Introduction

Section 25 of the Pharmacy Act 1964 (NSW), like the previous section 21 of the Pharmacists Act 1974 (Vic), provides that “a person (not being a Pharmacist), a corporation or a body of persons unincorporated shall not carry on, as owner or otherwise, the business of a Pharmacist in a pharmacy or otherwise have a pecuniary interest, direct or indirect, in the business of a Pharmacist carried on in a pharmacy” (the Prohibition).  A person contravening the Prohibition is guilty of an offence.

In the recent NSW Supreme Court case of Pham v Doan, the court had to determine:

1. whether a partnership existed between Mr Pham and Mr Doan in relation to the ownership of, amongst other things, two pharmacies; and
2. if a partnership existed, the effect of the Prohibition on that partnership.

Facts

Mr Doan had married Mr Pham’s sister.  Mr Pham was a qualified and registered pharmacist in New South Wales.  Mr Doan was not a pharmacist.  Mr Pham’s younger brother was studying to become a pharmacist.

The dispute concerned the ownership of:

1. the Grant’s Pharmacy (which also included a post office agency) (the Grant’s Pharmacy);
2. the freehold upon which the Grant’s Pharmacy was carried on (North Ryde property); and
3. the pharmacy business at South Windsor (South Windsor Pharmacy).

Mr Pham claimed he was the sole owner of the Grant’s Pharmacy and the North Ryde property.  Mr Doan asserted that the Grant’s Pharmacy, North Ryde property and South Windsor pharmacy were owned by Mr Pham and himself in partnership until the partnership was dissolved in or about November 2002. 

Mr Doan sought declarations and orders for the dissolution of the partnership and taking of accounts, as well as orders that he had an equitable charge over the assets of the Grant’s Pharmacy, post office agency, South Windsor Pharmacy and North Ryde property.

The relationship between the parties and the property

In his judgment, Justice Barrett summarised the circumstances surrounding the purchase of the businesses and the land and the relationship between the parties as follows:

Purchase of Grant’s Pharmacy

• It was through Mr Ioannidis, the accountant to the parties, that Mr Pham and Mr Doan became aware that the Grant’s Pharmacy business was up for sale.  At the time of the purchase, Mr Pham was 24 and had no business experience.
• The whole of the purchase price was financed by a loan made to Mr Pham by the ANZ Bank against a guarantee provided by F.H. Faulding.  The loan was also supported by a guarantee provided by Mr Doan’s fashion company and a mortgage of the home owned by Mr Doan and his wife.
• Mr Pham was the purchaser under the contract of sale.  Mr Doan became the registered licensee of the Australia Post Office agency.  The business name was registered in the name of both Mr Pham and Mr Doan.
• The arrangements for the purchase appeared from the documents (particularly solicitors' letters) to have been dealt with principally by Mr Doan.

Purchase of North Ryde Property

• The purchase price for the North Ryde Property was derived from monies borrowed by Mr Doan from the National Australia Bank against the security of the North Ryde Property itself and a mortgage over a house owned by Mr Pham’s sister and brother.  The initial deposit was provided out of the Grant’s Pharmacy bank account. 
• The purchaser under the contract was Mr Doan.

Purchase of South Windsor Pharmacy

• The South Windsor Pharmacy was purchased in anticipation of Mr Pham’s younger brother obtaining his pharmacy qualifications and with a view to him working at the pharmacy. 
• The purchaser under the contract of sale was Mr Pham (although it was signed by Mr Doan pursuant to a power of attorney). 
• The whole of the purchase monies was provided by Australian Pharmaceutical Industries Ltd, against a bill of sale over the assets of the Grant’s Pharmacy and a mortgage of the home owned by Mr Pham, his brother and parents. 
• The business name was registered in the names of both Mr Pham and Mr Doan.

Accounts

• Tax returns had been prepared by Mr Ioannidis for a partnership described as “Doan and Pham”.  Partnership accounts had also been prepared.
• A tax file number was issued for the partnership.  There was also an Australian Business Number in the name of Doan and Pham, with the relevant business entity described as “family partnership”. Mr Ioannidis lodged Business Activity Statements in relation to the TFN and ABN referring to the taxpayer as "Doan and Pham trading as Grant’s Pharmacy." 

The Prohibition

According to Mr Doan, both parties were aware of the Prohibition, but he was under the impression that the restrictions only applied at the time of the purchase and that the partnership was permissible if arranged in such a way that it did not involve a “stamp my name in the pharmacy”.  According to Mr Ioannidis, he asked the parties on a number of occasions whether they had received legal advice regarding their arrangements in light of the Prohibition, and they had replied they had.  Neither party had received legal advice regarding their arrangements.

DECISION

Existence of a Partnership

There were a number of discrepancies between the facts according to Mr Pham and according to Mr Doan, as each party sought to present themselves as having played a leading role in the relevant decision making and negotiation.  However, Justice Barrett found that Mr Pham played a less prominent role than he sought to present and Mr Doan played a more active role.  Justice Barrett came to this conclusion through the commercial experience of Mr Doan as compared to Mr Pham. 

Justice Barrett also found that there was support for Mr Doan’s version of events in the documentary evidence.  For example, the documents for the Grant’s Pharmacy showed Mr Pham as the purchaser on the record, but documents relevant to the purchase of the North Ryde Property showed involvement by Mr Doan only, who was the Purchaser on record.  Even in the purchase of the South Windsor Pharmacy, all parties, including the financier, solicitors and accountant, corresponded with Mr Doan.

In relation to the securities provided by the family members, Justice Barrett found there was a clear pattern in practice of mutual support amongst family members and that the use of the family home by Mr Doan as security in connection with the acquisition of Grant’s Pharmacy, for example, should be seen as attributable to that alone.

Justice Barrett considered the tax documents to be the strongest contemporary documentary evidence of the existence of a partnership and that the evidence of Mr Ioannidis, which favoured Mr Doan’s interpretation, carried a great deal of weight.

Justice Barrett held that he was satisfied the evidence supported the case that Mr Doan and Mr Pham intended to, and did, become partners at the time of the purchase of the Grant’s Pharmacy and extended to the acquisition of the North Ryde Property and South Windsor Pharmacy.

The Prohibition

The definition of “partnership” under the Partnership Act 1892 is “a relationship that subsists between persons carrying on a business in common with a view of profit”.  On the basis of this definition, Justice Barrett concluded that “implicit in my finding as to the existence of a partnership between the Plaintiff and the Defendant, therefore, is a finding that they carried on the relevant business in common, that each was a party to the carrying on the business and that each had a financial interest in it." 

Justice Barrett found there had been two contraventions of the Prohibition.  Firstly Mr Pham and Mr Doan had contravened the Prohibition by carrying on the partnership business itself and, secondly, Mr Doan had, with the knowledge and assistance of Mr Pham, contravened the Prohibition by having an interest in the partnership business. 

Effect of prohibition on Partnership

As Justice Barrett had found a contravention of the Prohibition had occurred, he had to determine whether this contravention had the effect of making the partnership illegal as formed and therefore void.

To do this, Justice Barrett had to have regard to the true effect and meaning of the statute and to the language used and scope and purpose of the statute itself, in this case being the Pharmacy Act 1964 (NSW).

After an analysis of the Minister’s second reading speech regarding the Prohibition, Justice Barrett concluded that the public purpose of the Prohibition

“was to ensure that individual pharmacists are the only persons involved financially in the operation of pharmacies, so that non-pharmacists (including companies) should not enjoy the financial benefits of pharmacy operations.  Whether these objectives are compatible with the community expectations today is beside the point.” 

Justice Barrett noted that the Prohibition was amended six times and in subsequent years the Act was amended a further fifteen times, yet the basic principles remained in force and it was presumed that the legislative purpose continued.  Justice Barrett went on to say:

“the carrying on of a pharmacy business by a partnership (or, as the Act puts it, “a body of persons unincorporated”) which includes a non-pharmacist is prohibited.  It must follow that the formation of a partnership which is to carry on a pharmacy business and in which a non-pharmacist has a pecuniary interest by reason of being a member of the partnership is something that the Act aims to prevent.  The creation of such a partnership is contrary to the perceived public interest in the protection of the economic welfare of pharmacists.”

Justice Barrett took the view, taken by Kirby P in the case of Chappuis v. Filo (1990) 19 NSWLR 490 which also dealt with the Prohibition, and held that the contravention of the Prohibition in this case had the effect of making the partnership between Mr Pham and Mr Doan illegal and consequently void.

Limiting the Effects

Chappuis v Filo, concerned a pharmacist conducting a business consisting of dispensing and sale of prescription medicines and non-prescription items.  The pharmacist entered into two contracts of sale – one being a contract with another pharmacist of the dispensing and sale of prescription medicines, and the other being a contract with the same pharmacist (under the first contract) and also non-pharmacist together for the remainder of the business.  The majority of the court held that there was a separation of the operations and no contravention of the Prohibition. 

Mr Doan argued that if illegality by reason of a contravention of the Prohibition was found, its effects should be confined to the part of the parties’ operations that involved pharmacy business narrowly viewed, so that the illegality did not strike at anything to do with the North Ryde Property and the post office agency conducted in the Grant’s Pharmacy.  However, Justice Barrett rejected this argument and found that there was no separation made by the parties and the undivided and unallocated collection of assets as a whole, including goodwill, together with the attendant liabilities must have been taken to represent the relevant “business”.  He went on to say that although there were additional elements to the pharmacy business, those additional elements did not somehow cause it to cease being the business of a pharmacist. 

Justice Barrett finally concluded that he was of the opinion that “the contractual consequences of the operation of Section 25(1), in relation to the parties’ partnership must be as described by Kirby P. and that this must be so with respect to the whole of the subject matter of their partnership.”

Outcome

Justice Barrett held that:

“the Defendant, although having established on the evidence the existence of the partnership, cannot be afforded the assistance of the court by way of vindication of the rights thereby found to have accrued to him.  The court will not enforce, give effect to, or otherwise recognise those rights.” 

Consequently, because of the impact of the Prohibition on the parties’ agreement to form the relevant partnership (which, extended to and embraced the Grant’s Pharmacy (including the post office), the North Ryde property and South Windsor Pharmacy), the court would not grant any relief which recognised or flowed from the existence of that partnership.

Postscript

In a further judgment on 24 June 2005, Justice Barrett refused to recognise a resulting trust in favour of the partners for the South Windsor property, because to do so would entail recognition of partnership property and, hence, recognition of the existence of the partnership.  This would have gone against his conclusion that the creation of the partnership was illegal, with the result that the court will not grant any relief which recognises or flows from its existence.

For more information, please contact Damien Wurzel on +613 9608 2288 or email d.wurzel@cornwalls.com.au