FEDERAL COURT OF AUSTRALIA

Idoshore Pty Limited ACN 068 703 293 v IPN Medical Centres (NSW) Pty Limited ACN 093 560 448 [2007] FCA 2025

IDOSHORE PTY LIMITED ACN 068 703 293 v IPN MEDICAL CENTRES (NSW) PTY LIMITED ACN 093 560 448 AND ANOR

NSD1510 OF 2004

EMMETT J

29 OCTOBER 2007

SYDNEY

THE COURT ORDERS THAT:

1.                  In addition to the sums of $85,000.00 and $125,000.00 that the Court ordered the respondents and each of them pay to the applicant on 7 August 2007, the respondents and each of them pay to the applicant the sum of:

(a)        $98,489.02, being pre-judgment interest on the sums which the court ordered the respondents to pay to the applicant on 7 August 2007;

(b)        $220,579.00, being the “adjustment upwards” referred to in Declaration 1 of the Court made on 7 August 2007; and

(c)        $11,226.21, being pre-judgment interest calculated to 2 November 2007 on the sum in 1 (b).

2.                  The respondents pay the applicant’s costs of the proceeding up to and including 30 May 2005 on a party and party basis.

3.                  The respondents pay all reasonable costs of the applicant of the proceeding reasonably incurred after 30 May 2005 up to and including 7 August 2007.

4.                  The respondents pay the applicant’s costs of the proceedings after 7 August 2007 on a party and party basis.

5.                  The applicant pay the respondents’ costs thrown away by the amendment to the statement of claim in march 2006 and the respondents’ costs thrown away by the vacation of the hearing dates by order of the Court on 3 March 2006.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     On 7 August 2007, for reasons that his Honour delivered on that day, Conti J made orders including a declaration that:

“upon the true construction of the Business Sale & Purchase Agreement bearing date 14 December 2000 (the Agreement), made between the parties to the proceeding, and in the events that subsequently happened, the respondents, IPN Medical Centres (NSW) Pty Limited and IPN Healthcare Pty Limited (Foundation), are severally liable to pay to the applicant an adjustment upwards to the purchase price pursuant to subclause 3.3(a) of that Agreement to the extent appearing in the reasons for judgment of the Court.”

2                     His Honour had originally directed that the parties provide written submissions as to adjustment upward referred to in the declaration, but his Honour’s compulsory retirement under the Constitution intervened.  However, before retiring, his Honour ordered that that question be determined separately from and after the other questions in the proceeding that his Honour had already determined. 

3                     The adjustment upward referred to in the declaration was addressed by his Honour at paragraph [164] of his Honour’s reasons.  In relation to the issue of the entitlement of the applicant, Idoshore Pty Ltd (Idoshore), to an upward adjustment to the purchase price, his Honour indicated his view that the lower assessment of quantum of damages made by Mr Christopher Phillips of Deloitte Touche Tohmatsu was “soundly conceived in principle”.  However, his Honour considered that any quantification of damages must have regard to his Honour’s further findings that:

(i)         the pre-contractual representations and collateral warranties pleaded were not promissory in nature nor otherwise went to the root of the contract; and

(ii)        there was no viable cause of action in law for the recovery of moneys by Idoshore from the respondents directly or indirectly referrable to any conduct of the respondents regarding the so-called “Loss of Billings for Grech” and consequential loss.

4                     His Honour said that the calculation of loss and damage proposed by Idoshore required revision downwards in order to accommodate those findings.  The calculation to which his Honour was referring is contained in paragraph [105] of his Honour’s reasons, in which his Honour set out comparative figures concerning the appropriate approach to the assessment of damages.  In order to put the matter in context, it is necessary to say something about the terms of the Agreement under consideration by his Honour.

5                     By the Agreement, Idoshore agreed to sell and the respondents agreed to purchase the Business, as described, for the purchase price, as defined.  The Business consisted of the provision by Idoshore of premises and related facilities for medical practitioners, in return for which the medical practitioners would pay to Idoshore a proportion of their gross earnings, which varied between 40% and 50% of the gross earnings of each medical practitioner.  The purchase price was defined as 4.5 times the sum of $250,000 (defined as the EBITDA Benchmark) amounting to $1,125,000, plus consumables, less accrued entitlements. 

6                     However, clause 3.3(a) of the Agreement provided that the parties would calculate an adjustment to the purchase price.  The method for calculating the adjustment was to be 4.5 times an amount calculated by deducting the sum of $250,000 from the earnings before interest, tax, depreciation and amortisation determined in accordance with Australian Accounting Standards from time to time.  That figure was referred to as the EBITDA.  Mr Phillips provided a calculation of the adjustment.  Of necessity, that involved a determination of the earnings of the Business. 

7                     One of the medical practitioners was Dr Grech.  The arrangement between Dr Grech and Idoshore was that Dr Grech would pay 40% of his earnings.  However, Dr Grech ceased to utilise the Idoshore premises and facilities during the course of the relevant period.  The relevant period was from 1 February 2001 to 31 January 2002.  For reasons that were an issue in the proceeding, there were no figures available for the earnings of the Business for the whole of that period.  Nor were there particulars available of the earnings of Dr Grech during the period that he utilised Idoshore’s facilities and premises, which ended on 21 September 2001. 

8                     In his calculation, Mr Phillips assumed that Idoshore would be entitled to have Dr Grech’s prospective earnings brought into account for the purposes of calculating the adjustment to the purchase price.  The parties agree that, in the light of the conclusion reached by his Honour, that element should not have been taken into account.  The issue in the proceeding in respect of which his Honour made the declaration set out above, was Idoshore’s entitlement to the adjustment to the purchase price and the amount of the calculation of that adjustment.  His Honour indicated his preference for the lower figure calculated by Mr Phillips.  However, that figure was calculated after taking into account projected earnings from Dr Grech.  The parties were at issue as to how that figure should be adjusted to reflect his Honour’s conclusion that earnings for Dr Grech from the time when he left on 21 September 2001 should not have been brought to account. 

9                     After considerable dialogue, it emerged that the difference between the parties concerned the way in which the adjustment should recognise the fact that Dr Grech would be expected in the ordinary course, to have taken annual leave of four weeks per year.  The assumptions that were made included that Dr Grech would have worked only  on weekdays.  The number of weekdays in the period would normally be 261.  On the assumption that four weeks, or 20 weekdays, consisted of annual leave, the number of days worked would be 240. 

10                  The parties have made separate calculations of the adjustment, one on the assumption that Dr Grech had taken none of his leave before he left, the other on the assumption that Dr Grech had taken all of his leave before he left.  The evidence does not enable a determination one way or the other as to that question.  In all of the circumstances, it appears to me that the appropriate course would be to assume that leave was taken consistently during the year, such that the period from Dr Grech’s departure on 21 September 2001 to the end of the year on 31 January 2002 should be assumed to have been a period during which Dr Grech would have taken a pro rata part of his annual leave.  In round terms, that would mean 240 divided by 261, multiplied by 94.  The figure of 94 represents the number of working days from 21 September 2001 to 31 January 2002. 

11                  That figure comes to somewhere between 86 and 87.  The parties accept that, on the basis of the proposition of principle that I have just outlined, the figure that should be adopted would be 87.  That, as I understand it, resolves the question that was left outstanding by Conti J in the making of the declaration.  That figure of 87 having been arrived at, the parties are now in a position to calculate the appropriate adjustment to the purchase price in respect of which Idoshore is entitled to judgment against the respondents. 

12                  A further issue to be determined in the proceeding concerns the construction of a different provision of the Agreement.  Under the Agreement, 20% of the purchase price was to be deposited by way of Warranty Security Deposit as security for the possibility of breach of warranties by Idoshore.  Any interest accruing on the Warranty Security Deposit was to form part of the Warranty Security Deposit itself, and was to be dealt with in the same way as the Warranty Security Deposit.  That is to say, it was to be payable to the party entitled to the Warranty Security Deposit.  Clause 10.5(f) provided that, in the event that there were no breaches of warranty established, Idoshore was entitled to be paid the amount of the Warranty Security Deposit. 

13                  The amount of the Warranty Security Deposit was a total of $210,000 being sums of $85,000 and $125,000.  In the events that occurred, the Warranty Security Deposit should have been paid to Idoshore on 1 February 2004.  In the intervening period, interest accrued on the Warranty Security Deposit in the sum of $21,332.41.  Under the terms of clause 10.5(f), that amount of interest should form part of the Warranty Security Deposit and should have been paid to Idoshore by the respondents.  The amount was not paid to Idoshore because, in circumstances referred to in his Honour’s reasons, the deposit was withdrawn prior to 1 February 2004.  Had the respondents performed their obligations under the Agreement, Idoshore would have been entitled to receive the deposit of $210,000 plus $21,332.41 on 1 February 2004.  It has not received that amount.  In the orders made on 7 August 2007 his Honour provided that the respondents should pay to Idoshore a total of $210,000 being sums of $85,000 and $125,000.  His Honour left outstanding the question of the interest on that amount. 

14                  In my view, there should also be an order that the respondents pay to Idoshore the sum of $21,332.41, being the interest that would have been payable had it performed its obligations under the Agreement.  The amounts of $210,000 and $21,332.41 should have been paid to Idoshore on 1 February 2004.  Accordingly, it is appropriate that the respondents be ordered to pay interest pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act) from that day, until the date of judgment on those amounts. 

15                  However, the respondents raise a further question concerning the interest.  They point to what they say was unnecessary delay, on the part of Idoshore, in bringing this proceeding to trial.  I would be disposed to agree that there was unnecessary delay on Idoshore’s part.  It failed to comply with directions given by Conti J during 2005.  On 28 September 2005, his Honour ordered that the matter be fixed for hearing in March 2006.  However, in February 2006 Idoshore indicated that it wished to make fairly substantial amendments to its statement of claim and wished considerably more time within which to file its evidence.  The leading affidavit on which Idoshore relied, that of Mr O’Shanassy, was not filed until February 2006.  The expert evidence upon which it intended to rely, in the form of Mr Phillips’ report, was not available, at that stage.  Indeed it was not filed until some 12 months later, when the trial finally began in February 2007. 

16                  There were complaints during 2006 concerning the adequacy of the respondents’ discovery, following the amendments that were made pursuant to leave given by his Honour in March 2006.  Nevertheless, I am persuaded that, but for the defaults on the part of Idoshore, the proceeding more likely than not should have been ready to proceed on the date fixed for hearing in March 2006. 

17                  Delay is not ordinarily a reason for refusing the inclusion of interest on damages up to the date of judgment.  The rationale for such interest is that the wrongdoer has had the use of the claimant’s money.  The claimant has been without the use of the money and should be compensated accordingly.  On the other hand, the award of interest is discretionary and a delay can be relevant to the exercise of the discretion. 

18                  Unreasonable delay, in circumstances where the interest rate means that the defendant is unjustly left as the source of the claimant’s investment income may require some adjustment.  Idoshore seeks rates in accordance with the usual practice, being the rates normally ordered in the Supreme Court of New South Wales.  The respondents say that those rates exceed commercial interest rates.  However, there is no evidence before me as to that matter; nor have the respondents made any effort to adduce evidence to show that being ordered to pay interest at those rates would be an unfair burden.  It would have been open to the respondents to adduce evidence to show what use, if any, has been made of the money that ought to have been paid to Idoshore in February 2004.  They have not done so. 

19                  In the absence of any evidence of unfairness or injustice, I do not consider that there is any justification for departing from the order that would normally follow.  That is to say, that there should be included in the judgment, interest from the date on which payment should have been made, up to the date of judgment, at the rates prescribed by the Supreme Court of New South Wales. 

20                  The final question that remains to be determined is the question of costs.  As I have said, Idoshore made significant amendments to its statement of claim in March 2006.  It appears that the parties contemplated that the usual order would be made, namely, that the costs thrown away by the amendment be borne by the amending party.  However, no such order appears to have been made and Idoshore does not say anything in opposition to the making of that usual order.  It is appropriate, therefore, that Idoshore be ordered to pay the respondents’ costs thrown away by the amendment made in March 2006.  To the extent that costs were thrown away by the vacation of the dates fixed for hearing, Idoshore should also be ordered to pay those costs.  Whether there were costs thrown away and their quantum will be a matter for the taxing officer. 

21                  Idoshore also seeks a special order in relation to the costs of the proceeding.  It has been substantially successful in the proceeding, although there are some aspects in respect of which it was unsuccessful.  On the other hand, the respondents do not suggest that the trial was relevantly extended by reason of those issues. 

22                  Idoshore’s claim for a special order is based on an offer of compromise made by it, at an early stage in the conduct of the proceeding.  On 9 May 2005 Idoshore’s solicitors wrote to the respondents’ solicitors, making an offer of compromise in accordance with the provisions of Order 23 of the Federal Court Rules.  The offer of compromise was that Idoshore was prepared to accept damages in the sum of $385,000.  A covering letter indicated that that figure was arrived at, as follows:

(a)              $85,000, in respect of the Warranty Security Deposit.

(b)              $300,000, in respect of the adjustment in the purchase price.

23                  The result, as determined by Conti J, includes judgment for Idoshore, not only in respect of the sum of $85,000, but also in respect of the other figure of $125,000, to which I have already referred.  Thus, in relation to that question, Idoshore has been substantially successful, well in excess of the offer of compromise.  In relation to the figure for the adjustment in the purchase price, the result will be judgment in Idoshore’s favour in the sum of approximately $450,000.  That is well in excess of the figure that it indicated it was willing to accept by way of compromise.  

24                  The respondents’ response is that the proceeding was substantially amended in March 2006.  They say that, as at May 2005, no evidence had been filed by Idoshore indicating the basis of its claim.  In particular the detailed expert evidence from Mr Phillips was not filed until early 2007.  The respondents say that, therefore, it was reasonable, in the circumstances, for them not to accept the compromise offer and accordingly, the Court should order that costs be awarded on the usual basis. 

25                  However, it is clear from the statement of claim, as it was originally filed, that the matters in respect of which Idoshore has been successful were clearly raised and asserted in the statement of claim.  Paragraph 47 of the statement of claim asserted that it was a term of the agreement that the respondents agreed that, if the Business made an EBITDA greater than the benchmark EBITDA, it would pay Idoshore an additional amount as consideration for the purchase.  That is a clear reference to the provisions to which I have already referred. 

26                  Paragraph 29 of the statement of claim asserted that it was a further term of the Agreement that the respondents would manage the Business with a view to making a profit.  Paragraph 31 then alleged that, in breach of that term, the respondents failed to manage the Business with a view to making a profit.  While the allegation of the breach of the obligation to manage the Business so as to make a profit does not reflect precisely the language of the Agreement, and was, indeed, amended, the essence of the claim remained unchanged.  That is to say, it was clear enough to a reader of the statement of claim that Idoshore was complaining that, following the completion of the Agreement, it would have been entitled to an adjustment of the purchase price but that, because of the way in which the Business was conducted, it failed to achieve that payment. 

27                  The statement of claim in its original terms always claimed damages in the amount of $210,000 in respect of the Warranty Security Deposit.  The amendments made no real change to that claim. 

28                  Thus, it is clear, in my view, that it was always apparent from the statement of claim that Idoshore was making claims in respect of which ultimately it was successful before Conti J.  In all of the circumstances, it ought to have been clear to the respondents that an offer was being made that was in fact significantly more favourable to it than the judgment that in the event will be entered.  It is appropriate, therefore, to make a special order in respect of the costs. 

Associate:

Dated:         19 December 2007