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CITE

Notable Unreported Decision
Appeal Determined (QCA)

Vision Eye Institute Ltd v Kitchen[2014] QSC 260Applegarth J
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Vision Eye Institute Ltd v Kitchen[2014] QSC 260

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. There be declarations that the defendants are not presently entitled to the release of the restricted securities under the Escrow Deed. 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. 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. The relief sought in paragraphs 5 and 6 of the claim be refused. The defendants’ counterclaim be otherwise dismissed. 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 Allied Express Transport Pty Ltd v Mears [2010] NSWSC 1112, cited Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; [1973] HCA 288, cited Androvitsaneas v Member First Broker Network Pty Ltd [2013] VSCA 212, cited Ashcoast Pty Ltd v Whillians [2000] 2 Qd R 1, cited Attorney-General Commonwealth of Australia v Adelaide Steamship Co Ltd [1911-13] All ER Rep 1120, cited Australian Broadcasting Commission v Australasian Performing Rights Associations Ltd (1973) 129 CLR 99; [1973] HCA 36, cited Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 304 ALR 186; [2013] HCA 54, cited BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105; [2010] NSWCA 347, cited Bridge v Deacons (A Firm) [1984] AC 705, cited Brown v Brown [1980] NZLR 484, cited Buckley v Tutty (1971) 125 CLR 353; [1971] HCA 71, cited Butt v Long (1953) 88 CLR 476; [1953] HCA 76, cited C Convenience Stores Pty Ltd v Wayville Plaza Retirement Pty Lld (2012) 114 SASR 299, cited Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717, followed Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25, followed Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24, followed Connors Bros Ltd v Connors [1940] 4 All ER 179, cited DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12, cited Edwards v Warboys [1984] AC 724, cited Elders Ltd v E J Knight & Co Pty Ltd [2009] NSWSC 1462, cited Electricity Generation Corporation v Woodside Energy Ltd (2014) 306 ALR 25; [2014] HCA 7, cited Expectation Pty Ltd v PRD Realty Pty Ltd (2004) 140 FCR 17; [2004] FCAFC 189, cited Fadu Pty Ltd v ACN 008 112 196 Pty Ltd as Trustee of the International Linen Service Unit Trust [2007] FCA 1965, cited Gould v Vaggelas (1985) 157 CLR 215; [1984] HCA 68, cited Hanna v OAMPS Insurance Brokers Ltd (2011) 202 IR 420; [2010] NSWSC 267, cited Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; [1988] FCA 40, cited Henry Leetham & Sons Ltd v Johnstone White [1907] 1 CH 203, cited HTW Valuers Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54, cited I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109; [2002] HCA 41, cited Informax International Pty Ltd v Clarius Group Ltd (2011) 277 ALR 495; [2011] FCA 183, cited Kerr v Morris [1987] Ch 90, cited Jamieson v Westpac [2014] QSC 32, cited JQAT Pty Ltd v Storm [1987] 2 Qd R 162, cited Koompahtoo City Council v Sandpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61, cited Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449, cited Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; [1989] HCA 23, cited Lidner v Murdochs Garage (1950) 83 CLR 628; [1950] HCA 48, cited Lyne-Pirkis v Jones [1969] 1 WLR 1293, cited March v E. & M. H. Stramare Pty Ltd & Anor (1991) 171 CLR 506; [1991] HCA 12, cited Marks v GIO Australia (1998) 196 CLR 494; [1998] HCA 69, cited Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274; [1988] FCA 413, cited N E Perry Pty Ltd v Judge (2002) 84 SASR 86; [2002] SASC 312, cited Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305; [1990] FCA 35, cited Orton v Melman [1981] 1 NSWLR 583, followed Pearson v HRX Holdings Pty Ltd (2012) 293 ALR 554; [2012] FCAFC 111, cited Pioneer Concrete Services Ltd v Galli [1985] VR 675, cited Potts v Miller (1940) 64 CLR 282; [1940] HCA 43, cited Putsman v Taylor [1927] 1 KB 637, cited Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd Receiver and Manager Appointed) 42 NSWLR 462; [1997] NSWSC 473, cited Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18, cited Serisier Investments Pty Ltd v English [1989] 1 Qd R 678, cited Seven Network (Operations) Ltd v Warburton (No 2) (2011) 206 IR 450; [2011] NSWSC 386, cited Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359; [1931] HCA 21, cited Sherk v Horwitz [1972] 2 OR 457, cited Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418, cited Smith v New Court Securities Ltd v Scrimgeour Vickers [1997] AC 254, cited Smith v Ryngell [1988] 1 Qd R 179, cited Synavant Australia Pty Ltd v Harris [2001] FCA 1517, cited Waddell v Mathematics.com.au Pty Ltd [2013] NSWSC 142, cited Wardley Australia Ltd v Western Australia (1992) 175 CLR 514; [1992] HCA 55, cited Watson v Foxman (1995) 49 NSWLR 315, cited Waters Lane Pty Ltd v Sweeney [2006] NSWSC 222, cited Weinberg v Mervis 1953 (3) SA 863, cited Heydon The Restraint of Trade Doctrine (3^rd ed. LexisNexis Butterworths, New South Wales, 2008) Jackson Post-Employment Restraint of Trade (Federation Press, New South Wales, 2014) Lindgren “The Ambiguity of ‘Ambiguity’ in the Construction of Contracts” (2014) 38 Australian Bar Review 153 Randall “Express Termination Clauses in Contracts” (2014) 73 Cambridge Law Journal 113
COUNSEL:	P J Flanagan QC with S R Cooper for the plaintiffs R J Whitington QC with D A Quayle for the defendants
SOLICITORS:	Clayton Utz for the plaintiffs Thomson Geer for the defendants

TABLE OF CONTENTS

PART I : INTRODUCTION, ISSUES AND BACKGROUND 10
PART II: CONTRACTUAL ISSUES 35
Principles of construction 35
Relevant provisions 36
Issues of contractual interpretation: cl 3.3 37
The meaning of “Salaried Doctor Partner” 40
The meaning of “New Doctor Agreement” 40
The meaning and scope of the exclusion “in relation to Salary” 43
The meaning and scope of the exclusion “in relation to ... the Business Plan” 46
The meaning of “severally and overall” 51
Overview of the proper construction of cl 3.3 53
Was Dr Kitchen entitled to terminate the Service Agreement? 55
Did Vision (Icon) breach cl 9.1(a) of the Service Agreement? 56
Were the alleged breaches “material”? 57
Did Vision fail to remedy the material breaches notified to it within 14 days? 60
Dr Kitchen’s purported termination 60
Purported termination on grounds not identified in the Notice of Breach 60
Did Vision repudiate the Service Agreement? 61
Conclusion on Dr Kitchen’s purported termination 62
Repudiation by Dr Kitchen 62
PART III – RESTRAINT OF TRADE PROVISIONS 63
Relevant principles 63
What legitimate interests was Vision entitled to protect under a restrictive covenant? 66
The impugned conduct 68
The relevant provisions 69
The relationship between the two agreements and the similar restraints in each 74
The various restraints and their reasonableness 76
Are the restraints reasonable in the interests of the covenantees? 84
Are the restraints in sub-clauses 17.1(c) and (d) in the Service Agreement offensive to public policy? . 86
Are the other restraints offensive to public policy?. 86
PART IV – VISION’S LOSS 90
Lost earnings from Rockhampton for the period ending 31 March 2011 90
Lost earnings from Rockhampton for the period after 31 March 2011 . 90
Would Dr Kitchen have remained with Vision after 31 March 2011? 92
A point of principle. 98
Lost earnings after 31 March 2011 - assessment 100
Conclusion – Rockhampton losses 101
Lost earnings from Gladstone clinic for the period ending 31 March 2011 102
Damages for breach of enforceable restraints of trade 110
The quantum of loss suffered by the termination of the Service Agreement 111
PART V – THE ESCROW DEED 114
PART VI: COUNTERCLAIM FOR MISLEADING AND DECEPTIVE CONDUCT 115
Introduction 115
The law 116
Context and sequence of statements 117
Credibility and reliability: oral communications 118
The PEF representations 120
Were the proven PEF representations misleading? . 125
The purpose of the PEF 125
The operation of the PEF 126
Were the PEF representations misleading in the respects pleaded? 129
The incentive scheme representations . 132
EBIT and actual costs 133
Elements of the scheme applying equally 139
Were the representations about the incentive scheme misleading? 140
No less favourable representations 143
Were the no less favourable representations misleading? 144
The growth representations 145
Was it misleading to describe Vision as a secure, growing and stable company? 148
Was the Vision model fatally flawed? 149
Conclusion - growth representations 153
Reliance and causation issues 154
Did the defendants rely on the representations? 156
The causation issue 160
Defendants’ damages claim 165
The methodology adopted by the experts 166
The measure of damages 168
The validity of the assumptions the experts were instructed to adopt 171
Was a loss suffered? 176
Vision’s simplified comparison of the defendants’ position 177
Date of transaction analysis 178
Conclusion – defendants’ damages claim. 180
Late application for leave to amend counterclaim 182
PART VII – CONCLUSION 186

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:

whether Dr Kitchen was a "Good Leaver" within the definition of that term in the Escrow Deed;

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;

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]

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.

Dr Reich recalls that during the course of that board meeting Dr Kitchen and he excused themselves from the room during discussions about Dr Unger. Whilst they were outside the meeting room Dr Reich asked Dr Kitchen why he was stepping down from the board and, according to Dr Reich, Dr Kitchen said words to the effect of:

“You should be leaving the board too. It’s going to get very nasty.”

Dr Reich thought that Dr Kitchen was referring to his dissatisfaction with the status of negotiations about his bonus. Dr Kitchen’s recollection of this conversation is different. He says that he told Dr Reich that he had concerns about his exposure as a director and asked Dr Reich if he had any similar concerns, to which Dr Reich replied, “Not particularly”. Dr Kitchen says that he told Dr Reich that he should consider his exposure. Dr Kitchen denies that he said to Dr Reich words to the effect that “You should be leaving the board too. It’s going to get very nasty”. I do not accept Dr Kitchen’s denial. Dr Reich would be likely to recall those words. Dr Kitchen’s prediction that things were “going to get very nasty” proved correct. As summarised at the start of this judgment, Dr Kitchen, through his lawyers, launched the first legal salvo on 25 August 2009 when his solicitors wrote to Vision and Icon’s lawyers alleging material breaches of the Service Agreement. Within the next few weeks each party had purported to terminate the Service Agreement, and Dr Kitchen established a new clinic in Rockhampton.

Overview of the situation in late August 2009

I shall summarise the position in which the parties found themselves in late August 2009, before solicitors’ correspondence was exchanged and the relationship terminated. Dr Kitchen’s Service Agreement had about 17 months to run. Unless it was terminated pursuant to cl 15 by Dr Kitchen, he was subject to non-compete provisions.

By August 2009 Dr Kitchen was not thinking about the large price he negotiated in early 2006 for the sale of his and Dr Noble’s practices. The share price of Vision had dropped to a fraction of its price in 2006 and, as a result, there had been a dramatic decline in the value of Vision shares held in escrow which reflected part of the consideration for the acquisition of his practice. Dr Kitchen was dissatisfied that his demands to renegotiate his Service Agreement had not been met. The sentiment at the time of people like Dr Rogers is understandable: why should Dr Kitchen be given a more favourable deal by way of remuneration under his Service Agreement than the deal done in 2006? That deal made his incentive payment under his Service Agreement depend on increases in the EBIT of all the practices he sold, not just the ones in which he presently worked.

Dr Kitchen saw things differently. Although he still described the other practices as his, he did not control them or their costs. Yet the right of Vision to manage the practices it had acquired, in accordance with an agreed Business Plan, was what Dr Kitchen had sold to Vision.

Dr Kitchen became aware that there was a growing disparity between the EBIT he was responsible for in Central Queensland and the EBIT being generated by the other practices and doctors elsewhere within Vision. However, this overlooks the fact that entities associated with Dr Kitchen received a large consideration and other advantages for the acquisition of the Central Queensland practices, with their EBIT and potential for growth as represented by Dr Kitchen in the 2006 negotiations.

In addition to these financial issues, there was a personal element in the falling out between Dr Kitchen and Vision. Disgruntled with Vision’s management and its poor share price, Dr Kitchen was looking for a way out.

Despite his dissatisfaction with Vision and desire to strike a better deal with it, it is noteworthy that during the 2008-2009 period, Dr Kitchen did not assert that he had been misled by the matters about which he now characterises in these proceedings as misleading and deceptive conduct, and which he alleges induced him to enter into the acquisition contracts in early 2006. When his solicitors wrote on 25 August 2009 to Vision the only misrepresentation alleged was one in relation to the role and purpose of the Practice Enhancement Fund. They alleged that Dr Kitchen had been led to believe that shares equalling 7.5 per cent of the valuation of the practice which had been acquired would be issued to a fund and would be used for the recruitment and retention of doctors. His solicitors’ letter of 25 August 2009 was the first time Dr Kitchen complained about what was later pleaded as the Practice Enhancement Fund (“PEF”) representations, and no complaint was made then or earlier about other alleged misleading and deceptive conduct. These other alleged representations were only pleaded for the first time in later amendments to the defendants’ pleadings.

As noted at the start of these reasons, following exchanges of correspondence between solicitors, by 13 September 2009 each of the parties purported to terminate the Service Agreement.

Post-termination events

By early September 2009 Dr Kitchen had embarked upon steps to compete with Vision. On 2 September 2009 a new company called CQ Eye Pty Ltd was incorporated. He set about establishing a new practice called “CQEye” in Rockhampton. On 15 September 2009 the local newspaper carried an article “Top Eye Dog Banned from Own Surgery” in which Dr Kitchen was quoted as saying that about 50 to 70 patients a day were missing out on treatment and that Vision was putting profit before patient care. Vision disputes this and says that Dr Kitchen did not raise any of these matters with it. On 18 September 2009 local newspapers announced that Dr Kitchen had left Vision to set up his own practice and provided a phone number for patients seeking an appointment. On 19 September 2009 Dr Kitchen was reported in the Rockhampton newspaper as saying that patients had their appointments cancelled by non-medical staff. Vision disputes this and said that it took all available steps to ensure that the interests of patients were prioritised and established a process for patients to be treated.

Vision attempted to address issues with Queensland Health and others. Despite Vision’s endeavours, it found it impossible to find a permanent full-time replacement for Dr Kitchen. This was due both to Dr Kitchen’s continued practice in Rockhampton in competition to Vision and the unavailability of an experienced doctor ready to take up the role in Central Queensland. There is a general shortage of ophthalmologists in Australia and it was a difficult task to recruit new doctors. Vision was unable to find anyone within its organisation or from outside it who was prepared to take up the position in Rockhampton in the circumstances that prevailed.

By October 2009 future bookings beyond December 2009 in Rockhampton had ceased. As a result of this and the difficulty in finding a permanent full-time ophthalmologist to replace (and compete with) Dr Kitchen, in November 2009 the board of Vision resolved to close the Rockhampton practice. As a consequence of Dr Kitchen’s departure the Rockhampton clinic incurred substantial losses whilst it remained open. It was progressively scaled back and closed in January 2010.

Vision’s Gladstone clinic was operated by Dr Steyn, an ophthalmologist from South Africa who was recruited by Dr Kitchen in around August 2008.

In the circumstances detailed in connection with Vision’s claim for loss, by May 2010 Dr Steyn was considering leaving the country. On 27 May 2010 his team leader left and the rest of the staff in Gladstone resigned with immediate effect. They had been offered jobs by Dr Kitchen. As a result, Dr Steyn had no support staff except for staff which Vision could spare him.

On 24 May 2010 Dr Steyn tendered his resignation, effective 30 June 2010. Under the terms of his consultancy deed, Dr Steyn was entitled to retain patient records. He requested that his patient records be provided to Dr Kitchen’s new practice in Gladstone.

On 24 May 2010 Dr Kitchen and his associate, Dr Glenn Martin, announced that they had established a CQ Eye consulting practice at the Mater Medical Suites in Gladstone. In addition to this advertising, a newspaper article promoted the new eye clinic. On 27 May 2010 Vision’s arrangement with the Mater was terminated upon five weeks’ notice, effective 30 June 2010 and Dr Kitchen took over that space from which to run his new clinic. Dr Steyn transferred all of the Vision patients of the Gladstone clinic to Dr Kitchen’s new practice, CQ Eye.

Dr Kitchen continues to practice in Rockhampton and Gladstone.

Vision remains Australia’s largest provider of ophthalmic care, with 18 dedicated ophthalmic consulting facilities, eight day surgeries and seven refractive and laser eye centres in Victoria, New South Wales and Queensland. The group currently has 77 doctors, including 35 Doctor Partners, 23 Associates and 19 Visiting Surgeons. It has about 500 staff. Its Doctor Partners own about 10 per cent of its issued capital.

The proceedings

These proceedings were commenced on 21 September 2009. Given the number and complexity of the issues being litigated, the matter was placed on the Supervised Case List. The pleadings have been amended many times. Directions were made in the Supervised Case List for the trial to be conducted as an electronic trial and for witness statements to be exchanged. Witness statements, if confirmed, stood as the evidence-in-chief of witnesses. The complex loss and damage issues were addressed by highly qualified experts who prepared a joint report.

The matter proceeded as an e-trial over a four week period in June 2014. Numerous witnesses were called. The legal costs generated in preparing this matter for trial and in conducting the trial must be enormous. But so are the amounts claimed by the parties in their claims and counterclaims. Depending on the assumptions made by the experts, each has multi-million dollar claims against the other, and on some assumptions each has a claim against the other for more than $20 million.

PART II: CONTRACTUAL ISSUES

Principles of construction

Vision’s claim in contract turns on the proper construction of the Service Agreement in the context of its interdependence with the Share Purchase Agreement. The principles governing the construction of such a contract are not in dispute and they need not be restated at length. The meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean. It requires consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract.^[2]

Evidence of the surrounding circumstances known to the parties is admissible to assist in the interpretation of the contract if “the language is ambiguous or susceptible of more than one meaning”.^[3]

Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”.^[4]

A court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption that the parties intended to produce a commercial result. The contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.^[5] If the contract is open to two possible constructions, the preferred construction is the one which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust even though the construction adopted is not the most obvious.^[6]

Relevant provisions

Under the Service Agreement, Icon agreed to employ Dr Kitchen. The parties’ obligations under the Service Agreement were conditional on completion of the Share Purchase Agreement having occurred in respect of Dr Kitchen’s business.

Subject to cl 3.2, the term of the employment was five years. Clause 3.2 contemplated that Dr Kitchen and Icon might extend the Service Agreement or enter into a new employment agreement at the end of its five year term.

The Service Agreement required Dr Kitchen to perform his duties at the “Relevant Service Clinic” for an average of 11 consulting and/or operating sessions per week. Dr Kitchen’s base salary was to be $400,000 gross per annum. Clause 10.2 provided for his salary to be increased in accordance with the Salaried Partner Doctor Incentive Scheme “if the agreed increased through put” was achieved by him. The salary was also increased by the percentage increase in CPI over the previous year.

Two provisions of the Service Agreement assume importance for the purposes of initial issues of contractual interpretation: cl 3.3 and cl 9.1(a). Clause 3.3 provided:

“The 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.”

Any amendments made for the purposes of cl 3.3 were to take effect from the commencement date of the relevant New Doctor Agreement.

Clause 9.1(a) of the Service Agreement provided that from the effective date (which was 1 April 2006, as defined in the Share Purchase Agreement) Icon must:

“(a)notify the Ophthalmologist as soon as the Company, VGH or any Related Body Corporate of VGH enters into any new Doctor Agreement with any Salaried Doctor Partner at any time after the Effective Date during the Term in circumstances where the Ophthalmologist has or will (upon satisfaction of any condition or upon any agreement becoming operative) have a right under clause 3.3.”

Issues of contractual interpretation: cl 3.3

The parties by their pleadings and submissions identified a number of contractual issues in connection with cl 3.3 to which I will turn. These were:

(a)the meaning of “Salaried Doctor Partner”;

(b)the meaning of “New Doctor Agreement”;

(c)the meaning and scope of the exclusion “in relation to Salary”;

(d)the meaning and scope of the exclusion “in relation to ... the Business Plan”;

(e)the meaning of “severally and overall”.

These subsidiary issues of interpretation depend upon the meaning of cl 3.3, when read as a whole, and the meaning of cl 3.3 is derived from the Service Agreement as a whole. Any interpretation should consider the Service Agreement’s close connection with the Share Purchase Agreement.

I have earlier discussed the relationship between the Share Purchase Agreement and the Service Agreement. One would not exist without the other. The commercial basis upon which the Share Purchase Agreement was struck affected the terms and operation of the Service Agreement. The basis upon which the practice was acquired, including the price paid by Vision, affected matters including the base salary to be paid, the EBITA target in the Business Plan annexed to the Service Agreement and the agreed performance targets which determined whether the base salary was increased by the annual performance bonus.

The commercial circumstances which the Service Agreement (and the Share Purchase Agreement) addressed and an object which they were intended to secure was the generation of sufficient profit during the five years of the Service Agreement to provide Vision with a return on its investment. An ophthalmologist in Dr Kitchen’s position (or more precisely the entities which he controlled that owned and operated the practice he conducted) was paid substantial consideration and promised other advantages in order to sell a practice, and in return agreed to become a salaried employee for five years. After paying Dr Kitchen’s salary and other costs, Vision expected to derive enough from the earnings he and others generated in the practice to recover its initial investment, ideally within five years.

In a broad commercial sense, the Vision model incorporated in the Service Agreement entered into by Dr Kitchen deliberately under-rewarded the ophthalmologist during those five years. Doctors were paid a base salary and an annual bonus that was fixed in a way that was difficult to achieve. Instead of being fully rewarded, directly or indirectly, for all of their individual effort during the first five years of employment, the ophthalmologist who sold his or her practice received a substantial capital amount and other advantages, and promised to work a certain number of sessions and undertake duties in accordance with the Business Plan which was annexed to the Service Agreement.

Someone being paid a base salary of $400,000 and an annual performance bonus hardly qualifies as a wage slave. Yet the Vision model depended on an ophthalmologist in Dr Kitchen’s position being prepared to work for five years at what, viewed in isolation, might be an inadequate remuneration for the work performed. The actual remuneration, however, could not be viewed in isolation because the ophthalmologist was rewarded under the associated acquisition contract by being paid, directly or indirectly, a substantial amount for the sale of the practice and the promise to work for at least five years pursuant to the Service Agreement, and to thereafter be subject to certain restraints. Someone in Dr Kitchen’s position was able to structure their affairs to receive a capital payment in a tax effective way. For example, Dr Kitchen was predicted to pay capital gains tax of “slightly over” ten per cent on the transaction.

The base salary and the incentive bonus (if any) rewarded individual effort. However, like any wage or salary package in any employment relationship, the employer expected to derive a value from the employee’s labour in excess of the amount paid to the employee. The Salaried Doctor Partner Incentive Scheme was designed to reward individual performance if the Salaried Doctor Partner exceeded performance targets. Where actual performance exceeded the target, the doctor was entitled to a maximum of 60 per cent of the “over performance”.

Unless and until the performance target was reached, the Salaried Doctor’s reward for performance consisted of the base salary. Until the performance target was reached, Vision, not the Salaried Doctor Partner, obtained the benefit of the improved performance. If actual performance was greater than the performance target, the Salaried Doctor Partner shared the “over performance”.

This feature of the Vision model, which was explained to Dr Kitchen, was described in some passages of the evidence as the “out performance bonus”. It was also described as a carrot. The Service Agreement also contained a stick. Subject to cl 10.7, an amount equal to seven per cent of salary was to be deducted in respect of each quarter in which the EBITA was less than 85 per cent of the EBITA target in the Business Plan. Clause 10.7 permitted any deduction made under cl 10.6 to be refunded if by 30 June each year the ophthalmologist had achieved at least 85 per cent of the EBITA target for the year.

These broad commercial purposes of the Service Agreement and the associated Share Purchase Agreement were known to the parties at the time the contracts were entered into. The surrounding circumstances known to Vision and Dr Kitchen at the time the Service Agreement was executed are more fully described in paragraph 12 of Vision’s fourth further amended reply. Dr Kitchen was familiar with the fact that the Service Agreement which he was entering was one whereby a salaried ophthalmologist contracted to be employed by Vision or a related body corporate and whose practice was acquired by Vision. In final submissions, the defendants accepted that the Vision model was one whereby Vision expected to recover its investment by the cash flow and the profit it generated over that five year period on the basis of an agreed EBITA.

Viewed in the context of an acquisition, the doctor was selling an expected earnings stream after payment of salary and other costs and Vision was expecting to derive a profit for each of those five years after paying the base salary, any out performance bonus and other costs. In that context, the Service Agreement’s promise to work on certain terms for five years was tied to the acquisition of a practice.

The Service Agreement expressly contemplated employment after the first five years would be on terms reached by mutual agreement between Vision and the ophthalmologist or, subject to the ophthalmologist continuing at the same or higher level of performance, be on terms no less favourable than those applying at the expiry of the initial five year period. In other words, the terms of the Service Agreement during the five years following acquisition of the practice might be suitable in the context of an acquisition, but any extended agreement would be negotiated in a different context. By that time the acquisition would have been completed some five years earlier and the Salaried Doctor Partner would not be selling a practice. Any new employment agreement entered into by the doctor who had served that five year period might have to be on different terms, including terms which better rewarded actual performance to induce the doctor to remain withVision.

Until the five year period of employment expired, Dr Kitchen was, in effect, locked into an employment relationship as part of the sale to Vision of an expected earning stream which funded its acquisition. After that five year period it would be open to Vision and Dr Kitchen to negotiate the terms of an extended employment agreement in a different commercial context.

The meaning of “Salaried Doctor Partner”

An issue raised by the pleadings and identified at the start of the trial was the meaning of “Salaried Doctor Partner”. Vision contended that the term is limited to doctors who, like Dr Kitchen, entered into an employment contract with Vision (or one of its associated companies) for a fixed period as part of Vision’s acquisition of their practice. Its submissions referred to the surrounding circumstances known to both parties at the time that the Service Agreement was executed, including the different terms upon which Vision and its related companies contracted with doctors who did not sell any practice earnings to Vision.

The defendants originally submitted that “Salaried Doctor Partner” had the meaning described in cl 1.3 of the Service Agreement, and that this definition was sufficiently broad to encompass any retained or employed doctor. In final written submissions the defendants did not press this contention and stated that they confined their case to Salaried Doctor Partners whose practices were acquired for cash and shares. I noted during oral submissions that I interpreted this as a concession, and the defendants do not suggest otherwise. The effective concession was properly made for the reasons more fully developed in paragraphs [91] to [132] of Vision’s submissions.

In short, there were important differences between doctors who had agreed to sell a practice to Vision and doctors, such as Associates or Visiting Surgeons, who did not. Agreements with doctors who had not sold a practice to Vision were not properly comparable with the terms of a Service Agreement with a doctor who had.

Vision correctly submitted that if Dr Kitchen’s Service Agreement were to be amended to match the terms in contracts with doctors who had not sold a practice to Vision, then the terms governing his service would become “untethered from the terms on which Vision acquired his practice”. Such a construction would not make commercial sense when the terms of the practice acquisition and the terms of Dr Kitchen’s subsequent employment were so plainly connected. For those reasons, Vision was correct to submit that an agreement with a doctor who had not sold his or her practice to Vision was not an agreement with a “Salaried Doctor Partner” and so did not fall within the scope of cl 3.3.

The parties accept that the term “Salaried Doctor Partner” applies both to doctors who sold an established practice with historical earnings to Vision and agreed to be employed for five years and to doctors, such as Associates, once they agreed to sell their practice (or more precisely their expected EBIT stream) to Vision and become Salaried Doctor Partners under a staged acquisition.

The meaning of “New Doctor Agreement”

Vision relies on similar considerations in submitting that the term “New Doctor Agreement” limits the comparison under cl 3.3 to agreements entered into with a doctor for the initial five year service period after the acquisition of his or her practice. The defendants contend that the term applies to service or employment 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.

Vision relies upon the fact that once the initial five year service period had been completed, by which time Vision had expected to recover its acquisition investment, Vision would have to strike a new deal with the doctor in order to have the doctor remain and work for it. The commercial circumstances surrounding the negotiation of an extended or new contract of service or employment would be quite different. That new deal would not involve Vision acquiring any practice from the doctor. In those circumstances, Vision might be prepared to contract with a Salaried Doctor Partner who had completed the five year service term on different conditions to those that applied during the initial five year service period. This might involve a new contract with the doctor for a period of less than five years on different terms, including terms for remuneration that were not tied to the acquisition EBIT. At the end of the first five year period, a Salaried Doctor Partner’s continuing relationship with Vision was “untethered from the initial acquisition”, and the doctor might choose to leave.

The fundamental difference between an agreement entered into with a doctor for an initial five year period after acquisition of his or her practice and a so-called “second term agreement” was that, in re-contracting with doctors who had served their five year period, there was no acquisition. Once the initial five year period expires, Vision was not so much seeking to recoup its capital expense as entering into new agreements in order to persuade a doctor to remain with it.

Vision also points to the fact that cl 3.3 falls to be applied in circumstances where the initial five year service periods for different doctors start and conclude at different times. This means that Vision would be recontracting with some Salaried Doctor Partners at the expiry of their initial five year service period at a time when other Salaried Doctor Partners, like Dr Kitchen, were still within the initial five year service period. If, according to the defendants’ argument, Dr Kitchen’s Service Agreement was to be amended during his initial five year service period to match the terms and agreements with Salaried Doctor Partners who were recontracting after the expiry of their initial five year service period, then the terms governing his service during the initial five year period would become untethered from the terms on which Vision acquired his practice. According to Vision, such a construction does not make commercial sense where the terms of the practice acquisition and the terms of Dr Kitchen’s employment for the initial five year period were so plainly connected.

The defendants submit, however, that the obvious commercial purpose of cl 3.3 and cl 9.1(a) is “to ensure equality of employment terms as between ophthalmologists”, and that the only sensible reading of cl 3.3 that is consistent with that object and purpose is that it extends to any more favourable terms offered to another doctor after the date of Dr Kitchen’s agreement. The defendants contend that Vision’s argument that second term agreements are not New Doctor Agreements stretches contextual interpretation beyond any accepted limits and simply seeks to re-write the contract in terms that, after the fact, seem convenient to Vision.

I am not persuaded that this is so. Vision’s submissions better reflect the commercial circumstances that Dr Kitchen’s Service Agreement addressed and the objects which it was intended to secure. In addition, I am unable to accept the defendants’ contention that the obvious commercial purpose of the relevant terms was to “ensure equality of employment terms as between ophthalmologists”. Clause 3.3 does not guarantee equality of employment terms as between ophthalmologists. Significant matters are excepted or carved out from the terms which the ophthalmologist might elect to have included. An appropriate interpretation of the exceptions in relation to salary, the business plan and other matters might ensure that commercial terms affected by the acquisition context are not considered in the exercise of comparing the terms of Dr Kitchen with the terms of a Salaried Doctor Partner who is recontracting after the expiry of his or her initial five year service period. However, such an approach would not be sufficient to address terms which Vision might negotiate under a “second term agreement” in order to persuade a doctor who had served his or her initial period of employment to remain with Vision. For example, it would not accommodate a case in which the Salaried Doctor Partner, who had completed the initial period of employment, was only prepared to recontract for a period of less than five years.

To construe cl 3.3 so as to permit Dr Kitchen to require Vision/Icon to amend his five year service agreement so that it was reduced to a term of say two years because another Salaried Doctor Partner had entered into a second term agreement for two years would be inconsistent with the commercial circumstances in which the Service Agreement came to be entered into and undermine the objects which it was intended to secure. It would produce consequences which would be unreasonable and inconvenient. It would not make business common sense to permit someone in Dr Kitchen’s position the right to amend his initial five year employment agreement by reference to the terms of a service or employment agreement negotiated by Vision with a doctor who was recontracting after the expiry of his or her initial five years of service.

It would be distinctly inconvenient and particularly uncommercial to only permit Vision to offer improved terms of employment to a Salaried Doctor Partner who had completed his initial five year service period if it offered those same terms to someone in Dr Kitchen’s position. The quantification of Dr Kitchen’s counterclaim for breach of contract in failing to offer him such terms illustrates the commercial consequences to Vision of interpreting cl 3.3 as extending to any doctor who enters into a contract with more favourable terms after 1 April 2006.

To point to such consequences does not involve re-writing the contract by reference to circumstances that arose after it was entered into and which now appear inconvenient to Vision. At the time the parties entered into the contract, and in the circumstances then known to them, it would have been commercially inconvenient to both Vision and to the defendants, in their capacity as shareholders in Vision, to permit the Vision model to be undermined by allowing Salaried Doctor Partners to include in their initial agreement terms negotiated by doctors who had completed their post-acquisition five year term.

Vision points to the seemingly absurd, indeed catastrophic, commercial consequences of construing cl 3.3 in the manner contended for by the defendants. The defendants reply that these consequences are of Vision’s own making. To point to uncommercial and possibly absurd results is said by the defendants to be a bootstraps argument which relies upon an absurdity arising from breach of the contract, rather than compliance with it. The defendants argue that it was Vision’s choice to grant more favourable terms for doctors entering into second term agreements and that the financial and commercial consequences of doing so should not affect the proper interpretation of cl 3.3.

I accept the defendants’ argument that the proper interpretation of cl 3.3 should not depend upon the consequences to Vision of having breached cl 3.3, as properly construed. However, one simply returns to the issue of how cl 3.3 should be properly construed.

It should be construed so as to avoid distinctly inconvenient, uncommercial and apparently unintended consequences. These consequences would materialise if cl 3.3 was to be interpreted in a manner which inhibits Vision from offering more favourable terms in order to induce a Salaried Doctor Partner to enter into a second term agreement.

In summary, the standard Service Agreement which Dr Kitchen entered into specifically contemplated that at the expiry of the five year period Vision and the ophthalmologist might enter into a new agreement on more favourable terms to the ophthalmologist than the original agreement. The commercial context in which the Service Agreement was entered into and the surrounding circumstances, including the Vision model as explained to Dr Kitchen, distinguish between a Salaried Doctor Partner who is serving his or her initial five year period after the acquisition of his or her practice, and a doctor who enters a contract after that five year period had been served, where there is no practice to acquire. The ophthalmologist is able to leave Vision (subject to any valid restraints in the contracts) and Vision might reasonably be expected to offer more favourable terms in order to induce the ophthalmologist to enter a new service or employment contract. The interpretation of cl 3.3 which best reflects the commercial circumstances which the Service Agreement addressed and the objects which it was intended to secure is that advanced by Vision.

The term “New Doctor Agreement” does not extend to an agreement entered into with a Salaried Doctor Partner who recontracted with Vision after the expiry of the initial five year service term. Such an agreement is not a “New Doctor Agreement” and does not fall within the scope of cl 3.3. The relevant point of comparison for the purpose of cl 3.3 of the Service Agreement is with an agreement entered into with a doctor for the initial five year service period after the acquisition of his or her practice.

The meaning and scope of the exclusion “in relation to Salary”

The meaning of “in relation to Salary” is relevant because the defendants contend that a number of matters, including the bonus paid under the Salaried Doctor Partner Incentive Scheme, fall outside its scope. The plaintiffs contend that such a construction is unduly narrow and fails to give effect to the words “in relation to” which is used in the relevant exclusion.

Clause 3.3 uses the word “Salary” and thereby adopts the definition in cl 1.3 of the Service Agreement which states that Salary has the meaning given to it in cl 10.1. Clause 10.1 provides:

“The Company will pay the Ophthalmologist a total salary at the rate of $400,000 gross per annum, payable in fortnightly instalments in arrears (Salary).

Other parts of cl 10 state that the Salary will be increased above the base figure of $400,000. For example, cl 10.4 provides for the Salary to be increased by reference to the percentage increase in CPI over the previous year. Importantly, cl 10.2 provides:

“The Salary will be increased during the Term in accordance with the Salaried Partner Doctor Incentive Scheme if the agreed increased through put is achieved by the Ophthalmologist.”

Clause 10.3 further defines that the Salary is inclusive of certain matters, such as superannuation contributions

The defendants draw a distinction between “Remuneration” (the heading to cl 10), “Salary” and the performance bonus. They submit that the annual performance bonus referred to in the document “Annexure 3: Salaried Doctor Partner Incentive Scheme” is something quite different from a salary, which refers to a fixed remuneration. A bonus is contingent and variable and does not fall within the ordinary meaning of salary.

The defendants are correct in making these distinctions. Remuneration is something different to salary and this is reflected in cl 10 which provides for the ophthalmologist to be remunerated by way of subsidies for certain matters such as attending conferences (cl 10.8) and the verifiable costs of purchasing books and journals (cl 10.9). The defendants are also correct to argue that, in some contexts at least, a bonus would not be ordinarily treated as part of an individual’s salary. This may be the case where the bonus is paid as a matter of the employer’s discretion. In other contexts, where an employee is paid a base salary together with contractually guaranteed bonuses, such as bonuses based upon sales achieved by that employee, the employer and the employee might use “salary” in a broader sense as comprehending the components of base salary and bonus.

The relevant inquiry here is the meaning of “Salary” in the context of cl 10. In that context one is concerned with a bonus which is guaranteed and which is expressed to increase the Salary, not simply to be something that is paid in addition to Salary. The better view is that the Salary referred to in cl 10.1 includes the increases required by cl 10.2 and cl 10.4. If, however, this involves too wide a meaning of “Salary”, the bonus provided for in cl 10.2 is “in relation to Salary”.

The defendants resist this conclusion and submit that when cl 10.2 refers to “Salary” being increased, it refers to the “locked in increased salary provided for in Annexure 3, clause 3(c)”, and not the performance bonus. The defendants submit that the entitlement to be paid an annual bonus must be found somewhere else by way of an ad hoc implied term that it be paid.

I am unable to agree. Clause 10.2 provides for the Salary to be increased in accordance with the scheme, and reference to the Salaried Doctor Partner Incentive Scheme contained in Annexure 3 shows that this increase can be in one of two forms. The first is by payment of an annual performance bonus. The second, under cl 3(c) of the Scheme, is where the doctor has surpassed the performance target for that salary band and believes that level of performance is maintainable. In such a case, subject to agreement, the doctor’s annual salary is increased to the appropriate band. Other parts of Annexure 3 refer in terms to an “entitlement” to an annual performance bonus (cl 3(a)(iv)).

Clause 10.2, when read in conjunction with Annexure 3, does more than simply provide a mechanism for an increase in the base salary to be “locked in” if the parties agree. It provides for the Salary to be increased by a performance bonus if agreed performance targets are exceeded by the Salaried Doctor Partner. In contractual terms, the entitlement to the bonus is found in cl 10.2. The Salary is increased by the performance bonus.

It is unnecessary for Vision to go so far as to establish that the term “Salary” includes such a bonus, but there are persuasive grounds to reach this conclusion. The terms of cl 10 suggest that the Salary referred to in cl 10.1 means the salary as increased in accordance with cl 10.2 and cl 10.4. The reference to “Salary” in cl 3.3 includes increases required by cl 10.2 and cl 10.4. It makes little or no commercial sense to interpret the term “Salary” as having the narrow meaning of base salary, exclusive of increases, including CPI increases.

The principal issue is not whether the reference to “Salary” in cl 3.3 is limited to what may be described as the base salary of $400,000, disregarding increases in the salary in accordance with cl 10.2 and cl 10.4. The principal issue is whether the bonus that is paid pursuant to the Salaried Doctor Partner Incentive Scheme is “in relation to Salary”. I am persuaded that it is. An increase in the Salary by virtue of cl 10.2 is clearly “in relation to Salary”. The words “in relation to” are to be interpreted in their contractual context. In that context, an increase to the base salary is “in relation to” Salary because it has a sufficient connection with the Salary. It falls within the express exclusion of a term “in relation to Salary”.

In summary, the incentive bonus provided for in Annexure 3 of the Service Agreement increases the Salary pursuant to cl 10.2. Clause 10.2 which provides for the payment of such an incentive bonus is a term “in relation to Salary”.

Similar reasoning would tend to suggest that the reduction in the Salary for under-performance contained in cl 10.6 is “in relation to Salary”. Clause 10.6 provides for an amount equal to seven per cent of Salary to be deducted in respect of each quarter in which the EBITA is less than 85 per cent of the EBITA target in the Business Plan. The defendants characterise this as a form of penalty for under-performance. Whilst recognising that the deduction is from Salary otherwise payable, they submit that the proper characterisation of the provision is one in relation to penalty for under-performance rather than Salary itself.

That argument seems to suggest that the term must be in relation to one thing or another. However, it may be possible to characterise the provision as being both in relation to a penalty for under-performance and in relation to Salary. In any case, it is hard to conclude that a required deduction from Salary is not “in relation to Salary”. I note that there is a slight point of distinction between cl 10.2 and cl 10.4 on the one hand, and cl 10.6 on the other. The former refer to the Salary being “increased”. Clause 10.6 does not refer to a decrease in salary. It refers to an amount being “deducted” from the Salary. This may be a distinction without a difference and the better view is that the deduction provided for in cl 10.6 is “in relation to Salary”.

If, however, I am wrong in this conclusion it may not have any practical consequence. The defendants submit that cl 10.6 and cl 10.7 (which provides for any deduction to be paid to the doctor in the event that the EBITA for the full financial year is at least 85 per cent of the target) were removed from later service and employment agreements with ophthalmologists. If cl 10.6 is not regarded as a term “in relation to Salary” then the failure of Vision/Icon to notify Dr Kitchen of the absence of such a term in certain other agreements would appear to be a breach of cl 9.1(a) of the Service Agreement. Such an alleged breach was not specified in Dr Kitchen’s Notice of Material Breach of Contract dated 25 August 2009 so as to give rise to a right of termination pursuant to cl 15.3 in the event that Vision failed to remedy that material breach within 14 days of written notification of it.

For completeness I should mention that, even assuming a breach in respect of the omission of cl 10.6 and cl 10.7 from later agreements and that the breach was “material”, there is no evidence that Dr Kitchen would have exercised his right under cl 3.3 to amend his agreement to omit cl 10.6 and cl 10.7. In addition, if he had done so then there would not have been any financial benefits for him because it is not said that he stood to be penalised pursuant to cl 10.6 for having failed to reach 85 per cent of the EBITA target in the Business Plan.

I also think it unlikely that Dr Kitchen would have agreed to such an amendment lest it have adverse, flow-on consequences for him and Vision. On one view of matters, an amendment to remove cl 10.6 and cl 10.7 from Dr Kitchen’s agreement would trigger a similar entitlement for other Salaried Doctor Partners and remove a penalty for under-performance for them as well as Dr Kitchen. Dr Kitchen would have been unlikely to favour the removal of a penalty for under-performance among doctors who were more likely to under-perform than he was.

I mention in the context of alleged under-performance a separate complaint of the defendants that Vision failed to enforce in some instances the penalties contained in cl 10.6 against certain doctors. It is unnecessary to address the details of those cases. There is a significant difference between amending the terms of an agreement by removing terms about under-performance and, as a matter of discretion and good business judgment, applying the provision about under-performance in a sensible way. It is unlikely that the parties to a Service Agreement would contemplate that a penalty for under-performance would be strictly applied where the under-performance was due to factors beyond the control of the doctor. For example, if Dr Kitchen was unable to achieve 85 per cent of EBITA during a quarter because his Rockhampton clinic was flooded and could not be used for several weeks, then Vision might sensibly decide not to enforce cl 10.6 against him.

Finally in connection with the scope of “in relation to Salary”, it is possible that matters embedded in the Salaried Doctor Partner Incentive Scheme such as individual performance targets and which governed the payment of the performance bonus pursuant to cl 10.2 are “in relation to Salary”. It is unnecessary to decide this point since, for the reasons which follow, if they are terms of the contract then they are “in relation to ... the Business Plan”.

The meaning and scope of the exclusion “in relation to ... the Business Plan”

A number of matters which the defendants rely upon as being more favourable for the purposes of cl 3.3 are found in another doctor’s Business Plan. These include the manner in which the base EBIT or EBITA is determined, which, in turn, affects the payment of an incentive bonus under the Salaried Doctor Partner Incentive Scheme. Another is the annual percentage growth figure upon which performance targets are calculated.

Vision submits these and other matters do not fall within cl 3.3 because they are not terms and also because, if they are, they are “in relation to the Business Plan”. In response, the defendants contend that the term governing the bonus is not “in relation to ... the Business Plan”. They also contend that the growth target is not “in relation to ... the Business Plan” but is in relation to the Salaried Doctor Partner Incentive Scheme.

The preliminary, and perhaps more fundamental issue joined between the parties is whether the matters pointed to are terms of the Service Agreement, as distinct from matters simply found in the Business Plan. In that regard, Vision observes that a number of the matters that are contended to be more favourable are no more than matters taken from the pages of business plans that are annexed to other agreements and are not in the nature of terms.

The Service Agreement contains standard terms in relation to the “Business Plan” which is defined to mean “the Ophthalmologist’s Business Plan which is annexed as Annexure 4”. For example, standard cl 4.1(a) requires the Ophthalmologist to undertake duties in a diligent and professional manner in accordance with the Business Plan. Clause 4.1(b) requires the Ophthalmologist, at least two weeks before each anniversary of the Completion Date, to provide a revised Business Plan in respect of the Ophthalmologist’s practice for the next 12 months that is acceptable to the employer, acting reasonably. Clause 4.1(f) requires the Ophthalmologist to develop new work and business in accordance with the Business Plan. Whilst there are these standard terms in relation to the Business Plan, the contents of the Business Plans are individually agreed.

It is questionable whether in the context of at least cl 3.3 of the Service Agreement that the individualised contents of each Business Plan is a term of Dr Kitchen’s Service Agreement which falls to be compared with the terms offered under a New Doctor Agreement to another Salaried Doctor Partner after 1 April 2006. Expressed differently, does cl 3.3 call for a comparison between the contents of Dr Kitchen’s individualised Business Plan and the individualised Business Plan which is annexed to a New Doctor Agreement?

The defendants correctly submit that, upon the correct construction of cl 3.3, the comparison required relates to “terms of this Agreement” and “terms offered under any service or employment agreement ... other than in relation to the Business Plan”. This means that the comparison is between terms of agreements, not the contents of the Business Plans themselves. Upon this approach to the construction of cl 3.3, individualised financial targets and other matters which are to be found only in the Business Plan and which are not themselves terms of the agreement are not the proper subject for the comparison required by cl 3.3. Whilst such matters appear in an annexed Business Plan, I am not persuaded that such individualised matters are terms of the Service Agreement for the purposes of cl 3.3. Not every individualised matter contained in a Business Plan could qualify as a term for the purposes of cl 3.3 since it would tend to result in what is supposed to be an individualised matter, determined in the context of the acquisition of an individual doctor’s practice, becoming a standardised term.

These matters are not themselves terms for the purpose of cl 3.3. They are simply matters upon which the actual terms of the Service Agreement fix. The matters pointed to by the defendants, such as how EBIT is determined, are not terms for the purposes of cl 3.3 and therefore fall outside the operation of cl 3.3.

It is strictly unnecessary to consider the next issue of whether they are terms “in relation to ... the Business Plan”. However, it is appropriate to address Vision’s submission that if the relevant contents of the Business Plan are a term of the Service Agreement for the purposes of cl 3.3, then it is a term of the Service Agreement “in relation to ... the Business Plan”. In particular it submits that the financial performance targets, which are set for the purpose of, among other things, determining an entitlement to receive a bonus under the incentive scheme, are expressly excluded from the operation of cl 3.3 because, if one assumes that these targets are terms of the Service Agreement, they are terms “in relation to ... the Business Plan”. The defendants respond that matters in relation to the incentive bonus and in relation to growth requirements are not “in relation to ... the Business Plan”.

As to the incentive bonus, as previously discussed, the defendants contend that this is an entitlement which arises by virtue of Annexure 3 to the agreement and is payable by virtue of an implied term. The heart of Dr Kitchen’s complaint is that whereas his financial performance is assessed by reference to growth in EBIT determined by reference to actual costs, in other cases the performance bonus is determined by reference to growth in EBIT determined on the basis that costs are fixed at 40 per cent of revenue.

This complaint directs attention to the definition of EBIT and EBITA. Clause 1.3 of the Service Agreement states:

“EBIT means the earnings before interest and tax attributable to the Business in each Quarter referred to in clause 10.6, determined on the same basis as EBITA has been determined for the purposes of the Business Plan annexed as Annexure 4, (and for the avoidance of doubt, on a proper commercial basis);” (emphasis added)

This definition contemplates that EBIT (and EBITA) can be determined in more than one way, provided it is on a proper commercial basis. The Service Agreement leaves the determination of EBIT to the method adopted in a particular Business Plan. In Dr Kitchen’s case it was by reference to the EBIT agreed after a process of due diligence and which was stated as a figure in the Business Plan annexed to his Service Agreement. In the case of another doctor, EBIT might be determined in an individual’s Business Plan on the basis that costs (excluding the ophthalmologist’s salary) were 40 per cent of revenue, or on some other basis. The definition of EBIT does not dictate that the Business Plan should provide that it be determined inevitably by reference to actual costs. The definition permits a different method, including a percentage of revenue, where, for example, it would be a difficult or practically impossible process to arrive at a figure for actual costs.

This is not to say that the meaning of EBIT depends upon what is convenient to Vision. It is simply to observe that the standard contract contemplates that EBIT could be determined in a number of ways, not just using actual costs based on historical data. The evidence showed that in some cases, particularly where there is more than one ophthalmologist in a practice, it would be difficult or at least contentious to determine the actual costs that are attributable to an individual ophthalmologist. The sharing of the costs of employing a receptionist at a multi-practitioner clinic is one example. Should the costs of a receptionist be shared according to the revenue generated by each practitioner or equally?

The definition of EBIT does not permit the parties to adopt some arbitrary formula since the clause requires EBIT to be determined on a proper commercial basis.^[7] But the adoption of a justifiable fixed costs percentage where actual costs cannot be easily determined would not be arbitrary. The defendants developed an argument that determining EBIT by reference to an assumption that costs were 40 per cent of revenue relieved the subject doctor from a practical obligation to economise on costs. I am not persuaded that such an approach is inappropriate in the case of an Associate being recruited as a Salaried Doctor Partner who does not have financial records permitting his or her historical costs to be calculated. The present issue, however, is not whether such an arrangement could be characterised as more or less favourable than determining EBIT on the basis of actual costs. The present issue is the proper interpretation of cl 3.3, including the exclusions contained in it.

The standard Service Agreement that was used as the template for Dr Kitchen’s Service Agreement and for new Salaried Doctor Partners after him had the same definition of EBIT. That definition contemplated that the EBITA would be determined on a basis to be found in an individualised Business Plan. The EBITA in the Business Plan was a matter to which the standard terms of the agreement applied. This did not make the EBITA base or the EBITA target a term of the agreement for the purposes of cl 3.3. The base EBITA and the target EBITA were to be found in the Business Plan, and nowhere else. In practical terms they affected the entitlement to a performance bonus pursuant to cl 10.2 and the liability to a deduction from salary for the purpose of cl 10.6. However, these individualised targets and the method by which the base EBITA was determined in a particular case were not a term of the Service Agreement for the purposes of cl 3.3.

If, however, they were a term for the purposes of cl 3.3, then they clearly were a term “in relation to ... the Business Plan” because the practical operation of the term depended on the contents of the Business Plan. Similarly, the percentage increase above the base EBIT that determined the availability of the bonus also was to be found only in the Business Plan and, if a term, was “in relation to ... the Business Plan”.

The actual term about the payment of an incentive bonus, cl 10.2, was the same in each contract, and therefore “no less favourable”. If, however, the way in which that term applied in a particular case due to the contents of the annexed business plan was a term of an agreement then it was a term “in relation to ... the Business Plan”.

The terms of the Service Agreement do not state, or even contemplate, that every Business Plan must have the same content in respect of EBIT or EBITA, the basis upon which it is determined and the percentage by which it increases each year. The definition of EBIT and the commercial context in which the Service Agreement was entered into indicate that the base EBIT and consequential targets are individualised. It would be surprising if cl 3.3 was to operate so as to standardise matters which, by their nature, should be individualised for ophthalmologists and found in his or her Business Plan. Otherwise, cl 3.3 would operate to reduce the target for performance to a level for the doctor with the lowest EBIT or the most favourable method by which to determine EBIT. The defendants’ arguments would have the effect of permitting Dr Kitchen (and others) to take advantage of a different doctor’s EBIT or the method used to determine it. This would have the effect of disconnecting the operation of the incentive bonus scheme from the basis upon which the practice was acquired by Vision.

There is a practical link between acquisition EBIT and the EBIT contained in the Business Plan for the purposes of, among other things, an entitlement to a performance bonus. It is difficult to see why Vision would use a different base EBIT for the acquisition of a doctor’s earnings stream to the base EBIT that was used for the incentive bonus. If, for example, EBIT is determined on the basis of an assumed cost base as a percentage of revenue because it is too difficult to calculate an actual cost base for a doctor working in a multi-doctor practice, it would be odd to require EBIT for the purpose of out performance to be based on actual costs.

More generally, the commercial context in which the Service Agreement was negotiated and the need to construe it so as to secure its commercial purpose require that cl 3.3 is construed in a manner which recognises that the contents of Business Plans, including the determination of EBIT were matters for individual negotiation in the context of an acquisition. In the circumstances, cl 3.3 should be construed so that individualised targets and the base from which they are set are not terms of the Service Agreement which attract the operation of cl 3.3. They do not attract the operation of cl 3.3 either because they are not terms of the agreement or because they fall within the exclusion of terms “in relation to ... the Business Plan”. Financial matters contained in a business plan such as base EBIT/EBITA are individualised and fall outside the operation of cl 3.3. This is so whether the figures are determined in accordance with a formula, based upon an agreed figure arrived at after a process of due diligence or determined by some other process.

The basis upon which EBIT/EBITA is determined is expressly stated to be found in the individualised business plan, and is not set by the terms of the agreement itself or some common understanding of how EBIT/EBITA is generally determined. This is subject to the express proviso contained in the definition of “EBIT” that it is determined for the purposes of the Business Plan on a proper commercial basis. It follows that the method or basis upon which EBIT is determined falls outside the operation of cl 3.3.

Individualised base EBIT/EBITA performance targets and the method by which they are determined in an individual case are not a term for the purposes of cl 3.3.

As a matter of company policy and to encourage revenue growth most of the Business Plans annexed to relevant agreements provided for the EBITA target in the Business Plan to increase by ten per cent compounding each year. However, it is possible to imagine circumstances in which a particular doctor who was to become a Salaried Doctor Partner would not agree to an EBITA target in his or her Business Plan which increased by ten per cent each year, exposing the doctor to a salary deduction under cl 10.6 if the quarterly EBITA was less than 85 per cent of the EBITA target. A doctor selling his or her practice to Vision might be at a career point when he or she did not wish to work harder and achieve compounding growth of ten per cent each year. In such a case the doctor might negotiate a growth target of less than a ten per cent annual increase and, in return, negotiate a lower base salary or a lower sale price.

The defendants submit that the growth target is not “in relation to” the Business Plan but is in relation to the Salaried Doctor Partner Incentive Scheme. I am unable to accept that submission. The fact that an individualised growth target has a bearing upon the incentive bonus and might be said to be in relation to the incentive scheme does not mean that it is not also “in relation to” the Business Plan. I consider that the financial performance targets (including the method by which a base EBIT was determined for the purpose of the incentive scheme and other purposes, and the growth provided for in the Business Plan) are matters “in relation to” the Business Plan.

In summary, I am not persuaded that these individualised matters in a business plan, including the base EBIT/EBITA or the amount by which they increase each year, each are a term of the Service Agreement for the purposes of cl 3.3. Instead, they are matters included in the Business Plan to which standard terms in the Service Agreement apply, including standard terms in relation to the performance of duties (cl 4.1(a)), the payment of a performance bonus (cl 10.2) and a deduction from salary for failing to reach 85 per cent of the EBITA target (cl 10.6).

If, however, these individual matters are terms then they are terms “in relation to ... the Business Plan” within the meaning of cl 3.3. They are to be found only in the Business Plan and they have a sufficient connection to the Business Plan to be excluded from the operation of cl 3.3.

As a result, many of the matters pointed to by the defendants in the Business Plans annexed to the contracts of other Salaried Doctor Partners fall outside of the operation of cl 3.3.

The meaning of “severally and overall”

Vision submits that the parties used the words “severally and overall” in cl 3.3 in order to prevent a party in Dr Kitchen’s position from seeking amendments to incorporate individual terms from other agreements which might, viewed in isolation, appear more favourable than the corresponding provision in his Service Agreement, but where a comparison of the two agreements overall showed that his overall position was no worse. This submission should be generally accepted, whilst noting that the relevant comparison expressly excludes a number of matters.

More contentiously, Vision submits that the comparison between Dr Kitchen’s Service Agreement and the New Doctor Agreement must take into account the price which he received for his practice, and the work practices required to generate the acquisition EBIT on which the purchase price was based, as compared to the price received by the other doctor. In other words, Dr Kitchen only has a right to amend the terms of his Service Agreement where the terms of that agreement as a whole, construed in light of the acquisition of his practice, are less favourable than the terms of the New Doctor Agreement as a whole, construed in light of the acquisition of that doctor’s practice.

I am unable to accept Vision’s submission for two main reasons. First, the acquisition of the practice, including the price paid for it, is reflected in factors that are excluded from the comparison exercise. These include terms in relation to salary, terms in relation to the Business Plan and terms in relation to certain categories of leave. Secondly, a comparison exercise which required an inquiry into the acquisition of each doctor’s practice would be extraordinarily complex and time-consuming. It would involve a comparison between the nature and value of different practices and the commercial arrangements by which practices were acquired. As this case indicates, such an inquiry may be extremely complex. In any event, the parties should not be assumed to have contemplated that the comparison called for by cl 3.3 would entail such a difficult practical exercise. As the defendants submit, one would have to inquire into “incommensurables or incomparables.” Such an exercise would be impractical and potentially highly costly for Vision in order for it to comply with its obligations to notify under 9.1(a).

Vision submits in support of its argument the example of an agreement which requires a doctor to work only half the number of sessions which Dr Kitchen works but for a significantly lower salary and in circumstances where the price paid for that doctor’s practice was significantly less due to the lower acquisition EBIT resulting from the doctor working fewer sessions. Vision argues that the construction for which the defendants contend requires one to ignore the lower salary and acquisition price. The only relevant consideration for comparison would be the number of sessions the doctor is required to work and Dr Kitchen would be able to elect to work the fewer number of sessions, notwithstanding the fact that he was paid a higher salary and received a higher acquisition price for his practice on the basis of historic EBIT generated from working the number of sessions agreed in the Service Agreement. I consider that Vision’s argument is adequately answered by the proposition that the number of sessions worked is a term in relation to salary or a term in relation to the Business Plan. The number of sessions to be worked has a clear and direct relationship upon the negotiated salary. It also has a direct bearing upon the contents of a Business Plan which is the place in which EBITA is to be found. Accordingly, it would fall within one of the exclusions and not be part of the comparison exercise.

The defendants are correct to submit that the comparison required by cl 3.3 does not require account to be taken of a large array of factors extrinsic to the terms of the Service Agreement, and which may be imponderable in their effect on value or benefit.

Under cl 3.3, Dr Kitchen might identify an individual term in another Salaried Doctor Partner’s New Doctor Agreement and contend that it is more favourable to the comparable term of his Service Agreement. However, the exercise of comparison under cl 3.3 does not permit him to “cherry pick” individual terms, viewed in isolation. Leaving aside terms that are the subject of express exclusion, the relevant comparison is with the terms of his agreement “severally and overall” with the terms offered under another’s doctor’s New Doctor Agreement.

As a result, if all but one term of the agreement are the same and the term of the New Doctor Agreement that is different is more favourable to the ophthalmologist than the comparable term in Dr Kitchen’s agreement, then Dr Kitchen may elect to have his agreement amended to include it. In other cases there may be more than one term which is different, one which is more favourable, and one which is less favourable. In such a case an overall comparison is required since the clause directs attention to the several and overall effect of the terms.

A helpful example was given by counsel for Vision in oral submissions. A New Doctor Agreement might be negotiated with a doctor who intended to take parental leave during the five year period of the initial Service Agreement following acquisition of her practice. In return for varying the standard pro-forma Service Agreement, Vision required the doctor to serve extra time to make up for the period of parental leave. In other words, the period of parental leave extended the term of the agreement. A party in Dr Kitchen’s position could not invoke cl 3.3 simply to include the more favourable term in relation to parental leave, disregarding the disadvantage of the term of the agreement being extended. On one view, he might seek the inclusion of both the provision for paternal leave and the term which extended the term of the agreement. If, instead, a New Doctor Agreement simply included a term for paternal leave with no other corresponding or compensating provision, then this term would be more favourable and if it did not fall within one of the express exclusions, then he could require it as a term of his agreement pursuant to cl 3.3.

Finally, cl 3.3 contemplates that the comparison exercise may extend beyond a comparison between individual terms. Dr Kitchen might compare the effect of a number of terms in his Service Agreement with the terms of a comparator agreement. In such a case the comparison must have regard to the overall effect of the non-excluded terms of one agreement with the non-excluded terms of the other. It is only where the terms severally and overall of the New Doctor Agreement are more favourable than the terms of Dr Kitchen’s agreement that Dr Kitchen has rights under cl 3.3 and an entitlement to be notified pursuant to cl 9.1(a) that he has or may have a right under cl 3.3.

Overview of the proper construction of cl 3.3

The exercise of considering the meaning of particular words and phrases within cl 3.3 detracts somewhat from the requirement to consider the clause as a whole, and to consider cl 3.3 in the context of the Service Agreement as a whole and the commercial context in which it was negotiated. An important part of that commercial context was the acquisition by Vision of Dr Kitchen’s practice and his associated agreement to work as a Salaried Doctor for Vision for an initial term of five years. The proper construction of cl 3.3 requires regard to that commercial context and Vision’s objective of obtaining a return upon its substantial investment in acquiring Dr Kitchen’s practice.

In general terms, cl 3.3 calls for a comparison between the terms of employment agreements which are the appropriate subject of comparison. Certain terms in relation to salary, in relation to the Business Plan, annual leave and other matters which are affected by the individual circumstances of doctors and the terms upon which their practices were acquired are not the proper subject of comparison and are expressly excluded from the comparison exercise which cl 3.3 contemplates.

Again, in general terms, the commercial purpose of cl 3.3 is to ensure that a Salaried Doctor Partner in the same employment situation as another Salaried Doctor Partner is treated no less favourably and that, leaving aside terms in relation to expressly excluded matters, a Salaried Doctor Partner in Dr Kitchen’s position has the same standard terms of employment as a Salaried Doctor Partner who enters into a New Doctor Agreement after the commencement of his or her Service Agreement. The broad process of standardisation of terms of employment contemplated by cl 3.3 does not apply to all doctors and to all of the terms of the employment agreements reached with them. Simply put, not all doctors are equal, but those in the same position should be employed on equal terms.

Not all doctors are equal because they undertake different kind of work, work a varying number of sessions per week and might choose to have different amounts of leave. Some might be content to negotiate a relatively small base salary in return for a higher acquisition price than others. These and other differences between doctors means that cl 3.3 does not guarantee equal terms between doctors.

Not all doctors who enter into a service or employment agreement with Vision are in the same position for another important reason and, as a consequence, cl 3.3 does not guarantee equality of terms between them. A doctor who has completed an initial term of employment following acquisition of his or her practice is not in the same position as a doctor who is still serving an initial period of employment, during which Vision is seeking to recoup its investment. To compare a doctor in the former category with a doctor in Dr Kitchen’s position is like comparing apples and oranges.

It would be invidious, if not impossible, and also unjust to compare the terms of Dr Kitchen’s Service Agreement with the terms offered under an agreement reached with someone who had already completed an initial period of employment and was no longer bound to work for Vision. It would be invidious because a further employment contract is not associated with any acquisition and Vision might be required to offer such a doctor more favourable terms than are offered under its standard Service Agreement to persuade the doctor to continue to work for Vision. For example, the doctor who had completed an initial term of employment of five years might not be inclined, for a variety of reasons, to commit to a further period of five years, but be prepared to work for two years. If the defendants’ preferred construction was adopted it would entitle Dr Kitchen to elect to have his five year agreement amended so as to provide for a reduced term of two years so as to match the two year term of a doctor who had already served out his initial five year period. Such a construction would have extremely adverse consequences for Vision and its shareholders and the parties should not be taken to have intended that cl 3.3 of Dr Kitchen’s agreement (and the same standard term in other Service Agreements) should have such an operation.

Clause 3.3 should be construed so as to advance the commercial purpose of ensuring that Dr Kitchen enjoyed the same terms of employment, subject to the specified exclusions, as a Salaried Doctor Partner in the same position as him who entered into a service or employment agreement in connection with the sale of a practice after 1 April 2006. This purpose is best achieved by construing “New Doctor Agreement” in the manner contended for by Vision.

The terms “in relation to Salary” and “in relation to ... the Business Plan” should be given a businesslike interpretation that produces a commercial result, having regard to the genesis of the Service Agreement, the commercial link between it and the Share Purchase Agreement and the purpose to be secured by the Service Agreement in that commercial context. Those terms should be construed so as to avoid consequences which are capricious, unreasonable and inconvenient. Moreover, if those terms were narrowly construed, the Service Agreement would cease to have a proper, businesslike operation in the context of the acquisition of a doctor’s practice. The exclusions “in relation to Salary” and “in relation to ... the Business Plan” should be construed so as to accommodate the fact that the practical content of standard terms in relation to those matters are affected by the circumstances of an acquisition and the terms of the acquisition contract.

Not all doctors serving their first five year period of employment following an acquisition are in the same position because the nature of their practices are different and the different natures of the practices which they sold are reflected in different base salaries, different business plans, and different base EBITs for the purpose of performance bonuses and penalties. In addition to the differences already noted, some doctors serving their first period of employment following the acquisition of their practices sold a practice which had a history of revenue and actual costs from which a base EBIT might be determined, whereas others who worked in a multi-practitioner practice for a percentage of the revenue they generated did not have a history of actual costs, or at least a history of actual costs which could be easily determined. In such a case their costs might be assumed to be a percentage of the revenue they generated. These differences are accounted for in the way in which EBIT or EBITA is determined for the purposes of the Business Plan annexed to the Service Agreement. These differences between practices and the manner by which EBIT is determined explains why the EBIT or EBITA figures (and the method by which they were arrived at) were simply matters in each doctor’s Business Plan to which the standard terms of the agreement applied. The actual terms of the agreement in relation to EBIT and EBITA were the same.

In reaching the conclusions which I have about the proper construction of cl 3.3, I have had regard to the surrounding circumstances known to the parties, including discussions between Dr Kitchen, Dr Unger and Ms Shaw in January 2006. Those communications, to be discussed in further detail in connection with the defendants’ counterclaim for misleading and deceptive conduct, do not detract from the interpretation which I have reached.

Was Dr Kitchen entitled to terminate the Service Agreement?

Vision’s claims for breach of contract depend upon whether Dr Kitchen was entitled to terminate the Service Agreement, either under cl 15.3 or by reason of Vision’s alleged repudiation of the Service Agreement.^[8] In turn, Dr Kitchen’s entitlement to terminate depends on whether Vision breached its obligations so as to trigger a right to terminate under cl 15.3 or amounted to a repudiation of Vision’s obligations so as to entitle Dr Kitchen to terminate the Service Agreement under the general law. The substantial issues in relation to termination of the Service Agreement have earlier been identified as issues 9 – 16 and can be further briefly summarised as follows:

(a)Did Vision (Icon) breach 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?

(b)If so, was any breach of cl 9.1(a) a “material breach” for the purposes of cl 15.3?

(c)If so, did Vision (Icon) fail to remedy the breach within 14 days of written notification of it?

(d)If so, was the Service Agreement validly terminated by Dr Kitchen after the 14 day period by his solicitor’s letter dated 10 September 2009?

(e)Was Dr Kitchen entitled to rely upon alleged breaches of the Service Agreement that were not identified in the notice of breach delivered on 25 August 2009?

An issue identified by the parties at the start of the trial, does not remain in issue. The defendants accept that the purported termination on 8 September 2011 was sent before the expiry of the 14 day period required under cl 15.3. In addition, Vision does not press the waiver argument previously identified.

If the defendants fail to establish the breaches of contract and repudiatory conduct alleged by them against Vision, then Dr Kitchen and the other defendants accept that his conduct in September 2009 evinced an intention no longer to be bound by the Service Agreement and supports a finding of repudiation entitling Vision to terminate the Service Agreement under the general law and sue for damages.

Did Vision (Icon) breach cl 9.1(a) of the Service Agreement?

In paragraph 5 of their counterclaim and in their submissions, the defendants allege numerous failures to notify which are alleged to constitute breaches of cl 9.1(a). Because of the construction which I have adopted to cl 3.3 and other terms of the Service Agreement, these allegations of breach cannot be sustained, and Dr Kitchen did not have an entitlement to terminate the Service Agreement in reliance upon them. The breaches alleged in subparagraphs 5(a) to 5(s) of the counterclaim are many and varied and it would add greatly to the length of this judgment to reproduce them or the extensive particulars in Schedule A to the counterclaim which consists of 166 items. Vision’s response to each of the terms pleaded in paragraphs 5(a) to 5(s) of the counterclaim were set out in Annexure B to its submissions. For the reasons given in that document I conclude that, with two possible exceptions, Vision (Icon) was not obliged to notify Dr Kitchen of the terms which are alleged in the counterclaim to be more favourable.

The possible exceptions relate to a term in respect of restraint of trade after termination and a term in relation to parental leave. As to the former, the defendants point to agreements made with nine other doctors which are alleged to be more favourable than the terms in Dr Kitchen’s Service Agreement in relation to a geographical restraint and the restraint period. Assuming that each of the relevant agreements was a New Doctor Agreement to which cl 3.3 applied, any alleged breach was remedied pursuant to cl 15.3 within the required 14 day period when Vision’s solicitor’s letter dated 8 September 2009 offered to amend Dr Kitchen’s agreement to reduce the geographical restraint to a maximum radius of 15 kilometres and to reduce the restraint period to a maximum of 18 months. As a result, there was no entitlement to terminate pursuant to cl 15.3.

In any event, it is questionable whether the terms pointed to by the defendants in other agreements in respect of different practices are more favourable. It was not established by the defendants that a maximum geographical radius of 15 kilometres in respect of other practices was more favourable than the maximum radius of 20 kilometres which applied under Dr Kitchen’s Service Agreement. It would depend upon the nature of each practice and what might loosely be described as its “catchment area”. A 20 kilometre radius in a provincial city may be more favourable than a 15 kilometre radius in a metropolitan area. The former might catch a smaller percentage of former Clients or a smaller market than the latter. If, however, terms offered by Vision to a Salaried Doctor Partner who entered a New Doctor Agreement after 1 April 2006 and which provided for a maximum geographical area of a 15 kilometre radius and a restraint period cascading from an 18 month period were more favourable terms, then any material breach of cl 9.1(a) was remedied. The alleged breach in respect of more favourable restraint of trade terms was not of a kind which constituted a repudiation.

The second possible exception in respect of breaches of cl 9.1(a) relates to a term of Dr Tenen’s agreement which permitted her to take unpaid parental leave. The period of parental leave taken by Dr Tenen was to be added to the initial five year service term to ensure that she worked the full five years, being the period that Vision sought to recover its investment in her practice. Vision argues that the inclusion of parental leave did not provide her with any real advantage over the terms of Dr Kitchen’s Service Agreement when the relevant terms are considered overall. This argument is well-made. However, the facility for parental leave, even unpaid leave which has the effect of extending the initial term of employment, is a more favourable term. This was not a term to which Dr Kitchen pointed as a material breach in his solicitor’s letter dated 25 August 2009, possibly because he was not aware of it. However, Vision’s solicitor’s letter dated 8 September 2009 offered to amend his agreement so as to deal with parental leave and this was effective to remedy any material breach for the purposes of cl 15.3. The omission to offer such terms in relation to parental leave, if a breach of the obligation to notify under cl 9.1(a), was not of a character which evinced an intention by Vision to be no longer bound by its obligations under the Service Agreement.

In the light of my interpretation of the Service Agreement, and subject to the two possible exceptions which I have addressed, the defendants have failed to prove that the matters pleaded in paragraphs 5(a) to 5(s) of the counterclaim were more favourable terms to which the obligation to notify under cl 9.1(a) of the Service Agreement applied. The defendants have failed to prove the numerous alleged breaches of cl 9.1(a) that were pleaded and contended for by them.

Were the alleged breaches “material”?

Because I have rejected the defendants’ contention that Vision breached the Service Agreement in the numerous respects alleged in paragraph 5 of the counterclaim, and because the two possible breaches addressed by me in the previous section were remedied within the 14 day period provided for in cl 15.3, it is strictly unnecessary to address whether each of the breaches alleged by the defendants would amount to a “material breach”. However, since the issue was litigated I should make findings in that regard.

Vision argues that even if Icon had been obliged to notify Dr Kitchen of the allegedly more favourable terms this was not a material breach which gave rise to a right to terminate under cl 15.3 or otherwise. It cites authority for the proposition that a material breach must be a matter “of moment or of significance, not merely trivial or inconsequential”.^[9] Vision submits that this means that the breach must have an adverse effect on the benefit which the innocent party otherwise would have gained from the contract. Vision submits that the alleged breaches were not material in circumstances where:

(a)Dr Kitchen had notice of many of the terms he now argues were more favourable, yet did not take any steps to have Vision incorporate them into his Service Agreement; and

(b)he does not plead that he would have incorporated a number of the terms he now argues were more favourable.

Vision’s argument about “notice” should not be accepted as establishing that Vision gave him “notice” as defined in cl 25 of the Service Agreement. It did not. Nor did it purport to informally notify Dr Kitchen in accordance with its obligations under cl 9.1(a). Vision’s argument, as I understand it, is not that it fulfilled its obligations under cl 9.1(a) by notifying Dr Kitchen. Its argument is that any failure to notify was not a “material breach” because Dr Kitchen already knew about these matters.

Vision’s cross-examination of Dr Kitchen established that he had extensive knowledge of the terms of other doctors’ agreements, particularly those doctors who he recruited to work in Central Queensland clinics. In paragraph 150 of his witness statement Dr Kitchen acknowledged that he had assisted in recruitment in Central Queensland and had copies of some of the agreements. However, he said he had never reviewed them in detail or appreciated that the terms being offered to them were more favourable than the terms of his agreement. I conclude that Dr Kitchen was aware of the terms of agreements with a number of doctors who he recruited.

Dr Kitchen also had some knowledge of the contents of other doctors’ Service Agreements by virtue of his attendance at board meetings of Vision in late 2008 and early 2009. An agreement with Dr Chen was summarised in the materials prepared for the board meeting on 27 April 2009. I conclude that, given Dr Kitchen’s general interest in the financial affairs of Vision and the terms upon which new doctors were recruited and their practices acquired, he knew that Dr Chen’s practice was acquired on the basis of costs fixed as 40 per cent of revenue. The defendants make the point that knowledge of the basis upon which EBIT was calculated for the purpose of acquisition cannot be equated with knowledge of the fact that the same base EBIT was to be used for the calculation of performance bonuses and the like. However, this point of distinction, which was developed in legal argument, was probably not apparent to Dr Kitchen at the time. Someone in his position would tend to assume that the base EBIT (and the method used to determine it) adopted for the purpose of acquisition would be used for the purpose of the Business Plan. Why would the parties adopt an assumed cost percentage for the purpose of an acquisition but a different basis for the purpose of a business plan negotiated in the context of that acquisition? I conclude that Dr Kitchen’s familiarity with the basis upon which Associates were remunerated and sometimes became Salaried Doctor Partners under a staged acquisition process and that the practice of at least Dr Chen was based upon such a 40 per cent figure left him with some knowledge of the fact that acquisition contracts with new doctors like Dr Chen and their Service Agreements were based upon costs being a fixed percentage of revenue.

I do not accept Dr Kitchen’s evidence in paragraph 150 of his witness statement. I conclude that he had a reasonable knowledge of the terms that were offered to doctors who he recruited to Central Queensland.

The state of Dr Kitchen’s knowledge in these respects does not, however, persuade me that (assumed) breaches of the terms of which he knew would not be “material breaches” for the purposes of cl 15.3. In some cases the terms which were offered to other doctors, including doctors who Dr Kitchen recruited, would have been more favourable to him if he had chosen to have them incorporated in his Service Agreement. The fact that he did not seek their inclusion does not prove that any relevant breach was not a “material breach” for the purposes of cl 15.3.

One possible explanation for Dr Kitchen not taking steps to have such terms incorporated into his Service Agreement, despite his knowledge of those terms in the agreements negotiated with other doctors after 1 April 2006, is that Dr Kitchen did not apprehend that such terms gave rise to rights under cl 3.3. It is possible that he understood, in my view correctly, that the matters fell within exclusions and were not subject to what may loosely be described as the “no less favourable” clause of his and other previously-contracted Salaried Doctor Partners who had the benefit of cl 3.3 of the standard Service Agreement.

Whatever the explanation for Dr Kitchen not taking steps to have Vision incorporate the terms about which he knew into his Service Agreement, if Vision breached the Service Agreement by failing to notify him of them then the breach would amount to a “material breach” because it cannot be said that a breach was merely trivial or inconsequential. A failure to formally notify terms which had potential financial consequences for Dr Kitchen would deprive him of the opportunity to consider exercising rights under cl 3.3, and the consequences of having the terms of his Service Agreement amended so as to include the terms. The loss of the opportunity to reflect on the potential advantages of amending his agreement would not be trivial or inconsequential.

Some of the alleged breaches may not have qualified as “material”. However, if the defendants had established many of the breaches alleged by them then I consider that the breaches would have been “material” breaches within the meaning of cl 15.3.

Did Vision fail to remedy the material breaches notified to it within 14 days?

For the reasons discussed above, the defendants have not established that there was a material breach of the obligation under cl 9.1(a) which was the subject of written notification in Dr Kitchen’s solicitor’s letter dated 25 August 2009. As already noted, if the alleged breaches in respect of restraint of trade terms in some doctors’ agreements and a term in relation to parental leave in Dr Tenen’s agreement triggered an obligation to notify under cl 9.1(a) then any material breach in that regard was remedied within 14 days of written notification by Vision’s solicitor’s letter of 8 September 2009.

Dr Kitchen’s purported termination

Dr Kitchen’s purported termination of the Service Agreement in his solicitors’ letter dated 8 September 2009 was ineffective to terminate the agreement pursuant to cl 15.3. The 14 day period allowed under cl 15.3 had not expired at the time the notice purporting to terminate the Service Agreement pursuant to cl 15.3 was sent on 8 September 2009. Where a right to terminate is expressly granted by the contract, strict compliance with its terms is required.^[10] The right to give notice of termination under such a clause must not be anticipated, and where such notice is given even slightly prematurely, it is of no effect^[11]. An express right to terminate under cl 15.3 could not be validly exercised before the time provided for it in the clause.^[12]

The second purported notice of termination given by Dr Kitchen’s solicitors on 10 September 2009 was stated to be without prejudice to the position stated in the letter of 8 September 2009 and to terminate the Service Agreement pursuant to the formal notice of termination attached.

Icon did not breach the Service Agreement, save in two possible respects, being matters which were remedied within the 14 day period. Insofar as alleged breaches were the subject of written notification in the letter of 25 August 2009, the alleged breaches were not in fact breaches of the Service Agreement which gave rise to a right to terminate pursuant to cl 15.3 upon the expiry of the 14 day period. Dr Kitchen did not have a right to terminate the Service Agreement pursuant to cl 15.3 and any purported termination of the Agreement on that basis was ineffective.

Purported termination on grounds not identified in the Notice of Breach

Dr Kitchen did not refer in his solicitors’ letter dated 25 August 2009 to many of the terms pleaded by him in his counterclaim. Vision argues that in not giving the required notification of the alleged breaches, Dr Kitchen deprived it of the opportunity to remedy the breaches.

As a matter of principle, the right to terminate pursuant to an express termination clause will only be effective if there is strict compliance with the clause, and this includes the requirement to give written notification of the breach. A breach which is not the subject of written notification cannot be relied upon for the purposes of termination pursuant to cl 15.3.

This is not to say that an alleged breach that was not identified (even in suitably general terms so as to permit Vision to investigate the allegation and remedy the alleged breach in time) cannot be relied upon to terminate the Service Agreement pursuant to an entitlement under the general law. Vision does not contend that cl 15.3 operates as, in effect, a code governing Dr Kitchen’s entitlement to terminate the Service Agreement.

Although Dr Kitchen could not rely upon breaches that were not notified in accordance with cl 9.1(a) to terminate the Service Agreement pursuant to cl 15.3, it was open to him to terminate the Service Agreement if he had a common law entitlement to accept a repudiatory breach or if Vision otherwise conducted itself so as to evince an intention to no longer be bound by the Service Agreement. The general rule is that an innocent party may justify termination in reliance upon a ground which was not originally relied upon as a ground of termination and about which the terminating party was unaware at the time.^[13] In accordance with this general principle, it was open to Dr Kitchen to rely upon an alleged repudiatory breach of the Service Agreement that was not notified in the solicitors’ letter dated 25 August 2009 as giving rise to a common law entitlement to terminate.

Did Vision repudiate the Service Agreement?

The issue then is whether Dr Kitchen was entitled under the general law to terminate the Service Agreement on the grounds of Vision’s repudiation of its obligations, notwithstanding that his purported termination was ineffective to terminate the Service Agreement pursuant to the right to terminate expressly conferred by cl 15.3.

A contract is repudiated if a party evinces an intention no longer to be bound by it or shows that it intends to fulfil the contract only in a manner substantially inconsistent with the obligations and not in any other way.^[14]

For the reasons previously given, Icon did not breach the Service Agreement in the numerous respects alleged by Dr Kitchen in these proceedings. As to the two possible breaches which I have earlier canvassed, Vision remedied those breaches within 14 days of receiving Dr Kitchen’s letter of 25 August 2006. It did not evince an intention not to be bound by the Service Agreement.

In the light of the construction which I have adopted in relation to the terms of the Service Agreement, Vision adopted a generally correct interpretation of its contractual obligations. Any arguably erroneous interpretation of its contractual obligations advanced in its letter of 8 September 2006 is not said to constitute, of itself, a repudiation of the contract.^[15]

For completeness, I should add that the evidence discloses that the management of Vision took steps to ensure that New Doctor Agreements accorded with what I will describe as its standard form of contract so as to not give rise to rights under cl 3.3 and obligation to notify under cl 9.1(a). That said, there was evidence of side agreements in relation to certain matters. However, it was not demonstrated that such side agreements related to matters other than matters that were the subject of exclusion under cl 3.3. The evidence does not disclose that Vision adopted a practice of disregarding its obligations towards Dr Kitchen under cl 3.3. It apprehended, correctly in my view, that it was not obliged to give Dr Kitchen notice of the numerous matters raised by him in these proceedings which are alleged to have constituted more favourable terms falling within cl 3.3 of the Service Agreement.

The fact that in response to Dr Kitchen’s notice of material breach Vision identified a number of matters which might be caught by cl 3.3 does not prove a material breach, let alone repudiatory conduct. The identification of such matters is explicable by Vision acting out of an abundance of caution so as to avoid Dr Kitchen having a right to terminate pursuant to cl 15.3.

Conclusion on Dr Kitchen’s purported termination

Dr Kitchen did not have a right to terminate the Service Agreement, either pursuant to the express termination provisions of cl 15.3 or pursuant to a common law entitlement to terminate on the ground of alleged repudiation by Vision.

Repudiation by Dr Kitchen

Dr Kitchen purported to terminate the Service Agreement on 8 September 2009 without proper cause. It is unnecessary to address whether this purported termination amounted to repudiatory conduct. When Vision asserted that the notice was premature, Dr Kitchen took no further steps in reliance upon it and, in any event, Vision did not accept the repudiation at that time.

Dr Kitchen again purported to terminate the Service Agreement in his solicitors’ letter dated 10 September 2009. He did so without proper cause. It is unnecessary to address whether this second purported termination was itself repudiatory conduct entitling Vision to terminate. It might be argued that the purported termination was a bona fide assertion of rights based upon a mistaken interpretation of the Service Agreement. It is unnecessary to reach a concluded view about whether the second notice of termination amounted to repudiatory conduct because Dr Kitchen’s conduct was not limited to having solicitors send the notices in question. He acted on the basis that the Service Agreement was at an end. Even before these notices were issued he had taken steps to depart from Vision and establish a new clinic in Rockhampton. The defendants accept that if Dr Kitchen is unsuccessful in proving Icon’s breaches of contract then Dr Kitchen had evinced an intention no longer to be bound by the Service Agreement.

I find that Dr Kitchen evinced an intention to no longer be bound by the Service Agreement, including his conduct in purporting to terminate the Agreement on 10 September 2009. He repudiated the contract by renouncing his obligations under it. A reasonable party in Vision’s position could hardly draw any other inference than that Dr Kitchen considered himself to be no longer bound by the Service Agreement and did not intend to fulfil his obligations under it.

Dr Kitchen having repudiated the Service Agreement, Icon was entitled to accept his repudiation and terminate the Agreement on 13 September 2009. This is the date upon which it and Vision’s solicitors wrote to Dr Kitchen’s solicitors and accepted his wrongful repudiation of the Service Agreement.

PART III – RESTRAINT OF TRADE PROVISIONS

Because Dr Kitchen did not validly terminate the Service Agreement pursuant to cl 15.3, the restraint of trade provisions of cl 17 did not cease to apply by virtue of cl 17.7 of the Service Agreement and the restraint of trade provision in cl 12 of the Share Purchase Agreement did not cease to apply to Dr Kitchen by virtue of cl 12.7 of the Share Purchase Agreement. The restraint of trade clauses survived Dr Kitchen’s purported termination of the Service Agreement. An issue arises about their enforceability.

This issue arises in the context of considering Vision’s loss: Vision’s case being that if Dr Kitchen had performed the Service Agreement rather than repudiated it, he would have served out the balance of its term and not commenced to practise in Rockhampton in breach of the restrictive covenants. Vision submits that Dr Kitchen would not have challenged their validity or, that if he had done so, any challenge probably would have failed.

In addition to submitting that the restrictive covenants are valid as part of its case on the loss caused to it as a result of the repudiation and termination of the Service Agreement, Vision relies upon them in alleging that Dr Kitchen breached cl 17 of the Service Agreement and the defendants breached cl 12 of the Share Purchase Agreement.

The defendants submit that these provisions are unreasonable restraints of trade because:

they purport to give Vision more than adequate protection for its legitimate interests because of the extent of their purported geographic application; and

they are offensive to public policy because they would deter establishment by Dr Kitchen of regional ophthalmic specialist clinics in many areas and from providing ophthalmic services in areas where Dr Kitchen had not ever practised before, and thereby limit the public’s access to such services.

Relevant principles

The principles governing the validity of restrictive covenants of the kind under consideration are not in dispute. The general principle is that a restraint of trade is prima facie invalid, but may be enforced if it affords no more than reasonable protection to the party in whose favour it is imposed and is not injurious to the public.^[16]

The party who seeks to enforce the restraint has the onus of proving that the restraint is reasonable as between the parties.^[17] The restraint must operate to protect a legitimate interest of the covenantee. The test is whether the restrictive covenant exceeds what is reasonable and necessary for the protection of the legitimate interest.

The reasonableness of the restraint is determined at the date of entry into the agreement.^[18] The issue is whether the agreement was a reasonable one to make at the relevant time, having in mind the best estimate the parties could make for the future.^[19] Reasonably foreseeable expansions are taken into account in determining the scope of a protectable interest.^[20] The covenant can be that which is reasonable to protect the contemplated expansion.^[21] The test is whether at the date of the agreement reasonable people in the position of the parties would have expected that performance of the agreement ... would be likely to generate significant new goodwill which the covenantee ... could reasonably protect.^[22]

The buyer of a business has a legitimate interest in protecting its investment against competition by the seller, since without a covenant against competition the buyer would not get what it was contracting to buy.^[23] A covenant against competition is reasonable if it protects the goodwill that is purchased. The question of whether the protection given to the covenantee is excessive can give rise to issues about the width of the activities that are restrained, the area or scope of the restraint and whether the duration of the restraint is unduly long.^[24] The principal protection afforded by such restraints is of goodwill in the form of connection with existing or potential customers.^[25] An employer also has a legitimate interest in maintaining a stable workforce.^[26]

In what may be described as “employee cases”, different interests are at stake to those that arise in the sale of a business. Subject to reasonable restraints to protect an employer’s legitimate interests, an employee should be free to pursue a living in his or her chosen field. The principal interest which can be protected by a restraint against a former employee is the benefit of the former employer of the relationships with its customers.^[27] In general, restrictive covenants restraining an employee will be scrutinised more strictly than covenants in relation to the sale of a business.^[28] A restraint upon a former employee may be reasonable if it allows a replacement employee to establish a connection with customers and thereby protect the employer’s goodwill.^[29] One test is to ask how long it will take the connection between the ex-employee and the customer to die away.^[30]

Not all cases can be categorised according to a dichotomy of sale of business cases and employee cases. In some cases, an employment contract is entered into by the seller or an individual associated with the seller of a business, such as the seller’s major shareholder or controlling mind. Such a case tends to be treated differently to an ordinary employee case.^[31] In some cases, the relevant restrictive covenant is found only in the sale agreement. In the present case, similar restraints are found in both the Service Agreement and in the Share Purchase Agreement.

Although cases abound involving medical practices “it is unwise to seek to deduce some general principle from them”.^[32] Some arise in the context of a medical partnership or similar commercial arrangements.^[33] Others concern the purchase of the practice management goodwill and the goodwill of a medical practice, but not the goodwill of each doctor in his or her professional practice.^[34] As Young JA stated in Sidameneo, a court will fall into error in this area of the law if it fails to recognise that the decided cases are very much fact specific.^[35] That said, cases recognise that the connection between patients and a medical clinic is a form of goodwill and a legitimate interest of value to the owner of the practice.^[36]

The same may be said of the connection between a referring doctor and the specialist or group of specialists to whom patients are referred. Just as the goodwill of a general practitioner rests on the willingness of patients to consult him or her, the goodwill of a specialist rests on the willingness of other medical practitioners to refer patients to him or her.^[37] The connection between the referring doctor and the clinic or practice which has been purchased is a legitimate interest which may be protected by a reasonable restraint of trade.

The fact that the parties agreed to the restraint and that the contract acknowledges that the restrictions are reasonable is some evidence of their reasonableness,^[38] particularly where the parties bargain from a position of equality.^[39] An acknowledgement of reasonableness should be given appropriate weight.^[40] This is because the parties are taken to have a good knowledge of the relevant industry and are in a better position than the Court to assess what amounts to reasonable protection.^[41] However, a declaration by a party that a restraint is reasonable does not bind the Court.^[42]

Provisions in a restrictive covenant may be severed if they are capable of being regarded as divisible and deleted without materially modifying the effect of what remains. In addition, the parties may expressly provide that each obligation has independent operation and is severable.

Courts will not rewrite the parties’ contract for them. However, within certain limits which are not alleged to have been exceeded in this case, a contract may contain cascading restraint of trade clauses.^[43]

What legitimate interests was Vision entitled to protect under a restrictive covenant?

Vision was not simply the buyer of a stand-alone medical practice. Vision was not simply agreeing to employ Dr Kitchen, as it might employ an ordinary employee. Vision was acquiring Dr Kitchen’s practice so that it would become part of a network of practices and clinics, and was employing Dr Kitchen in the context of the acquisition of his practice. It expected the practice it acquired to expand and for Dr Kitchen to be part of Vision’s plans to expand in Central Queensland and elsewhere. Dr Kitchen knew this and promoted the acquisition of his practice as part of Vision’s expansion plans.

The Service Agreement contemplated that Dr Kitchen would work at existing clinics at North Mackay, Rockhampton, Gladstone, Bundaberg and Hervey Bay. It also contemplated in cl 5.1 that he might be required to work, and consent to work, at other clinics from which Vision or related entities provided services.

Vision’s acquisition of Dr Kitchen’s practice and his employment via Icon under the Service Agreement were linked, both legally and commercially. It is necessary to consider Vision’s legitimate interests in protecting its goodwill in two related respects:

as buyer of goodwill which it hoped to maintain and expand with Dr Kitchen’s employment for at least five years and with the involvement of additional doctors; and

as employer of Dr Kitchen who would make connections with new patients and referring doctors during the period of his employment.

The consideration which Vision agreed to pay under the Share Purchase Agreement was fixed in the context of an associated agreement which contemplated that he would be employed, not necessarily exclusively in Central Queensland, for at least five years. Vision was paying for a practice which had an existing goodwill, and the parties would reasonably have expected performance of the agreements would be likely to generate significant new goodwill with referring doctors and patients which Vision could reasonably protect.^[44]

The goodwill which the parties would have expected the performance of the agreements to generate included expansion of existing practices and the development of new practices as part of Vision’s model for growth and the parties’ plan to expand operations in Central Queensland by recruiting additional doctors.

The doctor-patient relationship in the present case can be said to differ from a typical relationship between a patient and a general practitioner. In the case of a specialist ophthalmologist, the personal connection may be weak, because patients generally do not require long-term relationships with their ophthalmologists. Common conditions like cataracts can often be treated in a one-off procedure and do not require ongoing treatment. Treatment for other conditions is different, for example, the regular injections required to treat wet macular degeneration. Treatment for glaucoma requires consultations about twice a year, and most patients choose to see the same ophthalmologist so their condition can be monitored over the course of time. The doctor-patient connection may not be as strong as the connection in a long standing relationship between a patient and a general practitioner. However, it is a connection that is likely to generate goodwill of value to the doctor’s employer. In addition, the connection between patients and a clinic is a form of goodwill and of value to the parties who own the practice.^[45]

Vision’s submissions emphasise the amount which it agreed to pay to acquire Dr Kitchen’s practice as part of Vision’s expanding business and the expected state of its business after Dr Kitchen was employed for at least five years. This is said to give rise to a legitimate interest which Vision was entitled to protect. However, the issue is not so much the amount paid by Vision, or the adequacy of the consideration given for the restraint.^[46] Instead, in asking whether a restraint is reasonable in the interests of the party, it is permissible to consider the quantum of consideration received by the covenantor and the effect of the agreement on the position of the covenantor.^[47] In this case, a large consideration was agreed to be paid in order to acquire Dr Kitchen’s practice so that it might be integrated into Vision’s expanding network. Whilst no specific part of the consideration was apportioned to the restraints, the agreement described it as substantial. Dr Kitchen and Vision intended the Central Queensland part of Vision’s operations to grow over the five years following the sale to Vision. Having paid a substantial amount to acquire Dr Kitchen’s practice and to have Dr Kitchen work for it for at least five years, Vision had an interest in not having the human face of the purchased business go into competition with it, particularly in the vicinity of the Central Queensland practices and in areas of Central Queensland where that business was well-known and expected to expand.

It might be said that Vision had a broader commercial interest in not having the defendants, including Doctor Kitchen, go into competition with it in other areas in which Vision had a presence and into which it intended to expand. The question, however, is whether Vision had a legitimate interest to protect in those areas. In the context of the acquisition of a business, it is the business that is being acquired that may be legitimately protected, not the existing business of the buyer of which it will become part.

The mutual presentations that occurred in January 2006 demonstrated that both parties contemplated the growth of Vision and the expansion of the operations of the practices and clinics which Vision expected to acquire from the defendants. At the time of entering the agreement there was no reason to suppose that Vision would not open additional clinics in Far North Queensland or acquire existing practices in other parts of Queensland if the opportunity presented itself. In 2006 Dr Kitchen’s family arrangements were such that he and his wife were prepared to relocate. They later relocated from Mackay to Rockhampton. Depending upon the recruitment of doctors to work in Central Queensland, there was scope for Dr Kitchen to relocate and develop Vision’s practices elsewhere in Queensland or, indeed, in other parts of Australia.

The parties must be taken to have reasonably contemplated that Vision would continue to expand and that the Central Queensland business and practices which it acquired would expand during the term of the Service Agreement. The interest that might be legitimately protected by a reasonable restrictive covenant was “the state of the enterprise in five plus years’ time”.^[48] One must consider the goodwill which Vision acquired and the new goodwill it and Dr Kitchen expected to generate from performance of the agreements. It was not unreasonable for the parties to assume that Dr Kitchen had and would continue to attract patients and referring doctors, and that unless there was some restraint, some of those patients and referring doctors would follow him if he left Vision, with an adverse effect on Vision’s purchased goodwill.

Vision and its related entities which employed its staff also had a legitimate interest in maintaining a stable workforce.^[49] As an employer they had an interest in protecting their connection with staff in the same way that a business has an interest in protecting its connection with customers. Staff may not be bound to always work for an employer, just as customers are not bound to give their custom to a business. However, the legitimate interest of an employer in retaining a stable workforce entitles it to reasonable protection against having staff “poached” by another employee who has influence over them or a former owner of a business with whom the staff have a connection.

The impugned conduct

In paragraphs 25 and 26 of the second further amended statement of claim, Vision pleads a range of conduct which is alleged in various ways to have breached separate restraints in each of the Service Agreement and the Share Purchase Agreement. In general terms, the restraints are alleged to have been breached by the defendants’ and Dr Kitchen’s conduct in:

opening the CQ Eye clinic within three kilometres of the Vision clinic in Rockhampton and within a week of his purported termination of the Service Agreement;

opening the CQ Eye clinic in the same building as the Vision clinic in Gladstone less than nine months after his purported termination of the Service Agreement;

publicising the opening of the new CQ Eye clinics and seeking to have Vision patients contact him to arrange for appointments at the new practices; and

employing former Vision staff in the new clinics.

Vision places at the forefront of these allegations the canvassing or soliciting of custom or business away from a “Client” in breach of cl 17.1(c) of the Service Agreement and cl 12.1(c) of the Share Purchase Agreement. It also relies on subparagraphs (a), (d) and (e) of each of those clauses in respect of the establishment of a private practice within the defined “Geographical Area”.

The relevant provisions

Clause 17 of the Service Agreement and cl 12 of the Share Purchase Agreement have a similar structure. The obligations inhibit competition in different ways, and each clause contains a number of separate, independent obligations. There are some differences between the two clauses, the most important being the “Geographical Area”. It is defined in the Share Purchase Agreement as “Queensland” whereas the Service Agreement defines “Geographical Area” in cascading areas within a 20, 15, 10, 5 and 2 kilometre radius of a “Service Clinic”. For the purposes of the Service Agreement, a “Service Clinic” is defined to mean any place of business from which Icon, Vision or a related body corporate of Vision provides services during the initial term and any extension of the initial term under cl 3.

I shall set out cl 17 of the Service Agreement in full. Rather than also set out cl 12 of the Share Purchase Agreement in full I shall note some of the more important differences between it and cl 17:

“17Non-competition

17.1Subject to clause 17.7, the Ophthalmologist will not, without the prior written consent of the Company, directly or indirectly do any of the following:

(a)at any time during the Term or the Restraint Period directly or indirectly participate in any Restricted Business at any place within the Geographical Area:

(i)as a promoter, principal, sole trader, joint-venturer, partner, director, officer, manager, employee, contractor, adviser, agent, trustee, beneficiary, unit-holder or shareholder (other than as the holder of no more than 5% of the issued capital of any company or trust whose shares or units are listed on a recognised stock exchange), or

(ii)without affecting the above, in any other capacity in which the Ophthalmologist is likely to or may directly or indirectly benefit from using or disclosing any confidential information acquired under this Agreement;

(b)without limiting the generality of clause 17.1(a) above, at any time during the Restraint Period within the Geographical Area be employed by, provide services to, or have any other business association with a Direct Competitor;

(c)at any time during the Restraint Period within the Geographical Area either on the Ophthalmologist’s own account or for any other person:

(i)canvas or solicit orders, custom or business relating to any Restricted Business from a Client, or otherwise

(ii)interfere with or endeavour to entice away a Client from the Protected Persons;

(d)at any time during the Restraint Period within the Geographical Area either on the Ophthalmologist’s own account or for any other person accept any request to provide services which relate to the Restricted Business to a Client;

(e)at any time during the Restraint Period and either on the Ophthalmologist’s own account or for any other person, solicit, interfere with or endeavour to entice away from a Protected Person any person who at any time within twelve months before the Termination Date (or where at the Termination Date, the period of Employment is less than twelve months, that lesser period) was an employee, contractor, partner or consultant of the Protected Persons;

(f)at any time during the Restraint Period within the Geographical Area counsel, procure or otherwise assist any person to do any of the acts referred to in this clause; or

(g)at any time after the Termination Date represent himself as being in any way connected with or interested in the business of the Protected Persons.

17.2For the purposes of this clause 17, the following words will have the following meanings:

Client means:

(a)a person who at any time during the period of twelve months prior to the Termination Date (or if at the Termination Date the period of Employment is less than 12 months, that period) was a client of the Protected Persons with whom the Ophthalmologist has had contact as a consequence of that person being a Protected Person with or performed services for during the Employment; and

(b)without limiting the generality of paragraph (a) of this definition, a Client includes a referring doctor or a patient of the Company, VGH or a Related Body Corporate of VGH, with whom the Ophthalmologist has dealt during the Employment.

Direct Competitor means:

(a)a direct competitor of the Company, VGH or any of their Related Bodies Corporate; and

(b)any other person who primarily engages in the Restricted Business in the Geographical Area.

Geographical Area means:

(a)an area within a twenty kilometre radius of a Service Clinic unless that area is held invalid for any reason by a court of competent jurisdiction;

(b)in which case, an area within fifteen kilometre radius of a Service clinic unless that area is held invalid for any reason by a court of competent jurisdiction;

(c)in which case, an area within ten kilometre radius of a Service Clinic unless that area is held invalid for any reason by a court of competent jurisdiction;

(d)in which case, an area within five kilometre radius of a Service Clinic unless that area is held invalid for any reason by a court of competent jurisdiction;

(e)in which case, an area within a two kilometre radius of a Service Clinic.

Restraint Period means:

(a)24 months from the Termination Date, unless that period is held invalid for any reason by a court of competent jurisdiction;

(b)in which case, 18 months from the Termination Date, unless that period is held invalid for any reason by a court of competent jurisdiction;

(c)in which case, 12 months from the Termination Date, unless that period is held invalid for any reason by a court of competent jurisdiction;

(d)in which case, 6 months from the Termination Date.

Restricted Business means the provision of business of providing Ophthalmic Services.

17.3The parties agree that the acts referred to in clause 17.1 if undertaken by the Ophthalmologist during the Restraint Period and within the Geographical Area would be unfair and calculated to damage the business of the Protected Persons and would lead to substantial loss to the Protected Persons.

17.4The parties agree that the covenants and restraints of this Agreement are reasonable and that substantial consideration has been received in respect of such covenants and restraints both directly and indirectly by the Ophthalmologist.

17.5The provisions of this clause 17 will not in any way operate to limit the generality of any other clause of this Agreement, all of which will have at all times independent operation unrestricted by the provisions of this clause 17.

17.6If:

(a)any of the restrictions contained in clause 17.1 are judged to be unenforceable by a court or tribunal because they go beyond what is reasonable to protect the business of the Protected Persons; and

(b)these restrictions would be judged reasonable by that court or tribunal if the extent of the restrictions were reduced (including, but not limited to the Restraint Period or Geographical Area),

then the restrictions will be reduced by the minimum amount required by that Court or Tribunal to make them enforceable.

17.7This clause 17 will not apply:

(a)if the Ophthalmologist terminates this Agreement pursuant to clause 15.3;

(b)if, on compassionate grounds based on the Ophthalmologist’s circumstances at the time, the Company (in its absolute discretion) so directs the Ophthalmologist in writing;

(c)if the Company fails to remedy a material breach by it under this Agreement; or

(d)if the Company is the subject of an Insolvency Event.”

There is an obvious problem with, and apparent omission of words from, the definition of “Client” in cl 17.2. The term “Protected Persons” is defined by the Service Agreement to mean Icon and Vision, their Service Clinics and any of their Related Bodies Corporate. It is fairly apparent that the words “a client of ” have been inadvertently omitted from subparagraph (a) of the definition of “Client”. The person being referred to in the clause is obviously a Client rather than one of the Protected Persons. The clause does not make sense without the inclusion of those words. Accordingly, subparagraph (a) should be read as if it contains the following words.

“a person who at any time during the period of twelve months prior to the Termination Date (or if at the Termination Date the period of Employment is less than 12 months, that period) was a client of the Protected Persons with whom the Ophthalmologist has had contact as a consequence of that person being a client of a Protected Person with or performed services for during the Employment”

Subparagraph (a) of the definition of Client might be compared with the similar definition in the Share Purchase Agreement which reads:

“a person who at any time during the period of 12 months prior to the Termination Date was a client of a Protected Person with whom the Doctor has had contact or performed services for during his engagement by the Company”

The “Company” referred to in the Share Purchase Agreement was Swordfish Nominees Pty Ltd.

As noted, the Geographical Area is defined differently in each agreement. Another significant difference is that cl 12 of the Share Purchase Agreement imposes obligations upon the Warrantors, whereas cl 17 imposes obligations only upon Dr Kitchen. The Warrantors under the Share Purchase Agreement are the sellers (Dr Kitchen and Michelle Kitchen as trustees of the MDK Trust) and Dr Kitchen. The Share Purchase Agreement picks up some of the definitions contained in the Service Agreement. Whereas the restraints in cl 17 are defined in some cases as being “at any time during the Term or the Restraint Period” cl 12 refers to “at any time prior to the expiry of the Restraint Period”. These and other slight differences are not of any consequence in the circumstances. Relevantly, the Restraint Period commences with cascading periods (the longest being 24 months and the shortest being six months) from the Termination Date which is defined to be the date on which the employment of Dr Kitchen by Icon pursuant to the Service Agreement terminates, for whatever reason.

Clause 17.7 of the Service Agreement and cl 12.6 of the Share Purchase Agreement provide that the relevant clause will not apply to Dr Kitchen if he terminates his Service Agreement pursuant to cl 15.3 of the Service Agreement.^[50]

The parties in their submissions proceeded on the basis that the restraints in both cl 17 of the Service Agreement and cl 12 of the Share Purchase Agreement ceased to apply to the defendants if Dr Kitchen terminated the Service Agreement pursuant to cl 15.3 of the Service Agreement. This is not strictly correct, since cl 12.6 of the Share Purchase Agreement only provided that cl 12 would not apply “to the Doctor” in that event. Nothing turns on that distinction in the light of my finding that Dr Kitchen was not entitled to terminate the Service Agreement under cl 15.3. However, the distinction suggests that in different circumstances Dr Kitchen might be freed from the restraints in both clauses, but the sellers remain bound by the restraints in cl 12 of the Share Purchase Agreement notwithstanding Dr Kitchen’s termination of the Service Agreement.

The relationship between the two agreements and the similar restraints in each

Subject to the differences that I have noted, the two clauses seek to restrain the same activities. It will be necessary to consider the individual restraints. The pleadings place them in two categories. The first relates to canvassing or soliciting custom or business relating to ophthalmic services from a Client or otherwise interfering with or endeavouring to entice away a Client from Vision. The second relates to the establishment of a practice that provides ophthalmic services and employing persons who were employed in the business prior to the Termination Date.

Because separate, though similar, restraints were contained in the Service Agreement and the Share Purchase Agreement, I raised during oral argument the issue of whether, despite the contracts being interdependent, broader restraints might be permitted in the Share Purchase Agreement so as to protect the buyer of a business than the restraints that would be permitted in an employment contract. The defendants fairly acknowledged that the Service Agreement was connected with the sale and that the defendants could not prevent a legitimate attempt to protect a connected interest which arose as part of the same transaction. That said, the defendants submitted that the Share Purchase Agreement had to be tested on its merits as a sale restraint and the Service Agreement had to be tested on its merits as an employment restraint.

Vision contended that whilst one ordinarily would tend to look at the restraints in the sale agreement as protecting the goodwill that had been purchased and Vision’s capital investment as a buyer, the two contracts were interdependent. The agreements should be read together. The Service Agreement was not an ordinary employment contract. It was an agreement entered into with a company acquired by the buyer of the business. If, for example, the Share Purchase Agreement did not contain a restraint clause, or contained a restraint clause that was invalid, one would still have regard to the fact that the Service Agreement was entered into with the alter-ego of the seller of the business, and would not have been entered into if there had not been a purchase of the business and its goodwill. I agree. As a result, each agreement must be considered as to whether it protected the related legitimate interests of Vision as the buyer of goodwill and as the employer of Dr Kitchen.

Vision’s interest as buyer of Dr Kitchen’s practice cannot be isolated from its interest in employing Dr Kitchen (via Icon). Performance of the Service Agreement was linked to the interests which Vision acquired and expected to keep as a result of entering into the Share Purchase Agreement. The Service Agreement was linked to the maintenance and growth of the goodwill acquired from the defendants and Dr Kitchen’s employment was integral to that interest. Vision was prepared to pay a substantial amount to acquire the business and to oblige Dr Kitchen to work for its related company, Icon, so that at the end of his employment, the goodwill of the practice which it acquired would be maintained and hopefully increased. The parties contemplated this and that Vision would generate significant new goodwill as a result of the defendants and Dr Kitchen performing their agreements. Vision was entitled to reasonably protect the goodwill and other business interests which it acquired and the additional goodwill which the parties expected performance of both contracts to generate.

In the circumstances, it is artificial to treat the Service Agreement in isolation, as if it was entered into with a doctor who was simply recruited to Vision, rather than a doctor whose practice had been sold to Vision in the expectation that his employment for a period of at least five years would maintain and increase the goodwill which Vision agreed to purchase. This accords with the approach in other cases which support the proposition that in the context of a sale of a business the “employee” covenant is not looked at in isolation, and it does not matter whether the relevant covenant is in the employment contract or the sale contract.^[51]

The independence of the agreements means that one or both can seek to protect the legitimate interests of Vision and its related entities as a the buyer of the business and its goodwill^[52] and as the employer of Dr Kitchen who had, and was expected to continue, to generate goodwill as the “human face”^[53] of his employer. However, care is required to identify in a particular context the legitimate interest which is said to justify a particular restraint in either the Service Agreement or the Share Purchase Agreement.

The goodwill of the seller included the custom of existing clients (both patients and referring doctors) and the propensity of those existing clients to recommend to others the services of the business. In general, in employee cases the interest in customer connections is limited to existing customers, whereas it may extend more widely in sale of goodwill cases.^[54] The buyer of the goodwill in a medical practice is interested in being protected against future competition of the seller with persons who are patients of the practice at the time of the sale and with potential patients.^[55] It is legitimate for the buyer to secure potential patients in that area and adjoining places into which the practice was reasonably expected to expand.^[56]

The theory that only the business being sold is protected is said to entail the consequence that “the size of any business of which the business sold becomes part is irrelevant”.^[57] The theory that only the business being sold is protected is qualified by allowance for reasonable and expected expansion. Still, it is the business being sold, not the business of which it will become part, which determines the interest being protected. Accordingly, it is the area in which it operates (and any expansion within that area by way of infill or into adjoining places by virtue of its goodwill), not the area in which the buyer operates that governs the reasonableness of a restraint.^[58]

The various restraints and their reasonableness

Vision must justify the reasonableness of the restrictive covenants it seeks to enforce, not simply the reasonableness of their application to the impugned conduct in Rockhampton and Gladstone. The defendants plead that each restraint is unreasonable because it purports to give greater than adequate protection for Vision’s legitimate interests by reason of its purported geographic application. In the case of cl 17 of the Service Agreement it is its purported geographic application to locations proximate to Vision’s Service Clinics. In the case of cl 12 of the Share Price Agreement the challenge is to its purported geographic application to all of Queensland. The defendants did not plead that, if the restraints were reasonable in their geographical application, their duration was too long or that the conduct restrained was unduly wide. This is understandable since the evidence was that a significant proportion of patients visit such a clinic only sporadically, and the authorities take account of the fact that, in such a case, a reasonably long period may be required to “break” the connection between doctor and patient.^[59]

Each agreement contains more than one restraint. The reasonableness of each restraint has to be tested on its merits. It is too simplistic to ask the general question in respect of each agreement: is the Geographical Area unduly wide? Whether the Geographical Area is too wide depends upon the context in which the defined Geographical Area is applied.

The non-solicitation of a “Client” and similar restraints in the Service Agreement

Clause 17.1(c) of the Service Agreement does not impose a total restraint against soliciting business by providing ophthalmic services within an area up to 20 kilometres of a Vision clinic. It is a restraint on soliciting business in such an area from a “Client”. In simple terms, a “Client” is someone who, during the 12 months prior to the termination of Dr Kitchen’s employment, was a client of Vision with whom Dr Kitchen had contact as a consequence of that person being a client of Vision. The client might be a patient or a referring doctor. Similar observations apply in respect of subclause 17.1(d), which is concerned with the provision of services to a “Client”.

The defendants challenge the restraints in cl 17.1(c) and (d) because the restraints apply within the stipulated proximity of any Vision clinic. This tends to overlook the limitation of the restraint to a “Client”. It is not a broad restraint on soliciting business or providing services to persons in the vicinity of any Vision clinic. Each restraint is limited to “Client” being a patient or referring doctor with whom Dr Kitchen dealt with in the course of his employment with Vision. The restraint is limited to persons whom Dr Kitchen has a connection as an employee of Vision, and this reduces its operation, irrespective of its geographic application.^[60]

According to the defendants, Dr Kitchen’s engagement was in circumstances where he only ever operated in, and could only have goodwill in, Central Queensland. I am unable to accept the proposition that the parties at the time of entering into the Service Agreement only expected Dr Kitchen to generate goodwill with patients and referring doctors in Central Queensland. Whilst the parties may have expected that Dr Kitchen would spend a substantial part of at least his initial term of employment in Central Queensland so as to maintain practice goodwill, recruit new doctors and expand its operations, the term of the Service Agreement might extend beyond its initial five year period.

At any time during its initial five year period or during its extended period Dr Kitchen might begin to practice in places other than Central Queensland. For example, depending upon the staffing in Central Queensland, he might be asked to develop Vision’s business in Far North Queensland and to establish a clinic in Cairns. He might be asked to establish a Vision clinic in his home state of South Australia. For personal and professional reasons he might have wished to relocate to another area. Depending on his and his family’s priorities, Vision’s needs for his services and the recruitment of other doctors to work in Central Queensland, Dr Kitchen might work in a Vision clinic outside of Central Queensland. He might do so for a few days each month or for a longer period. Just as Vision had to consider having one of its other doctors work in its Central Queensland clinics after Dr Kitchen’s departure, Dr Kitchen might have agreed to fill in for, or replace the services of, another doctor who left a Vision clinic outside of Central Queensland.

Clause 5.1 of the Service Agreement expressly contemplated that Vision might require Dr Kitchen to perform duties at other Service Clinics with his consent. These might include new clinics in Central Queensland or clinics outside Central Queensland. If Dr Kitchen agreed to work in a Vision clinic outside Central Queensland he would develop professional connections with referring doctors and patients in the course of performing that work as an employee of Vision. The possibility of Dr Kitchen working for Vision outside of Central Queensland was not purely theoretical. Clause 5.1 of the Service Agreement confirms this. Vision was entitled to reasonable protection of the goodwill which Dr Kitchen generated wherever he worked for it.

Given the Vision Group’s interest in protecting goodwill in the form of an employee doctor’s connection with patients and referring doctors, the relevant restraints in sub-clauses 17.1(c) and (d) seem reasonable as between the parties. Even though they extend to Geographical Areas outside of Central Queensland, they are not unreasonable because cl 17.1(c) and cl 17.1(d) was tied to clients with whom Dr Kitchen had personal contact.

The defendants note that the restraints imposed under these sub-clauses of cl 17.1 protected not only the interests of Dr Kitchen’s employer, Icon, but its holding company, Vision and other companies related to Vision. Icon is said to have not had any existing business to protect apart from the business of the clinics acquired from Dr Kitchen and there is said to be no evidence that it intended to expand on the number or location of such clinics. But this ignores Icon’s interest as Dr Kitchen’s employer under the Service Agreement and the goodwill he was expected to generate for the Vision Group in performing his employment.

Icon became Dr Kitchen’s employer in the circumstances earlier canvassed. It became the wholly-owned subsidiary through which Vision employed Dr Kitchen. Icon, as Dr Kitchen’s employer, had an interest in deploying his services in Central Queensland, and elsewhere if required, in order to advance Vision’s business interests, as well as preserving and increasing the goodwill which Vision had acquired from Dr Kitchen and entities associated with him.

There is some scope for an employer to restrict an employee from dealing with customers of another entity within the same corporate group, where one entity is used to employ staff to gain and maintain customers for the group, and the employee in the course of employment generates such a customer connection. However, an employer in one business within a group cannot seek to gain protection from competition in another unrelated business within the group.^[61] This is not a case of different businesses trading in different fields within a diverse group of related companies. Dr Kitchen’s employer, Icon, formed part of the Vision Group and in performing his contract he was developing goodwill for the Vision Group.

Dr Kitchen covenanted to protect not only the interests of his employer (Icon) but the parent company of his employer (Vision). In negotiating the interdependent agreements, the parties operated on the basis that for all practical purposes, Dr Kitchen was to be employed by the Vision Group. He was to undertake his duties in accordance with the business plan negotiated between him and Vision. He was expected to work at clinics that were owned and operated by Vision or one of its related bodies corporate. Icon had an interest in protecting the goodwill that was acquired as a result of the acquisition of Dr Kitchen’s practice and which Dr Kitchen’s employment pursuant to the Service Agreement was expected to maintain and increase for Vision’s benefit. As Dr Kitchen’s direct employer, Icon also had an interest in protecting the goodwill which Dr Kitchen generated for the benefit of the Vision Group in performing the Service Agreement.

Sub-clause 17.1(c) is in essence a non-solicitation clause, whereas sub-clause 17.1(d) is a restraint on accepting a request to provide services to a “Client”. Similar considerations apply to both. There may be a need for a longer protection against solicitation of a patient than for a patient who follows the doctor and requests services.^[62] However, the interest being protected by sub-clauses (c) and (d) is essentially the same. Each sub-clause protects a legitimate interest in the goodwill developed by Dr Kitchen with referring doctors and patients and which he would continue to develop with referring doctors and patients as an employee.

As to sub-clause (d), the defendants’ submissions raise an argument to the effect that it was not in the public interest to exclude a medical specialist such as Dr Kitchen from meeting the needs of patients with whom he or she has a long-standing clinical relationship. I consider that issue later in that context of whether the restraint is offensive to public policy. To the extent the argument is raised as being relevant to the reasonableness of the restraints as between the parties I consider that the restraint is reasonable. Any restriction on patient choice of doctor does not make the restraint unreasonable as between the parties since such a restriction is integral to the protection of the covenantee’s goodwill.

In summary, I conclude that subclauses 17.1(c) and (d) of the Service Agreement are reasonable in their geographic application since they are concerned with soliciting business from a “Client” or accepting a request to provide ophthalmic services to a “Client”. This does not mean any client of Vision. It means either a patient or a referring doctor of Vision, with whom Dr Kitchen had contact because that person was a client of Vision or because Dr Kitchen performed services for the person during his employment.

Each of the restraints protected the legitimate interests of Vision in:

the goodwill of “Clients” which was acquired as a result of the acquisition of Dr Kitchen’s practices and which it expected to maintain as a result of Dr Kitchen’s performance of the associated Service Agreement; and

the goodwill of “Clients” which he was expected to generate in working for Vision at any of the Vision clinics at which he might agree to work during the course of his employment.

Because the restraints are limited to “Clients” (as defined) their geographic application was not excessive. I do not accept the defendants’ argument that the only patient of Vision with whom Dr Kitchen might be expected to have professional contact during the term of his employment contract was in Central Queensland, so that the covenantee could only have goodwill in Central Queensland. The Service Agreement contemplated that he might work in other Service Clinics, and it was entirely possible that during the course of the Service Agreement (which might be extended in accordance with cl 3.2 beyond its first five years of operation) he might do so. He would generate connections with “Clients” and goodwill for Vision in any such places.

I conclude that each of the restraints in cl 17.1(c) and cl 17.1(d) of the Service Agreement protected the legitimate interests which I have identified and was not unreasonable, as the defendants contend, because of their purported geographic application.

Definition of “Client”

The pleaded objection to the reasonableness of the restraint was its purported geographic application, not the duration of the restraint or that, on one view, it may have extended to clients with whom Dr Kitchen had contact some years earlier during the course of his employment pursuant to the Service Agreement.

Therefore it is unnecessary to determine an issue about the interpretation of “Client” raised in the defendants’ submissions, but which was not raised in the pleadings. The defendants interpret “Client” as meaning a patient or referring doctor of Vision during the period of 12 months prior to the termination of the Service Agreement and with whom Dr Kitchen has had contact at any time during the five years of his employment with Icon/Vision. A competing interpretation is that the definition does not refer to Dr Kitchen’s contact with the patient as being at any time during the term of his engagement. The definition refers to a person who during the period of 12 months prior to the termination date was a client of Vision with whom Dr Kitchen has had contact. On this view, the contact by Dr Kitchen must have occurred within the 12 month period and been with a client of Vision.

The interpretation of “Client” is awkward because the concluding words of (a) (“during the Employment”) seem to create a separate temporal element to the earlier 12 month period, at least in respect of “performed services”. One practical problem with this approach is that it would be hard to tell when a person ceased to be a client of Vision in order to decide if the person was a client of Vision within the 12 month period.

Although it is unnecessary to decide the point, I prefer to interpret sub-clause (a) of the definition as creating one temporal element, namely the period of 12 months during which the ophthalmologist must have had contact as a consequence of the person being a Client of Vision or performed services as an employee under the Service Agreement. On this view the words “during the Employment” are concerned not so much with a different temporal requirement but with the fact that the services were performed during and in the course of the employment, and not in connection with some other activity.

On this approach the “Client” who Dr Kitchen is precluded from soliciting during the Restraint Period within the Geographical Area is a person who during the 12 months prior to termination:

was a client of Vision with whom Dr Kitchen has had contact as a consequence of that person being a client of Vision;

was a client of Vision for whom Dr Kitchen performed services.

The inclusion of the words “during the Employment” serve to emphasise that the services performed for the person do not extend to services performed in some other capacity, such as non-ophthalmic services or ophthalmic services performed as a volunteer. They tie the definition of “Client” to contact with clients in performing services in the course of the ophthalmologist’s employment with Icon/Vision.

Had it been necessary to decide the point, and the defendant’s interpretation of “Client” had been preferred, I would not regard the geographic application of cl 17.1(c) and (d) as excessive and unreasonable because “Client” was so defined. The sporadic and often infrequent contact between an eye specialist and a patient would make a restraint of this kind reasonable.

The non-solicitation and similar restraints in the Share Purchase Agreement

Whilst the restraints in cl 17.1(c) and (d) of the Service Agreement are reasonable to protect the legitimate interests of Icon/Vision against the solicitation of a “Client” by its former employee, Dr Kitchen, or providing services to such a “Client”, the restraints in cl 12.1(c) and (d) of the Share Purchase Agreement cannot be similarly justified. Even assuming that the Share Purchase Agreement picked up the Service Agreement definition of “Protected Persons”, the definition of “Client” in the Share Purchase Agreement turns on contact with a client of a Protected Person during Dr Kitchen’s engagement by “the Company”. The Company is defined to be Swordfish Nominees, and there is no evidence that Dr Kitchen was engaged by it, rather than by Icon which operated the relevant practice before and after Vision’s acquisition of it. Swordfish Nominees simply owned Icon.

Therefore sub-clauses 12.1(c) and (d) cannot be relied upon as valid restraints against the solicitation of business from referring doctors and patients with whom Dr Kitchen had established goodwill in the course of his post-acquisition employment by Icon. Insofar as they relate to customer connection generated as an employee or independent contractor of Swordfish Nominees, they may be valid restraints but there is no evidence that Dr Kitchen was employed or engaged by Swordfish Nominees before the sale.

Restraint against establishment of a competing practice

I turn to the different category of restraints which are not necessarily concerned with the provision of ophthalmic services by Dr Kitchen to a “Client”, but which, in effect, prohibited the establishment of a practice in competition with Vision and the employment of individuals who, at any time within 12 months before the termination date, had been an employee, contractor, partner or consultant of the protected entities. These restraints appear to be principally directed to the protection of the goodwill and business acquired by Vision from competition by the seller of the business, and also with the interest in maintaining a stable workforce which would not be poached by a previous owner or former employee.

Again, the defendants’ objection to the extent of protection is the purported geographic application of the restraints. In the context of Vision’s acquisition of Dr Kitchen’s practices from the defendants it is appropriate first to consider cl 12.1(a) of the Share Purchase Agreement. The defendants point to the reach of the “Geographical Area” of the restraint in the Share Purchase Agreement, namely all of Queensland. They note that at the time of entry into the Share Purchase Agreement Vision conducted ophthalmic practices in Melbourne, Sydney, Brisbane, the Gold Coast and Townsville. They submit that, while Vision may have had the potential to expand its coverage, it cannot be the case that the exclusion of Dr Kitchen and the other defendants from all of Queensland was reasonably necessary to protect the interest and goodwill in the practices it had acquired from them.

Vision, as buyer of the Kitchen practices, had a legitimate interest to protect in respect of the Central Queensland practices and their expected expansion. As discussed above, in the case of the sale of a business, it is the business and goodwill of the business that is sold that may be protected. A buyer’s existing business (including the goodwill it enjoys in the areas in which it currently operates) is not itself protected, even where the business being bought is to be integrated into it. Clause 12.1(a) went beyond protecting Vision’s legitimate interests as a buyer of the Central Queensland practices.

I conclude that the restraint in cl 12.1(a) of the Share Purchase Agreement was excessive in terms of its geographical reach because it extended beyond the area of Central Queensland in which the practices that were acquired operated and were expected to expand. Vision was not entitled to enforce such a geographically wide restraint in order to protect its legitimate interests as the buyer of those practices.

The counterpart restraint in cl 17.1(a) of the Service Agreement, to the extent it seeks to protect an interest as buyer in the context of Dr Kitchen’s effective role as seller, also extends beyond the area of Central Queensland and, as a result, is unreasonably wide.

To the extent Icon might protect its and Vision’s legitimate interests as Dr Kitchen’s employer, the restraint in cl 17.1(a) of the Service Agreement was excessive in terms of its geographical reach because it extended beyond the area of any Vision clinic in which Dr Kitchen would in fact work as an employee. Also, legitimate interests in connection with goodwill which Dr Kitchen might develop as Icon’s employee could be, and were, reasonably protected by non-solicitation and similar restraints. A total ban on competition in any of the relevant areas, rather than one directed to dealings with patients and doctors with whom Dr Kitchen has a connection as employee, was excessive to protect the legitimate interests of his employer.

Clause 17.1(a) prevented Dr Kitchen establishing a practice in the vicinity of any Vision clinic, including clinics in which he would not in fact work at any time during the course of his employment. Such a restraint is unreasonably wide in referring terms of its geographic restraint to protect his employer’s interest (and the legitimate interests of its parent company) in the goodwill he was expected to generate as an employee. The counterpart restraint in cl 12.1(a) of the Share Purchase Agreement had a different geographic reach, but that reach was too wide to protect Vision’s interest in the goodwill Dr Kitchen was expected to generate as an employee of Icon/Vision in performing the Service Agreement. It was not confined to the area of Vision clinics in which he would work or places in which patients, referring doctors and staff with whom he dealt as a Vision employee were located.

Restraint against poaching staff

As noted, Vision was entitled to protect itself during the term of the agreement and prior to the expiry of the Restraint Period against the Warrantors enticing away certain persons who were employed by Vision. Sub-clause (e) was not the subject of separate submissions, but the pleaded objection is to its purported geographical restraint.

An employer has a legitimate interest in protecting its connection with staff since it comprises part of its goodwill and is amenable to protection by a covenant in a manner similar to customer connection.^[63] But the reasonable protection of that interest does not justify a covenant against enticing away an employee with whom the covenantor has had no connection.

Sub-clause (e) does not contain such a limitation, and is not confined to employees with whom Dr Kitchen might be supposed to have influence, such as employees of the practice sold by him. Its geographic application was too wide. Unlike other sub-clauses, it was not even confined to Queensland in the case of the Share Purchase Agreement and to the vicinity of any Vision Clinic in the case of the Service Agreement. Sub-clause 17.1(e) of the Service Agreement would include the employee of a Vision clinic in which Dr Kitchen had never worked and staff with whom he had no connection. The terms of the restraint would, for example, prevent Dr Kitchen from offering to employ a receptionist who worked in one of Vision’s Melbourne clinics (where he might never have worked) in a clinic he planned to establish in Adelaide. The sub-clause is unreasonable in the absence of a requirement for connection between Dr Kitchen and the relevant employee. Because it applies to all Vision clinics, not just the ones in which Dr Kitchen would work under the Service Agreement and thereby establish a connection with fellow employees, or the Central Queensland clinics in which he had worked and presumably established a connection with staff, it is too wide to protect legitimate interests as an employer or buyer. It is unenforceable.

Sub-clause 12.1(e) of the Share Purchase Agreement is not confined to enticing away employees of the Seller. It extends to employees of a “Protected Person” (a term not defined in that agreement). Assuming it picks up the definition of “Protected Persons” in the Service Agreement, the restraint is too wide to protect Vision’s legitimate interest as:

the parent company of Dr Kitchen’s employer for the same reason that cl 17.1(e) extended beyond the legitimate interests of his employer;

the buyer because the employees and others who could not be enticed away might be employed at any Vision clinic, far away from the business acquired and be a person who had no connection with the Seller or Dr Kitchen. It is too wide in its geographic application and is unenforceable.

The parties’ acknowledgment of the reasonableness of the restraints

The fact that the parties to each agreement acknowledged that the restraints were fair and reasonable is some evidence of their reasonableness.

Vision urges the Court in reaching a conclusion about the reasonableness of the various restraints to have regard to the fact that Dr Kitchen and the defendants bargained with Vision from a position of equality, that Dr Kitchen was familiar with non-compete provisions having included similar provisions in contracts with doctors who worked for his Central Queensland practice, and had his solicitors review the agreements and seek variations to them before they were executed. Only limited weight should be placed upon these matters in determining the issue of reasonableness. Also, as Dr Kitchen submitted, the restraints, being part of Vision’s standard terms, were not open for negotiation, at least in the context of the Service Agreement.

Dr Kitchen was surprised when he saw that the draft Share Purchase Agreement only restricted him to Queensland. The restraint permitted him and the other Warrantors to establish ophthalmological practices that directly competed with Vision’s practices in Victoria and New South Wales and to establish clinics in other States. But Dr Kitchen’s apparent belief that Vision might have sought to restrain the seller from competing against it in other parts of Australia and his surprise that it had not done so counts for every little. He was not a lawyer, and being unfamiliar with the restraint of trade doctrine might have thought that a buyer can legitimately protect itself from competition against its existing businesses, rather than the business which it intends to buy.

The defendants also point to evidence given by Mr Rodaway that during his tenure as CEO he considered a new standard form of restraint clause which was more favourable to the new doctors and re-signing doctors, and was said to apply only within a certain kilometre radius over a certain period of time by reference only to the practice in which a doctor had worked. I would not regard this evidence as a recognition, let alone an admission, by Vision that the previous form of restraints were unreasonable. It simply is evidence that, at some later time, and well after the time at which the present agreements were negotiated, different restraint of trade clauses were included in the employment agreements of certain new doctors. Any new contractual term does not have much bearing upon the reasonableness of any restraint in an acquisition agreement of the kind negotiated with the defendants. The evidence of Mr Rodaway about certain restraint of trade provisions in the new standard doctor contract is not very probative of the reasonableness, or otherwise, of other provisions.

In summary, I place limited weight in determining the issue of reasonableness upon the fact that the defendants, with their familiarity with non-compete provisions and acting with legal advice, acknowledged that the restraints were reasonable. Likewise, I put limited weight on the fact that well after the relevant date Vision introduced some different restraint of trade provisions into its Service Agreement.

Miscellaneous issues

Vision pleaded, but did not press, an argument that the restraints were reasonable having regard to the fact that between November 2008 and August 2009 Dr Kitchen was a member of Vision’s board and, as a member of the board, had access to and was involved in decisions about the strategic and commercial nature of Vision’s business. The defendants correctly submit that the time for determining reasonableness is when the restraint was entered into, and that Dr Kitchen’s elevation to the board should not be taken into consideration in assessing the reasonableness of the restraint.

Vision’s submissions referred to the fact that when the parties entered into the Service Agreement and the Share Purchase Agreement it was expected that Dr Kitchen would play an important role in the management of the Central Queensland practice and, in that role, would gain knowledge about Vision’s financial processes and pricing. This knowledge is said to be of a kind which could prejudice Vision in any of the areas in which it operated, not simply in those clinics which made up the Central Queensland practice. The acquisition of such knowledge was not pleaded as a matter which justified the reasonableness of the restraint, and I need not consider the matter.

Also, there was no pleaded reliance upon, or challenge to the validity of, restraints of the kind contained in cl 17.1(a)(ii) of the Service Agreement and cl 12.1(a)(ii) of the Share Purchase Agreement about benefiting from using or disclosing any “Confidential Information”.

Are the restraints reasonable in the interests of the covenantees?

Vision must justify the reasonableness, as between the parties, of the separate restraints it seeks to enforce, and prove that the particular restraint is no wider than is reasonably necessary to protect the covenantee’s legitimate interest. I have concluded that Vision had a legitimate interest as buyer of the practices and anticipated owner of Icon in the goodwill that was acquired and the goodwill which was expected to be generated during the term of Dr Kitchen’s employment. The legitimate interests of Vision and Icon in the performance of the Service Agreement and the Share Purchase Agreement in their capacities as buyer and as employer are linked, legally, commercially and practically. To the extent they can be separated, Vision had an interest as buyer in patients remaining patients of the Central Queensland practices it bought, in new patients attending its Central Queensland clinics as a result of the practice’s goodwill, and in doctors continuing to refer patients to those clinics and to the Vision doctors engaged to work at them. The authorities recognise the legitimate interest of the owner of a medical practice in protecting the goodwill of the practice. In addition, Vision and Icon had a legitimate interest in the goodwill and business which Dr Kitchen generated as an employee, particularly his connection with patients and referring doctors.

The first restraint upon which Vision relies is cl 17.1(c) of the Service Agreement. It is reasonable because it is limited to canvassing or soliciting custom or business from a “Client” or endeavouring to entice away a “Client” from Vision or one of its clinics, a Client being a person with whom Dr Kitchen had contact or performed services. I have concluded that it was reasonable for Vision/Icon to protect its interests as employer of Dr Kitchen in that regard. Dr Kitchen might work during the term of his employment in another Vision clinic. In the circumstances, the purported geographic application of this restraint was not excessive. Vision/Icon had interests to protect in such professional connections, irrespective of where the patients or referring doctors were located. The restraint in sub-clause 17.1(d) is similarly limited and also reasonable.

Because of the different definition of “Client” the parallel restraints in cl 12.1(c) and (d) of the Share Purchase Agreement cannot be justified as protecting legitimate interests in goodwill generated by Dr Kitchen with a “Client” as an employee of Icon after the acquisition. The restraints relate to “Clients” with whom Dr Kitchen had contact or performed services for during his engagement by Swordfish Nominees, not his employment by Icon. He was not engaged by Swordfish Nominees either before or after the sale to deal with patients and referring doctors.

In short, there were no “Clients” as defined in the Share Purchase Agreement because the referring doctors and patients with whom Dr Kitchen dealt were not dealt with during any engagement of him by Swordfish Nominees.

The second category of restraints relates to the establishment of a private practice providing ophthalmic services in the relevant geographical area in competition with the Vision Group business and employing persons who were employed in the Vision Group prior to 13 September 2009. Vision relies on cl 17.1(a) and/or cl 17.1(e) of the Service Agreement and cl 12.1(a) and cl 12.1(e) of the Share Purchase Agreement. Vision as buyer of the practices and Icon as Dr Kitchen’s prospective employer had interests in the protection of the goodwill which was acquired and which it expected to grow following the acquisition, and also in the goodwill which was anticipated would be generated by Dr Kitchen’s performance of the Service Agreement. The Geographical Area to which the restraints in the Share Purchase Agreement applied extended beyond Central Queensland to the whole of Queensland. I have concluded that this was not reasonable to protect Vision’s legitimate interests as a buyer because it extended beyond the area of the business that was acquired.

Clause 17.1(a) and cl 12.1(a) were excessive to protect Icon and Vision’s interests as employer because each restraint on establishing a practice extended beyond the areas in which Dr Kitchen would work as an employee and generate goodwill for Icon and Vision. The Vision Group’s interest in the goodwill Dr Kitchen generated in performing the Service Agreement, in particular his connection with patients and referring doctors, extended to areas in which he would be employed by Icon, and these extended beyond Central Queensland. However, it was not reasonable to prevent its former employee, Dr Kitchen, establishing a practice in an area in which he had not worked as an employee of Icon/Vision or in an area where he had no connection with clients of Vision. Also, the restraint extended to establishing a new practice in which Dr Kitchen did not himself work, but simply owned. Because the geographical reach of each sub-clause (a) extends beyond the area of Vision clinics in which Dr Kitchen would in fact work as an employee of Icon, and is not otherwise limited to areas in which, as an employee, he generated a connection with patients, doctors and Vision staff, it is unreasonable.

The restraints imposed by cl 12.1(e) of the Share Purchase Agreement and cl 17.1(e) of the Service Agreement are unreasonable and go beyond what is reasonable to protect the legitimate interest of Vision in maintaining a stable workforce. The restraints extend to employees with whom the defendants as Seller and Dr Kitchen as employee had no connection.

Vision has established that only two of the restraints upon which it relies are not wider than reasonably necessary to protect it and Icon’s legitimate interests. The remainder are unenforceable.

Are the restraints in sub-clauses 17.1(c) and (d) in the Service Agreement offensive to public policy?

Because the restraints which are reasonable as between the parties are few in number and limited to dealing with “Clients” my conclusion about whether they are offensive to public policy may be shortly stated. The relevant restraints did not prevent the establishment of a clinic. The defendants might establish a clinic and Dr Kitchen might practice ophthalmology provided he did not solicit custom from or provide services to a “Client”. Subject to these restraints, he might practise in declared areas of need. There would be scope to practice in Rockhampton and Gladstone to meet demand from patients who were not “Clients”. The restraint upon dealing with a “Client” for the relevant restraint period has not been shown to reduce the overall provision of ophthalmic services in areas of need to such an extent to be contrary to public policy. Dr Kitchen was free to treat as many patients as he could whilst other doctors treated any “Clients” during the restraint period.

Any restraint on a “Client’s” ability to consult a particular doctor of his or her choice is outweighed by the public interest in upholding restraints of the present kind, which enable the doctor in question to treat other patients, whilst protecting the legitimate interests of a covenantee.

The restraints imposed by sub-clauses 17.1(c) and (d) of the Service Agreement are not contrary to public policy.

Are the other restraints offensive to public policy?

I will address the parties’ public policy arguments more fully because, if I had found the other restraints to be reasonable as between the parties, I would not have found them to be unenforceable on the public policy grounds advanced by the defendants.

The defendants plead that the restraints relied upon by Vision are offensive to public policy in that the restraints:

would deter establishment of regional ophthalmic specialist clinics on all of the eastern seaboard of Australia; and

would prohibit the defendants providing ophthalmic services in areas where Dr Kitchen had not ever practised before and so limit the public’s access to such services.

The first plea is refined in the defendants’ submissions to refer to the establishment of clinics on all of the eastern seaboard of Australia (in the case of the Service Agreement) and anywhere in Queensland (in the case of the Share Purchase Agreement). A distinction is drawn in the pleadings between the effect of the restraints in deterring the establishment of regional ophthalmic specialist clinics and the provision of ophthalmic services. It should be noted in that regard that not all of the restraints prevent Dr Kitchen from working as an ophthalmologist. For example, he might work as an employee in an unrelated party’s practice which did not compete with Vision.

The defendants accept that the onus of establishing that a restraint of trade is not reasonable in the public interest rests upon the party making that assertion. This concession is properly made in the light of the authorities.^[64] Heydon observes that “most restraints reasonable between the parties are not harmful to the public interest generally, and the burden of proving the unusual should be on the party who alleges it.”^[65] The onus of proving unreasonableness in the public interest is said to be “a heavy one once reasonableness in the covenantee’s interest has been proved.”^[66] And Heydon observes that this is certainly true in cases of goodwill and employees’ covenants.^[67]

In the context of goodwill, Bridge v Deacons (A firm)^[68] is authority that there is a clear public interest in imposing restraints on professional partners, since this facilitates the entry of young partners, thereby encouraging the entry of young persons into the profession. This ultimately benefits clients by tending to secure continuity in the practice. This proposition is apposite in the present case where the Salaried Doctor Partners were styled as partners and an emphasis was placed upon succession as a means of securing Vision’s future.

Heydon cites substantial authority for the view that a covenant against a solicitor acting for a client of a partnership after the solicitor departs from it is not against public policy, notwithstanding the fiduciary relationship and the confidence that existed between them. There may be exceptions where such a covenant may be bad, for example, where the covenant operates to prevent a solicitor continuing to act for a client in pending litigation.^[69] Further, it has been held to be not against public policy for a general medical practitioner operating under the National Health Service to be bound by a covenant against competing with his former partners.^[70]

There is a Canadian authority where a covenantor, being a specialist in obstetrics and gynaecology, invalidated a covenant providing that on departure from a medical centre at which he worked, he would not practice in the area for five years.^[71] Heydon considers that most of the justifications for that decision are questionable in view of the rejection by the Privy Council in Bridge v Deacons (A firm) of any principle of public policy requiring that a client who wanted a particular lawyer should be able to have that lawyer despite any covenant. There may be an exception in the case of a specialist obstetrician in circumstances where it would be wrong that the specialist’s former patients should be deprived of treatment by the specialist during and after pregnancy.

In Orton v Melman^[72], McLelland J rejected an argument that a restraint should be invalidated on the ground of injury to the public interest, based on patients’ freedom of choice of doctors. I respectfully follow this approach in the absence of authority invalidating restraints in cases of this kind on the ground of a patient’s supposed right to see the doctor of their choice. Such a right must be balanced against important matters which serve the public interest. These include the public interest in the enforcement of contracts, including bargains where persons pay substantial amounts for goodwill on the understanding that the seller will not compete for a reasonable period with the party to whom the goodwill is sold. The sale of interests in professional practices so as to allow parties to realise the value of their endeavour and the preservation of value in practices that are sold are in the public interest. Without facilitating such transactions by upholding parties’ bargains, the value in professional practices could not be preserved and professional succession encouraged. The public interest generally requires such bargains to be honoured. In making this observation about the public interest in the performance of contracts, I do not wish to overstate the significance of the sanctity of contracts.^[73]

In support of their public interest arguments, the defendants refer to evidence about areas of Australia which are or were under-serviced by ophthalmologists. Some of this evidence post-dates 2006. However, it is sufficient to observe that in 2006 there were 92 ophthalmologists working in what is described as Inner Regional Areas and 25 working in Outer Regional Areas. Rural and regional areas had been identified as areas of need. Advisory bodies have identified a reasonable benchmark ratio between ophthalmological surgeons and populations, and according to these figures, the ideal number of ophthalmologists in Rockhampton and Gladstone as at 30 June 2006 was four and two respectively. In 2006 Rockhampton had approximately the ideal number of ophthalmologists, whereas Gladstone was under-serviced. However, by 2009 only two ophthalmologists were based in Rockhampton. With an ageing population the demand for ophthalmologists was not expected to decline. The evidence indicated the difficulties that were encountered in Vision recruiting ophthalmologists to be employed by it in Central Queensland. Overseas trained doctors had to be recruited by Dr Kitchen on behalf of Vision.

The evidence cited by the defendants does not persuade me that the relevant restraints were offensive to public policy. There is no evidence that, if unrestrained, the defendants would have sought to establish an ophthalmological practice in some remote location, such as Western Queensland. The evidence suggests that ophthalmological specialists tend to be based in large population centres. They may be based in one city and service other cities and towns by visiting there for a certain number of days per month. To the extent that the restraints deter the establishment by the defendants of ophthalmological practices in Townsville, Brisbane, the Gold Coast, Sydney and Melbourne, most of these centres would not qualify as regional centres, and they were not shown to be areas of acute need in the relevant period. To the extent that the defendants were restrained from establishing regional ophthalmological specialist clinics in Central Queensland and other parts of Queensland, it has not been demonstrated that these centres were so lacking in ophthalmological services, either in private practice or in public hospitals, that precluding the defendants from establishing a practice there for a short period was contrary to the public interest.

The fact that Vision was unable to employ a replacement doctor in Rockhampton in 2009 and in Gladstone in 2010 does not prove that the needs of patients could not be met by other doctors such as a doctor who worked on his own account or met the demand for services, as Dr Glenn Martin did in Gladstone. There is inadequate evidence, in the circumstances, to demonstrate that observance by Dr Kitchen and the defendants of the relevant restraints would have prevented the needs of the public being met by other doctors, and was contrary to the public interest. The defendants have not proven for example, that if there was great demand for ophthalmic services in Rockhampton during the period of any restraint that other doctors based in other centres would not visit Rockhampton for a few days each month as Dr Kitchen did while he was based in Mackay prior to contracting with Vision.

The relevant restraints did not totally prohibit Dr Kitchen or the other defendants providing ophthalmic services in other areas where Dr Kitchen had not previously practised. That would include many areas of regional Victoria and regional New South Wales and any areas of need in South Australia and Western Australia. The restraints in the Service Agreement did not prevent Dr Kitchen, if he chose to, from being employed as a doctor in meeting the needs of patients in remote locations in Queensland and other areas of need.

To the extent that the restraints did limit the defendants from providing ophthalmic services in areas where Dr Kitchen had not previously practised, the restraints are not shown to have been such as to leave members of the public without access to ophthalmological services. To the extent they prevented Dr Kitchen from providing ophthalmological services in those areas, any inhibition upon him and the defendants in that regard is outweighed by other public interests, including the protection of the legitimate interests of the covenantees and the broader public interest in enforcing contracts.

Any inhibition upon the defendants establishing ophthalmological specialist clinics in certain locations and in providing services in certain areas may have had some effect upon access to ophthalmic services. However, the extent of the restriction has not been shown to make it contrary to the public interest to enforce the restraints upon which Vision relies. The defendants have not discharged the substantial onus of proving that the restraints were offensive to public policy on the grounds pleaded by them.

PART IV – VISION’S LOSS

Vision submits that it has suffered losses as a consequence of Dr Kitchen’s wrongful termination and breach of the restraint provisions, consisting of:

costs incurred in closing the Rockhampton clinic;

lost earnings from the date of the wrongful termination up to the end of the five year service period on 31 March 2011 as a consequence of the closure of:

(i)the Rockhampton clinic; and

(ii)the Gladstone clinic;

lost earnings after 31 March 2011 as a consequence of the closure of:

(i)the Rockhampton clinic; and

(ii)the Gladstone clinic.

In response, the defendants acknowledge that if Dr Kitchen had performed the Service Agreement rather than repudiate it, Vision would not have incurred the costs it did in closing the Rockhampton clinic in early 2010. There is no dispute about the costs incurred by the closure of the Rockhampton clinic. The expert accountants analysed relevant documents and assessed the loss to be $256,571 (without interest). That loss is in addition to any claim for lost earnings.

As to lost earnings, both for the period to 31 March 2011 and afterwards, it is convenient to address, in turn, the position of the Rockhampton clinic and the position of the Gladstone clinic.

Lost earnings from Rockhampton for the period ending 31 March 2011

There is no dispute that if Dr Kitchen had not terminated his Service Agreement then he would have continued to work in the Rockhampton clinic until at least 31 March 2011 and the Vision group would have continued to have the benefit of the earnings from the clinic during that period. The parties do not agree about the level of earnings during that period, and I return to that topic in connection with issues of quantum.

Lost earnings from Rockhampton for the period after 31 March 2011

Vision’s primary contention is that Dr Kitchen would have recontracted with Vision for further periods after 30 March 2011. Vision argues that the most likely hypothetical scenario is that Dr Kitchen would have weighed up the risk of commencing practice in competition with Vision, the disruption and inconvenience involved in commencing a new practice somewhere away from Rockhampton beyond the scope of the contractual restraints, and the improved remuneration model being introduced by Vision and decided to recontract with Vision to continue to work in the Rockhampton practice after 31 March 2011.

Alternatively, it submits that he would have weighed up the risk of commencing practice in competition with Vision and the loss of income that would have resulted to him from not practising during the term of the restraint and considered opportunities to commence a new practice away from Rockhampton and beyond the scope of the contractual restraints. Vision’s case is that once such a new practice was established there was no reason for Dr Kitchen to return to Rockhampton once the restraint had concluded. On either scenario advanced by Vision, its Rockhampton practice would not have been eroded by competition from Dr Kitchen.

The defendants’ case is that he would not have renewed his contract to work at Rockhampton and that Vision would not have been able to recruit a doctor to replace him.

The defendants also reject Vision’s alternative contention that, assuming he did not renew, he would have served non-competition periods of between 6 and 24 months and thereafter would not have worked at a practice in competition with Vision. The defendants’ position is that the restraints were unreasonable and void, and that Dr Kitchen would have sought and obtained advice to this effect.

Part of Vision’s case is that if Dr Kitchen had not renewed, then Vision would have been able to prepare for Dr Kitchen’s departure in March 2011. It submits that if Dr Kitchen had not purported to terminate the contract in September 2009 and immediately commenced a new practice in competition with Vision’s Rockhampton clinic, then during the course of the initial term Vision would have sought Dr Kitchen’s commitment to a further term in sufficient time to make alternative arrangements for the Rockhampton practice in the event Dr Kitchen did not commit to a further term. Dr Kitchen accepted that he would have been required to provide Vision with 18 months’ notice of his intention to leave at the end of the five year service period. On this scenario, Vision would have had a much longer time to identify a replacement doctor, and would have been recruiting that doctor to a successful established practice. The replacement doctor would have been introduced to referring doctors and patients before Dr Kitchen departed, so as to maximise the Rockhampton practice’s prospects and ensure an orderly handover. Dr Kitchen accepted in his evidence that he would have felt obliged to co-operate with such a succession plan.

Vision’s case is that Dr Kitchen’s breach of contract deprived it of a proper opportunity to arrange for the transfer of the Rockhampton practice to a replacement doctor. Vision argues that given the financial performance of the practice, it would have used that opportunity to ensure that a replacement doctor was recruited to Rockhampton in sufficient time to maintain that practice after Dr Kitchen departed. Also, with notice of Dr Kitchen’s intended departure, Vision could have attempted to protect its interests from any attempt by Dr Kitchen to commence practice in breach of the non-compete provisions.

Instead of being able to prepare for Dr Kitchen’s departure, Vision was taken by surprise when he left in September 2009 and commenced a new practice, with Vision’s patient base and most of its staff moving to Dr Kitchen’s new practice. In those circumstances, Vision was unable to find a permanent replacement to take over whatever remained of the practice and to rebuild it. In effect, a burnt out shell remained and this was not an attractive situation into which to recruit a new doctor.

Would Dr Kitchen have remained with Vision after 31 March 2011?

I turn to Vision’s primary contention that Dr Kitchen would have recontracted with Vision to continue to work in the Rockhampton practice after 31 March 2011. The fact that Dr Kitchen was prepared to leave Vision in September 2009 and compete with it does not prove what he would have done some 17 months later. He left Vision in September 2009 because he believed that he was entitled to terminate the Service Agreement and was freed from its non-compete provisions. Vision’s submissions emphasise that under the different hypothetical situation, Dr Kitchen would have felt bound by the non-compete provisions and would have been unlikely to have challenged their validity. On this basis, he probably would have recontracted with Vision to work in Rockhampton, rather than move away to practise beyond the scope of the contractual restraints. One attraction of staying with Vision was that he would have been offered improved remuneration under the new model that Vision developed for doctors after their initial five year period.

I accept that the improved remuneration model being introduced by Vision would have been a matter taken into account by Dr Kitchen in deciding whether to recontract. In part of his cross-examination Dr Kitchen accepted that if he had done the deal he proposed with Mr Tanner in March 2009, then it is likely that he would still be with Vision today. However, any hypothesis about what might have been in that regard is not very probative on the present issue. The fact is that such a deal was not done in March 2009 and Dr Kitchen’s relations with Mr Stamp, Mr Thompson and others continued to deteriorate.

The topic of what Dr Kitchen would have done had he not terminated the Service Agreement was taken up in cross-examination. Dr Kitchen disagreed with the proposition that, at the end of the five years, feeling bound by the non-compete provisions, he would have re-signed with Vision. He explained that at the time he was not aware of the precise terms of the non-compete provisions and did not know that they extended beyond the clinics in which he had worked. He explained that leaving after five years and going “on holidays” was one option. He also gave evidence that “I would have seen if I could come to some compromise with Vision”. His wife and children did not want to leave Rockhampton and, according to Dr Kitchen, he and Vision “would have worked something out. But I wouldn’t have stayed with Vision as it was”.

As to the restraints, Dr Kitchen said that he would have honoured them if he had to do so. He later explained that he did not realise that the clauses were as wide as they were and that if he had not terminated the contract, thinking that he had a basis for doing so, he would probably have inquired about their reasonableness. Until he received that advice he would have observed the restraints.

As to honouring obligations to co-operate with Vision in terms of succession for the Rockhampton practice, Dr Kitchen explained that he had tried for a substantial time to get somebody for Rockhampton and it was impossible to do so under the terms that Vision was offering. He doubted that he would have been successful in recruiting someone. After 2007 he tried, without success, to recruit another doctor to Rockhampton. He gave up trying to do so and decided to stay because he and his family liked Rockhampton. Whilst he was able to recruit overseas-trained doctors to Mackay, Gladstone and other places, Dr Kitchen remarked that a lot of people do not like Rockhampton. There were also increasing difficulties in recruiting overseas-trained doctors. When Dr Kitchen first moved to Rockhampton there were five eye specialists there but they retired or moved on. By 2014 there was only Dr Kitchen and another eye specialist.

I accept Dr Kitchen’s evidence that in considering whether to re-sign with Vision, assuming he had not terminated the Service Agreement, he would have sought advice about the reasonableness of the restraint of trade clauses. At the relevant time Dr Kitchen was not enamoured by Vision. Whereas in 2007 with Dr Unger as CEO, Dr Kitchen was very supportive of Vision, by 2009 he was estranged from its management. Mr Stamp was its CEO until May 2010, followed by Mr Thompson who remained CEO until August 2012. Dr Kitchen did not enjoy good relations with either of them.

I do not reject the possibility that Dr Kitchen, having weighed up his options, would have re-signed with Vision on the basis of an improved remuneration package similar to the new remuneration model which Vision developed. It is even possible that he may have re-signed for a lengthy period. However, I consider that it is improbable that he would do so without carefully considering other options and seeking advice about the enforceability of the restraint of trade provisions. If he believed that he was not bound by them then he may have opened in competition with Vision in Rockhampton, with every prospect of staff following him. Some former patients who fell outside the definition of “Client” might follow him without a breach of sub-clauses 17.1(c) and (d). If the other restraints were not enforceable then he and the other defendants might establish a practice which attracted new work (in the sense of patients who had not previously been patients of Dr Kitchen and Vision) and patients with whom he had not had contact within the previous 12 months. So there was good reason to seek advice about the validity of the restraint clauses.

The fact that Dr Kitchen would have sought advice does not say what that advice would have been. One certainly cannot say that because in this litigation the defendants assert that all of the restraints are invalid that this would have been the advice he received in 2010-2011. However, it seems probable that he would have been advised that he had arguable grounds to challenge the validity of the various restraints because of their purported geographical extent.

For the reasons earlier discussed, he had good grounds to challenge many of the restraints and it is likely that in any such challenge many of the restraints would have been found to be too wide because of their purported geographical reach. Questions about their validity may have been sufficient to resist any interlocutory injunction sought by Vision. For the reasons that I have given in connection with the validity of the non-compete provisions, I do not accept Vision’s submissions that a challenge by the defendants to those provisions probably would have failed.

The present issue is about the advice Dr Kitchen and the defendants probably would have received in 2010-2011 about the validity of the restraints if he had not terminated the Service Agreement. One cannot assume that the advice that he received would accord with the decision that I have reached about the extent of the validity of those restraints. I conclude that Dr Kitchen probably would have been advised that he had viable arguments to challenge all of the restraints, and good grounds to argue that the Queensland-wide restraint in the Share Purchase Agreement was too wide. He may have been told that the restraints in sub-clauses 17.1 (c) and (d) of the Service Agreement against soliciting clients might be sustained.

Just as there is a significant amount of speculation about the advice which Dr Kitchen would have received in the period leading up to March 2011, assuming the Service Agreement remained on foot, one cannot be sure what advice Vision would have received on that topic at the same time. However, it was in all the parties’ interests to resolve issues about the validity of the restraints without resort to litigation. Both parties had interests at stake. The restraints were an important part of the Vision model. Dr Kitchen once described them as a pillar and was successful in passing a resolution about the importance of enforcing them. Notwithstanding that resolution, Vision would appreciate that it had much to lose if a challenge to the restraints went to court and all or even most of the restraints were held to be invalid. If the relevant restraints were not enforceable then Dr Kitchen and the defendants would be “off the hook”. Depending upon the extent of the geographical restraint in other sale agreements, there may have been flow-on effects for other doctors.

Dr Kitchen also had good reason to compromise with Vision. The option of moving away from Rockhampton was an unattractive one, both professionally and personally. He might have gone elsewhere, such as Adelaide, and established a new practice outside of the purported scope of the restraints. He may have gone to work in Cairns or some other location arguing that he was not validly restrained by either agreement from simply practising as a specialist in a third party’s employment in such a place. The option of simply going on holidays for the period of the restraint was not a real possibility. Dr Kitchen may have gone on holidays for a short time, but I am unable to conclude that he would have gone on holidays for even the shortest restraint period of six months, let alone for 24 months. Dr Kitchen’s work commitment is remarkable. It is likely that he would have wanted to work even away from Rockhampton for the period of any reasonable restraint rather than be idle. A compromise with Vision would give him the opportunity to work in Rockhampton: the place that he and his family liked to live. Whereas in the 2007 period, Dr Kitchen and his family contemplated moving away if he could find someone else to work in Rockhampton, by late 2008 he and his wife had had their second child and they wished to stay there.

In short, all parties had an interest in compromising.

Faced with uncertainty about the outcome of litigation over the validity of the restraint provisions and the costs of litigation, it is likely that the parties would have sought a resolution. The possible outcomes of any litigation were that all of the restraints would be enforceable, none of them would be enforceable or some of them would be enforceable. Vision was prepared to enforce restraint provisions, as litigation involving Dr Blanc in May 2007 proved. That was a case in which Dr Blanc, a South African doctor who had a six month contract, decided to “just move across the road” and Icon commenced proceedings against him. Although Vision had an interest in enforcing the restraint provisions of its agreements, it also had an interest in avoiding a possible court challenge to the validity of those restraints. Vision’s primary interest was in having the Rockhampton practice continue for as long as possible, ideally with Dr Kitchen, given his capacity to generate revenue and profits for Vision.

Mr Tanner gave evidence about a group of doctor partners on the Gold Coast who wanted to leave at the end of their five year term and to do so in a harmonious way. Vision had discussions with them about their non-compete provisions and an amicable arrangement was reached. Mr Tanner’s recollection was that the arrangement was for them to “work out” a year of their non-compete period. As a result, there was an orderly transfer.

In the present case there would have been scope for a similar, mutually-beneficial outcome. Under such an arrangement Dr Kitchen would remain in Rockhampton. He might prepare to leave Vision at the end of the negotiated extension period, whilst observing legal obligations to not solicit clients and staff during that period. Vision could attempt to recruit a replacement for him during the balance of the term and the relevant “work out” period. Vision would avoid the consequence of Dr Kitchen walking away in March 2011, particularly if it had not found a replacement by then. It would have extra time to find a replacement and prepare for competition with Dr Kitchen. It would derive the benefit of Dr Kitchen’s work during the additional period.

I find it unlikely that Dr Kitchen would have re-signed with Vision for a further period of five years or for any lengthy period commencing in March 2011, let alone that he would remain with Vision for any significant part of his remaining working life. Assuming he had not terminated the contract in September 2009, in 2010-2011 he probably would have remained alienated from Vision. Any aspirations that he had under Dr Unger’s leadership to rise within Vision’s organisation and perhaps to become its CEO had long gone. Dr Kitchen’s continuing performance as a Salaried Doctor Partner was unlikely to boost the still-languishing share price of Vision. Although in March 2009 Dr Kitchen had told Mr Stamp in an email that Dr Kitchen was “not going anywhere for the next two years whatever transpires, so you/Vision have my undivided attention”, by late 2009 Dr Kitchen was looking for a way to terminate his agreement with Vision. Under Vision’s management in 2010-2011, Dr Kitchen would not have been remunerated at a level that he thought he deserved and it is likely that he would have perceived himself as being on the outer: contributing a large amount to Vision’s revenue and profit, whilst being inadequately rewarded. A new remuneration package whereby he was rewarded with 65 per cent of his personal EBIT would be more attractive than his existing salary. However, if he worked on his own Dr Kitchen and entities associated with him would derive all of the practice’s EBIT. Any attractions of remaining with Vision after March 2011 would have been outweighed by the attraction of working for himself.

Even if Dr Kitchen had had a greater personal commitment to remain with Vision after the expiry of his initial five year term of employment, it is unlikely that any new term he negotiated would be for a lengthy period. Any agreement would have an improved remuneration package. However, Dr Kitchen would not have had a strong commitment to Vision in 2010-2011. He would have sought and obtained advice that cast doubt upon the validity of the restraint provisions. Acting on that advice he might simply have gone into competition against Vision in Rockhampton in March 2011, hoping to successfully challenge their validity in any litigation. I think it more likely, however, that he would have reached a compromise with Vision. The most likely compromise is one whereby he would have worked for Vision for another year under its new remuneration package and, in doing so, agreed to be free of the restraints at the end of that 12 month period.

I conclude that it is likely that the defendants would have entered into new agreements whereby Dr Kitchen would work in Vision’s Rockhampton practice for a year beyond the expiry of his initial Service Agreement. After that he and the defendants would have been free to compete.

I also find that the alternative scenario advanced by Vision is unlikely. I am not satisfied that it is likely that Dr Kitchen, having weighed up matters, would have moved away from Rockhampton and established a new practice beyond the scope of the contractual restraints, and having done so, not returned to Rockhampton. It also follows from my finding about a likely compromise that I am not satisfied of the defendants’ scenario that upon completion of the term on 31 March 2011, Dr Kitchen would not have recontracted with Vision for any further period, and, instead, would have established practices in Rockhampton and Gladstone. Of the competing scenarios the most likely is that Dr Kitchen would have:

weighed up his options;

sought and obtained advice about the validity of the restraints and not felt bound by all of them in the light of the advice he received;

raised arguments about the invalidity of those restraints in negotiations with Vision in 2010-2011; and

reached a compromise with Vision whereby he recontracted to work for a period of one year under the new remuneration model, and at the end of that one year period been free to compete against Vision, including by establishing practices in Rockhampton and Gladstone in competition with Vision’s clinics in those cities.

On this scenario, after 31 March 2012 Dr Kitchen and Vision would have been in competition in Rockhampton, assuming Vision could have found a replacement. That raises the issue of whether Vision would have been able to recruit a doctor to replace Dr Kitchen at Vision’s Rockhampton clinic. The evidence indicates that it would have had difficulty in doing so. There was a general shortage of specialists in centres like Rockhampton and Gladstone at the relevant time. As noted, Dr Kitchen had tried, without success, to recruit an additional doctor to Vision’s Rockhampton practice in around 2007. This was on the basis of a package similar to those used to recruit doctors to Mackay, namely a base salary and what Dr Kitchen described as a “six times multiple”. By 2010-2011 there were increasing official constraints upon the registration of foreign-trained doctors which would have made recruiting a replacement more difficult.

I do not rule out the possibility that Vision might have attempted to recruit one of its existing doctors to move to Rockhampton. Any such recruit would have had the opportunity to join a very successful practice, albeit one which was at risk of competition from Dr Kitchen once he left. Rockhampton was an area of need and it should not be assumed that Dr Kitchen and his replacement would simply be left to compete by sharing the work which Vision’s Rockhampton practice generated. Dr Kitchen could seek new work. The new recruit could do the same. One could not assume that Dr Kitchen would simply take work away from Vision’s practice as distinct from meeting new demand. Still, it seems likely that some patients would follow him and that he would have the ability, once he went into competition free of any restraints, to entice staff at Vision’s Rockhampton clinic to work for him. Any potential recruit to replace Dr Kitchen would need to take into account these future challenges.

If Dr Kitchen encountered difficulties in recruiting another doctor to join him in 2007 in Rockhampton and eventually gave up trying, it seems likely that Vision would have encountered similar, if not greater, problems in recruiting a new doctor to take over its Rockhampton practice in 2010-2012. Vision did not suggest that one of the doctors who had been recruited by Dr Kitchen to work in Mackay or any other of its doctors would have been prepared to relocate to Rockhampton in order to replace Dr Kitchen. Dr Kitchen’s evidence about a lot of people not liking Rockhampton in the context of attempts to recruit a specialist into the practice there was uncontradicted. The fact that by the relevant period the number of specialists practising in Rockhampton had reduced may be said to have provided an opportunity for an ambitious doctor to be recruited. If a doctor was prepared to relocate and take over the Vision practice he or she could derive a good income by meeting the significant demand for services. However, Vision’s chances of obtaining such a recruit would have been low.

All the evidence indicates it would be difficult for Vision to recruit anyone to Rockhampton. It seems that Vision would have been required to pay more than it was prepared to pay in 2007 to recruit a doctor to Rockhampton. Also, notwithstanding the apparent need for additional ophthalmologists in Rockhampton, Vision has yet to recruit someone to try and build up a presence there and to re-establish a Vision clinic in that city.

I conclude that if Dr Kitchen had performed, rather than terminated the contract, and co-operated with Vision in attempting to recruit a doctor to succeed him in the Rockhampton practice it is unlikely that he and Vision would have been successful in doing so prior to 31 March 2011, or even during the extended period of the contract leading up to Dr Kitchen’s presumed departure in March 2012.

The fact that Vision is unlikely to have recruited a replacement does not mean that it is not entitled to some compensation in this regard. Dr Kitchen’s repudiation of the agreement greatly reduced Vision’s prospects of recruiting a new doctor. It is entitled to be compensated for the value of that lost opportunity. One is concerned with the difference between the closure of Vision’s Rockhampton clinic in late 2009 and early 2010 because of Dr Kitchen’s repudiation of the Service Agreement, whereby Vision was left without any real practice in Rockhampton, and the hypothetical scenario of Dr Kitchen honouring his employment contract and Vision attempting to find a replacement to join an existing practice. Vision lost the opportunity to recruit a new doctor to an existing practice. It suffered a loss as a consequence of Dr Kitchen’s breach of contract in not having a Rockhampton practice after early 2010. One consequence is the loss of the opportunity to continue that practice and derive earnings from it in the period after 31 March 2011 and until 31 March 2012 with Dr Kitchen (following a compromise along the lines I have concluded was a likely outcome of negotiations) and then after 31 March 2012 with a replacement doctor. The loss of the chance to recruit a new doctor to an existing practice should be compensated because that opportunity carried with it the opportunity to maintain a practice in Rockhampton and to derive earnings from it. However, a relatively low value should be placed upon that loss of opportunity.

The value which should be placed upon it is quite different to that arrived at by the joint experts on the basis of assumptions which cannot be sustained, including assumptions which the experts themselves described as arbitrary. I shall return to the question of quantum later. For present purposes it is sufficient to observe that consequential losses arising from the loss of the opportunity to derive earnings from the Rockhampton clinic after 31 March 2011 should be substantially discounted because of:

the low probability of finding a recruit who would have been willing to take over the practice in circumstances in which Dr Kitchen was likely to leave it, with staff following him;

the need to make any remuneration package sufficiently attractive to induce a suitably-qualified recruit to work in Rockhampton rather than in some more attractive location;

the risk that even if such a recruit could be found the practice would be affected by staff following Dr Kitchen and the difficulties that would be encountered in replacing them;

the possibility that some patients and referring doctors would follow Dr Kitchen, affecting the practice’s earnings or at least requiring it to attract new patients;

the improbability that any replacement doctor would generate the practice EBIT which Dr Kitchen was able to generate.

A point of principle

In oral argument senior counsel for the defendants raised what was said to be a point of principle in relation to the recovery of damages after 31 March 2011.

He questioned whether I could assess damages beyond 31 March 2011. One aspect of his argument was the submission that the assessment must end with the relevant contractual obligation, and since Dr Kitchen was only obliged to work until 31 March 2011 there is no case for damages for breach of contract beyond that date. It was argued that the Court must not assess damages on the basis of a kind of performance that a party was not obliged to undertake. In this context, if the restraint provisions were not enforceable, then Vision should not be entitled to damages on the basis that Dr Kitchen would have been “scared off” by the restraints. A related point was that damages should not be assessed on the basis of speculation. Damages for breach of contract were said to be awarded by reference to the scope of the protection of the contract and the reasonable contemplation of the parties. If the relevant restraints were not enforceable, then it was said to be contrary to principle to allow the plaintiffs to obtain damages on the basis that they had some continuing operational force. Damages had to be assessed according to the true obligations imposed by the contract, not their de facto operation.

In dealing with these submissions it is necessary to distinguish between Vision’s claim for damages arising from Dr Kitchen’s breach of contract in failing to perform the Service Agreement, purporting to terminate it and setting up in competition to Vision when he should have been working for it; and Vision’s separate claim for breach of the restraint of trade provisions. As to the latter, the proper plaintiff is only entitled to damages for breach of the restraints which are valid and enforceable. It cannot recover damages for the breach of provisions which are unenforceable.

As to the former, Vision is permitted to seek compensation for the consequences of Dr Kitchen’s wrongful termination of the Service Agreement, including consequences which endure after 31 March 2011, provided these fall within principles of compensation (including rules about remoteness) and are supported by evidence. In doing so, Vision is not enforcing a contract other than the one upon which it is entitled to sue. It is not seeking to enforce a contract entered into for a period after 31 March 2011. Vision is not entitled to enforce such a hypothetical contract.

Vision is entitled, however, to rely upon the enforceable terms of the 2006 Service Agreement and, in doing so, compare the position it found itself in as a result of Dr Kitchen’s unlawful purported termination with the position it would have been in if he had performed that contract. Subject to governing principles about the scope of protection for damages in contract, including rules of remoteness, and the requirement to prove loss by acceptable evidence, Vision is entitled to seek damages for losses it suffered as a consequence of Dr Kitchen’s breach of contract. These include the loss of earnings for the term of the Service Agreement to 31 March 2011, and the loss of the opportunity to derive earnings from the Rockhampton clinic after 31 March 2011. These earnings might have been derived by Dr Kitchen being persuaded to extend the term of the contract or to enter a new contract on different terms, or by another doctor or doctors operating the clinic following Dr Kitchen’s presumed departure on 31 March 2011.

Such a loss may be characterised as the loss of an opportunity Vision would have had if Dr Kitchen had performed the contract, rather than repudiated it. In simple terms, it can be described as the financial consequences to Vision of being forced to close the Rockhampton clinic as a result of Dr Kitchen’s repudiation and with it Vision’s opportunity to operate the practice at a profit. The losses which flowed from the closure of the Rockhampton clinic do not necessarily end at 31 March 2011. Vision is entitled to explore the hypothetical position if Dr Kitchen had performed his Service Agreement up to 31 March 2011 and whether, after 31 March 2011 either he or a replacement doctor would have continued Vision’s Rockhampton practice. One compares that hypothetical scenario with the position in which Vision was left, namely without a Rockhampton practice in late 2009.

In considering the competing hypothetical scenarios advanced by Vision, and the defendants, one is not enforcing unenforceable restraint of trade provisions. Considering whether or not those provisions would have been observed without question by Dr Kitchen, been challenged by him and found to be unenforceable, or been the subject of a compromise, is simply part of assessing the likely course of events if Dr Kitchen had continued to work for Vision after September 2009.

Lost earnings after 31 March 2011 - assessment

What would have occurred to the practice after 31 March 2011? Would Dr Kitchen or another doctor have operated it and, if so, for how long?

In determining whether or not Vision sustained losses as a result of not being able to operate a Rockhampton practice after 31 March 2011, and in assessing an appropriate amount of compensation for any such loss, one is concerned with a range of possibilities. They all spring from the fact that by reason of Dr Kitchen’s unlawful termination of the Service Agreement, Vision did not have a Rockhampton practice as at 31 March 2011, whereas it would have had one at that time if he had honoured the Service Agreement. For the reasons which I have given, Vision lost the opportunity to continue to derive earnings from the Rockhampton practice in the period after 31 March 2011, with or without Dr Kitchen. It lost the opportunity to continue that practice as a direct consequence of Dr Kitchen’s breach of contract.

The value attributed to that lost opportunity is a different matter. A range of possibilities need to be considered. Possibilities which are negligible or fanciful should be disregarded. Little value should be placed upon possibilities which, if assigned a figure, would have a very low percentage. These include the possibility that Dr Kitchen would have stayed with Vision forever. In theory at least, Vision lost the opportunity to conduct a practice at Rockhampton with Dr Kitchen in charge up until the time of Dr Kitchen’s retirement. However, that theoretical earnings stream is not compensable for a number of reasons. Such a possibility, like others, is subject to general constraints on the recoverability of damages for breach of contract. At a certain point losses which might be said to be sustained for many years to come could not said to be caused by Dr Kitchen’s breach. They might be said to be too remote because they were not in the reasonable contemplation of the parties. Alternatively, it would not be reasonable to compensate for them because Dr Kitchen’s breach did not forever preclude Vision from again establishing a clinic in Rockhampton.

Among the other hypotheses to be considered is the hypothesis that Dr Kitchen would have walked away from the practice on 31 March 2011 and never returned to practice in Rockhampton. Another is that he would not have competed during the period of any valid restraint, but done so afterwards. Another is that he would not have sought legal advice about the validity of the restraints, and simply observed them. Another is that he would have contested the restraints, the matter would have been litigated and at a trial only the restraints which I have found to be enforceable would have been enforced.

For the reasons which I have given, I consider that the most likely scenario is that, having obtained legal advice, Dr Kitchen would not have felt bound by all of the restraints. He would have stayed in Rockhampton and negotiated an arrangement with Vision whereby he worked for their mutual benefit for another year after 31 March 2011 under improved remuneration arrangements, following which he would have been free of the restraints.

If Dr Kitchen had performed his contract, Vision would have had a business presence in Rockhampton in March 2011 when the initial term of his Service Agreement came to an end. If there had not been a compromise of the kind which I have discussed, then Vision would have had some limited restraint on competition from Dr Kitchen soliciting custom from or accepting a request from a “Client”. On this hypothesis, Vision would not have been totally immune from competition even after 31 March 2011, and would have been open to full competition from Dr Kitchen by no later than 31 March 2013 and much sooner if a shorter cascading restraint was upheld. On this hypothesis, Dr Kitchen would have stayed in Rockhampton and been able to develop new patients when he went into competition in April 2011. There probably would have been enough new work to occupy him. If there was not, he might have supplemented his work in Rockhampton with work in other centres where there were patients who were not “Clients” within the meaning of his Service Agreement.

If Vision had been able to recruit another doctor to work in the clinic after Dr Kitchen left it, then there probably would have been enough demand for ophthalmic services in Rockhampton to enable both Vision and Dr Kitchen to pursue profitable practices. The evidence suggests that there was a need for five ophthalmologists in Rockhampton by 2010.

For the reasons which I have given, a more likely hypothesis is that, instead of departing Vision upon the expiry of the initial term of his contract on 31 March 2011, Dr Kitchen would have worked for it for another year. Similar issues arise under this scenario about the recruitment of a new doctor and the nature and extent of competition between Dr Kitchen and Vision when he would have parted company with it on 31 March 2012. On this scenario he would not have been constrained at all in competing with Vision after 31 March 2012 if, in fact, Vision was able to recruit another doctor to replace him.

Conclusion – Rockhampton losses

By reason of Dr Kitchen’s breach of contract, Vision was left at a disadvantage in competing after the end of the initial term of Dr Kitchen’s contract expired on 31 March 2011. Vision lost the opportunity to derive earnings from its Rockhampton clinic after 31 March 2011 either with Dr Kitchen (assuming he re-signed with it) or with a replacement doctor.

If Dr Kitchen had performed his contract then Vision would still have had a practice in Rockhampton as at 31 March 2011. However, it would have been exposed to competition from Dr Kitchen soon afterwards even if he observed the few restraints which I have found to be valid and enforceable. The most likely scenario is that, Dr Kitchen would have sought and obtained advice which questioned the validity of the many restraints imposed by each agreement. In response to this advice, the defendants would have reached a compromise with Vision whereby he “worked out” the restraints by agreeing to work for Vision for another year under the new remuneration model, after which he and the other defendants would have been free from the restraints.

As a result, Vision (or more precisely Icon) is entitled to compensation for Dr Kitchen’s breach of contract in purporting to terminate the Service Agreement, repudiating it and not performing it during its initial term which expired on 31 March 2011. Damages fall to be assessed under the following categories:

The direct costs of closure which have been assessed at $256,571 (not including interest);

Loss of earnings for the term of the Service Agreement ending 31 March 2011;

Loss of earnings from the Rockhampton clinic for the additional period ending 31 March 2012 during which Dr Kitchen would have worked under the new 65 per cent remuneration package;

Loss of the opportunity to earn a profit in Rockhampton after 31 March 2012.

Damages for categories 2, 3 and 4, including the loss of the opportunity to derive earnings after 31 March 2011 and, also, after 31 March 2012 remain to be assessed. But on the basis of my findings, it is unlikely that Vision would have been able to recruit a new doctor to replace Dr Kitchen after 31 March 2012, 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. The quantification of each of the categories of loss is considered further below.

Lost earnings from Gladstone clinic for the period ending 31 March 2011

The issue of what loss Vision suffered as a result of Dr Kitchen’s failure to perform his Service Agreement up to at least 31 March 2011, and what position Vision would have been in if he had performed that agreement according to its terms requires consideration of certain evidence in relation to the Gladstone clinic and Dr Steyn’s departure from it in June 2010.

Facts

Dr Kitchen personally recruited Dr Steyn to work for Vision in Gladstone. It took Dr Kitchen two years to recruit a doctor to conduct Vision’s practice there. Dr Steyn was an ophthalmologist from South Africa and in around August 2008 he was engaged by Vision as an independent contractor under a Consultancy Deed. As an overseas-qualified ophthalmologist, the Queensland Medical Board required Dr Steyn to be supervised by an appropriately-qualified local ophthalmologist. Prior to Dr Kitchen’s departure from Vision, he supervised Dr Steyn. I infer that Dr Steyn and Dr Kitchen had a reasonable working relationship.

In February 2009 Dr Steyn failed to pass the RANZCO advanced clinical exam. Dr Lawless, the Medical Director of Vision says that before Dr Steyn’s first attempt at the exam he advised Dr Steyn to put in the appropriate level of effort to pass the exam, even if this meant cutting down on his clinical work. Dr Lawless suggested that Dr Steyn spend a week or two at Vision’s Chatswood practice in order to immerse himself in a study environment. However, he was busy in Vision’s Gladstone practice and did not take up the offer. Dr Steyn was a very experienced ophthalmologist. During the 20 months that he worked at Vision he consulted more than 4,500 patients and did more than 1,400 procedures with a complication rate of less than one per cent. He was working during this time without any direct supervision, and was working for Vision in Gladstone because of Vision’s difficulty in recruiting an Australian trained doctor to work there. Dr Steyn says he was judged by RANZCO only on a written exam and no regard was had to his clinical practice and experience.

In July 2009 Dr Steyn sought an improvement in the conditions of his engagement, and Vision agreed to review his situation. He sought a new contract and improved terms of payment. Vision attempted to resolve these issues with him. It put forward a proposal on 9 October 2009, however, on 10 October 2009 Dr Steyn purported to resign, giving Vision 12 months’ notice. It is apparent from Dr Steyn’s email that day that he was unhappy about his situation and his unhappiness was not only about his salary. He was disaffected about the limited say he had in running the Gladstone practice, which was highly profitable, and that his staff were underpaid. Dr Steyn’s Consultancy Deed made no provision for him to resign. It was due to come to an end in February 2010.

By the time of Dr Steyn’s purported resignation in October 2009, Dr Kitchen had left Vision. On 12 October 2009 Dr Steyn proposed that Dr Kitchen continue to be his supervisor. Vision did not regard this as a workable solution because the Queensland Medical Board requires a supervisor to be able to access the relevant doctor’s practice and files, and Dr Kitchen could not do this. As a result, on 4 December 2009 Dr Steyn was told that Dr Kitchen could not be his supervisor.

In October and November 2009 Vision attempted to resolve Dr Steyn’s concerns without success. On 1 December 2009, having increased his remuneration to $400,000 per annum from 1 September, Vision reiterated its support to him for his upcoming exams and asked him to withdraw his resignation. The same day Dr Steyn thanked Vision for its offer to support him in passing his exams, and mentioned that if he did not pass them then Vision would be “without an ophthalmologist in Gladstone”. There were legal and financial issues for him to seek advice about, but he said he wished to devote all of his time to preparing for the upcoming exam. He indicated he would not be withdrawing his resignation.

In around March 2010 Dr Steyn again failed to pass the RANZCO qualification exam. It remained open to Dr Steyn to apply to the Australian Medical Council again for recognition as an ophthalmology specialist, after completing further clinical and surgical training. Vision suggested that it could provide support to Dr Steyn to allow him to continue practising ophthalmology in Gladstone. However, on 14 May 2010 Dr Steyn wrote to Vision. He was aggrieved by the process by which he had been examined and the injustice that, having worked successfully without any direct supervision, he was assessed to be not comparable to a newly-qualified registrar who lacked his surgical or clinical skills and experience. He expressed the grievance that he was regarded as good enough to work independently in a remote area in which no Australian was willing to work, only to be told that he was not good enough. He indicated that he would not sit the exam again since there was no guarantee of having a fair review. He told Vision that he would not be able to continue working in Gladstone for much longer and that he was considering leaving the country.

At around the same time Dr Kitchen (together with Dr Glenn Martin) was in the process of establishing the CQ Eye consulting practice in Gladstone. On 24 May 2010 they publicly announced that they would be commencing regular clinics and that, with Dr Steyn leaving, there was a need for a service in Gladstone and an opportunity for Dr Kitchen to return and provide it with his colleague, Dr Martin.

On 22 May 2010 Dr Steyn reported to Vision that the previous day his team leader had left, and the rest of the staff also resigned with immediate effect. He correctly inferred that they were offered jobs with Dr Kitchen. As a result, Dr Steyn was left with no support staff, other than staff that Vision could spare him. He described things turning against him in Gladstone and in Australia and that if RANZCO did not support him he would be leaving soon.

On 24 May 2010 Dr Steyn tendered his resignation with effect from 30 June 2010. His letter of resignation included the following passages:

“Vision has lost its entire permanent, experienced and regular staff as of last Friday. These staff members, some of whom have been at this practice for many years, are an integral part of its success. I strongly believe that I cannot professionally maintain a practice with temporary and supplemental staff. Nor is it simply a matter of advertising and finding suitable replacement staff. Gladstone is a small community without an abundance of suitably qualified and experienced ophthalmic staff.

Having joined Vision and initially enjoyed the support, encouragement and guidance of Dr David Kitchen, both on the ground and by telephone this support has not been available to me for some time. Whilst I understand that Dr Kitchen has departed from Vision no attempt was made to effectively replace him and I have simply been left to my own devices to find any mentoring, support or advice. I have [had] no contact from my supposed Vision endorsed clinical supervisor Dr Peter Henier. None of this has provided me with the necessary support that would help and support my future registration with RANZCO or the Medical Board.”

Vision conducted its Gladstone clinic out of consulting rooms at the Mater Hospital on a month-to-month lease. In late May 2010 this arrangement was terminated upon five weeks’ notice, effective 30 June 2010, and Dr Kitchen subsequently took over the space from which to run his new clinic. Under the terms of his Consultancy Deed, Dr Steyn was entitled to retain patient records once he had left Vision. He also owned most of the surgical equipment. On 21 June 2010 he advised Vision that he had transferred all of the Vision patients at the Gladstone clinic to Dr Kitchen’s new practice. Vision’s Gladstone clinic effectively closed on or about 18 June 2010 after the last day of scheduled surgery.

Importantly for present purposes, Vision took no steps to recruit a replacement doctor after Dr Steyn tendered his resignation in October 2009. Nor did it take any steps to obtain equipment or replace the equipment owned by Dr Steyn, which he took with him. Dr Lawless explained that after Dr Steyn’s purported resignation in October 2009 he did not take steps to recruit another doctor to Gladstone because he thought Dr Steyn would remain and pass the exams in March 2010. However, when Dr Steyn did not pass those exams no steps were taken by Vision to find a doctor who could replace Dr Steyn in Gladstone.

Vision’s contentions

Vision submits that if Dr Kitchen had not wrongfully terminated his Service Agreement in September 2009 and commenced practice in Gladstone in May 2010, then its Gladstone clinic would not have lost its permanent support staff and Dr Kitchen would have remained available to mentor and support Dr Steyn until at least March 2011. It adds that if Dr Kitchen had not wrongfully terminated his Service Agreement, then the Gladstone clinic would have remained open beyond 31 March 2011. For the same reasons advanced by it in relation to its lost earnings claim from the Rockhampton clinic after 31 March 2011, Vision submits that Dr Kitchen would not have commenced practice in competition with Vision in Rockhampton and, consequently, would not have expanded that competing practice to Gladstone.

Vision’s claim, at least in respect of lost earnings from the Gladstone clinic for the term of the Service Agreement ending 31 March 2011, rests upon the propositions that:

Dr Steyn would have stayed working in its Gladstone clinic and continued to be mentored by Dr Kitchen; and

even if Dr Steyn chose to leave the Gladstone clinic despite Dr Kitchen’s continued presence as the head of Vision’s Central Queensland practice, then:

(i)Vision, with Dr Kitchen’s assistance, would have found a replacement;

(ii)Until such a replacement was found Dr Kitchen would have felt obligated to try and keep the Gladstone clinic open after Dr Steyn’s departure.

Part of its submission is that, just as he was able to engage Dr Glenn Martin to work in his new Gladstone clinic, if he had remained with Vision until March 2011 Dr Kitchen would have found a solution to keep the Gladstone practice open until Dr Steyn was replaced. This may have involved working in the Gladstone clinic himself for some time and engaging others, such as Dr Martin, to assist. He and Vision would not simply have allowed the Gladstone clinic to close.

Thedefendants’ contentions

The defendants submit that the Gladstone clinic would have closed even if Dr Kitchen had not terminated his Service Agreement. Dr Steyn would have resigned. The defendants point to the evidence that Dr Steyn was disillusioned with Vision from as early as July 2009, during a time when Dr Kitchen was still employed by Vision. Any suggestion that Dr Steyn would not have resigned had Dr Kitchen remained with Vision is submitted to be “highly speculative and of no probative value”. Whilst Dr Kitchen may have sought to assist Dr Steyn to pass his exams, Dr Kitchen’s evidence was that Dr Steyn did not put enough effort into passing the exam. The defendants submit that, in any event, it is impermissible speculation to assume that Dr Steyn would have passed his examinations and remained with Vision had Dr Kitchen not terminated his Service Agreement. Dr Steyn had failed the exam once under Dr Kitchen’s supervision. In the circumstances, the defendants submit that the only conclusion reasonably open is that Dr Steyn would have resigned and departed by mid-2010.

As to the recruitment of another doctor to replace Dr Steyn, the defendants submit that although Dr Kitchen would have assisted in attempting to find a replacement, it was extremely difficult to find doctors to work in Gladstone. Dr Kitchen’s evidence under cross-examination, which I accept, is that although there would not have been any financial incentive for him to do so, he would have done some work in Gladstone once Dr Steyn left because of the obligations he felt to the community. Working in Gladstone was not going to reward Dr Kitchen under his contract. It would not contribute to any great boost to Vision’s share price, and it would not have been financially advantageous for him to do work in Gladstone instead of Rockhampton. He may have done some work in Gladstone on weekends or on a few days per week, while still undertaking his practice in Rockhampton. According to Dr Kitchen, the option of engaging Dr Martin to go to Gladstone at the time was unrealistic. The unchallenged evidence is that Dr Martin did not like working for Vision.

Another impediment to recruiting a doctor to replace Dr Steyn was that Dr Steyn owned the equipment at the clinic and the patient records. According to the defendants, the clinic would be left with no equipment and no patient records and there was no reasonable likelihood of recruiting a replacement. The only reasonable inference is that while Dr Kitchen would have maintained the Gladstone clinic in the short term to look after urgent and critical patients, the clinic would have closed in the near term after Dr Steyn’s departure.

Theissues

Vision claims to have suffered a loss of the earnings that would have been derived from the Gladstone clinic for the period ending 31 March 2011 on the basis that had Dr Kitchen continued to perform his Service Agreement there was no reason to think that it would not have remained a viable practice, even if Dr Steyn had departed.

Vision’s case is that it is more likely than not that if Dr Kitchen had performed his Service Agreement and not opened a Gladstone clinic in May 2010 then Vision would have continued to have the benefit of the earnings from its Gladstone clinic until at least 31 March 2011. Vision’s loss can be described as the loss of the benefit of an earnings stream or it may be described as the loss of the opportunity to continue to operate the Gladstone clinic. As with the claims for lost earnings in respect of the Rockhampton clinic, it is convenient to address separately the claim for lost earnings from the continued operation of the Gladstone clinic up to 31 March 2011 and after 31 March 2011.

The essential issue is what position Vision would have been in in terms of the continued operation of its Gladstone clinic if Dr Kitchen had performed the Service Agreement until at least 31 March 2011. The subsidiary issues are as follows. If Dr Kitchen had not purported to terminate the Service Agreement and set up in competition with Vision in Rockhampton in September 2009, but instead had performed his Service Agreement up to at least 31 March 2011:

would Dr Steyn have resigned and left Vision?; and

if so, would Vision have been able to keep the Gladstone clinic open by finding a replacement doctor?

The present issue is concerned with compensation for Dr Kitchen’s breach of the Service Agreement and his repudiation of that agreement and determining the loss which Vision suffered as a result. An award of damages for breach of contract in that regard seeks to place Vision in a position it would have been in if Dr Kitchen had performed his Service Agreement according to its terms. As discussed earlier, it does not depend upon proof that the restraints contained in his Service Agreement and in the Share Purchase Agreement were valid and enforceable and prevented them from establishing a clinic in Gladstone in May 2010.

Would Dr Steyn have resigned?

I accept the defendants’ submission that Dr Steyn was already disillusioned with Vision as early as July 2009. If Dr Kitchen had remained employed as the Regional Director of Vision throughout 2009 and 2010 then he would have been available to mentor and support Dr Steyn. In his final resignation letter of 24 May 2010 Dr Steyn stated that after joining Vision he “initially enjoyed the support, encouragement and guidance of Dr Kitchen, both on the ground and by telephone”. Whilst Dr Kitchen acknowledged that he would have continued to mentor Dr Steyn, it is not clear that this would have been sufficient to allow Dr Steyn to pass his exams in March 2010. In undertaking his exams, Dr Steyn had to compete with Registrars working in hospitals who obtained regular tutoring and help. Dr Steyn did not avail himself of the opportunity to obtain tuition in Chatswood before either his exams in February 2009 or March 2010. It is not apparent that additional mentoring from Dr Kitchen between September 2009 and March 2010 would have enabled Dr Steyn to pass his exams. It may have made a difference, but to say that it probably would have involves impermissible speculation.

Assuming, however, that the provision of mentoring and support from Dr Kitchen would have made a difference, it seems that Dr Steyn was dissatisfied with Vision’s management of the Gladstone practice, the terms of his remuneration and the remuneration of the staff. Even if he had passed his exams in March 2010, there is no reason to suppose that he would have remained with Vision in Gladstone for any substantial time.

I take into account the fact that Dr Steyn’s eventual resignation was influenced by the defendants’ establishment of a new practice in Gladstone and the loss of staff. However, if this had not occurred, and if instead, Dr Kitchen had remained as Regional Director of Vision after September 2009, then there is a substantial likelihood that Dr Steyn still would have resigned in the first half of 2010, particularly if he again failed to pass the exams.

I do not accept the defendants’ submission that the scenario of Dr Steyn continuing with Vision if Dr Kitchen had remained with Vision is impermissible speculation. However, the prospects of Dr Steyn remaining with Vision were not high. If Dr Kitchen had stayed with Vision, then there is some chance that Dr Steyn would have continued to work for Vision throughout 2010 and up to 31 March 2011, and perhaps even beyond that date. The possibility that he would have stayed beyond June 2010 cannot be described as negligible. Because of Dr Kitchen’s breach of contract and failure to perform his Service Agreement up to and including 31 March 2011 the chance of Dr Steyn remaining with Vision was reduced. Vision lost something of value. It is more likely, however, that Dr Steyn would not have passed the exam in March 2010 and, notwithstanding support from Dr Kitchen, left Vision some time mid-2010.

I conclude that it is more probable than not that Vision would have been looking to replace Dr Steyn at some time prior to 31 March 2011, even if Dr Kitchen had performed his Service Agreement up to the expiry of its initial term on that date.

Vision lost the chance to replace Dr Steyn 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.

Would Vision have been able to keep the Gladstone clinic Open?

Dr Kitchen, who had success in recruiting other overseas-trained doctors to join Vision in Central Queensland, took two years to recruit such a doctor to work in Gladstone. Once Dr Kitchen left Vision it encountered problems recruiting a doctor to work in Gladstone. For example, there was no-one in Rockhampton to provide mentoring and supervision. But even if Dr Kitchen had remained with Vision and not established a new practice in Gladstone, he and Vision would have encountered difficulties in recruiting a replacement for Dr Steyn. This is notwithstanding the fact that, at the time, the Gladstone clinic was a profitable one and there was unmet demand for ophthalmic services in Gladstone.

It is likely that, upon Dr Steyn’s decision to leave Gladstone and to leave the country, Vision would have been able to negotiate an agreement with him to acquire his equipment and the patient records to which he was contractually entitled. However, it would make little commercial sense for Vision to do so or to enter into a long-term lease, if it could not secure the services of a doctor to replace Dr Steyn. One factor affecting the recruitment of such a doctor would be the possibility that, at some stage after Dr Kitchen left Vision, Vision’s Gladstone staff would follow him, leaving Dr Steyn’s replacement in the same predicament in which Dr Steyn found himself in May 2010. It has not been shown that Dr Glenn Martin would have been prepared to work for Vision in Gladstone for any extended period, even if Dr Kitchen had urged him to do so. The fact that he was prepared to work with Dr Kitchen in the defendants’ new Gladstone practice after May 2010 does not prove that he would have worked for Vision in Gladstone.

The fact that Vision took no steps to replace Dr Steyn after his original resignation and later, after he failed his exam in March 2010, suggests that Vision had little confidence that it would be able to find a replacement. Significantly, it took no steps to replace Dr Steyn or to make any contingency arrangements for his replacement, even before Dr Kitchen terminated his employment in September 2009.

Dr Lawless gave evidence that if Dr Steyn had followed through on his intention and resigned with effect from October 2010 then Vision would have tried to maintain the practice and tried to find a new ophthalmologist to go there permanently. Gladstone was still an area of need. Dr Lawless acknowledged that it would be difficult to get people there but he thought that it could be done. He thought that, on this scenario, Vision could have taken short-term measures and then taken some months to attract a new doctor to go there permanently.

Although this is a possibility, the fact that Dr Kitchen took two years to recruit someone to Gladstone suggests that it is unlikely that Vision would have found a permanent replacement for Dr Steyn in a matter of months, even with Dr Kitchen’s assistance in recruiting someone. Dr Steyn’s unhappy experience in working for Vision would hardly assist in recruiting a replacement. I infer that Vision did not begin to take steps to find a replacement for Dr Steyn even after he failed his exam in March 2010 because it realised that it would be extremely difficult to find such a replacement and it simply hoped that Dr Steyn would remain. That hope was misplaced because Dr Steyn was dissatisfied with Vision, completely alienated by the process under which he was examined in March 2010 and not prepared to sit the exam again.

I conclude that Vision was unlikely to be able to find a replacement for Dr Steyn even if Dr Kitchen had performed his Service Agreement. Without a full-time doctor to replace Dr Steyn, the Gladstone clinic would have been in decline. Some temporary measures may have been taken to provide a service to patients. But no long-term solution has been suggested. The fact that the Gladstone clinic was a very profitable one whilst Dr Steyn conducted it does not mean that it would have continued to operate once Dr Steyn resigned. The evidence suggests that Vision could not have effectively replaced him. Dr Kitchen and others may have been able to provide some temporary short-term measures in the months following Dr Steyn’s departure. However, their attendance in Gladstone would have deprived Vision of their presence in other Vision clinics. The Gladstone staff would not be fully occupied. The whole economics of the Gladstone practice would have been different. Lacking a full-time replacement for Dr Steyn, it is likely the Gladstone clinic would have been forced to close within a matter of months after Dr Steyn’s departure, even assuming Dr Kitchen’s continued employment with Vision during this period. It seems likely that there would have been an orderly shutdown of the practice, and this probably would have occurred prior to 31 March 2011.

Lost earnings from continued operation of the Gladstone clinic after 31 March 2011

For the reasons addressed above, it is very unlikely that the Gladstone clinic would have remained open after 31 March 2011. There is a chance that it would have. However, the chance of the Gladstone clinic remaining open beyond 31 March 2011 in the hypothetical situation that Dr Kitchen had not wrongfully terminated his Service Agreement in September 2009 is very low. For the reasons already given, it is unlikely that Dr Steyn would have remained and operated the Gladstone clinic, and Vision would have had great difficulty in replacing him permanently. I should add that in the unlikely event that it did continue to operate the clinic after 31 March 2011, then once Dr Kitchen worked out the 12 month compromise period I have addressed in connection with the Rockhampton clinic, he and the defendants would have been in a position to compete in Gladstone. After 31 March 2012 he could entice Vision’s staff to join a new practice, leaving its Gladstone practice without support staff.

The chance of Vision having kept its Gladstone clinic open beyond 31 March 2011 cannot be described as negligible. However, the chance that it would have been able to do so if Dr Kitchen had not wrongfully terminated his Service Agreement is a small one.

Conclusion

By reason of Dr Kitchen’s wrongful termination of his Service Agreement, Vision lost the opportunity to:

persuade Dr Steyn to remain with it operating its Gladstone clinic under Dr Kitchen’s mentorship up to at least 31 March 2011;

find a replacement for Dr Steyn in far different and better circumstances to the circumstances in which Vision found itself in May 2010 when Dr Steyn resigned, forcing the closure of Vision’s Gladstone clinic.

If Dr Kitchen had not wrongfully terminated his Service Agreement in September 2009, then the Gladstone clinic would not have lost its permanent support staff in May 2010 and Dr Kitchen would have remained available to mentor and support Dr Steyn. However, it is likely that Dr Steyn would have resigned and left Vision well prior to March 2011 and Vision would have had great difficulty in finding a permanent replacement for him.

Vision is entitled to be compensated for the loss of the small chance to keep the Gladstone clinic operating at a profit after June 2010.

Damages for breach of enforceable restraints of trade

Among the issues identified by the parties was whether Dr Kitchen breached the restraint of trade provisions, to the extent they are enforceable, and, in particular, whether his conduct in commencing practice in Rockhampton and Gladstone in competition with Vision breached those restraints. If it did an issue arises as to the loss and damage which Icon and/or Vision suffered as a result.

I have found that only two of the restraints are enforceable. Those that are enforceable did not completely prohibit Dr Kitchen and the defendants from commencing to practise in Rockhampton and Gladstone. In essence, they prevented the defendants from soliciting custom from a “Client” and from accepting a request to provide ophthalmic services to such a client. In the media statements which are particularised in paragraph 25 of the amended statement of claim Dr Kitchen urged patients who had appointments to contact him so that he could make alternative arrangements. I note in passing that the radio announcer who interviewed Dr Kitchen on 15 September 2009 told listeners, “Remember he can’t contact you, legally, but you certainly can contact his team”. It is likely that the newspaper article and radio interview in September 2009 enticed away a number of people who would fall within the definition of a “Client” from Vision, and also that in establishing a clinic in Rockhampton in competition with Vision, Dr Kitchen accepted requests to provide ophthalmic services to “Clients”. Dr Kitchen thereby breached the non-solicitation restraints and the other valid restraints in cl 17.1(c) and (d) of the Service Agreement.

Vision suffered a loss as a result of those breaches. However, Dr Kitchen’s promotion of his new practice and the establishment of it would also have generated work from many individuals who did not fall within the definition of “Client”. To the extent that such business was lost to Vision, it was not a loss that can be said to have been caused as a direct result of the breach of an enforceable restraint. Vision probably would have suffered such a loss if Dr Kitchen and the defendants had observed the enforceable restraints.

I am not in a position to properly assess the loss and damage which Icon and/or Vision suffered as a result of breaches of the enforceable restraints. I will give the parties an opportunity to make supplementary submissions on this aspect since their submissions on the restraint of trade clauses were largely based on arguments that either all the restraints were valid or that none of them were valid. The extent of the loss caused by breach of the valid restraints (as distinct from establishing a new practice) was not proved with any precision. In any case, the parties may not wish to avail themselves of the opportunity to make further submissions upon the quantum of the loss and damage which may have been proven to have been suffered by the breaches of the restraints which I have found to be enforceable. As presently advised, any loss in this regard was far less than the loss and damage suffered by reason of Dr Kitchen’s termination of the Service Agreement.

The quantum of loss suffered by the termination of the Service Agreement

I have earlier made findings about the loss suffered as a consequence of the termination by Dr Kitchen of the Service Agreement and the subsequent closure of the Rockhampton and Gladstone clinics. I have addressed categories of loss in respect of each clinic and the periods over which Vision/Icon suffered a loss of earnings. For the reasons which follow, it is not presently possible to assess the quantum of loss in each category, notwithstanding the monumental work undertaken by the parties’ legal representatives and the two expert witnesses, Mr Lom and Mr Morris. The joint experts’ report is in several parts, based upon joint instructions and a number of assumptions. Each expert gave oral evidence and the experts differed on some matters, including an appropriate discount rate. However, they agreed on many matters and the report is a useful basis upon which to approach the assessment of at least some categories of loss. I shall address those categories and attempt to assess the plaintiffs’ damages as far as possible.

Costs of closing the Rockhampton clinic

The evidence and the experts agree the relevant loss to be $256,571. These losses were sustained in late 2009 and early 2010. The experts have produced two interest rate calculations, one based on simple interest applying the Court’s interest rates on judgment debts for the period from 13 September 2009 to 28 February 2014. The alternative applies a compound interest rate of 8.6 per cent based upon Mr Lom’s assessment of Vision’s interest expense as reported for the 2010 financial year. Either rate would be open as a matter of discretion in awarding statutory interest. I prefer to adopt the simple interest rate on judgment debts.^[74] The relevant total as at 28 February 2014 was $353,219. This figure will need to be updated by calculating interest to the date of judgment.

Lost earnings from Rockhampton for the period ending 31 March 2011

The calculation of this loss should be based on the historical performance of the Rockhampton clinic, not on the basis of a March 2009 Business Plan. On that basis, the experts assumed average monthly revenues of $345,000, and calculated lost monthly earnings of $191,100. The resulting losses up to 31 March 2011 appear in Appendices 1 and 2 of Part A of the joint report.

The experts have assumed an annual growth rate of four per cent. The resulting assessment is a conservative one because it does not include the significant increase in revenues associated with the treatment of macular degeneration, which commenced from 2010. Enhanced revenue from a new treatment would seem to be within the reasonable contemplation of the parties and to be recoverable. Dr Kitchen accepted that if he had not terminated the Service Agreement, the benefit of those revenues would have gone to Vision. Both experts agreed that there was no reason why those additional revenues would not form part of the plaintiffs’ loss.

Without including such an increase in revenue, the total lost monthly earnings between September 2009 and March 2011 are calculated in the joint report to be $3,757,241.

The parties are agreed that the cash flows should be discounted, but the experts did not agree on the appropriate rate.

Mr Lom preferred a discount rate of 15.5 per cent which was drawn, in part, from Vision’s Weighted Average Cost of Capital which reflects Vision’s cost of borrowing and the share market’s perception of the return that Vision should provide its shareholders. The defendants contend that this figure does not reflect the risk to forecast lost earnings from the specific clinics in question. Mr Morris contended for a discount rate of 17.5 per cent as better reflecting that risk. Mr Morris’ opinion was based on the proposition that the forecast future cash flows reflected, in essence, a one-doctor clinic and that if Vision lost that doctor, then it effectively lost the clinic. Vision correctly submits that this approach does not adequately take account of the ability of Vision to cover for the departure of a doctor. A great deal of time could be spent debating whether the risk to Vision’s earnings in the Rockhampton clinic was more or less than the risk to its earnings in general, or clinics with a different demographic profile or an older doctor. Both discount rates adopted by the experts were defensible and Mr Morris accepted that he could not argue against 16.5 per cent as an appropriate discount rate in this case. The different discount rates do not lead to significantly different loss figures, at least in this category. The difference is less than $50,000. I conclude that, even accepting that Vision had some capacity to cover for the departure of a doctor from Rockhampton or from Gladstone, the discount figure of 17.5 per cent is supported by the multiple which Vision applied to capitalise the earnings of Dr Kitchen’s practices on acquisition. Accordingly, a discount rate of 17.5 per cent seems the most appropriate rate to apply in this context.

Lost earnings from Rockhampton for the year between 31 March 2011 and 31 March 2012

Similar considerations apply here. However, the relevant calculation must take account of the application after 31 March 2011 of Vision’s 65 per cent remuneration model, reducing the plaintiffs’ loss from $191,100 to $118,985 per month (calculated in September 2009 figures).

Lost earnings from Rockhampton after 31 March 2012

The experts calculated the Rockhampton loss on a number of different bases including no competition from Dr Kitchen and competition during various periods from 6 months to 24 months, commencing September 2009. They were also instructed to make various assumptions about the effect of competition, and that a replacement doctor would have produced 20 per cent less revenue than Dr Kitchen. A number of these assumptions are arbitrary, as the experts acknowledged. In addition, a number of them do not accord with my findings about competition from Dr Kitchen and when it would have commenced.

Based on their instructions, the experts calculated cash flows after 31 March 2011 and arrived at their present value. For example, on the basis of no competition from Dr Kitchen and that the Rockhampton practice continued to grow at a rate of four per cent per annum, the experts arrived at a net present value of:

$11,981,708 as at 13 September 2009 using a discount rate of 17.5 per cent; and

the net present value of $13,865,025 using a discount rate of 15.5 per cent.

Smaller amounts were calculated on the basis of various non-compete periods. Needless to say, on the assumptions made, the amounts were very large. The experts explained their approach as calculating an annual cash flow after 31 March 2011 of $1,544,340 which was converted into a “terminal value” by dividing by the discount rate of 17.5 per cent (Morris) or alternatively 15.5 per cent (Lom), net of the growth rate of four per cent.

It seems to me to be inappropriate to use these figures as a starting point for the assessment of lost earnings from the continued operation of the Rockhampton clinic after 31 March 2011, or after 31 March 2012, because the calculations are based upon certain arbitrary assumptions which do not reflect my findings about the course of events, such as, when competition with Dr Kitchen would commence and the risk that the Rockhampton clinic would close unless a replacement doctor was found.

It might be argued that the risk of closure may be factored into the discount rate of 17.5 per cent, and no further substantial discount required. However, my provisional view is that the figures arrived at by the joint experts are not a satisfactory starting point, and that the parties should be given an opportunity to address in supplementary submissions the calculation of Icon’s loss from the closure of the Rockhampton clinic in September 2009 in the light of my findings.

Loss of earnings from continued operation of the Gladstone clinic for the period ending 31 March 2011

The experts calculated lost monthly earnings from the Gladstone clinic in the amount of $60,510 based upon the period when Dr Kitchen did not practice in competition with it. This was based upon the plaintiffs’ contentions that Dr Kitchen would have served out his Service Agreement, the Gladstone practice would not have closed on 30 June 2010 and a replacement doctor would have been found for Dr Steyn to run the practice. As appears from my findings, these contentions cannot be sustained. There was a chance that the Gladstone clinic would be kept open and that a replacement doctor would have been found for Dr Steyn. However, the chance is a small one. In any case, after applying different discount figures the experts arrived at lost monthly earnings between June 2010 and March 2011 of a little over $500,000 before interest. Again, the calculations do not include a significant increase in revenue associated with the treatment of macular degeneration.

Lost earnings from Gladstone after 31 March 2011

Adopting a similar approach to that applied in relation to the Rockhampton clinic, the experts arrived at a figure for the lost earnings from the continued operation of the Gladstone clinic after 31 March 2011. Based on lost monthly earnings of $60,510 (in June 2010) and assuming no competition from Dr Kitchen, the plaintiffs’ losses from the closure of the Gladstone clinic after 31 March 2010 were:

$5,341,854 using a discount rate of 17.5 per cent;

$6,278,811 using a discount rate of 15.5 per cent

as at 13 September 2009, to which interest would then be added. Again, these figures, and alternative figures assuming competition from Dr Kitchen are based upon certain assumptions and instructions which do not adequately reflect my findings about the prospects of replacing Dr Steyn and the likelihood that the Gladstone clinic would have continued to operate if Dr Kitchen had performed his Service Agreement until at least 31 March 2011 and then worked under a compromise arrangement until 31 March 2012.

Conclusion – quantum

For these reasons it is appropriate to seek further submissions on the assessment and calculation 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. I will invite submissions from the parties as to appropriate directions for the filing of service of supplementary submissions and the process by which calculations are made.

PART V – THE ESCROW DEED

The defendants own certain shares in Vision as part of the consideration for the sale, which are held in escrow. Pursuant to clause 2.9 of the Escrow Deed, the shares held in long term escrow were to be released from escrow if, at the expiry of the non-compete period, there had been no breach of the restraints in the Service Agreement. Since Dr Kitchen breached cl 17.1(c) and (d); the defendants are not entitled to have the shares released to them under cl 2.9 of the Escrow Deed.

Pursuant to clause 2.9 Vision is entitled to buy back the shares which remain in escrow if, among other things, Dr Kitchen ceases to be an employee in circumstances where he is a “Bad Leaver”. The defendants counterclaimed that he was a “Good Leaver”, having departed in circumstances in which Vision/Icon failed to remedy a breach within 14 days of written notification, and that the shares should be released from the escrow conditions. However, I have found that Dr Kitchen ceased to be an employee in circumstances which would make him a “Bad Leaver” as defined in the Escrow Deed.

As a result the defendants have not established an entitlement to the relief sought in respect of the Escrow Deed.

I shall hear the parties as to whether Vision has or intends to exercise its rights to “Buy Back Securities” pursuant to cl 2.11 of the Escrow Deed. As presently advised, it would seem appropriate to declare that the defendants are not presently entitled to the release of the restricted securities, and to refuse the relief sought by the defendant in paragraph 47 of the counterclaim in respect of the release of the shares held in escrow.

PART VI: COUNTERCLAIM FOR MISLEADING AND DECEPTIVE CONDUCT

Introduction

The defendants allege that during the course of the negotiations with Vision a number of representations were made which induced them to sell the practice to Vision and Dr Kitchen to enter the Service Agreement. These representations are described in the defendants’ pleadings as:

(1)the Practice Enhancement Fund (“PEF”) representations;

(2)the incentive scheme representations;

(3)the “no less favourable” representations; and

(4)the growth representations.

They are alleged to have been conveyed from three sources:

(a)Vision’s IPO Prospectus which Dr Kitchen downloaded and analysed in mid-November 2005;

(b)a PowerPoint presentation provided to Dr Kitchen in November 2005, and

(c)statements made to Dr Kitchen by Dr Unger in a meeting in Mackay in January 2006.

The essential issues are:

whether the pleaded representations were made (“the representation issue”);

whether the representations that were made were misleading or deceptive or likely to mislead or deceive (“the contravention issue”);

whether the representations induced the defendants to enter the transaction (“the reliance issue”); and

whether the defendants would not have entered the transaction if there had been no contravention (“the causation issue”).

The representations are separately pleaded. The case was conducted on the basis of a separate consideration of whether each of the alleged representations was made, and whether each was misleading or deceptive or likely to mislead or deceive for the reasons pleaded by the defendants. This does not alter the fact that the defendants rely on a course of conduct and, particularly on the issue of reliance, one is concerned with the effect on Dr Kitchen of the conduct as a whole. In that regard, there is a relationship between at least some of the pleaded representations. For example, the PEF features both in the PEF representations and as a statement about succession planning as part of the so-called “growth representations”. When a court is concerned to ascertain the mental impression created by a number of representations conveyed by one communication, it is wrong to attempt to analyse the separate effect of each representation.^[75] Still, it is convenient to address, as the parties’ submissions did, each category of representation and the contravention issues in respect of each category. After that, it will be necessary to consider issues of reliance and causation with respect to any proven contravening conduct.

Certain statements relevant to each of the representations are admitted. Vision points to the contents of some of the documents to contest that certain representations were made or that they were relied upon. There was some limited contest about what was said to Dr Kitchen by Dr Unger when they met in Mackay in January 2006. To the extent the recollections of witnesses differ about what was said, issues of credibility and reliability arise for determination.

The law

Before turning to the contents of the Prospectus, the PowerPoint presentation and what was said by Dr Unger at the January 2006 meeting in respect of each of the alleged representations, it is appropriate to recall the general principle that whether or not representations were conveyed by a document or a conversation depends upon the effect of such statements upon the person to whom they are communicated, judged by reference to their context.^[76] The characterisation of conduct involves the assessment of a notional cause and effect relationship between the conduct and the state of mind of the relevant person or class of persons. The test is necessarily objective.^[77] A practical distinction exists between the approach to characterisation of conduct as misleading or deceptive when the public is involved and when conduct occurs in dealings between individuals. In the former case, the characterisation inquiry is to be made with respect to a hypothetical individual. In the case of an individual, it is not necessary that he or she be:

“‘reconstructed into a hypothetical, “ordinary” person. Characterisation may proceed by reference to the circumstances and context of the questioned conduct. The state of knowledge of the person to whom the conduct is directed may be relevant, at least as insofar as it relates to the content and circumstances of the conduct”.^[78]

The essential question is whether the relevant communications, viewed as a whole, are misleading or deceptive or likely to mislead or deceive. The question of whether conduct is misleading is “logically anterior to the question of whether a person has suffered loss and damage thereby”.^[79] Conduct may be misleading because it leads a person into error at the time a communication is made. If the person later comes to appreciate the true position before a transaction is entered into then the impugned conduct, viewed as a whole, will not have resulted in a loss.^[80]

In considering the anterior question of whether conduct is misleading or deceptive or likely to mislead or deceive, the first issue is what kind of statement was made?^[81] Was it a statement of historical present fact made on the basis that its truth was known to its maker? Was it a statement of opinion? Did it take the form of a prediction?^[82]

Where the alleged contravention relates primarily to a document, the effect of the document must be examined in the context of the evidence as a whole. The Court should not examine the effect of the relevant statements in isolation.^[83] Whether or not conduct is misleading or deceptive is an objective question that the court must determine from the whole of the conduct.^[84]

In some circumstances in which a person is alleged to have been misled by a document, such as an advertisement, a court may conclude that a consumer might absorb only the general thrust or dominant message in circumstances in which this was not a consequence of selective attention or an unexpected want of vigilance. This may be a consequence of an advertising strategy.^[85] In other circumstances, such as the sale or acquisition of a business, the party to whom the communication is made might be expected to give greater attention to the whole of the document and to absorb more than its general thrust.

Context and sequence of statements

This case is not about the hypothetical consumer of an advertisement. It concerns an identified individual, Dr Kitchen, and the characterisation of the conduct of Vision in making the relevant communications to him and whether its conduct was misleading or deceptive. This falls to be assessed by having regard to those circumstances, including his prior knowledge at the time the conduct occurred. This includes his careful analysis of documents prior to any communication with Vision in the context of an anticipated, large, commercial transaction. The conduct in question was directed to a person of substantial commercial experience and business acumen.

The sequence and circumstances in which Dr Kitchen read documents and was told things is significant.

Prior to his relevant dealings with Vision, Dr Kitchen carefully analysed investment information from Bell Potter Securities and Vision’s IPO Prospectus. Dr Kitchen obtained the Prospectus from the ASX website and analysed it thoroughly before he spoke in detail to anyone from Vision. He appreciated that the Prospectus was a document that Vision had prepared for the market at large and was not addressed to doctors considering selling their practice to Vision.

On 21 November 2005, Dr Kitchen was sent Vision’s standard slideshow presentation in the form of a PowerPoint presentation. The information in it about Vision related to matters about which Dr Kitchen and Mr MacKenzie already knew from their earlier enquiries.

When Dr Unger and Ms Shaw met with Dr Kitchen in Mackay in January 2006, they provided a general presentation about the possibility of an acquisition, and Dr Kitchen provided his own presentation, based upon the “Sharing the Vision in Queensland” document. The Vision PowerPoint presentation provided a general overview of Vision and about how it acquired practices.

The PowerPoint presentation and the things said at the meeting should not be considered in isolation. Those communications were made to someone who had carefully read the Prospectus and the Bell Potter information.

The issues of whether Vision’s conduct conveyed the pleaded representations and was misleading and deceptive is a matter of characterisation of its conduct, assessing the notional effect on Dr Kitchen by reference to context, including his state of knowledge. The characterisation of Vision’s conduct poses an objective question which is determined in all of the circumstances, and not by reference to parts of communications viewed in isolation.

Credibility and reliability: oral communications

There is not a significant dispute about what was said by Dr Unger to Dr Kitchen in Mackay in early January 2006. Dr Unger, who was called as a witness by the defendants, accepted that he said many of the things which Dr Kitchen alleges he said. Vision also admitted that many of these things were said. However, certain matters were contested and it is necessary to address the reliability of the evidence about these contested conversations.

Each of the three witnesses who gave evidence about these conversations, namely Ms Shaw, Dr Unger and Dr Kitchen, was, to some extent, reconstructing what they think was said, rather than recollecting precisely what was said at the January 2006 meeting. None professed to have a detailed recollection of the actual words that were used in those discussions. The defendants did not complain about the making of most of the alleged representations until the proceedings were well-advanced. Ms Shaw and Dr Unger, like Dr Kitchen, were required to give evidence in mid-2014 about a conversation that occurred in January 2006.

The difficulties confronting a claimant who alleges that spoken words were misleading were identified by McLelland CJ in Equity in a frequently-cited passage in Watson v Foxman.^[86] As his Honour stated, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the Court to be reasonably satisfied that they were in fact misleading in the proved circumstances. His Honour continued:

“In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”

The respective recollections of Ms Shaw, Dr Unger and Dr Kitchen were affected by the passage of time, their acknowledged inability to recall the precise words that were spoken and the fact that, as this insightful passage indicates, what is actually remembered often is little more than an impression from which plausible details are then, often subconsciously, constructed. However, courts routinely face these problems in resolving contests about what was said in conversations that occurred many years before evidence is given at trial. The resolution of those disputed questions of fact is assisted by the inherent probability of an account, whether it is reflected in contemporaneous documents and the apparent credibility and reliability of a particular witness.

It seems probable that the statements made by Dr Unger to Dr Kitchen were consistent with the matters contained in documents that described how Vision operated and the basis upon which it acquired practices. It is also likely that Dr Unger accurately described Vision’s business and practices. If what he said was inconsistent with what was written or with what Ms Shaw understood about those matters, then it is unlikely that she would have allowed Dr Kitchen to be misled. It is probable that she would have corrected Dr Unger or at least clarified matters. She was familiar with Vision’s operations, and although she may not have understood some of the finer details relating to the PEF, she had a clear understanding of how Vision’s business operated and the basis upon which it acquired practices.

I was impressed by the evidence of both Ms Shaw and Dr Unger. I do not have the same confidence in the credibility and reliability of Dr Kitchen. He was reluctant to recall certain matters and professed not to recall them. As stated in paragraph 150 of his witness statement, he professed to have a very limited knowledge of the agreements which he negotiated with other doctors. He confirmed this in his oral evidence but I find that he did have considerable knowledge about those matters. When asked about arrangements that were struck with Dr Eshun-Wilson, he professed an inability to recall that he negotiated to receive 18 per cent of any out performance bonus earned by Dr Eshun-Wilson. Given the attention which was directed in the proceeding to out performance bonuses in general and his role in recruiting other doctors, I find it difficult to believe that Dr Kitchen was unable to recall that matter. If he had frankly told what he recalled about that matter it would have undermined his assertions and assisted Vision’s case. I reluctantly find that he professed a lack of knowledge when he in fact had such knowledge.

I do not accept his evidence about matters suddenly dawning on him on 4 August 2009 when Mr Stamp explained that some doctors had their incentive payments and their EBITA calculated on a costs basis of 40 per cent. According to Dr Kitchen, it was only when he was told these things and that Mr Stamp said words to the effect: “You should have negotiated a better deal” that it “suddenly dawned” on him that some doctors had a better deal. His evidence is that he felt deceived and betrayed by this. I found his evidence in this regard contrived and I do not accept it. If he felt betrayed by being misled into thinking that all doctors had their EBITA and incentive payments calculated on the same basis then it is remarkable that he did not register his dissatisfaction and feeling of betrayal in an email to Mr Stamp, Mr Tanner or other Vision representatives soon after these matters “suddenly dawned” on him. It is remarkable that there is no complaint about misleading or deceptive conduct in this regard in his solicitors’ letter of 25 August 2009. I return to the absence of complaint in relation to that and other matters in considering the issue of reliance.

Although in many respects Dr Kitchen gave reliable evidence, made appropriate concessions under cross-examination and generally sought to assist the Court in determining the facts, in the two respects I have given and in some other respects he was reluctant to give evidence which undermined his case. As a result, I have serious reservations about the credibility and reliability of Dr Kitchen’s evidence.

To the extent that there is a conflict between the recollections of Ms Shaw and Dr Unger on the one hand, and the recollections of Dr Kitchen on the other hand, about what was said in Mackay in 2006, I prefer the recollections of Ms Shaw and Dr Unger. There was no great inconsistency between the evidence of Ms Shaw and Dr Unger. To the extent there was, I prefer her recollection.

The PEF representations

The defendants allege that a number of representations were made about the PEF. These representations were contained in the Prospectus and the PowerPoint and were conveyed by Dr Unger in the January meeting. The defendants rely on the following statements in the Prospectus:

Vision had a “self-sustaining model ... [u]nder Vision Group's management model, 7.5% of the Partners proceeds when Vision Group acquire[d] their practice [were] notionally allocated to the Practice Enhancement Fund. The Fund [would] be used to partially fund further acquisitions and awards made by Vision Group”;

the PEF offered “Vision Group a future means of attracting, retaining and increasing the equity participation of Doctors, including Partners, Associates, Visiting Surgeons and other eligible staff”; and

the Medical Director might “from time to time invite participation in the Practice Enhancement Fund” and had “a discretion to issue shares at a lower price or even at no cost”.

The PowerPoint presentation contained statements to the effect that:

doctors have put aside shares to recruit new doctors and enhance the Group;

succession planning has been a core part of the model from the outset;

7.5 per cent of original practice value acquired has been set aside to recruit new doctors – a continuous cycle is envisaged, supported by new doctors also assigning succession shares;

shares are allocated at the practice level with sign off by the Medical Director;

recruiting new doctors is part of a doctor’s contract and fundamental for doctors to grow and realise retained share value;

the shares, with accrued dividends, should be sufficient to recruit new doctors;

outperformance bonus paid from over-budget EBITA and from the PEF; and

if a doctor failed to transfer the full agreed amount of their budgeted EBITA to a successor, a proportion of their long term escrow shares would be transferred to the PEF for future disbursement.

Dr Unger is said to have made the following statements to Dr Kitchen during the course of the January meeting;

7.5 per cent of the total consideration paid to purchase Dr Kitchen’s practice was to be “sacrificed” into the PEF and he would be “paying 7.5% into the fund”;

the PEF was used to recruit new doctors as well as reward, incentivise and retain existing doctors and ensure succession planning;

the PEF was non-negotiable, all doctors were required to contribute to the PEF and had done so;

that the concept of the PEF meant leaving “something on the table for the next guy”;

that the PEF was a key element of the Vision business model and it was an important principle that each doctor contribute to their own succession;

the consideration payable for Dr Kitchen’s practice would be reduced by the amount to be placed in the PEF;

7.5 per cent of the value of all acquired practices had been and would in the future be placed in the PEF;

the purpose of the PEF shares was that they would be held like escrowed shares to reward a successor doctor in the future for staying with Vision for a long time;

the dividends derived from the shares would also be paid into the PEF so the PEF would be compounding;

the shares together with the accrued dividends held in the PEF may be used in part to recruit new doctors and to reward and incentivise junior partners who were joining existing practices; and

the PEF was to be used for part succession planning and part recognition of performance of young doctors.

Simply put, the defendants’ case is that these statements represented to Dr Kitchen that:

(a)the PEF consisted of a fund of actual shares; and

(b)the fund could be used for the stated purposes: succession planning, recruiting and incentivising employees, recognising the performance of young doctors and to partially fund future acquisitions.

In response to these allegations Vision admits that it made a number of statements about the PEF including:

7.5 per cent of the value of a practice being acquired would be notionally set aside in the PEF;

the consideration payable for the practice would be reduced by the amount which would be allocated to the PEF;

the unissued shares in the capital of Vision allocated to the PEF would be used to incentivise associate doctors and employees and to recruit new doctors;

Vision also notes that the PowerPoint presentation contained the following statements:

“Doctors have put aside shares to recruit new doctors and enhance the Group”;

“7.5% of original practice value acquired has been set aside to recruit new doctors. With accrued dividends, this should be sufficient to recruit new doctors;” and

“Out-performance bonus from (sic) paid from over-budget EBITA plan and from the Practice Enhancement Fund”

Vision also notes that the Prospectus contained a number of statements about the PEF including:

“Following the Offer and Buy-Back, the Shares issued pursuant to this Prospectus will represent approximately 60.9% of Vision Group's capital (diluted for unissued Practice Enhancement Fund Shares), and approximately 39.1% will represent the holding of Continuing Shareholders (including a pool of unissued Shares comprising the Practice Enhancement Fund)” (section 2.2);

[referring to 2,594,279 unissued shares in the Practice Enhancement Fund] “Currently represented by Deferred Shares on issue at the date of this Prospectus, but will be cancelled prior to listing. The Shares referred to on completion of the Offer and Buy-Back will effectively be an unallocated share capital pool available to be issued in the future by the Board in accordance with the Practice Enhancement Fund plan rules (as described in section 10.10)” (Note 2 to section 2.4);

“Under Vision Group's management model, 7.5% of the Partners' proceeds when Vision Group acquires their practice are notionally allocated to the Practice Enhancement Fund. The Fund will be used to partially fund further acquisitions and awards made by Vision Group. When a doctor is awarded a portion of the Fund, the Doctor will be required to sacrifice 7.5% into the Practice Enhancement Fund. The unissued Shares in the Fund will represent 4.0% of the diluted Shares post the completion of the Offer and Buy-Back” (section 4.8.3);

“Following listing, Vision Group will have 64.2 million diluted Shares, including approximately 2.6 million Shares available to be issued under the Practice Enhancement Fund” (section 10.2);

“Vision Group has established this Practice Enhancement Fund to promote its long-term success. The Practice Enhancement Fund offers Vision Group a future means of attracting, retaining and increasing the equity participation of Doctors, including Partners, Associates, Visiting Surgeons and other eligible staff” (section 10.10);

“The Medical Director may from time to time invite participation in the Practice Enhancement Fund. Participants will be invited to subscribe for a new issue of Vision Group shares. Shares will generally be issued to Participants at the weighted average price at which those shares were traded on ASX over the one week period before the date of allocation...The Medical Director also has a discretion to issue shares at a lower price, or even at no cost. A Vision Group provided loan would fund the acquisition cost of the shares. The shares will be registered in the name of the Participant, but will remain subject to restrictions on dealing as specified by the Medical Director...until Participants satisfy performance hurdles and have repaid the loan.” (section 10.10.1);

“The Medical Director will specify the performance hurdles that will generally need to be satisfied before the Practice Enhancement Fund shares will vest. Performance hurdles may include minimum tenure periods and performance criteria individually specified by the Medical Director at the time of the invitation. Generally, provided any loan outstanding has been repaid, Practice Enhancement Fund shares will vest once the applicable performance hurdles have been satisfied.” (section 10.10.2);

“Vision Group may extend a loan to enable Participants to acquire shares under the Practice Enhancement Fund. Generally speaking, the loan period will be a mixture of short and long term elements so as to provide an appropriate incentive structure, unless a Participant ceases to perform services for Vision Group as set out in their service agreement or facility use agreement, in which case the loan will become payable within 28 days.” (section 10.10.3);

“The number of Shares that can be issued under the Practice Enhancement Fund is initially set at 2,594,279 plus notional accretions as if the [Dividend Reinvestment Plan] applied to those unissued Shares over time. The Board may increase the size of the Practice Enhancement Fund in the future at its discretion.” (section 10.10.6);

The Notes to the financial statements in the “Half Year Financial Report 31 December 2005” contained additional information about the PEF including:

“As part of the various acquisitions made by Vision Group, Vision Group has provided that a notional amount equivalent to 7.5% of the aggregate purchase consideration be set aside as a means of incentive for junior partners and associates.

The notional amount represents a maximum number of shares which may be issued to partners, associates and visiting surgeons.

At 31 December 2005, Vision Group had accumulated 3,621,735 notional rights, which may at the discretion of the Board, be issued as part of the incentive packages of doctors on terms and conditions to be approved by the Board.”

Vision contests that it made any representation that the PEF would consist of issued shares in Vision or that actual dividends would be paid on such shares.

Dr Kitchen contends that the statements in the PowerPoint presentation that “the shares, with accrued dividends, should be sufficient to recruit new doctors” as well as the statements by Dr Unger that he would be “paying 7.5% into the fund”, that “the dividends derived from the shares would also be paid into the PEF so the PEF would be compounding” and that “the shares together with the accrued dividends held in the PEF” all led him to believe that the PEF was an actual rather than a notional fund and comprised actual shares.

It is improbable that at the January meeting either Ms Shaw or Dr Unger said anything inconsistent with their understanding of the PEF or what was said about it in the Prospectus. Although neither fully understood some of the financial, legal and accounting intricacies of the PEF, both knew it did not consist of actual shares. The Prospectus and reports with which they were familiar clearly described the fund as “notional”. They are unlikely to have referred to the PEF as if it consisted of actual shares.

Dr Kitchen had read the 2004 Prospectus in detail prior to seeing the PowerPoint presentation. The PowerPoint presentation did not describe the PEF as notional. But it was a general overview and would be understood in the context of what was stated in the more detailed Prospectus. It would not add anything of substance to what Dr Kitchen reasonably understood about Vision as a result of his own inquiries and detailed consideration of the Bell Potter Securities information and Vision Prospectus. The Prospectus accurately represented that the PEF was a notional pool of unissued capital. The annual report for 2005, which Dr Kitchen read closely, said the same thing. I am not persuaded that the Prospectus, the PowerPoint presentation or the things said to Dr Kitchen in fact represented that the PEF consisted of a fund of actual shares. Dr Kitchen was not misled by Vision into believing that it consisted of actual shares.

A further issue about the PEF statements is whether they represented to Dr Kitchen that the PEF could be used for its stated purposes. I am persuaded that they did.

Were the proven PEF representations misleading?

Because the defendants have not proven that the statements about the PEF represented that it consisted of a fund of actual shares, this aspect of its claim for misleading and deceptive conduct falls away.

The remaining issue is whether the PEF statements, insofar as they represented that the PEF could be used for its stated purposes, were misleading.

The purpose of the PEF

The purpose of the PEF, as stated in the Prospectus, was to offer Vision “a future means of attracting, retaining and increasing the equity participation of Doctors, including Partners, Associates, Visiting Surgeons and other eligible staff”. The Prospectus stated that the PEF “will operate in conjunction with [Employee Incentive Plan], the other Vision Group employee share plan”. The PowerPoint presentation stated that the PEF was to introduce new doctors and “facilitate the transfer of existing partners’ practices”.

The purpose of the PEF, so far as Dr Unger was concerned, was to be his “private sandpit” where he could reward doctors and other Vision employees as he saw fit, subject to the approval of Vision’s board. He intended to consult with and accept recommendations from doctors and practice managers about how the PEF could be used. Its essential purpose was:

(a)the allocation of shares in Vision as a means of creating an incentive for doctors to stay with Vision in the long term;

(b)to ensure that the doctors paid, in part, for their own succession.

As to the latter, Dr Unger explained in his witness statement that when Vision acquired a practice, the doctor was expected to work with Vision to implement a succession plan before their retirement. The business model which Dr Unger formulated was for Vision to offer a “new recruit”, who was to take over an existing doctor’s EBIT, a base payment in one form or another together with the opportunity to establish an EBIT from their own efforts. That growth in EBIT would then be purchased by Vision for a capital sum after a year or two of that doctor’s performance. For example, if a doctor recruited a second doctor to take over some of the practice, the first doctor could start referring work to the new doctor and undertake fewer cases. According to Dr Unger, Vision would end up paying two salaries during the period of transition as well as paying for some EBIT which it had originally acquired from the first doctor and which had gravitated to the second doctor. Dr Unger took the view that the first doctor should contribute to his or her own replacement and that the PEF could be used to, in part, pay the additional cost to Vision for recruiting the new doctor.

Dr Unger also intended that the PEF should be used to ensure the continued support of other staff, including practice managers. Staff or doctors who were considering leaving might be offered shares as an incentive to stay and, in such a case, the shares were to be held in escrow for up to 10 years for doctors and three years for other staff. Dr Unger also intended that, once a doctor’s initial five year contract expired, and he was involved in negotiations with those doctors to recontract for a further period, the PEF could be used, with shares issued to be held in escrow until the expiry of the second contract.

The general purposes of the PEF, as devised by Dr Unger, were understood by the directors and senior management of Vision. Dr Rogers explained that the unissued shares that were notionally allocated to the PEF “were to be used as a means of rewarding employees, rewarding other people at times that [Dr Unger] thought appropriate ...”. Dr Rogers recalled Dr Unger describing the PEF as a “war chest” that would allow shares to be issued to young doctors who were joining, and that “in some ways you were putting part of your acquisition towards ... the future ongoing success of the group”.

The operation of the PEF

It is unnecessary to dwell on the history of the PEF and some of the complexities associated with the Initial Public Offering (IPO) whereby pre-IPO shares were deducted from the Salaried Doctor Partner’s shareholdings and allocated to the PEF. Upon Vision successfully listing on the Australian Stock Exchange on 17 December 2004, a proportion of the newly-created ordinary shares were deducted from the existing shareholdings and notionally allocated to the PEF. As at 31 December 2004 Vision had accumulated 2,594,279 notional rights in the PEF, which, at the discretion of the board, could be used as part of incentive packages offered to doctors. As at 10 June 2005, 1,006,228 rights had been earmarked for allocation to existing Salaried Doctor Partners, subject to the achievement of performance hurdles. If those performance hurdles were not met, the rights would remain in the PEF.

As briefly explained in the PowerPoint presentation, each time Vision acquired a practice, a notional amount equivalent to 7.5 per cent of the value of the practice being acquired was allocated to the PEF by applying the share price at the time and allocating that amount to the PEF register. The remaining 92.5 per cent was recorded on Vision’s balance sheet. This also meant that the incoming Salaried Doctor Partner (or entities associated with him or her) accepted a price of 92.5 per cent of the agreed value of the practice and only paid capital gains tax on that amount.

Mr Mark Hansen, who was Vision’s Chief Financial Officer from May 2002 until February 2009, maintained the PEF register which was updated when Vision acquired a practice (to increase the fund by 7.5 per cent of the acquisition value) and when shares were issued in respect of the fund. The register was balanced every six months and audited twice a year by external auditors. Vision received accounting, tax and legal advice in relation to the operation of PEF.

In June 2005, 625,553 shares were issued to existing Salaried Doctor Partners on meeting performance hurdles, and this allocation was recorded in the PEF register and noted in Vision’s financial accounts and annual report.

In December 2005 Vision’s board resolved to invite a number of Salaried Doctor Partners and employees to participate in the PEF and to be allocated shares in Vision subject, in some cases, to escrow restrictions. Vision’s board proposed to facilitate interest-free, limited recourse loans, secured by the subscriber pledging their shares to Vision until the loan had been repaid in full. Vision’s board approved the share issue in April 2006 and in May 2006, 1,216,761 shares were issued under the offer.

Dr Unger received some queries about the non-recourse loan arrangement, and why the PEF allocation was by way of loan and not gift. He explained in a memorandum dated 9 May 2006 how the PEF allocation worked. In essence, dividends payable on the shares were credited against the loan. At the end of the term of the loan, the recipient could either pay off the balance of the loan and take the shares, or, if the shares had decreased in value, return the shares with no obligation to pay that balance. His memorandum explained that if no loan was provided then tax was payable until the recipient sold the shares. He explained that the plan rewarded recipients for their work and their commitment, whilst not placing them in a disadvantaged tax or financial position.

After the completion of Vision’s purchase of Dr Kitchen’s practice, relatively few shares were issued from the PEF. In November 2006, 11,765 shares were issued to Dr Rogers and on 1 April 2008, 37,314 shares were issued to Dr Genge and Dr Roberts. In February 2010, 56,340 shares were issued to Dr Groeneveld. Vision’s chairman, Mr Tanner, initially explained in his oral evidence this low level of activity in the PEF register on the basis that doctors did not join Vision for a few years and because the GFC hit. However, as Mr Tanner later accepted in his evidence, doctors were recruited during this period. New doctors were recruited into existing practices. Mr Tanner explained that a relatively insignificant number of shares issued between 2006 and 2008 because “the young doctors didn’t earn them”. He went on to explain that PEF shares were not simply given when someone became a doctor. The doctor had to serve time and around that stage the doctors had not “earned PEF shares”.

Apart from its potential use as a means of attracting new doctors into an existing practice, the PEF was available as a means of rewarding existing staff. As the Prospectus noted, the PEF was intended to operate like Vision’s other employee share plan. Under new Australian accounting standards, share-based payments to employees had to be expensed. Dr Unger could not recall when he was advised that the accounting rules had changed, but it was some time after the board approved share issues in February 2006.

Mr Hansen addressed the issue of share-based payments and their financial implications to Vision in a board information paper dated 14 February 2008. That paper addressed principally options that were issued to Vision Executives under Vision’s Long Term Incentive Scheme. The memorandum also addressed the “out performance loan scheme” and the accounting treatment of loans provided to fund purchases for shares “ostensibly from the Practice Enhancement Fund”. This included the 1,216,764 shares that were issued in May 2006 and which were funded by limited recourse, interest-free loans to doctors and employees. In short, depending upon the terms upon which shares were issued and the value, if any, which Vision obtained in respect of any shares which were purchased and recorded as coming from the PEF, Vision might incur an expense.

If the PEF was used as a means to benefit an employee and if the purchase of the shares by the employees was paid by a non-recourse loan, then the employee did not receive any taxable benefit on the inception of the transaction. However, Vision was required to expense the benefit assessed as an option arrangement for the purpose of its accounts. There is nothing remarkable about this. It was how all share-based incentives operate for companies.

The operation of the PEF was also subject to ASX rules which applied to shares held in escrow. Mr Tanner explained that once the notional shares became “real shares” and were granted out of the PEF, the issued shares that were allotted to doctors were subject to ASX guidelines. They were issued under what Mr Tanner described as “our 10 or 15 per cent ASX guideline”. There was a limit on the number of escrow shares that Vision was able to control under the ASX rules. The notional shares in the PEF had not been on the company’s balance sheet. Once they were issued and allotted they went on the balance sheet in the same way as any new issue of share capital.

Mr Stamp, who was CEO of Vision between December 2008 and May 2010, gave evidence about the PEF Register being maintained and that, in accordance with the rules of the PEF, 7.5 per cent of each acquisition was notionally allocated to the PEF as unissued share capital that was available to be used as an incentive to doctors considering re-contracting with the company. Vision’s efforts to recontract doctors were largely successful. Mr Stamp’s oral evidence was that he undertook a review of the PEF by consulting with the Chief Financial Officer, the Financial Controller, the company secretary and a partner from Ernst & Young. The advice provided to him was that during his time as CEO the PEF operated as intended and that the historical records of it were accurate.

In a presentation to a Vision Group partners’ meeting on 15 August 2009 Mr Stamp addressed the operation of the PEF and stated: “In reality since listing, the PEF usage has been both real and notional”. He explained that he meant by this that whilst notional shares “sat in the PEF Register” they had a real impact and diluted the earnings of the company. According to Mr Stamp, the shares in the PEF did not become real until they were issued as capital in the company to a recipient.

Mr Stamp explained that he had a strong desire to use the PEF which he described as a “fantastic tool for the company”, based upon his experience of share-based incentives. In one version of a new remuneration model he proposed to use the PEF as an incentive for managing partners in order to drive them to better manage their group. However, the challenge with using the PEF at the time was that it was the height of the GFC and the company had experienced an earnings decline. There was considerable pressure from the market. With the decline in the share price many more “PEF shares” would be needed to provide the same incentive and the company, at that point in time, could not afford the cost of such a share-based incentive scheme.

Despite these challenges that Mr Stamp encountered in using the PEF, it remained available to be used for its intended purpose.

Mr Tanner explained in his evidence that whilst the PEF continued to exist it has been superseded in recent years by a new “young doctor model”. A number of exhibits showed that in 2008 and 2009 Vision reviewed share-based payments. The Employee Incentive Plan and the PEF were considered, since both were a form of employee share plan, the operation of which naturally came at a cost to Vision. However, this evidence about the operation of the PEF a number of years after the PEF representations are alleged to have been made are not determinative of the question of whether statements about the PEF were misleading at the time they were made insofar as they represented the PEF could be used for its stated purposes. It is sufficient, however, to mention that in mid-2009 in a paper about the PEF, consideration was given to a number of matters, including accounting treatment of future issues of shares from the PEF, and the impact of PEF transactions on key ratios. It was said that banking covenants would not be affected by the share-based payments and that when shares “are issued from the PEF they become ordinary shares and are currently included in the calculation of basic and diluted EPS.” This document confirmed that the PEF still existed in 2009 and was available to be used for its intended purpose, as stated in the Prospectus.

Were the PEF representations misleading in the respects pleaded?

The thrust of the defendants’ case as to why the PEF representations were misleading is that no PEF holding vehicle existed to receive shares issued on account of a reduction of the consideration paid to entities that sold their practices, that Vision took no effective steps to establish such a holding vehicle and did not actually issue any shares that could be held in such a fund. For the reasons earlier given, the defendants have not proven that the statements about the PEF represented that it consisted of an entity that held actual shares.

The remaining pleaded aspect of the defendants’ case as to why the PEF representations were misleading or deceptive or likely to mislead or deceive is that Vision had no system or practice of recruiting or rewarding new doctors from the 7.5 per cent reduction factor. In final submissions this secondary aspect was reformulated so as to allege that the PEF was not able to be used for the represented purpose of attracting, retaining and increasing the equity participation of doctors and other eligible staff. Whether or not the PEF statements were misleading or deceptive in that regard depends upon the characterisation of them at the time they were made in late 2005 and early 2006. It requires consideration of how the PEF was intended to operate and whether it operated as represented at the time; and also, to the extent that the PEF statement concerned future matters, whether Vision had reasonable grounds for making those statements at the time.

As to the former matter, the PEF existed and operated at the time the PEF representations were made. Notional shares were allocated in accordance with the PEF’s purposes.

For the reasons explained by Mr Tanner and Mr Stamp, the PEF continued to be used after the representations were made and after the Kitchen transaction settled, although in much smaller volumes. Vision’s share price had fallen below $3 in early 2008 and continued to decline. Its level of borrowings, and market concerns about whether certain Salaried Doctor Partners would re-sign when their five year contracts came to an end, made Vision vulnerable to a steep decline in its share price, particularly during the GFC. Vision did not acquire further practices like Dr Kitchen’s, however, it recruited new doctors without having to resort to the PEF. The decline in the share price limited the use that could be made of the PEF after 2008 to recruit new doctors. These events, and the sparing use of the PEF in later years does not mean that Vision had no reasonable basis for making the statements which it did about the PEF in late 2005 and early 2006. Up to that time the PEF had been used for its intended purpose and Vision intended to continue to use it for its stated purposes.

The fact that a limited number of shares were issued relying upon the unissued capital that was recorded in the PEF may mean that the PEF was not used to the extent that Dr Unger (and others) may have contemplated in late 2005 and early 2006. However, it does not mean that the PEF could not be used for its stated purposes. Instead, the circumstances that developed, including a change in accounting rules, meant that the PEF was used to only a limited extent.

The extent to which the PEF was used depended upon the need to provide an incentive for existing doctors to recontract and to attract new doctors, and the financial implications of agreeing to allocate shares upon Vision’s profit. If it was to be used then, depending upon the terms of any individual transaction, there would be an effect on Vision’s financial affairs. If the PEF was used to reward performance or to secure the re-signing of an existing doctor then Vision would obtain something in return for the cost of issuing shares. It remained for the CEO in consultation with the board to decide whether Vision should issue shares, given its cost. The challenges facing Vision in operating what was, in essence, an employee share-based incentive scheme, did not mean that the PEF could not be used for its stated purpose. It could be, but at a cost, and the discretionary issue for Vision, particularly in the post-GFC period, was whether the cost was an acceptable one.

Shares issued against the PEF were not necessarily to be given away. A recipient might be required to purchase them. The defendants make the point that the use of a non-recourse loan arrangement meant that the company would be receiving value twice over for the proportion of the practice acquired that had been “sacrificed” into the PEF. This submission rested upon an observation by a former Vision CEO, Mr Rodaway. He expressed the opinion that if a doctor had foregone 7.5 per cent of the value of a practice acquisition to effectively buy shares to put into the PEF and then another doctor borrowed to buy those shares from Vision, the shares were effectively paid for twice. It was said that in such a case Vision had taken value from either the doctor at acquisition, or the doctor to whom the shares were allocated.

I am unable to accept the double payment submission which is based upon this opinion. The doctor from whom a practice was acquired may have “sacrificed” 7.5 per cent of the value of a practice but this so-called “sacrifice” was a means of paying for succession in the manner Dr Unger explained. Vision, having paid for the doctor’s EBIT when it was originally acquired, wished to avoid the additional costs of having the doctor’s earning stream redirected to a newer doctor. If it, in effect, gave away shares to recruit a new doctor then Vision would not be receiving “value twice over”. If, however, Vision did obtain value by offering PEF shares to a new or an existing doctor (with or without the assistance of a loan) then the value Vision obtained from the purchaser of the shares was apt to reduce the financial impact upon Vision of using the PEF to attract or retain doctors. In simple terms, instead of giving away the shares, Vision would obtain value for them.

I conclude that Dr Unger and Vision correctly stated the purpose of the PEF in 2006. They did not represent that it was a fund consisting of actual shares. The defendants’ argument that the PEF could not be used for its intended purpose is not established by the fact that in subsequent years only limited use was made of it. The PEF was still available but its operations were constrained by the circumstances which prevailed at that time, including a rapid decline in Vision’s share price. The fact that limited use was made of the PEF does not mean that it was not available for succession planning if resort to it was necessary and in Vision’s financial interests. The PEF remained available for succession planning if a successor negotiated an entitlement to be paid by way of shares upon increasing a practice’s earning or, in Mr Tanner’s words, if the new doctor “earned it”.

Insofar as Dr Unger and Vision made statements in late 2005 and early 2006 to Dr Kitchen about the future use of PEF, Dr Unger and Vision had reasonable grounds for making those statements, based upon the PEF’s past operation and what they understood to be Vision’s future business prospects. The implications of anticipated changes to accounting rules and the effect which they might have on the way in which Vision accounted for future issues of shares from the PEF, did not deprive Dr Unger and Vision of a reasonable basis upon which to explain the PEF’s purpose and intended future operation. Dr Unger and Vision intended to continue to use the PEF for its stated purposes at the time the statements were made.

In summary, the defendants have not established that the PEF representations were misleading or deceptive or likely to mislead or deceive. The fact that, in different circumstances and after the decline in Vision’s share price, the PEF was not able to be used to the extent which Mr Stamp and others would have liked does not mean that it was misleading or deceptive of Dr Unger and Vision to make the statements which they did about PEF. The statements were correct concerning the nature and purpose of the PEF and the defendants have failed to establish that the PEF statements were misleading insofar as they represented that the PEF could be used for its stated purposes. A reasonable basis existed for making such a statement at the time and the minimal use that was made of PEF in late 2006, 2008 and 2010 proves that it could still be used.

A further aspect of the defendants’ submissions about the PEF representations should be mentioned. This submission seems to rest upon the proposition that the PEF statements represented that the PEF consisted of actual shares. It is a matter raised in Mr Rodaway’s witness statement whereby he disagreed with Vision’s pleading that Vision was able to use the unissued capital recorded in the PEF to invite practitioners to participate in it by subscribing for a new issue of shares in Vision. Mr Rodaway made the point that there were no new share issues “from the PEF” during his time at Vision. Instead, a doctor would enter into an arrangement to acquire what Mr Rodaway described as “PEF shares” to be issued against a loan and then Vision issued shares to the borrower. Mr Hansen accepted that if shares were purportedly issued out of the PEF under a non-recourse loan arrangement then they would simply be shares issued by the company to the recipient and owned by the recipient on terms. Once it is accepted that the PEF did not consist of actual shares but was a register of unissued shares, this point falls away. The PEF was used even though the actual shares were issued and allocated to the doctor in the ordinary way in which shares are issued. The number of shares issued was reflected in entries in the PEF Register. The cost to Vision of issuing shares was accounted for. Non-recourse loans were used to address the tax consequences for recipients of shares issued from the PEF. A distribution from the PEF reduced the amount of unissued capital recorded in the PEF Register. Unissued capital became issued capital. This was how the PEF was intended to work. Vision did not mislead Dr Kitchen in making statements about the nature and purpose of the PEF.

The incentive scheme representations

The defendants allege that in both the PowerPoint presentation and in statements made by Dr Unger at the January 2006 meeting a number of representations were made about the nature of the operation the incentive scheme. These are:

at the time a Salaried Doctor Partner sold his or her practice to Vision, the parties ascertained the Salaried Doctor Partner’s earnings before the deduction of interest, tax and amortisation expenses (EBITA) for the previous financial year;

the EBITA for the relevant year was calculated by reference to the Salaried Doctor Partner’s actual earnings, less his or her actual costs, with the exception of interest, tax and amortisation costs;

an annual performance target was set for the first year, which was equivalent to 110 per cent of the EBITA in the previous year, and for years after the first year, the target compounded so that it was 110 per cent of the previous year’s target;

where, in any given year, the Salaried Doctor Partner generated EBITA which was in excess of the performance target for that year, the Salaried Doctor Partner would receive 60 per cent of such excess by way of an incentive or bonus; and

these elements of the scheme applied equally to all Salaried Doctor Partners participating in the scheme.

The defendants point to two statements contained in the PowerPoint presentation:

service agreements were based on an agreed budget which included base salary and base revenue and EBITA and 10% organic EBITA growth (page 12); and

doctors share of above budget EBITA was 60% with Vision retaining 40% (page 16).

The defendants also contend that during the January meeting Dr Unger made statements to the effect that:

Dr Kitchen's contract would contain outperformance incentives such that, if he grew his practice profit by more than 10% compounding, he would receive 60% of the EBITA above that 10%;

EBITA was the practice profit after deducting an agreed salary for the doctor; and

this term was not negotiable because, in effect, if Dr Kitchen were to be offered better terms than the other doctors, then that would have to flow on to all the other doctors.

The defendants contend that these statements, taken together, indicated that the method of calculation for outperformance bonuses was based on “true” or “actual” EBIT. “True” or “actual” EBIT in this sense is said to refer to earnings calculated on the basis of the actual costs incurred in the operation of a particular practice as opposed to earnings calculated on the basis of an assumed cost base. The parties and many witnesses used the terms EBIT and EBITA interchangedly in their submissions and evidence.

In response, Vision admits to having represented that:

at the time of the sale of his/her practice, Vision ascertained an ophthalmologist’s EBITA for the previous financial year;

the EBITA for the relevant year was calculated by reference to the doctor’s actual earnings less his or her actual costs with the exception of interest, tax and amortisation costs in cases where actual earnings and actual costs were known;

an annual performance target was set for the first year, equivalent to 110 per cent of the previous year’s target;

for years after the first year, the target compounded so that it was 110 per cent of the EBITA in the previous year;

where, in any given year, the doctor generated EBITA which was in excess of the performance target for that year, the doctor would receive 60 per cent of such excess by way of incentive or bonus.

EBIT and actual costs

Vision contends that in the January meeting Dr Unger qualified any statement about EBIT being calculated by reference to actual costs to situations where actual earnings and costs were known. Its case is that in the course of the meeting Dr Unger discussed the process by which an Associate might be brought into an existing practice, and that a fixed cost of 40 per cent was used for the calculation of EBIT in the case of an Associate who was brought into a multi-doctor practice through a staged acquisition.

The essential factual issue is what, if anything, was said in the context of EBIT about actual costs, including:

(a)whether anything was said about EBIT in a case like Dr Kitchen’s practice, where actual costs were known; and

(b)whether anything was said about EBIT in the case of the recruitment of an Associate to become a Salaried Doctor Partner, and who worked on the basis of assumed costs fixed as a percentage of revenue, typically 40 per cent.

When Vision acquired a doctor’s practice, it formulated a purchase price by applying a multiple to the practice’s historical earnings before interest, tax and amortisation, that is, operating profit (earnings before interest and tax) with amortisation (of intangible assets, such as goodwill) added back (EBITA). A practice’s normalised EBITA was determined by analysing and deducting the operating expenses of the practice, including doctor salaries. Actual cost figures were used, where known, but in some cases, such historical data was not available. For example, where the doctor had been an Associate, Vision applied a deemed cost base of usually 40 per cent of revenue.

The PowerPoint presentation did not describe how EBITA was determined for the purpose of an acquisition and an agreed budget. It stated that the agreed budget contained the EBITA. It was this figure that was used to arrive at a personal performance bonus or a practice bonus pool whereby a doctor received 60 per cent of “above budget EBITA”. As previously noted, the Service Agreement stated that EBIT was determined on the same basis as EBITA was determined for the purposes of the Business Plan. However, the present issue is not the contractual definition of EBIT or EBITA but alleged pre-contractual representations about those matters. The PowerPoint did not specifically say how EBITA was determined in cases where individual doctors’ actual costs were not known.

The resolution of the present issue about what was represented turns upon what a person in Dr Kitchen’s position would reasonably understand in the light of his meetings in Mackay in January 2006 at which the PowerPoint (which he had already viewed) formed the basis of Dr Unger and Ms Shaw’s oral presentations. What a person in Dr Kitchen’s position would reasonably understand is determined in that context and by reference to what he knew about acquisitions, incentives and the subject matters of his discussions.

Dr Unger’s witness statement recalled describing to Dr Kitchen that newly recruited young doctors did not have practices which produced any EBIT for Vision to buy. The Associate built up a practice for a further one or two years at the end of which they would be generating EBIT which Vision could purchase for a capital sum. He went on to tell Dr Kitchen that if Vision purchased the EBIT at the end of the first year and then the Associate increased the EBIT further in the second year, Vision would buy that additional EBIT at the five times multiple.

Dr Unger’s witness statement recalled telling Dr Kitchen something to the effect that Vision operated an acquisition scheme by which, at the time of acquisition, the parties ascertained a doctor’s EBIT and that the EBIT for the relevant year was calculated by reference to the doctor’s actual earnings less his or her actual costs. In his oral evidence Dr Unger recalled that the base EBIT was struck in order to create a three-year business plan and that the “out performance” was measured from that base, so that the business plan operated to set a budget target.

Under cross-examination Dr Unger agreed that the fixing of the cost at 40 per cent for Associates was done because, at least at that time, it was difficult, if not practically impossible, to calculate the actual costs of an Associate who was part of a multi-doctor practice. He also accepted that when speaking to Dr Kitchen about the acquisition of a doctor’s practice by reference to EBIT and EBIT being calculated by reference to actual earnings less actual costs, that this statement was qualified by his saying that this was “in circumstances where the actual earnings and the actual costs were known”.

Dr Unger thought that he would have spoken to Dr Kitchen about the way in which a new person would be introduced and what the mechanics of that were. Dr Unger knew that where actual costs could not be ascribed or established, a fixed cost of 40 per cent was used for the staged acquisition for Associates entering into an existing multi-doctor practice. He recalled speaking to Dr Kitchen about the possibility of growing the practice by bringing in Associates who would become Salaried Doctor Partners.

Like the evidence of Dr Kitchen and Ms Shaw, the evidence of Dr Unger was, in large measure, a reconstruction of what he thinks he said to Dr Kitchen about matters such as EBIT and the recruitment of an Associate into a multi-doctor practice. It is questionable whether Dr Unger said much at the meeting about how EBIT was determined and I am not persuaded on the basis of his witness statement or any other evidence that he used the words “actual costs”. Dr Kitchen could not remember the precise words used by Dr Unger during the meeting and his witness statement makes no mention of Dr Unger referring to “actual costs”. Instead, Dr Kitchen recalls Dr Unger referring to the acquisition of a practice on the basis of a multiple of the practice’s profit, described as EBITA, and that EBITA was calculated after deducting an agreed salary for the doctor. Dr Kitchen says that beyond explaining that EBITA was the practice profit after deducting an agreed salary, Dr Unger did not explain the term EBITA.

Dr Unger’s witness statement purports to recall referring to Vision’s acquisition scheme and that EBIT for the relevant year referred to the doctor’s actual earnings less his or her actual costs. I am not persuaded that Dr Unger has a reliable recollection of using these words. But any discussion in that context, according to Dr Unger’s witness statement, was in respect of the acquisition of an existing practice, where a multiple of 5 was used for a practice that had only one principal ophthalmologist and a higher multiple for large ophthalmic group practices. Any statement about EBIT and actual costs in such a context would be referrable to the acquisition of an entire practice and that practice’s actual costs.

According to Dr Unger, he separately discussed the recruitment of young doctors who did not have EBIT for Vision to buy, who were paid a percentage of revenue and allowed to build up a practice which Vision would purchase for a capital sum. Dr Unger did not purport to say how the EBIT of such a doctor, working in a multi-doctor practice, was determined.

Based upon the defendants’ witness statements it is not apparent that Dr Unger represented that in all kinds of acquisitions actual costs were used to determine a doctor’s EBIT.

Accordingly, I am not satisfied that, even on the defendants’ witness’ evidence-in-chief, that Dr Unger made an unqualified statement that EBITA was determined in all cases on the basis of actual costs. Arguably, so much may have been impliedly represented in the case of the acquisition of the practice of a principal ophthalmologist (like Dr Kitchen) or the practice of a group. But it was not represented in the case of the acquisition of a recruited Associate’s so-called EBIT, being an individual doctor who worked on the basis of a percentage of revenue and who was recruited into a multi-doctor practice.

If, however, Dr Unger’s evidence-in-chief should be read as making an unqualified statement about EBITA being based upon actual costs in all cases, under cross-examination he accepted that no such unqualified statement was made.

The PowerPoint presentation which was shown that day simply referred to EBITA and to budgeted EBITA, and did not refer to either actual costs or an assumed costs base.

Dr Kitchen may have reasonably understood, based on his understanding of EBITA in the case of a practice like his, that EBITA would be determined using the practice’s actual costs in such a case. But he knew the basis upon which Associates were paid and Dr Unger described the basis upon which Associates were recruited to become Salaried Doctor Partners in Vision. In the circumstances, I am not persuaded by the evidence of the defendants’ witnesses that Dr Unger represented that actual costs, rather than an assumed percentage costs base, were used in the case of Associates who were recruited into practices as Salaried Doctor Partners.

Ms Shaw frankly acknowledged that she could not confidently assert on oath what Dr Unger said at the Mackay meeting about the different models that were used for the acquisition of practices and she did not purport to offer evidence about what actual words Dr Unger used on that occasion. However, she did recall Dr Unger in his oral presentation speaking about the acquisition of new partners and also about the incentive scheme. Under cross-examination it was put to Ms Shaw that when Dr Unger referred to the concept of EBIT in relation to the incentive bonus scheme he said that EBIT was calculated by reference to the actual earnings, less the actual costs. Ms Shaw responded:

“It depends which type of doctor you are talking about recruiting. So normally it would be – on established practices we use the actual costs. When new Associates coming in there was another formula where it was split – a percentage split”.

When it was put to her that she could not remember precisely what was said on that topic she responded that “it was pretty clear” and then her answer was interrupted. She finished her answer by saying, “In terms of the recruitment of doctors, the models were all slightly different as were outlined in that presentation.”

Ms Shaw’s recollection of what was said may be affected, to some extent, by her recollection of the usual presentation which Dr Unger gave in such situations. However, I conclude that she has some recollection of a discussion about the different bases upon which doctors were recruited.

In re-examination Ms Shaw returned to the topic of the difference between the acquisition of an established practice where one knew what the profitability had been in the past and the case of “new Associates and the succession doctors coming through” who came into the organisation at a cost to Vision and were put on a “generic costs of a split of about 60/40”. She explained that it cost a lot more as they built up their revenue over time and while surgery cases were being transferred to them. Established partners had EBIT or EBITA determined on “actuals from the past” and a quite detailed financial analysis occurred. In the case of the second model there was an initial 60/40 split because in some weeks they would generate little income and their income built up over time. Ms Shaw explained that it was “basically on assumptions” and they (the Associates) “absorbed resources from the existing practices as well”. The issue, however, is whether a similar explanation was given at the meeting in Mackay.

Dr Unger and Ms Shaw were familiar with these two different forms of acquisition: the acquisition of an established practice like Dr Kitchen’s, and the staged acquisition of what was described as EBIT in the case of an Associate who was remunerated on a 60/40 basis. Their evidence is to the effect that Dr Unger referred to the second type of acquisition at the meeting with Dr Kitchen in Mackay. It seems inherently probable that he would do so. Dr Unger’s (and Ms Shaw’s) presentation was tailored to Dr Kitchen’s circumstances. Those circumstances were that, following Vision’s acquisition of Dr Kitchen’s practice, Dr Kitchen would be required to recruit Associates with a view to their becoming Salaried Doctor Partners. Dr Unger’s evidence was that he did not think that Dr Kitchen could achieve the performance target unless he recruited new doctors, as Dr Kitchen was working at maximum capacity, and following the acquisition he would need to apply himself to succession-planning and transitioning his workflow to new doctors. The prospect of recruiting such a person into the practice was one which had occurred to Dr Kitchen. In his email to Mr McKenzie on 7 November 2005, well before he first spoke to Dr Unger, he appreciated that Dr Unger wanted a succession plan. He wrote:

“I haven’t wanted anyone else in ‘till now as I want to do all the work and keep the income, but of course once Icon is sold and I have the $ from what has been built up, then I have no problem and in deed (sic) will be happy to get more Ophthal’s (sic) on board.”

If the proposed acquisition of Dr Kitchen’s practice proceeded, then it was in both Dr Kitchen’s interests and in Vision’s interests for additional ophthalmologists to be recruited into the practices. It is highly likely that this aspect and the process by which recruited Associates would become Salaried Doctor Partners under a staged acquisition process would have been discussed at the meeting.

The practice of Associates working within a multi-doctor practice being engaged on the basis of their costs being an assumed, fixed percentage of the revenue they generated, was a familiar one. The difficulties of ascertaining the actual costs which such a doctor generates would not have required much elaboration in the discussions that occurred in Mackay.

It is unlikely that at the meeting in Mackay the process by which Vision arrived at the personal EBIT generated by a doctor within a multi-doctor practice was discussed in great detail. However, it is likely that some things were said about it because both Dr Kitchen and Vision were concerned to recruit additional Salaried Doctor Partners into the practice after it was acquired by Vision. I conclude that it is likely that what was said by Dr Unger was sufficient to differentiate between:

(a)the acquisition of an existing practice where actual costs could be reviewed to arrive at an EBIT for the purpose of acquisition of the established practice and performance bonuses; and

(b)a staged acquisition where assumptions were made about the costs generated by a doctor in generating EBIT.

I conclude that statements at the meeting about the acquisition of an existing practice like Dr Kitchen’s and the performance bonuses for a single-practitioner practice like Dr Kitchen’s, might have been understood as referring to EBITA in the context of the actual earnings and the actual costs of such a practice (to the extent they could be ascertained or agreed). However, such statements would not have been reasonably understood as applicable to the acquisition of an Associate’s EBIT in a staged acquisition process, or to the base EBIT for the purpose of such a doctor’s performance bonus. This is because the following matters were outlined or known to Dr Kitchen:

(a)the process for acquiring an existing practice with actual costs is different to the acquisition of EBIT generated by an Associate within a multi-doctor practice;

(b)actual costs could only be used where they could be ascertained;

(c)Vision used a fixed figure of 40 per cent to determine the EBIT generated by an Associate within a multi-doctor practice because it was difficult to calculate the actual cost of an Associate who was part of a multi-doctor practice.

I decline to find that Vision made an unqualified statement to the effect that the EBITA (or EBIT) for the relevant year was calculated by reference to the Salaried Doctor Partner’s actual earnings, less his or her actual costs. I find that in the course of discussing the acquisition of Dr Kitchen’s practice, and the acquisition of EBIT generated by Associates who might become Salaried Doctor Partners, any representation to the effect that EBITA was calculated by reference to the doctor’s actual earnings less his or her actual costs would have been reasonably understood as applying to cases where actual earnings and actual costs were known. I am not persuaded that the presentations to Dr Kitchen represented that actual costs were always used to calculate EBITA (or EBIT), and in particular that actual costs were always used in arriving at figures stated in the agreed budget for the purpose of a Salaried Doctor’s inventive bonus.

I have found that the discussions in Mackay adverted to the process by which Vision arrived at the EBIT generated by an Associate within a multi-doctor practice, and that Dr Unger did not represent that in such a case the EBIT was calculated by reference to the doctor’s actual earnings, less his or her actual costs. This makes it unnecessary to consider later in the context of misleading and deceptive conduct what the position would have been if Dr Unger did not advert to how EBIT was determined in the case of someone without a known or ascertainable history of actual costs. If the statements made at the meeting had simply been about how people with a history of actual costs, like Dr Kitchen, had their EBITA determined, then a question would have remained whether such a statement was misleading or deceptive or likely to mislead or deceive. That issue essentially would have turned on the question of whether it was misleading in the circumstances of discussing how EBITA was determined in a case where actual costs were known to omit to refer to how EBITA was determined in a different case. The defendants’ case was not argued on the basis that Dr Unger was under a duty to disclose such matters, such that his silence in not addressing circumstances different to those of Dr Kitchen was misleading or deceptive or likely to mislead or deceive. In any case, it is unnecessary to address such an argument because I am not persuaded that Dr Unger made the unqualified representation that the defendants have pleaded about the calculation of EBITA.

Elements of the scheme applying equally

That statements were made to the effect that the annual performance target grew by 10 per cent each year is not disputed. Nor is there any dispute that statements were made to the effect that the Salaried Doctor Partner would receive 60 per cent of the excess of the performance target. The remaining issue is whether Vision represented that the “said elements of the scheme applied equally to all Salaried Doctor Partners participating in the scheme”. For the reasons given above, one of those alleged elements has not been proven to have been represented, namely that EBITA was calculated by reference to actual costs in all cases. As a result the defendants have not proved that the pleaded elements were said to apply equally.

The alleged representation that “the said elements of the scheme applied equally to all Salaried Doctor Partners participating in the scheme” should not be confused with the “no less favourable representations” to which I will next turn. It is necessary, however, to address some of the evidence in that regard in order to determine whether Vision represented to Dr Kitchen that certain elements of the incentive scheme applied equally to all doctors participating in the scheme.

Dr Kitchen gave evidence that Dr Unger said words to the effect that:

(a)Vision’s overriding company philosophy was that all doctors should be treated equally;

(b)the doctors’ contracts contained “no less favourable” clauses to ensure this; and

(c)any two doctors could put their contracts side by side and be satisfied that they had no cause for complaint.

Dr Kitchen’s recollection was that Dr Unger also said words to the effect that the only exceptions to the no less favourable principle were “each doctor’s salary and their base EBIT”.

Dr Unger’s recollection was that he told Dr Kitchen words to the effect that if any other doctor partner entered into a Service Agreement after Dr Kitchen joined Vision that contained more favourable terms than Dr Kitchen’s Service Agreement then “with some exceptions related to the history of the practice being acquired afterwards such as salary and annual leave, Dr Kitchen, along with all existing contracted doctors would be offered those favourable terms”. Dr Unger did not purport to state all of the exceptions. Also, the subject of comparison was the contracts of each doctor, not their respective business plans. Dr Unger’s usual presentation was to tell acquisition targets that Vision treated doctors equally and that any two doctor partners within Vision “should be able to sit down and put their contracts side by side and be satisfied that they had no cause for complaint”. Dr Unger could not recall the specific detail about what he said to Dr Kitchen on that topic.

Dr Kitchen accepted in cross-examination that Dr Unger’s statements about equal treatment related to contracts and not to individual business plans.

General statements about doctors being treated equally, and that there were exceptions to the no-less favourable principle, including salary, base EBIT and matters related to “the history of the practice”, could not be reasonably understood as representing that all elements of the incentive scheme applied equally to all Salaried Doctor Partners. A non-exhaustive number of exceptions existed. At best, the statements made would suggest that all Salaried Doctor Partners participated in the same bonus or incentive scheme. The statements pointed to by the defendants did not represent that the same methodology was used for all Salaried Doctor Partners in arriving at a base EBIT or the EBIT target in the individual business plans.

Dr Kitchen and his adviser, Mr MacKenzie, were informed in a document provided to them by Mr Hansen on 17 January 2006 that the incentive scheme was based on out-performance of an agreed individual business plan. This correctly stated how the contract operated, namely that the EBIT target for the purpose of the incentive bonus scheme and the base EBIT from which it was calculated were to be found in the individual business plans.

I conclude that the defendants have not proven that Vision represented, without qualification, that each of the elements pleaded in paragraph 36(b) of the counterclaim applied equally to all Salaried Doctor Partners participating in the scheme.

Were the representations about the incentive scheme misleading?

The defendants’ main complaint about the incentive scheme is that the incentive scheme was intended to have, and was represented as having, a common methodology across Salaried Doctor Partners to determine an agreed base EBIT, from which a standard percentage increase applied. However, Vision did not intend to adopt, and did not represent that it applied, the same methodology in arriving at an agreed EBIT base. It could not use actual costs where they were not known and could not be easily ascertained, due to of the absence of historical data about the actual costs which the doctor generated within a multi-doctor practice. Because the making of the relevant alleged representation has not been proved, Vision’s case of misleading and deceptive conduct in this regard fails. The statements made to Dr Kitchen about the incentive scheme have not been proven to be inaccurate or misleading, and the fact that some doctors had their EBIT calculated on the basis of costs as a fixed percentage of revenue did not render Vision’s conduct misleading or deceptive, or likely to mislead or deceive.

I should, however, address an aspect of the defendants’ submissions about contravention in respect of the incentive scheme representations.

The defendants submit that, contrary to Vision’s case, an individual doctor’s actual revenue and the actual costs occasioned in deriving that revenue could be allocated with sufficient precision. However, the evidence suggests otherwise. Both Dr Unger and Mr Rodaway recognised the difficulties in determining the costs which should be attributed to an individual doctor within a practice comprised of numerous doctors. These difficulties affected the determination of base EBIT for the purpose of acquisition of an Associate’s EBIT and the payment of a personal performance bonus.

The defendants referred to a negotiation that took place in relation to the recruitment of Dr Horak and Dr Boets in contending that what the defendants referred to in cross-examination and submissions as “true EBIT” could be fixed by reference to actual costs occasioned in deriving revenue. Mr Rodaway was the CEO at the time of these negotiations. He and Dr Kitchen devised a formula to allocate the practice’s costs between the two doctors so as to appropriately reflect their relative personal exertion. However, the evidence of a formula being devised tends to suggest that actual costs occasioned by each doctor in deriving the revenue which they generated could not be drawn from financial records and that a formula was used as a proxy for actual costs. The costs generated by individual doctors in deriving the revenue that each generates in a multi-doctor practice is a different matter to the actual costs generated by the practice as a whole in which they work.

The defendants’ submissions canvass what is said to be the discriminatory effects of using different methodologies for calculating “out performance EBIT”. One point made by the defendants during the trial is that a fixed percentage cost base provides an incentive to an individual doctor to drive up revenue without any incentive to economise on costs. That may be true in theory but there was evidence that Vision’s management monitored costs. Individual doctors needed to justify incurring costs, and while doctors may have had significant influence in decisions, there were procedures to control costs.

Whilst the point about the absence of any incentive to economise on costs is well-made, it might also be said that an individual doctor whose incentive bonus was determined by reference to a fixed percentage cost base might complain that he or she had no incentive to economise on costs. If costs were contained and were reduced below the fixed percentage there would be no reward in terms of a bonus.

The defendants also complain about the adoption of the same base EBIT for the purpose of acquisition and for the purpose of the calculation of the incentive bonus. They submit that while they had no reason to know that the acquisition EBIT was calculated other than on an actual costs, their complaint is with out performance EBIT and that it was calculated on what is said to be “an arbitrary and not true EBIT basis”. The defendants’ submissions in this regard raise the question of why Vision would use a different base EBIT for the acquisition of a doctor’s earnings stream to the base EBIT that was used for the incentive bonus. For example if an Associate sells his or her earnings stream to Vision and it is determined on the basis of costs fixed at 40 per cent of revenue, why would an actual cost base then be used for the calculation of out performance, especially if the reason that a 40 per cent assumed cost base is used is because it is too difficult to calculate an actual cost base for an associate working in a multi-doctor practice?

One would assume that the same methodology was used to arrive at the base EBIT for the purposes of both acquisition and the incentive bonus. The evidence tended to suggest that the comparison of base EBIT and the EBIT that was achieved would have to be calculated in the same way in order to determine whether a 10 per cent growth target was achieved. For example, Ms Shaw’s evidence referred to 10 per cent growth from “what was acquired”. This suggests a tie between the method of calculating base EBIT and the method of calculating the EBIT that was achieved for the purpose of earning an incentive bonus.

The defendants make a separate complaint that Vision agreed with some doctors that they might earn a bonus if they achieved annual growth in EBIT of less than 10 per cent. However, a representation about the typical annual growth of 10 per cent that applied to a Salaried Doctor Partner whose EBIT was being acquired under an acquisition contract would be reasonably understood as applying only to Salaried Doctor Partners in a similar situation, and not to doctors whose initial term of employment was at an end and who might negotiate a different remuneration package outside the context of an acquisition.

In any event, representations in late 2005 and early 2006 to the effect that a Salaried Doctor Partner’s annual performance target was a sum equivalent to 110 per cent of EBITA in the previous year would not be falsified by the fact that some years later Vision negotiated growth targets of less than 10 per cent with a limited number of doctors who were not then selling their practices. The relevant representation appears to have been an accurate one at the time it was made, and to the extent that it may have implied something about the future, it was reasonably based on existing arrangements.

Vision’s submissions make specific reference to the case of Dr Sacks. His lower annual growth target was negotiated when his original five year agreement concluded in 2008. An 11 June 2009 email from Mr Thompson, the then CFO, to Mr Stamp, the then CEO reported that Dr Sacks’ “hurdle was increased by five per cent in FY08 and four per cent in FY09. A new salary of $450K was also agreed in FY09, well in excess of CPI. This was the result of a negotiation to fix more of his salary so it was received throughout the year as opposed to waiting post year end for the out performance bonus”. This example shows that in the case of a Salaried Doctor Partner who had served an initial employment term of five years, it might be necessary, from Vision’s point of view, to renegotiate a new salary and a reduced annual percentage increase in order to induce a Salaried Doctor Partner to re-sign. Such a case does not prove that the incentive scheme representations made in late 2005 and early 2006 to Dr Kitchen were false or misleading.

In summary, the defendants have failed to prove that all of the alleged representations in relation to the incentive scheme were made, and it has failed to establish that the incentive scheme representations which it has proven were misleading or deceptive, or likely to mislead or deceive.

No less favourable representations

I have already quoted some of the evidence upon which the defendants rely in alleging that Dr Unger represented at the January 2006 meeting that all Salaried Doctor Partners subject to a Service Agreement with Vision would be equal as regards their conditions of employment and that:

(a)any two Salaried Doctor Partners within Vision should be able to sit down and put their contracts side by side and be satisfied that they had no cause for complaint; and

(b)where any other Salaried Doctor Partner subsequently entered into a Service Agreement which created more favourable terms, those terms would be immediately offered to Dr Kitchen.

(the “no less favourable representations”)

The defendants allege that in the course of the January 2006 meeting Dr Unger made representations to Dr Kitchen to the effect that:

Vision's overriding company philosophy was that all doctors would be treated equally and this was contractually enshrined;

doctors’ contracts contained a “no less favourable” term to ensure this;

all doctors had the same contract terms apart from starting EBITA, salary and holiday and conference leave, which would vary;

any two doctors could put their contracts side by side and be satisfied they had no cause for complaint;

the principle was a “fundamental tenet of Vision” and it created a “level playing field for all”;

the principle meant that doctors could not gain advantages over other doctors in the sale and contract process, but also that they would not be worse off than other doctors during the term of their contract; and

it was not possible for Dr Unger to agree to allow Dr Kitchen certain more favourable terms, because all doctors had to be treated equally and, if Dr Unger did it for Dr Kitchen, he would have to do it for every other Vision doctor.

In response Vision accepts that it represented that there would not be any material differences between the terms of the contracts of doctors where Vision acquired their practices and that if there were material differences between the terms offered to Dr Kitchen and a subsequent doctor, aside from the core conditions central to the generation of EBIT of the practice acquired, then those terms would be offered to Dr Kitchen.

As noted, Dr Unger’s evidence was that he told Dr Kitchen that the agreement to offer the same terms was subject to exceptions that related to the history of the practice being acquired, including salary and annual leave. He went on to explain that the no less favourable provision about which he spoke to Dr Kitchen was “contractually enshrined” and subject to certain exceptions. Dr Kitchen accepted in cross-examination that when Dr Unger referred to the no less favourable provision that Dr Kitchen knew that the term would ultimately be found in the contract.

The pleaded representations do not capture the fact that Dr Kitchen understood that any representation about the terms which might be offered to him in the future was qualified by non-exhaustive exceptions which he understood included historical matters. These were the kind of matters that were likely to be embedded in the individual Business Plans agreed to between Vision and a doctor or doctors who were selling their EBIT to Vision. Dr Kitchen accepted that when Dr Unger spoke about the no less favourable principle he was only speaking about doctor partners who had sold their EBIT to Vision. The things said to Dr Kitchen also made clear that the extent of the no less favourable principle was to be found in the terms of the Service Agreement. Accordingly, I do not accept that the no less favourable representations, as pleaded, were conveyed.

Were the no less favourable representations misleading?

The actual statements and representations made by Vision, and by Dr Unger in particular, were not misleading. The Service Agreement gave expression to what had been said. The defendants correctly submit that a representation as to the effect of a contractual provision is not inevitably or necessarily displaced or neutralised by the terms of the contract subsequently entered into under the inducement of a representation. The issue is one of fact and evidence. It is possible that a party may be misled into entering a contract that contains a term which is given an objective meaning by a court which is different to the meaning which the party was induced to believe it had. However, this is not such a case. The terms of the Service Agreement reflected what was represented about the matter, and Dr Kitchen was told that the no less favourable principle was contractually enshrined. If after reading cl 3.3, and if after obtaining legal advice as to its effect, he misunderstood its operation, then any misunderstanding on his part is not attributable to the representations which Vision made.

The defendants’ case as to why the no less favourable representations are said to be misleading and deceptive is advanced on three bases. The first is that Vision, prior to April 2006, had entered into Service Agreements with Salaried Doctor Partners that were more favourable than the terms which were offered to Dr Kitchen. However, the relevant point is not contracts that were entered into prior to 2006, but contracts that were entered into after that date. Secondly, it is said that Vision was prepared to enter into agreements or vary agreements with Salaried Doctor Partners on terms that were more favourable than those upon which Dr Kitchen was engaged without offering those more favourable terms to Dr Kitchen. For the reasons that I have given in connection with Vision’s contract claim, Vision essentially complied with its contractual obligations pursuant to cl 3.3 and cl 9.1(a). To the extent that it breached those provisions in some minor respects in later years, this does not establish that the no less favourable representations were false or misleading, or that Vision intended to breach Dr Kitchen’s Service Agreement. Thirdly, Dr Kitchen pleads that Vision had no intention of informing him of more favourable terms offered to another Salaried Doctor Partner after he entered into the Service Agreement and that Vision had no system or process for reviewing Service Agreements that were subsequently entered or amended. This allegation is not established. Vision did intend to inform Dr Kitchen of matters which it understood were not captured by cl 3.3. It correctly understood that many of the matters upon which Dr Kitchen relies as falling within cl 3.3 fell outside it.

Vision did not have a system for monitoring many of the matters about which Dr Kitchen complains, but it was not required to monitor those matters in order to comply with its contractual obligations. Vision used standard form contracts to ensure compliance with the no less favourable term of Dr Kitchen’s contract and similar contracts. Vision’s management sought to contain departure from those standard terms. When doctors sought variations to the standard terms then Vision considered whether they would trigger the no less favourable provision.

In summary, Dr Kitchen was not misled. He understood that the no less favourable principle was contractually enshrined and subject to exceptions that would be found in the contract. In the event of a dispute over the scope of the exceptions, they could be interpreted by a court. Dr Kitchen clearly understood that the no less favourable principle did not apply to matters such as EBIT. The actual representations that were communicated to Dr Kitchen about the no less favourable principle and how it was contractually enshrined were not misleading or deceptive, or likely to mislead or deceive.

The growth representations

The defendants allege that Vision made a number of representations which are labelled “the growth representations”. This label is something of a misnomer as many of the alleged representations are about the Vision model at the time Dr Kitchen agreed to sell his practice. The pleaded representations are that Vision was a secure, growing and stable company based on a proven business model and, in particular that:

Vision would be expanding its operation into areas outside Victoria, New South Wales and Queensland, including other States of Australia, New Zealand and Asia;

the Salaried Doctor Partners within Vision were committed to the model long-term;

there were other doctors in the ophthalmology community who wanted to join Vision and Vision was having to turn some of these doctors down as it was being strategic in its acquisitions;

centralisation meant generating significant synergies and that relative scale allowed Vision greater capacity to invest in new technologies;

Vision had adopted and was using Key Performance Indicators to measure and improve performance;

Vision had succession structures in place and was an attractive option to new graduates;

the Vision model was a key driver of the group’s performance, that it was a “robust proven business model” and would “create value” and “long-term financial security”;

Salaried Doctor Partners would be penalised for underperformance;

Salaried Doctor Partners were motivated to achieve their Base EBITA so as to obtain the release of Vision shares in short-term escrow; and

Vision had secure revenue with sustainable margins.

The defendants point to statements in the PowerPoint presentation to the effect that:

there was still significant capacity for Vision to continue to consolidate the private ophthalmology sector (page 4);

Vision had adopted key performance indicators universally used throughout the healthcare industry (page 11);

Vision's model was a key driver of its historical performance (page 15);

Vision provided reward for outperformance and penalty for under performance (page 5);

base salary was reduced if EBITA was below budget (page 16);

base salary (including the potential for reduction for underperformance) and bonus for outperformance drove productivity (page 15);

Vision was underpinned by a robust proven business model and a secure earnings base with sustainable margins (page 22);

joining Vision Group resulted in long-term financial security through equity holding (page 14);

long-term equity holding directly aligned doctors’ interests with all shareholders and created a self-regulating model which ensured business continuity (page 15);

succession planning was a core part of the model deploying the PEF succession shares and recruitment therewith was fundamental for doctors to grow and realise retained share value (page 17); and

the maintenance of a Vision shareholding (with associated dividends) created a self-regulating and self-sustaining model (page 22);

The defendants also point to statements in the Prospectus that Vision:

had a long-term committed doctor base (page 18);

selectively reviewed acquisition opportunities (page 43);

was focussed on recruiting new doctors, particularly younger doctors and had commenced an accredited training program for students in their final year of ophthalmology (page 44); and

had a proven and successful business model (page 44).

The defendants also allege that in the January 2006 meeting Dr Unger made a number of statements to the same effect. These include statements about doctors’ remuneration, performance targets and provisions in doctors’ contracts for a “salary clawback” if the doctor achieved less than 85 per cent of their sale EBIT and that the recruitment of new doctors was a core part of the Vision model.

Vision admits that it made the following statements to Dr Kitchen:

Vision was a secure, growing and stable company with a sound business model;

Vision was “hopeful” of expanding its operations into areas outside of Victoria, New South Wales and Queensland, including Asia and New Zealand;

doctor partners within Vision were committed to the model long term;

there were other doctors in the ophthalmology community who wanted to join Vision and Vision was having to turn some of these doctors down as it was being strategic in its acquisitions;

centralisation meant generating significant synergies and that relative scale allowed Vision greater capacity to invest in new technologies;

Vision had adopted and was using KPIs to measure and improve performance;

Vision had succession structures in place and was an attractive option to new graduates;

the Vision model was a key driver of the group’s performance, that it was a “robust proven business model” and would “create value” and “long term financial security”;

there was a penalty provision in doctor contracts for underperformance;

doctor partners were motivated to achieve their base EBITA so as to obtain the release of Vision shares in short term escrow; and

Vision had secure revenue with sustainable margins.

It is not necessary to canvass differences between the recollections of Dr Unger, Dr Kitchen and others about what was said at the meeting. The PowerPoint presentation to which Dr Unger spoke and what Dr Unger said conveyed the pleaded “growth representation”.

The real issue is not about the substance of what was represented about the Vision model, but whether the things that were represented were misleading.

The defendants contend that these representations described the Vision model without alerting Dr Kitchen to the fact that the Vision model was, in their submission, fatally flawed in the sense that the doctor remuneration model was inherently unattractive to doctors and meant doctors were unlikely to re-sign after their initial five year service agreement. The defendants then argue that the later significant decline in Vision’s share price was largely attributable to this flaw.

Vision contests that the representations were misleading, and notes that that Dr Kitchen was a sophisticated investor who was capable of appreciating the fact that in taking equity in Vision as part of his acquisition price he was agreeing to take on a degree of risk that the price would fluctuate.

Most of the representations relate to the Vision model at the time the statements were made, but some general statements about Vision being a growing company with a model that would “create value” and “long term financial security” implicitly or expressly were about future matters. The essence of the representations was that Vision was a growing, stable company with a proven business model, and that it was expected to continue to grow and remain stable.

The “growth representations” cannot be divorced from features of the Vision model, some of which have been canvassed in the context of specific representations about remuneration and the PEF. The defendants’ case reiterates some of these matters, but makes the broader points that:

the Vision model was critically dependent on attracting and retaining the allegiance of suitable medical practitioners;

the provision of equity was seen as the means of both attracting and retaining doctors in that it made them an integral part of the shareholders and gave doctors a sense of ownership;

the attractiveness of Vision depended on sustainable value through the share price;

the retention of key doctors and the maintenance of particular levels of productivity were essential to Vision achieving forecast performance;

a material reduction in Vision’s share price could affect doctor morale, Vision’s ability to retain or recruit doctors, its financial performance and its ability to grow.

In this regard, there was said to be a “feedback loop” between the share price and its effect on the ability to retain or recruit doctors: each adversely affecting the other.

The defendants also contend that it was vital for Vision to have a remuneration model that rewarded EBIT performance and EBIT growth. They argue that the remuneration model employed by Vision at the time the representations were made was “fatally flawed” and that this must have been self-evident. Vision needed to develop a new remuneration model to ensure doctors re-signed after their initial period of employment. Market uncertainty over whether these doctors would re-sign contributed to a steep decline in Vision’s share price.

Was it misleading to describe Vision as a secure, growing and stable company?

One important aspect of the defendants’ case is whether it was misleading to represent that Vision in late 2005 and early 2006 was a secure, growing and stable company with a proven business model to which Salaried Doctor Partners were committed, and which would recruit new doctors and drive performance.

The evidence indicates that Vision was a secure, growing and stable company at that time. Its acquisition model was attractive to doctors. It had plans to expand into further markets and was investigating such an expansion. As a result of those investigations it did not proceed with those expansion plans, but this does not mean that the relevant statements were misleading at the time they were made. Some existing practices did not fit Vision’s criteria and some others were not interested in being acquired.

Vision’s expansion increasingly depended on opening new clinics and recruiting doctors to existing ones. As Mr Tanner observed in retrospect a few years later at the 2008 annual general meeting, Vision had by then exhausted its historic growth paths. However, the fact that by 2006 there was a limited number of existing practices in Victoria, New South Wales and Queensland which Vision might acquire did not mean that Vision was not a growing company, with plans to continue to grow. It grew and recruited additional doctors.

Was the Vision model fatally flawed?

The defendants’ submission is that the remuneration model was fatally flawed. However, a distinction must be drawn between:

the existing model which was used to recruit new doctors and which in fact recruited new doctors to the company;

the need to develop a more attractive model to induce existing Salaried Doctor Partners to re-sign at the expiry of their initial five year terms of employment.

As to the former, the Vision model had been successful in recruiting doctors, as reflected in the success of the public float and its growth. Associates continued to join it. The defendants have not established that the remuneration model used to recruit Salaried Doctor Partners would not continue to attract Associates and others to become Salaried Doctor Partners.

As to the latter, Vision was required to develop a remuneration model that was attractive enough to induce Salaried Doctor Partners to re-sign, including doctors who were not attracted to being remunerated on the basis of a fixed salary with a bonus scheme that incorporated performance targets that were very difficult to achieve. A fixed salary model was not a good long-term model. However, Vision did not suggest that it would be. Instead, it was a model that was structured to facilitate the acquisition of practices and it was apt to achieve that purpose. A five year fixed salary contract with hard to achieve performance bonuses would not be attractive to Salaried Doctor Partners in the long term. To ensure the retention of doctors, it was necessary to develop a model which better rewarded the doctors for the profit they generated.

Mr Tanner’s concession that, with the benefit of hindsight, putting doctors on a fixed salary for a long period of time was not going to grow the business and that Vision should have operated on a variable remuneration model from day one does not mean that in 2006 it was misleading to describe the Vision model as a proven one. It had attracted doctors and continued to do so, with Associates prepared to transition from a revenue based system of remuneration to a fixed salary.

In addition to attracting new doctors, Vision was able to have existing doctors extend their initial five year service term for a further period. Some of the doctors entered into new Service Agreements before the expiry of their initial contracts as a sign of their commitment to the company. A number of doctors signed new contracts for a further term once the EBIT model had been approved by Vision’s board. The retention of existing doctors may have been affected by the inclusion of restraint of trade provisions in their agreements. I was not directed to any evidence that doctors threatened to leave Vision if a new remuneration model was not developed.

At the time the representations were made to Dr Kitchen about the Vision model, the existing Salaried Doctor Partners appeared to be committed to Vision for the long term and, as events transpired, they re-committed to the company.

However, at some later time, which was not precisely identified in the evidence other than it was after 2006, the market began to have doubts about whether existing doctors would re-sign. Vision’s level of debt, which had been incurred in order to fund acquisitions, also presented a problem for its share price, particularly with the restriction in credit that culminated in the global financial crisis. Doubts about whether doctors would re-sign and whether Vision could refinance $120 million of debt to the banks contributed to a sharp decline in Vision’s share price. According to Mr Tanner, with the GFC the level of debt was the market’s biggest concern.

I am not persuaded that the pleaded representations were misleading at the time they were made insofar as they represented that Vision was a secure, growing and stable company with a proven business model. Nor was it established that Dr Unger and others should reasonably have foreseen a steep decline in Vision’s share price, with consequences for Vision’s ability to provide equity as a means of both attracting and retaining doctors. Based on the doctors’ apparent commitment to the company, Dr Unger or others at Vision in late 2005 and early 2006 had reasonable grounds for believing that existing Salaried Doctor Partners, or at least many of them, would remain with Vision and reach new agreements for the period after their initial five year terms of employment. It has not been established that Dr Unger and Vision should reasonably have foreseen that the share price would decline markedly as a result of rumours about the risk of doctors not re-signing.

Vision’s board and its senior management devoted a great deal of time and effort to developing a new remuneration model that would suit doctors when their initial period of employment ended. This model was largely successful in retaining doctors.

The defendants place particular reliance upon the fact that the process of developing a new remuneration model for doctors who had completed their initial term of employment was protracted and that the new doctor model went through many iterations by 2008-2009. However, that does not establish that in 2005-2006 it was misleading to represent that Vision had a proven business model which was attractive to doctors and that its Salaried Doctor Partners were committed to the model. It was not necessary to have a new remuneration model concluded to represent that the company was stable.

I do not accept the defendants’ submission that the Vision model was “fatally flawed” and that this must have been self-evident to Dr Unger and others in 2005-2006. The fact that Vision set about devising a new remuneration model that would apply to doctors when they completed their initial term of employment does not prove that the Vision model was flawed at the time the representations were made. The process of developing a new model was necessarily complicated with a need to balance the interests of Salaried Doctor Partners who might seek a more attractive remuneration package and the interests of Vision in maintaining profitability. The delay in developing a new remuneration package was also due, in part, to the decline in Vision’s share price, particularly during the GFC.

The task of assuring Vision’s banks and others that Salaried Doctor Partners would re-sign must not have been made any easier by the departure of Dr Kitchen and the loss of the revenue which the Central Queensland practices generated. Also, with a steep decline in the share price, there was a limit to the extent to which unissued capital reflected in the PEF Register could be used to issue shares and allocate them to doctors which Vision sought to recruit or retain.

Other strategies were used by Vision to attract and retain doctors, including a collegiate environment, the provision by Vision of state of the art day surgeries, other modern technology for use by doctors, the employment of good nursing staff and back-office support.

Although not specifically pleaded, the defendants contend that a basic deficiency in the Vision model was its reliance upon equity to attract and retain doctors and that this was a “self-perpetuating and compounding problem”. In other words, if the share price declined and this appeared to be a trend, then Vision was exposed to a vicious cycle of declining share price, declining attractiveness to recruit and retain doctors and disaffection among doctors who had sold their practice in return for equity, part of which was held in escrow. If the share price declined before the shares came out of escrow then the doctors were not in a position to realise the full value of their practice.

I do not accept that there was a basic deficiency in the Vision model because it relied upon equity to attract and retain doctors. The use of equity as part of the consideration for acquisitions avoided the need for Vision to borrow additional funds to finance acquisitions paid fully in cash. Moreover, having Salaried Doctor Partners as shareholders gave them a sense of ownership and assisted in aligning their personal interests with the interests of their employer. In agreeing to sell their practices for a combination of cash and equity and in entering into escrow arrangements, the doctors who sold their practices assumed the risk of a decline in the share price as well as the potential reward of a growth in the share price. The defendants do not plead, nor could they, that Vision represented that the share price would grow and was not at risk of falling. Dr Kitchen must have reasonably understood, as with any investment, that the share price might go up or it might go down after the transaction.

The various statements which are relied upon as constituting the so-called “growth representations” are not said to have represented, let alone warranted, that the Vision share price would not decline. Moreover, the Prospectus to which Dr Kitchen paid close attention disclosed:

“A material reduction in Vision Group’s Share price post listing may impact morale and Vision Group’s ability to retain and recruit Doctors, impacting Vision Group’s ability to grow in the future and Vision Group’s financial performance.”

The defendants’ submissions on this aspect of the case, in substance, are that the risk of a decline in Vision’s share price was not accurately stated because of supposed flaws in the Vision model which should have been apparent to Vision in 2006. However, I am not satisfied that it was apparent in late 2005 or early 2006 that there was a substantial risk that existing doctors under a five year employment agreement would not re-sign at the end of that agreement. Market concerns in that regard were not proven to have existed at that time. As matters transpired, the doctors in question were committed to Vision, and it was not misleading to represent this.

Vision’s performance prior to the time the representations were made, the apparent success of its model in recruiting doctors, its consistent growth in revenue and its ongoing profitability provided reasonable grounds for Dr Unger and others in late 2005 and early 2006 to make statements to the effect that it was a secure, growing and stable company based on a proven business model. To the extent that representations involved an element of prediction to the effect that the model would “create value” and “long term financial security”, Vision had reasonable grounds for making those statements.

The defendants also point to the problems that developed in respect of the use of the PEF to retain and recruit new doctors under succession plans in circumstances in which there was a great decline in Vision’s share price. That decline in the share price was partly due to the GFC, and was not predicted, or reasonably predictable, in late 2005 or early 2006.

At the time there were reasonable grounds to expect that the PEF would be available, if required, to assist in retaining doctors and recruiting new doctors. In the final analysis, if it became inadvisable or unattractive to use the PEF for its stated purpose because of a subsequent decline in the share price, Vision still had the value reflected in the PEF and might use such unissued capital to attract and retain doctors.

The defendants also complain that the remuneration model used by Vision did not adequately reward EBIT performance and EBIT growth. I have already addressed issues about the development of a new remuneration model for doctors who would re-sign. The remuneration model that was used to recruit Associates to become Salaried Doctor Partners, which adopted a fixed percentage model for costs, was a model that Associates understood and was likely to attract new doctors to commit to the company. The defendants’ contention that the use of fixed costs provided an incentive to drive revenue but not to contain costs, has previously been addressed. The evidence indicates that costs were controlled by Vision’s management and Dr Reich gave evidence, which I accept, that doctors were mindful of costs. Also, as Mr Stamp observed, the doctors were substantial shareholders and had an interest in the company managing costs. Vision’s board reviewed performance, profitability and costs. The fact that, in some instances, it acceded to requests by doctors to incur additional costs does not prove that costs and performance were not managed. The evidence is that they were.

The representation that Vision had adopted, and was using, key performance indicators to measure and improve performance, was correct.

The representation that Vision had succession structures and was an attractive option to new graduates was correct. Its systems attracted new graduates and Associates. Associates who had proved themselves and had the potential to contribute to Vision’s growth were offered the opportunity to become Salaried Doctor Partners. Many Associates became Salaried Doctor Partners and thereby the Vision model provided for succession. Staged acquisitions of their “practices” meant that, in return for an agreed salary and equity participation, Vision received 100 per cent of the revenue generated by these doctors rather than the 40 per cent retained under the Associate arrangement. In these various respects the Vision model was a proven business model and drove performance.

The representation that doctors’ contracts contained a provision to penalise doctor partners for under-performance was correct. Dr Unger correctly stated words to the effect that the Salaried Doctor Partners’ contracts contained a salary claw-back provision if he or she achieved “less than 85% of their sale EBIT”. Incidentally, this representation confirms the link between EBIT for the purpose of acquisition and EBIT for the purpose of remuneration. In any case, the statement about the contents of the contract were correct at the time they were made. The contract did contain those provisions. It was a matter for Vision to decide whether those provisions would be enforced in the particular circumstances, including whether a failure to achieve 85 per cent of EBIT was due to extraneous factors or under-performance.

Finally, the representation that Vision had secure revenue with sustainable margins has not been proven to be misleading. Despite the problems which beset Vision’s share price, particularly during the GFC, and the loss of the revenue generated by the practices which Dr Kitchen left when his contract was terminated, Vision had secure revenue streams and always made a profit.

Conclusion - growth representations

In general, Vision’s survival, despite the GFC, market concerns about doctors re-signing and Dr Kitchen’s departure in breach of contract, tend to suggest that Vision had a basically sound model, which it had developed in the years prior to the January 2006 meeting. Doctors were committed to Vision. The financial performance of practices was managed and key performance indicators were used to monitor performance.

Vision did experience a marked and sustained fall in its share price and this fall was apt to affect Vision’s ability to use equity to fund further acquisitions, to recruit new doctors and to retain other doctors. Acting within the tight financial constraints imposed upon it by its bankers, Vision was limited in how much money it could devote to making new remuneration packages sufficiently attractive to doctors to induce them to re-sign. The development of a new remuneration model for those doctors was a complex matter and was protracted in the financial circumstances which affected Vision in the 2008-2009 period. Providing doctors with a remuneration package which gave them a high share of the profit which they generated would have a corresponding effect upon Vision’s own profit and, in turn, its share price. The fact that Vision found itself in difficult circumstances in 2008-2009 does not necessarily mean that the statements which were made to Dr Kitchen in late 2005 and early 2006 were misleading. In 2006 Vision and Dr Unger in particular had reasonable grounds to describe Vision in the terms it was described to Dr Kitchen. Dr Kitchen’s close analysis of the Prospectus and the Bell Potter Securities document enabled him to understand the nature of Vision’s model. That model was not fatally flawed at the time the relevant representations were made by Vision to Dr Kitchen.

There was no representation that the Vision share price would not decline. The Prospectus contained the perhaps obvious statement to a sophisticated investor like Dr Kitchen about the consequences of the share price falling.

In late 2005 and early 2006 when the relevant representations were made, Vision had tasks ahead of it, including further possible acquisitions and expansion into new areas. It would be required to re-sign doctors once they completed their initial five year term of employment. Still, at the time the representations were made Vision had achieved considerable success and there were reasonable grounds to assume that its success would continue. Insofar as those representations made statements about future matters, there were reasonable grounds to make them.

Finally, it should be recalled in the context of this aspect of the claim for misleading and deceptive conduct, that Vision is not being sued for a failure, as a professional adviser to Dr Kitchen, to provide reasonable financial or business advice. He had his own professional advisers and Vision did not purport to act as a professional adviser, promising to exercise the reasonable care and skill of such an adviser. Insofar as Vision made statements about the future it was required to have reasonable grounds for making them. However, Vision had reasonable grounds for making the statements which it did. The absence of reasonable grounds is not established by the fact that, viewed in hindsight from 2009, it experienced a decline in its share price, made only limited use of the PEF and took a substantial time, in difficult circumstances, to develop a new remuneration model. Despite these problems, most of its doctors re-signed, which tends to confirm their commitment to the Vision model.

I am not persuaded that the so-called “growth representations”, most of which were about the existing state of affairs at the time the representations were made, were misleading or deceptive in respect of the Vision model.

Reliance and causation issues

I have concluded that the defendants have failed to prove that Vision contravened s 52 of the Trade Practices Act 1974 (Cth) or s 1041H of the Corporations Act 2001 (Cth) in making the representations pleaded by the defendants. It is strictly unnecessary to address issues of reliance and causation, but it is appropriate to do so.

Issues of reliance and causation are related. Claimants in the defendants’ position who seek compensation on the basis that the relevant transaction would not have occurred if the contravening conduct had not been engaged in must prove a sufficient connection to satisfy the concept of causation.^[87] Liability for loss depends on proof that the loss was suffered “by” the contravention. This requirement consists of elements of what may be called factual causation and also normative and policy-based factors that affect the scope of liability.^[88] This reflects the fact that in law “causation” reflects two types of enquiry. The first is how an occurrence came about. The second is attributing legal responsibility for a given occurrence. At law, a person may be responsible for a loss when his or her conduct is one of a number of conditions sufficient to produce that loss.^[89]

In this matter, the causation issue focuses upon issues of factual causation. It is well-settled that the contravening conduct need not have been the only cause of the claimed loss or damage. It must, however, have been a cause of the loss or damage.^[90] In order for it to have caused loss or damage and for the claimant to recover that loss or damage in a “no transaction” case, the claimant usually must prove reliance upon the contravening conduct in entering into the transaction, and that if the conduct had not been engaged in the transaction would not have occurred.

The parties’ submissions about reliance and causation

The parties’ submissions addressed these aspects, and some of the same evidence was relied upon as being relevant to both issues, namely:

whether or not the defendants relied upon representations that were alleged to be misleading; and

whether or not the transaction would have occurred if that conduct had not been engaged in.

Dr Kitchen gave evidence that he relied on each of the representations in coming to a decision to sell Vision. His wife was content to defer to him in connection with the sale of the practice and he was the primary decision-maker in respect of both the business and medical aspects of the practice.

The defendants contend that proof of reliance on the pleaded representations is supported by the fact that the various representations were calculated to induce the defendants to sell the practice and for Dr Kitchen to become a Salaried Doctor Partner.

Vision argues that the subsequent action of the defendants, including the absence of complaint during the life of the Service Agreement and the late pleading of the misleading and deceptive conduct claim, is inconsistent with the defendants’ alleged reliance upon the pleaded representations. The defendants respond that there is nothing in their post-settlement conduct or the subsequent facts which contradicts Dr Kitchen’s evidence or dispels the overwhelming, natural inference, that he relied upon representations which were intended to persuade him to sell his practice to Vision.

Vision submits under the general heading “Reliance” that the Court should not accept the defendants’ case that, were it not for the statements in question, the defendants would not have entered into the transaction. Vision submits that the defendants’ case on causation should be rejected in circumstances where:

Dr Kitchen and his advisers had adequate time to independently assess whether the sale to Vision was appropriate; and

the evidence demonstrates that he was motivated by the financial benefits which he would derive from a sale to Vision.

Vision’s ultimate submission is that, even if the representations had been proven to be misleading, they did not result in the defendants’ suffering the loss or damage claimed by them. Expressed differently, if the representations had not been made and the alleged misleading conduct had not been engaged in, the defendants would still have entered into the transaction and, as a consequence, they have failed to prove their “no transaction” case.

Did the defendants rely on the representations?

Both the PowerPoint presentation and the Prospectus contain disclaimers. They disclaim responsibility for any information provided in the PowerPoint presentation or for any action taken by the recipient of it on the basis of such information. The Prospectus disclaimed making any representation or warranty about the forecast, prospects or returns contained in the Prospectus, noted that they were subject to significant uncertainties and contingencies and encouraged the recipient to seek professional advice. Of course, the Prospectus related to a different investment, namely an investment by way of an Initial Public Offering. Dr Kitchen was not taken to these disclaimers in his evidence. Even if he did not read these disclaimers he would have appreciated that he was required to make his own assessment of the matters contained in those documents. He was an astute businessman and sought and obtained the advice of his accountant before any direct contact with Vision. As noted, he also carefully considered information obtained from Bell Potter Securities and the Prospectus.

Dr Kitchen’s reliance upon his own independent assessment of information about Vision, including information in the Prospectus and in the PowerPoint about which is not alleged to be misleading, and his obtaining financial and other advice from his accountant in relation to the proposed transaction, do not necessarily mean that he did not also rely upon the alleged representations. It simply means that they may have played a relatively minor role in his decision to sell his practice to Vision and to sign the associated Service Agreement.

Vision’s submissions contain 30 paragraphs in support of its argument that Dr Kitchen was motivated by the financial benefits that he would derive from a sale to Vision. They highlight the significant advantages, including the taxation advantages, that arose for the defendants in entering into the transaction. The essential points made by Vision in this context are:

Dr Kitchen set about to present his practice as an attractive acquisition for Vision. As early as October 2005 Dr Kitchen hoped to “stag (scil, snag) a 3 mill profit” on his recent purchase of Icon. His careful analysis of the Bell Potter Securities document and the Prospectus persuaded him that he might expect to sell his practice for an amount that exceeded $20 million.

He set about promoting his practice to Vision so as to achieve this price.

He struck a highly-beneficial arrangement with Dr Noble whereby Dr Noble agreed to “gift” to Dr Kitchen $2.4 million of the proceeds of the sale of his practice. This payment would be tax-free to Dr Kitchen and was a powerful factor in concluding a sale of both Dr Kitchen’s practice and Dr Noble’s practice to Vision.

Acting upon his accountant’s advice, Dr Kitchen was able to structure the transaction to minimise tax. Part of this was an arrangement for Vision to assume significant debts. By mid-January 2006 Dr Kitchen was determined to “come away with $20M”. On 18 January 2006 Dr Kitchen sought advice from Mr Mackenzie as to whether he would be better selling his practice to Vision for $17.8 million or working as he was for five years and continuing to own his own practice. Mr Mackenzie advised Dr Kitchen that he would be better off selling. Negotiations continued and in late March Mr Mackenzie advised Dr Kitchen that he would be able to walk away from the sale to Vision with $6 million after all taxes and repayment of loans (but excluding shares held in long-term escrow), and that on a $20 million sale Dr Kitchen would be paying “slightly over 10” per cent tax.

The defendants respond to Vision’s case about Dr Kitchen’s strong financial motive by correctly pointing out that in every commercial transaction of this kind a party is motivated to make money. The email exchanges on 18 January 2006 in which Mr Mackenzie advised Dr Kitchen that he would be better off selling are described by the defendants as a “back-of-envelope” calculation which was based upon the express and unrealistic assumption that his practice would have no value after five years.

On 9 December 2005 Dr Kitchen had written in an email that he was not sure if he wanted to make the sale. The defendants point to Dr Kitchen’s evidence about the importance he placed upon the meeting with Dr Unger and what was said to him at the meeting. Dr Kitchen explained that it was important that he expected Vision’s share price to increase through the organic growth of the company, and that he would have a return through dividends. These matters were important in circumstances where he was selling to Vision in exchange for a substantial parcel of its shares.

The defendants are correct to point out the difficulty associated with any argument that Dr Kitchen did not rely upon representations relating to the stability of Vision, and Dr Kitchen’s expectation that Vision’s share price would be maintained through continued growth in the company, in circumstances in which a substantial part of the consideration was shares which were to be held in escrow. The representations were calculated to induce the defendants to take a substantial part of the consideration of the sale in the form of shares. It cannot be suggested that the worth of the equity which the defendants expected to receive meant little or nothing to them. Representations about the stability of Vision, the soundness of its business model and its expected expansion were likely to induce someone in Dr Kitchen’s position to rely upon them. This is the case even for a sophisticated investor who appreciates that there is an ever-present risk that shares might fall in value.

I conclude that the defendants had a strong financial motive to enter into a transaction that would result in the sale of the practices for an attractive sum, the assumption by Vision of a large debt and substantial tax benefits to the defendants. Their strong motivation to enter into the transaction, however, does not necessarily mean that they did not rely upon representations which were apt to induce them to enter into the transaction.

Vision next relies upon the absence of complaint during the life of the Service Agreement. The evidence establishes that Dr Kitchen did not complain to Dr Unger that he had been misled by anything he had been told before selling his practice to Vision. In addition, for several months prior to his purported termination of the Service Agreement, Dr Kitchen was involved in protracted negotiations with Mr Tanner, Mr Stamp and Mr Thompson in an attempt to renegotiate the terms of his Service Agreement. He accepted during his cross-examination that if Vision had agreed to the deal which he proposed to Mr Tanner, then it was likely he would still be with Vision today. Remarkably, Dr Kitchen did not complain about alleged misleading and deceptive conduct and the making of false representations in the course of attempting to negotiate a better deal in 2009.

Even when Vision did not agree to his proposal and after his departure from Vision’s board, he did not complain to it or to Vision’s executives that he had been misled into selling his practice and that he would not have sold it if those statements had not been made to him.

I have previously remarked upon the notable fact that, according to Dr Kitchen, he only learned that some Salaried Doctor Partners had their EBITA calculated on a fixed cost base of 40 per cent when, on 4 August 2009, he discussed with Mr Stamp his incentive arrangements. He says that he felt “deceived and betrayed” when Mr Stamp said to him words to the effect “you should have negotiated a better deal” and then it “suddenly dawned” on him that some other doctors must have a better deal. I am not persuaded by Dr Kitchen’s evidence that there was this sudden revelation. But if he felt “deceived and betrayed” because Vision earlier had represented to him that all doctors had their EBITA calculated on the basis of actual, not assumed costs, then one would have expected him to complain about such a misrepresentation. I have concluded that Dr Kitchen was not misled in that regard and also was not misled by any related “no less favourable” representation. If, however, he was misled in that regard then the absence of a timely complaint about being misled is remarkable.

The defendants make a point about the fact that the methodology to the determination of base EBIT for the purposes of an acquisition is not necessarily the same as the determination of EBIT for the purposes of a bonus. Dr Kitchen knew, at least by virtue of an April 2009 Board pack in respect of the Stage 1 acquisition of Dr Chen’s practice, that it was calculated on the basis of an assumed cost of 40 per cent. It is not apparent to me that Dr Kitchen made, or would have made, a distinction at the time between the calculation of EBIT for the purposes of such an acquisition and the determination of EBIT for the purposes of a doctor like Dr Chen being paid a bonus. Despite his apparent interest in how his own bonus, and presumably the bonuses of others, were calculated, Dr Kitchen did not enquire whether an assumed cost of 40 per cent was adopted for Dr Chen or other doctors’ bonuses.

Even after being told on 4 August 2009 that a 40 per cent model was used for incentive payments for other doctors, and having this confirmed by both Dr Unger and Mr Rodaway, an alleged misrepresentation in respect of the incentive bonus scheme was not the subject of complaint in communications with Vision. It did not feature as an alleged misrepresentation in his solicitor’s letter of 25 August 2009. The absence of complaint after 4 August 2009 leads me to conclude, along with other evidence, that Dr Kitchen was not misled, as he later alleged, in respect of incentive bonus representations. But if he was misled in that regard, the absence of complaint suggests that he did not place any particular reliance upon those representations.

Similarly, no timely complaint was made about the no less favourable representation or the so-called growth representations. Dr Kitchen’s solicitor’s letter dated 25 August 2009 only complained about a misrepresentation in respect of the role or purpose of the PEF.

The absence of complaint during the term of the Service Agreement in relation to matters about which Dr Kitchen now complains was not adequately explained by him and the absence of complaint undermines the defendants’ case on reliance and causation.

Even when the defendants filed a counterclaim on 21 October 2009, the only allegation of misleading and deceptive conduct related to statements about the PEF. Even then, it was not alleged that the statements about the PEF had not been made, the defendants would not have entered into the transaction. Their pleaded case was that if the statements about the PEF had not been made, they would not have forgone the part of the consideration which related to the PEF. The defendants’ case of misleading and deceptive conduct was amended on 21 May 2010, but it was not until they filed their further amended counterclaim on 20 October 2010 that the claim was expanded to include additional alleged representations and the assertion that, but for these representations, the defendants would not have entered into the transaction.

The defendants seek to explain the late pleading of misleading and deceptive conduct claim by reference to disclosure of certain documents by Vision in 2010. Some of the documents relate to the use and operation of the PEF, but the disclosure of these documents does not explain the late inclusion of allegations in relation to other matters. Dr Kitchen gave evidence that he raised issues of misrepresentations with his solicitors as early 2009. The defendants were entitled to not waive legal professional privilege concerning these communications and I draw no adverse inference against the defendants for declining to waive their privilege.

Instead, I simply proceed on the basis that there is no explanation as to why these representations, if made and relied upon, were not pleaded in the original counterclaim or in the first amendment to it in May 2010. Even accepting that additional disclosure may have had some consequences in assisting the defendants to further particularise their case, many of the documents upon which the defendants rely in supporting their case of misleading and deceptive conduct were in their possession and were disclosed by them.

The late pleading of aspects of the misleading and deceptive counterclaim, together with the absence of a timely complaint about these matters, cast doubt upon whether the contested representations were in fact made. However, if the contested representations were made, then the absence of a timely complaint and the late pleading of these matters weakens the defendants’ case on reliance and causation.

In summary on the issue of reliance, I place little weight upon Dr Kitchen’s witness statement asserting a reliance upon each of those matters. If the representations were in fact made, then Dr Kitchen placed only limited reliance upon them. This is because, in deciding whether to commit to the transaction, he undertook his own assessment of Vision and its model and satisfied himself that it presented a good opportunity to sell his and Dr Noble’s practice in return for very substantial benefits. The transactions were structured to be tax-effective. The proposed transactions were financially advantageous to the defendants, even in circumstances in which a substantial part of the consideration was in the form of shares which were subject to various escrow restrictions. Even with those restrictions, and the risk of a fall in Vision’s share price, the transaction was an attractive one for Dr Kitchen.

The alleged representations were a few of the many things he relied upon in deciding to sell his practice and execute the Service Agreement. He relied upon his own assessment of the financial and tax benefits of the transactions. He relied upon the contents of the Bell Potter Securities information document. He relied upon the contents of the Prospectus and the PowerPoint presentation in respects which are not alleged to have been misleading or deceptive. He also relied upon things said by Dr Unger at the meeting in Mackay which are not alleged to have been misleading and deceptive. Before viewing the PowerPoint presentation and hearing Dr Unger’s presentation, Dr Kitchen had independently reached a view about the Vision model and Vision’s prospects. What was stated in the PowerPoint presentation and what was stated by Dr Unger was largely confirmatory of the results of Dr Kitchen’s own assessment of matters and the advice which he received. However, the fact that he relied upon many other matters does not disprove that he also relied upon the alleged representations. If the contested representations had been proven then I would have concluded that the defendants relied upon them as well as the admitted representations to some limited extent.

I conclude that if the alleged representations were made, then the matters pointed to by Vision, including:

the defendants’ independent assessment of matters;

the defendants’ motivation by the financial benefits that would be derived from the sale; and

the absence of timely complaint

weaken, but do not negative, the inference of reliance. I conclude that Dr Kitchen placed some limited reliance upon the alleged representations.

The causation issue

I turn to the issue of causation. The relevant issue is whether the defendants would have entered into the transaction if the alleged misleading and deceptive conduct had not occurred. In some cases that past hypothetical fact is considered by enquiring into what would have happened if the alleged representations had not been made. However, asking what would have happened if the representations had not been made is only one way to address the real issue. Another relevant enquiry is to ask what would have happened if additional statements had been made so that the alleged representations were qualified or supplemented and ceased to be of a character that made them misleading or deceptive or likely to mislead or deceive. In that regard, the test is not what the outcome would have been if Vision had fulfilled the role of a professional investment adviser or disclosed all of the information in its possession that might have affected a potential purchaser.

In assessing the likely course of events if the alleged misleading and deceptive conduct had not occurred, one must avoid a piecemeal approach. The defendants’ case on causation is not defeated by Vision demonstrating that the absence of misleading and deceptive conduct in one respect would not have been enough for there to have been no transaction. The relevant enquiry is to consider what the defendants would have done if there had been, on the defendants’ case, no misleading and deceptive conduct. Account must be taken of the fact that some of the representations are related to one another.

As to the PEF representations, Vision did not represent that the PEF consisted of a fund of actual shares. If it had said more, so as to emphasise that it was a fund in the nature of a pool of unissued shares, then the defendants would not have acted differently. I have found that Vision did not engage in misleading and deceptive conduct about the use of the PEF fund for its stated purposes. If, however, it had stated more to Dr Kitchen about matters which might affect the extent to which the PEF might be used in the future for its stated purposes, then the defendants’ decision probably would have been the same. Even if the defendants had been told that the PEF was unlikely to be used to the same extent as it had been in the past, then the value reflected in the “sacrifice” made by doctors who sold their practices to Vision before or after Dr Kitchen’s sale, along with Dr Kitchen’s “sacrifice”, would be retained in Vision. It would not be lost to Vision or indirectly to its shareholders (including entities associated with Dr Kitchen). The value would have remained to be used by some other means to achieve the PEF’s stated purposes. If shares were not issued from the PEF for little or no consideration, then the shareholding of Dr Kitchen and others would not be diluted.

Relevantly, even after Dr Kitchen became aware of the limited use made of the PEF to recruit and retain doctors, he did not complain about being misled by the alleged PEF representations until 25 August 2009. This was when his solicitors complained that Vision had acted in bad faith or misrepresented the purpose and role of the PEF in circumstances in which it had not allocated shares to the extent represented by it. The defendants’ solicitors did not assert that he would not have entered into the transaction if the alleged representations had not been made. Instead, it sought a payment on account of the amount that the price paid for shares in Swordfish Nominees had been reduced by 7.5 per cent of value that was “given up”.

I find that if the alleged misleading and deceptive conduct in respect of the PEF representations had not been engaged in, and Dr Kitchen had been told additional things about the likely future use of the PEF, then he probably still would have committed to the transaction. On such a scenario, Dr Kitchen may have been more circumspect about the likely use of the PEF for succession planning.

The reduction of 7.5 per cent in the suggested value of the practice was not part of a purchase price that was being lost. Dr Kitchen and entities associated with him were not being asked to sacrifice part of the consideration received by them into the PEF. The consideration was arrived at by discounting a notional value of the practice by 7.5 per cent so as to accommodate the future cost to Vision of a succession.

In any event, the amount that Vision was prepared to pay even taking account of the “PEF sacrifice”, was still a very attractive one from Dr Kitchen’s viewpoint. It would have remained an attractive one if he had been told more about the PEF and its likely future operation. It is possible that there may have been some additional negotiation. It is probable, however, that the transaction would still have proceeded on essentially the same terms.

As to the incentive scheme representations, the key causal inquiry is about the likely course of events if either:

Vision had not made the alleged representations about how EBITA was determined; or

Vision had said more about the use of an assumed percentage of revenue for the purpose of calculating EBITA in some cases.

On either scenario, the course of events is likely to have been the same. The matters which I have addressed in the context of the reliance issue lead me to conclude that these representations were not important in the defendants’ decision to commit to the transaction. If, contrary to my earlier findings, the defendants were misled in respect of the alleged incentive scheme representations then a relevant inquiry is the likely response of the defendants if Vision had said more about how EBITA was determined in cases where actual earnings and actual costs were not known, so that the defendants were not misled. I think it unlikely that this additional information would have had any significant effect upon the defendants’ decision to proceed with the transaction, which offered them many advantages.

The same conclusion applies to the “no less favourable” representations. If Vision had been more explicit about the comparison exercise that was undertaken in accordance with its standard Service Agreement, including the matters that were excluded from the comparison exercise, then Dr Kitchen is likely to have accepted this prior to entering into and settlement of the transaction in the first half of 2006. Dr Kitchen did not believe that if two Salaried Doctor Partners sat down and put their contracts side by side, that their terms and the business plans annexed to their contracts would be identical. Dr Kitchen was not induced to believe that all Salaried Doctor Partners within Vision were treated the same way, or that they should be. After all, when he was attempting to renegotiate the terms of his contract in 2009 he wrote in an email to Mr Stamp and Mr Tanner:

“... I think we will agree that all doctor partners are not equal, never were and never can be. If the premises going forward is that they are, I am concerned we will win the under-performers (and older) and lose the over-achievers (and younger) going forward.”

Dr Kitchen was not led to believe that the terms of all of the contracts would be precisely the same and that he could insist upon the same terms as those contained in the contract of another Salaried Doctor Partner who subsequently entered into a Service Agreement. If he had been told more about how the “no less favourable” principle was enshrined in the terms of the Service Agreement and how Vision applied that principle then the defendants still would have entered into the transaction.

The growth representations, if misleading, were more likely to have an effect on the defendants’ decision to enter the transaction than the other representations which are alleged to have been misleading. This is because they had a bearing upon the likely future value of shares in Vision, and the transaction required the defendants to accept a substantial amount of equity, with some shares held in short-term escrow and other shares held in long-term escrow.

That said, the “growth representations” are not alleged to have represented that the share price would increase, and not fall. Instead, they represented that Vision was a secure, growing and stable company based on a proven business model. I have found that such a representation, and the matters more particularly relied on in support of that representation, have not been shown to be misleading. If, however, the growth representations had been misleading, the dual inquiry remains as to what the position would have been if either the representations had not been made or if additional matters had been disclosed so that the representations in question no longer could be characterised as misleading. In that regard, I have considered the likely outcome if additional information had been given, including that:

•there was limited scope for the acquisition of further existing practices in Victoria, New South Wales and Queensland;

•the continuing security, growth and stability of Vision depended on maintaining the commitment of Salaried Doctor Partners and developing proposals that would attract Salaried Doctor Partners to re-sign with Vision when their initial term of employment came to an end;

•a significant reduction in Vision’s share price would adversely affect morale and Vision’s ability to retain and recruit doctors, and adversely affect Vision’s ability to grow in the future and its financial performance (a matter disclosed in the Prospectus which Dr Kitchen read).

If these and other matters had been disclosed so that the “growth representations” could not be fairly characterised as misleading, then the defendants may have been more circumspect about the long-term financial advantages of the transaction. They may have placed less reliance upon the growth representations taken in isolation, and relied more upon their own assessment of the financial and other advantages of committing to the transaction. However, I think it likely that the transaction would still have proceeded on essentially the same terms.

As noted, the causation question is not resolved by considering each aspect of alleged misleading and deceptive conduct in isolation. The relevant inquiry is what would have occurred if none of the alleged misleading and deceptive conduct had been engaged in. It is unnecessary to repeat aspects of the evidence canvassed in the context of the reliance issue that is also relevant to the causation issue. The matters which I have considered in the context of reliance need to be taken into account in reaching a conclusion on the causation issue.

I conclude that if the alleged misleading and deceptive conduct had not occurred, then the defendants still would have proceeded with the transaction. Their own assessment of the proposed transaction, unaffected by the contentious representations, would have led to the conclusion that it was a good deal for Dr Kitchen and entities associated with him. Dr Kitchen was working to full capacity and the Vision model represented an opportunity to realise the value of his practice in a tax-effective manner. For example, the sale of Dr Noble’s practice for the negotiated price allowed the defendants to receive a large tax-free gift. Dr Kitchen represented his practice as fitting comfortably with the Vision model and was able to negotiate a good price for it, even with the so-called PEF sacrifice. There was no evidence about other prospective purchasers of his practice or that they would offer such an attractive, tax-effective deal.

The communication of additional information which supplemented, qualified, clarified or corrected the contentious representations may have led Dr Kitchen, with the assistance of his financial and legal advisers, to conclude that there were some greater risks associated with Vision’s future financial performance and that Vision’s share price may not grow as Dr Kitchen expected it to. However, even with those matters taken into account, the transaction would have remained an attractive one to Dr Kitchen.

In determining the causation issue, one is not concerned with the attitude which Dr Kitchen had towards Vision in 2009, when its share price was in the doldrums, and Dr Kitchen found himself in conflict with Vision’s management. By then he was seeking to negotiate a special remuneration package for himself which would not be disclosed to other doctors who were directors. By late 2009 Dr Kitchen was frustrated with Vision’s management and unhappy about its share price. Even then, his evidence was that if management had agreed to his demands in terms of a remuneration package, he would have remained with Vision.

The causation issue is not concerned with what Dr Kitchen’s attitude would have been in late 2005 and early 2006 if he had known then what he knew in 2009 about Vision’s then share price and management. The relevant issue is what he would have done if the misleading and deceptive conduct had not been engaged in.

In resolving that issue Vision submits that there is no direct evidence from Dr Kitchen that he would not have sold his practice if the statements had not been made. I do not regard the absence of such direct evidence as significant. If there had been such self-serving statements in Dr Kitchen’s witness statement then, in accordance with Rosenberg v Percival,^[91] little weight would have been placed upon it.

I determine the causation question in the manner I have outlined, by having regard to the likelihood or otherwise that there would have been no transaction if the alleged misleading and deceptive conduct had not occurred. I am not persuaded that there would have been no transaction. Limited reliance was placed upon the contentious representations which are alleged to have been misleading and deceptive. If the alleged misleading conduct had not occurred then other representations which are not alleged to have been misleading, Dr Kitchen’s own assessment of the advantages and disadvantages of the transaction and the financial benefits which the transaction seemed to offer probably would have led to the defendants entering into a transaction with Vision on essentially the same terms. The defendants have not proven that if the alleged misleading conduct had not occurred there would have been no transaction.

Defendants’ damages claim

The defendants’ “no transaction” case, which I have found to have been not proven, seeks damages based upon Part C of the joint experts’ report of Mr Brian Morris and Mr Paul Lom. The experts were asked to quantify the defendants’ loss on various alternative assumptions.

The essential differences in those assumptions relate to the manner in which Dr Kitchen would have conducted and grown his practices. They include the assumed acquisition of Dr Noble’s practice. The first alternative was that the CQEC would have maintained its growth rate as between 2002 and 2006, both separately and as combined with Dr Noble’s practice. The second alternative was that it would have grown in a similar manner and with the revenue stream that occurred with Vision. The third alternative was that CQEC would have grown in accordance with the scenario outlined in Annexure B to the instructions. This document comprises 49 paragraphs. They include:

The acquisition of the Noble practice and the remuneration of Dr Noble and his replacement;

The adoption of a different business model whereby Dr Kitchen would have recruited a doctor to buy into and take over his practice in Mackay to allow him to develop other practices. For example, this assumes that in bringing a surgical ophthalmologist into the Mackay practice he would have paid that ophthalmologist a minimum of $300,000 per annum or 50 per cent of after-tax profit and that the doctor would have worked towards purchasing 50 per cent of the shares in the Mackay practice;

The establishment of a Central Queensland Excimer Laser Practice;

The impact of the advent of a new drug for macular degeneration and the impact of changes to the billing practices for cataract surgery.

Vision submits that the assumptions which underpin the various scenarios considered by the experts in Part C of the joint report have not been established and, as a result, any loss suffered by the defendants should not be assessed on that basis. Its essential submission is that the joint experts’ report “miscarried” because the various scenarios and assumptions have not been established.

Vision’s primary submission is that the defendants failed to establish that they suffered any loss as a consequence of entering into the sale transaction. This is said to be supported by a simplified comparison of the value and financial performance of Dr Kitchen’s practice at the time he sold to Vision and the value and performance of the practice which he established after leaving Vision. Vision poses the question of whether the benefits which the defendants received from the sale of the practice and during the time Dr Kitchen worked for Vision outweighed the financial benefits which they would have received over the same period if they had not sold.

The methodology adopted by the experts

The instructions sought an expert opinion on the basis that had certain representations not been made, the defendants would not have sold and would have followed one of three potential paths. From that starting point the instructions asserted that the defendants “will have suffered loss if the total sums they earned on each of those alternative paths were greater than the total sum they did in fact earn upon selling to Vision Group”. Paragraph 36 of the instructions continued:

“On this basis, please say whether the defendants suffered loss and if they did what the loss was”.

The different scenarios were then outlined. The joint experts’ report addressed its methodology and expressed the following opinion about the Measure of Loss:

“4.2In our opinion, the defendants’ loss is the difference between:

4.2.1.the cash flows that the defendants would have received, if the alleged misrepresentation had not occurred; and

4.2.2.the cash flows that they actually received and are likely to receive in the future, comprising:

4.2.2.1.the consideration that the defendants received from Vision for selling Swordfish;

4.2.2.2.the remuneration that Dr Kitchen received while employed by Vision; and

4.2.2.3.the cash flows from the defendants new business, CQ Eye.”

In forecasting the cash flows that would have been derived by the defendants, the experts made no allowance for a salary to Dr Kitchen on the basis that this had no effect on the defendants’ loss. They assumed that the relevant cash flows were to be measured at the effective date of the sale to Vision and, accordingly, discounted them to 1 April 2006.

Having arrived at the cash flows that the defendants would have received under different scenarios, the experts then considered the cash flows that they actually received. The report addressed the cash consideration that the defendants received under the Share Purchase Agreement. They also had regard to the fact that the defendants received the benefit of a payment to the NAB of $7,327,414. However, for the reasons that they explained at paragraph 5.9 the payment was recognised as a notional inflow to the defendants from Vision and a notional outflow from the defendants to NAB. The amount was included as a cash consideration received by the defendants and a notional payment to NAB to avoid a double count.

The defendants did not include in the sale consideration received the amount the defendants retained in respect of the Noble Practice acquisition. The experts noted that they had not included the amount of $2.55 million^[92] contended for by Vision in their calculation of the cash received as sale consideration, and stated that they regarded the matter as one for a determination by the Court. They stated that if the defendants received and retained the benefit of $2.55 million then their loss would need to be reduced by that amount.

As to the shares in Vision, for the reasons explained by the joint experts’ report there was no contest that upon settlement of the transaction the defendants received 1,338,236 shares in Vision at a deemed issue price of $4.25 per share so that the shares were ascribed a value of $5,687,503 at the issue date. There were additional shares issued, having a combined value of approximately $1.2 million in August 2008 when the performance hurdle for the Phase 3 Consideration was met. Account was taken of the fact that for both the Phase 1 shares and the Phase 3 shares approximately 77 per cent of the shares were held in short-term escrow and approximately 33 per cent were held in long-term escrow. The experts took account of the dividends received by the defendants on the shares while held in escrow and the shares were given the value which they had when they were released from escrow. I note that the joint experts’ report does not appear to take account of the value of shares that to date have not been released from escrow. The result of their calculations was that the defendants could have realised approximately $1.6 million when shares were released from escrow and that they received dividends of approximately $429,000 plus franking credits of approximately $184,000. The experts also took account of the remuneration received by Dr Kitchen by way of salary and out performance bonuses.

They then turned to the CQ Eye Trust cash flows to the end of June 2013. Adding together the relevant cash flows which they had calculated, the experts arrived at a figure of $26,999,346 as the relevant cash flows the defendants received in the period ended June 2013.

The experts discounted certain cash flows at a pre-tax discount rate of 17.5 per cent, and arrived at a net value of $21,688,000. On this methodology, for the defendants to have suffered a loss, the net present value of the cash flows they would have derived but for the sale had to exceed $21,688,000.

On each of the scenarios which the experts were asked to adopt, and for the reasons more fully developed by them in their very substantial report, the cash flows that the defendants would have received if the transaction had not occurred exceeded the cash flows that they were said by the experts to have actually received. For example, the first scenario of maintaining the 2002-2006 growth rate separately from the Noble Practice arrived at a present value of $28,482,000 and a calculated loss of $6,794,000 calculated as at 1 April 2006 to which interest would be added. On different scenarios of growth, the first alternative arrived at loss figures of $14,330,000 and $17,892,000 before adding interest to 28 February 2014 so as to produce a loss including interest of $25,095,756 and $31,333,794.

On the defendants’ second alternative, and on the assumptions adopted therein, the loss as at 1 April 2006 was approximately $15.5 million, and with interest to 28 February 2014, was $27,179,772. On the defendants’ third alternative the loss as at 1 April 2006 was $16,388,000, and with interest added came to $28,699,878.

I have not attempted to address the many complex issues which the experts were required to address concerning growth figures and adjusted net cash flows in respect of macular degeneration and cataract surgery pricing. Instead, I have simply summarised the cash flow methodology which the experts adopted on the basis of their instructions and alluded to the different assumptions which they were asked to address.

The measure of damages

Remedies under legislation such as the now-repealed Trade Practices Act 1974 (“TPA”), and the measure of damages that is adopted to remedy a contravention are not constrained by common law rules about how a loss is proved and measured.^[93] In cases in which a party has been induced to buy or sell land, a business or shares as a result of a contravention of s 52 of the TPA, damages are usually calculated as at the date of the transaction. Under what has been described as the “rule in Potts v Miller”, damages are assessed as at the date of the transaction by calculating the difference between what was paid and the value of what was acquired.^[94]

The date of transaction rule has many attractions, including its simplicity. It avoids the task of reconstructing the financial ramifications of entering into a transaction for years after the event, and determining whether later matters should be excluded as being the result of supervening events or as being too remote. However, as Lord Steyn observed in Smith New Court Securities Ltd v Scrimgeour Vickers^[95], the valuation method is only a means of giving effect to the overriding compensatory rule. The date of transaction rule was described as “simply a second order rule applicable only where the valuation method is employed”.^[96] The High Court in HTW Valuers Pty Ltd v Astonland Pty Ltd^[97] held that the measure of damages applied in Potts v Miller does not apply in all cases. In some cases it may not be possible to determine whether a loss was suffered and to measure it by determining the value of what was sold or bought at the date of the transaction.

If, however, it can be, then the rule in Potts v Miller is well-established as the usual and conventional measure of loss in a case in which a transaction was induced by conduct that was misleading or deceptive. It avoids false collateral issues and the task of investigating and reconstructing the financial ramifications of a variety of matters over a period of years, including the effect of management decisions and market movements.^[98]

The date of transaction rule often commends itself where a loss was suffered as a result of entering into a transaction that would not have been entered into, absent the contravening conduct. Frequently it is applied where an asset, such as a business, is bought as a result of contravening conduct and the primary entitlement of the buyer in such a case is the difference between the true value of the business and the price paid for it.^[99] Here one is not concerned with the purchase of a business in a case in which the buyer paid a certain amount for a business which had a true value which was less than the price paid. However, in principle, the date of transaction rule, as embodied in Potts v Miller, would seem to be applicable. Instead of paying to acquire a business, the defendants transferred something of value and, in return, were paid in cash and shares and acquired other things of value, such as the assumption of the NAB liability. On its case, it was induced to transfer a thriving practice of great value and did not receive as much in cash, shares or other advantages. On the defendants’ case this was due, in part, to the Vision shares not being worth as much as the defendants (or the market) thought they were worth in April 2006 and because some of the shares had to be held in escrow for a period during which their market value might decline.

A threshold issue is the nature of the loss which the defendants claim to have suffered as a result of entering into a transaction which they claim they would not have entered into had certain representations not been made to them. On the defendants’ case they lost at least the value of the practices that were sold. In arriving at an appropriate measure of the loss they suffered as a result of selling the Kitchen practices, account must be taken of the advantages the defendants gained. There seems no obstacle in principle or practice in applying the usual measure of damages in this case by determining the value of what was lost at the date of the transaction and deducting from it the real value of the advantages the defendants received, again assessed at the date of the transaction.

The experts were not instructed to give an opinion about whether the defendants suffered loss, according to the usual valuation method and a date of transaction rule. They were not asked to, and did not purport to, value the business sold (either having regard to, or ignoring, the extent to which that value depended upon Dr Kitchen working in the practice for a period of at least five years pursuant to the Service Agreement). The experts were not instructed to arrive at the value of the practice at the date of transaction as a first step in measuring the alleged loss, before deducting advantages received as a result of the transaction.

The exercise which they engaged in was to compare cash flows of both a capital and income variety which the defendants were said to have received and the cash flows which the defendants would have received on certain assumptions. The approach of determining those cash flows and arriving at a net present value for them as at April 2006 may have some superficial resemblance to a valuation exercise. But it is a different exercise to the usual valuation method of assessing loss as at the date of transaction. I raised during addresses whether the way in which the experts were instructed to approach the calculation of loss and damage was correct in terms of principle. I am not persuaded that it was an appropriate measure of loss in the circumstances.

Any approach to the measure of the defendants’ claimed loss comes with its complexity and it is not surprising that the experts were instructed to express an opinion about the loss which the defendants collectively suffered because they entered into the transaction. They were not asked to separately assess the loss suffered by the Seller (Dr Kitchen and his wife in their capacity as trustees for the MDK Trust) and by Dr Kitchen personally as a result of his entry into the Service Agreement. The value of the share that was sold in Swordfish Nominees Pty Ltd cannot be conveniently separated from Dr Kitchen’s personal involvement in the practice. The practice that was sold by the sale of the share had a very large value because Dr Kitchen worked in it and was expected to continue to work in it. If separately assessed, the value of the practice would depend upon the salary that was paid or promised to be paid to Dr Kitchen as an employee or consultant. If there was no separate salary or similar cost to engaging him in the practice then the value of the practice would be based upon an assumption that he would work in it and be rewarded for his work indirectly through the earnings which the practice generated without having to pay him a salary. In any case, any approach to the assessment of damages is most conveniently approached by treating the claimed loss as one which the defendants together suffered.

It was not argued that the approach of comparing a hypothetical cash flow which the defendants would have received if the transaction had not occurred with the cash flows that they actually received is appropriate because the usual date of transaction rule applied in Potts v Miller was unavailable to measure the defendants’ combined loss. Rather, the experts were effectively told in paragraph 35 of their instructions that the defendants would have suffered loss if the total sums they earned on each of the alternative paths were greater than the total sum they did in fact earn upon selling to Vision. I leave to one side whether, on this approach, it is appropriate, or simply convenient, to contrast the cash flows up to the period ended June 2013 and whether that date is simply chosen for convenience. I also leave to one side the fact that this cash flow approach does not appear to take account of the value of shares which are owned by the defendants and still held in escrow. My present concern is not whether the methodology which the experts adopted on the basis of their instructions takes account of cash flows which the defendants are likely to receive in the future. The issue is whether the methodology of comparing cash flows over a certain period is the most appropriate method to determine whether a loss has been suffered and, if so, to measure that loss.

This is not a criticism of the experts who were specifically instructed to approach the question of loss on the basis that a loss would be suffered if the hypothetical cash flow exceeded the defendants’ actual cash flow. In some cases, such as Astonland, the nature of the loss suffered and the subject matter of the claim may make it appropriate to depart from the rule in Potts v Miller. However, in many cases the alternative of assessing loss and damage at the time of trial or at some other date after the date of transaction may generate numerous additional issues and assumptions which make the simpler Potts v Miller measure more appropriate. In summary, I am not persuaded that the comparison of cash flows which the experts were asked to undertake is an appropriate measure of loss in the circumstances of this case.

The validity of the assumptions the experts were instructed to adopt

I turn to the issues raised by Vision’s submissions to the effect that the scenarios and assumptions which the defendants were asked to adopt were all too favourable to the defendants and, in any case, a significant number of assumptions which underpin the various scenarios have not been established.

Would Dr Noble’s practice have been acquired?

Annexure B to the instructions to the experts included several paragraphs relating to the scenario that the defendants would have purchased the Central Coast Eye Clinic from Dr Noble in mid to late 2006, and would have done so for $500,000. In short, the scenario of acquisition of the Noble Practice relies upon the fact that Dr Noble was very unwell by that time, would have been looking to divest his practice and in fact retired prior to Christmas 2006, despite having a three year contract. Dr Kitchen gave evidence that he would have offered to purchase Dr Noble’s practice for about $500,000, being the approximate cost to him of purchasing new equipment and setting up a practice in Bundaberg. His opinion was that Dr Noble would have accepted this price because Dr Noble had ceased undertaking surgical procedures in about 2004 and, had Dr Kitchen not purchased Dr Noble’s practice to facilitate an on-sale to Vision, then Dr Noble would not have been able to sell his practice. Dr Kitchen says that if Dr Noble had been unable to work for him after the acquisition of his practice, he would have found an alternative consultant to do the work. If Dr Noble had been able to do so, then he would have paid him either 20 per cent of revenue or $250,000, whichever was the greater, for the first 12 months. On this scenario, the defendants would have maintained the profitability of the Bundaberg and Hervey Bay clinics, and recruited a permanent senior ophthalmologist who would have worked on the basis of 50 per cent of the revenues they produced.

Vision contests the hypothetical scenario that Dr Kitchen would have acquired Dr Noble’s practice. It points to the fact that prior to 2006 Dr Kitchen had every opportunity to buy Dr Noble’s practice, but did not do so even after Dr Noble told Dr Kitchen in 2005 that he was not well and he wanted to cease practice in the reasonably near future. Vision submits, and I accept, that there would have been no motivation to buy Dr Noble’s practice. There was no offer by Dr Kitchen to do so. Instead, Dr Noble’s practice was packaged together with Dr Kitchen’s practice for the purpose of a sale to Vision so as to ensure that Dr Kitchen received the benefit of the EBIT associated with the surgery he performed on Dr Noble’s patients.

It seems unlikely that Dr Kitchen would have committed to acquiring a practice without some assurance that Dr Noble would continue to conduct the required consultations to generate surgical work for Dr Kitchen, or that a replacement could be found to do so. Dr Kitchen mentioned the possibility of finding a suitable replacement. It seems unlikely that Dr Kitchen would have committed to the substantial cost of acquiring Dr Noble’s practice without a high degree of assurance that such a replacement could be found, and would be prepared to work on a basis which yielded a substantial profit to Dr Kitchen from owning the practicee.

I do not accept that Dr Kitchen would have offered to purchase Dr Noble’s practice if there had been no sale to Vision. But if he had done so, the issue becomes whether Dr Noble would have been prepared to sell the practice for $500,000, as the defendants suggest.

What price would Dr Noble have demanded?

The total purchase price which Vision attributed to the Noble Practice, namely $4.25 million, is not a reliable guide as to its true value or the price for which Dr Noble would have been prepared to sell it to Dr Kitchen if the Vision transaction had not occurred. The apportionment was influenced by tax considerations, including Dr Noble’s protection from capital gains tax.

There is no real evidence to support Dr Kitchen’s opinion that Dr Noble probably would have accepted $500,000 had Dr Kitchen offered him this price. In communications before the Vision sale Dr Noble indicated that he would accept $2.5 million for his practice on the basis that he received a salary of $200,000 and his wife received a salary of $60,000 as practice manager. Dr Kitchen’s financial adviser at the time remarked upon the high figure which Dr Noble was seeking. Dr Noble ultimately accepted $1.85 million out of the sale proceeds to Vision. This evidence makes it highly improbable that he would have accepted as little as $500,000 in order to sell his practice, including its equipment, to Dr Kitchen if the transaction with Vision had not proceeded.

I conclude that if Dr Kitchen had approached Dr Noble in late 2005 or early 2006 about selling his practice then any offer of $500,000 would have been rejected. There is no evidence that Dr Kitchen would have offered him any more. Dr Kitchen’s evidence is simply that he would have offered him $500,000 being the approximate cost of purchasing new equipment and setting up a practice in Bundaberg at the time. This makes a different scenario problematic.

I add, for completeness, and in light of the fact that Dr Noble initially sought $2.4 million, and was eventually prepared to accept $1.85 million, that it is unlikely that he would have been prepared, at that time, to sell his practice for any less than $1.5 million. I am not satisfied that Dr Kitchen would have been prepared to pay that much. He did not give evidence that he would have done so.

However, if Dr Kitchen had offered that price on the assumption that Dr Noble would have been prepared to work for the first 12 months on the basis of 20 per cent of revenue or $250,000, Dr Kitchen would soon have been required to find a replacement. I note that a salary of 20 per cent of revenue is significantly below the market rate for ophthalmologists working as independent contractors, and Dr Kitchen accepted as much. Any long-term replacement for Dr Noble would have required payment of around 50 per cent of the revenues he or she produced. Dr Kitchen showed an ability to recruit overseas-trained doctors for Vision, and there is some prospect that he would have found such a doctor to work in Bundaberg and Hervey Bay clinics, assuming his acquisition of Dr Noble’s practice. However, for the reasons I have given, I am not persuaded that it is likely that Dr Kitchen would have purchased Dr Noble’s practice, let alone done so for $500,000.

Scenario of a sale of the Mackay practice

Another scenario which the experts were asked to adopt was that Dr Kitchen would have recruited an overseas-trained specialist to “buy into and take over his practice in Mackay to allow him to develop his other practices.” On this scenario Dr Kitchen would have moved to Rockhampton so long as he could find doctors to fill the other practices and would have developed the Rockhampton practice in largely the same way as he developed it while at Vision. According to this scenario, the new overseas-trained specialist would have been required to carry out both the surgical and non-surgical load in the Mackay clinic.

Vision’s first response to this scenario is that it recognises, as Dr Kitchen did in his evidence, that he was working at full capacity and that without recruiting more surgical ophthalmologists his practice’s growth potential was limited. It next submits that this scenario should be treated sceptically because it is inconsistent with Dr Kitchen’s own statements in the relevant period. I have earlier quoted his email of 7 November 2005 to Mr Mackenzie which was to the effect that it was to his detriment to recruit another operating ophthalmologist into Mackay. In response, the defendants’ counsel submitted that this was with respect to surgery and that Dr Kitchen saw that the way to maximise his potential was to use more consultant ophthalmologists in order to feed him the surgical work. However, the relevant scenario was not to simply recruit a consultant to provide Dr Kitchen with more surgical cases in Mackay. It was to recruit someone to undertake both surgical and non-surgical cases in Mackay so as to enable Dr Kitchen to move to Rockhampton and to exploit its growth potential.

There is no contemporaneous evidence that Dr Kitchen had such a plan in 2005. The contemporaneous evidence is inconsistent with the scenario. Still, there is some possibility that, had there not been a sale to Vision, Dr Kitchen’s natural entrepreneurial streak would have led him to develop practices in other parts of Central Queensland, provided he could recruit new doctors to carry on both the surgical and non-surgical load. However, it remained in his interests to rely upon consultant ophthalmologists to feed him surgical cases.

Although Dr Kitchen did not discuss or record any plan to recruit another operating ophthalmologist into Mackay to enable him to move to Rockhampton, the possibility of him doing so is an opportunity which the defendants did not explore because of their entry into the Vision transaction. It might be given some value. However, I think it more likely that, had the Vision transaction not proceeded, Dr Kitchen would have maintained the practice which he did and attempted to optimise its profit by maximising his own surgical load.

He sold his practice to Vision on the basis that new doctors would be recruited to expand Vision practices in Central Queensland. This does not mean that he would have followed the Vision model. The scenario in question of recruiting a surgical ophthalmologist who would work for $300,000 or 50 per cent of profit, whichever was the greater, and then work towards purchasing 50 per cent of the shares in the Mackay practice is a possible, but unlikely scenario.

On the scenario which Dr Kitchen developed, he would have required a purchase price of $4,405,000 for a 50 per cent interest in the Mackay practice based upon a multiple of five times EBIT. There is no evidence that the hypothesised overseas-trained recruit would have been prepared to pay such a purchase price. Dr Kitchen’s opinion that such a sale could have been achieved is not adequate evidence that it would have been. The fact that Vision, a large public company, was prepared to purchase certain practices on the basis of a multiple of five times EBIT does not mean that an individual, with less resources than Vision, would have been willing to do so or had the financial capacity to do so after being recruited by Dr Kitchen.

Accordingly, I find it unlikely that Dr Kitchen would have developed the Mackay practice in the manner which he hypothesised and sold a 50 per cent share in it for the price which the experts were instructed to adopt.

Similar considerations apply to the recruitment of doctors in other parts of Central Queensland by Dr Kitchen if the Vision transaction had not proceeded.

The establishment of an Excimer Laser Practice

The experts were instructed, and Dr Kitchen gave evidence, that if Vision had not acquired his practices then in 2008 he would have started a Central Queensland Excimer Laser Group. He outlines the costs of doing so and says that he would have entered into a partnership with a surgeon in Brisbane, with patients having consultations in Central Queensland and the surgical procedures carried out by the Brisbane-based surgeon. The patients would have flown to Brisbane and Dr Kitchen estimated that he would have been able to attract sufficient patients to perform 500 procedures per year. He outlines the fees which he expects he would have earned.

A proposal along these lines was put to Vision by Dr Kitchen and it was not pursued by Vision because it was not considered to be commercially sound. This does not necessarily mean that Dr Kitchen would not have pursued such an opportunity himself since he clearly apprehended that it was a worthwhile one. Still, he did not identify any surgeon who would have been prepared to go into partnership with him on the basis outlined. Vision also points to the fact that in the period of five years since he left Vision Dr Kitchen has not established such a practice and this undermines the assumption that he would have established such a practice if he had not sold to Vision. Dr Kitchen explained under cross-examination that he had not done so due to the stresses and costs of the present litigation, and I accept his evidence in that regard.

The assumptions adopted by the experts depends upon acceptance of Dr Kitchen’s evidence about the likely number of cases and the profitability of the venture. Dr Rogers’ statement in reply suggests that these figures are not realistic, given the number of procedures performed by Dr Lenton in the well-established Townsville laser practice and the profitability of that practice. It is sufficient to conclude that the financial assumptions which the experts were instructed to adopt, like many of the other assumptions they were asked to adopt, are unduly favourable to the defendants and unrealistic in the light of the evidence.

Growth rates

This is a topic of great complexity and includes assumptions about the percentage by which certain revenues would have increased per year. Each scenario is based upon different assumptions about growth including, in some cases, assumed growth of 10 per cent per annum. In some cases the experts were prepared to assume that the CQEC practice would have grown at the rate of 10 per cent per annum in the years to 30 June 2011 and at four per cent per annum thereafter.

Any prediction of likely growth if the Vision transaction had not proceeded depends very much upon an assumption of whether Dr Kitchen’s practice would have grown through the recruitment of additional consultants, additional surgeons and developed practices in different centres. It depends upon the role which Dr Kitchen would have played in such an expanding network of practices. It also depends upon various assumptions about the rate at which costs in different centres would have increased and whether doctors recruited by Dr Kitchen would have been able to achieve the efficiencies and profitability which he was able to achieve in his own practice.

Although there may have been some limited scope for Dr Kitchen to achieve growth in his practice without recruiting an additional practitioner, all of the evidence points to the fact that he was working at almost full capacity, namely six or seven days a week by the time he sold his practices to Vision and he could not simply continue to expand his practice without engaging an additional doctor. Mr Lom’s observations in the Joint Experts’ Report in this regard should be accepted. On that basis, there would have been a limit to Dr Kitchen’s capacity to increase the revenues of his practice on his own. The projections appearing in appendices to the Joint Experts’ Report about growth in the practices through to 2029, when Dr Kitchen will be aged 64, are therefore highly speculative.

I am not satisfied that a 10 per cent growth rate until 2011 is realistic and should be applied.

Another feature of the calculations requiring brief comment is the implications for macular degeneration. This has proved to be a highly profitable source of work in recent years and would have contributed to growth in revenue for at least some period of years. The issue has been more fully addressed in the experts’ report. Adjustments should be made to take account of macular degeneration work and contract surgery pricing. This new work would increase revenues, but such an increase should not necessarily be added to an otherwise assumed growth rate of 10 per cent.

In summary, I am not satisfied that the growth assumption upon which the experts were asked to base their calculations are realistic.

Conclusion – validity of assumptions and use of the Joint Experts’ Report

For the foregoing reasons, I am not satisfied that the defendants have established a number of the key assumptions upon which the experts were instructed to base their calculations.

I have not been persuaded that the methodology adopted by the experts was appropriate. Even if I had been persuaded that the methodology adopted in the instructions to the experts and the one adopted by them was an appropriate one to determine loss and its measure, a number of the key assumptions which they adopted have not been established by the evidence.

I am not in a position to arrive at a conclusion about loss and its measure by a simple process of adjustment. For example, if I was to assume, despite the absence of evidence, that Dr Kitchen would have been prepared to offer $1.5 million for the Noble practice in late 2005/early 2006 and Dr Noble would have accepted that price, then there would be a complex exercise in addressing the cost of borrowing $1.5 million to purchase the Noble practice and the profitability (or otherwise) of the practice. Such an assumption depends, in turn, on an assumption that Dr Kitchen could have found another ophthalmologist to replace Dr Noble in late 2006. With so many of the assumptions upon which the various scenarios depend not having been established, and where different assumptions cannot be confidently made on the basis of the evidence before me, I conclude that Part C of the joint experts’ report cannot be relied upon as the basis upon which to assess the defendants’ claimed loss.

Was a loss suffered?

In a “no transaction” claim of the present kind there are two distinct but related issues. The first is whether a loss was suffered and the second is the measure by which it is assessed. Resort to the process of comparing the advantages and disadvantages which a party has experienced up to the date of trial as the result of entering into a transaction may lead to the conclusion that no loss has been suffered when, according to the usual date of transaction rule, a loss would be proven. This may be because of some good fortune, the effects of good management or general market movements over the relevant period after the date of transaction. The adoption of an inappropriate measure of damage may lead to an erroneous conclusion about whether loss was suffered.

A comparison between:

the cash flow that a claimant received over a number of years after a transaction, and the cash flows the plaintiff is likely to receive in the future; and

the cash flows that the plaintiff would have received if the transaction had not been entered into

may lead to the conclusion that the plaintiff suffered a loss. But the cash flows may reflect many matters in addition to the inherent virtues and vices of the thing that has been acquired. Cash flows may be affected by management decisions, the existence or absence of competition in a particular market at various times and general market fluctuations. These market fluctuations may reflect worldwide, national and local economic forces, as with the decline of share prices following the GFC, particularly among highly-geared companies. In such a case, adoption of the rule in Potts v Miller, which ascertains whether there has been a loss and measures it as at the date of transaction, might lead to the conclusion that there was no loss. The claimant acquired something having a value at the date of transaction and other benefits which exceeded the price paid. The fact that the thing acquired deteriorates in value and becomes worth far less than its value at the date of transaction is not taken into account. If the thing acquired, be it shares, real property or a business, is sold many years later, then a cash flow comparison may suggest that the claimant is much worse off financially than it would have been in had the transaction not occurred. But such a cash flow comparison, which brings into account both capital and income, may not be an appropriate indication of any loss that is recoverable. The plaintiff may not have suffered a loss by reason of the transaction because at the date of the transaction the amount which it paid was not more than the true value of the thing it received. In a different case, the amount which the claimant received to sell an asset may have been more than its value. Subsequent events, however, may have devalued what it received, for example, if it swapped one piece of land for another or accepted shares as part of the purchase price of the business it sold and the value of the land or shares it acquired subsequently fell.

The methodology and assumptions the experts were asked to adopt do not persuade me that the defendants suffered a loss as a result of entry into the transaction, or that the measure of any such loss approaches the amounts which the experts have calculated.

Vision’s simplified comparison of the defendants’ position

In addition to submitting that the calculations made by the Joint Experts are based upon various assumptions which were not established by the evidence, Vision submits that the results arrived at by them are counter-intuitive. They advance what is said to be a simpler approach of considering the value of Dr Kitchen’s practice at the time he sold to Vision and the value of the new practice which he established after leaving it.

Vision points to the fact that in the last full financial year before selling to Vision, Dr Kitchen’s practice as an EBIT of approximately $3 million. The sale to it proceeded on the basis of an estimated EBIT for 2005-2006 of approximately $3.2 million, and even if Dr Noble’s EBIT was added the EBIT would be less than $3.7 million. By comparison, Dr Kitchen’s new CQ Eye Practice generated a net profit of approximately $3.4 million for its first nine months to June 2010 and by June 2011 its net profit was more than $5.5 million. Vision submits that this comparison shows that by taking Vision’s patient base in Rockhampton and later in Gladstone, the defendants held a practice which was at least as valuable as the practice which they had sold to Vision in 2006, if not more valuable. On that basis the defendants are said to have been no worse off after Dr Kitchen left Vision than they had been when the practice was sold.

On the question of whether the benefits which the defendants received from the sale of the practice and during the time Dr Kitchen worked for Vision outweighed the financial benefit which they would have received over the same period if they had not sold, Vision’s submissions tabulated the financial benefits which were said to show that the financial benefits of the sale outweighed the income which would have been earned assuming there was no sale. Whilst this comparison included the ($2.4 million which Dr Kitchen received from Dr Noble and $7.8 million for the assumption of the NAB loan, it did not include the value of the Vision shares which the defendants received as part of the acquisition consideration. The income calculation is based upon 10 per cent annual growth in the Kitchen and Noble practices from the June quarter of 2006 to when Dr Kitchen terminated the Service Agreement and commenced the CQ Eye Practice.

On this basis, Vision submits that even if it was liable on the misleading and deceptive conduct claim, the defendants have failed to establish that they suffered any loss as a consequence of entering into the sale transaction.

The defendants respond to these submissions by reference to flaws in the component of practice EBIT which results from the impact of macular degeneration income. The comparison is said to fail to include the impact of growth in the CQ Eye Practices from macular degeneration work and cataract surgery prices. They also note that the comparison was not one which was put to the experts so as to allow them to advance any criticism.

Another matter which I raised in the course of oral submissions, and to which I will return in the final part of this judgment, is whether a proper comparison of the benefits which the defendants have enjoyed from operating the CQ Eye practice would need to bring into account the amount which Dr Kitchen is required to pay in respect of Vision’s contractual claims. If account is to be taken of the fact that he has ended up with a practice which is worth the same or more than the one which he sold, and which generates such a high income because he, in effect, took over Vision’s Rockhampton and Gladstone practices, then principle would seem to dictate that the cost of doing so, including any damages award, would need to be taken into account.

For the reasons given by the defendants, and for the additional reasons that I have mentioned, I do not consider that the simplified comparison advanced by Vision is a reliable guide to whether the defendants suffered a loss as a consequence of entering into the sale transaction.

Date of transaction analysis

The value of what was sold

I have declined to undertake the comparison which Vision urges as some form of reality check on the defendants’ very large damages claim in order to reach a conclusion about whether the defendants have proven that they suffered a loss. To check whether a loss was suffered and to measure any such loss one might resort to the conventional valuation approach in a case of this kind. To take a simple example, if the owner of a fish shop was induced to sell its business for a consideration which included money and bars which were said to be gold, but which were in fact made of bronze, then a date of transaction valuation assessment would lead to a comparison between the value of the business that was sold and the true value of what the seller received, namely money together with the value of the bronze bars. If the latter exceeded the value of the business then the seller would not have suffered a loss, despite being misled. The buyer, who misrepresented the nature of the bars, would simply have paid too much for the business, even taking account of the true value of the bronze bars.

In principle, such an approach seems open in the present case. A business or practice of the kind that was sold, or more precisely the share that was sold, is something for which there is a market and the value of the business might be determined by a sale process or by an expert applying a suitable multiplier to the business’ net maintainable earnings. The value of the Kitchen practice was not necessarily the notional figure which Vision and Dr Kitchen arrived at by applying an agreed multiplier to an agreed EBITA. This is because Vision was not prepared to pay that amount and required a reduction of 7.5 per cent to ensure, among other things, the continuing value of the practice which it purchased through a process of succession. Also, Vision may simply have paid too much for the practice. However, the price which was negotiated is some evidence of the value of a practice in circumstances in which Dr Kitchen promised to work for the agreed salary for at least five years. Vision also acquired the benefit of protection from competition, to the extent that any restraint of trade clauses prevented the defendants from competing with it. The value of the practice which was sold by the defendants to Vision seems to be a matter which could have been ascertained in the same way that the value of business and professional practices are routinely determined.

The value of what was gained by the defendants

The next issue is determining what was lost, if anything, by the defendants in selling the Kitchen practice is the value of the advantages which they gained as a result.

The gains or advantages which the defendants received as a result of the transaction include the cash components of the sale and the value of the shares which they were promised under the different phases of the acquisition. For the reasons which I have given, the sale consideration by way of cash consideration and shares has not been fully accounted for in the joint experts’ report’s assessment of the cash flow that the defendants received from the sale of Swordfish. That cash flow includes remuneration received by Dr Kitchen during his employment with Vision. However, the cash consideration calculated at paragraph 5.3 of the report, which includes $2.55 million from the Noble practice and $7.3 million from the NAB loan discharge totals approximately $13.7 million.

The “gift” which Dr Noble agreed with Dr Kitchen, namely the difference between the price which Vision paid for the Noble Practice and the amount which Dr Noble was prepared to accept, is an obvious benefit which needs to be brought into account in assessing the advantages which the defendants obtained by reason of entry into the transaction with Vision. The defendants’ senior counsel accepted as much.

If a valuation method was to be used then an issue would arise as to the value of the Vision shares which the defendants acquired as a result of the transaction. It would require their value to be assessed as at the date of transaction, having regard to the fact that they were subject to various escrow conditions. In my view, it would require the value of each share to be assessed below the traded share price of Vision’s shares at the relevant date because the shares were held on escrow conditions. The experts did not address this valuation issue. Instead, they were concerned with a cash flow issue, and adopted the price which the shares actually commanded at the dates they came out of escrow. This differs from a valuation exercise.

The true value of Vision’s shares as at 1 April 2006 may have been less than their market value at the time. But their true value in April 2006 cannot be equated with the market value of Vision’s shares after the GFC. If, for example, the defendants had listed their assets and liabilities once the transaction was completed, in order to borrow money or for any other purpose, they would have included the shares held in escrow as part of their assets and liabilities. They may have been required to discount the then market value of an equivalent number of Vision’s shares to take account of the escrow conditions. The shares would have had a substantial value, and presumably, a greater value than their value a few years later after the GFC and a huge decline in Vision’s share price. The same may be said as to their true value at the date of transaction.

I simply observe that on any comparison between the position in which the defendants found themselves as a result of the transaction and the position in which they would have found themselves if the transaction had not proceeded, account would need to be taken of the real value of the shares they received including an appropriate value of the shares held subject to escrow conditions. Because of their instructions and resultant methodology, the Joint Experts have not sought to do so.

The shares had an ascribed value of $5,687,503 at the date of issue in April 2006 and a further ascribed value of approximately $1.2 million in August 2008. The ascribed value of these shares would need to be discounted to take account of escrow conditions. However, depending upon the discount, including a discount for the risk that a Phase 3 consideration would not be earned, one would arrive at a very substantial amount for the total value of the benefits which the defendants received, assessed at the date of the transaction.

As discussed, this valuation exercise has not been undertaken by the experts. The matters canvassed above are simply to indicate that it is not evident that the value of the practice which was sold by the defendants was more than the value of the benefits which they acquired under that transaction, both being assessed as at the date of the transaction. One cannot proceed on the simple assumption that the shares which they acquired as part of the transaction were worth at the date of the transaction the amount to which the Vision share price fell over later years, including falls that were the result of the largely unexpected GFC.

Conclusion – defendants’ damages claim

I am not satisfied on the basis of the expert report, or by reference to the evidence, that the defendants suffered a loss by entering into the transaction in circumstances in which, on the defendants’ case, they otherwise would not have done so.

The parties and the experts have approached the question of loss and its measure by reference to the position of the defendants together, requiring account to be taken of Dr Kitchen’s remuneration received pursuant to the Service Agreement. This is obviously a convenient approach where the value of the practice and its income depends upon Dr Kitchen’s personal involvement in it.

In seeking to prove that they suffered a loss, the defendants did not call evidence which sought to place a value upon the business which they sold (and the associated promise of Dr Kitchen to work for the buyer for at least five years). The defendants have not properly valued the cash, shares and other advantages which the defendants received as a result of the transaction. These advantages include the Noble gift and the assumption of the NAB debt of $7.8 million. The methodology which the experts were instructed to adopt does not seem an appropriate one to determine whether the defendants suffered a loss or to measure any such loss.

In the circumstances, I am not persuaded that the value of what the defendants lost as a result of entering into the transaction exceeds the advantages which they received as a result of entering into it. The assessment undertaken by the experts does not prove that a loss was suffered or its amount. This is because of the methodology which they adopted and the assumptions which they were instructed to adopt, many of which have not been established by the evidence.

In the result, the defendants have not proved to my satisfaction that they suffered a loss as a consequence of entering into the transaction. If, however, they did suffer a loss, I am not in a position to assess it on the basis of the evidence before me. The task would require much more than mathematical adjustments which could be undertaken by the parties with the assistance of the experts so as to adjust their calculations of loss.

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]

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:

costs incurred in closing the Rockhampton clinic;

lost earnings from Rockhampton for the period ending 31 March 2011 (the end of the initial five year term of the Service Agreement);

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.

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:

There be judgment for Icon against Dr Kitchen for damages for breach of the Service Agreement, in an amount to be assessed.

There be declarations that the defendants are not presently entitled to the release of the restricted securities under the Escrow Deed.

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.

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.

The relief sought in paragraphs 5 and 6 of the claim be refused.

The defendants’ counterclaim be otherwise dismissed.

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.

Footnotes

[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

[2] Electricity Generation Corporation v Woodside Energy Ltd (2014) 306 ALR 25 at 33, [35] (“Electricity Generation Corporation”).

[3] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352 (“Codelfa”) and see Lindgren “The Ambiguity of ‘Ambiguity’ in the Construction of Contracts” (2014) 38 Australian Bar Review 153.

[4] Electricity Generation Corporation at [35] citing Codelfa.

[5] Electricity Generation Corporation at [35].

[6] Australian Broadcasting Commission v Australasian Performing Rights Associations Ltd (1973) 129 CLR 99 at 109.

[7] The defendants did not argue that the use of a percentage cost base was not “a proper commercial basis” in the cases in which such a method was used.

[8] References to Vision are for convenience. The breaches and repudiation are alleged by Icon in respect of the Service Agreement, while Vision claims breaches of the Share Purchase Agreement.

[9] Waters Lane Pty Ltd v Sweeney [2006] NSWSC 222 at [29]. The defendants cite authority that material in such a context means essential or important. Elders Ltd v J Knight Pty Ltd [2009] NSWSC 1462 [48]; Androvisaneas v Members First Broker Network Pty Ltd [2013] VSCA 212 [89] – [92].

[10] See Randall “Express Termination Clauses in Contracts” (2014) 73 Cambridge Law Journal 113 at 116-117 (“Randall”).

[11] Ibid.

[12] Waddell v Mathematics.com.au Pty Ltd [2013] NSWSC 142 at [92] and cases cited therein.

[13] Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 at 377-378, and see Randall at 117-118 in relation to recent English authority to the same effect.

[14] Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 633-634; Koompahtoo City Council v Sandpine Pty Ltd (2007) 233 CLR 115 at 135 [44].

[15] DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 431-3; Roadshow Entertainment Pty Ltd v ACN 053006269 Pty Ltd (1997) 42 NSWLR 462 at 479.

[16] Buckley v Tutty (1971) 125 CLR 353 at 376 (“Buckley”); Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418 at [29], [75] (“Sidameneo”).

[17] Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 317-318 (“Amoco”).

[18] Amoco at 308; Sidameneo at [71].

[19] Putsman v Taylor [1927] 1 KB 637 at 643.

[20] J D Heydon The Restraint of Trade Doctrine 3rd ed, (LexisNexis Butterworths New South Wales 2008) (“Heydon”) at p 47- 48, 151-152, 155, 207. The possibility must be “something more than a hope, based on contingencies, which may or may not occur.”: ibid 155 n 58.

[21] Sidameneo at [71] and the cases cited therein.

[22] Sidameneo at [72] citing BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at 121 [67].

[23] Butt v Long (1953) 88 CLR 476 at 486.

[24] Fadu Pty Ltd v ACN 008 112 196 Pty Ltd as Trustee of the International Linen Service Unit Trust [2007] FCA 1965 at [81] – [82] (“Fadu”); see generally Heydon at 202-213.

[25] Fadu at [81] – [82].

[26] Sidameneo at [60]; Cactus Imaging Pty Ltd v Peters (2006) NSWLR 9 at [43]-[60] (“Cactus”) Informax International Pty Ltd v Clarius Group Ltd (2011) 277 ALR 495 at 509 [57]; Allied Express Transport Pty Ltd v Mears [2010] NSWSC 1112 at [14]; Heydon at 133 n 153; Jackson Post-Employment Restraint of Trade (Federation Press, New South Wales 2014) Chapter 4, 72-75 (“Jackson”).

[27] Pearson v HRX Holdings Pty Ltd (2012) 293 ALR 554 at [46]; Lidner v Murdoch’s Garage (1950) 83 CLR 628 at 636.

[28] Heydon at 86-90.

[29] Smith v Ryngell [1988] 1 Qd R 179 at 185; Koops Martin v Reeves [2006] NSWSC 449 at [88] (“Koops”)

[30] NE Perry Pty Ltd v Judge (2002) 84 SASR 86 at 91 [28]-[30], 92 [35], 96 [60] and [63], 98 [72], 103 – 104 [101] and [103] (“NE Perry”)

[31] Heydon p 91.

[32] Sidameneo at [96].

[33] Ashcoast Pty Ltd v Whillans [2000] 2 Qd R 1.

[34] Sidameneo at [53].

[35] Ibid at [43].

[36] NE Perry at 89 [22].

[37] Blakely and Anderson v de Lambert [1959] NZLR 356 at 376.

[38] Ashcoast Pty Ltd v Whillans (2000) 2 Qd R 1.

[39] Ibid; Perry at 90 [26], 92 [35].

[40] Sidemeneo at [87]

[41] Lyne-Pirkis v Jones [1969] 1 WLR 1293 at 1301-1302.

[42] Buckley at 377; C Convenience Stores Pty Ltd v Wayville Plaza Retirement Pty Ltd (2012) 114 SASR 299 at 324 [128].

[43] Hanna v Oamps Insurance Brokers Ltd (2011) 202 IR 420; Seven Network (Operations) Ltd v Warburton (No 2) [2011] NSWSC 386, (2011) 206 IR 450; JQAT Pty Ltd v Storm [1987] 2 Qd R 162.

[44] Sidameneo at [72].

[45] Perry at 89 [22]; Sidameneo [66].

[46] Heydon p 213.

[47] Amoco at 306.

[48] Sidameneo at [102].

[49] Sidameneo at [60]; and see cases cited at footnote 26.

[50] Clause 12.6(a) of the Share Purchase Agreement contains a typographical error and the parties agree that, by mistake, it refers to cl 9.3 rather than 15.3 of the Service Agreement.

[51] Heydon p 91. And see Jackson at p 119-121. A court will construe a restraint of trade provision in an employment contract in a different fashion where the employee was the seller of the business in which they now work. One reason is that the restraint imposed upon such an employee can be treated as part of the consideration for the sale of goodwill. For example see Synavant Australia Pty Ltd v Harris [2001] FCA 1517 at [69].

[52] Reference to the sale of the business and its goodwill is a convenient reference to the business and goodwill which was acquired as a result of the Share Purchase Agreement.

[53] Koops at [30]-[35].

[54] Heydon p 199

[55] ibid citing Weinberg v Mervis 1953 (3) SA 863 at 870 and see Pioneer Concrete Services Ltd v Galli [1985] VR 675 at 694-695 as to protection of future customers of a business that is sold.

[56] ibid; the reference to “adjoining places” is drawn from Connors Brothers v Connors [1940] 4 All E R 179 at 194.

[57] Heydon at p 207 n 125.

[58] As a result there are numerous cases in which excessive area restraints have been found to be invalid: Heydon p 208. For example, a covenant against welldrilling in New Zealand when the business being sold was mainly carried on in the north of the North Island was invalid: Brown v Brown [1980] NZLR 484.

[59] NE Perry at 92 [35], 98 [72] – [73].

[60] It has been said that where a restraint prohibits solicitation of customers, no area limitation is generally required: Koops at [86]; Smith v Ryngellat 185 and see Heydon at p 210.

[61] Koops at [72] - [78]; Henry Leetham & Sons Ltd v Johnstone White [1907] 1 Ch 203; see generally Jackson pp 17-18.

[62] Perry at 94-95 [45].

[63] Cactus at [55]; and the cases cited at footnote 26.

[64] Discussed in Heydon pp 33-40.

[65] Ibid at 36.

[66] Ibid at 37; A-G Commonwealth of Australia v Adelaide Steamship Co Ltd [1911-13] All ER Rep 1120 at 1124.

[67] Ibid.

[68] [1984] AC 705 at 708-719;

[69] Edwards v Warboys [1984] AC 724 at 27; Heydon at 217-218.

[70] Kerr v Morris [1987] Ch 90, cited in Heydon at 218.

[71] Sherk v Horwitz [1972] 2 OR 457.

[72] [1981] 1 NSWLR 583 at 588.

[73] Sidameneo at [86]; Heydon at p 275.

[74] It is undesirable to encourage the calling of accountants or other experts to give evidence about applicable rates of interest in every case or even frequently: Serisier Investments Pty Ltd v English [1989] 1 Qd R 678 at 681.

[75] Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 304 ALR 186 at 197 [52] (“TPG”).

[76] Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 318, [24] (“Campbell”).

[77] Campbell at 319 [25].

[78] Campbell at 319 [26].

[79] Campbell at 318 [24] applied in TPG at 196 [49].

[80] TPG at 196 [50].

[81] Campbell at 321 [32].

[82] Campbell at 321 [32] – [33].

[83] Campbell 341-342 [102].

[84] Ibid.

[85] TPG at 197 [52].

[86] (1995) 49 NSWLR 315 at 318-319.

[87] Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525.

[88] I&L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 at 119 [26] (“I & L”).

[89] March v E. & M. H. Stramare Pty Ltd and Anor (1991) 171 CLR 506 at 509.

[90] I & L at 127 [55] – 129 [58].

[91] (2001) 205 CLR 434.

[92] The experts refer to the figure as $2.55 million whereas the parties’ submissions refer to the figure as being $2.4 million.

[93] Marks v GIO Australia Holdings (1998) 196 CLR 494.

[94] Potts v Miller (1940) 64 CLR 282 at 297-300 followed earlier authority to like effect as to the measure of damages in tort. The rule was recently discussed in Jamieson v Westpac [2014] QSC 32 at [127] – [136] a matter currently under appeal.

[95] [1997] AC 254 at 283-284.

[96] Ibid.

[97] (2004) 217 CLR 640 at 656-657 [35].

[98] Expectation Pty Ltd v PRD Realty Pty Ltd (2004) 140 FCR 17 at 50 [254] – 51 [258].

[99] There is no prima facie entitlement to further compensation for subsequent losses since trading losses in the case of an unprofitable business may be captured in the primary entitlement: Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305 at 308. However, consequential losses, including some trading losses may be recoverable in accordance with Gould v Vaggelas (1985) 157 CLR 215 at 221-222.

[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.

Editorial Notes

Published Case Name:
Vision Eye Institute Ltd & Anor v Kitchen & Anor
Shortened Case Name:
Vision Eye Institute Ltd v Kitchen
MNC:
[2014] QSC 260
Court:
QSC
Judge(s):
Applegarth J
Date:
23 Oct 2014
White Star Case:
Yes

Litigation History

Event	Citation or File	Date	Notes
Primary Judgment	[2014] QSC 260	23 Oct 2014	Judgment on liability in respect of claims for breach of contract and declarations: Applegarth J.
Primary Judgment	[2015] QSC 66	21 Apr 2015	Judgment for the plaintiff in the amount of $10,845,476: Applegarth J.
Primary Judgment	[2015] QSC 164	17 Jun 2015	The defendants pay 95 per cent of the plaintiffs’ costs of the principal proceeding and of the counterclaim, including reserved costs, to be assessed on the indemnity basis: Applegarth J.
Notice of Appeal Filed	File Number: Appeal 4961/15	19 May 2015	-
Appeal Determined (QCA)	[2016] QCA 226	09 Sep 2016	Appeal dismissed: McMurdo P, Fraser JA, Daubney J.
Appeal Determined (QCA)	[2017] QCA 32	14 Mar 2017	The appellant pay the respondents’ costs of and incidental to the appeal: Margaret McMurdo P, Fraser JA and Daubney J.

Appeal Status

Appeal Determined (QCA)

Cases Cited List of Cases Cited by this judgment

Case Name	Full Citation	Frequency
"Express Termination Clauses in Contracts"	(2014) 73 Cambridge Law Journal 113	4 citations Jump To Cite 1 - (2014) 73 Cambridge Law Journal 113 Cite 2 - (2014) 73 Cambridge Law Journal 113 Cite 3 - (2014) 73 Cambridge Law Journal 113 Cite 4 - (2014) 73 Cambridge Law Journal 113
"The ambiguity of “ ambiguity ” in the construction of contracts"	(2014) 38 Australian Bar Review 153	4 citations Jump To Cite 1 - (2014) 38 Australian Bar Review 153 Cite 2 - (2014) 38 Australian Bar Review 153 Cite 3 - (2014) 38 Australian Bar Review 153 Cite 4 - (2014) 38 Australian Bar Review 153
A-G Commonwealth of Australia v Adelaide Steamship Co Ltd	[1911-13] All ER Rep 1120	2 citations Jump To Cite 1 - [1911-13] All ER Rep 1120 Cite 2 - [1911-13] All ER Rep 1120
Allied Express Transport Pty Ltd v Mears	View on:JADE[2010] NSWSC 1112	2 citations Jump To Cite 1 - [2010] NSWSC 1112 Cite 2 - [2010] NSWSC 1112
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd	View on:JADE(1973) 133 CLR 288	4 citations Jump To Cite 1 - (1973) 133 CLR 288 Cite 2 - (1973) 133 CLR 288 Cite 3 - (1973) 133 CLR 288 Cite 4 - (1973) 133 CLR 288
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd	View on:JADE[1973] HCA 288	1 citation Jump To Cite 1 - [1973] HCA 288
Androvitsaneas v Member First Broker Network Pty Ltd	View on:JADE[2013] VSCA 212	2 citations Jump To Cite 1 - [2013] VSCA 212 Cite 2 - [2013] VSCA 212
Australian Broadcasting Commission v Australasian Performing Right Association Ltd	View on:JADE(1973) 129 CLR 99	2 citations Jump To Cite 1 - (1973) 129 CLR 99 Cite 2 - (1973) 129 CLR 99
Australian Broadcasting Commission v Australasian Performing Right Association Ltd	View on:JADE[1973] HCA 36	1 citation Jump To Cite 1 - [1973] HCA 36
Australian Competition and Consumer Commission v TPG Internet Pty Ltd	(2013) 304 ALR 186	5 citations Jump To Cite 1 - (2013) 304 ALR 186 Cite 2 - (2013) 304 ALR 186 Cite 3 - (2013) 304 ALR 186 Cite 4 - (2013) 304 ALR 186 Cite 5 - (2013) 304 ALR 186
Australian Competition and Consumer Commission v TPG Internet Pty Ltd	View on:JADE[2013] HCA 54	1 citation Jump To Cite 1 - [2013] HCA 54
BB Australia Pty Ltd v Karioi Pty Ltd	(2010) 278 ALR 105	2 citations Jump To Cite 1 - (2010) 278 ALR 105 Cite 2 - (2010) 278 ALR 105
BB Australia Pty Ltd v Karioi Pty Ltd	View on:JADE[2010] NSWCA 347	1 citation Jump To Cite 1 - [2010] NSWCA 347
Blakely and Anderson v De Lambert	[1959] NZLR 356	1 citation Jump To Cite 1 - [1959] NZLR 356
Bridge v Deacons	View on:ICLRUK(1984) AC 705	2 citations Jump To Cite 1 - (1984) AC 705 Cite 2 - (1984) AC 705
Brown v Brown	[1980] NZLR 484	2 citations Jump To Cite 1 - [1980] NZLR 484 Cite 2 - [1980] NZLR 484
Buckley & Ors v Tutty	View on:JADE(1971) 125 CLR 353	3 citations Jump To Cite 1 - (1971) 125 CLR 353 Cite 2 - (1971) 125 CLR 353 Cite 3 - (1971) 125 CLR 353
Buckley v Tutty	View on:JADE[1971] HCA 71	1 citation Jump To Cite 1 - [1971] HCA 71
Butt v Long	View on:JADE(1953) 88 CLR 476	2 citations Jump To Cite 1 - (1953) 88 CLR 476 Cite 2 - (1953) 88 CLR 476
Butt v Long	View on:JADE[1953] HCA 76	1 citation Jump To Cite 1 - [1953] HCA 76
C Convenience Stores Pty Ltd v Wayville Plaza Retirement Pty Lld	(2012) 114 SASR 299	2 citations Jump To Cite 1 - (2012) 114 SASR 299 Cite 2 - (2012) 114 SASR 299
Cactus Imaging Pty Ltd v Peters	View on:JADE[2006] NSWSC 717	1 citation Jump To Cite 1 - [2006] NSWSC 717
Cactus Imaging Pty Ltd v Peters	View on:NSWLR(2006) 71 NSWLR 9	2 citations Jump To Cite 1 - (2006) 71 NSWLR 9 Cite 2 - (2006) 71 NSWLR 9
Cactus Imaging Pty Ltd v Peters	View on:NSWLR(2006) NSWLR 9	1 citation Jump To Cite 1 - (2006) NSWLR 9
Campbell v Backoffice Investments Pty Ltd	View on:JADE[2009] HCA 25	1 citation Jump To Cite 1 - [2009] HCA 25
Campbell v Backoffice Investments Pty Ltd	View on:JADE(2009) 238 CLR 304	8 citations Jump To Cite 1 - (2009) 238 CLR 304 Cite 2 - (2009) 238 CLR 304 Cite 3 - (2009) 238 CLR 304 Cite 4 - (2009) 238 CLR 304 Cite 5 - (2009) 238 CLR 304 Cite 6 - (2009) 238 CLR 304 Cite 7 - (2009) 238 CLR 304 Cite 8 - (2009) 238 CLR 304
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales	View on:JADE(1982) HCA 24	1 citation Jump To Cite 1 - (1982) HCA 24
Codelfa Construction Pty Ltd v State Rail Authority of NSW	View on:JADE(1982) 149 C.L R. 337	2 citations Jump To Cite 1 - (1982) 149 C.L R. 337 Cite 2 - (1982) 149 C.L R. 337
Connors Bros. Ltd. v Connors	[1940] 4 ALL E.R. 179	2 citations Jump To Cite 1 - [1940] 4 ALL E.R. 179 Cite 2 - [1940] 4 ALL E.R. 179
DTR Nominees Pty Ltd v Mona Homes Pty Ltd	View on:JADE[1978] HCA 12	1 citation Jump To Cite 1 - [1978] HCA 12
DTR Nominees Pty Ltd v Mona Homes Pty Ltd	View on:JADE(1978) 138 C.L.R 423	2 citations Jump To Cite 1 - (1978) 138 C.L.R 423 Cite 2 - (1978) 138 C.L.R 423
Edwards v Warboys	View on:ICLRUK[1984] AC 724	2 citations Jump To Cite 1 - [1984] AC 724 Cite 2 - [1984] AC 724
Elders Ltd v EJ Knight & Co Pty Ltd	View on:JADE[2009] NSWSC 1462	2 citations Jump To Cite 1 - [2009] NSWSC 1462 Cite 2 - [2009] NSWSC 1462
Electricity Generation Corporation (t/as Verve Energy) v Woodside Energy Ltd and Ors	View on:JADE[2014] HCA 7	1 citation Jump To Cite 1 - [2014] HCA 7
Electricity Generation Corporation (trading as Verve Energy) v Woodside Energy Ltd	(2014) 306 ALR 25	4 citations Jump To Cite 1 - (2014) 306 ALR 25 Cite 2 - (2014) 306 ALR 25 Cite 3 - (2014) 306 ALR 25 Cite 4 - (2014) 306 ALR 25
Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd Receiver and Manager Appointed	View on:NSWLR[1974] 42 NSWLR 462	1 citation Jump To Cite 1 - [1974] 42 NSWLR 462
Expectation Pty Ltd v PRD Realty Pty Ltd	View on:JADE[2004] FCA FC 189	1 citation Jump To Cite 1 - [2004] FCA FC 189
Expectation Pty Ltd v PRD Realty Pty Ltd	(2004) 140 FCR 17	2 citations Jump To Cite 1 - (2004) 140 FCR 17 Cite 2 - (2004) 140 FCR 17
Fadu Pty Ltd v ACN 008 112 196 Pty Ltd as Trustee of the International Linen Service Unit Trust	View on:JADE[2007] FCA 1965	3 citations Jump To Cite 1 - [2007] FCA 1965 Cite 2 - [2007] FCA 1965 Cite 3 - [2007] FCA 1965
Gammasonics Institute for Medical Research Pty Ltd v Comrad Medical Sysytems Pty Ltd	View on:JADE[2010] NSWSC 267	1 citation Jump To Cite 1 - [2010] NSWSC 267
Gould v Vaggelas	View on:JADE(1985) 157 CLR 215	2 citations Jump To Cite 1 - (1985) 157 CLR 215 Cite 2 - (1985) 157 CLR 215
Gould v Vaggelas	View on:JADE[1984] HCA 68	1 citation Jump To Cite 1 - [1984] HCA 68
Hanna v OAMPS Insurance Brokers Ltd	(2011) 202 IR 420	2 citations Jump To Cite 1 - (2011) 202 IR 420 Cite 2 - (2011) 202 IR 420
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd	(1988) 39 FCR 546	2 citations Jump To Cite 1 - (1988) 39 FCR 546 Cite 2 - (1988) 39 FCR 546
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd	View on:JADE[1988] FCA 40	1 citation Jump To Cite 1 - [1988] FCA 40
Henry Leetham & Sons Ltd v Johnstone White	View on:ICLRUK[1907] 1 Ch 203	3 citations Jump To Cite 1 - [1907] 1 Ch 203 Cite 2 - [1907] 1 Ch 203 Cite 3 - [1907] 1 Ch 203
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd	View on:JADE[2004] HCA 54	1 citation Jump To Cite 1 - [2004] HCA 54
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd	View on:JADE(2004) 217 CLR 640	2 citations Jump To Cite 1 - (2004) 217 CLR 640 Cite 2 - (2004) 217 CLR 640
I & L Securities Pty Ltd v HT W Valuers (Brisbane) Pty Ltd	View on:JADE(2002) 210 CLR 109	3 citations Jump To Cite 1 - (2002) 210 CLR 109 Cite 2 - (2002) 210 CLR 109 Cite 3 - (2002) 210 CLR 109
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd	View on:JADE[2002] HCA 41	1 citation Jump To Cite 1 - [2002] HCA 41
Informax International Pty Ltd v Clarius Group Ltd	(2011) 277 ALR 495	2 citations Jump To Cite 1 - (2011) 277 ALR 495 Cite 2 - (2011) 277 ALR 495
Informax International Pty Ltd v Clarius Group Ltd	View on:JADE[2011] FCA 183	1 citation Jump To Cite 1 - [2011] FCA 183
Jamieson v Westpac Banking Corporation	[2014] QSC 32	2 citations Jump To Cite 1 - [2014] QSC 32 Cite 2 - [2014] QSC 32
JQAT Pty Ltd v Storm	[1987] 2 Qd R 162	2 citations Jump To Cite 1 - [1987] 2 Qd R 162 Cite 2 - [1987] 2 Qd R 162
Kerr v Morris	View on:ICLRUK[1987] Ch 90	2 citations Jump To Cite 1 - [1987] Ch 90 Cite 2 - [1987] Ch 90
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd	View on:JADE(2007) 233 CLR 115	2 citations Jump To Cite 1 - (2007) 233 CLR 115 Cite 2 - (2007) 233 CLR 115
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd	View on:JADE[2007] HCA 61	1 citation Jump To Cite 1 - [2007] HCA 61
Koops Martin v Reeves	View on:JADE[2006] NSWSC 449	5 citations Jump To Cite 1 - [2006] NSWSC 449 Cite 2 - [2006] NSWSC 449 Cite 3 - [2006] NSWSC 449 Cite 4 - [2006] NSWSC 449 Cite 5 - [2006] NSWSC 449
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd	View on:JADE(1989) 166 C.L R. 623	2 citations Jump To Cite 1 - (1989) 166 C.L R. 623 Cite 2 - (1989) 166 C.L R. 623
Laurinda v Capalaba Park Shopping Centre Pty Ltd	View on:JADE[1989] HCA 23	1 citation Jump To Cite 1 - [1989] HCA 23
Lindner v Murdock's Garage	View on:JADE(1950) 83 CLR 628	2 citations Jump To Cite 1 - (1950) 83 CLR 628 Cite 2 - (1950) 83 CLR 628
Lindner v Murdock's Garage	View on:JADE[1950] HCA 48	1 citation Jump To Cite 1 - [1950] HCA 48
Lyne-Pirkis v Jones	View on:ICLRUK[1969] 1 WLR 1293	2 citations Jump To Cite 1 - [1969] 1 WLR 1293 Cite 2 - [1969] 1 WLR 1293
March v E & MH Stramare Pty Ltd	View on:JADE(1991) 171 CLR 506	2 citations Jump To Cite 1 - (1991) 171 CLR 506 Cite 2 - (1991) 171 CLR 506
March v Stramere (E & MH) Pty Ltd	View on:JADE(1991) HCA 12	1 citation Jump To Cite 1 - (1991) HCA 12
Marks v GIO Australia Holdings	View on:JADE(1998) 196 CLR 494	2 citations Jump To Cite 1 - (1998) 196 CLR 494 Cite 2 - (1998) 196 CLR 494
Marks v GIO Australia Holdings Ltd	View on:JADE(1998) HCA 69	1 citation Jump To Cite 1 - (1998) HCA 69
Munchies Management Pty Ltd v Belperio	(1988) 58 FCR 274	2 citations Jump To Cite 1 - (1988) 58 FCR 274 Cite 2 - (1988) 58 FCR 274
Munchies Management Pty Ltd v Belperio	View on:JADE[1988] FCA 413	1 citation Jump To Cite 1 - [1988] FCA 413
N E Perry Pty Ltd v Judge	View on:JADE[2002] SASC 312	1 citation Jump To Cite 1 - [2002] SASC 312
NE Perry Pty Ltd v Judge	(2002) 84 SA SR 86	7 citations Jump To Cite 1 - (2002) 84 SA SR 86 Cite 2 - (2002) 84 SA SR 86 Cite 3 - (2002) 84 SA SR 86 Cite 4 - (2002) 84 SA SR 86 Cite 5 - (2002) 84 SA SR 86 Cite 6 - (2002) 84 SA SR 86 Cite 7 - (2002) 84 SA SR 86
Netaf Pty Ltd v Bikane Pty Ltd	(1990) 26 FCR 305	2 citations Jump To Cite 1 - (1990) 26 FCR 305 Cite 2 - (1990) 26 FCR 305
Netaf Pty Ltd v Bikane Pty Ltd	View on:JADE[1990] FCA 35	1 citation Jump To Cite 1 - [1990] FCA 35
Orton v Melman	View on:NSWLR[1981] 1 NSWLR 583	2 citations Jump To Cite 1 - [1981] 1 NSWLR 583 Cite 2 - [1981] 1 NSWLR 583
Pearson v HRX Holdings Pty Ltd	(2012) 293 ALR 554	2 citations Jump To Cite 1 - (2012) 293 ALR 554 Cite 2 - (2012) 293 ALR 554
Pearson v HRX Holdings Pty Ltd	View on:JADE[2012] FCAFC 111	1 citation Jump To Cite 1 - [2012] FCAFC 111
Pioneer Concrete Services Ltd v Galli	View on:VR(1985) VR 675	2 citations Jump To Cite 1 - (1985) VR 675 Cite 2 - (1985) VR 675
Potts v Miller	View on:JADE(1940) 64 CLR 282	2 citations Jump To Cite 1 - (1940) 64 CLR 282 Cite 2 - (1940) 64 CLR 282
Potts v Miller	View on:JADE[1940] HCA 43	1 citation Jump To Cite 1 - [1940] HCA 43
Putsman v Taylor	View on:ICLRUK(1927) 1 KB 637	2 citations Jump To Cite 1 - (1927) 1 KB 637 Cite 2 - (1927) 1 KB 637
Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd	View on:JADE[1997] NSWSC 473	1 citation Jump To Cite 1 - [1997] NSWSC 473
Roadshow Entertainment Pty Ltd v C.E.L. Home Video Pty. Ltd.	View on:NSWLR(1997) 42 NSWLR 462	1 citation Jump To Cite 1 - (1997) 42 NSWLR 462
Rosenberg v Percival	View on:JADE(2001) 205 CLR 434	2 citations Jump To Cite 1 - (2001) 205 CLR 434 Cite 2 - (2001) 205 CLR 434
Rosenberg v Percival	View on:JADE[2001] HCA 18	1 citation Jump To Cite 1 - [2001] HCA 18
Serisier Investments Pty Ltd v English	[1989] 1 Qd R 678	2 citations Jump To Cite 1 - [1989] 1 Qd R 678 Cite 2 - [1989] 1 Qd R 678
Seven Network (Operations) Ltd v Warburton (No 2)	(2011) 206 IR 450	2 citations Jump To Cite 1 - (2011) 206 IR 450 Cite 2 - (2011) 206 IR 450
Seven Network (Operations) Ltd v Warburton (No 2)	View on:JADE[2011] NSWSC 386	2 citations Jump To Cite 1 - [2011] NSWSC 386 Cite 2 - [2011] NSWSC 386
Shepherd v Felt & Textiles of Australia Ltd	View on:JADE(1931) 45 CLR 359	2 citations Jump To Cite 1 - (1931) 45 CLR 359 Cite 2 - (1931) 45 CLR 359
Shepherd v Felt & Textiles of Australia Ltd	View on:JADE[1931] HCA 21	1 citation Jump To Cite 1 - [1931] HCA 21
Sherk v Horwitz	[1972] 2 OR 457	2 citations Jump To Cite 1 - [1972] 2 OR 457 Cite 2 - [1972] 2 OR 457
Sidameneo (No 456) Pty Ltd v Alexander	View on:JADE[2011] NSWCA 418	15 citations Jump To Cite 1 - [2011] NSWCA 418 Cite 2 - [2011] NSWCA 418 Cite 3 - [2011] NSWCA 418 Cite 4 - [2011] NSWCA 418 Cite 5 - [2011] NSWCA 418 Cite 6 - [2011] NSWCA 418 Cite 7 - [2011] NSWCA 418 Cite 8 - [2011] NSWCA 418 Cite 9 - [2011] NSWCA 418 Cite 10 - [2011] NSWCA 418 Cite 11 - [2011] NSWCA 418 Cite 12 - [2011] NSWCA 418 Cite 13 - [2011] NSWCA 418 Cite 14 - [2011] NSWCA 418 Cite 15 - [2011] NSWCA 418
Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd	View on:ICLRUK[1997] AC 254	2 citations Jump To Cite 1 - [1997] AC 254 Cite 2 - [1997] AC 254
Smith v Ryngiel	[1988] 1 Qd R 179; [1987] QSC 129	3 citations Jump To Cite 1 - [1988] 1 Qd R 179 Cite 2 - [1988] 1 Qd R 179 Cite 3 - [1988] 1 Qd R 179
Synavant Australia Pty Ltd v Harris	View on:JADE[2001] FCA 1517	2 citations Jump To Cite 1 - [2001] FCA 1517 Cite 2 - [2001] FCA 1517
Waddell v Mathematics.com.au Pty Ltd	View on:JADE[2013] NSWSC 142	2 citations Jump To Cite 1 - [2013] NSWSC 142 Cite 2 - [2013] NSWSC 142
Wardley Australia Ltd v Western Australia	View on:JADE(1992) 175 CLR 514	2 citations Jump To Cite 1 - (1992) 175 CLR 514 Cite 2 - (1992) 175 CLR 514
Wardley Australia Ltd v Western Australia	View on:JADE[1992] HCA 55	1 citation Jump To Cite 1 - [1992] HCA 55
Waters Lane Pty Ltd v Sweeney	View on:JADE[2006] NSWSC 222	2 citations Jump To Cite 1 - [2006] NSWSC 222 Cite 2 - [2006] NSWSC 222
Watson v Foxman	View on:NSWLR(1995) 49 NSWLR 315	2 citations Jump To Cite 1 - (1995) 49 NSWLR 315 Cite 2 - (1995) 49 NSWLR 315
Weinberg v Mervis	(1953) (3) SA 863	1 citation Jump To Cite 1 - (1953) (3) SA 863
Whillans v Ashcoast Pty. Ltd.	[2000] 2 Qd R 1; [1998] QCA 34	3 citations Jump To Cite 1 - [2000] 2 Qd R 1 Cite 2 - [2000] 2 Qd R 1 Cite 3 - [2000] 2 Qd R 1

Cases Citing List of cases on Queensland Judgments citing this Judgment

Case Name	Full Citation	Frequency
Allen v Queensland Building and Construction Commission	[2023] QCATA 66	2 citations
Atlas People Pty Ltd v Carter Mills Hotels Pty Ltd	(2023) 3 QDCR 477; [2023] QDC 240	5 citations
Australian Timber Supplies Pty Ltd v Duncan Welsh	[2021] QSC 266	2 citations
Auto Parts Group Pty Ltd v Cooper	[2015] QSC 155	2 citations
City Fertility Sydney CBD Pty Ltd v Reims Investments Pty Ltd	[2025] QSC 210	5 citations
GBAR (Australia) Pty Ltd v Brown	[2017] 2 Qd R 256; [2016] QSC 234	7 citations
Kitchen v Vision Eye Institute Ltd	[2016] QCA 226	17 citations
Kitchen v Vision Eye Institute Ltd	[2017] QCA 32	1 citation
Lake v GBST Holdings Ltd	[2019] QSC 253	2 citations
LCR Group Pty Ltd v Bell	[2016] QSC 130	1 citation
Leaver v Leaver	[2023] QDC 179	2 citations
Legal Services Commissioner v Leneham	[2016] QCAT 314	1 citation
Prowealth Corporation Pty Ltd v Property Investment Advisory Pty Ltd	[2022] QDC 257	2 citations
Vision Eye Institute Ltd v Kitchen (No 2)	[2015] QSC 66	2 citations
Vision Eye Institute Ltd v Kitchen (No 3)	[2015] QSC 164	2 citations

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Vision Eye Institute Ltd v Kitchen[2014] QSC 260