Commonly, large medical centre operators recruit doctors by acquiring a doctor’s existing practice and agreeing the terms upon which the doctor will render medical services at the new centre from then on. However, where the doctor does not comply with those terms, the medical centre operator will generally be entitled to damages for breach of contract.
In this Alert, Partner Luke Mountford, Special Counsel Anthony Pitt, Senior Associate Tim Scanlan and Associate Hayley Schindler discuss the recent decision of IPN Medical Centres Pty Ltd v Van Houten & Anor  QSC 204 in which Justice Jackson of the Supreme Court of Queensland considered this very scenario and what damages the medical centre operator was entitled to by reason of the Doctor’s default.
The relevant facts of the case were as follows:
- IPN Medical Centres Pty Ltd (IPN) recruited Dr Van Houten to practice at IPN’s medical centre at Mermaid Beach, Gold Coast.
- To do so, the parties entered into the following:
- a Sale Contract, whereby IPM acquired Dr Van Houten’s existing medical practice at Palm Beach, Gold Coast for $320,000 (which was allocated amongst the assets as including $145,000 for intellectual property and $145,000 for goodwill); and
- a Services Contract, whereby Dr Van Houten agreed to render medical services from IPN’s medical centre at Mermaid Beach for 35 hours per week for 46 weeks per year for a term of 5 years.
- The Sale Contract provided that Dr Van Houten’s commitment to comply with the terms of the Services Contract were fundamental reasons for IPN’s agreement to purchase Dr Van Houten’s practice pursuant to the Sale Contract.
- Under the Services Contract, IPN granted to Dr Van Houten a non-exclusive licence to use IPN’s facilities and to receive materials, account services, business development services and information technology services for the purposes of conducting Dr Van Houten’s practice.
- On 14 November 2007, Dr Van Houten commenced to practise at IPN’s medical centre at Mermaid Beach. However, without notice and less than 6 months into the 5 year contract term, Dr Van Houten ceased practising from 23 May 2008.
- On 2 June 2008, Dr Van Houten purported to terminate the Services Contract on the basis of various alleged misrepresentations and breaches of collateral contractual warranties made by IPN, including that:
- there were fewer patients for Dr Van Houten to see at the Mermaid Beach medical centre than expected; and
- IPN made representations or warranties to Dr Van Houten about advertising his practice and promoting and supporting his cosmetic medicine practice, which had not been fulfilled.
- IPN disputed Dr Van Houten’s position and, on 13 June 2008, terminated the Services Contract by reason of Dr Van Houten’s repudiation of the contract.
- IPN commenced proceedings in the Supreme Court of Queensland against Dr Van Houten seeking damages for breach of contract.
- Dr Van Houten defended the proceeding on the basis that he had instead validly terminated the Services Contract, and filed a counterclaim seeking various remedies on the basis of numerous representations and warranties with regard to:
- the gross billings and annual net income Dr Van Houten would generate;
- the steps IPN was to take to assist Dr Van Houten build up his cosmetic medicine practice;
- the support to be provided to Dr Van Houten; and
- the manner in which other doctors at the centre could practice cosmetic medicine.
Justice Jackson considered each of the alleged representations and warranties relied upon by Dr Van Houten, but found that based on the evidence, none of them had been proven or made out. In some cases, it was found that the alleged representations could not amount to contractual warranties in any event as they were inconsistent with the terms of the contract itself. As a result, Justice Jackson found that IPN had validly terminated the contract.
IPN claimed damages on two bases as follows:
- IPN claimed damages pursuant to an “agreed damages” clause contained in the Sale Contract, which became operative if Dr Van Houten breached the Services Contract and IPN terminated. The agreed damages clause provided for damages to be payable in the sum of $5,500 per month for the first 36 months of the term of the contract, and $3,000 per month for the balance of the term of the contract.
- In the alternative, IPN claimed damages for the loss of the earnings IPN would have made had Dr Van Houten performed the Services Contract for the entire 5 year term.
Dr Van Houten argued that the agreed damages clause was a penalty and was therefore unenforceable.
However, Justice Jackson found that “the interest protected by the bargain in cl 11.3 [the agreed damages clause] was the loss to the plaintiff [IPN] of the benefit of the [Services Contract]”. His Honour also found that “the value of that interest was reflected in the parties’ agreement under the Sale Contract as to the amount of the purchase price allocated to goodwill ($145,000) and the amount of the purchase price allocated to intellectual property ($145,000)”, and that these values would be undermined by the loss of Dr Van Houten’s services.
Accordingly, Justice Jackson held that the agreed damages clause was not a penalty and gave judgment in favour of IPN in the sum of $428,275 (inclusive of interest).
As IPN was successful pursuant to the agreed damages clause, Justice Jackson did not consider whether IPN would otherwise have been entitled to damages for the loss of earnings IPN would have made had Dr Van Houten performed the Services Contract for the entire 5 year term.