Dr Praneal Dutt Sharma v Dr Phillip Segal and Dr Greg Chen

1. [1]

   HIS HONOUR: Doctors Praneal Sharma, Phillip Segal and Gregory Chen are specialist radiologists. For some years, they have operated three radiology clinics in south-west Sydney. They have fallen out. They are in dispute about the terms on which their association must be dissolved.

2. [2]

   The doctors hold their interests in the clinics through a unit trust of which the fifth defendant (the Company) is the trustee. The sixth and seventh defendants are other corporate vehicles of the parties, but they play no meaningful role here. Each of the Sharma and Segal interests hold 960 (or 40%) of the units and the Chen interests hold the remaining 20%. The shares in the Company are owned and controlled in the same proportions. Where I refer to a doctor by name, I include his interests.

3. [3]

   Drs Sharma and Segal were in association for some years before Dr Chen joined them in 2013. The commercial relationship between them is governed by an instrument styled Deed of Agreement Commercial Arrangements dated 18 April 2013 (the Agreement). It contains provisions regulating what is to occur when their association is determined.

4. [4]

   The Agreement provides for, and describes, three types of “determination” namely, forced determination, agreed determination and discretionary determination. The consequences of each differ. Forced determination has not occurred. The parties are agreed that there has been a determination, but they are in dispute whether it is an agreed determination or a discretionary determination.

5. [5]

   If it is an agreed determination, the business is to be sold and the proceeds distributed to the parties via the trust. If it is a discretionary determination, there is provision for a buyout at a fixed price.

6. [6]

   Dr Sharma contends that there has been a discretionary determination and that the others must to buy him out for $1.4 million. Drs Segal and Chen contend that there has been an agreed determination, and that the business must be sold.

7. [7]

   The only issue is which type of determination it is.

The material terms of the Agreement

1. [8]

   Clause 5 of the Agreement provides:

The end of the commercial relationship

1. [9]

   By 30 June 2016, the relationship between Dr Chen on the one hand, and Drs Sharma and Segal on the other, had soured. On that date, Dr Chen’s lawyers (Booth Boorman & Kiely or BBK) gave notice that Dr Chen resigned as a director of the Company. From about that time, Dr Chen ceased to practice medicine in association with Drs Sharma and Segal. Matters did not end there.

2. [10]

   An exchange of correspondence between the doctors (through their lawyers) ensued. Relevant extracts are set out below.

3. [11]

   On 29 July 2016, Dr Sharma’s solicitors (Carneys Lawyers) wrote to Drs Segal and Chen:

4. [12]

   On 11 August 2016, Dr Segal’s solicitors (Clayton Utz) wrote to Drs Sharma and Chen and their lawyers:

5. [13]

   On 18 August 2016, Dr Chen’s solicitors wrote to Dr Sharma’s solicitors and Dr Segal’s solicitors, asserting breaches and repudiation of the Agreement by Drs Sharma and Segal. Dr Chen alleged, amongst others, that he had been underpaid in relation to radiology sessions, had not been simultaneously appointed a director of the company and had been denied dividends and or profits. The letter concluded as follows:

6. [14]

   On 30 August 2016, Dr Sharma’s solicitors wrote a long letter to Dr Chen’s solicitors and Dr Segal’s solicitors. Relevantly, they said:

7. [15]

   On 8 September 2016, Dr Sharma’s solicitors wrote to Dr Segal’s solicitors:

8. [16]

   On 14 September 2016, Dr Sharma’s solicitors wrote to Dr Chen’s solicitors and Dr Segal’s solicitors expressing amongst others objection to the postponement of a proposed meeting between the parties.

9. [17]

   On 16 September 2016, Dr Chen’s solicitors wrote to Dr Sharma and Dr Segal’s solicitors repeating allegations of breach and responding to various aspects of earlier correspondence. Relevantly, they said:

10. [18]

    Also on 16 September 2016, Dr Segal’s solicitors responded to the allegations of breach by Dr Segal, and made claims of breach by Dr Sharma of his obligations under the Agreement and of his statutory and equitable obligations as a director of the Company. The letter concluded as follows:

11. [19]

    On 19 October 2016, the doctors met. Their lawyers were present. The meeting was agreed to be without prejudice. There is no evidence of what occurred at the meeting save that in an affidavit, Dr Sharma’s solicitor, Mr Carney, says that there was no agreement reached at the meeting between the doctors to proceed with an agreed determination for the purposes of the Agreement.

12. [20]

    On 28 October 2016, Dr Sharma’s solicitors wrote to Drs Segal and Chen relevantly:

13. [21]

    On 7 February 2017, Dr Segal’s solicitors wrote to the other doctors’ solicitors:

14. [22]

    Since 7 April 2017, Dr Sharma has not worked at the clinics. He has apparently had personal medical problems.

15. [23]

    On 19 June 2017, Dr Chen’s solicitors wrote to the other doctors’ solicitors:

Proceedings commence

1. [24]

   Dr Sharma initiated these proceedings on 28 October 2016 by suing out a Summons and accompanying Commercial List Statement claiming that there has been a discretionary determination and that Drs Segal and Chen are obliged to purchase his units and shares. In the alternative he sought a declaration that there has been an agreed determination. He also alleged and claimed relief for oppression. His Commercial List Statement described the dispute as a shareholder dispute.

2. [25]

   Drs Segal and Chen filed Commercial List Responses. Dr Chen filed a Cross Claim asserting, amongst others, that the Agreement is void or had been terminated by him, and seeking the winding up of the Company. Dr Segal filed a Cross Claim asserting an agreed determination, asserting oppression and claiming an order that he purchase the units and the shares held by the others at a price determined by the Court.

3. [26]

   On 14 February 2017, I ordered the parties to attend mediation and stood the matter over to 26 May 2017. Evidently, the mediation was unsuccessful.

Final hearing

1. [27]

   On 18 May 2017, Dr Sharma filed a motion seeking orders for the appointment of provisional liquidators to the Company on the grounds that it had become dysfunctional as a result of the breakdown of the doctors’ relationship. The motion came before me on 9 June 2017. I indicated to the parties that I considered that they would be better served by a final hearing on the merits rather than by the distraction of an application for an appointment of liquidators. There was no demur. I stood the matter over to 14 June 2017, and on that day fixed it for final hearing on 26 June 2017, and made directions to ensure that it would be ready for hearing.

2. [28]

   Dr Sharma’s position was then (as it is now) that there has been a discretionary determination. Dr Segal’s position was then (as it is now) that there has been an agreed determination. Dr Chen, however, was still motivating other claims and was not prepared to commit to a firm position on either form of determination. However, shortly before the hearing, he abandoned all other claims. But he did not until the morning of the hearing commit to a firm position on the form of determination. On the morning of the hearing, he took the position of supporting Dr Segal without equivocation.

3. [29]

   Hence, as I have said earlier, the only issue is the binary one of whether the determination that has occurred is agreed or discretionary. The only substantive relief sought is a declaration as to which it is.

4. [30]

   The Court had the benefit of written and oral argument.

5. [31]

   Mr S. A. Lawrance of counsel appeared for Dr Sharma, Mr M. Izzo of counsel appeared for Dr Segal and Mr A. Hourigan of counsel appeared for Dr Chen.

6. [32]

   The argument for discretionary determination can be distilled into the following essential propositions:

7. [33]

   The argument for agreed determination can be distilled into the following essential propositions:

8. [34]

   For the reasons which follow the determination which has occurred is an agreed determination, not a discretionary determination.

9. [35]

   Which it is, is a question involving the proper construction of the Agreement as it applies to the events which have occurred.

10. [36]

    The Agreement is a commercial contract and is to be given a business-like interpretation. Interpreting it requires attention to the language used by the parties, the commercial circumstances which it addresses and the objects which it is intended to secure. Reference must be had to its entire text, context and purpose. It is to be construed so as to avoid making commercial nonsense or working commercial inconvenience. Preference is given to a construction supplying a congruent operation to the various components of the whole; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 117.

11. [37]

    The construction contended for by Drs Segal and Chen accords both with the language used by the parties and the commercial objects the Agreement is intended to secure. Dr Sharma’s contended construction, on the other hand, accords with neither. The construction contended for by Drs Segal and Chen gives congruent operation to the provisions of the Agreement as a whole. Dr Sharma’s construction works commercial inconvenience.

12. [38]

    Clause 5.11 does at least two things. First, it gives clear insight into how the parties intended the Agreement to operate and second, it defines the three types of determination which the Agreement contemplates might occur.

13. [39]

    Discretionary determination is defined as one which is “due to a breakdown in the commercial relationship, but one or more of the doctors wish to continue to utilise the Property and the Facilities” [emphasis added]. On the plain words of the definition, it is an element of such a determination that one or more of the doctors wish to stay on. On no view of the facts is that element present here. Hence, the determination cannot be a discretionary one.

14. [40]

    The motives respectively of Drs Segal and Chen for not wishing to continue are irrelevant. From at the latest 18 August 2016, each has taken (and maintains) the unequivocal position that he no longer wishes to work at the Property or utilise it and the Facilities. Dr Segal has said so in terms. Dr Chen resigned as a director, maintained that the Agreement was void or had been terminated and stopped working at the clinics. He also stated that the commercial arrangements were no longer viable with him.

15. [41]

    Under cl 5.11.3, a discretionary determination includes the circumstances described in cls 5.8, 5.9.1 and 5.9.2. The common feature is that one or more doctors wish to stay.

16. [42]

    Agreed determination is defined as one where the arrangements are no longer viable. That definition is satisfied on the facts here. None of the doctors wish to be part of them anymore. They are thus no longer viable.

17. [43]

    That the determination is an agreed one sits comfortably with the way cl 5 operates as a whole.

18. [44]

    The specific arrangements which apply after a determination vary depending on which kind of determination occurs. The applicable arrangements have a clear commercial congruity with the type of determination.

19. [45]

    Upon a forced determination, that is, one due to an unfortunate event (death or permanent physical or mental disablement) the units of the deceased or disabled doctor are sold for a consideration based on the price paid by Dr Chen, provided the forced determination occurs within seven years after the date of the Agreement (and presumably for a reasonable price otherwise assessed after that). In other words, the remaining doctors buy the deceased or disabled doctor’s interest for its value (assumed for a period of seven years to be what Dr Chen paid).

20. [46]

    Where the determination is discretionary, that is, where one or more doctors choose to go and one or more choose to stay, those remaining get the opportunity to buy the interest of those departing at a discount to the price originally paid by Dr Chen.

21. [47]

    Where all depart, because the arrangements are no longer viable, the business is sold and they share in the proceeds in accordance with their interests.

22. [48]

    Dr Sharma’s construction has the consequence that although the other doctors do not wish to stay, they must nevertheless buy Dr Sharma’s interest. His construction gives him, in effect a put option with respect to his interest, because he gave notice first. I consider this result to be inimical to the commercial rationale underlying the Agreement and to work commercial inconvenience.

23. [49]

    Clause 5.9.5 cannot sensibly be read or understood to require consensus ad idem, that is, a synchronised meeting of the minds of all three doctors. It merely requires each to have taken the described position. Where a doctor has given notice under 5.9.2, that doctor has already taken the described position. There is no rational reason why he should be required to take it again. A requirement for consensus ad idem also does not sit with the words of cl 5.9.5 because it would nonsensically require one person to agree that another no longer wishes to work at the Property. Added to this, on the construction contended for by Dr Sharma, a tripartite consensus is required. This would leave open the possibility that one doctor could give notice under cl 5.9.2, the others could then agree that the commercial arrangements ought to be determined and that they no longer wish to work at the Property, but the first doctor could take the position that he does not agree, thereby thwarting an agreed determination. This is inimical to the objects which the Agreement is intended to secure.

24. [50]

    Cl 5.14 is infelicitously drafted. Under cl 5.14.1 a meeting is to take place within three months of the date of the discretionary determination. This is clearly a reference to the date that notice is given, albeit that the discretionary determination may not ultimately eventuate. Under cl 5.14.2, whoever wishes no longer to be part of the commercial arrangements must resign and sell their shares and units to those who wish to remain within one month from the date that the discretionary determination occurs. The reference to one month after the discretionary determination occurs must be erroneous. It would be absurd to require the sale to take place before the meeting. What must have been contemplated is a sale one month after the meeting, provided by the meeting someone wishes to buy.

25. [51]

    The machinery of cl 5 works congruently in the following way. Once a discretionary determination is initially triggered, there must be a meeting. If some wish to stay, they buy the shares and units of those wishing to go. They in effect get the option of purchasing the departing party’s shares at a fixed price. If nobody wishes to stay there is clearly agreement by each that the commercial arrangements ought to be determined and that they no longer wish to work at the Property. An agreed determination results. That is this case.

26. [52]

    I record that the evidence does not establish that the meeting which occurred met the requirements of clauses 5.14.1 and 5.14.2. I doubt that it did, given its without prejudice status. It is nevertheless clear that each doctor has agreed that the commercial arrangements ought to be determined and that he no longer wishes to work at the Property.

27. [53]

    It must also follow from the facts that the parties agree that there has been a determination and that discretionary determination has not been established, that an agreed determination has occurred.

28. [54]

    Ironically, or perhaps not, the firm position taken by Dr Sharma on 30 August 2016 and 8 September 2016, that the parties had reached an agreed determination, is correct.

29. [55]

    The Court declares that there has been an agreed determination within the meaning of clauses 5.9.5, 5.10, 5.11.2 and 5.13 of the Deed of Agreement Commercial Arrangements dated 18 April 2013.

30. [56]

    The parties are to bring in Short Minutes disposing of the proceedings in accordance with this outcome.

31. [57]

    Should it be necessary, I will hear them on costs. The exhibits are to be returned.