Oval Solutions Pty Limited v Regional Express Holdings Limited
[2011] NSWDC 35
•03 June 2011
District Court
New South Wales
Medium Neutral Citation: Oval Solutions Pty Limited v Regional Express Holdings Limited [2011] NSWDC 35 Hearing dates: 21, 22 June, 20 October 2010 Decision date: 03 June 2011 Jurisdiction: Civil Before: Levy SC DCJ Decision: 1. See findings at paragraphs [109] - [110];
2. The parties are to bring short minutes within 28 days to enable the entry of final orders that reflect the findings of fact;
3. The parties are to be heard on the question of costs;
4. Liberty to apply on 7 days notice if further orders are required.
Catchwords: CONTRACT - construction of disputed contractual terms providing for remuneration of plaintiff for consultancy services provided to an airline Legislation Cited: A New Tax System (Goods and Services Tax) Act 1999 Cwth
Civil Procedure Act 2005, s 56
Uniform Civil Procedure Rules 2005, r 20.14(1)Cases Cited: Antaios Compannia Naviera SA v Salen Rederierna AB [1985] AC 191
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (219) CLR 165Category: Principal judgment Parties: Oval Solutions Pty Limited, formerly IAS Consulting Group Pty Ltd (Plaintiff)
Regional Express Holdings Limited (Defendant)Representation: Mr N Bender (Plaintiff)
Mr J Simpkins SC with Mr J Hynes (Defendant)
Piper Alderman (Plaintiff)
Owen Hodge (Defendant)
File Number(s): 2008/316816
Judgment
Table of Contents
A
INTRODUCTION
Nature of case
[1] - [3]
Factual background
[4] - [10]
Separation of issues
[11] - [13]
Evidence overview
[14] - [17]
Terms of retainer deed requiring interpretation
[18] - [27]
Principles of interpretation
[28] - [31]
Disputed factual issues
[32]
B
CONSIDERATION OF THE ISSUES
Issue 1 - Exclusion of unlevied airport taxes
[35] - [46]
Issue 2 - Subtraction of GST from cost savings
[47] - [53]
Issue 3 - Cost savings achieved in August 2004
[54] - [60]
Issue 4 - Calculations for Albury airport
[61] - [69]
Issue 5 - Cost savings for Ballina airport
[70] - [78]
Issue 6 - Passenger head taxes at Devonport airport
[79] - [85]
Issue 7 - Advertising incentive for Mildura airport
[86] - [91]
Issue 8 - Extension of Griffith airport agreement
[92] - [95]
Issue 9 - Cost savings at Lismore airport
[96] - [98]
Issue 10 - Arrangements for Orange airport
[99] - [103]
Issue 11 - Contractual defence to cross claim
[104] - [108]
Summary of findings on Issues 1 - 11
[109] - [110]
C
DISPOSITION & ORDERS
Disposition
[111]
Orders
[112]
A. INTRODUCTION
Nature of case
The matter at issue in these proceedings is a dispute between the plaintiff/cross defendant, Oval Solutions Pty Ltd ["Oval"] and the defendant/cross claimant, Regional Express Holdings Ltd ["REX"] concerning the amount payable to Oval for the services it provided to REX.
The services in question were provided by Oval pursuant to an agreement which was in the form of a retainer deed executed between the parties on 29 April 2003. The agreement provided for Oval to carry out consultancy work for REX in the domestic aviation industry in Australia in return for remuneration according to formulae set out in the retainer deed. The work required of Oval by REX was aimed at achieving costs savings and increasing the profitability of the business operations conducted by REX. In response to the claim by Oval, REX has issued a cross claim for alleged overpayments it made to Oval during the currency of the agreement.
At the time the parties entered into their arrangements, Oval was known as IAS Consulting Pty Ltd. For convenient and consistent reference to the contents of documents, I shall refer to Oval in parenthesis in substitution for wherever IAS is mentioned in the documents.
Factual background
REX operated a number of airline routes in regional centres in NSW. At each route location, the local municipal authorities in those areas operated airports. REX was seeking to reduce its operating overheads, and to thereby increase its profits for those routes. To do so, it engaged the consultancy services of Oval to assist in achieving those objects.
In all, there were 17 airports to which the deed related concerning REX's business operations. These were at Albury, Broken Hill, Bathurst, Ballina, Burnie, Coober Pedy, Devonport, Griffith, Lismore, Merimbula, Mildura, Moruya, Narranderra, Orange, Parkes, Portland and Wagga Wagga.
Between July 2003 and August 2004, Oval provided the required consultancy services to REX as was agreed. This included the negotiation of lower airport and passenger charges with regional councils and airports. In conformity with the agreement between the parties, REX made certain payments to Oval as a consequence of the provision of those services. Notwithstanding those payments, the parties remain in dispute as to the entitlement of Oval to receive further payments that Oval claims ought to have been calculated in its favour pursuant to the agreement.
Oval claims that it had negotiated substantial reductions in certain airport charges and other concessions on behalf of REX in 2003 in connection with charges levied by country airports. Oval claims to have negotiated those reductions in charges with private airport owners or with the regional councils responsible for the administration of the relevant airports to which the agreement of the parties applied. The charges concerned airport passenger taxes, aircraft landing fees, rent, security costs and various other charges levied by local governments at the airports.
The dispute between the parties concerns the contention by Oval that the costs savings calculations submitted to it by REX for the purpose of calculating Oval's charges, incorrectly omitted relevant financial data.
In addition, the dispute between the parties extends to the manner in which certain GST issues should be treated in calculating their rights and entitlements in connection with cost savings at some of the airports.
At the centre of the dispute between the parties is the meaning of certain contractual terms of the agreement embodied in the retainer deed, and as to whether the remuneration mechanisms within the agreement which triggered Oval's entitlement to payment, had been engaged as claimed by Oval. These considerations govern the ultimate amount of Oval's claim for entitlement to payment under the agreement. The evidence, which is contained in a compact disc comprising complex financial spreadsheets, did not permit the precise identification of the amount of Oval's claim. Oval seeks to identify the quantum of its claim after the relevant findings of fact have been made. REX issued a cross claim that initially sought restitution for an alleged overpayment of $48,018.67, later reduced to $25,045.36.
Separation of issues
The parties presented complex financial arguments, producing spreadsheet calculations that did not necessarily deal with all the matters of consequence that subsisted between them. At the outset of the hearing, Oval applied for the separate determination of identified questions so that the parties and their experts could then apply the findings on those issues to enable them to either reach agreement on the monetary consequences of such findings, or to alternatively seek to adduce further evidence to establish quantum in the absence of agreement between the parties on such consequential matters.
During the course of the hearing I indicated that I would determine the plaintiff's application for the separate determination of the issues in the course of my consideration of evidence and argument. Having heard the respective arguments, and having examined the complex financial spreadsheets that had been printed, I now formally grant that application. I make that order because of the intricate complexity of the calculations that arise, and because the balance of convenience indicates this course to be the most cost effective option for the parties. The court is not in a position to examine the complex data stored within the CD-Rom that was tendered in evidence.
It appears that at the case management hearings of this matter in the Commercial List, the parties did not expose for consideration by the court, the detailed financial complexity of the matter. Had they done so, the financial calculations required to be reached in the proceedings would most probably have been sent to a referee pursuant to UCPR r 20.24(1). However, given the procedural stage proceedings had reached, having regard to the requirements of s 56 of the Civil Procedure Act 2005, I considered it was inappropriate to refer the matter to a referee at the commencement of the hearing. Instead, I determined that the fairest and most expeditious course would be to deal with the separate questions, as was submitted by Oval, and to defer the assessment of final quantum pending agreement by the parties on the monetary effect of my findings, or so that further evidence could be called, as the case may be.
Evidence overview
Oval's only witness was Mr Scott Gustetter, a director of Oval. Mr Gustetter was an expert in airline marketing strategies and related business costings. REX's only witness was Mr Irwin Tan, the general manager of REX in Australia. Each of these witnesses had deposed to complex affidavits, which were read. That evidence included financial spreadsheets and were constructed upon a number of variables that influenced the ultimate quantum of the claim.
The plaintiff formally tendered a CD-Rom disc that contained financial data and spreadsheets: Exhibit "A". Ultimately, due to the order made for the separation of issues, it was not necessary to refer to the detail of this material.
Mr Gustetter prepared an initial spreadsheet setting out his assessment of the amount of Oval's claimed entitlement under the deed: Tab 26 of SG1 . That claim was disputed by REX. Mr Tan responded to that spreadsheet by disputing Mr Gustetter's calculations. Mr Gustetter subsequently responded to Mr Tan's critical analysis by making a number of concessions on various points in issue. Despite those concessions, by their respective analyses, the parties remain unable to resolve their differences. Those differences have prevailed due to differing underlying factual contentions. In turn, these questions relate to matters of interpretation of the terms of the retainer deed.
The parties each relied upon their own interpretation of the effect of the terms of the 29 April 2003 retainer deed they had executed. The terms of that deed defined the relevant charges. Clause 6.3 of the deed contained a formula for the calculation of the remuneration of REX. It is appropriate to set out the relevant terms of the retainer deed.
Terms of the retainer deed
The retainer deed between the parties was annexed as Tab 2 to the Exhibit to the 9 December 2009 Affidavit of Mr Gustetter: ["SG1"]. Some provisions of the deed were clear and required no interpretation. Others required construction. The operative provisions of the retainer deed comprised clauses 1 to 14. Schedule 1 to the retainer deed is concerned with interpretation and with miscellaneous provisions as well as some relevant definitions. Schedule 2 to the retainer deed sets out the services that were to be provided by Oval in 4 identifiable phases.
The first phase of their arrangements, which was estimated to be for 2 weeks, Oval was required to analyse the relevant market and REX's financial data to ascertain current prevailing charges, to evaluate market information to determine commercial objectives and targets, including the target of reducing REX's operating charges. The second phase of their arrangements, which was to be for a further 3 weeks, provided for the development of campaign materials and the development of arguments to be used within relevant presentations to council airport operators to support a case for reduced charges. The third phase of their arrangements, which was estimated to be for a further 8 weeks, involved the preparation of presentations to suppliers aimed at achieving reduced operational charges. This included negotiations, preparation of documentation and reports concerning cost savings. The fourth phase of their arrangements, which was estimated to be for a further 2 weeks, involved the finalisation of any remaining agreements, and following up on any outstanding issues.
The principal aim of the engagement of Oval was to reduce REX's business operating charges. Those charges were relevantly defined in clause 1.1(c) of the retainer deed as follows:
"(c) "Charges" means taxes, fees, rent, security costs, and any other charges levied by an airport or local government;"
Clause 1.1(d) of the retainer deed relevantly defined cost savings as follows:
"(d) "Cost Savings" means taxes, fees, rent, security costs, and any other charges levied by an airport or local government:
(i) negotiated by either REX or [Oval]; or
(ii) that can be offset, reduced or recovered, through additional funding or revenue by REX;
which are achieved from the Services provided during the Term:"
Clause 1.1(y) of the retainer deed relevantly defines term as follows:
"(y) "Term" means the period of twelve (12) calendar months commencing on the date of this Deed;"
In the context of this case, the term of the retainer deed must be taken to refer to the inclusive contractual period between 29 April 2003 and 28 April 2004.
By the operation of operative clauses 6.1 to 6.8 of the retainer deed, provision was made in the agreement for the payment of Oval's services in the following terms:
" 6. PAYMENT FOR SERVICES
6.1 During the first three calendar months of the Term, or as determined by [Oval], [Oval] will present to REX a table of Charges compiled:
(a) from the latest invoice received by REX or recipient generated from REX for each Supplier; and
(b) where no invoice is available, the amount that REX has accrued for the Supplier in the most recent accounting period from when the table is presented to REX; and
(c) any documents received from the Supplier identifying current Charges or future escalations in Charges:
("Draft Charges Tables")
6.2 Within 7 days of receipt of the Draft Charges Table REX will review the Draft Charges Table and advise [Oval] of any changes or amendments required and why. On agreement between the parties as to the amendments to be made to the Draft Charges Table the amended Charges Table will be adopted as the "Final Charges Table" . If the parties cannot agree on the form of the Final Charges Table clause 16 of Schedule 1 shall apply.
6.3 [Oval] will provide to REX:
(a) a table containing the difference in unit costs from the Final Charges Tables upon the completion of [Oval's] work in each port; and
(b) a list of actual cases where Charges are reduced or recovered; and
(c) a list of any other concessions obtained from Suppliers in the form of special funding:
("Cost Savings Advice")
The Cost Savings Advice will be applied to REX's actual operations in order to determine the total Cost Savings for each calendar month of the Term.
6.3 (sic and hereafter referred to as 6.3(#2)) REX will pay [Oval]:
(a) until Cost Savings equal $60,000 ( "Fixed Component" ), an amount equal to the Cost Savings generated, with such amount being payable in accordance with clause 6.5; and
(b) on exceeding the Fixed Component, an amount equal to Twenty per centum (20%) of the Cost Savings which exceed the Fixed Component ( "Variable Component" ) which:
(i) is calculated for each location or case where Charges are incurred; and
(ii) subject to clause 6.4, applies for a period of twelve (12) months in each location or case from which the Variable Component takes affect; and
(iii) is payable in accordance with clause 6.6.
6.4 If REX discontinues a contract with a Supplier, the Cost Savings will be payable to [Oval] until the Date of Termination of the contract with the Supplier.
6.5 The Fixed Component is payable by REX and will be paid in arrears by REX to [Oval] by monthly instalments on or before the 10 th Business Day of each calendar month, until the amount equal to $60,000 has been paid.
6.6 The Variable Component will be paid in arrears (and proportionately in the case of the first and final payments) by REX to [Oval] by monthly instalments on or before the 10 th Business Day of each calendar month, for twelve calendar months commencing on the month the Variable Component takes effect and be accompanied by:
(a) a recipient generated tax invoice; and
(b) a copy of the report containing the total number of arriving and departing passengers carried by REX for each port, generated from the REX Revenue Accounting System; and
(c) a copy of the report containing the total number of departures and arrivals for each port from the REX Flight Operations System.
6.7 Any payment to be made pursuant to this Deed and not received within 7 days of the due date will be considered Past Due ( "Past Due Date").
6.8 The obligation of REX to make payments pursuant to this clause will continue after the expiration of the Term including in circumstances where REX has reduced its Fares."
Clause 6.3 of the operative provisions of the retainer deed was clear in its terms. It provided that in assessing Oval's entitlements to the payment of its fees, there was to be a fixed component which required REX to pay Oval 100 per cent of all costs savings achieved on the specified routes up to a limit of $60,000. In addition to that fixed component, there was also provision made for a variable component. This comprised 20 per cent of all costs savings that had been achieved for 12 months from the date that the fixed component had been achieved.
In respect of REX's cross claim, Oval claimed that the terms of the retainer deed provided it with a complete answer to that cross claim by the following terms of clause 6.2 of Schedule1:
"REX waives any right to sue [Oval] for damages for anything under the terms of this Deed"
Before identifying the disputed factual matters, I set out a summary of the relevant guiding principles for interpreting the terms of the agreement between the parties.
Principles of interpretation
The principles of interpretation applicable to the agreement between the parties are well known. These are recognised as the objective theory of contract. The principles can be briefly stated. The fundamental precept is that the terms of the contract are to be interpreted and read so as to give business efficacy to the transaction and its relevant components. In this regard, the required approach is to consider what a reasonable person in the position of the other party would have understood the contract to mean in the context in which it was intended to apply: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165, at p 179, [40].
In this case, where there is no issue of any inequality of bargaining power between the parties, the interpretation of any disputed terms in the contract, requires objectively balancing the relative interests, needs and rights of the parties under the agreement.
In this regard, it is important to identify the objective of the underlying transaction. REX was seeking to reduce its business overheads and in the process, thereby, increase its profits. To achieve this, it required the assistance of Oval's consultancy and negotiation services. In return, Oval was to be entitled to fair remuneration according to the agreed formula within the deed. This was a purely commercial relationship,
Insofar as the agreement and its terms requires interpretation, a literal, technical, artificial or overly syntactic or semantically based analysis that yields absurd results is to be avoided in favour of more purposive conclusions that requires business commonsense: Antaios Compannia Naviera SA v Salen Rederierna AB [1985] AC 191, per Diplock LJ at 201.
Disputed factual issues
The partes have identified 10 disputed areas involving factual issues concerning Oval's claim as well as an 11 th substantive legal issue, which is the subject of REX's cross claim. These matters can be conveniently summarised as follows:
Issue 1 : Whether, in relation to a number of airports subject to the retainer deed, REX is entitled to exclude from its costs savings calculations, amounts that had been charged to passengers for airport taxes collected by REX before the dates that negotiated reductions in such taxes came into effect;
Issue 2 : Whether, in relation to all airports that were subject to the retainer agreement, the costs savings achieved by Oval pursuant to the retainer deed should be reduced by an amount representing the GST component in the charges that were reduced by REX's negotiations;
Issue 3 : The amount of cost savings achieved for REX in August 2004, in relation to a number of specified airports;
Issue 4 : The correct method of calculation of relevant passenger numbers and costs savings for REX at Albury airport;
Issue 5 : Whether, in relation to Ballina airport, the amount of $50,000 negotiated in May 2004, should be characterised as a relevant costs saving for REX;
Issue 6 : Whether, in relation to Devonport airport, an increase in passenger head taxes should be taken into account in calculating costs savings achieved by Oval for REX;
Issue 7 : Whether, in relation to Mildura airport, a $20,000 advertising incentive negotiated by Oval for the benefit of REX is to be characterised as a relevant costs saving;
Issue 8 : Whether, in relation to Griffith airport, a subsequent extension of an agreement resulting in costs savings for REX that was originally negotiated by Oval, should also be considered to be a relevant costs saving for REX;
Issue 9 : The correct period during which costs savings at Lismore airport were achieved for REX;
Issue 10 : Whether, in relation to Orange airport, a subsequent arrangement adopted by Orange Council should be taken into account as a costs saving for REX in calculating Oval's entitlements;
Issue 11 : Whether clause 6.2 of Schedule 1 to the retainer deed operates as a complete answer to REX's cross claim so as to render it unmaintainable;
B. CONSIDERATIOAN OF THE ISSUES
In the paragraphs that follow, I set out my findings of fact consequent upon my consideration of Issues 1 to 10 that have been identified as requiring preliminary determination. I have also set out my conclusion in relation to Issue 11 .
The expectation is that these findings should enable the parties to prepare short minutes to give effect to consequential calculations in consent orders which would then lead to the making of final orders.
Issue 1 - Exclusion pre-paid but unlevied airport taxes from costs savings
In Annexure A1 to his affidavit sworn 20 June 2010, Mr Gustetter prepared spreadsheet calculations in relation to several airports described in the line item " Tax pre-collected by REX but not paid due to tax holiday ". I take the reference in the spreadsheet to a " tax holiday " to be a reference to an agreement whereby a number of airport administrators or regional councils would, for an identified period of time, waive otherwise applicable passenger levies at the relevant airports. Where those charged amounts were not refunded to the passengers who had paid those amounts, the retention of those amounts by REX would arguably increase its revenue.
Oval claims that those levied amounts, which had been pre-paid by passengers who had purchased their tickets before the dates on which the relevant waivers took effect, should be brought into account in the calculation of Oval's entitlement to remuneration. This is because, as a result of the efforts of Oval, the councils and airports concerned had never levied those amounts from REX during the currency of the waiver. It was consequently argued that the retention of those amounts by REX represents a windfall profit to that company, which should be properly characterised as a cost saving within the terms of the agreement. It was therefore argued that these amounts should be accounted for to Oval by REX, in accordance with the agreed formula.
In examining this issue, it is plain that the differences between the parties are based on the disparate assumptions they have adopted as to how costs savings have been defined in the deed of retainer. In identifying the claimed entitlement of Oval, Mr Gustetter's spreadsheets take into account the argued retained profits, whereas Mr Tan's competing calculations do no take those matters into account. REX disputes the validity of the approach taken by Oval on this issue.
REX has argued, through the evidence of Mr Tan, that in the first 2 days of August 2003, savings of the kind contemplated by the agreement of the parties, in the total amount of $60,548, had been achieved since the commencement of the term on 29 April 2003. Accordingly, on that approach, it was argued by REX that Oval's entitlement to the fixed component of remuneration had crystallised at 2 August 2003. On an acceptance of that underlying assumption as was argued by REX, this necessarily means the period for calculating the variable component of Oval's entitlement to remuneration was defined as commencing on 2 August 2003 and concluding on 2 August 2004.
I have reservations as to the acceptability of the assumptions made by REX in this regard and I do not accept the validity of them. This is because Mr Tan's calculations did not bring into account the retained amounts of tax that had been pre-paid by passengers and not refunded to those passengers. As those amounts were not levied by the respective airports, due to what was described as a " tax holiday ", and as those amounts were not refunded to the passengers who had made the pre-payments, I consider that they must necessarily be seen to represent additional windfall profits for REX.
I consider that such additional or retained windfall profits must have necessarily increased the profitability of the operations of REX as contemplated by the agreement. The effect of such additional profits must necessarily have enabled REX to reach the agreed $60,000 target referred to in clause 6.3(#2) of the retainer deed at an earlier point in time than the date identified by Mr Tan.
Accordingly, applying different calculation methodology within the terms of the agreement, this would have necessarily influenced the identification of the date by which the fixed component of Oval's entitlement to remuneration had accrued in the amount of $60,000. The effect of this would be to identify an earlier date than the one estimated by Mr Tan for the commencement of the variable component of Oval's entitlement to remuneration.
I consider this to be the necessary conclusion that arises when the facts are viewed through the commonsense prism of business efficacy. The amounts of un-refunded pre-paid taxes retained by REX necessarily had the effect of increasing REX's revenue, and therefore, its profitability. As such, within the terms contemplated by the deed of retainer, this must be seen as a relevant cost saving to REX for which Oval is entitled to be remunerated: Retainer deed, clause 1.1(e) .
As a consequence of my finding on Issue 1 it is plain that Mr Tan's calculated accrual date for the crystallisation of the fixed component of Oval's remuneration must necessarily be revised and brought forward. As a consequence, the commencement and definition of the duration of the period for the calculation of the variable component must also be different from the date that was identified and assumed by Mr Tan.
The significance of this finding is that the state of the evidence does not disclose a proper basis upon which to undertake the required recalculation to identify a judgment sum. In my view, this is a compelling reason for acceding to the application made on behalf of Oval for the determination of the separate issues so as to enable the parties to translate the findings on this issue into a monetary calculation using the data disclosed by the parties. The court does not have the expertise to interrogate the financial data on the CD-Rom or compact disc marked as Exhibit "A" in order to achieve the required recalculation.
Accordingly, this is an issue upon which the parties will now have to seek to either reach an agreement that could be embodied in short minutes, or to adduce refocussed financial spreadsheets in further evidence.
In the interim, I record that Oval has therefore succeeded on Issue 1 .
Issue 2 - Contended subtraction of GST from cost savings
The parties are at issue as to whether, in relation to all the airports that are subject to the retainer agreement, the costs savings achieved by Oval pursuant to the retainer deed, should be reduced by an amount that represents the GST component within the charges that were reduced by REX's negotiations.
Oval claims that the inclusion of GST in the basal amount used to make its claimed remuneration calculations is consistent with the text of the retainer deed in which costs savings are defined to mean charges negotiated by Oval, which are in turn defined to include taxes: Retainer deed, operative clause 1.1; and clause 3.1 of schedule 1 . There can be no issue that GST is a tax: A New Tax System (Goods and Services Tax) Act 1999.
REX relies on the evidence of Mr Tan to the effect that in its calculations, Oval has doubled up on amounts for GST: Paragraph [27] of Mr Tan's affidavit . The argument by REX was that GST is not a relevant saving for REX and it should therefore be excluded from Oval's final calculations.
In my view REX's GST argument is flawed because it seeks to treat the GST issue as an accounting exercise in which an accounting policy is administered in order to determine profit whereas the agreement does not demand such an approach. In my view, the approach by REX fails to have regard to the underlying purpose or business efficacy of the exercise, namely to apply an agreed formula for the calculation of Oval's entitlement to remuneration based on gross figures that include GST. A purposive approach to interpretation of the agreement does not require the separation of the GST component before identifying Oval's entitlements, such as might occur in an accounting exercise for the preparation of income tax returns or profit and loss accounts.
In their retainer deed, the parties chose to adopt a formula that used REX's sales figures that were inclusive of GST as the gross yardstick by which to calculate Oval's fees. This did not involve a GST accounting exercise. Instead, it was simply a means by which to calculate fees. In my view, Oval's responsibility to the ATO concerning the GST component of its own fees is a separate question that does not feature in this litigation. The agreement did not require REX to separate out such amounts before calculating Oval's entitlement to remuneration.
In my view, for the purpose of identifying Oval's entitlement to remuneration, the agreement did not require the parties to identify the business and non-business tickets that were the subject of the bookings which may have had differing GST consequences for travelling passengers. In my view, for identifying the business efficacy of the agreement it is sufficient to simply refer to the agreed formula within the retainer deed on this issue. This issue has nothing at all to do with an accounting for the GST for the purpose of applying the agreed remuneration formula.
Oval has therefore succeeded on Issue 2 .
Issue 3 - Costs savings achieved in August 2004
There is dispute within the evidence of both Mr Tan and Mr Gustetter concerning the extent to which costs savings achieved in August 2004 were payable by REX to Oval in relation to a number of airports.
This area of dispute arises because clause 6.3(b)(ii) of the retainer deed provides that the variable component applies for a period of 12 months after the day upon which the fixed component ceases to apply.
In my view, Oval has correctly submitted that the resolution of this question is dependent upon the determination of what does or does not constitute costs savings. The answer to that question is consequential upon the construction of the agreement.
In this regard, REX contends that the costs savings advice documentation that Oval was required to provide to REX as required by clause 6.3 has not been provided. Mr Gustetter gave evidence that the costs savings advice documentation is contained in the CD-Rom which has been tendered.
REX has submitted that the CD-Rom does not contain that documentation. The court is not in a position to reject Mr Gustetter's evidence to the contrary.
In my view, the detailed nature of the financial evidence described by Mr Gustetter in his evidence leads me to infer that the CD-Rom does in fact contain that documentation, and I accept his evidence in that regard. I therefore find that Oval has satisfied the condition precedent for pressing its claim against REX pursuant to clause 6.3 of the retainer deed.
Oval has therefore succeeded on Issue 3 .
Issue 4 - Passenger numbers and related calculations for Albury airport
The parties are at issue as to the correct method for calculating costs savings based on historical passenger numbers at Albury airport. The issues here are the number of passengers who flew to and from Albury during the relevant period, and whether the identified notion of " seasonalisation " has any application in the process of calculating costs savings.
Passenger numbers at Albury
There was a relatively small discrepancy in the evidence as to the calculation of the relevant passenger numbers for Albury airport. Sensibly, for the purpose of assessing damages, Oval has conceded that the calculations should proceed upon the basis of the REX figures for passenger numbers at Albury. This is a matter that must be reflected in the short minutes that are required to be prepared by the parties.
"Seasonalisation"
The evidence discloses that in relation to Albury airport, the council was " quite happy to seasonalise Year 1 charges in order that REX obtain immediate benefits from the introduction of lower airfares ": Exhibit SG1, Tab 6.
REX argues that there was no evidence as to the meaning of the term " seasonalisation ". In my view, the meaning of that term is reasonably derived from the evidence of Mr Gustetter, who explained that the passenger numbers upon which the costs savings were based would be averaged over the term of the agreement with particular councils.
REX submitted that the " seasonalisation " process required that a 100 per cent waiver be applied to head taxes for the first 20,000 passengers at Albury airport from the commencement of the agreement, namely, during the first year commencing 29 August 2003, with a 50 per cent waiver applying thereafter.
In contrast, Oval submitted that the intention of the agreement was that there be a process of averaging over the entire term of the agreement.
In my view REX's argument is correct and must prevail. The intention of the parties is plain. A 100 per cent head tax waiver for the first 20,000 passengers for the first year is a readily understood concept which has commercial efficacy, as does the concept of a 50 per cent head tax waiver during the remaining currency of the agreement. In my view, there is no need to invoke averaging methodology implicit in the term " seasonalisation " where the calculation formula is plainly stated in the retainer agreement, as I find to be the case with the Albury passenger numbers head tax issue. In my view, this construction is consistent with the concept of conveying " immediate benefits" on Oval, such that an averaging notion does not need to be construed into the agreement in order to give it business efficacy.
The calculated amount that flows from this finding, including the GST component consistent with my finding at paragraphs [47] - [53] above, must now be identified by the parties.
REX has therefore succeeded on Issue 4 .
Issue 5 - Cost saving of $50,000 in May 2004 relating to Ballina airport
The matter at issue between the parties concerning Ballina airport is whether an amount of $50,000 that was negotiated and evidenced by a letter dated 28 June 2004 can be claimed by Oval as a relevant cost saving: Exhibit IT-1, page 42.
REX has argued that this amount was negotiated outside the terms of the retainer deed, and therefore, no relevant cost saving applies. In contrast, Oval has argued that the letter dated 28 June 2004, which was negotiated at a meeting on 17 May 2004, and which post-dated the expiry of the agreement at the end of April 2004 as indicated by Exhibit SG-1 at Tab 9, had the effect of extending the period for the calculation of cost savings to incorporate this sum.
The differing amounts calculated by the parties in respect of the Ballina claim are reconcilable in that, whereas Mr Tan excluded the amount of $50,000 on the basis that it was outside the terms of the agreement, Mr Gustetter's calculations included this sum because " Term " is defined by clause 1.1(y) of the retainer deed to mean 12 months from the date of the deed, which was 29 April 2003, and which expired on 28 April 2004.
Oval argued that clauses 6.3 and 6.4 of the retainer deed provide for the payment of costs savings achieved in the period of 12 months from the time that the variable component came into effect: clause 6.3(b)(ii) and clause 6.6 . It is common ground that this date was in August 2004. On that basis Oval argued that it was entitled to be paid for costs savings achieved during the period after the expiry of the term on 28 April 2004 until the agreed relevant date in August 2004, 12 months after the commencement of the variable component, namely $50,000: Letter 28 June 2004.
Rex argued that there is simply no contractual basis for the additional claim of a cost saving of $50,000.
In my view, these two inconsistent positions can be reconciled by construing the terms of the agreement reached between the parties as follows.
In my view, REX's position is flawed by its reliance upon an unduly narrow interpretation of remuneration for services provided during the " Term ": clause 1.1(e). In my view, Oval's submission is correct in that the " Term " was the ultimate defining point concerning liability for payment by REX because clauses 6.3(b)(ii) and 6.6 made it clear that " Term ", which was relevant to defining Oval's obligations, was not the only factor to be considered in calculating Oval's remuneration. The period commencing on a date 12 months after the commencement of the variable component was the appropriate reference point, and the effect of that extension must also be taken into account in calculating Oval's remuneration.
Accordingly, I find that Oval's entitlement to the disputed sum of $50,000 referrable to Ballina airport is properly claimed from REX.
Oval has therefore succeeded on Issue 5 .
Issue 6 - Passenger head taxes at Devonport airport
The matter at issue between the parties with respect to costs savings at Devonport airport is whether an increase in passenger head taxes should be taken into account when calculating such savings.
REX's position in relation to the Devonport head taxes is that such amounts represent a surcharge it had to pay to Devonport council, and as such, this did not comprise a relevant surcharge " passed on to customers " but was instead, a business cost factored into REX's airfare structure, rather than being specifically passed onto customers. REX argued that the retainer deed, which defined savings in charges and charges as " taxes, fees, rent, security costs and any other charges levied by an airport ": clause 1.1(c) and (e). REX consequently argued that such matters, which were factored into REX's airfare structure, are therefore to be excluded from the consideration and calculation of costs savings.
In explaining why the passenger head taxes at Devonport should, as a matter of interpretation, be included in the calculations, Mr Gustetter identified the historical incidence of passenger head taxes. This was because, as also was identified by Mr Tan, at the commencement of the arrangements, the existing fee levied by Devonport council was a $7.10 passenger tax, as well as a fee of $86 per landing and an additional rental liability of $2145. Oval's negotiations achieved a removal of the $86 landing fee and a rent holiday of $2145 per month, but at the same time, the passenger tax was increased from $7.10 to $8.40 plus GST.
In my view, Mr Gustetter has therefore correctly characterised the passenger head tax as a surcharge passed on to customers. This is in contrast to a landing fee, which could not possibly form a surcharge on passenger tickets as it was not possible to predict the number of passengers between whom a landing fee should be shared. The obvious implication of these arrangements was that the landing fee, which could not be passed onto customers, was replaced with a passenger tax, which could be directly passed onto customers, and as a result, it should form the basis for costs savings calculations in Oval's favour.
In the result, at Devonport airport, REX achieved the benefit of a relevant conversion of landing fees payable to the council into passenger taxes. This was as a result of Oval's negotiations, and in my view, it would be artificial and wrong not to characterise or treat these amounts as relevant costs savings under the agreement. This is so particularly since clause 6 of the retainer deed provided that Oval's remuneration was to be based on a reduction in charges payable by REX as a result of Oval's efforts.
In my view, contrary to the position advanced by Mr Tan, Mr Gustetter was correct in ignoring the increase in passenger head taxes at Devonport for the purposes of calculating cost savings. Mr Gustetter's position was consistent with clause 1.1(e)(ii) of the retainer deed which included savings achieved " through additional funding of revenue by REX " which achieved a benefit from the waiver of landing fees as a result of increased passenger head taxes. As a consequence, I prefer the interpretation of Mr Gustetter to that advanced by Mr Tan.
Oval has therefore succeeded on Issue 6 .
Issue 7 - Advertising incentive of $20,000 for Mildura
The matter at issue between the parties concerning Mildura airport is whether an amount of $20,000, representing an advertising incentive negotiated with Mildura council by Oval, should be characterised as a relevant cost saving pursuant to the retainer deed.
The amount involved was a concession or rebate on advertising expenses negotiated by Oval, although that amount was never claimed by REX, and concerned a contribution that Mildura airport was to make to an advertising campaign which was in turn to be matched by REX.
The evidence of Mr Tan, which I accept in this regard, was to the effect that his searches revealed that the proposed contribution amount of $20,000 was never claimed, received or spent by REX. As a consequence, REX argued that there was no relevant cost saving in the amount identified, which, on that approach, necessarily requires that the amount not be taken into account in calculating Oval's entitlement to remuneration.
In contrast to REX's position as outlined above, Oval argued that REX's failure to exercise the negotiated concession must be seen as being irrelevant to the question of whether Oval should be remunerated by taking that concession into account.
In my view, giving business efficacy to the arrangements between the parties, the opportunity of free advertising must be seen as a benefit negotiated by Oval to the advantage of REX. In the context that the sum of $20,000 falls within the ambit of " any other concessions obtained from suppliers in the form of special funding ", and thus within the broad mandate for Oval to negotiate such savings, I consider it to be immaterial that REX appears to have chosen not to avail itself of the negotiated advantage. The amount in question was a negotiated cost saving due to the efforts of Oval, and should therefore be taken into account in calculating Oval's remuneration.
Oval has therefore succeeded on Issue 7 .
Issue 8 - Whether extension of Griffith agreement is a relevant cost saving
The matter at issue between the parties in relation to Griffith airport is whether the subsequent extension, on 17 May 2004, of an agreement with Griffith council on 16 October 2003, resulting in costs savings that were originally negotiated by Oval, should also be considered to be a relevant cost saving for the purposes of calculating Oval's entitlement to remuneration.
The position taken by REX on this issue is that Oval is, unjustifiably, seeking to rely upon an arrangement arrived at by REX outside the terms of the original arrangement negotiated with Griffith council by Oval. In contrast, Oval argued, consistent with its position taken in respect of the Ballina agreement which is the subject of Issue 5 , that the extension of the earlier agreement was wrongly excluded from Mr Tan's calculations, claiming it to be a legitimate item upon which to base the claim of entitlement to remuneration.
In my view, in conformity with the approach taken in respect of Issue 5 , as outlined in paragraphs [70] - [78] of my reasons, this item of dispute should be resolved in favour of Oval in the same manner as the disputed item in respect of Ballina airport.
Oval has therefore succeeded on Issue 8.
Issue 9 - Costs savings at Lismore airport
The matter at issue between the parties in relation to the claimed costs savings at Lismore airport was narrowed during final submissions, and is now limited to the calculations that arise in the shortened period between 22 July 2003 and 22 October 2003, compared to the initial disputed period that was earlier claimed to have been between 1 July 2003 and 31 October 2003.
The basis of the claim by Oval is for its remuneration calculations to be made on 100 per cent of the amount calculated for Lismore council's head tax charges for a period of 3 months from 22 July 2003. The GST issue and the tax holiday issue have already been determined in favour of Oval in respect of Issues 1 and 2 of these reasons. The parties are now required to prepare short minutes that calculate the resultant charges and the resultant entitlement of Oval to remuneration concerning this issue.
Oval has therefore succeeded on Issue 9 .
Issue 10 - Inclusion of subsequent arrangements for Orange airport
The matter at issue between the parties in respect of costs savings at Orange airport is whether the evidence properly discloses the existence of a subsequently negotiated arrangement adopted by Orange council that should be taken into account as a cost saving in calculating Oval's entitlement to remuneration.
The original arrangement with Orange council was recorded in a letter dated 30 September 2003, which indicated that the relevant arrangement was due to expire in May 2004. That extension was negotiated and the result of the negotiations was recorded in an email dated 23 April 2004.
The plaintiff relies upon Exhibit B, which comprises an email dated 24 December 2010, which forwarded a press item about REX's arrangements with Orange Council to the effect that REX had apparently continued to pay the council discounted rates in April and June 2010. Oval claims that these circumstances amount to an underpayment of about $40,000, compared to the previous tabulation of final charges for April and June 2010. Oval claims the sum of $40,000 accrued entirely within the 12 months after the variable component commenced to operate, and therefore arose as a result of Oval's negotiations, thus providing a claimed legitimacy to remuneration including this data.
In my view, there are insurmountable difficulties with this component of Oval's claim. The first such difficulty is the exhibited letter dated 27 April 2004, which confirms that the arrangements relating to Orange were terminated on 31 May 2004. The second difficulty is that Oval places reliance on a media release apparently issued by REX as evidence of the continuation of the arrangement: Exhibit "B". That media release is without a complete contextual explanation. In my view, in these circumstances, there is no satisfactory evidence to support the claim made by Oval with respect to the claimed extension of the arrangements at Orange. The news release does not provide such evidence.
REX has therefore succeeded on Issue 10 .
Issue 11 - Effect on cross claim of Clause 6.2 to Schedule 1
REX has claimed that in its payment arrangements with Oval, it has overpaid Oval to the extent of $25,045.36. Any final determination of an entitlement to an offset or a credit of this amount, or any other agreed variant of it, will essentially require an accounting exercise that will necessarily follow from the amounts to be identified in the short minutes the parties are to prepare following the findings that I have recorded.
It remains necessary to deal with an argument raised by Oval in answer to REX's cross claim. Oval has pointed to clause 6.2 of Schedule 1 of the retainer deed which I have already cited at paragraph [26] of my reasons. The effect of that clause is that REX has agreed to waive any right to sue Oval for damages under the terms of the retainer deed.
Oval has argued that this clause inoculates it from any liability to REX concerning REX's cross claim because the cross claim involves a claim for damages under the terms of the deed.
I do not accept that argument because it lacks the requisite commercial or business efficacy that would extend to a factual matter of overpayment. The operative portion of the clause is for anything arising under the retainer deed. That must be construed as relating to rights and liabilities accruing under the deed, and not construed so wide as to prevent recovery of an over-payment due to a factual error. Were it otherwise, an unjust enrichment would be permitted to arise, and that would involve an unreasonable construction of the retainer deed. I therefore reject Oval's agreement in defence to REX's cross claim.
REX has therefore succeeded on Issue 11 .
Summary of findings on Issues 1 to 11
Oval has succeeded on Issues 1, 2, 3, 5, 6, 7, 8 and 9 . REX has succeeded on Issues 4, 10 and 11 .
The expectation of the parties is that following the determination of the identified issues, they will take the remaining steps required to finalise and resolve the balance of the issues in dispute between them in this litigation so as to identify their respective monetary entitlements and liabilities. Those remaining steps, in essence, involve consequential mathematical calculations that should not involve controversy.
C. DISPOSITION AND ORDERS
Disposition
Oval has succeeded in respect of the substantial proportion of its claim. Short minutes are required to enable the finalisation of the mathematical consequences of the findings in relation to Issues 1 - 11 , and to formulate orders for the implementation of those findings. The issue of the costs of the proceedings will be determined after hearing from the parties in respect of the final orders to be made.
Orders
I make the following orders:
(a) The parties are to bring short minutes within 28 days to enable the entry of final orders that reflect the findings of fact;
(b) The parties are to be heard on the question of costs;
(c) Liberty to apply on 7 days notice if further orders are required;
Decision last updated: 03 June 2011
0