Supreme Court New South Wales Medium Neutral Citation: Ortho Group (NSW) Pty Limited -v- John Meredith Harrison [2012] NSWSC 915 Hearing dates: 6 August 2012 Decision date: 06 August 2012 Jurisdiction: Equity Division - Commercial List Before: Hammerschlag J Decision: Plaintiffs' claim dismissed. Plaintiff to pay the defendants' costs of the proceedings Catchwords: CONTRACT - Construction - where Services Agreement contains provisions clear and unambiguous in their meaning - effect must be given to that meaning - EQUITY - Rectification of contract - necessity for party seeking rectification to establish actual subjective intention Cases Cited: Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1 McCourt v Cranston [2012] WASCA 60 Victoria Murray Goulburn Co-operative Co Ltd v Cobram Laundry Service Pty Ltd [2001] VSCA 57 Ryledar Pty Ltd v Euphoric (2007) 69 NSWLR 603 Category: Principal judgment Parties: Ortho Group (NSW) Pty Limited - First Defendant Ortho Group Pty Limited - Second Plaintiff John Meredith Harrison - First Defendant Peter Campbell Gray - Second Defendant David Duckworth - Third Defendant Ali Cemal Gursel - Fourth Defendant Roderick Stephen Kuo - Fifth Defendant Representation: G. Lucarelli - Plaintiffs C.R.C. Newlinds SC with D.F.C. Thomas - Defendants Sparke Helmore Lawyers - Plaintiffs Landerer & Company - Defendants File Number(s): 2012/133918 EX TEMPORE Judgment 1HIS HONOUR: These are proceedings in which the plaintiffs claim declarations as to the proper construction of written Service Agreements between them and the defendants and, in the alternative, rectification. 2The five defendants are orthopaedic surgeons. As part of a larger group of surgeons, they became associated with the second plaintiff in the promotion of an enterprise which, broadly speaking, involved the second plaintiff acquiring the surgeons' medical practices and associated assets with a view to the combined businesses growing (organically or by acquisition), and thereafter being sold or shares in the second plaintiff being listed on the stock exchange. The surgeons acquired shares in the second plaintiff as part of the enterprise. 3The first plaintiff, the New South Wales operating subsidiary of the second plaintiff, was the vehicle for the acquisition. For present purposes, however, it plays no relevant role. Where I refer to the plaintiff this will be a reference, unless the context otherwise indicates, to the second plaintiff. 4The founding transaction documents for the enterprise comprise principally a Shareholders Deed dated 9 October 2006, an Asset Purchase Agreement (Acquisition Agreement) with each surgeon under which he or she sold his or her practice to the plaintiff, and a Service Agreement with each surgeon under which he or she was engaged by the plaintiff to provide professional orthopaedic services. In the case of the defendants, each entered into an Acquisition Agreement and a Service Agreement on 20 November 2007. 5Under each Service Agreement, the relevant defendant (defined in it as the Doctor) was engaged for an Initial Term (as defined) commencing on the Commencement Date (as defined) until the earlier of a Sale or Listing and the fourth anniversary of the Completion Date (as defined). 6The Shareholders Deed contained an acknowledgement by the surgeons that the continued provision of their services would be the key to the valuation achieved on the Sale or Listing and that in the event of a Sale or Listing prior to the expiry of the Initial Term, the plaintiff and the surgeons would enter into a new Service Agreement or extend the term of the Service Agreement for four years from the Sale or Listing or for such other agreed period. 7Clause 1.1 of the Service Agreement includes the following definitions: Acquisition Agreement is defined to mean the Asset Purchase Agreement in Agreed Form between the Doctor, the company OGL and others dated on or about the date of this Agreement. Commencement date means the date of completion under the Acquisition Agreement. Completion date has the meaning given to it in the Acquisition Agreement. Engagement means the engagement of the Doctor by the company pursuant to this agreement. Initial Term has the meaning given to it in cl 3.1. Term means the initial term and any extension of the initial term under cl 3. Termination Date is the date upon which the Engagement terminates for whatever reason 8Clause 3 of the Service Agreement is in the following terms: 3. Term of Engagement 3.1 Subject to clause 3.2 the engagement will commence on the commencement date and will continue until the earlier of a sale or listing and the fourth anniversary of the completion date (the initial term) unless terminated earlier in accordance with this Agreement. 3.2 In the event of a sale or listing prior to the expiry of the initial term, the company and the Doctor will: (a) enter into a new Service Agreement on terms that are substantially the same and no less favourable to the Doctor than those applying to the Doctor under this Agreement immediately preceding the Sale or Listing as the case may be; or (b) extend the term of this Agreement, for a period of 4 years commencing on the date of the Sale or Listing. 9Clauses 12.1(a) and (b) of the Service Agreement contain covenants by the Doctor in restraint of trade. Under those provisions, the Doctor may not, for the Term and for a Restraint Period from the Termination Date (cascading from 12 months through 6 months to 3 months), participate in defined restricted activities. 10Clause 12.9 of the Service Agreement provides as follows: The Doctor may terminate the engagement by giving twelve months notice in writing to the Company provided that such notice may not be given during the first four years after the completion date. If the Doctor serves a notice pursuant to this clause 12.9 the Company may at its sole discretion elect that the provisions of clause 12.1(a) and (b) will not apply to the Doctor at the end of the notice period in lieu of the Doctor working the restraint period of twelve months. 11Completion Date is defined in cl 1.1 of the Acquisition Agreement to mean: (a) the date of this agreement; or (b) any other date that the purchaser and the seller agree in writing; or (c) any date to which completion is deferred under clause 8.6. 12As stated earlier, the Acquisition Agreement is dated 20 November 2007. The parties did not agree to any other date and completion was not deferred. It is thus common cause that the Completion Date was 20 November 2007. 13Towards the end of 2008 there occurred the period of turbulence on international financial markets which became known as the Global Financial Crisis or GFC. The plans for the Listing or Sale had to be shelved. 14As may be readily observed, cl 3 of the Service Agreement had the effect that if no Sale or Listing occurred before the fourth anniversary of the Completion Date, the Engagement would have then terminated, that is, on 20 November 2011. 15Against this background the plaintiff sought the surgeons' agreement to extend the Service Agreement. 16On 14 March 2009, the plaintiff convened a meeting of the general body of surgeons at the Four Seasons Hotel in George Street, Sydney at which it put a proposal for extension. Of the defendants, all except Dr Gray were present. The proposal was overwhelmingly, albeit not unanimously, approved. 17Following upon this, on 21 May 2009 the plaintiff wrote to the surgeons as follows: Ortho Group - increase in remuneration and extension of term At the general meeting of Ortho Group Pty Ltd (OGL) on 14 March 2009, we discussed certain changes to the way we will organise our business going forward. We would like to propose certain changes that would clarify the term of engagement for all doctors and implement the increased remuneration model. Specifically, our proposal would include the following: 1. Service Agreement - proposed changes (a) Each Doctor's service agreement would run for a period of six years from 1 July 2009, except if the circumstances described in paragraph 2(b) apply. In the case of a Younger Doctor, the Doctor's Service Agreement would run for a period of six years following the exercise by that Doctor of a Second Buy-Out right. The provisions of paragraph 2(b) would also apply to a Younger Doctor. (b) the base salary payable will be the same as under the current arrangements except that the remuneration will increase to 65% of EBIT 72 months (6 years) after a Doctor originally joined OGL. (c) If a sale or listing occurs at any time and the Doctor is at least 60 years old at such time, the Doctor and OGL agree to re-negotiate in good faith the Doctor's EBIT level and salary. Any such renegotiation would not alter a Doctor's Good Leaver status. There would not be a renegotiation of EBIT and salary levels solely as a consequence of a recapitalisation of the Company within 18 months of 1 July 2009. If not all OGL Doctors agree to extend their service agreements, a mechanism will be introduced to realign equity commensurate with the value of the extended service agreements. 2. OGL shareholders agreement - proposed changes We will clarify in the OGL shareholders agreement that: (a) a "compliance" listing will not be a listing for the purpose of the OGL shareholders agreement, and that if a listing or sale of OGL is not implemented within 6 years, Doctors will not be subject to any restraints from OGL and will be free to leave the OGL network. (b) if a listing or sale occurs within the period 1 July 2011 to 1 July 2013, each doctor must extend his service agreement term for a period of 4 years commencing on the date of listing or sale provided that such extension of term is approved by OGL and at least 75% of the Doctors; and (c) all shareholders agree to use their best endeavours to procure that a recapitalisation of OGL occurs within a period of 18 months from 1 July 2009. The purpose of this letter is to set out the changes necessary to your existing Service Agreement. Those changes are attached to this letter. Separately we will write to you regarding the relevant tidy up changes to the OGL shareholder agreement (to ensure that agreement is consistent with these changes). Please sign and return this letter to Ms Lisa Brown by Friday 5 June 2009 to indicate you acceptance of the above arrangements and the changes to your existing Service Agreement attached to this letter Yours sincerely Lisa Brown David Wood Director Director Ortho Group Pty Limited Ortho Group Pty Limited Ortho Group (NSW) Pty Limited Ortho Group (NSW) Pty Limited + 61 2 8436 2405 + 61 2 8436 2405 lbrown@ogl.net.au dwood@ogl.net.au Signed by the doctor: In the presence of: ______________________ _____________________ Name of doctor: Name of Witness: 18Enclosed with the letter was a document in the following terms: Change to your existing Service Agreement Under the varied Service Agreement, OGL will engage you to provide your medical services on substantially the same terms as your existing Service Agreement. We set out the specific changes to your existing Service Agreement as follows: 1 In clause 1.1: remove the definition of 'Commencement Date' and replace as follows: "Commencement Date means 1 July 2009" 2. Remove clause 3.1 and replace as follows: 3.1 Subject to clause 3.2, the Engagement will commence on the Commencement Date and will continue until the sixth anniversary of the Commencement Date (the Initial Term), unless terminated earlier in accordance with this Agreement. 3. Remove clause 3.2 and replace as follows: 3.2 If a Listing or Sale occurs within the period 1 July 2011 to 1 July 2013, the Doctor and the Company must extend the term of this Agreement for a period of 4 years commencing on the date of Listing or Sale provided that such extension of term Is approved by OGL and at least 75% of the Doctors. The term 'Doctors' has the meaning given in the Shareholders Deed. 4. Clause 7.5 will be subject to a new clause 7.5AA, and a new clause 7.5AA will be inserted as follows: 7.5AA Notwithstanding any other provision of this clause 7, the Base Salary will increase to 65% Sold EBIT 72 months (6 years) after the Doctor commenced providing services to the Company (including service provided before the variation of this Agreement), and from this point onwards, clause 7.5 will cease to apply. 5. Insert a new clause 7.9 as follows: If a listing or Sale occurs at any time after the Commencement Date and the Doctor is at least 60 years old at such time, the Doctor and the Company agree to re-negotiate in good faith the Doctor's Sold EBIT and Base Salary to levels that are acceptable to both parties. There will not be a renegotiation solely as a result of a recapitalisation of the Company which occurs within 18 months of 1 July 2009 19Within the period specified in the letter, each of the defendants signed it and returned it, signifying acceptance to the changes to the Service Agreement. 20On 8 March 2012, each of the defendants gave twelve months' notice of his intention to terminate the Engagement under the applicable Service Agreement. The form of the notice (using that given by the first defendant, Dr Harrison) was as follows: Service agreement (the "Agreement") between Ortho Group (NSW) Pty Limited, Ortho Group Pty Limited and Dr John Meredith Harrison dated 20 November 2007 as varied by letter agreement date on or about 25 May 2009. Dr John Meredith Harrison wishes to exercise his right under clause 12.9 of the Agreement and hereby gives notice of termination of the Engagement to Ortho Group (NSW) Pty Limited pursuant to clause 12.9 of the Agreement. Defined expressions used in this notice and not otherwise defined in this notice shall have the same meaning as given to them in the Agreement, Dated the 8th day of March 2012. 21Completion Date is defined in the Service Agreement to have the meaning given to it in the Acquisition Agreement which in turn defines it to mean, relevantly, the date of that agreement, namely 20 November 2007. Nevertheless, the plaintiff puts that under clause 12.9, as properly construed in the events that have occurred, the right to terminate the Engagement provided for in it has not yet arisen, despite more than four years having passed since the Completion Date. 22The plaintiff puts that where the words of cl 12.9 refer to "the first four years of the Completion Date" on their proper construction as a consequence of the change to the terms of the Service Agreement, they now mean "during the first six years after the Commencement Date". The plaintiff seeks a declaration that this is the meaning to be attributed to the provision. 23If this is correct no entitlement to terminate the Engagement will arise under cl 12.9 until after 1 July 2015. 24In the alternative, the plaintiff claims an order rectifying cl 12.9 so as to have that effect. 25Both contentions are unsustainable. 26As to construction, where words used in a written contract are unambiguous, the Court must give effect to them. Where there is no ambiguity, evidence of surrounding circumstances known to the parties or of the purpose or object of the transaction is not admissible. Absent ambiguity, there is no scope for the Court to attribute a different meaning to plain words even if to do so would give the contract a more commercial and business-like operation: see Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55]; Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1; McCourt v Cranston [2012] WASCA 60. 27The clear and unambiguous meaning of the words used in cl 12.9 is that the Doctor may terminate by giving twelve months' notice but he may not give it during the first four years after the Completion Date, a defined term with a specific meaning which fixes the date at 20 November 2007. There is no way in which the words of cl 12.9 are susceptible of being read as the plaintiff suggests. 28The defined terms Commencement Date and Completion Date are not interchangeable. No amendment to the definition of Completion Date was effected when the parties varied the Service Agreement in 2009. Completion Date can be one of a number of dates, including the date of the Acquisition Agreement. Commencement Date means only the date of completion under the Acquisition Agreement. 29In support of its submission that cl 12.9 should be read as it contends, the plaintiff relied on the decision of the Court of Appeal of Victoria in Murray Goulburn Co-operative Co Ltd v Cobram Laundry Service Pty Ltd [2001] VSCA 57. 30There, a clause (cl 6) in a written contract for the supply of uniforms, laundry and associated services specified the contract period as "PERIOD 4 November 1996 - 3 November 1999". Another clause (cl 7) provided that "Supply shall continue under this contract for an initial period of three (3) years from the date the items are first supplied to the Cobram Plant and shall continue thereafter until three (3) months after written notice of termination has been given by either party". In March 1998, the parties amended the contract by letter altering the period in cl 6 to read "4 November 1996 - 3 November 2002". In December 1999, the appellant purported to terminate the agreement with effect from 28 April 2000 which the respondent treated as a repudiation. The appellant claimed it was entitled to terminate the agreement under cl 7 on the basis that the initial period was to November 1999. The respondent claimed that the initial period in cl 7 was by necessary inference extended to coincide with the new period in cl 6. The Court found that the parties intended cl 6 (as amended), and not cl 7, to prescribe the contract period. 31The facts there are distinguishable from those here. There, the initial term of the agreement was undoubtedly intended to mean the period of the agreement in its initial term and when the parties extended it beyond what was the initial term, it was hardly gainsayable that the period of the agreement was the period so extended. 32That is not this case. The Service Agreement contains specific provisions with specific meanings. Clause 12.9 can and does work congruently with the agreement as a whole. There is no absurdity, commercial or otherwise, in cl 12.9 having operation according to its terms notwithstanding the agreement of the parties otherwise to extend its operation. 33I turn then to rectification. 34What is necessary for rectification of a document is a common intention of the parties that continues to the time of execution of the document in question. It is not sufficient to show that a written instrument does not represent the common intention of the parties. It must be shown what their common intention was. The intention concerned is the parties' subjective or actual intention: Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at 655, [258]-[261] and [267] and following per Campbell JA. 35The plaintiff puts that the parties had a general and overarching common intention that upon variation of the Service Agreement in May 2009 all its provisions would, mutatis mutandis, operate as if the Service Agreement had first been entered into on 1 July 2009 for an Initial Term being from that date to the earlier of a Sale or Listing or the sixth anniversary of the new Commencement Date. It puts that the common intention was that the Initial Term under cl 3.1 would be until the earlier of a Sale or Listing and the sixth anniversary of the new commencement date and notice under cl 12.9 could not be given during the first six years after 1 July 2009, that is until 1 July 2015. It puts that the defendants were aware that they were binding themselves to a further period of employment and that in return they were issued certain shares. 36The intention which the plaintiff urges the Court to find was present is in effect one that the Service Agreement would be extended and that the defendants would, by that extension, forego any right under cl 12.9 to terminate giving 12 months' notice with the consequences for which cl 12.9 provides, until six years had elapsed from the new Commencement Date. 37The plaintiff's evidence falls far short of establishing any subjective intention that cl 12.9 was after the extension, to operate any differently than in the manner, in which, on its clear wording, it does. 38No party applied its mind to cl 12.9 in the context of the variation to the Service Agreement. There is no evidence which establishes the existence of any subjective intention as to how cl 12.9 was to operate let alone any intention that it was intended to operate differently from the way in which it does in the form in which it appears. 39Statements of general intention, including such statements said to be attributed to the defendants in general correspondence that the period of their employment was to be extended, fall far short of establishing any subjective intention on the part of any party to the transaction that cl 12.9 would operate as the plaintiff would have it operate. 40The variation agreement improved the value of the potential enterprise, whether or not cl 12.9 was present. There is in my opinion no inconsistency between the operation of cl 12.9 and the Service Agreement as extended. 41It is to be observed that the amendments which the defendants were asked to, and which they did, execute were proffered under a covering letter, were carefully prepared, had regard to other provisions of the Agreement, and varied cll 3.1, 3.2, 7.5 and 7.9 of the Service Agreements, some of which had references to the definition of Commencement Date which itself was varied. 42Far from being satisfied that there was any intention divergent from that reflected in the written agreement, I would be prepared to infer that there was an intention on the part of the defendants that the only amendments to the Service Agreement were to be those which were expressly provided for in the document which was circulated to them and acceded to. 43In these circumstances the proceedings are to be dismissed and I so order. 44The plaintiffs are to pay the defendants' costs of the proceedings. ********** Amendments 14 August 2012 - Paragraph 14 dated changed to 20 November 2011.Paragraph 19 the word "Doctors" amended to "defendants" Amended paragraphs: 14 & 19 14 August 2012 - Paragraph 14 - date amended to 20 November 2011Paragraph 19 - word "Doctors" amended to "defendants" Amended paragraphs: Paragraphs 14 & 19 14 August 2012 - Deletion of last sentence of the quote Amended paragraphs: 10 14 August 2012 - DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 August 2012