Dialog Pty Ltd t/as Dialog Information Technology v Sklar

[2019] NSWSC 15

Supreme Court

New South Wales

Medium Neutral Citation:	Dialog Pty Ltd t/as Dialog Information Technology v Sklar [2019] NSWSC 15
Hearing dates:	12 December 2018
Date of orders:	31 January 2018
Decision date:	31 January 2018
Jurisdiction:	Common Law
Before:	Fagan J
Decision:	1 Leave to appeal is granted so far as necessary to deal with all issues raised in the plaintiff’s summons and submissions. 2 The appeal is upheld. 3 The orders of the Local Court made on 23 April 2018 are set aside and in lieu thereof it is ordered: (1) Judgment for the plaintiff (Andrew Sklar) against the defendant (Dialog Pty Ltd) in the sum of $13,119. (2) The plaintiff (Andrew Sklar) is to pay the costs of the defendant (Dialog Pty Ltd) in the Local Court 4 The defendant is to pay the plaintiff’s costs of the summons in this Court.
Catchwords:	CONTRACTS – construction – interpretation – commission calculation – gross margin – meaning of gross margin – contra proferentem principle not applicable where no ambiguity upon application of general principles of construction – leave to appeal granted – appeal upheld
Legislation Cited:	Local Court Act 2007 (NSW)
Cases Cited:	Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; [1986] HCA 82
Texts Cited:	Oxford Dictionary of Accounting, 3d ed, Oxford University Press, 2005
Category:	Principal judgment
Parties:	Dialog Pty Ltd trading as Dialog Information Technology (plaintiff) Andrew Sklar (defendant)
Representation:	Counsel: M Doyle (applicant) A Tokley SC with P Barry (respondent)   Solicitors: Mills Oakley (applicant) Lander & Rogers (respondent)
File Number(s):	2018/155785
Publication restriction:	No
Decision under appeal	Court or tribunal: Local Court of New South Wales Jurisdiction: Civil Date of Decision: 23 April 2018 Before: Magistrate Greenwood File Number(s): 2017/168192

Judgment

1. This is an appeal from a decision of Magistrate Greenwood sitting in the Local Court at Sydney. The plaintiff that has brought the appeal, Dialog Pty Ltd (“Dialog”), was the defendant in the Local Court. The defendant in this Court, Mr Sklar, was employed by Dialog from 30 January 2014 to 31 July 2015 as a business development manager and senior account executive. Mr Sklar sued Dialog for commission of 7.41% of the gross margin on business he had generated during his employment.

2. In the Local Court Dialog did not dispute that Mr Sklar was entitled to commission at the rate he claimed under the terms of his employment contract. It contended that on the proper construction of the contract and on its correct application to the facts Mr Sklar’s entitlement was only $13,119. The dispute turned upon whether, in calculating the gross margin on revenue generated by Mr Sklarfor the company:

1. his base salary should be deducted as a direct expense of deriving that revenue;

2. the cost incurred by Dialog in providing technical services to clients should be deducted as a direct expense and

3. the amount of a refund to one client should be deducted either as a reduction of revenue or as a further direct expense.

3. On 23 April 2018 the learned magistrate upheld Mr Sklar’s claim. Her Honour gave judgment for $52,089.02 and ordered that Dialog pay Mr Sklar’s costs. It was held that deductions (1) and (2) referred to in the preceding paragraph were not required. The refund referred to at item (3) was upheld as a proper deduction but the magistrate’s calculation in relation to it is disputed. Dialog’s grounds of appeal come down to contentions that her Honour erred in two respects, namely:

1. by construing “Gross Margin” (in the term of the employment contract relating to commission) as not requiring deduction of direct labour costs from revenue and

2. in her Honour’s application of the commission term to the facts.

4. Construction of a contract is a question of law. Dialog is therefore entitled to bring the appeal on its construction ground as of right: s 39(1) of the Local Court Act 2007 (NSW). Application of the correctly construed contract to the facts of the case is a mixed question of fact and law for which leave is required: s 40(1). As the application of the contract to the facts is inextricably connected with Dialog’s construction point I will grant leave to appeal to the extent necessary to enable all of Dialog’s arguments to be considered.

Dialog’s business

5. The evidence before the Magistrate showed that in 2014 and 2015 Dialog’s business consisted of selling software to clients and providing them with information technology (“IT”) services, including installation, deployment, configuring and commissioning of software. Dialog also developed its own software solutions for clients. The clients were government departments and agencies, corporations and large business enterprises. Dialog’s business was divided into a general services unit and six “practices”. The practice in which Mr Sklar worked was designated “Google Solutions”. The National manager of that practice was Mr Glenn Irvine.

6. Dialog’s activities in its Google Solutions practice included advising clients on software technologies and systems which were available from Google Corporation and which would be compatible with the clients’ existing systems and IT needs. Dialog would procure such technologies from Google Solutions and on-supply them to the clients. It would then deploy the technologies, configure them suitably for the clients’ purposes and train the clients’ personnel in the use of the technologies. Dialog also developed for clients its own software which could be used compatibly with the clients’ other information technologies.

7. As manager of the Google Solutions practice Mr Irvine was involved in Dialog’s relationships with clients of the practice. He managed the staff of Dialog who worked within the practice, including business development managers and account executives such as Mr Sklar. He also managed technical service staff, including software engineers, who attended to the deployment, configuring and developing of software for clients. The role of the business development managers and account executives, such as Mr Sklar, included advising clients on software solutions, securing orders for the supply, installation and/or development of software and then managing the fulfilment of such orders from delivery and deployment of the software through any necessary configuration, development and training of staff.

The employment contract

8. By email of 24 January 2014 Mr Irvine on behalf of Dialog offered to Mr Sklar a remuneration package which was set out in a table of figures as follows (line numbers added for ease of reference):

1 Base               $150,000

2 Base+Super            $163,875

3 OTE [On Target Earnings]      $275,000

4 Commission            $111,125

5 [omitted - not relevant]

6 [omitted - not relevant]

Sales Targets

7 Revenue            $6,000,000

8 Gross Margin         $1,500,000

9 Commission Rate to Target      7.41%

9. The email provided further figures showing that a higher rate of commission would be paid on gross margin in excess of $1.5 million. The percentage would increase in steps at $1.5 million, $2 million and $2.5 million. Adjacent to the list of increases to the commission rate were figures which indicated the “Potential Extra Earn”, that is, the additional dollar amount of commission which could be derived by applying the higher rates to over-target Gross Margin. The email concluded with information concerning an allowance for Mr Sklar’s relocation from the United States and it made reference to an application for a s 457 Visa.

10. The “Base+Super” figure at line 2 reflects a superannuation component of 9.25% of the base salary. Against the heading “Sales Targets”, the “Revenue” figure of $6 million at line 7 is clearly the projected or target revenue expected to be derived by Dialog through “Sales” achieved by Mr Sklar. The “Gross Margin” figure of $1.5 million at line 8 is the company’s expected gross margin on revenue of $6 million. The meaning of “Gross Margin” was critical to the learned magistrate’s decision and it is critical to the appeal.

11. The “Commission” figure at line 4 is intended to be 7.41% of $1.5 million. That would actually be $111,150, not $111,125 as appears in the email. This error was recognised by both parties in the hearing before the magistrate and is of no consequence. The sum of the “Base+Super” at line 2 and the “Commission” at line 4 is $275,000 which is therefore the “On Target Earnings” indicated at line 3. $275,000 is the total of base salary plus superannuation plus commission which Mr Sklar would earn if his activities generated the target “Revenue” and if they resulted in a “Gross Margin” of $1.5 million.

12. There must have been some discussion between Mr Sklar and Mr Irvine between 24 and 30 January 2014 which resulted in the base salary being increased to $155,000. Mr Irvine wrote a letter to Mr Sklar on 30 January 2014 “confirming its offer of employment as an ICT Business Development Manager/Senior Account Executive-Google Enterprise”. The letter stated that the base salary would be $155,000 and with superannuation at 9.25% the base package would be $169,337. Mr Sklar was advised that his employment would be on the terms of a written Employment Agreement which was attached. Both Mr Irvine and Mr Sklar countersigned the letter and the Agreement.

Termination of employment and dispute regarding commission

13. In a little over a year up to mid-2015 Mr Sklar derived for the company revenue of only about $1.42 million on an accruals basis, which reduced to $1.19 million on a cash basis after a full refund had to be made to one client. The refund was made because software which had been sold to the client was not supported by its hardware and other programs and could not be installed. The revenue derived by Mr Sklar represented a significant shortfall on his target of $6 million. On the ground of underperformance Dialog terminated his services with effect from 31 July 2015. Dialog calculated his entitlement to commission on a schedule which listed 16 transactions which had been performed for 9 of the company’s clients. There was no dispute that these were the transactions by which Mr Sklar had generated revenue for the Google Solutions practice during his employment.

14. The revenue for each of the 16 transactions was shown in a column on the schedule. There were also columns for the cost to Dialog of the software supplied (headed “Dialog buy price”) and for the cost of services provided. For some transactions there was no buy price because the transaction involved only the provision of services. For others there was a buy price but no services cost, indicating that software had been on-sold without Dialog having incurred any software engineering or other technical costs. In Dialog’s calculations on this schedule, the buy price, the services costs and Mr Sklar’s base salary plus superannuation were deducted from the total revenue of the transactions, to derive what it contended was the gross margin to which Mr Sklar’s commission rate of 7.41% was to be applied.

15. The following table shows the parties’ competing contentions in the Local Court concerning calculation of gross margin on the 16 transactions:

Description	Dialog $	Mr Sklar $
1	Revenue	1,422,557	1,422,557
2	Less Dialog buy price	628,964	628,964
3	Less reversal of Spatial Software	234,770	Nil
4	Less services cost	168,740	Nil
5	Less Mr Sklar’s salary costs	213,038	Nil
6	Gross margin	177,045	793,593
7	@ 7.41%	13,119	58,805

Construction of the term regarding commission on gross margin

16. In the Local Court the parties adopted the following as an agreed fact:

The plaintiff’s Commission Rate to Target of 7.41% on the gross margin he earned for the defendant was a term of his employment with the defendant.

17. The email of 24 January 2014 and the letter and Employment Agreement of 30 January 2014 provided no elaboration of what was intended by Gross Margin. Nor was there any evidence of conversations by which the parties agreed upon a meaning for this term. The expression “gross margin” is widely used in commerce in relation to the trading activities of entire enterprises or departments within enterprises. Its meaning in commerce and accounting is elaborated in the following definitions given in the Oxford Dictionary of Accounting, 3d ed, Oxford University Press, 2005 (irrelevant portions not reproduced):

gross profit (gross margin; gross profit margin) The difference between the sales revenue of a business and the cost of sales. It does not include the costs of finance, administration, or distribution.

cost of sales (cost of goods sold; COGS) A figure representing the cost to an organisation of supplying goods or services for sale, excluding administration and other general overheads. In a sales organisation, it is the opening stock at the beginning of an accounting period plus the purchases for the period, less the closing stock at the end of the period. … In a service providing organisation, the cost of sales would be calculated as direct costs adjusted by the opening and closing values of work in progress. The cost of sales figure is deducted from the sales revenue to obtain the gross profit [or gross margin] for the period.

direct costs 1. Product costs that can be directly traced to a product or cost unit. They are usually made up of direct materials costs … , direct labour costs (charged by means of timesheets, timecards, or computer direct data entries) and direct expenses (which are subcontract costs charged by means of an invoice from the sub contractor). … 2. Departmental or cost centre overhead costs that can be traced directly to the appropriate parts of an organisation, without the necessity of cost apportionment. For example, the costs of a maintenance section that serves only one particular cost centre should be charged directly to the cost centre.

18. These Oxford Dictionary definitions accord with what I understand to be the widespread general usage of the relevant terminology in commerce and accounting, based upon my experience of such usage in many commercial and tax cases and based upon hearing and reading these terms as they are used in everyday life. The Macquarie Dictionary provides the following definition:

gross margin the difference between the retail and the wholesale price of the goods sold by a firm.

This is obviously a sense of the expression limited to businesses whose sole undertaking is the buying and reselling goods. That is, “sales organisations”. Such businesses are but one case for application of the more general definition given in the Oxford Dictionary.

19. The learned magistrate held that, as it was not stipulated that “Gross Margin” was to be calculated according to general accounting principles for a service organisation, either in the documents of January 2014 or in anything said by Mr Irvine at that time, it followed that the commission term of the employment contract required that “Gross Margin” should be calculated “as for a sales organisation”. In reaching this conclusion her Honour said that “the contra proferentem rule could also be said to apply in this case”.

20. With due respect to her Honour, it does not follow that because there was no express agreement that “Gross Margin” should be calculated according to general accounting principles, therefore the meaning of the expression defaulted to that which would be applicable to a sales organisation. In construing the term there was no such binary choice.

21. Mr Irvine’s email of 24 January 2014 used both the expressions “Sales Targets” and “Revenue”. I do not construe the contract as limiting the revenue which should be factored into the calculation of Gross Margin to that which was derived from re-selling software. The word “Sales” might suggest such a narrow meaning but the word “Revenue” is completely general as to type and certainly wide enough to embrace receipts both from re-selling and from the provision of services. Mr Sklar did not contend in the Local Court that only revenue attributable to the re-selling of software should be counted. On the contrary, he included in his calculation of gross margin all income derived by Dialog on transactions he had negotiated, including those where no software was on-sold; that is, where Dialog provided only engineering or other technical services. It would have been against his interests to construe the commission term as permitting only the re-sale price of software to be counted on the revenue side of the gross margin calculation.

22. Given that the revenue to be included in the calculation of Gross Margin is, on the construction I adopt, not limited to revenue from sales of software, I do not consider that the expression “Gross Margin” bears the narrow meaning given in the Macquarie Dictionary. That is a meaning apt for a goods re-selling enterprise only and, as such, is but one of the meanings which the expression may have when applied to the broad spectrum of different types of businesses. Dialog’s business was not one of pure software re-selling. There is nothing in the evidence to suggest that the parties made their agreement upon a mutual conventional understanding or assumption that Mr Sklar would be deriving revenue for the company solely from software sales or that all revenue he should generate would be treated as if it were software sales revenue.

23. The expression “Gross Margin” is used in the contract without there being a context, either of contractual words or of surrounding circumstances, capable of limiting it to the concept of gross margin purely on sale of goods. It is used in a setting which is not specific to any characterisation of the business Mr Sklar would be carrying on for Dialog. The expression therefore takes on the sense applicable to businesses, generally, as elaborated in the Oxford Dictionary of Accounting. It is to be applied in accordance with the Oxford Dictionary definitions, so far as applicable to the type of business which Mr Sklar in fact conducted for Dialog.

24. Against this it was submitted on behalf of Mr Sklar that his prior employment was in sales, that Mr Irvine knew this and that the nature of Dialog’s business (involving both sales and service) was not known to Mr Sklar and should be regarded as a subjective consideration affecting only one party to the contract. It was submitted that these circumstances “would have led a reasonable person in the position of [Mr Sklar] to believe that gross margin on [which] commission [would be] payable was gross margin of a sales organisation”. I reject that submission. In the absence of full exploration by Mr Sklar, before he accepted the employment, of the nature of Dialog’s business and the work he would be doing, the circumstances relied upon in the submission are neutral. They simply mean that both parties agreed to calculate commission upon gross margin according to the general understanding of that concept, without particularity for the type of business. In the absence of any common understanding or explicit discussion of the specific type of business Mr Sklar would be conducting on behalf of Dialog, there is no basis for attributing to “Gross Margin” a meaning which would only be appropriate for a pure sales organisation.

25. I do not consider that the contra proferentem rule provides any guidance to construction here. In Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; [1986] HCA 82 the operation of that principle was explained as follows (at [16]):

These decisions clearly establish that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity. … And the principle, in the form in which we have expressed it, does no more than express the general approach to the interpretation of contracts and it is of sufficient generality to accommodate the different considerations that may arise in the interpretation of a wide variety of exclusion and limitation clauses in formal commercial contracts between business people where no question of the reasonableness or fairness of the clause arises.

26. The rule requires that ambiguity in a term of a contract be resolved against the party who proffered the term for that party’s own benefit. The rule has no field of operation if no ambiguity arises upon construction of the relevant term according to all other general principles. Here the question of what meaning the parties must be taken to have intended by the expression “Gross Margin” is answered unambiguously upon application of general principles of construction. The expression has its usual meaning in commerce and accounting. That usual meaning is ascertainable from dictionary definitions and from the Court’s own experience of commercial and accounting usage. There is no ambiguity to be resolved contra proferentem.

Mr Sklar’s salary and the service costs as direct costs

27. The term “Gross Margin” in the employment contract is not referrable to the trading activity of Dialog’s entire enterprise or even to the trading activity of the Google Solutions practice. It is referrable only to the trading activity of Mr Sklar within Dialog’s business. That is clear from the setting out and content of the table of remuneration in the email of 24 January 2014 (see [12]). This was agreed between the parties (see [20]).

28. As described at [9]-[11] the business which Mr Sklar conducted for Dialog was a mixture of selling software and providing services. When one applies to this situation the concept of gross margin according to its generally understood meaning, incorporating accounting principles as expanded in the Oxford Dictionary, it is apparent in my view that Mr Sklar’s base salary and superannuation were direct costs of supplying software and services to the clients with whom he concluded transactions. The evidence is that Mr Sklar advised the clients on software which would satisfy their IT needs, procured the software and managed and oversaw its installation, configuration and deployment.

29. There is no evidence that his work in the company was directed to anything other than the transactions which he closed and executed. The expense to Dialog represented by his base salary and superannuation was therefore not an overhead or indirect cost which could be attributed to some general benefit for the company, merely supporting its enterprise in an overall way. It was specifically and directly a cost of generating the revenue which came from the 16 transactions with Mr Sklar’s 9 clients.

30. The same applies to the services costs of technical staff and software engineers. In 6 of the 16 transactions, services only were provided and no software was sold. The construction of the expression “Gross Margin” for which Mr Sklar contended in the Local Court and for which he still contends would result in all revenue from services-only transactions being included in the figure upon which his commission was calculated, without any deduction for the cost to Dialog of delivering those services through its technical personnel. A construction which would lead to such an uncommercial result could only be supported by clear words. In my view, there is nothing to support it. This improbable result would only arise from the narrow sale-of-goods meaning of “Gross Margin” for which Mr Sklar contends. This consideration supports the construction of “Gross Margin” according to its general, broadly applicable meaning in commerce and accounting, so that the labour cost to the company of delivering technical services is brought into the calculation of the gross margin on provision of those services.

Refund to the client who purchased iSpatial software

31. One of Mr Sklar’s transactions was the supply to a client of software known as iSpatial, procured by Dialog from Thermopylae Sciences and Technology LLC. This transaction was closed with the client early in Mr Skalr’s employment, in June 2014. According to Mr Irvine, Mr Sklar recommended it. It was common ground in the Local Court that installation of the product failed. The client was charged $234,770 for the iSpatial software and Dialog incurred a buy cost of $144,133. Mr Irvine gave evidence that by about 20 August 2014 it was known that the software could not be installed. It was not supported by the client’s “feature collections”, which I take to mean its hardware, operating systems and other software. About five months after Mr Sklar’s departure from Dialog the company was obliged to refund the client in full. However it was not able to obtain from the supplier of the software a refund of the buy cost.

32. On these facts the learned Magistrate concluded that “Mr Sklar was not entitled to receive commission on the iSpatial project”. Mr Sklar has not brought any cross-appeal and did not challenge this finding. In order to give effect to it her Honour deducted from Mr Sklar’s calculation of gross margin (the figure of $793,593 at line 6 in the right-hand column of the table at [19] above) the sum of $90,637. This was the gross margin on the iSpatial transaction ($234,770 revenue minus $144,133 buy cost). The result was a reduction of Mr Sklar’s commission, on her Honours calculation, as follows:

Commission claimed by Mr Sklar at 7.41%   $58,805

Less 7.41% of $90,637 gross margin for iSpatial   $6,716

Commission awarded   $52,089

33. With respect, her Honour erred in this calculation. It proceeded upon the premise that neither the revenue nor the buy cost of the iSpatial project should be brought to account. Both of those integers were taken out of the computation of Gross Margin upon which commission would be calculated by removing the difference between them, being $90,637, from Mr Sklar’s putative Gross Margin. What should have followed from her Honour’s findings was that the iSpatial revenue of $234,770 would be deducted from the revenue side of the Gross Margin calculation but the iSpatial expense of $144,133 would remain. That buy cost was incurred and was unrecoverable by Dialog even though the revenue had to be refunded to the client. Mr Irvine’s evidence that no refund could be recovered from the software supplier was not challenged.

Conclusion

34. For these reasons I hold that her Honour erred in her construction of the employment contract, in particular the meaning of “Gross Margin” in the term which provided for commission, and in her application of the commission term to the facts of Mr Sklar’s employment. The orders of the Court will be:

1. Leave to appeal is granted so far as necessary to deal with all issues raised in the plaintiff’s summons and submissions.

2. The appeal is upheld.

3. The orders of the Local Court made on 23 April 2018 are set aside and in lieu thereof it is ordered:

1. Judgment for the plaintiff (Andrew Sklar) against the defendant (Dialog Pty Ltd) in the sum of $13,119.

2. The plaintiff (Andrew Sklar) is to pay the costs of the defendant (Dialog Pty Ltd) in the Local Court

4. The defendant is to pay the plaintiff’s costs of the summons in this Court.

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Decision last updated: 31 January 2019