KDR Victoria Pty Ltd v JC Decaux Pty Ltd
[2020] VSC 390
•3 July 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2019 02855
| KDR VICTORIA PTY LTD (ACN 138 066 074) TRADING AS YARRA TRAMS | Plaintiff |
| v | |
| JC DECAUX AUSTRALIA PTY LTD (ACN 078 716 793) AS TRUSTEE FOR THE JC DECAUX AUSTRALIA UNIT TRUST | Defendant |
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JUDGE: | RIORDAN J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 4 May 2020 |
DATE OF JUDGMENT: | 3 July 2020 |
CASE MAY BE CITED AS: | KDR Victoria Pty Ltd v JC Decaux Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2020] VSC 390 |
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CONTRACT – Claim for declaration as to the proper construction of a commercial contract – Agreement to share profits derived from advertising revenue – Principles of construction of a commercial contract considered – Commerciality as an interpretative consideration – Claim for declaration dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R Craig SC with Mr R Rozenberg | Minter Ellison |
| For the Defendant | Mr A Hanak SC with Ms K Brazenor | Herbert Smith Freehills |
HIS HONOUR:
By writ filed 26 June 2019 and amended statement of claim filed 9 February 2020, the plaintiff seeks a declaration as to the proper construction of the Master Advertising Contract executed on 30 November 2017 (‘the Contract’) with the defendant, and claims $5,969,799.87 (exclusive of GST), being the amount it alleges is due for the first two years of the Contract.
The Contract
Under the Contract, the plaintiff and the defendant agreed to share the profits arising from the defendant’s supply of advertising services on the plaintiff’s assets.
Advertising services
The Contract grants the defendant ‘the exclusive right to place and display Advertising Material on the Advertising Assets’ of the plaintiff, and the defendant agrees to perform the ‘Services’, being the carrying out of ‘selling advertising rights for the placement and display of Advertising Material on the Advertising Assets’ and ‘the associated maintenance and cleaning of the Advertising Assets’.
‘Advertising Asset’ is defined to mean:
[T]he structures the Advertising Asset Display is installed within or on or the medium advertising is displayed on and includes:
(a) Tram Stop, includes Tram Shelters;
(b) Trams (including Wrapped Trams and external advertising); and
(c) Light Rail Billboard.
Further to this definition, ‘Advertising Asset’ is listed at item 9 of the Contract Particulars which refers to Annexure A. Annexure A identifies the number of Advertising Assets and groups them into seven different categories, being:
(a) Tram Stops, Static Panels;
(b) Tram Stops, Digital Units, tranche 1;
(c) Tram Stops, Digital Units, tranche 2;
(d) Transit, Wraps;
(e) Transit, External Panels;
(f) Transit, Tram Skybreakers; and
(g) Lightrail Billboards;
(‘the Advertising Asset categories’).[1]
[1]I will refer to them as ‘the Advertising Asset categories’, but there is no definition of such categories of Advertising Assets in the Contract.
‘Advertising Asset Display’ is defined as an ‘advertising unit installed within or on structures or mediums available to or developed for the purpose of displaying advertisement’.
Profit sharing
The profit sharing arrangements under the Contract require the defendant to pay the plaintiff:
(a) a Minimum Amount regardless of the Net Revenue received, paid monthly in advance; and
(b) if 70% of the Net Revenue exceeds the Minimum Amount, the Revenue Share Amount, being:
(i) 70% of the Net Revenue less the Minimum Amount, paid monthly in arrears; and
(ii) if 70% of the Net Revenue exceeds the Advertising Revenue Projection, 83% of the amount by which the Net Revenue exceeds the Advertising Revenue Projection, paid monthly in arrears; and
(c) other amounts referred to in clause 29.1(b)(iii)-(vi) that are not relevant to this dispute.
The critical clause for construction is clause 29, which relevantly provides as follows:
29.1 Payment of Due Amounts
(a)The Contractor [i.e. the defendant] must pay the Due Amounts to the Principal [i.e. the plaintiff] in accordance with this clause [29],[2] which depending on the relevant Invoice Date may include a Minimum Amount, a Revenue Share Amount, overheads and utilities, Contractor’s Contributions and/or an Unused Fund Amount.
[2]The Contract frequently refers to clause 28 when it is intended to refer to clause 29. These reasons assume and correct this error, which has been accepted by both parties.
(b)On an Invoice Date, the Due Amount will be calculated as the sum of the following amounts:
(i)any Minimum Amount payable on that Invoice Date (as may be adjusted in accordance with clause 24); [3] plus
[3]Clause 24 provides that the Minimum Amount may only be adjusted if certain events occur.
(ii) any Revenue Share Amount payable on the Invoice Date; plus
(iii) any Contractor’s Contributions; plus
(iv) overheads; plus
(v)in relation to the Final Invoice Date, 50% of the Unused Fund Amount (if any); plus
(vi) any applicable GST.
(c)Insofar as this clause 29 relates to an amount payable for the Final Invoice Period, this clause 29 survives termination of this Contract.
29.2 Minimum Amount
(a)The Minimum Amount is paid in advance by the Contractor to the Principal.
(b)The Contractor must pay the Principal a Minimum Amount on each Invoice Date, other than the Final Invoice Date and the Post Term Invoice Date.
(c)On the anniversary of the Contract, the Minimum Amount will be calculated in accordance with the following formula:
Minimum Amount = MA as set out in the Contract Particulars × the CPI Multiplier as at the last anniversary Service Commencement Date
29.3 Payment of Revenue Share Amount
The Contractor must pay the Revenue Share Amount to the Principal in accordance with this clause [29].
(a)The Revenue Share Amount is paid in arrears by the Contractor to the Principal in the month after the Net Revenue is derived.
(b)In relation to the relevant Invoice Date, the Revenue Share Amount will be calculated in accordance with the following formula
Revenue Share Amount = Revenue Percentage of the Net Revenue for the immediately preceding Invoice Period, less the Minimum Amount paid for the immediately preceding Invoice Period
The Revenue Share Amount will only be payable if it is more than $0. If it equals to or is less than $0 it is disregarded for that Invoice Date.
Of critical importance is the italicised formula in clause 29.3(b) (‘the Formula’), which includes the following defined terms:
(a)‘Revenue Share Amount’ is defined to mean the amount payable to the plaintiff calculated in accordance with the Formula.
(b)‘Revenue Percentage’ is defined to mean ‘the percentage described as such in the Contract Particulars’. The Contract Particulars state ‘Refer [to] Annexure M’, which includes the following tables:
| Advertising Assets/Panels | Revenue Share* (% of Advertising Revenue) | Revenue Share^ (% of Advertising Revenue above Advertising Revenue Projection) |
| Tram Stops, Static Panels | 70% | 83% |
| Tram Stops, Digital Units, tranche 1 | 70% | 83% |
| Tram Stops, Digital Units, tranche 2 | 70% | 83% |
| Transit, Wraps | 70% | 83% |
| Transit, External Panels | 70% | 83% |
| Transit, Tram Skybreakers | 70% | 83% |
| Lightrail Billboards | 70% | 83% |
| Partnership | 70% |
*Revenue Share on Advertising Revenue Projection
^Revenue Share on Advertising Revenue above Advertising Revenue Projection
Advertising Revenue Projection
| Advertising Assets/ Panels | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Total |
| Tram Stops, Static Panels | $7,177,924.81 | $7,393,262.56 | $5,344,082.90 | $5,344,082.90 | $5,344,082.90 | $5,344,082.90 | $5,344,082.90 | $41,291,601.87 |
| Tram Stops, Digital Units | $28,720,000.00 | $44,029,440.00 | $57,130,778.25 | $58,844,701.60 | $64,650,712.16 | $66,590.233.52 | $68,587,940.53 | $388,553,806.05 |
| Transit, Wraps | $5,633,862.00 | $5,802,877.86 | $5,976,964.20 | $6,156,273.12 | $6,340,961.32 | $6,531,190.15 | $6,727,125.86 | $43,169,254.51 |
| Transit, External Panels | $2,369,743.74 | $2,369,743.74 | $2,369,743.74 | $2,369,743.74 | $2,369,743.74 | $2,369,743.74 | $2,369,743.74 | $16,588,206.18 |
| Transit, Tram Skybreakers | $439,296.00 | $439,296.00 | $439,296.00 | $439,296.00 | $439,296.00 | $439,296.00 | $439,296.00 | $3,075,072.00 |
| Lightrail Billboards | $375,375.00 | $375,375.00 | $375,375.00 | $375,375.00 | $375,375.00 | $375,375.00 | $375,375.00 | $2,627,625.00 |
| Total | $44,716,201.55 | $60,409,995.16 | $71,636,240.09 | $73,529,472.36 | $79,520,171.11 | $81,649,921.31 | $83,843,564.02 | $495,305,565.60 |
(c) ‘Net Revenue’ is defined to mean:
[T]he total gross Revenue which has accrued to the Contractor (whether or not currently payable to the Contractor) in relation to the Advertising Material, excluding:
(a) the amount of any corresponding GST;
(b)the Contractor’s Costs incurred in the production and placement/removal of Advertising Material; and
(c)the amount of any corresponding commission paid to media buying agencies, excluding any deduction for any other reason, such as on account of any bad or doubtful debt;
For avoidance (sic) doubt, if the Contractor has earned additional Revenue as a result of on charging Contractor's Cost, the Contractor must include this in the gross Revenue.
(d)The reference to ‘Revenue’ in the definition of Net Revenue is itself defined to mean:
[A]ll the money (or the value of any payment in kind), received or receivable by the Contractor as a consequence of performing the Business, calculated as follows:
(a)includes all revenue relating to the placement of Advertising Material on Advertising Asset;
(b)includes any amounts received or receivable by the Contractor in return for use of the Advertising Asset;
(c)does not include any amount on account of GST paid by Advertisers to the Contractor; and
(d)is subject to a deduction for advertising commission paid to external media buying agencies but no other deduction whatsoever (including, but not limited to bad debts)[.]
(e) ‘Invoice Period’ is relevantly defined to mean ‘each month during the Term’.
(f)‘Minimum Amount’ is defined as ‘the minimum amounts payable by the Contractor to the Principal per Advertising Asset calculated in accordance with the Contract Particulars, as may be adjusted in accordance with clause 24’. The Contract Particulars refer to Annexure N which includes the following tables:
Annexure N Minimum Amount
Advertising Panels attributable to Minimum Amount
| Advertising Assets/Panels | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 |
| Tram Stops, Static Panels | 1101 | 1101 | 991 | 991 | 991 | 991 | 991 |
| Tram Stops, Digital Units, tranche 1 | 320 | 320 | 320 | 320 | 320 | 320 | 320 |
| Tram Stops, Digital Units, tranche 2 | 0 | 0 | 110 | 110 | 110 | 110 | 110 |
| Totals | 1421 | 1421 | 1421 | 1421 | 1421 | 1421 | 1421 |
Commencing Minimum Amount/Revenue share (per asset/panel), Year 1, to be increased annually as per CPI Multiplier
| Advertising Assets/Panels | Minimum Amount | Monthly Payment |
| Tram Stops, Static Panels | $378.25 | per panel |
| Tram Stops, Digital Units, tranche 1 | $5,621.97 | per Digital Unit |
| Tram Stops, Digital Units, tranche 2 | $6,646.11 | per Digital Unit |
| Transit, Wraps | $210,744.72 | Lump sum |
| Transit, External Panels | $94,602.32 | Lump sum |
| Transit, Tram Skybreakers | $ – | |
| Lightrail Billboards | $ – |
Minimum Amount
| Advertising Assets/Panels | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Total |
| Tram Stops, Static Panels | $4,997,458.63 | $5,122,395.10 | $4,725,886.36 | $4,844,033.52 | $4,965,134.35 | $5,089,262.71 | $5,216,494.28 | $34,960,664.94 |
| Tram Stops, Digital Units, tranche 1 | $21,588,376.85 | $22,128,086.27 | $22,681,288.43 | $23,248,320.64 | $23,829,528.66 | $24,425,266.87 | $25,035,898.55 | $162,936,766.27 |
| Tram Stops, Digital Units, tranche 2 | $ – | $– | $9,216,992.98 | $9,447,417.81 | $9,683,603.25 | $9,925,693.33 | $10,173,835.67 | $48,447,543.04 |
| Transit, Wraps | $2,528,936.66 | $2,592,160.08 | $2,656,964.08 | $2,723,388.18 | $2,791,472.89 | $2,861,259.71 | $2,932,791.20 | $19,086,972.79 |
| Transit, External Panels | $1,135,227.86 | $1,163,608.55 | $1,192,698.77 | $1,222,516.24 | $1,253,079.14 | $1,284,406.12 | $1,316,516.27 | $8,568,052.95 |
| Transit, Tram Skybreakers | $ – | $ – | $ – | $ – | $ – | $ – | $ – | $ – |
| Lightrail Billboards | $ – | $ – | $ – | $ – | $ – | $ – | $ – | $ – |
| Total | $30,250,000.00 | $31,006,250.00 | $40,473,830.62 | $41,485,676.38 | $42,522,818.29 | $43,585,888.75 | $44,675,535.97 | $274,000,000.00 |
(g) Due Amounts is defined to mean:
[T]he amount of money that the Contractor is required to pay to the Principal calculated in accordance with clause 29.1 and any other costs the Contractor must pay to the Principal during the Term[.]
The issue for resolution
The issue between the parties is whether, in calculating the Revenue Share Amount, the Formula is applied:
(a) accumulated for all of the Advertising Asset categories; or
(b) separately for each of the Advertising Asset categories.
The plaintiff contends that the Revenue Share Amount is the sum of the seven amounts produced by applying the Formula to each of the seven Advertising Asset categories. Accordingly, for each of the seven categories there are two steps being:
(a) the Revenue Percentage is applied to the Net Revenue component for that category (‘the plaintiff’s Net Revenue construction’); and
(b) the Minimum Amount for that category is subtracted from its corresponding Net Revenue component (‘the plaintiff’s multiple subtractions construction’); and
the seven amounts so produced are then added to make the Revenue Share Amount.
The defendant contends that the Revenue Share Amount is the amount produced by applying the Formula to only one Net Revenue and one Minimum Amount. Accordingly, the Revenue Share Amount is produced by the following two steps:
(a) the Revenue Percentage is applied only once to the total Net Revenue for all Advertising Asset categories (‘the defendant’s Net Revenue construction’); and
(b) the total Minimum Amount for all Advertising Asset categories is subtracted from this amount (‘the defendant’s single subtraction construction’).
The practical difference between the parties’ constructions arises because, if the Revenue Percentage and Minimum Amount are applied only once, as the defendant contends, any underperforming Advertising Asset categories will reduce the revenue payable on profitable Advertising Asset categories. This is best demonstrated by a hypothetical example focusing on the different results produced by the plaintiff’s multiple subtractions construction and the defendant’s single subtraction construction, assuming:
(a) only two categories of advertising assets;
(b) a Revenue Percentage of Net Revenue of $100 for Category 1 and $0 for Category 2; and
(c) a Minimum Amount of $40 for both categories.
On the plaintiff’s contention, the Revenue Share Amount payable to the plaintiff would be $60, while on the defendant’s contention, the Revenue Share Amount payable to the plaintiff would be $20.[4]
[4]The Revenue Share Amounts exclude the Minimum Amounts which would have been paid in advance.
Plaintiff’s contention Revenue Percentage of Net Revenue Minimum Amount paid Revenue Share Amount Category 1 $100 $40 $60 Category 2 $0 $40 $0 Total $60[5] Defendant’s contention Category 1 $100 $40 Category 2 $0 $40 Total $100 $80 $20[6] [5]Plaintiff’s Revenue Share Amount = (100 – 40) + (0 – 40) = $60, noting that clause 29.3 provides that a Revenue Share Amount less than $0 is disregarded.
[6]Defendant’s Revenue Share Amount = (100 + 0) – (40 + 40) = $20
Plaintiff’s submissions
In support of its construction, the plaintiff submitted as follows.
Revenue Share Amount
(a)The first table in Annexure M defines the Revenue Percentage, listing 15 percentages. The second table in Annexure M sets out various Advertising Revenue Projection thresholds. Both refer to the different Advertising Asset categories.
(b)A single Revenue Percentage cannot be applied to the total Net Revenue because of the different Advertising Revenue Projection thresholds. Therefore, it is necessary to treat the revenue streams from the different Advertising Asset categories separately and read the Formula as follows:
Revenue Share Amount = Revenue Percentage [per Advertising Asset] of the Net Revenue [per Advertising Asset] for the immediately preceding Invoice Period, less the Minimum Amount paid for the immediately preceding Invoice Period.
(c) The following clauses support this construction:
(iii) clause 38.2(c) which requires the defendant to provide its ‘calculation of the Revenue Share Amount for the month including workings for that calculation on each Advertising Asset’; and
(iv) clause 24.7 which requires the defendant ‘to pay the Revenue Share Amount on all Advertising Assets that generate Revenue’.
(d)On the defendant’s construction, the breakdown of the Advertising Asset categories in the first table in Annexure M has no work to do. It could simply provide as follows:
Advertising Assets/Panels Revenue Share (% of Advertising Revenue) Revenue Share (% of Advertising Revenue above Advertising Revenue Projection) All Advertising Assets/Panels 70% 83% (e)Similarly, in the second table in Annexure M, each of the Advertising Asset categories would be redundant and the Contract would only need to provide for the total projection for all Advertising Assets for each of the seven years.
Minimum Amount
(f)Minimum Amount must be read on its express terms as ‘minimum amounts calculated per Advertising Asset’, not as the sum of those amounts, for the following reasons:
(i) The definition of Minimum Amount refers to ‘minimum amounts’ in the plural, not to a single or aggregated sum.
(ii) The definition of Minimum Amount provides that the ‘minimum amounts’ are payable ‘per Advertising Asset’.
(iii) Annexure N provides a distinct method for calculating the Minimum Amount for each Advertising Asset category.
(iv) The fact that the table in Annexure N totals the annual projected Minimum Amounts across all Advertising Asset categories is only for the purpose of calculating the bank guarantee in accordance with item 19 of the Contract Particulars.[7]
[7]Item 19 of the Contract Particulars provides: ‘Contractor to provide a bank guarantee for an amount equal to the annual total of the projected Minimum Amount payable across all Advertising Assets as contained in Annexure N …’
Commerciality
(g)The plaintiff’s construction produces the more commercial result, for the following reasons:
(i)The substantive effect of the defendant’s construction is to reward it for the underperformance of certain Advertising Asset categories contrary to its obligations under clause 11.1, which require it, among other things, to ‘maximise the Revenue derived’.
(ii)On the defendant’s construction, it need not share the actual Net Revenue generated by:
(A)the Tram Skybreakers, being one of the Advertising Asset categories; or
(B)partnership fees paid to the defendant with respect to partnership packages under clause 16 of the Contract;
if there are other underperforming Advertising Asset categories, such that the aggregate Net Revenue is less than the aggregate Minimum Amount. In other words, as a consequence of failing to generate revenue on other Advertising Asset categories, the Tram Skybreakers and partnership fees are provided to the defendant ‘free of charge’.
Defendant’s submissions
In support of its construction, the defendant submitted as follows.
Plaintiff’s submissions are unclear
(a)The plaintiff’s submissions are fundamentally confused between the proposition that the calculations should be made on:
(v) a per asset basis, being each of the over 3,000 individual Advertising Assets; or
(vi) a per asset category basis, being the Advertising Asset categories.
Revenue Percentage of Net Revenue
(b) Clause 29.3(b) concludes with the words:
The Revenue Share Amount will only be payable if it is more than $0. If it equals to or is less than $0 it is disregarded for that Invoice Date.
This clause:
(i) refers to the singular ‘it’ on three occasions; and
(ii) specifies a binary outcome, which is a strong textual indicator that the Formula must be applied in a way which yields a single positive or negative result.
(c)The definition of Net Revenue is at odds with the plaintiff’s contention because Net Revenue is derived from Revenue which is defined as ‘all the money … received … as a consequence of performing the Business’. It follows that the words ‘the Net Revenue for the immediately preceding Invoice Period’ in the Formula is a single figure, derived by identifying in each particular month, the totality of the Revenue.
(d)The singularity of Revenue, and therefore Net Revenue, is incorporated into Annexure M, which refers to Advertising Revenue. That reference must be to Net Revenue.
(e)Revenue Percentage in the Formula is to be applied to the single aggregate figure for Net Revenue across all Advertising Assets. The Advertising Revenue Projection table in Annexure M includes a total that, on the plaintiff’s construction, has no role and would be redundant.
(f)Two of the Advertising Asset categories identified in the first table in Annexure M are ‘Tram Stops, Digital Units, tranche 1’ and ‘Tram Stops, Digital Units, tranche 2’. In Annexure N, these two Advertising Asset categories are also separately identified and are the subject of different fees. However, in Annexure M, whereas the first table separates out these two categories, the second table concerning Advertising Revenue Projection puts them together, giving a single figure for both. This means that from year 3, when tranche 2 of the Tram Stops, Digital Units commences, there is no separate Advertising Revenue Projection figure for this category, and no way of determining any such figure, in respect of which the percentages in the first table apply. That is, the percentage figures for the seven different Advertising Asset categories in the first table cannot be applied to a distinct figure for each such category in the second table, since there is no distinct figure for each such category in that table.
Minimum Amount and Revenue Share Amount
(g)The singular term Minimum Amount is defined in clause 1.1 as comprising ‘the minimum amounts’ (lower case, plural) in respect of individual Advertising Assets.
(h)Table 3 of Annexure N provides a single total Minimum Amount for each year of the Contract. The total is the sum of the minimum amounts calculated in accordance with the methodology set out in Annexure N.
(i)Clause 29 itself expressly contemplates that for any given month, there will only be a singular Minimum Amount and a singular Revenue Share Amount payable, if at all. When the term Minimum Amount is used elsewhere in the Contract, it is used in the singular.[8]
[8]See clauses 4(c), 10.3(a), 12.8(c), 15.7(f), 20.7, 22.1(e), 22.2(d) and 22.4(e) which are set out in the Schedule to these Reasons.
(j)Although the totals for the Minimum Amount in Annexure N do have a function in determining the amount to be paid as security, that does not mean they do not serve another function. In fact, item 19 of the Contract Particulars emphasises that the Minimum Amount specified in Annexure N is an amount that is ‘payable across all Advertising Assets’.
(k)Although clause 1.2(a) of the Contract provides that ‘the singular includes the plural and vice versa’, it is subject to the proviso ‘except where the context otherwise requires’. The text and context of clause 29 require that Revenue Share Amount be treated as a single sum.
(l)The definition of Net Revenue requires that it be determined by reference to all revenue from the entire business. To interpret it on a per Advertising Asset or Advertising Asset category basis would do violence to the express terms of the Contract.
Reporting obligations
(m)Clause 38.2 of the Contract and clause 2 of Annexure E, which concern monthly reports, do not assist the plaintiff’s construction, for the following reasons:
(i)They relate to a reporting obligation which cannot change the nature of the calculation required by clause 29.3(b).
(ii)The clauses do not refer to multiple Revenue Share Amounts, but rather to the calculation of the Revenue Share Amount (singular) in any given month.
(iii)The defendant’s construction does not render these clauses redundant because the report of its workings, on a ‘per Advertising Asset’ basis, discloses the calculation of the Revenue Share Amount each month.
Commerciality
(n)The defendant’s construction produces the more commercial result, for the following reasons:
(i)Commercial commonsense does not require that the plaintiff’s share of the revenue be maximised at the defendant’s expense.
(ii)The defendant’s construction does not result in the defendant receiving certain Advertising Asset categories ‘free of charge’ because the defendant is obliged to:
A. pay for maintenance and associated costs with respect to all Advertising Assets, including the Digital Advertising Displays and Light Rail Billboards;
B. reimburse the plaintiff for the supply of any utility services on any Advertising Assets; and
C. pay guaranteed Minimum Amounts over the life of the Contract, which are expected to total approximately $274 million.
(iii)The defendant’s construction does not disincentivise the promotion or marketing of advertisements because:
A. the defendant must ensure that its Net Revenue exceeds the Minimum Amount to avoid losses;
B. to the extent that the Net Revenue exceeds the Minimum Amount, the defendant retains all revenue until the point where 70% of the Net Revenue exceeds the Minimum Amount; and
C. beyond the point of the 70% threshold, the defendant retains 30% or 17% of the Net Revenue which exceeds the Advertising Revenue Projection.
Principles of construction in commercial contracts
To construe the terms of a commercial contract, the Court asks, ‘what a reasonable businessperson would have understood those terms to mean’.[9] To answer that question, ‘the reasonable businessperson [is] placed in the position of the parties’,[10] and the Court applies the following principles:
[9]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656-7 [35] (French CJ, Hayne, Crennan, and Kiefel JJ) (‘Woodside’); Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116 [47] (French CJ, Nettle and Gordon JJ) (‘Mount Bruce’).
[10]Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544, 551 [16] (Kiefel, Bell and Gordon JJ).
(a)The terms are construed objectively and the subjective intentions of the parties are irrelevant.[11]
[11]Ibid.
(b)The objective approach requires reference to the text and its ordinary meaning, together with:
(iii) the context, being the entire text of the contract including matters referred to in the text; and
(iv) the purpose.
These matters will ordinarily be identified by reference to the contract alone,[12] but evidence of mutually known objective background circumstances relevant to the purpose is admissible ‘no matter how clear the “ordinary meaning” of the words’.[13] Identification of purpose may allow admission of evidence of the genesis of the transaction, the background, the context and the market in which the parties are operating.[14]
[12]Eureka Operations Pty Ltd v Viva Energy Australia Ltd [2016] VSCA 95, [45]-[47] (Santamaria, Ferguson and McLeish JJA); Mount Bruce (2015) 256 CLR 104, 116 [46]-[48] (French CJ, Nettle and Gordon JJ); Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 45 WAR 29, 50 [76] (McLure P, with whom Newnes JA and Le Miere J agreed) (‘Hancock’).
[13]Lopes v Taranto [2018] VSCA 288, [66]-[72] (Kyrou, McLeish and Hargrave JJA), quoted with approval in Canale v G W & R Mould Pty Ltd [2018] VSCA 346, [45] (Whelan and McLeish JJA with whom Tate JA agreed). Cf Hancock (2012) 45 WAR 29, 50 [76] where the Western Australian Court of Appeal took the contrary view.
[14]Mount Bruce (2015) 256 CLR 104, 116-7 [46], [49] (French CJ, Nettle and Gordon JJ).
(c)Unless a contrary intention appears in the contract, the court is entitled to approach the task of interpretation on the assumption that the parties intended to produce a commercial result, and should construe it so as to avoid a commercial nonsense.[15] However, the court does not weigh the commerciality of the agreement, and business commonsense is a topic on which reasonable minds may differ.[16]
(d)If, after completion of this process, the language used in the contract ‘is ambiguous or susceptible of more than one meaning’, then evidence of surrounding circumstances external to the contract (‘surrounding circumstances’) is admissible to assist with interpretation of the contract.[17]
(e) Surrounding circumstances are:
events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating.[18]
(f)However, ‘evidence of the parties’ statements and actions reflecting their actual intentions and expectations’ is inadmissible.[19] Although evidence of prior negotiations is admissible to establish objective background facts known to both parties and the subject matter of the contract, evidence of negotiations reflective of actual intentions and expectations is not receivable.[20]
(g)Post contractual conduct is inadmissible to construe the terms of the contract.[21] However, the parties’ subsequent communications may be relevant to determine whether the parties intended to enter into a binding contract.[22]
[15]Woodside (2014) 251 CLR 640, 656-7 [35] (French CJ, Hayne, Crennan, and Kiefel JJ).
[16]Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, 198 [43] (Gleeson CJ, Gummow and Hayne JJ).
[17]Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352 (Mason J) (‘Codelfa’). See Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45, 62-3 [39] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ); Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604, 605 [2]-[5] (Gummow, Heydon and Bell JJ); Mount Bruce (2015) 256 CLR 104, 116-7 [46]-[49], [52] (French CJ, Nettle and Gordon JJ).
[18]Mount Bruce (2015) 256 CLR 104, 117 [50] (French CJ, Nettle and Gordon JJ).
[19]Ibid.
[20]Codelfa (1982) 149 CLR 337, 352 (Mason J); Golf Australia Holdings Ltd v Buxton Construction Pty Ltd [2007] VSCA 200, [28] (Nettle and Redlich JJA, with whom Neave JA agreed). As Gordon J said in Construction Forestry Mining Energy Union v Bovis Land Lease Pty Ltd [2008] FCA 1669, [15]: ‘the back-and-forth of the parties in concluding the transaction’ is not considered in construing the document.
[21] FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, 350.
[22] Queensland Phosphate Pty Ltd v Korda [2017] VSCA 269, [37] (Tate, Beach JJA and Sifris AJA).
Conclusion
The Revenue Share Amount is calculated by reference to the Formula, which requires particular consideration of three defined terms:
(a) Net Revenue;
(b) Revenue Percentage; and
(c) Minimum Amount.
First step: The plaintiff’s Net Revenue construction is preferred
Net Revenue is defined as ‘the total gross Revenue which has accrued to the [defendant] … in relation to the Advertising Material’ less specified deductions. The intention for Net Revenue to include, before deductions, all the revenue of the Business is confirmed by the definition of Revenue, which means ‘all the money … received or receivable by the [defendant] as a consequence of performing the Business’. The definition of Business is ‘the business of selling advertising rights for the placement and display of Advertising Material on the Advertising Asset’.
Although Net Revenue is defined as a single total sum, calculating the ‘Revenue Percentage of the Net Revenue’ in the Formula requires reference to the Net Revenue components of each of the Advertising Asset categories.
The need to refer to the Net Revenue components comes from the definition of Revenue Percentage which refers to Annexure M. With respect to each Advertising Asset category, Annexure M requires:
(a) calculation of 70% of the Net Revenue attributable to that category; and
(b) if the Net Revenue exceeds the Advertising Revenue Projection threshold for that category set out in the second table of Annexure M, calculation of 83% of the excess amount (except for revenue from partnerships).
I conclude that Annexure M requires separate calculations for each Advertising Asset category because, on the alternative construction, there is no work to be done by Annexure M setting out separate percentages and separate Advertising Revenue Projections for each category. On the defendant’s construction:
(a) the Contract could simply have provided that the defendant pay 70% of the Net Revenue up to the total Advertising Revenue Projection for all Advertising Asset categories in any given month, and 83% for any excess amount; and
(b) the absence of a provision for an 83% uplift for partnerships would have no effect. There would be no individual uplifts for any of the categories because the uplift would only be applied once to the total Net Revenue if it exceeded the total Advertising Revenue Projection.
I do not consider that this construction is displaced by the fact that the Advertising Revenue Projection for ‘Tram Stops, Digital Units’ does not separate tranche 1 and tranche 2.[23] The calculation of the relevant component of ‘Revenue Percentage of the Net Revenue’ for ‘Tram Stops, Digital Units’ would be based on the sum of tranche 1 and tranche 2.
[23]See the defendant’s submission summarised in paragraph 16(f) above.
Second step: The defendant’s single subtraction construction is preferred
Although I find in favour of the plaintiff’s Net Revenue construction as the first step in applying the Formula, a constructional choice arises as to whether the parties’ objectively intended for the second step of the Formula to apply the plaintiff’s multiple subtractions construction or the defendant’s single subtraction construction.
In my opinion, the defendant’s single subtraction construction is to be preferred because of the following textual and contextual matters:
(a)We are here construing the Due Amount payable on the Invoice Date under clause 29.1(b), which is relevantly ‘calculated as the sum of …:
(v) any Minimum Amount …; plus
(vi) any Revenue Share Amount …’
The text does not suggest that ‘any Revenue Share Amount’ would be the sum of multiple Revenue Share Amounts.
(b)The balance of clause 29 only contemplates a single subtraction because the relevant amounts are consistently referred to in the singular. In particular:
(i)clause 29.1(a) provides that a Due Amount ‘may’ include ‘a Minimum Amount, a Revenue Share Amount …’ (singular);
(ii)clause 29.2 refers repeatedly to ‘[t]he Minimum Amount’ and ‘a Minimum Amount’ (singular);
(iii)clause 29.3 refers to ‘the Minimum Amount’ (singular); and
(iv)clause 29.3 refers repeatedly to ‘the Revenue Share Amount’ (singular), and concludes by stating in clause 29.3(b) that this amount will only be payable ‘if it is more than $0. If it equals to or is less than $0, it is disregarded …’ (singular).
(c)Even allowing for the general provision that the singular may include the plural, there is nothing in clause 29, or the Contract more generally, which warrants construing clause 29.3(b) as providing for the plaintiff’s multiple subtractions construction.
(d)Throughout the Contract there is no indication that there would be more than a single Revenue Share Amount. For example, the plaintiff relied on clause 38.2(c) which obliges the defendant to set out full details of its ‘calculation of the Revenue Share Amount for the month including the workings for that calculation on each Advertising Asset’. The subclause contemplates workings with respect to each individual Advertising Asset (which would enable the calculation for each Advertising Asset category) but still only refers to a single Revenue Share Amount.
The plaintiff’s multiple subtractions construction would require:
(a) the Minimum Amount paid the previous month to be broken down into components for each Advertising Asset category; and
(b) each Minimum Amount component to be subtracted from its corresponding Net Revenue component;
to calculate the Revenue Share Amount for that Advertising Asset category.
I do not consider that construction to be consistent with the definition of Minimum Amount, or the context in which the term is used in the Contract, for the following reasons:
(a)Minimum Amount is defined as ‘the minimum amounts payable by the [defendant] to the [plaintiff] per Advertising Asset calculated in accordance with [Annexure N], as may be adjusted in accordance with clause 24’.
(b)I accept the defendant’s submission that to define a singular amount as comprising plural amounts is to indicate that the singular is to be determined by identifying and summing those individual amounts.
(c)The definition is a strong textual indicator that the Minimum Amount was meant to be the sum of the minimum amounts referred to in Annexure N. In my opinion, a reasonable businessperson would read the definition as providing that ‘the Minimum Amount’ is comprised of ‘the minimum amounts’ as calculated in accordance with Annexure N.
(d)Reading the definition of Minimum Amount as a single sum paid in the previous month is also supported by the following contextual matters:
(vii) The plaintiff’s construction requires the definition of ‘Minimum Amount’ to be effectively read as ‘the minimum amount for each of the categories of Advertising Assets’. The definition does not so provide. ‘Categories’ of Advertising Assets is not defined in the Contract.
(viii) The references to ‘Minimum Amount’ in the Contract, see for example the clauses contained in the Schedule to these Reasons, do not anywhere suggest an intention that there would be separate Minimum Amounts, as defined for the purposes of the Formula, for each of the seven Advertising Asset categories.
(ix) The defendant’s single subtraction construction does not mean that setting out the minimum amounts for each Advertising Asset category in Annexure N is redundant. It was necessary to include the method of calculating the minimum amount for each Advertising Asset category so that adjustments could be made pursuant to clause 24.
The plaintiff’s multiple subtractions construction is not supported by the reference in the definition of Minimum Amount to it being calculated ‘per Advertising Asset’. Advertising Asset is defined to mean each of the structures on which an Advertising Asset Display is installed. The Formula does not refer to categories of Advertising Assets and it was not contended that the Formula should be applied to each of the over 3,000 individual Advertising Assets. The reference to ‘per Advertising Asset’ is consistent with Annexure N providing the method for calculating the Minimum Amount by reference to each Advertising Asset, which it must do to allow an adjustment for changes contemplated by clause 24.
Commerciality
I note the following with respect to the competing submissions on commerciality:
(a) on the plaintiff’s multiple subtractions construction, the defendant would be required to pay at least the Minimum Amount referrable to each Advertising Asset category; whereas
(b) on the defendant’s single subtraction construction, the defendant could effectively set off amounts from over-performing Advertising Asset categories against underperforming Advertising Asset categories.
In monetary terms, the difference is that, on the plaintiff’s multiple subtractions construction, the defendant would be obliged to pay an additional $5,969,799.87, exclusive of GST, for the two years since commencement of the Contract.
In my opinion, there are good reasons why the plaintiff would have preferred the multiple subtractions construction for which it contends and similarly, there are good reasons why the defendant would have preferred the single subtraction construction for which it contends. The submissions on commerciality do not support either party’s construction. The following observations of Spigelman CJ writing extrajudicially about competing submissions on commerciality are apposite:
There can be no doubt that a ‘business-like’ interpretation or reliance on ‘business commonsense’ is an acceptable constraint on contractual interpretation. The only difficulty is that, at least 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.[24]
[24]Justice J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81 Australian Law Journal 322, 330, quoted in Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2019] NSWCA 185, [58] (Bell P).
Accordingly, in my opinion the Revenue Share Amount is:
(a) the sum of the Net Revenue components for each Advertising Asset category calculated in accordance with Annexure M (namely the plaintiff’s Net Revenue construction); less
(b) the Minimum Amount, being the single sum paid in the previous month calculated in accordance with Annexure N (namely the defendant’s single subtraction construction).
Orders
I will hear the parties on the appropriate orders consequential on these findings.
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SCHEDULE
List of clauses referring to ‘Minimum Amount’ relied on by the defendant
Clause 4(c)On receipt of the Principal’s notice under clause (a) the Contractor must promptly confirm to the Principal its receipt of such notice and must then give effect to the variation within the time stipulated in the notice. The Principal is not liable to pay the Contractor for any loss, damage, cost or expense suffered or incurred by the Contractor by reason of the placement of Advertising Material under a sponsorship arrangement pursuant to this clause 4, nor shall the Minimum Amount be adjusted.
Clause 10.3(a) Any adjustment to the Minimum Amount as a result of a suspension under this clause 10 will be calculated in accordance with clause 24.
Clause 12.8(c) The Contractor agrees it will pay the Principal the Minimum Amount in accordance with this Contract regardless of: …
Clause 15.7(f) Any adjustment to the Minimum Amount as a result of the removal of a Light Rail Billboard under this clause 15.7 will be calculated in accordance with clause 24.
Clause 20.7The Contractor is not entitled to a reduction in the Minimum Amount under this clause 20.
Clause 22.1(e) Where the effect of a variation under this clause 22.1 (a) is an adjustment in the number of Trams, Light Rail Billboards, Tram Stops or Advertising Panels at Tram Stops, any adjustment to the Minimum Amount as a result of a variation under this clause 22.1 will be calculated in accordance with clause 24.
Clause 22.2(d) Any adjustment to the Minimum Amount as a result of a variation directed by the Principal under this clause 22.2 will be calculated in accordance with clause 24.
Clause 22.4(e) Any adjustment to the Minimum Amount as a result of a change in the number of Advertising Panels on the Tram Shelter under this clause 22.4 will be calculated in accordance with clause 24.
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