera are held by Bidco,[3] The Growth Fund controlled 51 per cent of the shareholding in Bidco and thus had the controlling vote on the board of Ekera from early 2014 onwards.
[3]Defendant’s Court Book (“DCB”) 4.1
6 Dr Hughes is the sole director of Sportzcom. Dr Hughes was the managing director of Ekera up until 16 January 2016. The services provided by Dr Hughes are listed in Schedule 1 of the agreement and included the day to day strategic and commercial management of Ekera and associated dental practices. Dr Coulepis was appointed executive chairman of Ekera. He assisted Dr Hughes in integrating dental practices and managing part of the operations of the business.
7 In May 2015, Ekera’s board changed Dr Hughes’ role. He was asked to concentrate primarily on acquisitions of dental practices, although he still retained the title of managing director.
8 Mr Donald Grover was brought into the Ekera business by The Growth Fund in August 2016. Mr Grover is the operating partner for The Growth Fund. On 19 September 2016, Mr Grover became a director of Ekera. Mr Grover was asked by The Growth Fund to undertake a review of the operations of Ekera in circumstances where its financial performance had been critically poor in the previous year. Mr Grover gave evidence about the steps he took in reviewing Ekera’s business and the subsequent recommendations he made to the board following his evaluation.
9 As part of his operational review, Mr Grover evaluated the ongoing role of Dr Hughes in the structure of the business, as well as other staff. After performing that assessment, he concluded there were a number of issues about Dr Hughes’ performance which included:
(a) issues abut Dr Hughes’ lack of commercial judgment arising from the execution of his accountability for mergers and acquisitions (“M&A”) as a number of dental practices acquired by Ekera had not performed;
(b) poor judgment by Dr Hughes in recommending and influencing Ekera to employ Dr Hughes’ wife in a human resources role pursuant to an agreement whereby her company was paid $150,000 a year, which was well above the usual market rate for the services of a HR generalist;
(c) concerns about Dr Hughes’ poor performance as a team player within the head office;
(d) undisclosed conflicts of interest when dealing with suppliers.
10 Following Mr Grover’s presentation to Ekera’s board about the proposed restructure of the business, the board decided that notice should be given to Sportzcom to terminate the services of Dr Hughes. Other recommended changes were subsequently made, including the outsourcing of payroll and HR functions; Dr Coulepis’ responsibilities were altered and a new chief operating officer was hired in April 2017.
11 Dr Hughes was given notice of termination at a meeting held on 16 January 2017 between himself and Mr Grover at Ekera’s offices. Mr Grover commenced the meeting by informing Dr Hughes that it was not going to be a pleasant conversation as Ekera had decided to terminate Sportzcom’s services. Mr Grover gave some documents to Dr Hughes, including a letter dated 16 January 2017 reminding Dr Hughes of his obligations relating to Ekera’s confidential information and post engagement restrictive covenants.[4] Mr Grover explained that Ekera was concerned about two issues, namely:
(a)a concern that Dr Hughes had sought to change or alter figures in a due diligence report prepared by Ekera’s auditors, Grant Thornton Audit Pty Ltd (“Grant Thornton”); and
(b)the appointment of Dr Hughes’ wife to a HR role, particularly, on the basis it was deceptively similar to a previous business engaged by Ekera.
[4]PCB tab 32
12 Dr Hughes denied there was any conflict associated with his wife. He pointed out her engagement was common knowledge within the business and Ekera’s decision to retain her HR company was made by Dr Coulepis, to whom Dr Hughes reported. Dr Hughes said he asked for specifics about the Grant Thornton allegation but Mr Grover declined to give him any details.
13 Mr Grover gave evidence he also discussed clause 11.1.2(b) of the agreement. He reminded Dr Hughes that Ekera had the ability to terminate the contract with Sportzcom on the basis of that clause, due to underperformance of the business. He then gave Dr Hughes a draft deed of release and settlement to take away and consider.
14 Mr Grover asked Dr Hughes to pack up his office and remove his belongings. There was a discussion about how Dr Hughes’ departure would be portrayed to staff. Dr Hughes agreed to produce a letter of resignation which Mr Grover could circulate amongst staff. A proposed letter of resignation was sent by Dr Hughes to Mr Grover on 16 January 2017 following the meeting.[5] The letter stated that Dr Hughes had decided to step down from his role with immediate effect to pursue other business opportunities. Whilst the termination came as a surprise to Dr Hughes, Mr Grover acknowledged Dr Hughes behaved very professionally during the meeting.
[5]PCB tab 31
15 On 30 January 2017, Dr Hughes received two documents from Ekera, namely:
(a)a letter of termination addressed to Sportzcom relying upon clause 11.1.2(b) of the agreement; and
(b)a letter addressed to Dr Hughes reminding him of the restraints of trade contained in the agreement.[6]
[6]PCB tabs 33 and 34
16 The letter of termination dated 30 January 2017 relied upon clause 11.1.2(b) as a basis for termination. This clause permitted Ekera to terminate if the year to date EBITDA achieved in respect of a three month period was less than 20 per cent of the budgeted EBITDA. Dr Hughes was also advised Ekera would pay Sportzcom in lieu of the applicable notice period. The letter included a table setting out figures relating to budgeted and actual revenue of EBITDA for the quarter ending 31 December 2016. The variance between the two figures is 38.9 per cent. Mr Grover said the table was designed to support Ekera’s view that EBIDTA had not performed to the standard required under the agreement. Dr Hughes gave evidence that EBITDA data was not discussed with Mr Grover at their meeting on 16 January 2017 nor was it raised with him beforehand, which was confirmed by Mr Grover as being correct.[7] Dr Hughes disagrees with the figures set out in the table in the letter and disputes their accuracy.
[7]T183
17 A further letter of termination was sent by Ekera to Dr Hughes dated 16 February 2017.[8] This letter again relied upon clause 11.1.2(b) as the basis for termination but did not refer to any specific EBITDA data. The letter stated Ekera would pay Sportzcom in lieu of the applicable four month notice period and Sportzcom’s engagement with Ekera would end that day.
[8]PCB tab 35
18 Between 16 January 2017 and 16 February 2017, the parties negotiated the terms of a proposed deed of release and settlement agreement but were unable to reach agreement. Mr Grover said in evidence the letter of 16 February 2017 was sent because Ekera wished to conclude the matter as Dr Hughes had not returned a deed of release.
19 Ekera paid Sportzcom $101,357.14 in consultancy fees inclusive of GST on 23 February 2017, representing fees payable from 17 February 2017 to 17 June 2017. On 18 July 2017, Ekera paid Sportzcom the sum of $9,533.34 representing the balance of the term of the agreement from 18 June to 30 June 2017.[9] Consequently, Sportzcom has been paid all the fees it otherwise would have earned up to the expiry date of the agreement.
[9]Paragraphs 5 and 7 of the Amended Defence dated 4 December 2017 and DCB 128 and 131
Terms of the agreement
20 Both parties sought to rely upon various terms of the agreement in support of their arguments on contractual construction. In order to resolve this issue, it is necessary to consider a number of terms of the agreement.
21 Clause 1.1 deals with definitions. The definition of “End Date” is the date on which the agreement terminates. “Term” is defined as “the period from completion to 30 June 2017 unless terminated earlier in accordance with clause 11.”
22 Clause 2.1 deals with engagement. Ekera agreed to engage Sportzcom for the Term on the terms and conditions set out herein. It was also agreed that Sportzcom would supply the services of Dr Hughes for the Term.
23 Clause 11 deals with termination. Under clause 11.1.1, either party could terminate the agreement by giving the other party 12 months’ written notice.
24 Performance based termination is dealt with under clause 11.1.2. Ekera could terminate the agreement by giving four months’ written notice if:
(a)the EBITDA over a 12 month period (“LTM EBITDA period”) was below 15 per cent of the EBITDA over the 12 month period immediately preceding the commencement of the LTM EBITDA period; or
(b)the year to date EBITDA achieved in respect of a three month period is less than 20 per cent of the budgeted EBITDA.
25 Clause 11.1.3 qualified clause 11.1.2. Ekera could not terminate if the EBIDTA was adversely impacted by one of the various scenarios listed, including sub-paragraph (c) which stated: “Where Sportzcom has not been provided with the time referred to in clause 11.1.2(b) to rectify the shortfall.”
26 Clause 11.2 deals with payment in lieu of notice period. Under clause 11.2(a), Ekera could pay Sportzcom in lieu of all or part of any notice period it was required to provide.
27 Failure to give notice is provided for in clause 11.5. It provides as follows:
“(a) Each party acknowledges that:
(1) the requirement to provide 12 months’ written notice, with the exception of the provisions of clause 11.1.2, is in recognition of the fact that the role of Sportzcom within Ekera’s business is an important one; and
(2) if it terminates this agreement without giving the specified period of notice, Ekera’s business will be disrupted and as a result, it will suffer loss.
(b) In the event that either party terminates this agreement without giving the specified period of notice, the other party undertakes to pay an amount equal to the remuneration for the balance of the notice period not served.”
28 Clause 11.7 deals with the circumstances in which Ekera could terminate without notice, including where Dr Hughes engages in serious or wilful misconduct or other acts which were defined. It was not suggested, nor indeed was there any evidence to suggest that Dr Hughes had engaged in any serious or wilful misconduct. Pursuant to clause 11.7(g), Ekera could terminate the agreement at any time without notice if clause 11.1.1 was invoked, being the provision that entitled either party to terminate upon giving 12 months’ written notice.
29 Clause 11.9 is also relevant. It is headed “Expiry of Term” and states: “For the avoidance of doubt, the terms of this agreement will expire on 30 June 2017 if not terminated earlier in accordance with this clause 11.”
30 As can be seen from this review of the terms, the agreement was for a fixed term of three years expiring on 30 June 2017. The agreement does not contain any provision relating to options to renew or extension beyond the fixed term.
Legal principles relating to construction of contracts
31 The principles relating to the construction of contracts are not in dispute. The High Court restated the principles relating to construction of contracts in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd & Anor,[10] in which French CJ, Nettle and Gordon JJ held:
[10] (2015) 256 CLR 104
[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
[47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
[48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.”
[49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
[50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
[51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.”
(Citations omitted.)
32 This summary of the principles of construction was referred to more recently in Victoria v Tatts Group Ltd[11] and the Victorian Court of Appeal in Blakeley v CGU Insurance Ltd.[12]
[11][2016] HCA 5, at [51]
[12][2017] VSCA 378 at [166]
33 Ekera also relied upon Australian Broadcasting Commission v Australasian Performing Rights Association,[13] where Gibbs J noted:
It is trite law 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 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, … 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 …
[13](1973) 129 CLR 99, at 109-110
Sportzcom’s submissions on contractual claim
34 Sportzcom argues the purported reliance on clause 11.1.2(b) by Ekera as a basis for termination is misconceived. The first point made is that the figures contained in the letter of 30 January 2017 refer to quarterly figures and do not set out the year to date EBITDA achieved in respect of the three month period, being the period defined in clause 11.1.2(b). As a matter of construction, Sportzcom says the three month period referred to in clause 11.1.2(b) must mean three consecutive months where year to date EBITDA is less than 20 per cent below budget and not the average of standalone monthly EBITDA results.
35 Dr Hughes conceded financial performance was discussed at board level and EBITDA levels were reviewed at board meetings. His evidence was that they were comparing actual performance with a budget that should have been revised, so it was an inaccurate comparison.
36 Sportzcom also notes the monthly board packs record year to date EBITDA results (actual against budget). There is no three month period at any time prior to January or February 2017 where year to date EBITDA was “less than 20 per cent of the budgeted EBITDA”. This is also said to be supported by spreadsheet data in respect of the months of October, November and December 2016. In addition, where reliance was placed on adjusted practice EBITDA or operational EBITDA, there is no actual versus budget variance of year to date EBITDA recorded in any month that is minus 80 per cent. Given all these matters, Sportzcom says the reliance on the EBITDA results to justify termination was a poor smokescreen on the part of Ekera.
37 Accordingly, Sportzcom says Ekera was in breach of the agreement in seeking to rely upon the EBITDA figures as a basis for termination under clause 11.1.2(b).
38 The next point made is that clause 11.1.2(b) has no application where Sportzcom has not been provided with three months to rectify the shortfall as required under clause 11.1.3(c). There is no dispute on the evidence that such an opportunity was not afforded to Sportzcom prior to termination.
39 Sportzcom then referred to the requirement for giving 12 months’ written notice which it says it was not given under clause 11.1.1. It should be noted Ekera did not terminate under clause 11.1.1. Despite this, Sportzcom’s argument is that because clause 11.5 requires payment of the balance of the notice period not served, as the notice period is said to be 12 months on its case, this entitles Sportzcom to be paid for a period beyond the expiry of the agreement. Depending on the date of termination, this could mean either 12 months from January 2017 or, alternatively, 12 months from February 2017.
40 The amounts claimed by Sportzcom represent the balance of the 12 month notice period it says should have been given which is, either $165,354.84 if the termination was in January or, alternatively, $189,357.15 if the termination occurred in February 2017. The effect of the submission put forward by Sportzcom is to extend the period of the agreement beyond the expressly stated fixed term.
Ekera’s submissions on contractual claim
41 Ekera argues the construction put forward by Sportzcom that there must be 12 months’ notice given should not be accepted because:
(a) it is inconsistent with the definition of the term which was to run until 30 June 2017;
(b) if the plaintiff’s construction was favoured, then it would extend the date for the conclusion of the agreement which was inconsistent with the definition of the Term, the provision in clause 2.1 that the services would be provided for the Term and the provision in clause 11.9 that the Term would expire on 30 June 2017;
(c) the plaintiff’s construction would work commercial nonsense and inconvenience if a party was required to compel performance after 30 June. If that were correct, it would mean that one party could terminate, for example, on 29 June 2017, being the day before the conclusion of the term, which would have the effect of unilaterally extending the agreement for one year minus one day beyond the agreed contractual term;
(d) there is no express term which states that the notice provision continues to operate beyond the conclusion of the term and there is no clause providing an option to renew or for extension of the contract or renewal in any form. In that regard, Ekera relies upon the finding of Kaye J in Guthrie v News Ltd,[14] which places emphasis on the knowledge of a party to a fixed term contract that it will end on the date of the conclusion of the contractual term.
[14][2010] VR 196, at [199]
42 Given the construction relied upon by Ekera, it says it has paid all it was required to do, namely, remuneration up to 30 June 2017. In circumstances where the contract was ended, Ekera does not owe any debt to Sportzcom.
43 In my view, the construction put forward by Ekera is to be preferred. It is clear from the terms of the agreement that it was for a fixed term expiring on 30 June 2017. The construction put forward by Sportzcom that the agreement could extend beyond its fixed term by reason of the 12 month notice period is strained and conflicts with the clear language used in the agreement. In particular, it is contrary to the unambiguous wording in clause 11.9, namely, for the avoidance of doubt, the terms of the agreement will expire on 30 June 2017.
44 Clause 11.1.1 provides either party may terminate the agreement by giving the other 12 months’ written notice. Ekera did not seek to rely upon clause 11.1.1 when terminating and could not have done so in any event when there was less than 12 months to run before the agreement ended. Clause 11.5 refers to remuneration for the balance of the notice period not served. The notice period can only apply to a period during the currency of the fixed term agreement and not beyond. Furthermore, I agree with the submission put by Ekera that it would work a commercial nonsense if notice was given, say a day before the agreement expired, the party giving notice could unilaterally enjoy a further 12 month period of the agreement minus one day. On the flip side, if Sportzcom’s construction were accepted, then it could also mean that Ekera could have required Sportzcom to work an extra year beyond the fixed term. Such an outcome in my view would make commercial nonsense or work a commercial inconvenience and not one which reasonable business persons would have intended.
45 The other difficulty for Sportzcom on its construction point is that the 12 month notice period in clause 11.5(a)(1) is subject to the exception of clause 11.1.2, which permits a period of four months’ notice. Ekera sought to rely upon clause 11.1.2(b) when terminating. It was entitled then to give four months’ notice or payment in lieu of such notice under clause 11.5. In accordance with this clause, Ekera paid Sportzcom’s fees for the four month period in lieu of notice. If Ekera was not entitled to terminate under clause 11.1.2(b), the issue then is what damage flows from this breach. It is no answer to that issue to say that Ekera was somehow then required to give 12 months’ notice because its purported termination under clause 11.1.2(b) was unlawful. The reliance upon clause 11.1.1 is misplaced. I consider Sportzcom’s argument that it was entitled to be paid some eight months beyond the term of the agreement is flawed and inconsistent with the terms of the agreement.
46 The evidence at trial was unclear as to whether the year to date EBITDA achieved had fallen below 20 per cent of the budgeted EBITDA, being the basis for termination relied upon by Ekera. The accuracy of the figures relied upon by Ekera was disputed by Dr Hughes on a number of grounds. Dr Hughes also considered his treatment by Mr Grover and the Ekera board was unreasonable and blaming him for the poor results was misconceived. In particular, there was a non performing dental practice called the “No Brace Centre” which was having a significant drag on EBITDA results as it continually lost money over a prolonged period of time, which was not the fault of Sportzcom.
47 In final oral submissions, Ekera’s counsel said his client did not address the debate insofar as the defence was concerned whether Ekera had terminated properly in accordance with the clause 11.1.2(b), being the EBITDA reliance. Counsel submitted it was more helpful to focus on the central point as to whether his client was required to give 12 months’ notice or not. Given Ekera did not seek to convince the court that its reliance on clause 11.1.2(b) was justified and the various matters raised by Sportzcom about the accuracy of the EBITDA figures, I am not satisfied that Ekera has proved it was entitled to rely upon clause 11.1.2(b) as a basis for termination.
48 But even assuming the EBITDA figures relied upon by Ekera did fall within the parameters of clause 11.1.2(b), there is no dispute that Sportzcom was not given an opportunity to rectify the shortfall, as was required under clause 11.1.3(c). Consequently, Ekera did breach the agreement by seeking to rely on clause 11.1.2(b) as a basis for performance related termination because of its non-compliance with clause 11.1.3(c).
49 The question then is whether Ekera’s breach entitles Sportzcom to recover the debt now claimed as damages for breach of contract. The measure of damages flowing from the wrongful termination is the amount Sportzcom would have received had the contract been performed for the remainder of the term.[15] By reason of clauses 11.1.2 and 11.5, Ekera could make a payment in lieu of notice. It initially paid four months of entitlements in lieu of the four months’ notice period. The nature of a payment in lieu of notice is designed to set off or extinguish any claim for damages that would ordinarily be payable for wrongful termination of an agreement.[16] Ekera later paid the balance owing from the end of the four months to the expiry of the term, a period of some two weeks.
[15]Patterson v Middle Harbour Yacht Club & Anor (1996) 32 ATR 603
[16]Per Heerey J in Martin v Tasmania Development and Resources (1999) 163 ALR 79, at [51] – [53] (decision upheld on appeal)
50 Given Sportzcom has been paid its full entitlements up to the end date of 30 June 2017, it has suffered no loss. It is self-evident that had there been no purported termination, Sportzcom would have received the same amount if the agreement simply continued to run its natural course and finished on 30 June 2017. Consequently, I am not satisfied Sportzcom is entitled to claim any further monies as a debt because it was paid its full entitlements up to the expiry of the agreement.
51 Ekera also argued, as an alternative point, that Sportzcom, did not suffer any loss because it was the trustee of the Cadaceus Trust. Dr Hughes gave evidence that Sportzcom did not trade in any other capacity. The monies paid to Sportzcom were paid into its bank account by Ekera. After paying expenses, the remaining monies were distributed to beneficiaries of the trust. It was put that as Sportzcom did not make a profit because it did not retain the balance of monies it received pursuant to the agreement, Sportzcom could not therefore have sustained any loss and was precluded from recovering any damages.
52 I do not accept the argument put forward by Ekera that Sportzcom is not entitled to make a claim for damages because it did not make a profit. I accept Sportzcom’s submission that it is a nonsense to claim that Sportzcom has not suffered any loss because it treats its revenue from the consultancy agreement as trust property. Sportzcom was entitled to be paid the consultancy fees due under the agreement. The manner in which it distributed or disposed of those fees thereafter could not adversely affect its right to be paid, or in the event of a breach by Ekera prevent Sportzcom from suing for recovery of any fees owed.
Loss of opportunity claim
53 As an alternative claim, Sportzcom seeks damages for loss of an opportunity to renew the agreement or, alternatively, to enter into a new agreement with Ekera. Sportzcom points to the fact that damages are recoverable for the loss of any commercial opportunity, including a loss that flows from breach of contract.[17]
[17]Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, at 355 (Mason CJ, Dawson, Toohey and Gaudron JJ)
54 Sportzcom calculates its potential loss of income at $492,000, being a total remuneration over three years of at least $792,000 less expenses of approximately $100,000 per annum. Sportzcom accepts this figure should be discounted for any uncertainty or vicissitudes which it says in this case should be minor.
55 In Guthrie, Kaye J summarised the test for loss of opportunity as follows:[18]
The decisions of the High Court in Commonwealth v Amann Aviation Pty Ltd and Sellars v Adelaide Petroleum NL, make it clear that, in determining damages for loss of a valuable commercial advantage or opportunity, those damages are to be assessed by reference to the probabilities or possibilities of what would or might have happened, where such a determination is based on an hypothesis, whether past or future, as to what would have occurred or might occur, if the relevant breach of contract had not taken place.
[18]At [167]
56 Guthrie concerned a plaintiff employed as editor-in-chief of Herald Sun newspaper in Melbourne. After a series of disagreements between the plaintiff and the paper’s managing director, the chairman and CEO of News Ltd formed the view that the working relationship between the two senior executives had become untenable. The plaintiff’s employment as editor-in-chief was terminated. The plaintiff was paid a sum of money in accordance with the contract, including remuneration and other entitlements to the expiry date of the contract.
57 One of the claims made by the plaintiff was for damages representing the value of the lost opportunity of renewing his contract of employment for a further three years. Kaye J found the plaintiff failed to establish that he would have had any prospect of having his contract renewed in February 2010 had his contract not been terminated in November 2008.
58 His Honour formulated a two-step approach in determining the right of the plaintiff to recover damages for loss of opportunity to renew a contract:[19]
(1) Whether at the time at which the parties entered into the contract, it may be reasonably supposed to have been in their contemplation that, as the probable result of a breach of that contract by the defendant before its expiration, the plaintiff might suffer a loss of a valuable opportunity to renew or extend his contract with the defendant.
(2) If so, whether the plaintiff, as a result of the breach by the defendant of the contract in November 2008, did in fact lose a valuable opportunity to renew or extend his contract with the defendant.
[19]At [58]
59 Although a party cannot usually recover damages for something not promised by a defendant, this is subject to the rule in Hadley v Baxendale,[20] that a plaintiff can recover damages as arise naturally from the breach or as may be supposed to have been in the contemplation of the parties at the time they made their agreement as the probable result of the breach. His Honour considered clause 4 of the contract, which specifically provided for renegotiation of the continuity of employment, was sufficient to form the view that renewal of the contract was contemplated by the parties. He stated:[21]
The salient point is that, at the outset of the contract, the defendant recognised in the contract that there was a realistic expectation that the plaintiff would remain in his employment, at the expiration of the three year period.
[20](1854) 9 Exch 341
[21]At [63]
60 Kaye J concluded the relevant issue to be determined was the degree of possibility or probability that the defendant would have agreed, after the expiry of the contract term, to renew or extend to the term of the appointment. His Honour said as follows:[22]
In order to establish a claim for loss of opportunity on that basis, the plaintiff only needs to demonstrate that the prospect of his re-appointment, at that time, would have been more than “speculative” in such hypothetical circumstances. Thus, in order to succeed on this aspect of his claim, the plaintiff must prove, on the balance of probabilities, that if his appointment as editor-in-chief had not been terminated in November 2008, his prospects of re-appointment to that position, in February 2010 would not have been “so low as to be regarded as speculative”. If the plaintiff is able to establish that he would have had such prospects of renewal of his position as editor-in-chief in February 2010, then his damages would be assessed by reference to the proportionate chance that he had of having his appointment renewed.
[22]At [168]
61 His Honour’s finding that the plaintiff had “no prospect at all of having his appointment renewed”[23] was based on his conclusions regarding the evidence of the actual perception of the relevant decision-makers about the capabilities and performance of the plaintiff and the performance of the Herald Sun.[24]
[23]At [169]
[24]At [72]
62 In Masters Home Improvement Australia Pty Ltd v North East Solutions Pty Ltd,[25] the Court of Appeal recently considered, amongst other things, a claim for loss of opportunity to develop and lease a site for a home improvement store. The Court outlined three questions a court must ask itself when considering damages for loss of a commercial opportunity, namely:
[25][2017] VSCA 88
(1) Whether there was a commercial opportunity of some value (which is more than speculative or negligible); that is, was there a chance?
(2) Whether that opportunity has been lost; that is, would the plaintiff have pursued the opportunity?
(3) What amount should be awarded having regard to the prospects of success if the opportunity had been pursued? The court’s task is to then apply a discount which reflects the prospects of success, sometimes referred to as a Sellars discount.
63 Accordingly, it is necessary to determine whether there was a chance of Ekera agreeing to extend or renew the agreement with Sportzcom. Sportzcom must prove on the balance of probabilities that if the agreement had not been terminated, its prospects of renewing or entering into a new contract with Ekera in June 2017 would have been more than speculative, or not negligible in such hypothetical circumstances.
64 The agreement does not contain any provision for renewal, unlike the agreement in the Guthrie case. This then raises the preliminary question of whether the claim falls within the scope of Hadley v Baxendale. The relevant issue being whether Ekera would have realised that a loss of opportunity to Sportzcom to renew its contract was a likely result if the agreement was wrongfully terminated before 30 June 2017.
65 Sportzcom relies upon the fact that the remaining founders were re-engaged, being Dr Coulepis, Mr Hassett and Dr Harwood, through their related entities. On 6 June 2017, each of the founders entered into new consultancy agreements commencing on 1 July. Sportzcom contends it would have been reasonable to assume that if its contract was renewed, it would be for a period of three years, being the term upon which the agreement for Dr Coulepis and Mr Hassett were renewed. By contrast, Mr Harwood’s new agreement was for 12 months. But the issue is whether at the time of entry into the agreement, Ekera ought to have realised that if terminated the agreement wrongfully, Sportzcom would lose an opportunity to renew or extend the agreement.
66 Although there was no express contractual provision relating to renewal, I am prepared to accept there would have been a prospect of the agreement being renewed when the parties were negotiating in early 2014 having regard to Dr Hughes’ skills and extensive experience. The wording in clause 11.5(a)(1) supports this view, namely, that a period of 12 months’ notice was selected in recognition of the fact that the role of Sportzcom within Ekera’s business was an important one. I therefore accept this was a potential head of damage recoverable under Hadley v Baxendale.
67 Sportzcom contends the board dismissed it on the basis of the board’s erroneous belief there had been a failure to comply with clause 11.1.2(b) and that if the board had been satisfied that reliance was not available, it would not have terminated the consultancy agreement. This raises a practical difficulty for Sportzcom because the evidence of Mr Grover was to the effect that Sportzcom’s services were terminated for a host of reasons, including the reasons he explained to Dr Hughes during the course of their meeting on 16 January 2017. These reasons were in addition to the alleged failure to comply with the EBITDA targets. Therefore it does not follow, as Sportzcom would have it, that had the board had been satisfied the EBITDA basis for termination was not soundly made, it would then have re-engaged Sportzcom.
68 Ekera argues there are significant problems in respect of Sportzcom’s loss of opportunity claim; namely:
(a) There is no evidence put before the court that the grounds on which Ekera relied to terminate were or could have been rectified or otherwise did not exist. It is put that this an unassailable problem for Sportzcom because it is based on the premise that the grounds upon which Ekera relied to terminate were or could have been rectified.
(b) The emphatic evidence of Mr Grover, a director of The Growth Fund which controls the voting power of the board of Ekera, is that even if the agreement had not been terminated, Ekera would “absolutely not” have renewed it or entered into a new agreement with Sportzcom. The reason being inter alia was that Dr Hughes did not fit within the organisational structure or the people he recommended to be put in place at Ekera.[26]
[26]T186, L22 – T187, L5
69 The evidence of Mr Grover on that topic was unequivocal and when asked about the issue in his evidence in chief he said the following:
Q: In this case one of the allegations that's put against the defendant is that the plaintiff has lost the opportunity to have its consultancy agreement renewed or to enter into a new - or it's lost the opportunity to enter into a new agreement because of the termination. Can you tell the court, if the defendant had not terminated the consultancy agreement, would it have renewed the agreement or entered into a new agreement with the plaintiff?---
A: No.
Q: And, why not?---
A: Because the process we'd - that I'd gone through was making a decision, and a final decision, about structure and the people in that structure. So, there was never going to be a situation where we would have renewed that contract.
Q: What about entering into a new contract?---
A: Absolutely not.
70 In respect to the evidence that was led about the prospects of Sportzcom’s agreement not being renewed, Ekera relied upon the following:
(a)Mr Grover’s assessment that Dr Hughes was not a team player and should not be offered a role in the new structure of Ekera;[27]
[27]T164, L1
(b)The uncontested evidence of Mr Grover on behalf of The Growth Fund, which controls the board of Ekera, that he assessed the structure and people employed in Ekera and recommended to the board that Dr Hughes be replaced;[28]
[28]T186, L22 – T187, L5
(c)Concerns regarding Dr Hughes’ conflict of interest and issues of trust, namely:
(i)the uncontested evidence of Mr Grover of the concerns about Dr Hughes’ instruction to Grant Thornton relating to the preparation of a due diligence report in relation to a dental practice called Jeffcott;
(ii)perceived conflicts of interest, namely:
(1) The engagement of a company, Bond Street HR Advisory Pty Ltd, of which his wife was the sole director and shareholder, on a contract for $150,000 per annum which was later replaced by Mr Grover with another provider for $50,000 per annum;
(2) The handling of a dispute between Ekera and DRUT Pty Ltd of which Dr Hughes was also a director.
(3) Dealings with suppliers who were not at arm’s length to Dr Hughes.
(d) Concerns that Dr Hughes was not meeting practice acquisition criteria or parameters, that he had poor commercial judgment, he was stepping out of process parameters and that the presentation of possible acquisitions did not meet the board’s criteria, reflected a lack of commercial acumen on Dr Hughes’ part.[29] Mr Grover gave evidence he took these concerns into account when evaluating Dr Hughes.[30]
[29]DCB 94 and PCB tab 23
[30]T171. See also Dr Coulepis at T253, L13.
(e)The poor financial performance of Ekera which caused the board and Mr Grover to form the view that change was required. The poor financial performance was particularly for:
(i)the 2015 financial year which resulted in an operating EBITDA to budget of minus 58 per cent;
(ii)the 2016 financial year which resulted in an operating EBITDA to budget of minus 52 per cent;
(iii)the three months prior to the termination of Dr Hughes, Ekera had operating EBITDA of: (1) October 2016 – minus 57 per cent; (2) November 2016 – minus 48 per cent; and (3) December 2016 – minus 14 per cent.[31]
(f) Repeated failures of Dr Hughes to accept and act in accordance with the desires of the board. This led to warnings being given to him by Dr Coulepis in July 2016 that it was their leadership in question and they could not pass the buck. Another warning was given to Dr Hughes by Dr Coulepis on 27 November 2016 that there was likely to be structural changes at Ekera. He cautioned Dr Hughes should work within the M&A criteria stipulated, should not fail to disclose any conflicts of interest and that a failure to do so would be suicide.[32]
(g)Repeated disagreements with other directors over various matters, including the management of the “No Brace” dental practice.
[31]See Exhibit D1.
[32]PCB tab 29
71 The Growth Fund which controlled the board of Ekera accepted the proposal put to it by Mr Grover that Dr Hughes was not to be included in the proposed new structure and that the agreement be terminated.[33] Having regard to all these matters, Ekera argues the possibility of Sportzcom having its agreement renewed or alternatively, entering into a new contract, was fanciful and at best so low as to be regarded as speculative.
[33]DCB 120; T265 and T174
72 I accept the submissions put forward by Ekera on the loss of opportunity claim as being correct. Having regard to the evidence of Mr Grover about the reasons for the termination of Sportzcom, and in particular, the matters referred to in paragraphs 68 to 70 above, I am satisfied the chance of Sportzcom’s agreement being renewed or a new agreement being entered into was so low as to be speculative or negligible. Therefore, the second and third steps outlined in the Masters’ decision do not fall to be considered.
73 It should be noted Dr Hughes strenuously challenged the various allegations made against him. Ekera’s counsel accepted that the concerns of the board relating to the Grant Thornton allegation, for example, had not been proved. The matters relied upon by Ekera in respect of the loss of opportunity claim go towards assessing the perceptions of the decision makers at Ekera as to establishing the likelihood of whether Sportzcom would have been re-engaged. It may be well that those perceptions were not soundly based or possibly exaggerated. But by identifying those matters relied upon Ekera in support of its argument that it would not have re-engaged Sportzcom, it should not be understood that any of the various matters alleged were positively proved against Sportzcom and/or Dr Hughes.
Conclusion
74 Sportzcom has not proved it suffered any loss by reason of any contractual breach on the part of Ekera, because it was paid in full up until the expiry of the agreement on 30 June 2017. Therefore, the debt claim fails.
75 I find the chances of Ekera renewing the agreement or entering into a new agreement were so speculative or negligible that there was no opportunity of value lost by Sportzcom. Consequently, the plaintiff’s claim must be dismissed.
76 Subject to hearing from the parties, I propose ordering the plaintiff pay the defendant’s costs of the proceeding, including any reserved costs, to be taxed on the standard basis, in default of agreement.
- - -
Certificate
I certify that these 25 pages are a true copy of the Reasons for Judgment of Her Honour Judge A Ryan delivered on 10 April 2018.
Dated: 10 April 2018
Elisabeth Buchan
Associate to Her Honour Judge A Ryan
0
8
0