Case Note: Breach of Contract and Liability for Loss of Expected Benefit


: In this case, the Queensland Supreme Court held that a dentist, who had been lawfully terminated for allegedly sexually harassing a dental assistant, was liable to compensate his former employer for the loss of opportunity to profit from his services.

COMMERCIAL CONTRACTING – LIABILITY FOR BREACH through inappropriate conduct.

Maven Dental Group Pty Ltd v S & M England Pty Ltd and others [2018] QSC 220

Introduction

The case before the Supreme Court of Queensland arose following the termination of a facilities and administrative services agreement (FASA) between the plaintiff Maven Dental Group Pty Ltd (Maven) and the defendant dentist (Dr England). The FASA had been entered into in addition to a business purchase agreement (BPA) for the sale of Dr England’s dental practice business. The first and third defendants were corporations of which Dr England was the sole director and member. The termination of the FASA followed alleged improper conduct engaged in by Dr England in relation to an employee of the practice. Following the termination, Maven claimed damages for loss of Dr England’s working capacity based on the indemnities in both agreements.

Ultimately, the Court found Dr England and the other defendants liable for contractual damages of $1,446,453.23 under the indemnity, based on the loss of Dr England’s services following valid termination of the FASA by Maven in response to Dr England’s conduct.

Facts

Dr England and a colleague had over many years built up a substantial dental practice in Cairns. Dr England was an experienced dentist and orthodontist.

In 2015, Dr England and his colleague sold the practice as a going concern to Maven under the BPA. Maven paid about $2.8 million to acquire the interest of Dr England and his corporate entities in the dental business. Each dentist entered a separate facilities and administrative services agreement with Maven to set out the conditions for their ongoing work in the practice, which in Dr England’s case was agreed to continue for six years.

The FASA included a right for Maven to terminate in the event of a breach of contract by Dr England (clause 11.2):

“Company may terminate – Breach termination.

The company may terminate this Agreement immediately by Notice to Practice Entity on the happening of any of the following events:

(b) in the reasonably held opinion of the Company the Practice Entity has committed an act which if true would, in the opinion of the company, adversely affect the reputation or business of the company conducted from the premises; or

(c) Practice Entity is guilty of any wilful negligent or misconduct;…”

A few months later, Maven became aware of allegations that Dr England had sexually harassed a female dental assistant working in the practice. Following an internal investigation, Maven concluded that the allegations were true. It informed Dr England that he had committed an act that would adversely affect the reputation of the company and/or constituted misconduct, and terminated the FASA accordingly.

Maven subsequently considered that it had suffered and continued to suffer consequential losses due to Dr England’s absence from the practice for the remaining about five years and seven months of the term of the FASA. A different dentist subsequently recruited as replacement proved to generate much lower billings than would have been expected from Dr England. Maven therefore sought damages from Dr England and the other defendants under a contractual indemnity.

Issues

On trial, the issues were narrowed to the following:

  • Was there a lawful termination of the FASA, which depended on whether the alleged sexual harassment engaged clauses 11.2(b) or (c) of the FASA?
  • Did the FASA and BPA through the indemnities provide for an entitlement for Maven for compensation for future loss following the termination, specifically loss of an opportunity to profit from Dr England’s work for the remainder of the term?
  • If yes, what was the quantum of such a loss?

Evidence

Alleged sexual harassment

The allegations made by the dental assistant identified a pattern of repeated unwanted behaviour engaged in by Dr England. This included unzipping the assistant’s shirt, slapping and groping her buttocks, grabbing her vagina outside her cloths, and pulling down her pants. Dr England denied any such behaviour, and tried to minimise the relevance of other potentially innocuous events, including text messages from him to the assistant involving sexual or romantic innuendo. However, the content of the dental assistant’s affidavit in relation to the impugned conduct was supported by affidavit evidence from other witnesses. Ultimately, early in the trial, Dr England chose to not dispute the dental assistant’s evidence. The Court therefore accepted this unchallenged evidence about Dr England’s conduct.

Application of termination provision

The question then arose if the sexual harassment was appropriately characterised as misconduct, or conduct adversely affecting the reputation of the company.

The Court concluded that the FASA was intended to perpetuate the conduct of a dental practice. Conduct towards a junior staff member in the workplace involving repeated unwanted touching of intimate areas was clearly misconduct. There was no evidence to indicate that the conduct was anything other than wilful.

It was therefore not necessary to consider whether the conduct would also provide grounds for termination under clause 11.2(b), such grounds being that the conduct in the reasonably held opinion of the company would adversely affect its reputation. The Court therefore also did not consider Dr England’s submissions about a lack of procedural fairness in Maven having formed such a view, namely through a failure to consider the defendant’s response to the allegations prior to forming the view and terminating the FASA.

In view of the lawful termination of the FASA, Maven sought to rely on the indemnities under the FASA and BPA.

Indemnities

Both the FASA and the BPA contained indemnities in favour of Maven. The indemnity provided by the defendants under the FASA was as follows:

“9.1 Indemnity.

Practice Entity indemnifies and must keep indemnified the Company and its Associates and hold the Company and its Associates harmless from and against all Loss they suffer or incur arising in any way from or in connection with:

(f) any early termination of this Agreement by the Company in accordance with clause 11.2.”

Dr England submitted that on its correct interpretation, the indemnity could not apply where Maven itself had made the decision to terminate, thus causing its own loss. The Court found that this submission was not supported by the clear drafting of the indemnity under the FASA which lacked further conditions for the termination, other than it being for the specified reasons under clause 11.2.

The BPA also contained an indemnity as against the corporate third defendant:

The Purchaser will be entitled to recover from the Vendor and is indemnified by the Vendor, against all loss which the Purchaser suffers or incurs in connection with the Practitioner ceasing to provide the services contemplated in clause 6.7(a). This clause does not limit Loss recoverable at law in contract, in tort (including negligence), under statute, in equity, under judicial or statutory bodies or under industrial awards or agreements or under any other clause of this Agreement.

In view of the two indemnities, the Court found all three defendants liable for Maven’s loss of opportunity that arose from the termination, through the loss of Dr Maven’s services.

Characterisation of Loss

As the Court pointed out, the loss that had occurred was not the loss of the entire earnings that Dr England’s work could be expected to have yielded for Maven over the term of the FASA. It was the difference between the profit Maven could derive from Dr England’s work, compared to the work provided by another dentist recruited to replace him:

[…] the value of the loss suffered by Maven as a result of termination was the value of the opportunity held by Maven, immediately preceding termination, to make money from the work Dr England would likely perform for the business over the remaining five years and seven months following termination, and which it would not otherwise have had the opportunity to make without him working for the business. The latter qualification is important for the opportunity arose in the context of a business in which Maven could make money from a variety of other actual and potential future employees. […]

The loss to Maven was therefore correctly characterised as the difference between the expected earning for the remainder of the FASA in relation to services to be provided by Dr England and a hypothetical “average billing” dentist for the agreed term.

Quantum

Maven was able to provide evidence about the sums invoiced for services provided by Dr England during the first five months of the FASA. There was also evidence agreed between the parties to form the basis of calculations to predict the sum that another hypothetical dentist with “average” billings would have generated for Maven during the term of the FASA. In view of this evidence, the Court concluded that “[i]t cannot be doubted that [Dr England] was an above-average generator of dental income and presented a money-making opportunity for Maven which was materially more beneficial than that presented by the average dentist.

The Court applied a discount of 12.5% to the difference to account for the time value of the money and other uncertainties. No further discount was applied to account for the fact that the projected earnings were only potential earnings. The Court remarked:

While the exercise in which I am engaged is an assessment of that which is, in essence, hypothetical, the above exercise [of considering earlier billings by Dr England, and the billings of the replacement dentist] allows the court to arrive at an estimation which is considerably better-informed than often occurs in a court undertaking such an exercise.

The resulting sum was adjusted by setting off some monies owing to Dr England under the FASA and BPA.

Compliance Impact

Obviously, sexual harassment, regardless of gender or job seniority, is never acceptable in a workplace or otherwise. The case illustrates the potential effect of such misconduct by a healthcare provider under circumstances where the provider has a contractual obligation to provide skilled labour for the benefit of another party. Such an effect here did not require the existence of an employment relationship.

In such a situation, the ability for the other party to seek damages for breach of contract as of right, or under an indemnity, will depend on the terms of the agreement. The case supports the proposition that termination for breach as specifically considered in an agreement does not negate a right to damages for future loss for the terminating party. The relevant loss can be characterised as loss of the opportunity to profit from the skilled services that were required to be provided under the agreement.

The evidence here indicated that in spite of appropriate mitigation attempts through the recruitment of a replacement practitioner, the terminating party did not receive the expected benefit under the agreement. The loss was quantified accordingly as the difference between the expected profitability if Dr England had continued to work for the remainder of the term of the FASA, and the expected profitability of an average practitioner recruited to replace him for that term.