Vision Eye Institute Ltd v Kitchen
[2014] QSC 260
•23 October 2014
SUPREME COURT OF QUEENSLAND
CITATION: Vision Eye Institute Ltd & Anor v Kitchen & Anor [2014] QSC 260 PARTIES:
VISION EYE INSTITUTE LTD
(first plaintiff)
and
ICON LASER (AUSTRALIA) PTY LTD
(second plaintiff)
v
DR DAVID KITCHEN and MICHELLE KITCHEN (in their personal capacity and in their capacity as Trustees of the MDK Trust)
(defendant)
FILE NO: 10366 of 1999 DIVISION:
Trial Division
PROCEEDING:
Civil Trial
ORIGINATING COURT: Supreme Court of Queensland DELIVERED ON:
23 October 2014
DELIVERED AT:
Brisbane
HEARING DATE:
2, 3, 4, 5, 6, 10, 11, 12, 16, 17 and 18 June 2014 and Further Written Submissions 2 and 11 July 2014
JUDGE:
Applegarth J
ORDERS:
1.There be judgment for Icon against Dr Kitchen for damages for breach of the Service Agreement, in an amount to be assessed.
2.There be declarations that the defendants are not presently entitled to the release of the restricted securities under the Escrow Deed.
3.There be a declaration that, save for cl 17.1(c) and (d) of the Service Agreement, the restraints in cl 17 of the Service Agreement are void as an unreasonable restraint of trade.
4.There be a declaration that, save for cl 12.1(c) and (d) of the Share Purchase Agreement, the restraints in cl 12 of the Service Agreement are void as an unreasonable restraint of trade.
5.The relief sought in paragraphs 5 and 6 of the claim be refused.
6.The defendants’ counterclaim be otherwise dismissed.
7.The defendants’ application for leave to amend the second further amended counterclaim is refused.
CATCHWORDS:
CONTRACT – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – INTERPRETATION OF MISCELLANEOUS CONTRACTS AND OTHER MATTERS – where an ophthalmologist sold his practice to a publicly listed company and agreed to work for the company for at least 5 years –where a clause of the service agreement required the company to notify the ophthalmologist if any other ‘Salaried Doctor Partner’ who signed a ‘New Doctor Agreement’ received terms that ‘severally and overall’ were more favourable than the terms of the ophthalmologist’s agreement – where certain matters were excluded from the operation of the clause – where the ophthalmologist alleged a number of breaches of the ‘no less favourable clause’ – where a termination clause required notice of the alleged breach to be given to allow the company 14 days to remedy it – whether upon the proper interpretation of the ‘no less favourable clause’ and its exceptions the company failed to remedy the alleged material breaches
PROFESSIONS AND TRADES – HEALTH CARE PROFESSIONALS – MEDICAL PRACTITIONERS – OTHER MATTERS – RESTRAINT OF TRADE – where the ophthalmologist purported to terminate the agreement on the basis of a failure to remedy alleged breaches and established a practice in competition with the company – where the ophthalmologist thereby repudiated the agreement – where both the sale and employment agreements contained similar restraints to protect the interests of the company as the buyer of the business and as employer – where the restraints sought to prevent the ophthalmologist from establishing a competing practice within a defined geographical area – where the restraints sought to prevent the ophthalmologist from dealing with ‘Clients’ – where the restraints sought to prevent the ophthalmologist from hiring staff of the company – where the parties agreed the restraints were reasonable – whether the restraints were reasonable as between the parties – whether the restraints were offensive to public policy
TRADE AND COMMERCE – COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION – CONSUMER PROTECTION – MISLEADING AND DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS – PARTICULAR CASES – CONTRACTS GENERALLY – where the ophthalmologist alleged that he was induced to enter the agreements by certain representations – whether the alleged representations were made – whether the representations which were made were misleading – whether the ophthalmologist relied on the representations – whether the ophthalmologist would not have entered into the transaction if the alleged misleading conduct had not occurred
TRADE AND COMMERCE – COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION – ENFORCEMENT AND REMDIES – ACTIONS FOR DAMAGES – ASSESSMENT OR AVAILABILITY OF DAMAGES – BASIS UPON WHICH DAMAGES ASSESSED – where an expert report calculated losses alleged to have been caused by the conduct – where the calculation for loss was based on a comparative cash-flow analysis which included hypothetical scenarios – where assumed scenarios were not supported by the evidence – whether purported comparison of actual and hypothetical cash flows an appropriate basis upon which to determine loss
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Randall “Express Termination Clauses in Contracts” (2014) 73 Cambridge Law Journal 113COUNSEL:
P J Flanagan QC with S R Cooper for the plaintiffs
R J Whitington QC with D A Quayle for the defendantsSOLICITORS:
Clayton Utz for the plaintiffs
Thomson Geer for the defendants
TABLE OF CONTENTS
PART I : INTRODUCTION, ISSUES AND BACKGROUND
PART II: CONTRACTUAL ISSUES
Principles of construction
Relevant provisions
Issues of contractual interpretation: cl 3.3
The meaning of “Salaried Doctor Partner”
The meaning of “New Doctor Agreement”
The meaning and scope of the exclusion “in relation to Salary”
The meaning and scope of the exclusion “in relation to ... the Business Plan”
The meaning of “severally and overall”
Overview of the proper construction of cl 3.3
Was Dr Kitchen entitled to terminate the Service Agreement?
Did Vision (Icon) breach cl 9.1(a) of the Service Agreement?
Were the alleged breaches “material”?
Did Vision fail to remedy the material breaches notified to it within 14 days?
Dr Kitchen’s purported termination
Purported termination on grounds not identified in the Notice of Breach
Did Vision repudiate the Service Agreement?
Conclusion on Dr Kitchen’s purported termination
Repudiation by Dr Kitchen
PART III – RESTRAINT OF TRADE PROVISIONS
Relevant principles
What legitimate interests was Vision entitled to protect under a restrictive covenant?
The impugned conduct
The relevant provisions
The relationship between the two agreements and the similar restraints in each
The various restraints and their reasonableness
Are the restraints reasonable in the interests of the covenantees?
Are the restraints in sub-clauses 17.1(c) and (d) in the Service Agreement offensive to public policy?
Are the other restraints offensive to public policy?
PART IV – VISION’S LOSS
Lost earnings from Rockhampton for the period ending 31 March 2011
Lost earnings from Rockhampton for the period after 31 March 2011
Would Dr Kitchen have remained with Vision after 31 March 2011?
A point of principle
Lost earnings after 31 March 2011 - assessment
Conclusion – Rockhampton losses
Lost earnings from Gladstone clinic for the period ending 31 March 2011
Damages for breach of enforceable restraints of trade
The quantum of loss suffered by the termination of the Service Agreement
PART V – THE ESCROW DEED
PART VI: COUNTERCLAIM FOR MISLEADING AND DECEPTIVE CONDUCT
Introduction
The law
Context and sequence of statements
Credibility and reliability: oral communications
The PEF representations
Were the proven PEF representations misleading?
The purpose of the PEF
The operation of the PEF
Were the PEF representations misleading in the respects pleaded?
The incentive scheme representations
EBIT and actual costs
Elements of the scheme applying equally
Were the representations about the incentive scheme misleading?
No less favourable representations
Were the no less favourable representations misleading?
The growth representations
Was it misleading to describe Vision as a secure, growing and stable company?
Was the Vision model fatally flawed?
Conclusion - growth representations
Reliance and causation issues
Did the defendants rely on the representations?
The causation issue
Defendants’ damages claim
The methodology adopted by the experts
The measure of damages
The validity of the assumptions the experts were instructed to adopt
Was a loss suffered?
Vision’s simplified comparison of the defendants’ position
Date of transaction analysis
Conclusion – defendants’ damages claim
Late application for leave to amend counterclaim
PART VII – CONCLUSION
PART I : INTRODUCTION, ISSUES AND BACKGROUND
Introduction
This case arises from the sale in 2006 of an ophthalmologist’s practice in Central Queensland to a public company. The ophthalmologist agreed to work for the company for at least five years. In late 2009 he purported to terminate his employment contract and then set up new practices. The company says he breached his contract in doing so. The ophthalmologist counterclaims for breach of contract and also alleges he was induced to sell his practice by misleading representations. The claim and counterclaim each seek tens of millions of dollars.
Vision is Australia’s largest provider of ophthalmic care. It comprises ophthalmic consulting facilities, day surgeries and refractive and laser eye surgery centres. It is the ultimate parent company of Icon, which also provides ophthalmic services.
Dr Kitchen is an experienced ophthalmologist. He practices in Central Queensland. Until April 2006 his practice was owned by Icon, a wholly owned subsidiary of Swordfish Nominees Pty Ltd, the sole share in which was held by the MDK Trust. Dr Kitchen and his wife were trustees of the MDK Trust. Vision agreed to purchase Swordfish and thereby acquired Dr Kitchen’s practice. The sale comprised:
(a)a Share Purchase Agreement executed and exchanged on 3 May 2006 but effective 1 April 2006, and which was subsequently amended on 9 August 2007, 17 December 2007 and 25 July 2008;
(b)an Escrow Deed; and
(c)a Service Agreement between Icon and Dr Kitchen.
In short summary, Vision purchased the share in Swordfish by agreeing to make cash payments, assume certain liabilities and issue shares in vision. Certain shares were to be held in escrow under the Escrow Deed. The defendants as the sellers agreed to restraints on participating in a competing business, canvassing business and enticing a “Client” away from Vision’s business. The Service Agreement was for an initial term of five years. It imposed similar restraints on Dr Kitchen.
In 2009 Dr Kitchen attempted to negotiate new terms for his Service Agreement, but no agreement was reached. He resigned as a director of Vision on 17 August 2009. On 25 August 2009 Vision and Icon received a facsimile from Dr Kitchen’s lawyers which alleged that, in breach of cl 9.1(a) of the Service Agreement, he had not been notified that numerous Salaried Doctor Partners had been offered more favourable terms and conditions in relation to certain matters. The letter required the alleged breaches to be remedied within 14 days.
On 8 September 2009, and prior to the expiry of the 14 day period, Dr Kitchen purported to terminate the Service Agreement pursuant to cl 15.3. Later that day Vision and Icon’s solicitors responded to the letter of 25 August 2009. Their response denied the alleged breaches of the Service Agreement, and notified
Dr Kitchen of certain terms offered by Vision to individuals who were Salaried Doctor Partners. It also offered to amend Dr Kitchen’s Service Agreement to incorporate any or all of the terms at Dr Kitchen’s election.
On 10 September 2009, and without prejudice to the purported termination notified on 8 September, Dr Kitchen purported to terminate the Service Agreement. His solicitors contended that Vision and Icon’s solicitors’ letter of 8 September 2009 was incorrect in its interpretation of the Service Agreement and failed to remedy the alleged breaches.
In these proceedings Vision and Icon allege that by reason of Dr Kitchen’s purported termination of the Service Agreement on 8 September 2009 or on
10 September 2009, Dr Kitchen:
(a) wrongfully terminated the Service Agreement; and
(b)evinced an intention to no longer perform essential and fundamental terms of the Service Agreement or to be bound by it,
and that, in the circumstances, Dr Kitchen repudiated the Service Agreement.
On 13 September 2009 Icon purported to accept Dr Kitchen’s alleged repudiation of the Service Agreement and elected to terminate the Service Agreement with effect from that date. Icon seeks damages by reason of Dr Kitchen’s alleged repudiation.
Vision and Icon also seek to enforce restraints contained in cl 17 of the Service Agreement and in cl 12 of the Share Purchase Agreement. They also seek a declaration that certain shares remain subject to the Escrow Deed and that the defendants are not entitled to have them released.
The defendants reject these claims and bring a counterclaim. First, Dr Kitchen claims that Icon breached a term of the Service Agreement which required it to notify him as soon as Vision or any related body corporate entered into any New Doctor Agreement with any Salaried Doctor Partner in circumstances where
Dr Kitchen has or will have a right under cl 3.3. Second, the defendants claim rights under the Escrow Deed, arguing that Dr Kitchen was a “Good Leaver” as defined in the Escrow Deed. Third, the defendants claim that prior to their agreeing to sell Dr Kitchen’s practice certain representations were made to Dr Kitchen, and that these representations were misleading.
Issues in dispute
The pleadings are voluminous and complex. Prior to the trial the parties each formulated a list of issues that remained in dispute. They may be summarised as follows.
1. Whether as at 25 August 2009 Icon was in material breach of the Service Agreement?
This issue turns on the proper construction of the Service Agreement. The issues of construction centre upon cl 3.3 of the Service Agreement which provides:
“3.3The Ophthalmologist and the Company will, if the Ophthalmologist elects (in the Ophthalmologist’s sole discretion) promptly amend the terms of this Agreement as necessary from time to time so that the terms of this Agreement (severally and overall) are no less favourable to the Ophthalmologist than terms offered under any service or employment agreement (New Doctor Agreement) to any Salaried Doctor Partner by the Company, VGH or any Related Body Corporate of VGH at any time after the Effective Date during the Term other than in relation to:
(a) Salary;
(b) the Accrued Entitlements;
(c) annual leave;
(d) conference leave;
(e) the Business Plan; and
(f) the PI Cover Amount,
which shall remain as provided for in this Agreement.”
The following substantial issues of interpretation arise.
2. The meaning of “Salaried Doctor Partner”
Vision contends that the term limits the comparison under cl 3.3 to agreements entered into with a doctor whose practice had been acquired by Vision or one of its related entities, including Associates who have sold an earnings stream to Vision but does not apply to Associates who have not done so and Visiting Surgeons.
The defendants originally contended that it has the meaning described in cl 1.3 of the Service Agreement, namely an ophthalmologist who is a party to a service or employment agreement with Vision or a related body corporate of Vision and such other persons as the Board approves from time to time to be classified as Salaried Doctor Partners. In closing addresses the defendants did not press the argument that the term “Salaried Doctor Partner” includes Visiting Surgeons or Associates who have not sold an earnings stream to Vision.
3. The meaning of “New Doctor Agreement”
Vision contends that the term limits the comparison under the clause to agreements entered into with the doctor for the initial five year service period after the acquisition of his or her practice.
The defendants contend that it applies to service or employment agreements (being either new agreements or new terms modifying or varying existing agreements) with doctors who have previously had an agreement with Vision or a related body corporate of Vision if such service or employment agreements were made after 1 April 2006 (“the Effective Date of Dr Kitchen’s Service Agreement’).
4. The meaning of “in relation to Salary” and “in relation to the Business Plan” in cl 3.3 of the Service Agreement
The particular issue is whether the terms offered under any New Doctor Agreement to any Salaried Doctor Partner under the agreements relied upon by Dr Kitchen as being more favourable than the terms of the Service Agreement are in relation to “Salary” and/or the “Business Plan”, so that those terms are excluded from the operation of cl 3.3 of the Service Agreement. This issue raises the following issues of construction.
5. The meaning of “in relation to Salary”
Whether the exclusion in cl 3.3 of the Service Agreement in relation to “Salary” extends to terms in relation to the “Salaried Doctor Partner Incentive Scheme” set out in Annexure 3 to the Service Agreement (as Vision contends) or (as the defendants contend) whether, save for that part of the Salaried Doctor Partner Incentive Scheme referred to in cl 10.2 of the Service Agreement, the Salaried Doctor Partner Incentive Scheme is not “in relation to Salary”.
6. The meaning of “in relation to ... the Business Plan”
The particular issue is whether the contents of a Business Plan, agreed separately on an annual basis, can be characterised as a term of a service or employment agreement. Vision contends that the exclusion is engaged in respect of terms referred to in the Business Plan. The defendants contend that the exclusion does not apply when such terms are merely mentioned in the Business Plan and are not founded in the provisions of the Business Plan.
7. The meaning of “severally and overall”
Vision contends that the words require a comparison between Dr Kitchen’s Service Agreement (having regard to that agreement as a whole and extrinsic facts known to the parties at the time it was executed) on the one hand, and the relevant New Doctor Agreement and the accompanying acquisition agreement on the other hand.
The defendants contend that the words require a comparison between the terms of his Service Agreement on the one hand (both severally and/or overall) and the terms of the relevant New Doctor Agreement on the other hand.
Further, in this context, Vision contends that cl 3.3 of the Service Agreement does not permit Dr Kitchen to aggregate from various New Doctor Agreements, those terms considered more favourable on an individual basis without regard to the whole of the terms of the New Doctor Agreement from which those terms are drawn.
8. Was there a material breach of Dr Kitchen’s Service Agreement?
Depending upon the resolution of the issues of construction outlined above, it will be necessary to determine whether Icon breached Dr Kitchen’s Service Agreement by failing to notify him of the terms offered under any New Doctor Agreement to any Salaried Doctor Partner at any time after 1 April 2006 other than in relation to excluded matters. Having regard to the proper construction of the Service Agreement, the issue is whether Icon breached cl 9.1(a) by failing to notify Dr Kitchen of any of the terms relied upon by him in paragraph 5 of the counterclaim.
If Icon breached cl 9.1(a) the next issue is whether it was a “material breach” for the purposes of cl 15.3 of the Service Agreement and, in particular:
(a) did Dr Kitchen have notice of any of the terms that are now sought to be relied upon by him and take no steps to have those terms incorporated into the Service Agreement?; and
(b) would Dr Kitchen have taken up the terms that are relied upon by him if they had been notified to him under cl 9.1(a)?
Another issue is whether any material breach was the subject of written notification of the breach by Dr Kitchen. Vision contends that Dr Kitchen can only rely on clause 15.3 if notice was given to it and it had a chance to remedy the notified breach.
If a material breach was notified, did Vision fail to remedy the breach within 14 days of written notification of the breach? The defendants now acknowledge that the purported termination on 8 September 2009 occurred before a right to terminate had arisen under cl 15.3. The issue then is whether Icon’s solicitor’s letter of 8 September 2009 remedied the material breach.
The next issue is whether the Service Agreement was validly terminated by the solicitor’s letter dated 10 September 2009 or otherwise pursuant to cl 15.3 of the Service Agreement?
An associated issue is whether Dr Kitchen is entitled to terminate in reliance upon an alleged breach of the Service Agreement that was not identified in the Notice of Breach delivered on 25 August 2009.
9. Alleged repudiation and its consequences
Did Dr Kitchen repudiate the Service Agreement by purporting to terminate it and by notifying an intention, without proper cause, not to further comply with obligations under it? Dr Kitchen accepts that if his argument for breach is not accepted then he repudiated the Service Agreement.
If he did repudiate the Service Agreement, did Icon suffer any, and if so what, loss or damage as a result of such repudiation?
10. Restraint of trade provisions
In the event that Dr Kitchen validly terminated the Service Agreement pursuant to cl 15.3, then the parties accept that the restraints in cl 17 of the Service Agreement and/or cl 12 of the Share Purchase Agreement ceased to apply by virtue of cl 17.7 of the Service Agreement and cl 12.7 of the Share Purchase Agreement
In the event that the restraints contained in the Service Agreement and/or the Share Purchase Agreement survived the termination/purported termination of the Service Agreement, are such restraints contrary to public policy and void? If so, which restraints are void, and which restraints are enforceable?
To the extent that the restraints of trade are enforceable, did Dr Kitchen breach them? In particular, did Dr Kitchen’s conduct in commencing practice in Rockhampton and Gladstone in competition with Vision Group practices breach those restraints?
If so, what loss and damage did Icon and/or Vision suffer as a result?
11. Icon’s claim for breach of contract
If Dr Kitchen was not entitled to terminate the Service Agreement, what loss did Vision suffer as a consequence of that termination:
(a) would Dr Kitchen have been prevented from practicing in competition with Vision practices in Rockhampton and Gladstone for a period after the expiry of the Service Agreement?
(b) would Vision have continued to operate the Rockhampton and Gladstone clinics after the expiry of the Service Agreement?
(c) what is the appropriate basis upon which to assess any loss suffered by Vision as a consequence of the termination of the Service Agreement and the subsequent closure of the Rockhampton and Gladstone Clinics.
12. Dr Kitchen’s contract claim under the Service Agreement
If Vision breached cl 9.1(a) of the Service Agreement, what loss did Dr Kitchen suffer as a consequence of that breach by not being afforded the opportunity to amend his Service Agreement to adopt those terms? In particular:
(a) which terms would have been incorporated into the Service Agreement;
(b) what is the appropriate basis upon which to assess any loss suffered by Dr Kitchen as a consequence of the breach?
13. The defendants’ counterclaim under the Escrow Deed
The issues are:
(a) whether Dr Kitchen was a "Good Leaver" within the definition of that term in the Escrow Deed;
(b) whether it was an implied term of that deed that in the event of Dr Kitchen being a Good Leaver and otherwise validly terminating his Service Agreement prior to its expiry, the MDK Trustees would thereafter be entitled to undertake the restricted actions identified in clauses 1.1 and 1.2 of the Escrow Deed;
(c) whether Vision was obliged to take steps necessary to release the restricted securities from escrow and whether it should now be ordered to do so.
14. The defendants’ counterclaim for misleading or deceptive conduct
In the period before the defendants agreed to sell Dr Kitchen’s practice to Vision, did Vision make the representations alleged in paragraph 36 of the third further amended counterclaim regarding:
(a) the Practice Enhancement Fund;
(b) the Incentive Scheme;
(c) the No Less Favourable principle;
(d) the financial position of Vision and the prospects for its business.
If so, were such statements misleading and deceptive so as to contravene s 52 of the Trade and Practices Act 1974 (Cth) or s 1041H of the Corporations Act 2001 (Cth)?
If so, did the defendants rely on those representations, and were they thereby induced to enter into the agreements to sell the practice?
If the representations had not been made, would Dr Kitchen have decided to sell his practice to Vision?
If Dr Kitchen would not have sold his practice to Vision, how would he have developed and operated his practice after 2006?
What is the appropriate basis upon which to assess any loss suffered by the defendants as a consequence of the alleged contraventions?
The establishment of Vision and the Vision model
Vision has its origins in 2001 with four founding partners who at that time operated surgeries in Victoria. The founding partners included Dr Reich and Dr Unger, who gave evidence. In around 1999 or 2000 Ms Jayne Shaw approached Dr Unger on behalf of her then employer about the acquisition of his and other ophthalmic practices to form an integrated ophthalmic group. Dr Unger had similar ideas at the time about the potential to develop a business model for such a group. Ms Shaw and Dr Unger worked on developing a model for the consolidation and corporatisation of the Australian ophthalmic industry with a view to:
· acquiring existing compatible practices and encouraging visiting surgeons to increase surgical volume;
· establishing new practices in existing day surgery centres;
· acquiring the consulting and surgical revenues of high volume cataract surgeons who did not have their own day surgery centres.
Vision Group Holdings Pty Ltd was established in November 2001 with a view to consolidating the private ophthalmic industry by both acquiring existing practices and establishing new “greenfield” sites. Mr Shane Tanner became and remains its chairman. Dr Unger became its initial Chief Executive Officer, and from 2001 until November 2006, Ms Shaw was its Chief Operating Officer. Vision Group Holdings Pty Ltd successfully listed on the Australian Stock Exchange on 17 December 2004, and on 28 October 2011 it changed its name to Vision Eye Institute Ltd. For convenience, unless the context requires otherwise, I will refer to the former private company as well as the current company as “Vision”.
Vision’s first acquisition was of the shares in a company which owned the surgeries operated by the founding partners and a company which purchased and on-sold prosthetics for cataract surgery. These acquisitions were funded by a share subscription in Vision, the participants in which were AMP Investment Services, entities associated with Mr Tanner, Ms Shaw’s family trust and the founding partners. The proceeds of the share subscription were also to provide working capital to Vision to acquire and establish other ophthalmic practices. The share subscription raised $27,260,000. About half of this amount was from the founding partners by way of part consideration under the acquisition agreements. AMP Investment Services acquired about 50 per cent of the shares in Vision. The founding directors of Vision were Dr Unger, Ms Shaw, Mr Tanner and a representative from AMP Investment Services.
The structure of the acquisition of the founding practices was to be the model for later practice acquisitions. Under that model Vision or a related entity acquired a proposed Salaried Doctor Partner’s practice by way of a number of contracts which included a purchase agreement, an escrow deed and a share buy back deed. When Vision acquired a doctor’s practice it purchased a revenue stream for an agreed period consisting of three possible sources:
· Consultation fees for patient examinations and tests;
· Surgical fees for ophthalmic procedures;
· Day surgery theatre fees.
As with the acquisition of the founding practices, later acquisitions followed the same basic model:
(a)The total consideration was calculated by applying an acquisition multiple to the underlying Earnings Before Interest and Tax (EBIT) of the practice less an agreed salary;
(b)The total consideration paid to the owners of the practice was split between cash and equity in Vision;
(c)The ophthalmologist selling the practice entered into a Service Agreement with Vision which governed remuneration, employment conditions, entitlements and obligations;
(d)The ophthalmologists who owned the practice being acquired by Vision became “Salaried Doctor Partners” of Vision.
Vision’s arrangements with ophthalmologists
Vision entered into contracts with ophthalmologists as either:
(a)Salaried Doctor Partners, who were salaried employees with equity in Vision and whose practices had been acquired by Vision or a related entity for cash and shares in Vision at an agreed multiple of historical EBIT;
(b)Associates, who worked at Vision practices for a share of the revenue they generated; or
(c)Visiting Surgeons, who were independent surgeons using Vision day surgeries for some or all of their surgical procedures.
The agreements entered into by Vision with Salaried Doctor Partners, Associates and Visiting Surgeons differed.
In the case of Salaried Doctor Partners whose practices were acquired, Vision was purchasing an earnings stream for an agreed period. The common mechanism for acquiring an existing practice was a staged acquisition where, in addition to a payment on completion, there was also an “earn out” provision. The “earn-out” provision allowed an additional payment or payments to be made at agreed stages and upon reaching milestones if the practice had grown and improved its earnings.
The acquisition consideration, which comprised cash and shares, was determined by multiplying the particular practice’s historical EBIT less an agreed salary, by an agreed multiple. As to these components, EBIT depended upon the number of sessions the doctor worked, the amount of leave taken and the type of procedures undertaken. The negotiated salary also had a relationship to the historical EBIT of the practice, and depended on similar factors. The agreed multiple was determined by reference to factors such as the number of doctors in the practice, whether an acceptable succession plan had been implemented and whether the practice had viable operating and laser theatres. Vision also assessed risk, long term viability and potential growth. The multiples varied between 5 and 7.4 times the EBIT of the practice. A multiple of 5 times earnings was commonly applied when Vision acquired a sole practitioner’s practice. Vision preferred to acquire practices which comprised a number of ophthalmologists.
As employees of Vision, Salaried Doctor Partners were entitled to certain benefits, such as annual leave, conference leave, personal leave, long service leave, superannuation and participation in an incentive scheme. The agreed base salary that a Salaried Doctor Partner was to receive was deducted in arriving at the practice’s EBIT. The salary and other benefits a Salaried Doctor Partner was to receive was linked to and influenced the amount to be paid by Vision for the practice. For example, an ophthalmologist who entered into acquisition contracts with Vision could negotiate a higher annual salary by agreeing to reduce the acquisition consideration.
To protect Vision’s investment in acquiring a practice, the acquisition contracts were conditional upon the proposed Salaried Doctor Partner entering into a service or consultancy agreement with Vision or a related entity of Vision, and the terms of that service or consultancy agreement were conditional upon completion of the acquisition contracts. Typically, under these service or employment agreements, Salaried Doctor Partners agreed to:
(a) work with Vision for a minimum term of five years;
(b) receive an agreed base salary;
(c)achieve annual EBIT and growth targets by committing to the same number of sessions as when Vision acquired the practice;
(d)not compete with Vision at the end of the term for a specified period in certain locations.
Associates and Visiting Surgeons with whom Vision contracted were in a different category to Salaried Doctor Partners whose practices had been acquired by Vision. In the case of Associates, Vision collected all consulting, surgical and day surgery fees generated by associates who were paid a percentage of that revenue. Typically it was 60 per cent. Visiting Surgeons generated surgery fees for Vision and were entitled to the revenues they earned from surgical procedures.
Associates were not employees, but were engaged as independent contractors. In her or his first few years as an Associate, the ophthalmologist would try to build up an earning stream. If they were considered suitable candidates to become a Salaried Doctor Partner they would be given the opportunity to sell their “practice”. Such an acquisition differed from the acquisition of an existing ophthalmic practice including assets, staff, services and goodwill of a practice with financial records demonstrating a history of earnings and costs from which EBIT could be calculated. An Associate selling a “practice” was in effect selling a revenue stream which Vision expected to increase. Associates who became Salaried Doctor Partners typically did so through “staged acquisitions”, by which Vision purchased their practice at a multiple of EBIT for a capital value. However, because they generally only had small practices at the time, Vision agreed to later purchase any additional EBIT the doctor generated over the following few years.
The conversion of an Associate to a Salaried Doctor Partner contributed to the financial performance of Vision because, upon conversion to Salaried Doctor Partner status, Vision received 100 per cent of the ophthalmologist’s revenue in return for an agreed salary and equity participation compared to 40 per cent of the revenue the Associate generated.
In the case of a practice that was owned and operated by an ophthalmologist or a group of ophthalmologists, where historical earnings and costs could be ascertained from the practice’s financial records, the practice’s EBIT could be determined by reference to historical costs. In the case of Associates who were engaged by Vision with a view to building up their practice, the EBIT was not based upon the doctor’s actual costs because such historical data was not available. In those cases, Vision applied a deemed cost base of usually 40 per cent of revenue in determining the doctor’s EBIT.
Unlike Salaried Doctor Partners, Associates whose practices were not acquired:
(a) did not receive any acquisition consideration;
(b) did not enter into acquisition contracts with Vision or a related entity;
(c)were engaged on different contractual conditions to those of Salaried Doctor Partners;
(d)were paid an agreed percentage of their billings rather than an annual salary;
(e)did not receive any employee benefits, such as leave entitlements, superannuation contributions or eligibility for incentive scheme payments; and
(f)were not subject to a minimum contractual term.
The expansion of Vision
After its establishment in 2001 with the acquisition of the founding partners’ practices, Vision embarked upon the acquisition of existing ophthalmic practices in Queensland, New South Wales and Victoria. Its acquisition focused on practices which had the following attributes:
“· Demonstrable growth over a three year period;
· The expansion of Vision’s geographical footprint;
· Enhancement of Vision’s consulting and surgical expertise;
· Synergies which allowed Vision to enhance earnings;
· A culture consistent with Vision;
· Capacity for future EBIT growth of ten per cent;
· A strategy for business succession.”
Doctors whose practices might be suitable for Vision were identified. Vision sought to identify the best ophthalmologists with good clinical practices and existing day surgeries, or the opportunity to establish day surgeries. Practices with strong growth potential could attract new doctors and increase overall profitability.
Once a potential practice was identified, due diligence was undertaken to ensure that it met Vision’s criteria. Dr Unger and Ms Shaw would meet with the doctor or group of doctors comprising the practice to discuss the mechanics of the acquisition, including the amount and method of consideration to be paid. Dr Unger tended to explain the Vision model to the doctors, whilst Ms Shaw addressed the business and performance aspects of the practice. During Ms Shaw’s time as Chief Operating Officer (2001 – 2006), Vision acquired around 25 to 30 existing ophthalmic practices.
From time to time as Vision’s business grew changes were made to contracts and other matters. For example, the original Salaried Doctor Partners, such as Dr Reich, entered into a service deed for a period of five years which did not include an annual performance bonus to boost the agreed salary. By 2005 Vision had developed a Salary Partner Incentive Scheme to reward salaried partners through the provision of an annual performance bonus if certain growth targets were met and possible agreement, in the light of expected future performance, of a permanent base salary increase. The incentive bonus was incorporated into each new Salaried Doctor Partner’s Service Agreement. Under the scheme, Salaried Doctor Partners received up to 60 per cent of any amount they achieved over an agreed performance target.
The annual performance target tended to be an increase of 10 per cent per annum, compounding. Doctors found it hard to meet the 10 per cent compound growth target for the life of their contract, and this was a topic the doctors would often raise with senior management.
Ms Shaw explained that there were “vastly different circumstances in which each Salaried Doctor Partner joined Vision and the variables applicable to their particular practice”. However, the body of each doctor’s Service Agreement was largely the same.
Vision’s business model did not operate so that each Salaried Doctor Partner would be employed on exactly the same terms and conditions under their Service Agreements. As Ms Shaw noted, “the arrangements varied greatly with respect to terms and conditions of employment, primarily because they reflected what the individual doctor had been doing prior to the acquisition of the practice by Vision”. The variables included:
(a)the number of sessions worked per week. For example, one doctor partner might work 10 sessions per week and be expected to continue to do so; whereas another doctor partner would work less sessions. Their EBITs, and consequently the purchase price which Vision paid to acquire their practices, reflected that;
(b)the amount of annual leave taken;
(c)whether the doctor worked in the public or private sector;
(d)whether the doctor performed only cataract or laser surgery (which was highly profitable) or only macular degeneration work (which until 2010 and the advent of a regular injection treatment was generally less profitable);
(e)the initial EBIT calculation (that is, whether by reference to actual costs or on a deemed cost basis if no historical data was available); and
(f)whether the doctor participated in the Salary Partner Incentive Scheme.
In 2004 Vision’s shareholders agreed to consider an Initial Public Offer (“IPO”) in order to realise all or part of their investment in Vision. Vision’s board resolved to issue a Prospectus, under which Vision would offer 39,100,000 ordinary shares for subscription at $2.30 per share. Vision successfully listed on the Australian Stock Exchange on 17 December 2004.
Dr Kitchen and his practice
Dr Kitchen was born in 1964, and graduated from Flinders University in South Australia in 1987. In January 1996 he became a Fellow of the Royal Australian and New Zealand College of Ophthalmologists (“RANZCO”), and thereafter began building his ophthalmic practices. He established a laser-based clinic in Mackay in 1998. In 2000 he started a clinic in Gladstone and in 2001 he established a clinic in Rockhampton. In 2001 he also opened a day surgery in Mackay.
By 2004 he was also providing surgical services to Dr John Noble’s practice in Bundaberg. Dr Noble’s practice was called the Central Coast Eye Clinic. This is to be distinguished from Dr Kitchen’s practice, the Central Queensland Eye Centre (CQEC). Dr Kitchen spent about two days every four weeks at the Mater Hospital in Bundaberg, operating on patients of Dr Noble, who had clinics at Bundaberg and Hervey Bay.
In late 2005 Dr Kitchen divested himself of half of his interest in the laser clinic. By 2006 his CQEC practice consisted of consulting clinics at North Mackay, the Mater Medical Centre in Rockhampton and the Mater Medical suites in Gladstone. He also conducted surgical procedures at Mackay Day Surgery as well as at private hospitals in Rockhampton, Gladstone and Bundaberg. In 2006 there were about ten employees at the Mackay practice, two at the Gladstone practice, two at the Rockhampton practice and fifteen at Mackay Day Surgery. Dr Kitchen worked full time across these clinics, assisted by other doctors who worked as consultants in Rockhampton and in Gladstone. These doctors were primarily medical consulting ophthalmologists and not surgical ophthalmologists. Dr Kitchen’s model was to secure the services of ophthalmologists to do most of the consulting, and refer surgical procedures (which were better remunerated than consulting work) to him. By late 2005 and early 2006 he was working full time six days a week, and would work a seventh full day approximately every four weeks.
Prior to the acquisition of his practices by Vision, the CQEC corporate structure consisted of Icon Laser (Aust) Pty Ltd which carried on the ophthalmic practices in Mackay, Rockhampton and Gladstone. Swordfish Nominees Pty Ltd held all of the shares in Icon and Dr Kitchen and his wife, Michelle, in their capacity as trustees of the MDK Trust jointly held the sole share in Swordfish. The Mackay Day Surgery had a different corporate structure.
By late 2005 CQEC’s profit had increased significantly, and Dr Kitchen hoped to continue this growth. An email he sent to his accountant, Mr Mackenzie, in November 2005 revealed that he saw it as being to his detriment at the time to bring another surgical ophthalmologist into his practice. Prior to considering a sale to Vision, Dr Kitchen had been operating as a “one man band”, utilising other ophthalmologists to consult and refer surgical work to him. He had no plans to find a partner to perform surgery. The Vision model presented an opportunity to exploit CQEC’s potential for growth.
Negotiations between Vision and Dr Kitchen in late 2005 and early 2006
In 2005 Dr Kitchen received favourable reports about Vision. He began to consider selling his practice to Vision after being told that it bought practices at their EBIT amount times a multiple of between 5 and 7.
In October 2005, Dr Kitchen asked a friend to speak to Dr Unger about whether Vision might have an interest in acquiring Icon. An outline of Dr Kitchen’s practice earnings was given to his friend in order for it to be provided to Dr Unger. Contact was established between Dr Kitchen and Dr Unger. Discussions also occurred between Vision’s Chief Financial Officer, Mr Hansen, and Dr Kitchen’s accountant, Mr MacKenzie. At about this time Dr Noble indicated that he also was interested in selling his practice to Vision.
On 14 November 2005, shortly after initially making contact with Dr Unger,
Dr Kitchen sent a lengthy email to his accountant. It contained a detailed analysis by Dr Kitchen of a document produced by Bell Potter Securities which had reviewed Vision as an investment opportunity, and the Vision Prospectus.
Dr Kitchen obviously had read both documents thoroughly. He was attracted by the opportunity that the Vision model presented. He had turned his mind to how his practice would be a good fit for Vision and the mutual benefits of the transaction. The email shows that Dr Kitchen was excited by the prospect of receiving potentially $20 million for the sale of his practice.
On 14 November 2005 Dr Kitchen spoke to Dr Noble about acquiring his practice should Dr Kitchen wish to pursue a sale of his practice to Vision. Dr Kitchen understood that Dr Noble’s practice would be unattractive to Vision on its own.
On 21 November 2005 Dr Kitchen received from Mr Hansen a PowerPoint presentation titled “Associates and New Partners”. A few days later Dr Kitchen participated in a teleconference with Dr Unger, Mr Hansen and Mr MacKenzie. The teleconference ended with a plan for a meeting in Mackay to discuss the proposed sale of Dr Kitchen’s practices to Vision. In anticipation of that meeting, Dr Kitchen, with the assistance of a public relations and marketing consultant, prepared a presentation about his and Dr Noble’s ophthalmology practices for the purpose of presenting it to Vision at the planned meeting. This substantial document was titled “Sharing the Vision in Queensland”.
In early January 2006 Dr Unger and Ms Shaw met with Dr Kitchen at his Mackay clinic. Dr Kitchen gave a presentation based on the “Sharing the Vision in Queensland” package. Dr Unger also delivered a presentation about Vision. This was a standard presentation that Dr Unger gave at initial meetings with doctors at the time, and consisted mostly of publicly available information that gave doctors a general overview of Vision’s business model, structure and performance. Discussions continued the next night and Mr MacKenzie participated in them.
Dr Noble was not involved in the negotiations. Dr Kitchen proposed that Vision acquire both his and Dr Noble’s practice.
There is some contention about what was said by Dr Unger during the presentation. These issues will be considered later in the context of Dr Kitchen’s counterclaim for alleged misleading and deceptive conduct.
After Ms Shaw spent two days in Mackay discussing the practice with Dr Kitchen and his office manager, Vision decided to explore further a possible acquisition. A Heads of Agreement was negotiated and signed on 7 February 2006 after which a due diligence process commenced. Over this period Mr Hansen, Ms Shaw and others from Vision worked with Dr Kitchen, Mr MacKenzie and his office manager to construct a business plan prior to the sale of the practice being agreed and finalised. A business plan included matters such as the practice’s revenue and normalised EBITA, its profile and expansion opportunities, annual growth requirement and EBITA targets. Generally, the EBITA base and targets reflected what the doctor had been achieving in the practice prior to the acquisition. These figures also formed the basis for determining how much Vision paid to acquire the practice. The individualised business plan became an annexure to the doctor’s Service Agreement.
The acquisition of Dr Kitchen’s practice
On 26 April 2006 Vision’s board considered and approved the proposed acquisition of Dr Kitchen’s practice. The sale was formalised in the acquisition contracts earlier referred to and by Dr Kitchen’s entry into the Service Agreement with Icon.
Dr Kitchen controlled a complicated structure of different entities. Prior to the sale to Vision the Central Queensland Eye Centre was controlled by Icon, which was owned by Swordfish. The Mackay Day Practice was operated by Mackay Day Surgery Pty Ltd. The shares in that company were held jointly by National Day Surgeries Pty Ltd and a company controlled by Dr Kitchen, Quantum Lasers Pty Ltd.
In October 2005 before his direct dealings with Vision, Dr Kitchen restructured his financial arrangements. In October 2005, 50 per cent of the shares in Icon were held by Icon Laser International, a company incorporated in Delaware. Dr Kitchen caused Icon to borrow approximately $7.8 million from the National Australia Bank. Icon then lent this money to Swordfish which used the funds to purchase the 50 per cent of shares held by Icon Laser International in Icon. This had the effect of giving Icon effective control over all of the Central Queensland Eye Centre practices.
Vision’s acquisition of the Kitchen and Noble practices involved a number of steps. Icon purchased the assets from Dr Noble’s practice for $300,000 and paid Dr Noble and his wife $3.95 million for the shares in the company which operated Dr Noble’s practice. Swordfish then purchased the shares in Mackay Day Surgery Pty Ltd for $197,132.00. Vision then purchased Swordfish which owned Icon and Mackay Day Surgery Pty Ltd.
The consideration for the acquisition of the Kitchen and Noble practices was to be paid in three phases. Part of the first phase was the payment of $4.25 million, which under the agreements was the consideration attributed to Dr Noble’s interests. On any view this was far more than Dr Noble’s practice was worth. Dr Noble reached a side agreement with Dr Kitchen to the effect that he would receive $1.85 million out of the $4.25 million paid for his practice and Dr Kitchen would receive a “gift” of $2.4 million.
Vision also assumed loans owed by entities controlled by Dr Kitchen to the NAB of $7.8 million. The defendants contest that Vision’s assumption of the NAB debt formed part of the consideration for the acquisition of the practice. But they accept that for the purpose of calculating their damages claim for misleading or deceptive conduct that they received that advantage.
Under the first phase of the acquisition shares in Vision were issued with an ascribed value of $5,687,503. Of them, 1,029,412 shares were held in short term escrow ($4,375,001) and 308,824 shares were held in long term escrow ($1,312,502).
The second phase of the acquisition was an adjustment to the first phase payment to take account of the audited EBITA figure for the 2006 financial year. This figure became available after the agreements were executed. It was slightly lower than the estimate the agreements adopted and so $446,379 was repaid to Vision.
The third phase payment was made in 2009 and reflected an “earn out” bonus for increasing the EBITA of the practice to 133 per cent of the audited EBITA for the 2006 financial year. The payment totalled $4,810,663: $3,607,997 in cash and $1,202,665.39 in equity.
In addition, $460,000 was paid, in the third phase payment, to reward Dr Kitchen for recruiting four doctors to Vision. Under the 9 August 2007 Deed of Amendment, Dr Kitchen was entitled to payment of $115,000 for each doctor he recruited.
Developments in Vision after 2006
Shortly after the acquisition of Dr Kitchen’s and Dr Noble’s practices, Vision consisted of about 25 clinics. It had six clinics in Melbourne, seven clinics in Sydney and twelve clinics in Queensland. Of the Queensland clinics, two were in Brisbane, two were on the Gold Coast, two were in Townsville and the other six had been acquired from Dr Kitchen and Dr Noble in Central Queensland. Vision’s annual revenue for the year ended 30 June 2007 was $99,100,000. Its head office had about 11 employees. At times, as many as 500 employees worked in its various clinics. They included medical practitioners, other clinicians (such as optometrists and nurses) and administrative staff.
Because of the number of practices that Vision had acquired, there were a limited number of existing practices in Victoria, New South Wales and Queensland which met Vision’s criteria for acquisition. Vision’s continued growth depended increasingly on two factors. The first was having existing clinics redeveloped or relocated to alternative sites. The second was on recruiting into existing Vision practices junior doctors who would become Salaried Doctor Partners.
Each practice or clinic within Vision had a budget against which its financial performance could be measured. Vision’s management reported to the board about instances where a clinic was not meeting its budgeted performance. The Board would attempt to identify the problem and to take steps to improve the clinic or doctor’s financial performance. There could be a number of reasons why a clinic or doctor did not reach the budgeted financial performance from time to time. Some were internal. For example, if a clinic added a new doctor its financial performance might fall in the short term while the new doctor established his or her practice. External factors also affected the financial performance of doctors and clinics, such as a revision of government fee schedules or significant changes in the market for services. For example, the demand for laser refractive surgery peaked in the late 1990s and declined after 2005 with demographic changes, and it declined further after the onset of the Global Financial Crisis in 2008. This had a significant impact on the financial performance of the Vision clinics which had substantial refractive surgery practices.
Still, most of Vision’s doctors and clinics, and the majority of practices achieved, or at least went very close to achieving, their budgeted financial targets. Despite some problems, Vision remained profitable. However, because of its numerous acquisitions over the years, it had substantial debts which its bankers required it to pay down from its profits.
Towards the end of the initial five year term of employment of doctors whose practices had been acquired by Vision, doubts arose in the market about whether the doctors would re-sign Service Agreements. As it happened, almost all of them did. But doubts at the time and Vision’s level of debt saw a loss in market confidence, and there was a sharp decline in Vision’s share price. This decline had an effect on the number of shares that would be required to fund an acquisition. In other words, with a greatly reduced share price, more shares would be required to equate to
40 per cent of the acquisition price for a practice. In addition, far more shares would be required to be issued to provide an incentive bonus which equated to a certain monetary amount.
Development of a new remuneration model by Vision
Any modification of the remuneration model for doctors was a complex exercise. Vision might improve a Salaried Doctor Partner’s remuneration by either increasing the base salary, by lowering the target required to earn an annual performance bonus or by some other modification. Such changes might make it easier for Vision to retain existing doctors. But increases in salary costs would tend to erode the company’s profit (unless there were corresponding increases in revenue) and any erosion in the company’s profit would have adverse implications for the value of the company, its share price and the payment of dividends. A decline in share price had implications for doctors who owned shares in Vision as a result of receiving shares as part of the sale of their practices or otherwise.
Developing a new model was also complicated because the individual circumstances and contracts of doctors whose practices had been acquired varied greatly. The salary and other benefits (such as leave) were linked to the earning capacity of the doctor’s practice which, in turn, was determined by factors such as the number of sessions worked and the type of practice. The salary and other benefits that a Salaried Doctor Partner negotiated at the time a practice was acquired also affected the amount of the acquisition consideration. A Salaried Doctor Partner in negotiating the acquisition by Vision of their practice would, within certain limits, negotiate a salary. This would have the effect of either reducing or increasing the acquisition consideration. As a result, the salary and other benefits contained in the Service Agreement varied between Salaried Doctor Partners.
Because of their different circumstances, any company-wide change to the remuneration model was likely to affect Salaried Doctor Partners in different ways, depending upon the adjustment that was made.
Given the complexity and financial implications of changing the remuneration model for doctors who had sold their practices, it is unsurprising that various remuneration models were explored. It was not until August 2010 that Vision’s board approved a new EBIT-based remuneration model for Salaried Doctor Partners who had completed their initial five year term with Vision. Vision had earlier considered various remuneration models. A revenue model was developed in 2008. In 2009 a model based on individual performance and profitability was considered. Another model was developed which involved applying a percentage of individual personal exertion EBIT (which comprised the majority of the remuneration) and a percentage of group EBIT (to encourage teamwork and sharing of patients) and total company EBIT. The effect of this EBIT model was that a Salaried Doctor Partner would receive approximately 43 per cent of their personal exertion EBIT.
The proposed EBIT model involved paying the Salaried Doctor Partners collectively substantially more and its adoption depended upon Vision obtaining the approval of its bankers. Vision needed to ensure that any increased cost in paying doctors would not breach its banking covenants.
Dr Kitchen was initially a strong advocate of the proposed EBIT model. Despite advising his support for it in various communications in early 2009, and ratification by Vision’s board of the EBIT model on 30 March 2009, on 5 April 2009
Dr Kitchen raised a number of questions about it and asked that a “franchise model” be costed and considered. He indicated that he would not “sign off” on the EBIT model without being personally satisfied that it was the best option. This presented a problem because the EBIT model had been supported in principle by all of the directors (except Dr Kitchen) on 30 March 2009. These matters were raised with Vision’s chairman and on 27 April 2009 the board endorsed the EBIT model.
The EBIT model which entitled doctors to payment of 43 per cent of their EBIT was implemented for doctors who had completed their initial five year term. The EBIT model was made progressively more generous for doctors as Vision reduced its debt level (which at its peak was about $117,000,000). The EBIT model was revised to increase payments to doctors to 65 per cent of their EBIT.[1]
[1]Dr Reich referred to a 60 per cent EBIT model, whereas other evidence and the experts referred to a 65 per cent remuneration model
Developments after the acquisition of the Kitchen and Noble practices
In the financial year ended 30 June 2007 (the first full financial year after
Dr Kitchen and Dr Noble sold their practices to Vision) Dr Kitchen focused on recruiting new doctors to work in the practices. The need to recruit was made more urgent when Dr Noble left in November 2006. Substantial costs were incurred by Vision in recruiting new doctors into the practices and with the establishment of new rooms at Hervey Bay and Maryborough. As a result, Dr Kitchen did not receive a performance bonus in the 2007 financial year. However he was paid an additional $115,000 by Vision for each of the four doctors he recruited.
Dr Horak and Dr Boets were recruited to work in the Mackay practice and they commenced employment in May and August 2007 respectively. In June 2007
Dr Kitchen relocated to Rockhampton and commenced to work there full time. He continued to conduct the practice in Gladstone.
In 2008 Dr Kitchen was entitled to a bonus under his Service Agreement. However, he reached an agreement with Vision to not receive the bonus and to, instead, incorporate it into the third phase payment under a Deed of Variation dated
25 July 2009. In 2009 Dr Kitchen received a bonus payment of $203,086 under his Service Agreement.
There were a number of changes to the management of Vision between 2007 and 2009 which altered Dr Kitchen’s relationship with Vision. Mr Rodaway had been Chief Operating Officer after February 2007 and became Chief Executive Officer and Managing Director in October 2007 when Dr Unger stepped down from that position. He resigned his position as Managing Director in October 2008 but continued to act in the position of CEO until December 2008 when the new
Chief Executive Officer, Mr Stamp, started employment.
Dr Kitchen had a falling-out with Mr Stamp shortly after Mr Stamp’s appointment. It arose in relation to an arrangement Vision had entered into with Dr Frank Martin. Dr Martin was the oldest Doctor Partner in Vision, a specialist paediatric ophthalmologist and a Professor at Westmead Hospital. Dr Martin was highly regarded in the ophthalmic community and publicly spoke very positively of Vision. However, paediatric ophthalmology is not as well remunerated as other specialities and is generally more labour intensive and Dr Martin had contributed little to Vision’s EBIT for some time. As a result and also because of his advanced age, he was encouraged to close his Macquarie Street practice. Dr Martin did not want to do this and indicated that he wished to buy back his practice. Vision decided to allow Dr Martin to purchase his rooms back, but to keep Dr Martin’s surgical work. Dr Kitchen was upset by these developments: he thought that the restraint of trade clauses should have been enforced against Dr Martin. He was concerned that failing to enforce the provisions would set a bad precedent for Vision.
The approach which Vision’s management, including Mr Stamp, adopted to resolving matters with Dr Martin amicably is understandable. Not permitting an elderly and highly-regarded paediatric ophthalmologist to resume his relatively
un-remunerative practice in Macquarie Street by enforcing a restraint of trade clause against him may have generated litigation and bad publicity for Vision. However, Dr Kitchen dissented from this approach and at around this time tendered his resignation as a director of Vision. Mr Tanner met with Dr Kitchen to discuss his concerns and, as a result, Dr Kitchen withdrew his resignation as a director.
However, Dr Kitchen still had a poor relationship with Mr Stamp and Vision’s Chief Operating Officer, Mr Thompson. Dr Kitchen’s witness statement complains about the fact that they starting liaising with Central Queensland doctors directly in relation to operational matters about the clinics in which they worked and, at times, without Dr Kitchen’s knowledge. It is unnecessary to explore, let alone determine, the rights and wrongs of this new approach. Dr Kitchen had not been used to management exerting such control. Notably, his witness statement refers in different places to these practices as “my practices”. Although Dr Kitchen had an obvious financial interest in the financial performance of these practices and was a Regional Director, his statement reads as if he still owned these practices and that he, not the managers of the company that owned them, was entitled to decide how they should be run.
Dr Kitchen’s attempts to renegotiate his contractual arrangements with Vision
Soon after joining Vision Dr Kitchen successfully renegotiated his contract. A Deed of Amendment was executed 9 August 2007 to pay Dr Kitchen for the recruitment of new doctors to Vision. Two further Deed of Variations were executed which changed the criteria for Dr Kitchen to satisfy in order to achieve this third phase payment. In November 2008 Dr Kitchen began to attempt to renegotiate his contract in earnest. He initially sought to reduce his “out performance target” for the Central Queensland practices for the 2009 financial year from $5 million to $3.75 million. The proposal was discussed by Mr Tanner and Mr Stamp but ultimately rejected.
On 18 February 2009 Dr Kitchen emailed the non-executive directors of Vision with a comprehensive new proposal for his remuneration over a new five year period. In that email Dr Kitchen acknowledged that his initial contract still had two years to run. In this new proposal Dr Kitchen sought to be paid six times the Rockhampton EBIT to replace his current contract, a salary of $700,000 indexed to CPI and 60 per cent of outperformance based on a set EBIT which did not compound year on year. A number of other proposals were put forward by
Dr Kitchen, and they mainly centred on linking his outperformance to the performance of the Rockhampton clinic only, increasing his salary and bringing his agreement more in line with the new EBIT based model being negotiated for Salaried Doctor Partners who had completed their initial five year contract period.
Negotiations were complicated by Dr Kitchen’s draft 2010 business plan for the Central Queensland practices. It showed a decline in revenue of seven per cent and a decline in EBIT of 19 per cent from the 2009 figures. Dr Kitchen did not identify a cause for the fall in revenue apart from a lack of personal financial motivation.
Further discussions in April 2009 failed to resolve matters. On 25 May 2009
Dr Kitchen and Mr Tanner had appeared to reach a new agreement that would apply for the remaining two years of Dr Kitchen’s employment. However, Mr Stamp and Mr Thompson had significant concerns about the proposal, including the fact that details may have to be disclosed to the market as Dr Kitchen was a director and the fact this new agreement may set a precedent for other doctors within Vision. Another concern was that Vision needed to negotiate in a transparent and consistent process with a focus on ensuring the principles upon which doctors were remunerated would remain the same.
In early June 2009 a new proposal was put by Vision to Dr Kitchen. He put a counter-proposal to Mr Tanner which would have effectively renumerated him at
41 per cent of the EBIT he generated. Mr Tanner, in an effort to resolve the negotiations, put a paper to the Board on 19 June 2009 summarising Dr Kitchen’s request and reasons for them. The Board rejected the request and directed an alternate solution should be reached.
Dr Kitchen and Mr Tanner discussed an alternate proposal following the meeting. Mr Thompson and Mr Stamp did not agree to the proposal and without their support the issue was not put to the board. Dr Kitchen then advised that if an alternate remuneration agreement could not be found he would resign as a director because the time commitments involved were impairing his earning capacity. On 4 August 2009, in an attempt to resolve the remuneration issue Mr Stamp flew to Rockhampton to meet with Dr Kitchen. Mr Stamp put a new proposal to
Dr Kitchen which was ultimately rejected.
During the 2009 financial year, the EBIT had been declining in all of the clinics that Dr Kitchen had sold, except for Rockhampton, to which he had relocated. In discussions about the renegotiation of his contractual entitlements, Dr Kitchen sought to renegotiate his remuneration package with Vision on the basis that his performance bonus be calculated on the EBIT of the Rockhampton clinic alone, rather than the EBIT of all of the clinics that he had sold.
In seeking to negotiate a special arrangement for his own remuneration before the expiry of his initial five year term Dr Kitchen did not seem concerned that special concessions to him would set a precedent and have flow on effects for other agreements to which Vision was a party.
Dr Kitchen’s involvement on the board
In late 2008 Dr Kitchen was asked by Mr Tanner to join Vision’s board and, after completing a director’s course, Dr Kitchen did so. He observed the board meeting on 29 October 2008 and was formally appointed as a director on 10 November 2008. He attended board meetings in December 2008 and in February, March, April, May and August 2009.
Vision’s board considered the acquisition of doctors’ practices. Information about these acquisitions was included in the papers provided to the board before each meeting. In considering an acquisition the revenue and EBIT that was generated by the doctor prior to the acquisition was determined to enable Vision to decide what it would pay for the practice. The board discussed the details of acquisitions and was then asked to resolve whether to enter into the acquisition whereupon Vision would enter into standard form of contracts to effect the acquisition.
Dr Kitchen acknowledges that in the Board Packs he received as director, reference was made to agreements other than his, but that detailed terms were not disclosed. Instead, the Board Pack provided an overview of the consideration to be paid. For example, board papers for the meeting on 29 April 2009 gave an overview of the consideration paid for Dr Chen’s practice and disclosed that the “cost of the business” was 40 per cent of revenue. Dr Kitchen says that he cannot now recall whether he reviewed this figure at the time and that, to the best of his recollection, he did not examine the details of the consideration paid because the practice was not being acquired at the meeting.
Dr Kitchen’s witness statement tends to suggest that he did not concern himself with the details of acquisitions and did not examine the details of the consideration that had been paid in earlier stages of acquisitions or that were to be paid. For example, in respect of Dr Chen’s practice he says that he simply assumed that management had calculated the correct consideration and he did not carefully scrutinise the details. I am unable to accept Dr Kitchen’s evidence. The evidence persuades me that he was interested in the financial performance and value of the practices. As he acknowledged, in 2008 he learnt from reading the Board Packs that certain other clinics were under-performing and the board received monthly reports about the relative performance of clinics. He says that he was “always keen to read [about the] performance of my practices compared to other practices”. I conclude that Dr Kitchen throughout his time on the board was keen to analyse the revenue, costs and general performance of practices, including practices which Vision was proposing to acquire or had acquired.
Dr Kitchen’s departure from Vision’s Board
That Dr Kitchen was disgruntled about matters was no secret to the board. The CEO’s report to the board in October 2008 stated that Dr Kitchen was agitated by recent changes, and shortly prior to the board’s meeting on 29 October 2008
Dr Kitchen sent an email about Vision’s share price and Dr Unger’s departure. Vision’s share price had fallen to $1.24 in September 2008, and Dr Kitchen complained about what he perceived to be the removal of Dr Unger as CEO.
Mr Tanner explained to Dr Kitchen that Dr Unger’s resignation had nothing to do with his performance and that Dr Unger had left Vision to concentrate on another project.
The board had to deal with Dr Kitchen’s proposals to alter the basis upon which he was remunerated.
Dr Christopher Rogers, who has recently retired, practised as an ophthalmologist from 1976 and was a Salaried Doctor Partner at Vision. He attended meetings of the board as an alternate director. He first met Dr Kitchen in 2006. On 19 June 2009 Dr Rogers sat next to Dr Kitchen at a meeting of the Vision board. The meeting did not agree to proposed changes in calculating Dr Kitchen’s out performance bonus. Dr Rogers recalls that after the decision had been taken, he had a conversation with Dr Kitchen in which Dr Rogers explained that the other directors and he felt that as Dr Kitchen had been paid $22,000,000 for his practice he should accept the current method of calculating his out performance bonus.
Dr Rogers recalls that Dr Kitchen replied:
“I only got $18,000,000. I had to give $4,000,000 to John Noble”.
to which Dr Rogers stated:
“I’ve never understood why Noble got $4,000,000. Why was that?”
Dr Rogers recalls that Dr Kitchen responded:
“He wouldn’t sell for less and I needed his cataract patients”.
Dr Kitchen denies having had that conversation or any similar conversation with
Dr Rogers at that time or any other time. I accept Dr Rogers’ evidence that such a conversation took place. Dr Rogers impressed me as an honest, thoughtful and reliable witness. I do not accept that he has invented a conversation which simply did not take place. It seems to me entirely probable that a conversation of that kind, in which Dr Rogers attempted to explain the other doctors’ position, took place, and that Dr Rogers has a reliable recollection of it and the amounts that were discussed.
I would have understood if Dr Kitchen said that he did not recall the details of the conversation. However, his emphatic denial of such a conversation taking place is a different matter. I conclude that Dr Kitchen felt forced to deny having such a conversation because admitting that he said those things would be harmful to his case. Part of his case on damages is that if the Vision transaction had not proceeded he would have acquired Dr Noble’s practice for $500,000. The assertion that
Dr Noble would not sell it for less than $4,000,000 would harm Dr Kitchen’s case in that regard. The truth of the matter is that Vision agreed to structure the acquisition of Dr Kitchen’s and Dr Noble’s practices in a way that resulted in
Dr Kitchen receiving a large, tax-free windfall in the form of a supposed “gift” of $2.4 million out of the $4.25 million Dr Noble was paid.
The conversation that took place on 19 June 2009 places Dr Kitchen in a bad light. He was not frank with Dr Rogers at the time about the actual amount that Dr Noble was prepared to sell his practice for, and in claiming that he “only got $18,000,000” he did not reveal the true amount that was received by his entities after the deduction of the payment which Dr Noble was truly prepared to accept. Rather than tell Dr Rogers the truth, at the risk of undermining Dr Kitchen’s stance in renegotiating his contractual arrangements with Vision, Dr Kitchen chose to conceal the truth from Dr Rogers.
There was a conference for Doctor Partners on the Gold Coast on the weekend of
15 August 2009 and a board meeting on Sunday morning, 16 August 2009.
Dr Rogers recalls that during the course of the conference, Dr Kitchen said to him words to this effect:
“I’m not happy with how you’re looking at my out-performance bonus. I can get out of my contract with Vision Group at any time. When I signed up, my lawyer in South Australia said Vision Group will be in breach and I will be able to get out of the contract at any time because of the no less favourable clause”.
Dr Kitchen denies that any such conversation took place. However, I prefer
Dr Rogers’ evidence that it did.
Prior to the board meeting on 16 August 2009, Dr Kitchen had in mind that he would not stand for election to the board. This was because of his dissatisfaction with the outcome of negotiations with Mr Tanner, Mr Stamp and Mr Thompson about his remuneration and his general dissatisfaction with Vision’s management. Dr Kitchen left the board meeting before it concluded. That night he called
Mr Tanner to indicate that he was resigning as a director. Mr Tanner told him that it was not a good time to resign and asked Dr Kitchen to wait until after year-end announcements in a few weeks’ time. However, Dr Kitchen refused to do so and emailed his resignation. Dr Kitchen told Mr Tanner that night that he could not work with Mr Stamp and that it would be more advantageous for him to focus on Rockhampton. He also said that his board commitments were affecting his earning capacity.
The defendants having advanced their case on loss on the basis that I have described, it seems inappropriate to reopen the evidence to permit additional evidence including valuation evidence to be called. This is especially the case where, for the reasons I have earlier given, the defendants failed to persuade me that Vision engaged in the misleading and deceptive conduct which the defendants alleged, or that if such conduct had not been engaged in, the defendants would not have entered into the transaction.
The deal which Vision offered the defendants was a very good one. Whilst the price paid for the business included a substantial number of shares, it also included a substantial cash component. Vision assumed a debt of $7.8 million which was owed to the NAB. The defendants were able to obtain a tax-free “gift” of more than $2 million from Dr Noble. Even taking account of the risks, including the risk that the share price of Vision might fall with serious consequences for its financial performance, the deal which Vision offered to the defendants in early 2006 was attractive. In exchange for the promise of Dr Kitchen to work for Vision for at least five years, Vision was prepared to pay a very large amount for Dr Kitchen’s practice. There was no evidence that anyone else was prepared to offer that amount. The defendants received a substantial amount for the Kitchen practice. After five years, if Dr Kitchen terminated the Service Agreement the defendants were able to establish a new practice, subject to any valid restraint.
For these reasons and the reasons which I have more fully given on the issue of causation, if the impugned representations had not been made and the alleged misleading and deceptive conduct had not been engaged in, the defendants probably would have sold the practice to Vision on essentially the same terms.
The defendants have failed to prove the “no transaction” case advanced by them. For that reason, they have not established that they suffered the claimed loss as a consequence of the alleged contraventions. In addition, they have not proven, either by reference to the experts’ report or the evidence more generally, the amount of the loss they allege they suffered. The basis upon which the defendants’ case on loss was conducted, and the general requirement for a loss of this kind to be proved with appropriate precision, does not permit me to make some kind of broad brush or jury-type assessment of loss. For the reasons that I have given, it is not evident that the defendants suffered a loss when comparison is made between the value of the business they sold and the benefits which they obtained at the time of the transaction. No proper basis exists in the evidence for me to assess the claimed loss.
Both in respect of the causation issue, and in respect of proof of loss, the defendants have not proven that they suffered a loss because of the alleged conduct, or the amount of that loss. The result is that the defendants’ counterclaim for misleading and deceptive conduct should be dismissed.
Late application for leave to amend counterclaim
The parties’ submissions left open the possibility that Vision/Icon would succeed on a claim for breach of contract and be awarded substantial damages, whilst the defendants might succeed on the claim for misleading and deceptive conduct and be awarded compensation for that contravention. During oral argument I raised this possibility. The defendants’ immediate response was that because such a judgment was premised upon the defendants not having entered into the contracts, there would be no case in breach of contract, and an order should be made under s 87 of the TPA so as to deny an award of damages for breach of contract. However, this submission ignored the fact that the relief claimed by the defendants in their counterclaim pursuant to s 87 was limited to having the restraint of trade provisions set aside. The defendants had not sought to have the balance of either the Service Agreement or the Share Purchase Agreement declared to be void or voidable or set aside pursuant to s 87 of the TPA. Instead, the defendants claimed damages pursuant to statute and in the case of the TPA pursuant to ss 82 and/or 87.
In the light of this exchange, and at the conclusion of the defendants’ address in reply a day later, the defendants made some further submissions about the need for any damages award for misleading and deceptive conduct to give credit for the damages that Dr Kitchen would be required to pay, notwithstanding the fact that different parties were involved in each transaction. It was said that it would make no legal or economic sense for Icon to be entitled to a damages award as a result of the loss of its Rockhampton practice. However, this point was not pleaded. As a result, to achieve the practical result of, in effect, overturning both contracts, the defendants sought leave to amend to include a new paragraph 49 in the relief section of the counterclaim. Leave to make such a very late amendment was objected to and, given the hour of the day, and the importance of allowing the parties an opportunity to address the question of leave, I made directions for the parties to make submissions on the question of leave.
The proposed amendment advanced on 24 June 2014 claimed relief pursuant to s 87 of the TPA or in the alternative s 1325 of the Corporations Act that:
“subject to giving them credit for benefits received under the Share Purchase Agreement, the Service Agreement and the Doctors’ Voluntary Escrow Deed in any assessment of damages pursuant to paragraph 46 of the Counterclaim, those agreements and each of them be declared void and further, in the alternative, made enforceable ab initio.”
That proposed amendment was not pressed. It, in effect, sought rescission. The granting of such relief would have raised important discretionary issues. Because this form of amendment was not pressed I need say little more about it, save that I accept Vision’s submissions that the proposed prayer for relief begged the question of the value of the benefits received under each of the three agreements and discretionary considerations. It has been said that principles concerning rescission give safe, if not necessarily exclusive, guidance about the exercise of the discretion conferred by s 87, and the focus of the inquiry is whether restitution can be effected in a manner which does “practical justice” between the parties.[100]
[100]Munchies Management Pty Ltd v Belpiro (1988) 58 FCR 274 at 288; Henjo Investments Pty Ltd v Collins-Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 at 565.
I would not have been persuaded that it was appropriate at such a late stage to allow leave to amend, necessitating further inquiry into the issue of benefits and the possibility of effecting restitution. For obvious reasons the parties cannot be restored to their pre-transaction position by a transfer back to the defendants of the practices which they sold.
In their written submissions dated 2 July 2014, the defendants sought leave to amend to add the following paragraph:
“49.The defendants further seek an order pursuant to s 98 of the Trade Practices Act and/or s 1325 of the Corporations Act that so much of the Service Agreement as would entitle the plaintiffs or either of them to an award of damages not be enforced or, in the alternative, the Service Agreement be varied so as not to entitle the plaintiffs or either of them to damages for breach or repudiation.”
Vision objected to leave being granted to make such an amendment.
The defendants’ supplementary submissions argued that there was a causative connection between the misleading and deceptive conduct and Vision/Icon’s claim to contractual damages. It was said to follow that those damages were caused by the misleading and deceptive conduct which induced entry into the agreements and would sound in reflexive damages caused to the defendants by the misleading and deceptive conduct. The fact that the misleading and deceptive conduct was engaged in by Vision, and not Icon, was said not to matter because Icon had the benefit of that conduct post-settlement and s 87 of the TPA could avoid such artificial barriers to remedying loss caused by misleading and deceptive conduct. As a result, s 87 was said to allow an order to be made to preclude Vision and/or Icon obtaining an order for damages against the defendants or either of them for breach of contract. If an order was not fashioned in that way to preclude an award of damages, then the damages awarded to the defendants on their respective claims for misleading and deceptive conduct would need to take into account the amounts to be payable by them on the contract claims. Recourse to s 87 was said to avoid such unnecessary circularity.
The requested amendment was submitted by the defendants to be merely the legal consequence of facts open to be found on the evidence and this was not a case where a late amendment should be refused.
Vision objected to the amendment, and contended that the proposed amendment raised issues that were not dealt with sufficiently, or were not addressed at all, at the trial. The unpleaded allegation that any liability which Dr Kitchen has to pay damages to Icon for wrongful termination was “caused by” Vision’s alleged misleading and deceptive conduct was said to be a matter that would have been the appropriate subject to further evidence and argument at trial, and was premised upon a simple application of the “but for” test. Had this issue of causation been pleaded then there would have been greater attention paid at trial to the cause of the termination. Vision submitted that it would be unfair to simply proceed on the defendants’ assertion that any liability which flowed from the termination was caused by the alleged misleading and deceptive conduct, without giving Vision/Icon a proper opportunity to test the case in cross-examination of Dr Kitchen.
Arguments were also advanced about the inappropriateness of deducting from any award to Vision the personal liability of Dr Kitchen to Icon. It was said that Dr Kitchen had not advanced a claim for misleading and deceptive conduct in his own right, and the proposition that if Icon was a person involved in the alleged contravention raised additional issues which were not supported by the evidence at trial.
Finally, Vision made substantial submissions about the principles governing leave to make late amendments, and contended that when those matters were considered the interests of justice were best served by refusing leave to amend. The key factors were:
· The proposed amendment came after the conclusion of the trial and would not permit a just resolution of the litigation since further evidence and argument would be required;
· the defendants had a sufficient opportunity to plead the broader claim for relief under s 87 well before the trial commenced in proceedings which have been on foot since 2009;
· the plaintiffs would suffer significant prejudice if the proposed amendments were permitted and reopening the trial would cause prejudice to both the plaintiffs and other litigants;
· no explanation had been provided as to why the broader relief now sought had not been claimed in advance of the trial.
I am persuaded by Vision’s supplementary submissions. The issue of causation that the proposed amended form of relief raised was not pleaded in the existing pleading, or in a proposed amended pleading. It was not agitated at the trial. It is far more complex than presented in the defendants’ supplementary submissions.
The defendants’ supplementary submissions rest on the simple proposition that if the misleading and deceptive conduct had not occurred, the Service Agreement would not have been entered into and, as a consequence, Dr Kitchen would not be exposed to a claim for damages for breaching it. These propositions are practically incontestable. But they only address the issue of factual causation and not the more difficult question of whether an award of damages in Icon’s favour against Dr Kitchen would, in law, be said to have been caused by Vision’s contravention.
During oral argument I sought to illustrate the proposition by the simple example of a party who agreed to sell his fish shop and to become the manager of it, being employed by the buyer. The seller may have been induced to sell his shop by misleading and deceptive conduct. However, if some time after he began to work as the manager, he breached his contract of employment by taking money out of the till or by carelessly burning the shop down, then his employer would have a breach of contract claim against him, which would not disappear because he succeeded in a different capacity in alleging that if he had not been misled he would not have sold his fish shop. In that case the seller/manager would establish that the breach of contract claim brought against him in his capacity as manager was caused, in the sense that it was brought about, by the buyer’s misleading and deceptive conduct. However, it would not be clear that the consequences which he caused to his employer by, for example, carelessly burning down the shop, is a matter for which the employer should have legal responsibility. In such a case it is not self-evident that the purpose of an award of damages under s 82 or s 87 of the TPA would be achieved by effectively immunising the seller/manager of the consequences of his breach of contract.
The same may be said in this case. It is not self-evident that the damages which Icon suffered as a result of Dr Kitchen’s purported termination of the Service Agreement were caused by the claimed contravention by Vision. The termination was based upon an assertion of contractual rights to terminate, not alleged contravention of the TPA. In any case, difficult questions of fact and law arise as to whether a party who breaches a contract and repudiates it, leading to the contract’s termination and the suffering of loss by an employer, should be permitted to avoid the consequences of their breach of contract because, some years earlier, the contract was entered into as a result of alleged misleading and deceptive conduct.
I am not satisfied that the issues of causation with the proposed additional prayer for relief would raise are simply questions of law in relation to the legal consequences of facts found on the evidence. Had the new issue of causation been pleaded then issues in relation to termination might have been more fully explored in the evidence as a result of Vision’s pleading in response.
I accept Vision’s submissions about the principles governing an application for late amendment. The application of those principles leads me to conclude that leave should be refused. The issues raised by the proposed amendment are ones which should have been raised and argued in the course of the trial. If I was to allow the defendants to plead this broader claim of relief it would be necessary for the defendants to also plead the asserted causal connection between the misleading and deceptive conduct and any award of damages for breach of the Service Agreement, for Vision to respond to such amendment and for the new causation issue to be further litigated and fully argued. Otherwise Vision would be deprived of the opportunity to defend this new and different claim. The interests of justice both as between the parties and more broadly would not be served by reopening the trial. The trial has been one of great complexity and the issues in it should be resolved without further delay. No adequate explanation has been given as to why the broader relief now sought was not claimed earlier.
I decline to grant leave to amend in either the form proposed on 24 June 2014 or in the revised form proposed on 2 July 2014.
Incidentally, on the basis of my conclusions, the proposed amendment would have no utility. The defendants and Dr Kitchen personally have not established that they are entitled to relief for contravention of statute based upon alleged misleading and deceptive conduct.
PART VII – CONCLUSION
Dr Kitchen was not entitled to terminate the Service Agreement. By purporting to terminate it, by not complying with his obligations under it and by establishing a new clinic in Rockhampton in September 2009, Dr Kitchen repudiated the Service Agreement.
Icon was entitled to accept his repudiation, terminate the agreement on 13 September 2009 and recover damages for the loss it suffered as a result of Dr Kitchen’s repudiation.
Most of the restraint of trade provisions in the Service Agreement and in the Share Purchase Agreement are unenforceable since they exceed what is reasonable for the protection of the legitimate interests of Vision and Icon as buyer of Dr Kitchen’s practice and as Dr Kitchen’s employer. Sub-clauses 17.1(c) and (d) of the Service Agreement, however, are enforceable against Dr Kitchen.
As a consequence of Dr Kitchen’s wrongful termination and repudiation of the Service Agreement, Icon suffered loss and damages consisting of:
(a) costs incurred in closing the Rockhampton clinic;
(b) lost earnings from Rockhampton for the period ending 31 March 2011 (the end of the initial five year term of the Service Agreement);
(c) lost earnings from Rockhampton for the period ending 31 March 2012 under a likely compromise agreement which would have provided for Dr Kitchen to work for Vision for an additional year under a 65 per cent remuneration package, and thereafter been free to compete with Vision/Icon.
(d) the loss of the opportunity to earn a profit in Rockhampton after 31 March 2012, if it had been able to recruit a new doctor to replace Dr Kitchen after 31 March 2012.
As to (d), it is unlikely that Vision would have been able to recruit a new doctor to replace Dr Kitchen, and if it had been able to do so, the practice was at risk of losing staff and patients to Dr Kitchen when he established a new practice in Rockhampton. As a result, the value to be assessed for the loss of the opportunity will be relatively small.
In addition, Icon lost the chance to find a replacement for Dr Steyn in its Gladstone clinic in mid-2010 under very different circumstances to the circumstances which confronted it in mid-2010 as a result of Dr Kitchen’s wrongful termination in September 2009. However, Vision would have been unlikely to be able to find a replacement for Dr Steyn even if Dr Kitchen had performed his Service Agreement, and it is likely that there would have been an orderly shutdown of the Gladstone practice prior to 31 March 2011. The reduced chance to persuade Dr Steyn to stay in Gladstone and the reduced chance to find a replacement for Dr Steyn once he left should be compensated on the basis that Icon lost a small chance to keep the Gladstone clinic operating at a profit after June 2010.
Because my findings on loss, and the consequences of Dr Kitchen’s repudiation differ from the assumptions the joint experts were asked to adopt, I will seek further submissions on the assessment of Icon’s loss and damage, being the categories of loss I have found it suffered as a consequence of the termination of the Service Agreement and the subsequent closure of the Rockhampton and Gladstone clinics.
Because only a few of the restraints are enforceable, and the parties did not address the loss suffered as a result of Dr Kitchen’s breach of those few restraints (as distinct from other unenforceable restraints which precluded him from establishing a clinic and enticing staff to work for him), I am not in a position to properly assess the loss suffered as a result of the breach of the enforceable restraints. It would seem to be far less than the loss suffered by reason of Dr Kitchen’s termination of the Service Agreement. The parties may choose not to make supplementary submissions on the assessment of loss for breach of those few enforceable restraints.
Because Dr Kitchen breached some of the restraints in his Service Agreement and was a “Bad Leaver” (as defined in the Escrow Deed) the defendants are not presently entitled to the release of the shares held in escrow. I will allow the parties to make submissions about the form of declaratory or other relief that is appropriate in respect of those shares.
The defendants have failed to prove their counterclaim for misleading and deceptive conduct. I have not been persuaded that the representations which were in fact made were misleading or deceptive. The defendants relied to a limited extent on the representations. But on the issues of causation and loss, the defendants have not proved their “no transaction” case. If I had concluded that Vision engaged in the alleged misleading conduct, then the defendants still would not have succeeded on their counterclaim. In the absence of the alleged conduct the deal offered the defendants would still have appeared to be a very good one, and the defendants probably would have sold the practice to Vision on essentially the same terms. Also, the defendants have not proved that they suffered a loss as a consequence of entering into the transaction.
Proposed orders
I will make directions for supplementary submissions on the assessment and quantification of Icon’s loss in the light of my findings, and about the form of judgment and orders.
Subject to hearing from the parties about the form of judgment and orders, I propose that:
1. There be judgment for Icon against Dr Kitchen for damages for breach of the Service Agreement, in an amount to be assessed.
2. There be declarations that the defendants are not presently entitled to the release of the restricted securities under the Escrow Deed.
3. There be a declaration that, save for cl 17.1(c) and (d) of the Service Agreement, the restraints in cl 17 of the Service Agreement are void as an unreasonable restraint of trade.
4. There be a declaration that, save for cl 12.1(c) and (d) of the Share Purchase Agreement, the restraints in cl 12 of the Service Agreement are void as an unreasonable restraint of trade.
5. The relief sought in paragraphs 5 and 6 of the claim be refused.
6. The defendants’ counterclaim be otherwise dismissed.
7. The defendants’ application for leave to amend the second further amended counterclaim is refused.
The issue of costs will be addressed after the assessment of damages is concluded.
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