Cirrus Real Time Processing Systems Pty Ltd v Jet Aviation Australia Pty Ltd

[2023] NSWCA 280

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Cirrus Real Time Processing Systems Pty Ltd v Jet Aviation Australia Pty Ltd [2023] NSWCA 280

Hearing dates:

14 November 2023

Date of orders:

24 November 2023

Decision date:

24 November 2023

Before:

Bell CJ at [1];
Leeming JA at [70];
Kirk JA at [95]

Decision:

(1)   Appeal allowed.

(2)   Set aside the orders made by Ball J on 5 May 2023 and in lieu thereof order:

(a)       A declaration that on the proper construction of clause 1.1 of Annex E to Attachment B of the contract (B300 Services Support Contract – ACOTS2 (Contract No: HP 201771/2018/001) executed on 31 July 2018 between the plaintiff [now Appellant] as “Contractor” and the defendant [now Respondent] as “Hawker Pacific” with Effective Date of 1 August 2018, the “Base Date Index Value” is the value of the index for the quarter containing the date 1 January 2018 for the calculation of price adjustments on each price adjustment date;

(b)      The defendant [now Respondent] pay the plaintiff [now Appellant] the outstanding amounts owing to it under the Contract including interest that has accrued on outstanding amounts in accordance with cl 4.3 of the Conditions of Contract;

(c)      The cross-summons be dismissed.

(3)   The Respondent pay the Appellant’s costs of the appeal.

(4)   There be no order as to the costs at first instance.

Catchwords:

CONTRACT — Construction — Interpretation — Contractual purpose — Varied contract to be construed — Commerciality of contractual construction — Price adjustment mechanism — Meaning of Base Date Index Value when that composite term was not defined but when Base Date was defined

Legislation Cited:

Uniform Commercial Code § 2-209 (U.S.)

Cases Cited:

Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57

Berry v Berry [1929] 2 KB 316

Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; (2022) 96 ALJR 89

Creamoata Ltd v The Rice Equalization Association Ltd (1953) 89 CLR 286; [1953] HCA 40

Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd (2019) 101 NSWLR 679; [2019] NSWCA 185

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12

Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500; [1998] HCA 33

Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520; [2000] HCA 35

Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407

Gloria Jean’s Coffees International Pty Ltd v Daboko Ltd [2020] 2 NZLR 488; [2020] NZHC 29

Hillam v Iacullo (2015) 90 NSWLR 422; [2015] NSWCA 196

Hollis v Vabu Pty Ltd (2001) 207 CLR 21; [2001] HCA 44

Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11,110

International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2015] NSWCA 363

Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150

Ma Hongjin v SCP Holdings Pte Ltd [2020] SGCA 106

Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70

Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37

Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1

MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2019] AC 119; [2018] UKSC 24

Narich Pty Ltd v Commissioner of Pay-roll Tax [1983] 2 NSWLR 597

Newey v Westpac Banking Corporation [2014] NSWCA 319

Oaklane Dairy Ltd v Flooks [2023] NZHC 1852

Rosas v Toca 2018 BCCA 191

Rye v Phillips 203 Minn 567; 282 NW 459 (1938)

Sara Stockham Pty Ltd v WLD Practice Holdings Pty Ltd [2021] NSWCA 51

Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732

Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35

Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25

Willis Australia Ltd v AMP Capital Investors Ltd [2023] NSWCA 158

XL Insurance Co SE v BNY Trust Company of Australia Limited [2019] NSWCA 215

Texts Cited:

Perry Herzfeld and Thomas Prince, Interpretation (2nd ed, 2020, Lawbook Co)

Category:

Principal judgment

Parties:

Cirrus Real Time Processing Systems Pty Ltd (Appellant)
Jet Aviation Australia Pty Ltd (Respondent)

Representation:

Counsel:

K Smark SC with T Fishburn (Appellant)
J Giles SC with S Puttick (Respondent)

Solicitors:

Hazan Hollander (Appellant)
Johnson Winter & Slattery (Respondent)

File Number(s):

2023/164682

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity – Commercial List

Citation:

[2023] NSWSC 464

Date of Decision:

05 May 2023

Before:

Ball J

File Number(s):

2022/104920

HEADNOTE

[This headnote is not to be read as part of the judgment]

By a commercial contract which incepted on 1 August 2018 (the Contract), Cirrus Real Time Processing Systems Pty Ltd (Cirrus) agreed to provide software services to Jet Aviation Australia Pty Ltd (Jet). The Contract contained a price adjustment formula by which certain prices payable for “Recurring Services” and “S&Q Payments” were to be adjusted under the contract (the Formula). The Formula contained, as a term, “Base Date Index Value”, which was not defined. “Base Date” was defined separately as meaning 1 January 2018. The subject “Index” was agreed to be a specific Australian Bureau of Statistics “Wage Price Index”. The Contract specified that price revisions would occur on 1 January each year from (and including) 2019.

Over the course of the contract, three “Contract Change Proposals” were executed (respectively the 2019 CCP, 2020 CCP and 2021 CCP). These Contract Change Proposals had the effect of re-stating the price payable for “Recurring Services” and “S&Q Payments”. Both the 2019 CCP and the 2020 CCP were executed as deeds and expressly provided that the prices contained therein were calculated “in accordance with” the Formula. Both the 2019 CCP and the 2020 CCP also contained versions of the relevant section of the Contract reflecting the adjusted prices. The 2021 CCP was not executed as a deed and did not contain a revised section of the Contract, but did contain drafting instructions to replace an existing table (containing the prices payable) with a new table. Below the table, there was a notation stating that the table “identifies prices that were adjusted in accordance with” the Formula.

On 8 February 2022, Jet issued a Dispute Notice pursuant to the Contract in respect of the price adjustment to be made on 1 January 2022. Jet contended in that Dispute Notice that the 2019, 2020 and 2021 price adjustments were erroneous. Jet’s argument was that the “Base Date Index Value” should reflect the preceding year’s Index Value, thereby causing the price to be adjusted annually in line with the change in the Index. Cirrus’s argument was that the “Base Date Index Value” should be the Index Value as at 1 January 2018, meaning that the relevant escalator for a given year was not to be calculated by reference to index amounts from that year and the previous year but by reference to the index amounts from that year and the first year. It was not in dispute that the price adjustments contained in the 2019, 2020 and 2021 CCPs were all calculated in line with Cirrus’s preferred construction.

Ball J (the primary judge) preferred Jet’s construction, essentially because it best reflected the adjustment for wage price inflation which his Honour held to be the intent of the section, and made “perfect commercial sense” in contrast to the “odd consequence” which Cirrus’s construction would occasion. The primary judge rejected Cirrus’s case that the respective “Contract Change Proposals” constituted admissions as to the meaning of “Base Date Index Value”.

By notice of appeal, Cirrus appealed, propounding the same construction as at first instance but raising a new argument, namely that the Contract Change Proposals had effected variations to the Contract, and that the proper construction of the Contract, as amended, supported its argument as to the correct construction of the Formula.

The Court held, upholding the appeal:

1. In circumstances where it was common ground that the adjusted price in the 2021 CCP was only referable to the use of 1 January 2018 as the “Base Date”, the parties must be taken as having contractually agreed that the applicable “Base Date” in the context of the composite expression “Base Date Index Value” was 1 January 2018: [55] (Bell CJ); [79] (Leeming JA); [96] (Kirk JA).

2. The identification of the Base Date is derived from the amount set out in the 2021 CCP, as the contractually agreed output of the Formula: [56] (Bell CJ); [77]-[78] (Leeming JA); [96] (Kirk JA).

3. The primary judge correctly resolved the issues based upon the arguments presented to him, but these did not include the argument that the Contract Change Proposals effected variations to the Contract, which was the argument which was ultimately dispositive: [80]-[91] (Leeming JA); [95] (Kirk JA).

4. Discussion of considerations of commerciality in construction of contracts: [64]-[67] (Bell CJ); [84]-[89] (Leeming JA); [95] (Kirk JA).

Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70; International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2015] NSWCA 363; Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732, applied.

Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297; Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd (2019) 101 NSWLR 679; [2019] NSWCA 185; XL Insurance Co SE v BNY Trust Company of Australia Limited [2019] NSWCA 215; Willis Australia Ltd v AMP Capital Investors Ltd [2023] NSWCA 158, cited.

JUDGMENT

1. BELL CJ: This appeal relates to a question of contractual construction in relation to a commercial contract (the Contract) between Cirrus Real Time Processing Systems Pty Ltd (Cirrus or the Appellant) and Jet Aviation Australia Pty Ltd (Jet or the Respondent).

2. Under the Contract, the Appellant provides software services to the Respondent in connection with the development of “ACOTS2” (a software-based simulation training system to train air combat officers) and related technology support services for the system.

3. The Contract, which incepted on 1 August 2018, was for an initial term of just over six years with Jet having several contractual options to extend. The Contract contained a mechanism for price adjustments for “Recurring Services” which were defined as:

“all of the Services, other than Drop 2 development services, any S&Q Services and Task-Priced Services, required to be provided by the Contractor under the Contract.”

4. “Services” were in turn defined as:

“services and goods (including Deliverables) required to be provided under the Contract and includes items acquired in order to be incorporated in the Services.”

5. The dispute between the parties relates to a price adjustment formula in relation to price adjustments in respect of “Recurring Services” (the Formula). The Formula is as follows:

“For price adjustments to Recurring Services and Survey and Quote payments, the following price adjustments shall be applied.

Pn   =   (Pl * APV) + Pl

Where:

Pn   =   New year’s price

Pl   =    Last year’s price

APV   =   value as a percentage, calculated using the following formulae:

AUS Labour Index Value (past year) / Base Date Index Value -1”

The dispute specifically concerns the meaning of “Base Date Index Value”, the denominator in the Formula for calculation of the “APV”. “APV” would appear to be an abbreviation for “Applicable Price Variation”.

6. Ball J (the primary judge) summarised the competing constructions of the parties: Cirrus Real Time Processing Systems Pty Limited v Jet Aviation Australia Pty Ltd [2023] NSWSC 464 (the primary judgment or PJ) at [13] as follows:

“The dispute between the parties largely turns on the meaning of “Base Date” in the definition of “APV”. It is Cirrus’s case that the language of the Contract is clear. “Base Date” is defined to mean 1 January 2018. Consequently, the Base Date Index Value must be the index value for 1 January 2018. That is, it must be the index value for the quarter which includes 1 January 2018 – which is the index value for the March 2018 quarter. On the other hand, Jet submits that “Base Date” must be understood as a reference to the date at the beginning of the period to which the relevant calculation of APV relates. To take the calculation of Pn for the revision date of 1 January 2022 as an example, it is common ground that the numerator in the calculation of APV for that year is the value of the relevant AUS Labour Index for the past year – that is, for 2021. The index is issued quarterly. Consequently, the numerator is the index value for the 2021 December quarter. According to Jet, the Base Date Index Value is the index value for the beginning of that year – that is 1 January 2021. The index value that best reflects the index value as at that date is the index value for the quarter ending 31 December 2020.”

7. His Honour resolved the matter in favour of Jet’s construction, making the following declarations at [31]:

“(2)   A declaration that on the proper construction of clauses 1.1 and 1.4 of Annex E to Attachment B of the B300 Services Support Contract – ACOTS2 (Contract No: HP 201771/2018/001) between the Plaintiff and the Defendant dated 1 August 2018 (Contract), the “Base Date Index Value” for each Subsequent Price Revision Date is the value of the applicable index set out in clause 1.7 of Annex E to Attachment B to the Contract (Annex E) for the year prior to the “past year” referred to in the numerator;

(3)   A declaration that on the proper construction of clause 1.1 of Annex E, the value for ‘Last year’s price’ (‘PI’) to be used in the formula at clause 1.1 of Annex E is the adjusted price for the 12 month period commencing on 1 January of the previous year correctly calculated in accordance with the formula in clause 1.1 of Annex E;

(4)   A declaration that the ‘New year’s price’ (‘Pn’) calculated in accordance with clause 1.1 of Annex E to the Contract for the Price Revision Date of 1 January 2022 was:

(a)   $1,674,966.09 for Recurring Services; and

(b)   $2,225.02 per day for Survey and Quote Services”

8. One interesting feature of the dispute is that the parties were ad idem as to the operation and, by implication at least, the interpretation of the price adjustment mechanism in the first three annual price adjustments reviews. Indeed, as recorded by the primary judge at PJ [10]:

“Although not required by the Contract, the parties, in accordance with cl 6.3 of the Contract, executed deeds dated 8 April 2019, 7 December 2020 and 9 March 2021, described as Contract Change Proposals, which record the effect of those increases as changes to the Contract.”

In point of fact, only the first two of the three “Contract Change Proposals” were executed as deeds but neither party suggested that anything turned on that fact.

9. Clause 6.3.1 of the Contract provides for changes to the Contract to be made by “Contract Change Proposals”, to be executed by both parties as an agreed contractual mechanism for variation:

“Except as expressly permitted in the Contract, the Contract shall only be changed by a CCP in accordance with this clause 6.3. The parties are not liable to each other for any additional work undertaken or expenditure incurred unless the change is agreed in accordance with this clause 6.3.”

10. Further, and as shall be seen, the figured derived as a result of the first three annual price revision exercises applying the Formula was premised on the “Base Date Index Value” being the value of the “AUS Labour Index” (namely, the “ABS 6345.0 Series ID A2602909T Wage Price Index”) for the quarter containing the date 1 January 2018, this being the “Base Date” contended for by the Appellant.

11. There was and is no relevant dispute between the parties as to the principles to be applied to a question of interpretation of a commercial contract, although there was some debate on appeal as to the significance of the “Contract Change Proposals” which were effected as variations to the Contract in relation to price adjustments in the first three years of the Contract. It is plain that it is the Contract, as varied, that falls to be construed. As McHugh JA said in a related context in Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,118:

“[i]n a dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed.”

12. Contractual variations, whether express or implied by conduct, do not fall into the category of post-contractual conduct which will ordinarily not be available to take into account in the construction of a contract: Narich Pty Ltd v Commissioner of Pay-roll Tax [1983] 2 NSWLR 597 at 601; see also Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; (2022) 96 ALJR 89 at [188].

13. It is first necessary to set out the key contractual provisions in addition to those that have already been noted.

Key contractual provisions

14. The Contract comprises the following parts:

1. A “Contract Details Schedule” which lists the parties and contains an information table. It is referred to in other parts of the Contract as simply the “Details Schedule”.

2. The “Conditions of Contract” (COC);

3. The “Attachments” to the Contract, including:

1. “Statement of Work” (SOW) (Attachment A);

2. “Price and Payments” (Attachment B, which has a number of annexures, with Annex E to Attachment B relating to price adjustments); and

3. “Glossary” (Attachment C, which contains in cl 2, a table of definitions applicable to the Contract, which in turn is defined to include the COC, the “Details Schedule”, the Attachments including the SOW, any “S&Q Order” and any document expressly incorporated as part of the Contract).

15. The “Details Schedule” contains an “Information Table”. Item 3 of that table is in the following form:

Item 3

(clause 3.3)

Base Date:

01 Jan 2018

16. It may be noted that cl 3.3 of the COC does not refer, either expressly or implicitly, to “Base Date”. Furthermore, cl 3.3 of the COC does not relate to adjusting prices for fluctuations in the cost of labour. Instead, cl 3.3 refers to Imports and Customs Entry.

17. This is an early illustration of the fact that the Contract was poorly drafted, a matter which has rendered the task of contractual interpretation in the present case more complex and difficult.

18. It should also be noted that “Base Date” is not a term which is defined in the “Definitions Table” in the “Glossary” although “Escalation Date” is defined in the “Glossary” as meaning “the Base Date specified in the Details Schedule and each anniversary of the Base Date”. Furthermore, “Escalation Notice” is defined as meaning “a notice outlining the price adjustments to Recurring Services and Survey and Quote payments given in accordance with Annex E to Attachment B”. In keeping with the poorly drafted nature of the Contract, the terms “Escalation Date” and “Escalation Notice”, although defined in the “Glossary”, do not actually appear in any other part of the Contract. It is to be inferred that, at an earlier stage of drafting, they did appear or, alternatively, that when they were included in the “Glossary”, it was intended that they would be used.

19. Clause 3.1.1 of the COC provides:

“The Contractor shall provide the Services in accordance with the Contract, including:

a.   providing the Services by the relevant dates (if applicable) and in the manner required;

b.   achieve Approval or Acceptance of any Deliverables by the relevant dates (if applicable) and in the manner required;

c.   provide the Services in accordance with, and to the standards, specifications, certifications and other requirements set out or referred to in the Contract (including the SOW); and

d.   ensure that the Services are provided to a standard of quality not less than industry best practice for services of the same type as those Services.”

20. Clause 4.1.1 of the COC provides:

“Subject to the other provisions of the Contract and subject to achieving Acceptance of Deliverables where required by the Contract, the Contractor is entitled to make a claim for payment the following:

…

b.   for the performance of Recurring Services, in accordance with Attachment B”

21. “Recurring Services Fee” is defined as “in respect of a given period, the amount determined in accordance with cl 2.1 of Annex B to Attachment B as the Recurring Services Fee.”

22. Annexure B to Attachment B sets out the amounts payable to the Appellant for the provisions of “Recurring Services”. Clause 2.1 provides:

“The Recurring Services Fee has as its single and only element the Core Services Fee (determined in accordance with clause 3).”

23. Clause 3.1 of Annex B to Attachment B provides for the payment of a Base Fee, monthly in arrears, and for each Review Period and each KPI, a Performance Payment (if any) for that Review Period and for that KPI, as determined in accordance with Annex C. Clause 3.2 sets the Base Fee as an amount equal to the Core Services Fee less the At-Risk Amount, for a given period, and is not varied by the Performance Payment. Clause 3.3 contains Table B-2 (subsequently amended to become Table B-1), which, prior to amendments effected by the “Contract Change Proposals”, set out the Core Services Fee as follows:

ACOTS2 Through Life Support Costs
Item No.	Item Description	Annual Price (excluding GST & customs duty	Customs Duty (if applicable)	GST (if applicable)	Annual price (including GST & customs duty)	ADJUST-MENTS
$A	$A	$A	$A	(I)
Through Life Support Costs
Provision of ACOTS2 Through life support	$1,450,000.00	$145,000.00	$1,595,000.00	ABS 6345.0 Series ID A2602909T
SUBTOTAL	$1,450,000.00	$145,000.00	$1,595,000.00
Core Services Fee (i)					$1,595,000.00

24. The reference in the “ADJUSTMENTS” column to ABS 6345.0 Series ID A2602909T is a reference to Australian Bureau of Statistics Catalogue 6345 entitled Wage Price Index (the Index). This is the same index that is referred to later in Annex E to Attachment B dealing with adjustments for “Recurring Services” for fluctuations in the cost of labour (see [29] below).

25. Turning to “S&Q Services”, the term “Services” is defined as “services and goods (including Deliverables) required to be provided under the Contract and includes items acquired in order to be incorporated in the Services”. “S&Q Services” is defined as “the Services identified as S&Q Services in the SOW and such other services requested by the Commonwealth in accordance with cl 3.12 of the COC that are directly related to the Services”.

26. Annexure D to Attachment B describes the amount payable for the provision of “S&Q Services”, and provides various Tables of rates to be payable for such services, to be adjusted by reference to the Index.

Price Adjustment

27. As already noted, the Contract provides for yearly price adjustments as follows:

1. the first yearly price adjustment was 1 January 2019 (First Price Revision Date), pursuant to cl 1.3 of Annex E to Attachment B; and

2. the second price adjustment, and subsequently, was each anniversary thereafter during the term of the Contract (Subsequent Price Revision Dates) (i.e., 1 January 2020, 1 January 2021, 1 January 2022, 1 January 2023 and 1 January 2024), pursuant to cl 1.4 of Annex E to Attachment B.

28. It may be observed that 1 January 2019 was 12 months on from the date identified in the “Details Schedule” as being the “Base Date”, namely 1 January 2018.

29. It is necessary to set out the entirety of Annex E to Attachment B:

“ADJUSTMENTS

1.   ADJUSTMENTS FOR FLUCTUATIONS IN THE COST OF LABOUR

1.1.   For price adjustments to Recurring Services and Survey and Quote payments, the following price adjustment formula shall be applied.

Pn = (Pl * APV) + Pl

Where:

Pn   =   New year’s price

Pl   =    Last year’s price

APV   =   value as a percentage, calculated using the following formulae:

AUS Labour Index Value (past year)/ Base Date Index Value – 1

1.2.   The following is a worked example of the application of this formula and is intended for explanatory purposes only.

Worked Example

Pl   =   Last year’s price   =    $125,000

APV =   2.3%

Pn   =   (Pl * APV) + Pl

Pn   =   ($125,000 * 2.3%) + $125,000

Pn   =   $2,875 + $125,000

Pn   =   $127,875

1.3.   The First Price Revision Date shall be 01 January 2019.

1.4.   The Subsequent Price Revision Dates shall be 1 January of each year subsequent to the First Price Revision Date and shall be based upon the preceding period index values.

1.5.   Notification for price adjustments under clause 1.1 above must be made in writing by the Contractor to the Hawker Pacific Representative in accordance with COC Clause 6.2 no later than three months after the publication of the indices for the First Price Revision Date or Subsequent Price Revision Date as the case may be. The adjusted price applies, unless within 14 days of notification the Hawker Pacific Representative can demonstrate that the adjusted price calculation is not in accordance with the price adjustment formula in clause 1.1 above.

1.6.   Hawker Pacific shall not be liable for any claim for price adjustment under clause 1.1 submitted after the end of the three month period mentioned in clause 1.5.

1.7.   The Australian indices applicable to the labour components of the price for the Contract are set out in the following table:

Table B1-3:   Applicable Price Variation Indices

Index	Table/Group	Applies To
ABS Catalogue 6345 Wage Price Index, Australia	•   Quarterly Index •   Total hourly rates of pay excluding bonuses •   Australia •   Private Sector •   Professional, Scientific and technical services •   Table 5b Series ID: A2602909T	Australian Dollars (AUD)

1.8   In this clause 1, the following interpretations apply:

a.   subject to paragraph c and d, references to an index number for a quarter are to the index number(s) published during that quarter.

b.   if a source of an index publishes provisional and final index numbers, index numbers designated as provisional shall not be used.

c.   subject to paragraph c, if an index ls published more than once during a quarter, for the purposes of the formulae, the index number for that quarter shall be taken to be the average of all the index numbers published within that quarter.”

Contract Change Proposals

30. On 8 April 2019, the parties executed a Contract Change Proposal (2019 CCP) which relevantly included the following:

“RECITALS:

A.   Hawker Pacific Pty Ltd has entered into a sub-contract HP 201771/2018/001 dated 1 August 2018 (‘the Contract’) for the development of the redesigned Air Combat Officer Training System (ACOTS2) and the in-Service support of the system once incorporated into the CAF 11 Weapons System, comprising the B350 King Air Fleet and the attendant Support Systems.

B.   The Contract provides a mechanism by which price adjustments are calculated and applied, specifically Clause 1 of Annex E to Attachment B.

C.   The Contractor issued a notice to the Hawker Pacific Representative on February 20, 2019 identifying adjusted prices calculated in accordance with Clause 1 of Annex E to Attachment B, and in accordance with Clause 1.5 of Annex E to Attachment B, the adjusted prices applied from February 20, 2019.

D.   For administrative convenience, the Contractor and Hawker Pacific wish to place on Contract the results of the price adjustment which occurred on February 20, 2019.

E.   The Contract provides that changes are to be dealt with by CCP, specifically Clause 6.3.

F.   The Contractor proposes a change to the Contract as set out in this CCP.

AGREED TERMS:

…

Reference in Contract:

1.   Details of Proposed Change #1:

a.   The table entitled “Core Services Fee” in Annex B to Attachment B (“Recurring Services”) is amended to reflect the adjusted value of the Core Services Fee and the words “Note: Table B-1 identifies prices that were adjusted in accordance with Attachment B Annex E clause 1.5 on 20th February 2019.” are inserted immediately after the table entitled “Core Services Fee”

…

e.   The table entitled “Rates for S&Q Services” in Annex D to Attachment B (“S&Q Services (CORE)” is amended to reflect the adjusted value of the labour rate in the “Software Engineer” labour category and the words “Note: Table E-1 identifies prices that were adjusted in accordance with Attachment B Annex E clause 1.5 on 20th February 2019.” are inserted immediately after the table entitled “Core Services Fee”.

….

2.   Justification for Proposed Change:

a.   The proposed changes (1.a) and (1.e) identify in the relevant price tables the adjusted prices that apply.

b.   This aids the Parties in administering of the Contract, without in any way impacting the existing mechanism for adjusting prices that is set out at clause 1 of Annex E to Attachment B.

…

6.   Approval:

8.2   The CCP and its attachments are approved. The Contract shall be deemed to be changed on the date specified in this CCP or when this CCP has been properly executed by both parties.” (Emphasis added.)

31. Attached to the 2019 CCP was a form of Attachment B (including Annexures) as varied by the “Contract Change Proposal”.

32. On various dates concluding on 1 February 2021, the parties signed a “Contract Change Proposal” dated 7 December 2020 (2020 CCP), which contained the following relevant terms:

“RECITALS:

A.   Hawker Pacific and Contractor entered into a sub-contract HP 201771/2018/001 dated 1 August 2018 (‘the Contract’) for the development of the redesigned Air Combat Officer Training System (ACOTS2) and the in-Service support of the system once incorporated into the CAF 11 Weapons System, comprising the B350 King Air Fleet and the attendant Support Systems.

B.   Clause 1.1 of Annex E to Attachment B of the Contract provides that the Recurring Services and Survey and Quote payments are to be adjusted on annual basis in accordance with clause 1.5.

C.   The Contract provides that changes to the Contract are to be dealt with by CCP, specifically Clause 6.3.

D.   Hawker Pacific and the Contractor propose a change to the Contract as set out in this CCP.

…

3.   Details of Proposed Change (Mandatory): Attachment B Price and Payments, Annex B Recurring Services

Attachment B - Price and Payments to the Contract is amended in the manner described at 3.a and 3.b below, and for the purposes of this CCP only the changes are shown in mark-up at Appendix 1 to this CCP:

a.   The table entitled “Core Services Fee” in Annex B to Attachment B (“Recurring Services”) is amended to reflect the adjusted value of the Core Services Fee and the note located immediately after the table entitled “Core Services Fee” is adjusted to read; “Note: Table B-1 identifies prices that were adjusted in accordance with Attachment B Annex E clause 1.5 on 21^st February 2020.”

b.   The table entitled “Rates for S&Q Services” in Annex D to Attachment B (“S&Q Services (CORE)” is amended to reflect the adjusted value of the labour rate in the “Software Engineer” labour category and the note located immediately after the table entitled “Rates for S&Q Services” is adjusted to read; “Note: Table E-1 identifies prices that were adjusted in accordance with Attachment B Annex E clause 1.5 on 21^st February 2020.”

3.1.    Justification for Proposed Change

The proposed changes (3.a) and (3.b) identify in the relevant price tables the adjusted prices that apply. This aids the Parties in administering of the Contract, without in any way impacting the existing mechanism for adjusting prices that is set out at clause 1 of Annex E to Attachment B.” (Emphasis added.)

33. Attached to the 2020 CCP were revised copies of Annexes B and D to Attachment B.

34. On 16 March 2021, the parties signed the third Contract Change Proposal (2021 CCP). That Contract Change Proposal took a slightly different form from the 2019 and 2020 CCPs. Apart from not being executed as a deed (as already noted), Recital C was expressed differently to the Recitals in the two earlier deeds. Further, the “Justification for Proposed Change” contained no statement to the effect that the change was being proposed for or to assist the parties in “administering the contract”, as was contained in the 2019 and 2020 CCPs, but was in the following terms:

“2.1.1   The variations to the Contract at clause 1.1 and 1.2 of this CCP reflect the increase of the Core Services Fee and Rates for S&Q Services following the release of Index on 24 February 2021.”

35. Recital C of the 2021 CCP was as follows:

“C.   Pursuant to Annex E to Attachment B of the COC, the Core Services Fee (also known as the Recurring Services Fee) and Rates for S&Q Services Fees to be adjusted in accordance with the Index effective of 1 January 2021.” (Emphasis added.)

Also included in the 2021 CCP were several tables increasing the price payable for Support Services and S&Q Services (specifically the daily rates for a software engineer).

36. Unlike the 2019 and 2020 CCPs, no amended Attachment B (or part thereof) was attached to the 2021 CCP. Rather, the 2021 CCP contained drafting instructions to replace an existing table with a new table. The new Table B-1 was as follows:

ACOTS2 Through Life Support Costs
Item No.	Item Description	Annual Price (excluding GST & Customs Duty	Customs Duty (if applicable)	GST (if applicable)	Annual price (including GST & customs duty)	Adjustments
$A	$A	$A	$A	(i)
Through Life Support Costs
Provision of ACOTS2 Through life support	$1,633,458.18	$163,345.82	$1,796,804.00	ABS 6345.0 Series ID A2602909T
SUBTOTAL	$1,633,458.18	$163,345.82	$1,796,804.00
Core Services Fee (i)					$1,796,804.00

The new Table B-1 contained the following notation immediately underneath it:

“Note: Table B-1 – identifies prices that were adjusted in accordance with Clause 1.5 of Annex E to Attachment B on 24 February 2021.” (Emphasis added.)

37. As noted in [10] above, the figures derived as a result of the first three annual price revision exercises applying the Formula was premised on the “Base Date Index Value” being the value of the AUS Labour Index as at the quarter including the date of 1 January 2018, this being the Base Date contended for by the Appellant.

38. As will be seen, the fact that the parties acknowledged in the note to Table B-1 that the prices were adjusted in accordance with cl 1.5 to Annex E to Attachment B was significant as this acknowledgement became part of the Contract. Contrary to an argument put on behalf of the Respondent, it was not a form of post or extra-contractual statement of subjective intent; rather, it formed part of the contract which, axiomatically, must be construed as a whole: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46].

The Dispute Notice

39. On 8 February 2022, Jet issued a “Dispute Notice” under cl 6.8.3 of the Contract in respect of the price adjustment to be made on 1 January 2022 (the Dispute Notice). The Dispute Notice, signed by Mr Jason Kelly, Director Defence Commercial at Jet, and addressed to Mr Peter Freed, Managing Director of Cirrus, said:

“I refer to Contract No. HP2017771/2018/001 between Hawker Pacific Pty Ltd (now known as Jet Aviation Australia Pty Ltd) (“Jet Aviation”) and Cirrus Real Time Processing Systems Pty Ltd (“Cirrus”) dated 1 August 2018 (the “Contract”) and my subsequent correspondence dated 9 August 2021 and 23 September 2021 (the “Notices”).

As set out in the Notices, Cirrus has been made aware of an error that has resulted in the Annual Price Variation (APV) being incorrectly calculated contrary to Annex E to Attachment B of the Contract. Clause 1.4 of Annex E to Attachment B clearly states that the price adjustment for each year subsequent to the First Price Revision Date shall be based upon the preceding period index values. Despite this and Jet Aviation using all reasonable efforts in good faith to rectify this error, Cirrus has contended there is no error (“Dispute”).

In accordance with clause 6.8 of the Contract, Jet Aviation hereby gives Cirrus notice of the Dispute which shall be referred to the Management Representatives of Jet Aviation and Cirrus as specified in Item 8 of the Details Schedule of the Contract, being Mr. Jason Kelly and Mr. Peter Freed respectively.

If the Dispute is not resolved within 30 days of this Dispute Notice by the Management Representatives, the Dispute shall be referred to Senior Representatives of each Jet Aviation and Cirrus as specified in Item 9 of the Details Schedule of the Contract.”

40. The Dispute proved incapable of resolution and proceedings were commenced in the Commercial List of the Equity Division where they were heard by Ball J (primary judge) with his customary despatch.

41. One important point to be noted at this stage is that, in the hearing before the primary judge, unlike on appeal, the three Contract Change Proposals were relied on by Cirrus not as contractual variations per se but rather as asserted admissions on the part of Jet as to the meaning of the Contract and the identification of the Base Date in particular. Jet sought to counter this argument by characterising the Contract Change Proposals as post-contractual conduct, and thus not a legitimate aid in the construction of the words of a written contract, citing Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [35]; Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 at [318]-[322].

42. The primary judge rejected Cirrus’ argument that the Contract Change Proposals were admissions, holding at PJ [26]:

“Cirrus relies on the fact that Jet accepted its calculation of Pn in the first three years in which the calculation was performed. Nothing turns on the first year, since both interpretations of the formula produce the same result. In relation to the other years, Cirrus submits that Jet’s conduct operates as an admission and so falls within an exception to the principle that subsequent conduct is not relevant to contractual interpretation: see Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [121] per Basten JA. However, as Basten JA points out in that case (at [122]), referring to the statement by Spigelman CJ in County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [7], admissions are not an exception to the principle. Rather, an admission may operate where there is a question of fact concerning what the parties agreed. It is irrelevant or valueless where the admission is in relation to the interpretation of the written words of a contract, which is a question of law: see Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 at 736 (Lord Diplock); Cottonex Anstalt v Patriot Spinning Mills Ltd [2014] EWHC 236 (Comm) at [43]ff (Hamblen J). That is the position in this case.”

The primary judge’s reasoning

43. The primary judge’s reasons are principally to be found at PJ [15]-[21] as follows:

“[15]   First, there is no reason to think that “Base Date” was defined in the Contract for the purpose of cl 1.1 of Annex E to Attachment B. The expression “Base Date” is defined in Item 3 of the Contract Details Schedule, which includes a cross-reference to clause 3.3 of the Contract, suggesting that Item 3 was included for the purposes of that clause. However, the expression “Base Date” is not used in that clause. Indeed, the only place the expression itself is used is in the definition of “Escalation Date”, which itself appears to be a superfluous definition. The definition of “Base Date” appears to have been a definition left over from a previous draft that once included a clause 3.3 that used that term.

[16]   Second, cl 1.1 of the Contract specifically states that in the Contract, defined terms have the meaning given to them “unless the contrary intention appears”.

[17]   Third, the relevant expression in the definition of APV is “Base Date Index Value”. The whole expression has been capitalised. The term is not used in any other context, which indicates that it has a particular (albeit not expressly defined) meaning in the context of the calculation of APV. The position might be different if “Index Value” was defined separately or was not capitalised. In that case, “Base Case [sic]” would stand apart as a defined term from the separately defined term, “Index Value” or from the undefined expression “index value”. Capitalisation of the whole expression suggests that it should be treated as a single expression. Absent a definition, it should take its meaning from the ordinary meaning of the component words and the context in which they appear.

[18]   Fourth, it does no violence to the language to interpret the words “Base Date” as meaning the beginning or start date of the period to which the calculation relates. The definition of “APV” is clumsy. But, as I have said, it is common ground that the description of the numerator (“AUS Labour Index Value (past year)”) is a reference to the value of the relevant index at the end of the year in question. Consequently, it is natural to read the word “Base” in the description of the denominator as a reference to the value of the relevant index at the beginning of that year.

[19]   Fifth, cl 1.4 states that “The Subsequent Price Revision Dates shall be 1 January of each year subsequent to the First Price Revision Date and shall be based upon the preceding period index values”. Read literally, the provision makes no grammatical sense. The subject of the clause “shall be based upon the preceding period index values” is the “Subsequent Price Revision Dates”. However, it makes no sense to say that those dates shall be “based on” preceding period index values. The dates are fixed as 1 January each year. Those dates are not determined or based on index values.

[20]   In context, however, the clause appears to be saying that the calculation of Pn for subsequent years shall be based upon the preceding period index values. The relevant period is the preceding year. And the preceding index values in the calculation of APV are the immediately preceding index value for the numerator and the index value for the previous year for the denominator. That supports the conclusion that the “Base Date Index Value” in the definition of “APV” is to be understood as the index value at the beginning of the period to which the calculation relates.

[21]   Sixth, the interpretation of “Base Date Index Value” contended for by Cirrus has the odd consequence that the price payable under the Contract (or at least the relevant components) increases each year by the percentage increase in wages since the Base Date of the Contract rather than by the percentage increase in wages since the last increase, with the result that prior year percentage increases in wages since 1 January 2018 are applied each year to the amounts already determined by the application of those increases. On the other hand, the interpretation contended for by Jet makes perfect commercial sense. The Contract lasts for a number of years. Cirrus’s principal cost in providing services under the Contract is labour costs. Apart from performance-based payments (and deductions), the fees payable to it were fixed at the date of the Contract. It therefore made commercial sense for the parties to agree to a price adjustment mechanism which adjusts the price payable by reference to the increase or decrease in Cirrus’s principal cost over the life of the Contract. That is what Annex E of Attachment B, understood in the way described, does. Each year it increases (or decreases) the amount that Cirrus can charge by reference to the percentage increase (or decrease) in comparable wages in the previous year.”

Arguments on appeal

44. Although there are three separate grounds of appeal, the Appellant urges on this Court the same construction it contended for at first instance. As already noted, the principal difference, however, between the way the matter was argued at first instance and on appeal was that the Contract Change Proposals were not relied upon as admissions (and no challenge was made to the primary judge’s rejection of the Appellant’s contentions at first instance in this regard). Rather, the iterative Contract Change Proposals were relied upon as having effected variations to the Contract, with the changes introduced by the 2021 CCP being of particular significance. These changes were of contractual consequence and it was submitted that the Contract, as amended, supported the Appellant’s argument, in particular the notation to Table B-1 that the price indicated for the 2021 year had been calculated in accordance with cl 1.5 of Annex E to Attachment B (see [36] above). The submission was that the figure could only have been calculated in accordance with cl 1.5 of Annex E to Attachment B if the Base Date was intended by the contracting parties to be 1 January 2018, the date contended for by the Appellant.

45. Cirrus submitted on appeal that:

“That was the Contract that fell for construction, and its terms included the terms of the (new) table B-1, just as much as they included the formula in cl 1.1 of Annex E to Sch B, or the “worked example” in cl 1.2 of that annexure.

If a contract which the parties have varied is construed by reference to its unvaried form, that would undermine the parties’ capacity to change their agreement. A contractual variation does not occur in isolation from the rest of the contract, but becomes part of it, once made. The Contract is to be interpreted as a whole, and the inclusion of terms that (a) show revised prices consistent with the Appellant’s construction (and not the Respondent’s construction) and (b) that are stated to be “adjusted in accordance with” the relevant provisions, lends strong support to the objective intention of the parties being in accordance with the Appellant’s construction. Questions of a distinction between fact and law do not seem applicable in such a context – the revised terms are simply other terms which shed light (bright light) on the meaning of the related provisions of the Contract.

There is no suggestion that the variations in the present case were not effective, nor are their terms ambiguous in any respect. The fact that the parties took the step invoking a contractually provided mechanism for contractual variation to record the outcome of the variations each year only serves to indicate how (objectively) seriously the parties took the review process. And for each variation (although perhaps only the last variation is material) the prior communications between the parties whereby the basis of the calculations was set out is not “post-contractual conduct” either - it is part of the commercial context in which each of the (relevantly subsequent) contractual variations occurred.”

46. The Appellant submitted that the new Table B-1, inserted into the Contract by the 2021 CCP, was akin to but more powerful than a “worked example” of the kind that sometimes appears in commercial contracts or legislation. It was “more powerful” because it was not included by way of example but by way of what the parties had actually done and agreed.

47. The Respondent properly did not take a Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35 point in relation to the different way in which the Appellant relied upon the Contract Change Proposals in support of its argument in this Court. Rather, it submitted that the contractual variation did not alter the Formula or the terms of Annex E to Attachment B. It submitted that the analysis of the primary judge remained correct, including as to his Honour’s observations as to the commerciality of the competing constructions.

48. The Appellant, in addition to its reliance on the Contract Change Proposals, advanced a number of criticisms of the primary judge’s six point analysis at PJ [15]-[21] (see [43] above) as well as reiterating various textual arguments in support of its preferred construction. The simplest and most powerful argument was that the term “Base Date”, appearing as it does in upper case in the expression “Base Date Index Value”, was plainly intended to pick up the same term as identified in Item 3 of the “Details Schedule” of the Contract. Accordingly, it was submitted that the composite expression “Base Date Index Value” was intended to refer to the value of the AUS Labour Index as at 1 January 2018.

49. The Appellant submitted that the primary judge was wrong in PJ [15] to effectively dismiss the significance of the reference to “Base Date” in the “Details Schedule” because of the irrelevant reference to cl 3.3 of the Contract (see [16] above). The Appellant accepts the irrelevance of the reference to cl 3.3 but insists that the definitional identification of “Base Date” as being 1 January 2018 cannot be ignored in circumstances where it is not otherwise defined, and the term “Base Date” is used elsewhere in the Contract, including but not only in the formula for the calculation of “APV” for the purpose of the Formula.

50. The Appellant also drew attention to cl 1.1.1 of the COC which provides that “unless the contrary intention appears, words, abbreviations and acronyms have the meaning given to them in the Details Schedule or the Glossary at Attachment C”, and submitted that no contrary intention was manifested in the Contract. The primary judge at PJ [16] referred to the proviso – “unless the contrary intention appears” – but did not in terms identify what his Honour considered to be the “contrary intention” although it may be inferred from PJ [15] that he took the view that the term “Base Date” only applied for the purposes of cl 3.3 and not more generally.

51. Other aspects of the arguments advanced by both sides on the appeal are taken up in my consideration of the construction questions.

Consideration

52. The question of contractual construction presented by this appeal is finely balanced, and one can appreciate why the primary judge favoured arguments provided by Jet at first instance over those put by Cirrus.

53. However, the fine balance of the parties’ competing constructions shifts in favour of the Appellant’s construction when one takes into account: (i) the argument of which the primary judge did not have the benefit, namely that the Contract was varied by successive “Contract Change Proposals”; and (ii) the notation to the varied Table B-1 which affirmed that the revised price for the previous year was struck “in accordance with” cl 1.5 of Annex E to Attachment B.

54. Contrary to a submission advanced by Mr Giles SC for the Respondent, the import of the notation was that the figures shown in Table B-1 were the agreed outworkings of the Formula and adjustment mechanism provided for in Annex E to Attachment B. The reference to cl 1.5 in the notation immediately below Table B-1 is significant because it is cl 1.5 of Annex E to Attachment B that offered the Respondent the opportunity to contend that the adjusted price calculation was not in accordance with the price adjustment formula in cl 1.1. The tabular notation, with its reference to cl 1.5, amounts to a statement that the parties agreed contractually that their calculated figure derived from the correct application of the Formula.

55. It was common ground that the figure of $1,796,804 in Table B-1 (introduced into the Contract by the 2021 CCP) was only referable to the use of the “Base Date” as defined in Item 3 of the “Details Schedule” to the Contract, namely 1 January 2018. In such circumstances, the parties must be taken as having contractually agreed that that was the applicable “Base Date” in the context of the composite expression “Base Date Index Value” in the denominator of the formula for “APV” for the purposes of the Formula.

56. This analysis does not in fact turn on importing the definition of “Base Date” from Item 3 of the “Details Schedule” of the Contract; rather, the identification of the “Base Date Index Value” is derived from the amount set out in Table B-1 as introduced by the 2021 CCP as the contractually agreed output of the Formula. That it requires external data to be used, eg the “AUS Labour Index Value” for 2020, is not heterodox; that is data that is sufficiently identifiable by its contractual description within the Formula.

57. Even apart from the foregoing analysis, I would have been inclined to support the other textual arguments advanced on behalf of the Appellants in preference to those favoured by the primary judge. First, the Formula deliberately uses a defined term, as signalled conventionally by the use of the upper case: “Base Date Index Value”. True it is that that composite phrase was not defined (assuming the drafters in fact intended it to be a composite phrase as opposed to two separate terms run together, i.e., “Base Date” and “Index Value”).

58. “Base Date” was defined and the contractual drafter should, in my view, be taken to have intended to import that definition into the composite phrase (if it truly is composite), especially where the natural meaning of the undefined words “Index Value” is not elusive. Such deliberately used words such as “Base Date” are not to be lightly passed over: Newey v Westpac Banking Corporation [2014] NSWCA 319 at [114].

59. Secondly, the fact that the Details Schedule referred parenthetically to cl 3.3 in the context of the definition of “Base Date” did not mean that that was or would be the only place where the defined term would appear in the Contract. That it did not ultimately feature in cl 3.3 at all did not mean that it was not intended to carry its defined meaning in other places in the Contract where it appeared, such as in the context of the Formula.

60. Some support for that analysis is supplied by the definition in the “Glossary” of “Escalation Date” and “Escalation Notice”. The text of these definitions has already been noted (see [18] above) as has the curiosity that neither of these defined terms in fact appears elsewhere in the Contract. Accepting that, “Escalation Notice” is plainly connected to, or was intended to be connected to the Annex E to Attachment B price adjustment process because it refers to that process in terms in its definition. “Escalation Date”, which can be taken to be cognate to “Escalation Notice”, refers explicitly to the “Base Date” in the “Details Schedule”. A contractual line, albeit faint and perhaps somewhat problematic given that the twin terms “Escalation Date” and “Escalation Notice” nowhere else feature in the Contract, can nonetheless be drawn between the definition of “Base Date” in Item 3 of the “Details Schedule” and Annex E to Attachment B.

61. The primary judge stated at PJ [18] that it did no violence to the language to interpret the words “Base Date” as meaning the beginning or start date of the period to which the calculation relates. That may be so but it does not overcome the significance of the fact that “Base Date” was defined differently and in express temporal terms. This is reinforced by the fact that, in the definition of “Escalation Date”, reference is made to “each anniversary of the Base Date” whereas, on the primary judge’s preferred analysis, that “Base Date” would be ambulatory, as it were, and not have an anniversary; rather it would be different for each price adjustment review and would be defined by reference to a particular period of time rather than by reference to a fixed point in time of which one could speak of having an anniversary or anniversaries. The fixed nature of “Base Date” is further to be inferred from the temporal reference used in the numerator, but not the denominator, of the “APV”. The numerator of “APV”, being the “AUS Labour Index Value”, expressly relates to the “(past year)”. In contrast, the denominator of “APV”, being the “Base Date Index Value”, has no equivalent parenthetical reference. Therefore, as the Appellants submitted, the textual difference in relation to timing between the numerator and denominator for the “APV” suggests that: (i) the numerator is ambulatory; and (ii) the “Base Date” is fixed in time, as at 1 January 2018.

62. It is also necessary to consider cl 1.4 of Annex E to Attachment B upon which the primary judge and the Respondent placed considerable reliance. The text of cl 1.4 is set out at [29] above. Clause 1.4 is curious because the words “shall be based upon the preceding period index values” lack a subject; the clause does not say what it is that shall be based upon “the preceding period index values”. It is the “Subsequent Price Revision” to which this part of the clause is presumably referring. There is force in what the primary judge said at PJ [20] (see [43] above) in relation to cl 1.4, albeit that analysis is weakened by the judge’s acceptance at PJ [19] that, read literally, the provision makes no grammatical sense.

63. Plainly enough, the primary judge’s reading of cl 1.4 does not sit with the parties’ contractually agreed acknowledgement of the wording of the Formula and the implied or derived meaning of “Base Date” based on Table B-1. The Appellant’s explanation of cl 1.4 offered a means of resolving this tension:

“a.   The words “preceding period”, properly construed, enable the identification of (from a range of possible multiple past years referred to in clause 1.1) the applicable quarterly index, namely, the quarter for the preceding period to the respective Subsequent Price Revision Date. By way of example, for the Subsequent Price Revision Date of 1 January 2020 the “preceding period” is the quarter ending 31 December 2019. It follows that the words “and shall be based upon the preceding period index values” in clause 1.4 are a reference to the numerator of the fraction APV in the Formula for price adjustments calculated during the Contract. Clause 1.7 of Annexure E to Attachment B refers to a quarterly index not an annual index. Clauses 1.5 and 1.6 both refer to 3-month periods because they create a window of time for submitting adjustments that match the period for which the indices are published. See also clause 1.8 and in particular paragraph (a) that makes clear that the Contract is concerned with index values having a period of 3 months;

b.   Alternatively, the phrase, “(past year)” in the numerator is the only express text available in the Formula referring to a “preceding” period such that clause 1.4 ought to be construed as relating to the numerator;

c.   As a matter of logic, only the numerator was inevitably a variable and therefore required calculation on an annual basis. Whereas, it was logically sound for the denominator to remain fixed for every price adjustment. On this basis, clause 1.4 had to at least refer to the numerator as a variable from year to year”

64. Finally, it is necessary to consider the commerciality or otherwise of the competing constructions. The primary judge held at PJ [21] that “the interpretation contended for by Jet makes perfect commercial sense”.

65. The primary judge did not go so far as to say, nor did the Respondent suggest, that the construction favoured by the Appellant flouted business common-sense. Undoubtedly, on the Appellant’s interpretation, adjustments would be likely to have a compounding element. Arguments were advanced at first instance as to why this might be appropriate in view of the nature of the contract but these arguments only served to illustrate the wisdom of the observations of Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70 at [43] that:

“Of course, what in respect of a particular contract comprises “business commonsense”, as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible.”

66. As I observed in Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd (2019) 101 NSWLR 679; [2019] NSWCA 185 at [58]:

“Caution is required when resort is had (as ASC did) to assertions of “commercially unlikely consequences” as a reason for departing from the language parties have in fact used: see, for example, Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137 at [55]; Cushman & Wakefield (NSW) Pty Ltd v Farrell [2017] NSWCA 24 at [71]; Lindsay-Owen v Winton Partners Funds Management Pty Ltd [2017] NSWCA 78 at [20]. “Business commonsense” is also a topic upon which minds may differ, and what a lawyer may surmise to amount to business commonsense may be far removed from the true position, whether because of a general lack of understanding of commerce, or because of an information deficit as to the commercial positions of both parties and their larger commercial concerns. Indeed, as Spigelman CJ observed writing extra-judicially, “when the matter comes to the level of litigation, each party remains convinced that ‘a business like’ interpretation or ‘business commonsense’ happens to coincide with its own commercial interests”: “From Text to Context: Contemporary Contractual Interpretation” (2007) 81 ALJ 322 at 330.”

67. The resolution of the constructional question in the present case is not, in my opinion, assisted by resort to consideration of which construction yielded a more “commercial” outcome. The fact that the parties agreed for the first three years of a six-year contract an adjustment based on a 1 January 2018 “Base Date” scarcely supports a conclusion that the Appellant’s construction was uncommercial.

Conclusion

68. For the above reasons, I would allow the appeal and make the following orders:

1. Appeal allowed.

2. Set aside the orders made by Ball J on 5 May 2023 and in lieu thereof order:

1. A declaration that on the proper construction of clause 1.1 of Annex E to Attachment B of the contract (B300 Services Support Contract – ACOTS2 (Contract No: HP 201771/2018/001) executed on 31 July 2018 between the plaintiff [now Appellant] as “Contractor” and the defendant [now Respondent] as “Hawker Pacific” with Effective Date of 1 August 2018, the “Base Date Index Value” is the value of the index for the quarter containing the date 1 January 2018 for the calculation of price adjustments on each price adjustment date;

2. The defendant [now Respondent] pay the plaintiff [now Appellant] the outstanding amounts owing to it under the Contract including interest that has accrued on outstanding amounts in accordance with cl 4.3 of the Conditions of Contract;

3. The cross-summons be dismissed.

3. The Respondent pay the Appellant’s costs of the appeal.

4. There be no order as to the costs at first instance.

69. The reason for the fourth order is that, although the Appellant succeeded on appeal, it did so by reference to an argument not made at first instance and which was decisive to its success on appeal.

70. LEEMING JA: I agree with the Chief Justice that this appeal should be allowed. I write separately in order to explain why, if the parties’ submissions had been confined to those advanced at first instance, I would have reached the same result as the primary judge. What follows assumes familiarity with the reasons of the Chief Justice.

71. As the Chief Justice explains, the contract is the opposite of a model of clarity and precision. The same inattention to detail accompanied the three variations, two of which were effected by deed, and the third by simple contract. The sole effect of the third variation was to increase the price to be paid by Jet Aviation to Cirrus for services it was already bound to supply at prices determined by the previous deed. How a simple contract unsupported by consideration was effective to displace the effect of the previous deed was largely unexplored. At law a deed could not be varied by a simple agreement, but so long as there was valuable consideration, the variation would be effective in equity: Creamoata Ltd v The Rice Equalization Association Ltd (1953) 89 CLR 286 at 306, 321 and 326; [1953] HCA 40; Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500; [1998] HCA 33 at [114]. The position in equity now prevails: Berry v Berry [1929] 2 KB 316; Sara Stockham Pty Ltd v WLD Practice Holdings Pty Ltd [2021] NSWCA 51 at [15]. It is far from clear to me that the answer to this point is that the previous deed amended a simple contract, which was subsequently itself to be amended by a further simple contract, because the third variation seeks to alter the very provisions put in place by the deed which preceded it. It is true, as Lord Sumption said in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2019] AC 119; [2018] UKSC 24 at [18], that whether consideration is required in order to effect a contractual variation is “probably ripe for re-examination”. That issue has more recently been considered in Rosas v Toca 2018 BCCA 191 (holding that consideration is not required), and in Ma Hongjin v SCP Holdings Pte Ltd [2020] SGCA 106 at [54]-[94] (see also Gloria Jean’s Coffees International Pty Ltd v Daboko Ltd [2020] 2 NZLR 488; [2020] NZHC 29 at [30]-[31] and Oaklane Dairy Ltd v Flooks [2023] NZHC 1852 at [41]-[53] each reviewing the position in New Zealand). Under the Uniform Commercial Code, consideration is generally unnecessary (see §2-209(1), which reflects Stone J’s denunciation that the rule was “one of the relics of antique law which should have been discarded long ago”: Rye v Phillips 203 Minn 567 at 569; 282 NW 459 at 460 (1938)). One practical reason for adopting the position which seems to prevail in North America is that there is no reason to doubt that the parties (and indeed so far as the evidence discloses their lawyers) treated the formally agreed Contract Change Proposals executed by them as binding.

72. But no point having been taken by Jet despite this having been raised at the outset of the hearing (transcript, 14 November 2023, p 4), I proceed on the basis upon which the litigation has been conducted, namely, that each variation was effective. (Lest there be any doubt about the consequences of the way the appeal was argued, I should indicate that if the point had been taken, it is difficult to see what would turn upon it, because the first and second variations were effected by deed and did not require consideration, and the amendments incorporated the same statements concerning the basis upon which the adjusted rates were calculated, at least in the absence of any claim that proffering the first and second Contract Change Proposals was misleading or deceptive.)

73. In the present case, the parties effected the variations by direct textual amendment. Thus by way of example, the third “Contract Change Proposal”, which was executed as an agreement, reproduced what it described as the “Old Text” including a table containing (a) the “Through Life Support Costs” of $1,541,896.62 plus GST and (b) the note to that table in its then form, stating that it “identifies prices that were adjusted in accordance with Attachment B Annex E clause 1.5 on 21 February 2020”. The Contract Change Proposal then provided that that table “is deleted in its entirety and replaced with the following” and there follows a new table, identical with the earlier table save that the amount has risen to $1,633,458.18 plus GST and with a new note now saying that the table “identifies prices that were adjusted in accordance with clause 1.5 of Annex E to Attachment B on 24 February 2021”. The execution of the document thereby effected amendments to the text of their pre-existing written agreement.

74. In some cases (for example, Hillam v Iacullo (2015) 90 NSWLR 422; [2015] NSWCA 196 at [50]-[74]) it can be important to be precise about the legal effect of the variation. The joint judgment in Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520; [2000] HCA 35 at [22] stated:

When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists.

75. In Concut Pty Ltd v Worrell [2000] HCA 64; 75 ALJR 312 at [19], Gleeson CJ, Gaudron and Gummow JJ described these principles as “well settled”.

76. Plainly enough, the objective intention to be imputed to the parties in the present case is that they intended the earlier agreement to continue in effect, but as varied in the way set out in the subsequent Contract Change Proposals. That is the inevitable consequence of their choosing to alter their contractual relations by means of a second contract the sole effect of which is to alter the text of their existing bargain.

77. It was the parties’ contract as varied which gave rise to the obligation to pay for the services supplied by Cirrus. The contract as varied contained statements reflecting the parties’ agreement that the rates had been adjusted in accordance with cl 1.5 of Annex E to Attachment B.

78. I do not accept Jet’s submission that the amendments merely recorded the service of a notice to which no objection was taken. The critical Contract Change Proposal, which is the third variation executed on 9 March 2021, recites that the Recurring Services Fee and the Rates for S&Q Services Fees were “to be adjusted in accordance with the index” and that the parties “wish to vary the Contract in the manner described above by this CCP in accordance with the terms of the Contract”, and then provision is made for the insertion of the new tables and new notes as described above. This goes further than recording the fact that notifications for adjustments had taken place in accordance with cl 6.2 of the contract and cl 1.5 of Annex E to Attachment B. The positive statements in the recitals and the note are to the effect that the adjustment accords with the price adjustment formula. Clause 1.5 records that “the adjusted price applies, unless within 14 days of notification the [Jet] representative can demonstrate that the adjusted price calculation is not in accordance with the price adjustment formula in cl 1.1 above”. Read as a whole, and bearing in mind that what occurred was not merely the service of a notice asserting an adjusted price to which no response was given, but rather a formally executed amending contract which incorporated a note that the adjustment was in accordance with cl 1.5 of Annex E to Attachment B, the effect is an acknowledgement by both parties that the stated prices accord with the price adjustment formula.

79. The statements incorporated by the variations that the adjusted prices had been calculated in accordance with Attachment B Annex E are not decisive. The fact that one part of a contract states how a clause applies cannot of itself determine the legal meaning of that clause, which falls to be determined in the usual way, giving primacy to its text but read in light of the contract as a whole and where appropriate its surrounding circumstances. As Gordon J recently observed, albeit in another context, “The whole of the contract is to be construed including whatever labels the parties have used to describe their relationship, but those labels are not determinative: ‘parties cannot deem the relationship between themselves to be something it is not’”: Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; 96 ALJR 89 at [184], citing Hollis v Vabu Pty Ltd (2001) 207 CLR 21; [2001] HCA 44 at [58]. That said, the note which is newly incorporated into the parties’ contract is a powerful consideration bearing upon the proper construction of the price adjustment formula. That is because a court would strain against imputing to the parties an intention that the note and the price adjustment formula are inconsistent with one another, and the sole purpose of the note is to explain the basis upon which the adjustment has been computed.

80. None of the foregoing was advanced to the primary judge as a matter of construing the contractual documents. To the contrary, and indeed antithetically to the position advanced on appeal, the first, second and third variations were relied upon at trial as post-contractual conduct relevant as admissions, a proposition his Honour rejected. If the considerations above were not in play, I would respectfully agree with the construction upheld by the primary judge, for the following reasons.

81. The real difficulty in the case is that the price adjustment formula, if it is read in the way Cirrus submits it is to be read, is close to being absurd. The absurdity arises because the computation is based on one year’s escalation in the agreed index. That is to say the point of the formula is to calculate the new year’s price based upon the last year’s price but according to Cirrus, the relevant escalator is not calculated by reference to index amounts from that year and the previous year but by reference to the index amounts from that year and the first year. The effect of that increases exponentially throughout the term of the contract.

82. By way of example, the fee increased by 16.55% in 2024 when the index increased by 3.52%. That is difficult to reconcile with any construction which is not absurd. The absurdity arises because the increase bears no sensible relation to the indexation to which the parties have agreed. No sensible point is served by having an elaborate formula to adjust price annually by reference to an index, but having the adjustments determined by reference to the cumulative effect of that increase over the life of the contract. Thus, if the index increased in the first year by 10%, but by 2% in each of the second, third and fourth years, then according to Cirrus the price adjustment should be an additional 10%, 12%, 14% and 16% upon the previous year for each of the first four years. Thus if the price at the commencement of the contract were $1,000,000, the price would increase to $1,100,000 in year 2, $1,232,000 in year 3, $1,404,480 in year 4 and $1,629,196.80 in year 5.

83. In the example I have given, the absurdity is confirmed by the adjusted price bearing no relationship with anything in the real world. That comes about because I have hypothesised an index increase of 10% in year 1. Cirrus sought to deflect the impact of the exponential adjustment by emphasising that over the six year term of the agreement on the facts of this case, the effect was merely an extra $1.33 million, which was only 13% greater than the total price calculated according to Jet Aviation’s construction. That is so. But it is just as easy to identify comparisons that make the effect of Cirrus’ construction seem large. For example, on Cirrus’ construction, the increase in 2024 is 16.55% as opposed to 3.52%, which is some 470% greater.

84. But the real reason I do not see great force in the submission that Cirrus’ construction only alters the outcome in the present case by some 13% is that whether something is “commercial nonsense” or “commercially absurd” does not depend on the dollar effect of the construction on the facts of a particular case. It depends on whether the legal meaning to be imputed to the parties is outside the bounds of what could reasonably be attributed to them. In light of the parties’ submissions on this, it is as well to explain why that is so.

85. First, the question is always one of construction. The conclusion that one construction is “absurd” is a consideration favouring an alternative construction. A court is not under the guise of deprecating a meaning as “absurd” rewriting the parties’ chosen contractual language to achieve what the court regards as a less uncommercial meaning. Thus in International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2015] NSWCA 363 at [148] this Court stated that it “has no mandate to rewrite agreements merely to give them a more commercial operation”.

86. Secondly, the proper construction of the contract does not depend on the facts as they appear while it is in force. The facts may illustrate the absurdity, as they did in Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25 at [19], a decision mentioned at the hearing, but that does not alter the basic point. The proper construction of a contract is determined at the outset. Where the contract is varied, its proper construction as varied will be determined at the time the variation is effected.

87. Thirdly, judges tend not to be engaged in commerce and are far from the best placed to assess the commerciality or otherwise of a construction. I respectfully agree with the caution expressed by Lord Neuberger in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732 at [22]:

Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood.

88. Substantially the same point was made in Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd (2019) 101 NSWLR 679; [2019] NSWCA 185 at [58], in a passage endorsed and applied in XL Insurance Co SE v BNY Trust Company of Australia Limited [2019] NSWCA 215 at [78]-[79]. Further, as is observed in P Herzfeld and T Prince, Interpretation (2nd ed Lawbook Co 2020) at p 606, the High Court divided in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 on whether a construction accorded with commercial common sense.

89. Fourthly, for all those reasons, the test of absurdity is not easily satisfied, as was pointed out in Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297 at [18] and Willis Australia Ltd v AMP Capital Investors Ltd [2023] NSWCA 158 (a decision which reviews many of the authorities on this point at [51]-[60]) at [53].

90. In a case such as the present, the contractual language incorporates a formula. The formula has an evident purpose. The purpose is to permit price increases by reference to a relevant index. The largest component of the cost of the software services to be supplied is labour, and so it may readily be seen why an index based on professional and scientific wages was selected. The prices are to be determined every year, and the natural way of attributing a sensible meaning is by the price increase being reflected by the annual increase in the index, as opposed to the total increase in the index from the inception of the contract.

91. Putting to one side the three variations, the parties’ contractual language in this unhappily drafted contract may without undue strain be read so as to achieve that purpose, especially bearing in mind the evident carelessness reflected in other provisions of the contract. “Base Date” is defined but “Base Date Index Value” is not. I share the view of the primary judge that in a formula which turns on computing the next year’s rates by reference to the previous year, that previous year is naturally understood as being the “Base Date” for the purposes of that calculation. Although there is some force in the proposition that “Base Date” is not otherwise used in the contract, the reference to “Base Date Index Value” necessarily involves yet another drafting error, because neither “Index Value” nor “Base Date Index Value” is defined. Further, “Base Date” is merely a defined term, and the contract expressly provides that defined terms are displaced by a contrary intention. I respectfully agree with the six considerations relied upon by the primary judge at [15]-[25].

88. But three times during the life of the contract, the parties agreed by formal signed writing that the formula was to be applied literally, so that (for example) the escalator for year 3 was not the amount by which the agreed index rose in the previous year, but instead the total amount by which the agreed index arose in the first three years of the contract, even though the increase in the index in year 1 had already contributed (twice) to the price in year 2 and year 3. If those variations are regarded solely as admissions, as occurred at trial, then once again I respectfully agree with the primary judge that they do not materially bear upon construction, which is a question of law: Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [83], [120]-[121], [133]; Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 at [68]-[69].

89. But in this Court Cirrus contended that the variations were contractual, as opposed to post-contractual. That is plainly correct, and Jet made no submission to the contrary. It is impossible to resist the conclusion that the parties are to be taken to have affirmed that the price adjustment formula will operate in the manner Cirrus contends. This is not a question of regard to extrinsic materials. The contractual entitlement on which Cirrus’ right to payment rested turned upon the provisions as amended by the third variation, which inserted in terms a note stating that the increased price had been calculated in accordance with Attachment B Annex E. The conclusion reached by the primary judge entails that the parties’ formal contractual language was wrong, and in fact contrary to what was recorded in the very part of their bargain which determined the price, the dollar amounts had not been calculated in accordance with Attachment B Annex E. No claim for rectification was brought. I conclude that the parties must be taken to have meant what they explicitly and repeatedly said they meant, notwithstanding the departure from the relationship between the index and Cirrus’ cost of labour.

90. I agree with the orders proposed by the Chief Justice.

91. KIRK JA: The circumstances of this appeal are explained in the judgment of Bell CJ. His Honour’s judgment illustrates that this appeal raises a borderline issue of contractual construction. In my view the primary judge correctly resolved the issues based upon the arguments presented to him. The poor drafting of the contract reduces the force of close textual analysis and serves to emphasise the significance of purposive and commerciality considerations. I agree with Leeming JA’s discussion of those considerations at [81]-[90] above. They militate against the construction advocated by the appellant.

92. However, the decisive consideration in the appeal is a point not argued before the primary judge, namely that the significance of the rate-setting by the parties subsequent to entry into the contract was that it varied the contract in a manner confirming the appellant’s construction. I agree with the reasons of Bell CJ at [11]-[12] and [52]-[56], along with those of Leeming JA at [76]-[79] and [92]-[93], in that regard. I thus agree with the orders proposed by the Chief Justice.

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Amendments

09 May 2024 - replaced "holding the" by "holding that" in [71]

- replaced "Philips" by "Phillips" in citation in [71] and coversheet

- replaced "568" by "569" in pinpoint citation in [71]

Decision last updated: 09 May 2024