NEW SOUTH WALES COURT OF APPEAL
CITATION: Vodafone Pacific Ltd & Ors v Mobile Innovations Ltd [2004] NSWCA 15
FILE NUMBER(S): 40322/03
HEARING DATE(S): 20, 21, 22, 23 October 2003
JUDGMENT DATE: 20/02/2004
PARTIES:
Vodafone Pacific Ltd - First Appellant/First Cross-Respondent
Vodafone Network Pty Ltd - Second Appellant/Second Cross-Respondent Vodafone Pty Ltd - Third Appellant/Third Cross-Respondent
Mobile Innovations Ltd - Respondent/Cross-Appellant
JUDGMENT OF: Sheller JA Giles JA Ipp JA
LOWER COURT JURISDICTION: Supreme Court
LOWER COURT FILE NUMBER(S): SC 50123/01
LOWER COURT JUDICIAL OFFICER: Einstein J
COUNSEL:
T F Bathurst QC & T D Castle - First, Second and Third Appellants/First, Second and Third Cross-Respondents
F M Douglas QC & V F Kerr - Respondent/Cross-Appellant
SOLICITORS:
Henry Davis York - First, Second and Third Appellants/First, Second and Third Cross-Respondents
Deacons - Respondent/Cross-Appellant
CATCHWORDS:
Agency contract - engagement by service provider of agent to acquire by direct marketing and manage subscribers to its mobile telephone network - agent conducting Mobile Direct Marketing Operation - construction of provision precluding service provider from dealing with other service providers conducting competitive Mobile Direct Marketing Operation - whether "only" in definition of Mobile Direct Marketing Operation confined preclusion - construction of provision by which service provider set target level for acquisition of subscribers - whether could set target level of nil - whether required target level other than nil - whether terms implied as to good faith and reasonableness in setting target levels - content of implied terms found by judge - whether implication of terms as found precluded by contrary intent in contract - whether implication of terms a process of construction - whether misuse of power in setting target levels - finding of breach in failing to set target levels upheld but other findings of breach overturned - whether loss through failing to set target levels at all proved - whether breaches of other provisions of contract - whether damages for those breaches proved - whether contractual entitlement to payment under other provisions of contract. Transfer contract - agreement by service provider to transfer customers to agent to be managed under agency contract - whether mutual abandonment.
LEGISLATION CITED:
DECISION:
(1) appeal and cross-appeal each allowed in part; (2) Set aside the declarations in orders 1 to 5, orders 6, 7, 9 and 10 and the judgment made and given on 16 April 2003; (3) Stand the proceedings over to 12 March 2004 at 9.15 for directions; (4) Appellant/cross-respondent pay 25 per cent of the respondent/cross-appellant's costs of the trial; respondent/cross-appellant pay 80 per cent of the appellants'/cross-respondents' costs of the appeal and cross-appeal, and have a certificate under the Suitors Fund Act if otherwise qualified.
JUDGMENT:
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OFAPPEAL
CA 40322/03
SC 50123/01
SHELLER JA
GILES JA
IPP JA
Friday 20 February 2004
VODAFONE PACIFIC LTD & ORS v MOBILE INNOVATIONS LTD
Judgment
1 SHELLER JA: I have had the privilege of reading in draft the judgment of Giles JA with which I entirely agree. The orders should be as his Honour proposes.
2 GILES JA: This is an appeal and cross-appealfrom decisions in proceedings brought by Mobile Innovations Ltd (“Mobile”) against Vodafone Pacific Ltd, Vodafone Network Pty Ltd and Vodafone Pty Ltd (collectively, “Vodafone”). Mobile sued on an Agent Service Provider Agreement dated 2 October 1998 as varied by amending agreements in May 1999 and again in August 2000 (“the ASP Agreement”), an Additional Customer Management Agreement dated in March 2000 (“the ACM Agreement”) and a Website Agreement also dated in March 2000.
3 From at least the early 1990’s Vodafone Pacific Ltd owned and operated a public mobile telecommunications network in Australia. In April 2000 it transferred the network to its subsidiary Vodafone Network Pty Ltd, which thereafter operated the network. From April 1998 its subsidiary Vodafone Pty Ltd acquired and managed subscribers for the operator of the network. In the language of the industry, Vodafone Pacific Ltd and then Vodafone Network Pty Ltd was a carrier and Vodafone Pty Ltd was a service provider.
4 From a time in 1994 Mobile purchased mobile telecommunications services from Vodafone Pacific Ltd and resold the services. Subscribers acquired and managed by Mobile were connected to the Vodafone network, but were Mobile’s customers. In October 1998 that arrangement came to an end. Mobile sold its customer base to Vodafone Pacific Ltd for approximately $20 million. By the ASP Agreement Vodafone Pacific Ltd engaged Mobile as agent to acquire by direct marketing new subscribers to the Vodafone network on a postpaid basis (that is, subscribers billed after mobile phone use as distinct from those who prepaid) and to provide management services to the existing subscribers Mobile had acquired and the new subscribers it thereafter acquired.
5 By the ACM Agreement, in a letter from Vodafone Pty Ltd dated 16 March 2000 signed by Mobile on 20 March 2000, it was agreed that Vodafone Pty Ltd would provide 30,000 customers to Mobile by 30 June 2000, to be managed by Mobile under the ASP Agreement.
6 By the Website Agreement evidenced by a letter from Vodafone Pty Ltd dated 8 March 2000 it was agreed that Mobile would develop and administer Vodafone Pty Ltd’s E-commerce platform and that Vodafone Pty Ltd would pay the development, hosting and communication costs.
7 In its summons filed on 27 August 2001, as subsequently amended, Mobile claimed declaratory and injunctive relief under the ASP Agreement and damages for breaches of the ASP Agreement, the ACM Agreement and the Website Agreement.
8 The proceedings were heard over nineteen days in February and March 2003. The principal judgment was published on 27 March 2003, and a supplementary judgment on outstanding issues was published on 15 April 2003. The judge made orders-
(a) declaring the proper construction of the ASP Agreement (orders 1 to 5);
(b) restraining the engagement of two organisations to acquire subscribers by direct marketing (orders 6 and 7); and
(c) giving judgment for $14,219,100 as damages for breaches of the ASP Agreement ($11,518,100), the ACM Agreement ($2,467,000) and the Website Agreement ($234,000) (orders 8 and 9).
9 By its appeal Vodafone seeks to have the declarations, the restraining orders and all but $933,000 of the judgment set aside. The components of the judgment sum in issue, using the parties’ labels, are -
| Claim 1 |
ACM Agreement dispute |
$2,467,000 |
| Claim 4 |
June 2001 quarter dispute |
$312,000 |
| Claim 5 |
September 2001 quarter dispute |
$1,145,000 |
| Claim 6 |
December 2001 quarter dispute |
$2,253,000 |
| Claim 7 |
March 2002 quarter dispute |
$1,595,000 |
| |
June 2002 quarter dispute |
$1,451,000 |
| |
September 2002 quarter dispute |
$1,391,000 |
| |
December 2002 quarter dispute |
$1,354,000 |
| |
March 2003 quarter dispute |
$1,318,000 |
| Claims 6 and 7 |
Retention damages |
$100 |
| |
|
$13,286,100 |
10 As its label indicates, for claim 1 Mobile sued on the ACM Agreement. For claims 4 to 7 Mobile sued on the ASP Agreement. The declarations as to the proper construction of the ASP Agreement in orders 1 to 3 related to claims 6 and 7, while the declarations as to its proper construction in orders 4 and 5 related to the restraining orders 6 and 7. The components of the judgment sum not in issue are $699,000 for claim 2, the V.Mobile dispute,and $234,000 for claim 11, the Website dispute. For claim 2 Mobile sued on the ASP Agreement and, as its label indicates, for claim 11 it sued on the Website Agreement.
11 By its cross-appeal Mobile seeks to have declaration in order 5 reformulated in part and the restraining orders 6 and 7 wholly reformulated. It seeks to have the judgment sum increased by additional damages of $369,504 plus interest under claims 5, 6 and 7; independently of that increase in the judgment sum, it seeks to preserve a judgment in its favour for part of claims 5, 6 and 7 by way of contractual entitlement rather than damages.
12 At the trial the three Vodafone companies were generally referred to collectively as Vodafone. The declarations and the restraining orders were made and the judgment was given against all three Vodafone companies. The practice of collective reference to Vodafonewasfollowed intheappealandcross-appeal.
13 It was and is convenient to refer collectively to Vodafone unless there be reason to do otherwise. On the judge’s holdings, however, the orders should have distinguished between the three Vodafone companies. Both amending agreements treated Vodafone Network Pty Ltd rather than Vodafone Pacific Ltd as the Vodafone party to the ASP Agreement. The judge noted the defendants’ pleading that the ASP Agreement had been novated from Vodafone Pacific Ltd to Vodafone Network Pty Ltd on or about 31 March 1999, alternatively that Mobile was estopped from denying that such novation had occurred in or about May 1999, and said that “[u]ltimately the issue was not litigated” (para 22; see also para 9). Only one or other of Vodafone Pacific Ltd and Vodafone Network Pty Ltd could be restrained from breach of the ASP Agreement or liable in damages for its breach. Only Vodafone Pty Ltd could be liable in damages for breach of the ACM Agreement and the Website Agreement.
14 Vodafone permitted the orders to be made without differentiation. The Court should nonetheless not have made orders or given judgments against parties not shown to have been subject to them. The matter having been raised, Vodafone eschewed any complaint in the appeal that the orders failed to distinguish between the three Vodafone companies. Whatever its reasons for that stance, I do not think the Court can be quiescent. The integrity of its processes must be maintained, and it should not make unfounded orders.
15 The declarations and orders were concerned with the exclusivity conferred by Vodafone upon Mobile under the ASP Agreement and breach of contract by entry into agreements with X4 Pty Ltd (“X4”) and Housing Industry Association Ltd (“Housing Industry”). The judge made these declarations and orders -
“4. Upon the proper construction of the ASP Agreement, the word ‘solely’ in the definition of ‘Mobile Direct Marketing Operation’, qualifies the words ‘acquisition of subscribers’ namely by ‘remote selling, being an acquisition technique relying ‘solely’ on responses to advertisements effected by means of orders received centrally by telephone, fax, email or the Internet in response to advertisements placed in the press, magazines or catalogues or direct mail.
5. On its proper construction, the ASP Agreement:
(a) prevents each Defendant itself from appointing or dealing, directly or indirectly with a Service Provider which conducts a Mobile Direct Marketing Operation in competition with the Plaintiff;
(b) obliges each Defendant to procure that no Group Member appoints or deals directly or indirectly, with a Service Provider which conducts a Mobile Direct Marketing Operation in competition with the Plaintiff;
(c) precludes each Defendant when acting partly through or in conjunction with its agents, from conducting a Mobile Direct Marketing Operation in competition with the Plaintiff;
(d) does not preclude any Defendant when only acting itself, from conducting a Mobile Direct Marketing Operation in competition with the Plaintiff.
6. While the ASP Agreement is on foot, the defendants, by their directors, employees and agents, are restrained from acquiring post-paid subscribers to mobile telecommunication services by X4 Pty Limited placing advertisements in the press, magazines, catalogues or direct mail and receiving customer orders by telephone, fax, email or the Internet.
7. While the ASP Agreement is on foot, the defendants, by their directors, employees and agents, are restrained from acquiring post-paid subscribers to mobile telecommunication services by Housing Industry Association Limited placing advertisements in the press, magazines, catalogues or direct mail and receiving customer orders by telephone, fax, email or the Internet.”
16 The engagement of Mobile as agent was made in cl 2.1 of the ASP Agreement (in which Mobile was referred to as MI) -
“2.1 Appointment
Vodafone appoints MI, and MI accepts appointment, as Vodafone Billing Services’ non-exclusive agent service provider during the Term, through the Territory and through the Authorised Channels solely for the purposes of:
(a) performing the Acquisition Services for the purposes of acquiring New Subscribers for and on behalf of Vodafone Billing Services from MI’s Mobile Direct Marketing Operation; and
(b) to provide Management Services to New Subscribers and Existing Subscribers,
on condition that MI complies with Clause 6.3.”
17 Clause 2.4 provided -
“2.4 Acknowledgement concerning limitation on appointment
Notwithstanding any other provision in this Agreement, this Agreement concerns only the parties’ relationship with respect to the acquisition and management of Subscribers on a postpaid basis. The provision of prepaid mobile telecommunications services to subscribers may be dealt with in a separate agreement.”
18 Clause 2.5 provided -
“2.5 Acknowledgement concerning agency
MI acknowledges that each of the functions described in Clause 2.1 are performed by it as agent for a disclosed principal, Vodafone Billing Services, and subject to the terms of this Agreement.”
19 Compliance by Mobile with cl 6.3 was not in issue. Vodafone Billing Services was Vodafone Billing Services Pty Ltd, it seems another service provider in the Vodafone group, for which Mobile was to act as agent.
20 The Term was ten years from 30 September 1998, the Territory was Australia and Authorised Channel meant any direct marketing channel. Acquisition Services and Management Services in substance meant acquiring and connecting new subscribers to the mobile telephone services made available by Vodafone on a postpaid bas is, invoicing and collecting the relevant charges from the existing and new subscribers, dealing with disconnections, what was described as “customercare”, and other activities describedin Vodafone’s operations manual. Mobile Direct Marketing Operation meant -
“ ... the acquisition of subscribers to mobile telecommunications services solely by means of remote selling specifically where advertisements were placed in press, magazines and catalogues or direct mail and customer orders are received centrally by telephone, fax, email or the Internet or as may be agreed between the parties from time to time”. [emphasis added: the “solely” was the subject of the declaration in order 4.]
21 Mobile committed its Mobile Direct Marketing Operation exclusively to Vodafone. Although cl 2.1 described Mobile as “non-exclusive agent service provider”, Vodafone conferred a measure of exclusivity upon Mobile.
22 Mobile’s commitment was by cl 2.2, read with cl .2.6 -
“2.2 Exclusivity of Mobile Direct Marketing Operation
MI will devote the Mobile Direct Marketing Operation part of its business exclusively to Vodafone and Vodafone Billing Services for the purposes of its appointment under Clause 2.1. For the avoidance of doubt, during the term M I will not deal, and will procure that none of its Related Bodies Corporate deal, directly or indirectly with any other mobile network carrier or operator in respect of analogue or digital mobile phone services.”
“2.6 MI’s other business activities
Vodafone expressly acknowledges that MI’s Mobile Direct Marketing Operation may form only part of MI’s business. For the avoidance of doubt and subject to Clauses 2.2, 4 and 6, nothing in this Agreement restricts or is intended to restrict the conduct of that part of MI’s business outside the Mobile Direct Marketing Operation (the Non-ASP Activities).”
23 Vodafone’s conferral of exclusivity was by cl 2.7, subject to a presently irrelevant exception in cl 2.8 concerning dealing with credit card and charge card issuers, read with cl 2.3 -
“2.7 Persons with whom Vodafone may not deal
Vodafone will not, and will procure that no Group Member will, during the Term appoint, or deal with, either directly or indirectly, any new Service Provider, or any existing Service Provider which is a Group Member, which conducts a Mobile Direct Marketing Operation in competition with MI.”
“2.3 Acknowledgement concerning non-exclusivity
Subject to any specific provision of this Agreement to the contrary (including Clauses 2.7 and 2.8), MI acknowledges that any Group Member may do or authorise any person to do any of the following at any time:
(a) market, promote, distribute or sell the Mobile Services; or
(b) anything which MI is obliged or authorised to do under this Agreement,
including where such activities are in competition with the performance of MI’s obligations or the conduct by MI of activities authorised, under this Agreement.”
24 Group Member meant a member of the Vodafone group. Service Provider meant “a person who acquires, manages and supports principally post-pay mobile telephone service subscribers for a period as determined by their subscriber contract”.
25 The evidence going to breach of contract, contrary to the exclusivity conferred by Vodafone upon Mobile, was not extensive.
26 By an agreement with X4 dated 30 June 2000 Vodafone Pty Ltd appointed X4 as a dealer authorised to introduce potential users of the Vodafone network. Underthe agreement X4 could only conduct the business of promoting and selling connections of postpaid mobile services, and only at the customer’s or potential customer’s premises or at a specified location, being a shop in Sydney. By an agreement with Housing Industry dated 3 September 2002 Vodafone Pty Ltd made a similar appointment, the agreement being silent as to how Housing Industry could or would acquire subscribers.
27 In July 2001 X4 advertised Vodafone mobile telecommunication services, stating the address of its shop, giving a map of the shop’s location and describing it as a “show room”; the advertisement had a box stating “free delivery to your door 1300 30888 call X4 connection centre now”.
28 In November 2002 Housing Industry advertised Vodafone mobile communication services, inviting potential customers to call a particular telephone number of visit a particular website address. In December 2002 Vodafone advertised inviting potential customers to call the same telephone number.
29 There was no evidence that X4 or Housing Industry actually acquired a subscriber or subscribers by remote selling.
30 The judge’s conclusion was -
“878 In the result insofar as the activities of X4 and the Housing Commission [sic] are focused upon, Vodafone is shown to have breached clause 2.7 in and to the extent that it has been shown to have acted partly through its agents in the conduct of a Mobile Direct Marketing Operation in competition with Mobile.”
31 The judge’s reasoning to this conclusion is, with respect, not entirely clear.
32 He first dealt with the operation of “solely” in the definition of Mobile Direct Marketing Operations, saying -
“864 Attention has been focused by Vodafone on the use of the word “solely” in the definition of “Mobile Direct Marketing Operation”. The contention is that a Mobile Direct Marketing Operation only exists if the operator is doing that and nothing else. In short the contention by Vodafone is that clause 2.7 is limited in its application inter alia to where remote selling is the sole means by which the service provider acquires mobile telephone subscribers.
865 I accept as of substance the submission by Mobile that Vodafone's construction is incorrect for the following reasons:
- the word ‘solely’, grammatically qualifies the words ‘acquisition of subscribers’ namely by ‘remote selling’ which is an acquisition technique relying ‘solely’ on responses to advertisements and is effected by means of ‘orders received centrally by telephone, fax, email or the Internet’. The word ‘solely’ does not have any bearing on some other operation which may perchance be carried on by some other service provider.;
- the exclusivity given to Mobile, which is a critical part of the arrangement, would be worthless because the new service provider could have some other business (not even telephony related) alongside its direct mobile operation and would, on this construction, not be covered;
- the construction contended for by Vodafone would make clause 2.7 ambulatory. A competitor may be carrying on the same operation one day in breach of the one provision and the next day not in breach because it whimsically does something else on the next day.”
33 It is evident that the declaration in order 4 was framed upon the first dot point in para 865.
34 The judge then referred to the entry into the agreements with X4 and Housing Industry, and continued -
“X4 and the Housing Commission
868 Mobile submits and I accept that on the evidence presently adduced in relation to this claim and before the court:
- Vodafone has clearly appointed and is clearly dealing with both X4 and the Housing Commission [sic] [see the above described agreements];
- X4 and the Housing Commission [sic] have contracted to and are acquiring subscribers for Vodafone by direct marketing [see the above described agreements and paragraphs in Ms Blake’s affidavits];
- X4 and the Housing Commission [sic]:
- sell hardware as sellers in their own right,
- facilitate connections between the customer and Vodafone [the contractual relationship is entered into between the customer and Vodafone, these dealers acting as Vodafone's agent in this regard]
[see the above described agreements and paragraphs in Ms Blake’s affidavits; see also PX 7/ 1242]”
35 After a matter presently not material, the judge said -
“Dealing with the matter
870 It does not seem to me that properly construed clause 2.7 grants complete exclusivity to Mobile in the field of direct marketing. Vodafone itself is not proscribed from conducting that activity. The clause does however proscribe the conduct of the relevant activity by Vodafone when acting through or in conjunction with agents. This construction is consistent with the nature of the ASP and takes into account the exclusivity covenant binding Mobile [clause 2.2].
871 Clearly clause 2.7 prevents Vodafone itself from appointing or dealing, directly or indirectly, with a Service Provider which conducts a Mobile Direct Marketing Operation in competition with Mobile.
872 Clearly clause 2.7 also extends to oblige Vodafone to procure that no Group Member appoints or deals, directly or indirectly, with a Service Provider which conducts a Mobile Direct Marketing Operation in competition with Mobile.
873 In my view although clause 2.7 is not as elegantly drafted as it might have been, properly construed it is not intended to proscribe the activities of Vodafone in circumstances where it acts itself, as opposed to where it acts wholly or partly through an agent in conducting the relevant activity. Hence the clause can be seen to preclude Vodafone itself from conducting a Mobile Direct Marketing Operation in competition with Mobile. So much appears to have been conceded by Vodafone:
"Clause 2.7 prevents Vodafone... from in effect itself establishing a Mobile Direct Marketing Operation"
[Final submissions paragraph 32]
874 Vodafone focuses on the complaints concerning X4 and the Housing Commission [sic] putting the propositions that:
clause 2.7 is limited in its application to circumstances where the entity conducting the direct marketing is a "Service Provider", which not only acquires but also manages customers
Vodafone is not in breach of this clause if it:
- appoints a dealer as its agent to acquire the relevant customers,
- then manages and supports those customers its elf.
875 This construction is rejected for the reasons already given. Vodafone is precluded from conducting a Mobile Direct Marketing Operation where the relevant activity is carried on by Vodafone in conjunction with an agent.
876 In short [leaving to the side Vodafone’s obligations to procure that no Group Member will engage in particular conduct] clause 2.7 properly construed:
- precludes Vodafone when acting partly through its agents, from conducting a Mobile Direct Marketing Operation in competition with Mobile;
- does not preclude Vodafone when only acting itself, from conducting a Mobile Direct Marketing Operation in competition with Mobile;
877 In the result Vodafone is not precluded by clause 2.7 from promoting its plans by itself placing newspaper advertisements, conducting mail outs or contacting its existing customers by text messages.
878 In the result insofar as the activities of X4 and the Housing Commission [sic] are focused upon, Vodafone is shown to have breached clause 2.7 in and to the extent that it has been shown to have acted partly through its agents in the conduct of a Mobile Direct Marketing Operation in competition with Mobile.”
36 The declaration in order 5 must have been framed upon some of these paragraphs. But why was there breach of cl 2.7 in Vodafone, the undifferentiated collective, acting through X4 and Housing Industry?
37 From para 868 it seems that the commencement of the reasoning was that Vodafone had appointed and was dealing with X4 and Housing Industry, which organisations were conducting Mobile Direct Marketing Operations. Within cl 2.7, then, the appointment of and dealing with X4 and Housing Industry must have been as new ServiceProviders. ThathadbeenMobile’spleadedcase,intermsthatX4andHousing Industry were Service Providers and that the breach of cl 2.7 had been by Vodafone appointing and dealing with them as its agent. The pleaded case was reflected in Vodafone’s submission noted in para 874, which involved whether X4 and Housing Industry were Service Providers.
38 From this commencement, the reasoning must have been as follows. Vodafone had appointed and was dealing with new Service Providers, X4 and Housing Industry. X4 and Housing Industry had contracted to acquire subscribers for Vodafone, acting as Vodafone’s agent in facilitating connections between the customer and Vodafone with the contractual relationship between the customer and Vodafone. They were acquiring subscribersbyremoteselling. TheywereconductingaMobileDirectMarketing Operation in competition with Mobile. Clause 2.7 not only precluded Vodafone from acquiring subscribers by remote selling by appointing or dealing with them, but also precluded Vodafone through X4 and Housing Industry from acquiring subscribers otherwise than by remote selling because “solely” in the definition of Mobile Direct Marketing Operation was treated as qualifying the means of selling in the manner declared in the declaration in order 4.
39 Other paragraphs, however, obscure this reasoning. Paragraphs 871 and 872 are consistent with and support it, since they speak of appointment of and dealing with a Service Provider although not distinguishing between a new Service Provider and the other prohibited organisation in cl 2.7, an existing Service Provider. But in paras 870, 873 and 875 and following no reference to a Service Provider, one of the key concepts in cl 2.7, is to be found. Instead, the concept of agency alone seems to be used as sufficient to identify the organisation conducting the competitive Mobile Direct Marketing Operation. It seems that appointment of or dealing with an agent which conducts a competitive Mobile Direct Marketing Operation was thought sufficient for breach of cl 2.7, even acting“inconjunctionwith”suchanagent,whateverthatmaymean. Ifthatwasthe judge’s reasoning, it was not correct.
40 In these paragraphs, including the closing reference in para 878 to Vodafone acting “partly” through its agents, it does not seem that the premise is that the agent is a new Service Provider or an existing Service Provider. If that is the premise, no Service Provider other than X4 and Housing Industry is mentioned. In particular, and the point of this will become apparent, reasoning which treats Vodafone Pty Ltd as an existing Service Provider is not to be found. On the contrary, there is only the collective reference to Vodafone as the party subject to contractual obligations.
41 Vodafone submitted that “solely” in the definition of Mobile Direct Marketing Operation had the operation rejected by the judge, requiring that the Service Provider acquire subscribers solely by remote selling, and so that cl 2.7 did not preclude appointing or dealing with a Service Provider which acquired subscribers otherwise than by remote selling as well as by remote selling. If so, it said, the declaration in order 4 should be set aside. It submitted that the declaration in order 5 should be set aside, because paras (a) and (b) did no more than reproduce the language of cl 2.7 and paras (c) and (d) erroneously recast cl 2.7 into a proscription from acting through an agent when the agent which Vodafone appointed or with which it dealt may o r may not be a Service Provider. It submitted that it had not been shown that X4 and Housing Industry were acquiring subscribers by remote selling and that there was no basis for finding that they were conducting Mobile Direct Marketing Operations, whether or not “solely” had the declared operation. It submitted that in any event neither X4 nor Housing Industry was a Service Provider, because the definition of Service Provider required that they acquire, manage and support subscribers, but they only acquired subscribers and did not manage and supportthem.
42 Mobile conceded that Vodafone’s last submission, as to neither X4 nor Housing Industry being a Service Provider, was correct for the reason given. This very much changed the landscape, and Mobile of necessity submitted that there was a breach of cl 2.7 on a basis other than that found by the judge by either process of reasoning earlier postulated.
43 Mobile submitted that Vodafone Pty Ltd was an existing Service Provider and a Group Member and was conducting a Mobile Direct Marketing Operation in competition with Mobile, through its agents X4 and Housing Industry. Accordingly, by force of cl 2.7 Vodafone Pacific Ltd or Vodafone Network Pty Ltd (whichever it might be) could not deal with Vodafone Pty Ltd. Its further submissions proceeded from this basis for a breach. It acknowledged that para (d) of the declaration in order 5 should be set aside, but said that if Vodafone Pty Ltd was a Service Provider which was conducting a Mobile Direct Marketing Operation it could be restrained whether acting itself or through an agent: it said that paragraph (d) should be replaced by a reformulated declaration. Although in its written submissions it had sought to support para (c) of the declaration in order 5, at the hearing it proposed a reformulated paragraph. The new paras (c) and (d) were -
“(c) Prohibits the first and second defendant from dealing with the third defendant when conducting a Mobile Direct Marketing Operation, as defined by the ASP agreement, in competition with the plaintiff, including where the third defendant is acquiring subscribers to mobile telecommunication services partly through or in conjunction with its agents X4 Pty Limited and Housing Industry Association Limited.
(d) Precludes each Defendant, when only acting itself, from conducting a Mobile Direct Marketing Operation in competition with the Plaintiff.”
44 In conformity with these submissions, Mobile proposed alternative reformulations of the restraining order in order 6, in place of orders 6 and 7, both reformulations broadly following para (c) of the proposed declaration in order 5.
45 I have earlier referred to Mobile’s pleaded case that X4 and Housing Industry were Service Providers and that the breach of cl 2.7 had been by Vodafone appointing and dealing with them as its agent. Mobile said that although at the trial it had put the case of X4 and Housing Industry as new Service Providers, it had also put a case of Vodafone Pty Ltd as an existing Service Provider. It acknowledged that the latter case was “not pleaded as clearly as it might have been”, and referred to some pages in the transcript of the oral submissionsbeforethejudge. Theacknowledgement didnotgofarenough: thecaseof Vodafone Pty Ltd as an existing Service Provider was not pleaded at all. The submissions in the pages in the transcript were in Mobile’s oral submissions in reply. Reading the cold print with the benefit of the submissions made on appeal, they can be seen to put a case of Vodafone Pty Ltd as an existing Service Provider, although the putting of the case was bedevilled by loose reference to the collective Vodafone. But it is apparent that the case was not appreciated in the atmosphere of the trial, because it is not reflected in the judge’s reasons. Rather, it seems to have produced confusion involving agency.
46 Vodafone accepted that Vodafone Pty Ltd was a Service Provider and a Group Member. As to the case now propounded by Mobile, it submitted that “conduct” referred only to an operation directly carried on by the organisation in question, on the case now propounded Vodafone Pty Ltd, and that an operation carried on by an agent was not consistent with cl 2.3. It submitted, however, that Mobile should not be permitted to maintain the case of Vodafone Pty Ltd as an existing Service Provider, because it had not been pleaded and the questions whether Vodafone Pty Ltd conducted a Mobile Direct Marketing Operation and whether, if it did, it did so in competition with Mobile, had not been in issue at the trial. Whatever the operation of “solely”, it said, what amounted to conducting an activity was a question of fact and degree, and whether the activity was in competition with someone else’s activity was similarly a question of fact and degree. It said that these questions as applied to Vodafone Pty Ltd had not been agitated at the trial; there were no findings, and there was no evidence directed to findings favourable to Mobile.
47 Putting aside the operation of “solely” in the definition of Mobile Direct Marketing Operation, I do not think that the other aspects of cl 2.7 raised by Vodafone need be or should be addressed. I consider that Mobile should not be permitted to maintain the case of Vodafone Pty Ltd as an existing Service Provider.
48 That case was put only in Mobile’s submissions in reply. It is tolerably clear that what was put brought the concept of agency to prominence in the judge’s reasoning, but Vodafone Pty Ltd as a Service Provider was not taken up by his Honour. There is no mention of Vodafone Pty Ltd, as would be necessary if appointment of or dealing with it by one of the other Vodafone companies was in point. There is not even reference to the collective Vodafone as an existing Service Provider. There is no finding as to the conduct by Vodafone Pty Ltd of a competitive Mobile Direct Marketing Operation, and the late arrival of the case is underlined if it be thought how easily Mobile could have attended to proof of what Vodafone Pty Ltd did by way of remote selling quite apart from what it may have done by the agency of X4 and Housing Industry.
49 Although the judge found that X4 and Housing Industry were acquiring subscribers for Vodafone by direct marketing, meaning by remote selling (para 868 second dot point), and presumably considered that they were conducting Mobile Direct Marketing Operations in competition with Mobile, it does not follow that Vodafone Pty Ltd was conducting a Mobile Direct Marketing Operation in competition with Mobile through the agency of those organisations. Particularly is that so when the evidence of what X4 and Housing Industry did was scanty, and the extent of Vodafone Pty Ltd’s authority to X4 and Housing Industry and the significance of the activities of X4 and Housing Industry to Vodafone Pty Ltd’s conduct of a Mobile Direct Marketing Operation (as distinct from X4’s or Housing Industry’s) were not in issue. It is a question of fact and degree, as is competition, and I do not think it can be said that, had those matters been in issue at the trial, Vodafone might not have addressed them by further evidence. It should be noted that Mobile said (written submissions para 565) that the judge had not decided, and it did not seek to have determined on appeal or by remission to the judge, whether the evidence established that Vodafone was conducting a Mobile Direct Marketing Operation.
50 In my view the well established principles apply, to the effect that a party will not be permitted to raise a point on appeal which was not taken at trial if evidence could have been adduced which could possibly have prevented the point from succeeding (
Coulton v Holcombe (1986) 162 CLR 1 at 8-9;
Water Board v Moustakas (1988) 180 CLR 491 at 496-7;
Whisprun Pty Ltd v Dixon (2003) 77 ALJR 1598 at [51]), and that even if there is no question of further evidence it may not be in the interests of justice to allow the new point to be raised (
Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631 at 645-6;
Chilcotin Pty Ltd v Cenelage Pty Ltd [1999] NSWCA 11 at [14]-[18];
Whisprun Pty Ltd v Dixon at [52]). The case of Vodafone Pty Ltd as an existing Service Provider was not pleaded, and the point was not taken at the trial for the purposes of these principles when raised in submissions in reply in a manner which it is apparent, in the conduct of the trial, was not appreciated as putting the case now propounded.
51 The restraining orders in orders 6 and 7 must be set aside. They can not be replaced by a reformulated order 6, because breach of cl 2.7 was not established. It is not necessary to consider Vodafone’s submissions that it had not been shown that X4 and Housing Industry were acquiring subscribers by remote selling and that, putting “solely” aside, there was no basis for finding that they were conducting Mobile Direct Marketing Operations.
52 What then of the declarations in orders 4 and 5? A declaration does not necessarily fall with the order giving effect to it. In rare cases, where a contract must be construed in order to decide whether the contract has been breached it may be appropriate that the proper construction is declared even though the decision is that the contract has not been breached. But in my opinion the declarations must also be set aside.
53 Although it was not the subject of submissions, I respectfully question whether the declaration in order 5 should have been made at all. Where a claim is made to damages or an injunction, a judge’s consideration of the operation of a contractual provision in respects other than that immediately in issue, in the course of resolving the question of its application in the particular case, is not to be given declaratory status. Even as to the issue of the provision’s application in the particular case, upholding the claim to damages or an injunction will usually suffice, with the decision upon the operation of the provision as part of the reasoning to breach warranting the award of damages or the restraint, and a declaration going beyond the particular contractual breach will commonly not be appropriate. Mobile’s summons claimed restraining orders without any preceding declaration as to the construction of cl 2.7. In the present case the confusion which arose involving agency rather than Service Provider demonstrates the unwisdom of making the declaration, and it travelled beyond what was necessary for the decision in the particular case.
54 If the declaration in order 5 was to be made, it should not have been made in the form it took. Notwithstanding the general reference to Vodafone, cl 2.7 contractually bound only Vodafone Pacific Ltd or Vodafone Network Pty Ltd, depending on the unlitigated issue. On any view it did not prevent, oblige or preclude “each Defendant”, as the declaration purported to convey, since only Vodafone Pacific Ltd or Vodafone Network Pty Ltd was contractually prevented, obliged or precluded. Whichever of those two companies was contractually bound had the further obligation to procure appropriate conduct from other members of the Vodafone group, including Vodafone Pty Ltd. If either the other of Vodafone Pacific Ltd and Vodafone Network Pty Ltd or Vodafone Pty Ltd were to be restrained by injunction, the legal basis for an order against it would not be the direct contractual prevention, obligation or preclusion in the ASP Agreement, and the declaration did not correctly accord with the positions in law of the Vodafone companies. Despite the failure of the parties, particularly Vodafone, to differentiate between the three Vodafone companies, the Court should have been astute to ensure that the declaration was accurately framed.
55 That aside, in my opinion the declaration in order 5 should be set aside because so far as it does more than reproduce the language of cl 2.7 it is incorrect. Paragraphs (c) and (d) fail to recognise the part played by the concept of a Service Provider, and in the manner earlier outlined give erroneous ascendency to the concept of agency alone.
56 I do not think the reformulated paragraphs proposed by Mobile should be substituted. In the new para (c) the words down to “in competition with the plaintiff” do no more than reproduce the language of cl 2.7, and the following reference to acting through or in conjunction with X4 and Housing Industry lacks the necessary foundation of a finding that in doing so Vodafone Pty Ltd is conducting a competitive Mobile Direct Marketing Operation. The new para (d) is just incorrect, at the least because it goes beyond preclusion of whichever of Vodafone Pacific Ltd and Vodafone Network Pty Ltd is contractually bound and more fundamentally because it ignores that the prohibition is against the appointment of or dealing with a new or existing Service Provider.
57 In turning to the declaration in order 4, what I have said about sufficiency of a decision upon the operation of a provision as part of the reasoning to the particular contractual breach is again in point. There was a question whether the preclusion in cl 2.7 applied where, in the competitive Mobile Direct Marketing Operation conducted by the new or existing Service Provider, subscribers were acquired otherwise than by remote selling as well as by remote selling. That question could adequately be dealt with in the course of deciding whether X4 and Housing Industry, or Vodafone Pty Ltd if that case had been put, were conducting competitive Mobile Direct Marketing Operations.
58 At a level short of the substance of the question, the declaration in order 4 is flawed. It purports to express what is meant by remote selling without allowing, as the definition of Mobile Direct Marketing Operation does allow, for agreement between the parties upon other remote selling techniques; as well, in its second use of “solely” the declaration seems to make that word apply to reliance on responses to advertisements rather than, as the definition provides (and the commencement of the declaration states) the acquisition of subscribers. The declaration carries unintended alteration of cl 2.7 as a side-wind of purporting to decide the substance of the question.
59 More significantly, the declaration does not provide an answer to the substantive question, certainly not the answer given by the judge. It is clear enough that “solely” qualifies “acquisition of subscribers” in the definition of Mobile Direct Marketing Operation. But that does not mean that the definition is so construed that the Service Provider acquiring the subscribers is caught by the definition although also acquiring subscribers otherwise than by remote selling. It is consistent with, perhaps even favours, the opposite result. Mobile submitted that in qualifying “acquisition of subscribers” the work done by “solely” was that any particular subscriber was to be acquired only by remote selling, as distinct from the general activity of acquiring subscribers. But the definition is not directed to any particular subscriber, and to read it as Mobile submitted would make no sense – “solely” would add nothing to acquisition by remote selling. If the question is to be answered as the judge answered it, some other reasoning to that result must be found, and the declaration in order 4 has no utility.
60 The declaration in order 4 should be set aside quite apart from whether the judge’s answer to the question was correct. It would be wrong, however, to leave the judge’s answer to the question untouched if it is not correct: that would be likely to distort the parties’ conduct during the rest of the term of the ASP Agreement, which is still on foot.
61 Clause 2.7 prohibits appointment of or dealing with a Service Provider of a particular kind, a Service Provider which conducts a Mobile Direct Marketing Operation in competition with Mobile. Reading the definition o f Mobile Direct Marketing Operation into the clause, at first sight one of the characteristics of the prohibited Service Provider is that it “conducts” the acquisition of subscribers to mobile telecommunications services solely by means of remote selling. Hence Vodafone’s submission that, if the Service Provider in question “conducts” the acquisition of subscribers to mobile telecommunications services otherwise than by remote selling as well as by remote selling, it is not within the class of prohibited Service Providers. Vodafone added that Mobile’s appointment is described as non-exclusive and by Authorised Channels in cl 2.1, and that cl 2.3 makes clear that, subject to cl 2.7, Vodafone can engage in competitive direct marketing. There was no warrant, it said, forgiving Mobile greater exclusivity than granted by cl 2.7 on a strict reading.
62 If Vodafone’s submission be correct, cl 2.7 can be outflanked by ensuring that the Service Provider also acquires subscribers otherwise than by means of remote selling, at least to an extent satisfying the requirement that the Service Provider “conducts” the acquisition of subscribers by that means. The judge was influenced by this, although perhaps over-stating the matter with respect to non-telephony business and daily alteration in conduct. If the submission be correct, the exclusivity conferred by Vodafone on Mobile will be compromised, if not ephemeral. Mobile submitted that this was contrary to commercial common sense, particularly where Mobile had committed its Mobile Direct Marketing Operation exclusively to Vodafone in return for the exclusivity conferred on it by Vodafone.
63 On the construction adopted by the judge, on the other hand, if Vodafone appoints or deals with a Service Provider which falls within cl 2.7 it will not be able to deal at all with that Service Provider, even where the Service Provider acquires subscribers to mobile telecommunication services otherwise than by remote selling. The extremes are both unattractive.
64 If it can be done consistently with the words used, the ASP Agreement should be given a sensible commercial operation (
Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437;
Australian Broadcasting Commission v Australian Performing Rights Association (1972) 129 CLR 99 at 109;
Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at313-4). Avoidance of unreasonable, inconvenient or unjust consequences, where the language is open to two constructions, is permissible “even though the construction adopted is not the most obvious, or the most grammatically accurate” (
Australian Broadcasting Commission v Australian Performing Rights Association at 109, citing earlier authority). Regard to Mobile’s exclusivity given to Vodafone is of assistance in recognising how the definition of Mobile Direct Marketing Operations worked in the ASP Agreement.
65 It is plain from cll 2.2 and 2.6 that the exclusivity given by Mobile to Vodafone is confined to the acquisition of subscribers by remote selling. Mobile can acquire subscribers for other carriers provided it does not use remote selling. “Solely” in the definition of Mobile Direct Marketing Operation plays a part in leaving it free to do this, by quarantining that part of Mobile’s business being the business of acquiring subscribers to mobile telecommunication services by remote selling from that part of its business “outside the Mobile Direct Marketing Operation” (cl 2.6), including any business of acquiring subscribers to mobile telecommunications services otherwise than by remote selling. For this exclusivity, “solely” does not mean that if Mobile acquires subscribers to mobile telecommunication services otherwise than by remote selling, it is not conducting a Mobile Direct Marketing Operation at all. It means that Mobile is not conducting a Mobile Direct Marketing Operation so far as it does so.
66 For the exclusivity conferred by Vodafone on Mobile, the operation of “solely” isthesame. Itisnecessarytoconsiderthecompositephrase“whichconductsaMobile Direct Marketing Operation in competition with MI”. The competition is with that part of Mobile’s business being the business of acquiring subscribers to mobile telecommunications servicesbyremoteselling,andnotwithanybusinessofacquiring subscribers to mobile telecommunications services otherwise than by remote selling. Thus a Mobile Direct Marketing Operation conducted by a Service Provider is an offending Mobile Direct Marketing Operation only so far as the Service Provider acquires subscribers to mobile telecommunications services by remote selling.
67 Reading the characteristic of the prohibited Service Provider be in this way, results in a sensible commercial bargain. Vodafone and Mobile both submit to exclusivity in relation to acquisition of subscribers to mobile telecommunications services by remote selling, but no further. Vodafone can not escape cl 2.7 by ensuring that to the required extent (see para 61 above) the Service Provider also acquires subscribers otherwise than by means of remote selling. Conversely, if the Service Provider acquires subscribers by remote selling to the requisite extent, there can be restraint only in that respect and not from all dealing with the Service Provider.
68 I consider, therefore, that the judge was correct in his answer to the question, in that the preclusion in cl 2.7 still applies where, in the competitive Mobile Direct Marketing Operation conducted by the Service Provider (new or existing), subscribers are acquired otherwise than by remote selling as well as by remote selling; but with the limitation on the extent of the preclusion.
Claims 6 and 7 and their related declarations 1, 2 and 369 The damages of $9,362,100 under claims 6 and 7 were awarded for breaches of contract to do with determining at nil or failing to determine target levels for the determination of which cl 18.4 of the ASP Agreement provided. In the manner to be explained, the breaches of contract were founded on both construction of the agreement and implication of terms. The judge made the declarations -
“1. Upon the proper construction of the Agent Service Provider Agreement dated 2 October 1998 (“ASP Agreement”) the defendants were and are not entitled to determine nil as the target level in respect of the number of connections of New Subscribers under clause 18.4.
2. Upon the proper construction of the ASP Agreement the defendants were and are not entitled to refuse or fail to set a target level in respect of the number of connections ofNew Subscribers underclause 18.4.
3. Upon the proper construction of the ASP Agreement the defendants were and are not entitled to set a target level in respect of the number of connections of New Subscribers under clause 18.4 other than in conjunction with the determination of a Business Plan referred to in clause 21.”
70 Clause 18.4 of the ASP Agreement should be seen in the context of Mobile’s remuneration under the agreement. Mobile was remunerated in three ways.
71 First, Vodafone paid Mobile’s direct and indirect costs incurred in providing Acquisition Services, following a scheme in cl 17 of the ASP Agreement and relevant definitions as amended by the May 1999 amending agreement. The scheme involved monthly payment of an estimated amount and then quarterly adjustment to an actual amount. In more detail -
· not later than the commencement of the month prior to the commencement of each quarter, Vodafone and Mobile agreed on the Estimated Acquisition Cost in res pect of the quarter (cl 17.2);
· if Vodafone and Mobile failed to agree by the commencement of the quarter, the Estimated Acquisition Cost for the previous quarter was deemed to be the Estimated Acquisition Cost for that quarter (cl 17.4);
· Vodafone paid Mobile the Estimated Acquisition Fee, being a monthly sum calculated according to a formula of which the Estimated Acquisition Cost was a component, (cl 17.1);
· within fifteen business days after the end of the quarter Mobile calculated and notified Vodafone of the Actual Acquisition Costs for the quarter (cl 17.5);
· if the Actual Acquisition Costs for the quarter were less than the Estimated Acquisition Cost for the quarter, Mobile refunded 50 per cent of the difference to Vodafone; if they were more, subject to cl 17.7 Vodafone paid the difference to Mobile on the next monthly payment date (cl 17.6).
72 It can be seen that Mobile had an incentive to spend less than the agreed Estimated Acquisition Cost but, subject to cl 17.7, it suffered only in cash flow if its expenditure exceeded the Estimated Acquisition Cost. However, cl 17.7(a) provided that Mobile “must use its best endeavours to ensure that the Actual Acquisition Costs for a Quarter correspond to the Estimated Acquisition Cost for that Quarter as closely as possible”, and by cl 17.7(b) over-expenditure beyond a particular percentage and in particular circumstances would be excluded from the calculation of Actual Acquisition Costs.
73 Arriving at the Estimated Acquisition Cost involved an amount per New Subscriber and a number of New Subscribers, the number of New Subscribers in turn involving an expectation agreed in a Business Plan. More precisely, the definition of Estimated Acquisition Cost was -
“ ... in respect of any quarter:
CxS
where:
C = the amount determined in accordance with Clause 17 representing the agreed costs estimated to be incurred in providing the Acquisition Services or, failing agreement and subject to clause 17.7, the Actual Acquisition Costs for each New Subscriber for the previous Quarter; and
S = the number of New Subscribers expected to be connected in the next quarter as agreed in the Business Plan or, failing agreement, as determined by Vodafone.”
74 Mobile was not paid the quarterly Estimated Acquisition Cost. It was paid the monthly Estimated Acquisition Fee. The Estimated Acquisition Fee went beyond costs incurred in providing the Acquisition Services, its name being a little misleading in that respect, and extended to the second source of Mobile’s remuneration, the Base Acquisition Margin. I will return to the Estimated Acquisition Fee a little later in these reasons.
75 The Business Plan to which the definition of Estimated Acquisition Cost referred was the subject of cl 21 of the ASP Agreement, providing -
“21.1 Parties to agree Business Plan
Within one month prior to commencement of the relevant Quarter, MI and Vodafone must use their best endeavours to agree a Business Plan for that quarter.
21.2 Failure to agree Business Plan
If the parties fail to agree on the Business Plan as contemplated in cl 21.1, then the Business Plan for the 3 months prior to the relevant quarter will apply.
21.3 Expert determination
Failure by the parties to agree on the Business Plan not less than one month before the commencement of the relevant 3 month period will constitute a Dispute.”
76 Constitution of a Dispute enlivened cl 32, dealing with dispute resolution and providing a means of expert determination. Business Plan meant -
“ ... an agreed quarterly business plan or, failing agreement, a quarterly business plan as determined in accordance with Clause 32, which includes the components set out in the Operation Manual.”
77 The Operations Manual was an annexure to the ASP Agreement. Itappearedto be a document issued by Vodafone to service providers in general. It stated that the service provider must prepare a business plan annually, comprising a financial plan and a sales and marketing plan, and send it to a Vodafone officer. Amongst many otherthings, the financial plan was to include a three year budget, stating “the underlying assumptions”, and the sales and marketing plan was to include “actual and forecast connections by channel and state”, forecast connections being “expected connection levels over each calendar month”. Just what would be involved in including in the Business Plan the components set out in the Operation Manual was far from clear.
78 The May 1999 amending agreement provided that the Operation Manual should be amended -
“ ... by inserting the following paragraphs where appropriate:
(a) (i) VNPL will request Mobile Innovations to cost one or more scenarios based on different connection volumes for calcu lation of estimated costs to acquire. The details must be with Mobile Innovations by the 15th day of the second month in each quarter;
(ii) Mobile Innovations to cost each scenario and discuss any associated issues with VNPL within 1 week of receiving the request;
(iii) Mobile Innovations and VNPL to review costings and plan strategy for following quarter during the 4th week of second month of each quarter;
(iv) VNPL to formally respond in writing to Mobile Innovations with agreed Costs to Acquire for following quarter by the last day of the second month in each quarter;
(v) any changes required to Costs to Acquire or volumes during the quarter, or any significant variances arising must be discussed as an urgent priority. Changes to approved Cost to Acquire must be discussed with Mobile Innovations and notified by a VNPL Director in writing, giving adequate notice to Mobile Innovations.”
79 The contractual operation of this is rather obscure, but as will be seen Vodafone and Mobile took a course something like that described in the paragraphs in place of agreement upon a Business Plan.
80 Going to the second way in which Mobile was remunerated, Vodafone paid Mobile the Base Acquisition Margin earlier mentioned as a component of the monthly Estimated Acquisition Fee.
81 Base Acquisition Margin meant -
“ ... in respect of any month and subject to adjustment in accordance with Clause 18.1, an amount equal to:
(a) $40 times the number of New Subscribers connected to the System in that month, up to a maximum of 8,000, subject to Clause 18.2; and
(b) $20 times the number of New Subscribers connected to the System in that month in excess of 8,000, subject to Clause 18.2.
and in any event subject to Clause 18.3.”
82 Returning then to the Estimated Acquisition Fee, it meant -
“ ... in respect of each month during any calendar Quarter, and subject to adjustment in accordance with Clause 19.3.
[(Q +B1) xN1] +(Q –B2) xN2]
where
Q = Estimated Acquisition Cost divided by the number of New Subscribers expected to be connected to use the System in that Quarter;
B1 = $40 (representing the Base Acquisition Margin applicable to, subject to Clause 18.2, the first 8,000 New Subscribers);
B2 = $20 (representing the Base Acquisition Margin applicable, subject to Clause 18.2, New Subscribers in excess of 8,000);
N1 = the number of New Subscribers estimated to be connected to use the System in that month, but in any event not to exceed 8,000; and
N2 = the number of New Subscribers estimated to be connected to use the System in that month excess of 8,000.”
83 Clause 18 of the ASP Agreement did not provide directly for payment of the Base Acquisition Margin: payment came via the Estimated Acquisition Fee. Clause 18 was an overlay to the calculation of the Base Acquisition Margin component of the Estimated Acquisition Fee. It provided for periodical adjustment of the Base Acquisition Margin (cl 18.1), and adjustment did occur: it is not necessary to go to the detail. It provided for some qualification on who could be regarded as New Subscribers (cl 18.2): again it is not necessary to go to the detail. It then provided-
“18.3 Minimum Base Acquisition Margin
If, in respect of any Quarter, Vodafone determines that the target level for connections of New Subscribers is less than 12,000:
(a) if MI does not achieve the target level, the Base Acquisition Margin will be calculated and paid in accordance with the amounts specified in the definition of Base Acquisition Margin; and
(b) if MI achieves the target level, the Base Acquisition Margin will be calculated and paid assuming the greater of:
(i) the actual number of New Subscriber connectionsintheQuarter; or
(ii) 12,000.
18.4 Connection levels
Vodafone will have the sole discretion to determine, from time to time, the target level in respect of the number of connections of New Subscribers. The target level will be determined by Vodafone in conjunction with the determination of the Business Plan referred to in Clause 21.”
84 Pursuant to cl 17, the Estimated Acquisition Cost component of the Estimated Acquisition Fee would be adjusted upon ascertaining the Actual Acquisition Costs. Although the definition of Base Acquisition Margin and cl 18.3 provided for payment of the Base Acquisition Margin upon the actual number of New Subscriber connections, subject to the minimum Base Acquisition Marginon an assumed 12,000 connections, the effect of the multipliers N1 and N2 in the Estimated Acquisition Fee, being estimated numbers of New Subscribers, was that the component was arrived at on estimated rather than actual numbers. There was no express provision for adjustment of the Base Acquisition Margin component of the Estimated Acquisition Fee from the number of New Subscribers estimated to be connected to the number of New Subscribers actually connected. How the payment of the Base Acquisition Margin worked in this respect was not explored before us, and no doubt did not matter.
85 In cl 18.4, then, came the determination of target levels to do with which the damages were awarded. Determining a target level in respect of the number of connections ofNew Subscribers was taken up in the ASP Agreement only in cl 18.3, in connection with calculation of the Base Acquisition Margin, and through cl 11 next mentioned in connection with the Benchmark provisions of the agreement. Elsewhere in the ASP Agreement the language was that of an expectation as to the number of connections of New Subscribers, see in particular the definitions of Estimated Acquisition Cost and Estimated Acquisition Fee.
86 By cl 11.2 of the ASP Agreement Mobile had to satisfy the Benchmarks set out in a schedule to the agreement. Failure to meet a Benchmark constituted a First Level Breach or a Second Level Breach (cl 11.3). The Benchmarks were subject to review and alteration (cl 11.1). Occurrence of a breach enlivened a procedure for remedial action, including by discussion and mediation, with potential for ultimate termination of the agreement (cl 11.4).
87 So far as the Benchmarks in the schedule are presently relevant, if quarterly net connections were less than stated figures or monthly gross connections fell below stated figures, combinations of 6,000 and 3,000 in the original figures, and certain other requirements were met, a First Level Breach or a Second Level Breach was deemed to occur. As to both net connections and gross connections, however, the schedule included -
“A First Level Breach or a Second Level Breach (as the case may be) will not be deemed to occur if Vodafone has determined, in accordance with Clause 18.4, that the target level in respect of the number of New Subscribers is less than the number of connections comprising a First Level Breach or a Second Level Breach (as set out above).
88 The third way in which Mobile was remunerated need only be outlined. Vodafone paid Mobile a monthly Management Fee for providing the Management Services, calculated at an amount per subscriberto whom Mobile provided Management Services times the number of subscribers on the day prior to the commencement of the month. The Management Fee was subject to review and adjustment, and was adjusted.
89 Standing back from the detail of the ASP Agreement, it was in Mobile’s interests to maximise the number of New Subscribers it acquired. It was effectively reimbursed its direct and indirect acquisition costs, but through the Base Acquisition Margin (and subject to the Minimum Base Acquisition Margin) the more subscribers it acquired the more it was paid. It would be paid for providing Management Services to subscribers previously acquired, but over time those subscribers would be lost. A certain number of New Subscribers would have to be acquired in order to maintain its remuneration from the Management Fee, and the more New Subscribers Mobile acquired and then managed the greater the Management Fee it would receive. From Vodafone’s side, however, maximising the number of New Subscribers was not necessarily in its interests. It depended on whether the subscribers were profitable to it. The tension between the two interestswasfundamental. Itcanplainlybeseeninthedisputewhicharoseoverthe determination of target levels, and is important in deciding the implied terms issues.
90 Other provisions of the ASP Agreement material to claims 6 and 7 should be noted.
91 By cl 7 Vodafone promised to use its best endeavours to provide mobile telecommunications services on a postpaid basis to the existing and new subscribers brought or acquired by Mobile. However, Vodafone controlled the terms on which the mobile telecommunications services were provided. They were on Vodafone’s standard terms and conditions as notified to Mobile from time to time, which Mo bile could not alter (cl 7.3). Vodafone could alter the standard terms and conditions, and even suspend or discontinue the provision of mobile telecommunication services (cl 7.4). The qualification to Vodafone’s control was only that Vodafone would “use its best endeavours to give MI reasonable notice in advance” of any alteration to the standard terms and conditions where the alteration would cause detriment to subscribers (cl 7.4).
92 By cl 8 Vodafone was
“solely responsible for determining the tariff for Mobile Services (subject to the rights of Existing Subscribers) but will consult with MI as appropriate”.
The same qualification as to best endeavours in cl 7.4 applied to changes to tariffs. This underlined that, as Vodafone’s (more specifically, Vodafone Billing Services Pty Ltd’s) agent, Mobile could only acquire subscribers on “plans”, as they were called, which Vodafone was prepared to provide.
93 Clause 32 dealing with dispute resolution has already been mentioned. If a Dispute arose the parties had to meet to attempt to resolve it, at ascending corporate levels, and if they could not an independent expert decided it. The expert’s decision was final. The purpose of avoiding litigation was manifest. However, some disagreements were excluded from the dispute resolution procedure, relevantly
“Vodafone’s exercise of any discretion given to it under this Agreement”
as to which
“Vodafone’s decision will be conclusive and binding on the parties”
(cl32.6). It was common ground that the determination of target levels in connection with the number of connections of New Subscribers was an exercise of discretion excluded from the dispute resolution procedure.
94 Related to this, cl 41 of the ASP Agreement provided -
“41. EXERCISE OF DISCRETION
Where any provision of this Agreement allows Vodafone to exercise any discretion, including where some act of MI is expressed to be conditional on Vodafone giving its consent or granting its approval, Vodafone may (unless that provision provides to the contrary) exercise that discretion in any manner it sees fit.”
95 Clause 24.1 included -
“24.1 Exclusion of Warranties and representations
(a) (Exclusion) To the full extent permitted by Law and other than as expressly set out in this Agreement the parties exclude all implied terms, conditions and warranties.
(b) ...
(c) (MI has made own inquiries) MI acknowledges and declares to Vodafone that, in making its decision to become Vodafone Billing Services’ non-exclusive agent service provider on the terms of this Agreement, it has carried out all feasibility studies, inquiries, investigations and due diligence exercises that it considers necessary and prudent, and it has consulted its own independent professional consultants (including accountants and legal advisors) on such matters as the terms of this Agreement and the profitability and viability of performance under this Agreement.”
96 Finally, cl 44 provided -
“44. ENTIRE AGREEMENT
This agreement contains the entire agreement of the parties with respect to its subject matter. It sets out the only conduct relied on by the parties and supersedes all earlier conduct by the parties with respect to its subject matter.”
97 What, then, were the breaches of contract for which the damages were awarded? In the performance of the ASP Agreement the parties identified quarters by the closing month, so that the December 2001 quarter, for example, was the three months ending on 31 December 2001. The judge found that Vodafone was in breach of contract because it determined a target level of nil or failed to determine a target level for the December 2001 to the March 2003 quarters inclusive. On the judge’s findings of breaches of contract and assessments of damages, it did not matter whether the breach of contract lay in a nil determination or a failure to determine. He did not clearly find what had occurred for each quarter, although he referred near the end of his reasons to setting nil targets for the December 2001 and March and June 2002 quarters and failure to set targets for the September and December 2002 and March 2003 quarters (para 883).
98 No point arose that the breaches of contract occurred after the commencement of the proceedings in August 2001.
99 The judge’s reasoning to breach of contract must be found in a judgment which is lengthy and, with respect,at times diffuse.
100 In para 602 the judge identified as “the nil target issue” -
“Was there or was there not, whether as part of the proper construction of the ASP or by way of the legitimate implication of a term, any, and if so what, obligation upon Vodafone to:
· put forward, in order to gain agreement [as part of an agreed business plan]; or
· failing agreement, to determine.
by way of a 'target', that a particular positive number of new subscribers was [or alternatively, was reasonably], expected by it to be connected in the next quarter?”
101 After much discussion, to some of which it will be necessary to return, the judgment had a heading, “Holding in respect of the nil target issue”. The heading was followed by material under three sub-headings. The first was “Proper Construction” (paras 669-72), the second was “Obligation to co-operate”(paras 673-79) and the third was “Obligation of good faith and reasonableness” (paras 680-734, all on that subject despite other sub-headings).
102 Under the sub-heading “Proper Construction”, the judge said -
“669 In my view this issue may be decided shortly and by construing the ASP.
670 Upon the proper construction of the ASP Vodafone was not entitled to put forward nil as the target level in respect of the number of connections of new subscribers.
671 A number of pervasive [sic] reasons for this holding have generally already been given. A number of the submissions put forward by Mobile in support of the same proposition have already been included in the above reasons. It is however convenient to add by way of supplementing the courts [sic] earlier reasoning, the following factors each of which has substance:
· Under clause 18.3 the target must be set in conjunction with a business plan. Nil means no business plan. It follows the parties could not have contemplated it as a target.
· Clause 17.3 and then clause 32 would have no application because there would be no scope for the agreement of Estimated Acquisition Cost.
· The agreement is to perform “Acquisition Services”. A nil target is inimical to the notion of performing services. Mobile has an express obligation to perform the “Acquisition Services” (Clause 5.1(a) at TB147).
· The formulas in the definitions of “Estimated Acquisition Fee” and “Estimated Acquisition Cost” do not operate with a nil target.
· Under clause 13.1(a) Mobile took upon itself the obligation to promote the Mobile Services, subject to Vodafone’s reasonable directions from time to time. Mobile must not do anything which would reasonably be regarded as inconsistent with this obligation (TB157). It could hardly be suggested that a reasonable direction could be to stop promoting the Services or from Mobile’s point of view it would hardly be using its best endeavours if it refused to promote acquisitions.
· The concept of a nil target is contrary to various indicators in the agreement:
(i) the definition of “Payment dates” refers expressly to the efficient operation of Mobile’s business (TB140);
(ii) clause 2.2 - the undertaking by Mobile to devote its Mobile Direct Marketing Operation part of its business exclusively to Vodafone (TB145);
(iii) clause 4 – the non-compete obligations (TB147).
· The idea that Mobile was to stagnate cannot have been the intention of the parties, objectively construed.
· By setting a nil target Vodafone renders it impossible for Mobile to perform its obligations under the agreement.
672 The next question involves whether or not the pleaded terms of an obligation to co-operate, good faith and reasonableness form part of the ASP. As will appear from the following analysis, the very same decision may be reached by the implied term route.”
103 It is not easy to identify in the preceding discussion the “pervasive” (perhaps “persuasive”) reasons to which the factors stated in para 671 are supplementary, and the judge may have meant effectively to re-state factors found in that discussion.
104 One source of the reasons may be the discussion in pars 639-64, which were primarily directed at the nature of Vodafone’s conduct in setting target levels. Pararaph 641-2 will be set out in full later in these reasons. The paragraphs include that in setting target levels of nil or refusing to set target levels Vodafone “did so in an environment in which it eschewed any participation by itself in the setting of business plans” (para 639) and “walked away from such obligation as there was to endeavour to agree upon business plans” (para 641). This seems to underlie the factor in the first dot point in para 671, that determining a target level of nil (and presumably also failing to determine a target level) meant “no business plan”.
105 Another source of the reasons seems to be the judge’s discussion in relation to the Benchmarks -
“644 Gross connections are new connections. How then is Mobile expected to achieve a minimum performance standard apropos gross connections of more than 3000/month (ie 9000/quarter) [1st level breach provision] or 2000/month (ie 6000/quarter) [2nd level breach provision], in a situation where it has been effectively directed by Vodafone not to achieve any new connections at all? And how, in that circumstance, can Mobile continue to discharge its express obligation to use its best endeavours to promote the Mobile Services, subject to Vodafone's reasonable directions from time to time [clause 13.1 (a)]. Possibly this simply raises a question of whether or not the nil level target determination constitutes a reasonable direction in the circumstances.
645 The same point may be made with respect to net connections. How is Mobile to be expected to achieve quarterly net connections of more than 3000 [2nd level breach provision] or 6000 [1st level breach provision], in a situation where it has been effectively directed by Vodafone not to achieve any new connections at all? By definition net connections comprise the cumulative result when old connections churn away and new connections are acquired. If Mobile is obliged not to seek any new connections, then if any churn takes place there will be no net connections. So by definition Mobile cannot, by reason of Vodafone’s nil target determination [or failure to give any target], both comply with the minimum performance standard and at the same time also comply with its obligation to work towards achieving Vodafone’s identified target.”
“Churn” is mobile telephone jargon for a customer going to another service provider at the end of the customer’s contract period. Something of this discussion seems to have been taken up in the third, fifth and last two dot points of para 671,
106 In his consideration of the scheme involving Estimated Acquisition Cost and Actual Acquisition Costs, after noting a submission that by simply acquiring one subscriber Mobile would be entitled to the Actual Acquisition Costs the judge said -
“647 If Vodafone’s submission in this regard is correct it seems to me that it is particularly important to note that clause 17.7 (a) provides an express positive obligation upon Mobile to use its best endeavours to ensure that the Actual Acquisition Cost for a quarter correspond to the Estimated Acquisition Cost for that quarter as closely as possible. Hence if Vodafone, assuming an entitlement to do so, determines a nil target for any quarter, clause 17.7 (a) in fact imposes a positive obligation upon Mobile not to incur any Actual Acquisition Costs at all during that quarter.
648 It may also be arguable that where one is dealing with a target level of zero then as a matter of semantics, there will be no Estimated Acquisition Cost at all [as compared to an estimated acquisition cost of zero] for the relevant quarter.”
107 With doubt, another source of the reasons may be the judge’s observations upon the overall intent of the parties. Although under a sub-heading “Implied terms”, the judge said -
“657 The above general description of the disparate difficulties in construing the ASP in the face of a number of apparent internal conflicting provisions serves it seems to me to require one to stand back from the agreement in an attempt to discern from the words of the document, what the parties were apparently intent upon achieving in their relationship. That the contract was a long-term contract is obvious. Each of the parties had a clear commercial interest in entering into the ASP. But above and beyond every other consideration they were about setting out a mode in which Mobile could conduct the agency business which it was appointed to conduct. That was intended to be an ongoing business until the ASP was duly terminated according to its terms or according to the respective legal rights of the parties. The business concerned direct marketing. MobilewaspreventedfromconductingtheMobile Direct Marketing Operation part of its business otherwise than for Vodafone. [ASP clause 2.2] Hence the parties anticipated that over sundry periods of time, advertising of high order would lead to incoming applications for subscriptions to the services being sold.
658 It seems to me that the parties [sic] careful attempts to treat with the need to regularly, as each quarter approached, co- operatively work towards agreeing the terms of the business plans which would apply in respect of that quarter [attempts replete with the alternative dispute resolution provisions should these attempts proved unsuccessful], make plain that neither of them intended that at any stage either party would have an entitlement to simply refuse to participate in the production of any form of business plan at all. But by definition Vodafone's case of an entitlement to set the target at nil is predicated upon, proposition or carries as a correlative to the reasoning underpinning that case, just such a proposition. Its case suggests something which sounds illogical, namely that the proper construction of the ASP can be seen to have entitled Mobile, notwithstanding that Vodafone would set a nil target for an ensuing quarter, to nevertheless:
- go ahead and seek as many subscribers as it wished;
- be paid its Acquisition Costs in respect of each of those subscribers.
659 There was of course the express general obligation upon Mobile to carry out its best endeavours to promote the Mobile Services. Let us assume that a call came in from a would-be subscriber during a quarter in respect of which Vodafone had fixed a nil target and had concomitantly, not participated in the preparation of any business plan [for the reason which Mr Bathurst forward as there not being anything which could be included on such a plan]. One wonders in that circumstance just what would or could be the content of Mobile's obligation to carry out its best endeavours to promote the mobile services The construction for which Vodafone contends would seem to suggest that Mobile should either attempt to dissuade that would-be subscriber from subscribing to the service or alternatively, perhaps, that Mobile should endeavour to locate an existing subscriber and persuade that subscriber to churn, so that, in net terms, there would be a nil figure for new subscribers.
660 Likewise it seems to be a particularly awkward approach to the ASP to contemplate that in the face of a nil target determination [and concomitant absence of a business plan], the parties should be seen to have intended that Mobile had carte blanch to sign up as many subscribers as it wished, being paid all of its Actual Acquisition Costs in this regard. Were this to occur then clearly that which Vodafone, with its absolute discretion to determine target levels may be suggested as having bargained for, would be completely outflanked.
661 Certainly I recognise that the problem in rejecting the Vodafone construction to the nil target issue inheres in one or more of a combination of:
- the lack of an express criterion to be used as a yardstick by which to measure the reasonableness ofany particular target number as may be put forward; and
- the clarity of the provision within Schedule 1 which expressly recognises that Vodafone may determine, in accordance with clause 18.4, that the target level in respect of new subscribers, would be less than the number of connections comprising either a first level breach or a second level breach.
662 I am less impressed by the Vodafone submission relying upon the proposition than Mobile would [cf clause 17.6 (b)] still be entitled to receive its Actual Acquisition Costs notwithstanding that it may have virtually ignored the target set and simply gone about obtaining as many new subscribers as possible. This is because clause 17.6 (b) is expressly subject to clause 17.7 which latter clause, by subclause (a), obliges Mobile to use its best endeavours to ensure that the Actual Acquisition Cost for a Quarter correspond to the Estimated Acquisition Cost for that quarter as closely as possible. Hence it seems to me that as soon as Mobile would ignore the target in this way and obtain new subscribers at will and proceed to claim the whole of its Actual Acquisition Cost [on the basis that there had been an estimated Acquisition Cost of zero], Vodafone could legitimately assert that Mobile, by breaching clause 17.7 (a), had forfeited any entitlement which it otherwise may have had pursuant to clause 17.6 (b).”
108 I confess to difficulty, here in particular, in appreciating the judge’s points. The discussion appears to return to “no business plan” and to suggest that determining a target level of nil would prevent Mobile from earning its remuneration and force Mobile into breach of the ASP Agreement. These matters appear in the dot points in para 671.
109 The last source of the reasons, in the paragraphs immediately preceding heading “Holding in respect of the nil target issue”, may be the judge’s discussion of
The Eastern Extension Australasia and China Telegraph Co Ltd v The Commonwealth (1908) 6 CLR 647 (paras 663-8). This again is subject to doubt, since the judge began by saying that “one would not expect to obtain and generally cannot obtain any real assistance from the decidedcases”because it was a question of construction of the ASP Agreement. He continued, “It is interesting however to observe that in The Eastern Extension Australasia and China Telegraph Co Ltd v The Commonwealth ... ” (para 663) and discussed the case. The judge’s point seems to have been that in that case, in which there was power to “reduce” a scale of charges, it was held that the power to reduce did not authorize abolition of the charges (para 662). This does not seem to have been taken up in para 671.
110 As foreshadowed in para 672, the judge then moved to the implied terms, having said that “the very same decision may be reached by the implied term route”. The “decision” must have been that stated in para 670, that Vodafone “was not entitled to put forward nil as the target level in respect of the number of connections of new subscribers”.
111 Under the sub-heading “Obligation to co-operate”, the judge began -
“673 The pleaded co-operation term is that Vodafone would:
· do whatever was necessary to be done on its part to enable Mobile to have the benefit of the ASP;
· refrain from doing anything which would or which would be calculated to deprive Mobile of the benefit of the ASP.
674 In my view just such an obligation to co-operate expressed in such wide terms is shown to have formed part of the ASP. Indeed it would be difficult to suggest for a moment that such a term was not implicit in the ASP and is not implicit in every contract.”
112 In para 675 the judge posed the question, what conduct would constitute a relevant breach of the duty? He amplified the question -
“Does such duty to co-operate extend to require Vodafone to co-operate:
- by producing [by its determination], a positive number of new subscribers to be connected in the next quarter by way of a target [‘the limited reach’] or alternatively;
- by producing [by its determination], not only a positive number of new subscribers to be connected in the next quarter by way of a target , but also being a number of new subscribers which was reasonably expected by Vodafone to be connected in that quarter [‘the expansive reach’]”
113 He concluded that the duty to co-operate “does not go beyond the limited reach” (para 676). He set out “parameters ... supportive of the implied term giving only the limited reach” (para 676), and said -
“677 The very powerful argument against the implied term with the expansive reach is that it is simply impossible to understand what criterion could be used to measure whether or not Vodafone's determination of a particular positive number of new subscribers to be connected in the next quarter by way of a target could be said to be reasonably so expected. Use of the word "reasonably" in that context gives virtually no assistance at all as to just what is meant. As the ASP makes clear, Vodafone does seemto have been intended by the parties to have had the sole discretion to determine the target. Had the parties intended to qualify that discretion, as for example by an obligation that the target should be fixed by Vodafone by reference to (1) market and economic conditions or (2) to its own then position, taking into account market and economic conditions, the parties would have had to say so expressly. They did no such thing. And as pointed out above, the court is not in a position to in effect spell out what the parties have for themselves failed to agree upon. Nor is the court in a position to clarify that which is irremediably obscure. This problem presented by the suggested expansive reach comprises precisely such a circumstance of irremediable obscurity on the point.
678 Having said that I should make plain that it is likely that the implied duty to co-operate would be breached if Vodafone’s discretion could be shown to have been exercised arbitrarily or capriciously. The matter is probably more conveniently dealt with below in relation to the implied obligations of good faith and reasonableness. Clearly some areas of overlap are involved where the two tranches of implied term are concerned.”
114 The judge interpolated -
“679 Before moving to good faith and reasonableness it is convenient to note that my own view, consistent with that of Professor Carter, is that it probably does not matter whether the duty of co-operation is referred to as an implied legal duty discerned by a process of construction, a rule of law or an implied term. In terms of the contract before the court for construction the duty of co-operation may be found by each of these routes. Hence the labeling issue is not determinative in terms of the issues presently before the court.”
115 Under the sub-heading “Obligation of good faith and reasonableness”, the judge then said -
“680 The pleaded implied term is that Vodafone will act in good faith and reasonably in exercising its powers under the ASP.
681 As with the above analysis in terms of duty to co- operate, the far more difficult question in terms of implication of a good faith or reasonableness term concerns extrapolating fromthe general to the particular. The realquestion is as to the reach of the term. Precisely what conduct will constitute a relevant breach of these duties?
682 As already pointed out, this is one of those cases where likely there is an assimilation of the duties of cooperation and of good faith/reasonableness. In that sense both sets of duties extend to cover duties to act honestly and duties to have regard to the legitimate interests of the other party.
683 I would accept that there was an implied obligation to behave honestly and to do all such things as were necessary to enable the other party to have the benefit of the contract. [To my mind these are elements of good faith [cf Peden supra at 165]].
...
685 Probably when focusing upon the discretions given to Vodafone, the matter may be put as an implied obligation to exercise these discretions "honestly and in good faith but having regard to the provisions of the contract by which it is conferred".
686 Quite probably the implied obligation would be breached if the discretions were exercised arbitrarily or capriciously. But this is simply to require that the exercise of the discretion take place following at the least, a proper consideration of the matter after making any necessary inquiries" [cf Abu Dhabi National Tanker Co v Product Star Shipping Limited (The Product Star) (No 2) [1993] 1 Lloyd’s Rep 397].
687 Insofar as it is shown to have been unreasonable for Vodafone to determine a nil target, it is seen to have failed to act in good faith as well as to have acted unreasonably. Since determination of a nil target prevented the parties going forward in an endeavour to reach a business plan, Vodafone is shown to have unreasonably interfered with the enjoyment of an important benefit conferred by the express contractual terms so that the enjoyment was seriously undermined and rendered nugatory. Hence one may regard Vodafone's interference of this kind as
(1) a breach of the implied obligation to act reasonably; and
(2) a breach of the good faith obligation – insofar as there has been shown to be a failure to comply with standards of conduct which are reasonable having regard to the interests of the parties.”
116 The judge dealt with a submission by Mobile which he described as “probably simply a process of construction showing again the probable overlap between a result achievable by no more than a construction route, and the same result achievable by the application of principles which underpin the implied terms” (para 688). He said in para 689 that the submission was “only partly correct”, and continued -
“This is because the parties did not expressly qualify Vodafone's "sole discretion" to determine from time to time, the target level in respect of the number of connections of new subscribers. [1st sentence of clause 18.4]. Nor were the parties prepared to allow the expert to determine any issues concerning Vodafone's exercise of any discretion given to it under the agreement. Hence I do not see that Vodafone's discretion to set a target was proscribed by any such obligation as to act reasonably or in good faith in the sense that it was obliged to put forward by way of a 'target' that a particular positive number of new subscribers was reasonably expected by it to be connected in the next quarter.
690 However Mobile's close focus upon the obligation to determine a target in conjunction with the determination of the business plan clearly does throw up, as it seems to me, an obligation not to refuse to determine a target [nor to purport to determine a target of nil, which is in effect the same thing], for the simple reason that in essence this simply effectively stultifies any further operation of the agreement and could not have been intended.
691 As I have said, when one asks whether the good faith or reasonableness implied term obliged Vodafone to put forward by way of a 'target' that a particular positive number of new subscribers was reasonably expected by it to be connected in the next quarter, it does not seem to me that an affirmative answer can be given to this question. Here one is tampering with the express words of the ASP in an impermissible way. In relation to this field of discourse one is going outside conduct which by definition and with certainty operates to prevent the parties going forward in an endeavour to reach a business plan. One is here seeking to have the court in effect spell out what the parties have for themselves failed to agree upon. As before and for the same reasons the court is not in a position to clarify that which is irremediably obscure. The court would not require commercial parties such as these to behave reasonably towards each other in the matter of fixing positive as opposed to nil targets when, as Peden points out at 164, "they have not expressly included such a standard...” Peden cites the following passage from the United Kingdom Court of Appeal when refusing to imply a term in law: '[t]he common law cannot ...devise such a duty which the legislature has not thought fit to impose and it could not be just or reasonable for the court to impose it' . [Reid v Rush Tompkins Group Plc [1990] 1 WLR 212 at 230 per Ralph Gibson LJ].
692 This is not however to suggest that the implied obligations of good faith and reasonableness would not be breached if shown to have been exercised arbitrarily or capriciously.”
117 The judge referred to cases on the implication of a term in connection with the maintenance of a business, and said -
“715 As with Roadshow Entertainment [Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (Receiver and Manager Appointed) (1997) 42 NSWLR 462], Mobile was here appointed as sole or exclusive direct marketing agent. As with Roadshow Entertainment, that was a valuable right. As with Roadshow Entertainment, it is difficult to accept that it was the intention of the parties as manifested in their agreement, that Vodafone could defeat that right simply by refusing to determine a target at any time or at all, or by, what was in effect the same thing, setting a zero target. The ASP was a long termcontract providing for a specific term of years. It had very specific provisions with respect to termination. Importantly, as in Coulter, it expressly provided for the stepped but very significant consequences which would flow in the event of the first or second level breaches in terms of failure to meet the defined benchmarks. Further and also importantly, it brought with it the extremely significant covenant by Mobile to devote the Mobile Direct Marketing Operation part of its business exclusively for Vodafone so that it could not during the term, deal, and would procure that none of its related bodies corporate would deal, directly or indirectly, with any other mobile network carrier or operator in respect of analogue or digital phone services.
716 These are all circumstances which are taken into account in terms of the courts [sic] here decision that as a matter of the proper construction of the ASP, Vodafone was not entitled to set a nil target or to refuse to set any target. As a matter of implication, these authorities support the finding that the relevant duty to cooperate extended to require Vodafone to cooperate by producing [by its determination], a positive number of new subscribers to be connected in the next quarter by way of a target [referred to above as "the limited reach"].”
118 The judge then considered Vodafone’s submission that cl 24.1(a) of the ASP Agreement precluded the implication of what he described as “the co-operation term or the good faith term” (para 717). After reference to a number of cases, the judge said-
“726 The above reasons serve to set out the extent to which the implied terms of cooperation and good faith/reasonableness [limited as to relevant content], have been held to form part of the ASP. The terms are implied in the sense of being attributed to the contractual intent of the parties, discerned from the ASP objectively construed, the contrary nowhere appearing upon a proper construction of their bargain as reduced to writing in the form of the ASP.
727 The word ‘expressly’ in the phrase ‘other than as expressly set out in this Agreement’" requires some examination in this context. It is possible for the parties to express their agreement to a particular obligation without that obligation being written. In this sense it is not ‘expressed’ but it is nonetheless to be discerned as part of the parties contractual intent. This is the position in terms of the manner in which the ASP is here construed.
728 Properly construed the implied terms which have been found by the court are embodied in the ASP just as effectively as if they were written there in express language. They spring out of the bargain discernible from the ASP.
729 It follows that the defendant's submission that the implied terms now found by the court to be part of the ASP were expressly excluded by clause 24, is rejected.”
119 After referring to a submission by Mobile apparently intended to overcome the “limited reach” earlier mentioned, and saying that it “does not serve to outweigh any of the courts [sic] reasons nor to suggest that those reasons are incorrect in any parameter” (para 730), the judge moved on to assessment of damages. In the course of assessing damages he said that Vodafone “had breached the contractualobligation not to set a nil target and likewise by refusing to determine targets at all” (para 757) and that Mobile had suffered actionable loss “occasioned by reason of Vodafone’s setting of nil targets or refusing to set any targets” (para 759).
120 From all this it can be seen that the judge came to breach of contract through each of the proper construction of the ASP Agreement, an implied obligation to co-operate and an implied obligation of good faith and reasonableness. The following observations may be made.
121 The reasoning to breach of contract did not distinguish between determining a target level of nil and failure to determine a target level at all. Indeed, it scarcely addressed failure to determine a target level. The “nil target issue” identified in para 602 was in terms of an obligation to put forward or determine “a particular positive number”. Both the holding on the proper construction of the ASP Agreement and the holding by application of the obligation to cooperate were with respect to determining a target level of nil. The holding by application of the obligation of good faith and reasonableness was extended in paras 690 and 716, without any analysis, to failure to determine a target level. The judge’s later global description of Vodafone’s breaches in paras 757 and 759 and his assessmentofdamages treated determination of a nil target level and failure to determine a target level without discrimination, and the two were conflated.
122 However, there is a difference between determining a target level of nil and failing to determine a target level. Undoubtedly Vodafone was obliged to determine a target level: cl 18.4 of the ASP Agreement said so. Whether it could determine a target level of nil was a separate question. The damages for the two kinds of breach could differ. For example, in assessing damages for failure to determine a target level it would be material that Vodafone was entitled to determine a target level of nil, if that were the case, since the proper finding might be that if it had determined a target level Vodafo ne wouldhavedeterminedatargetlevelofnil; whereasthereasonsforholdingthat Vodafone was not entitled to determine a target level of nil could mean that damages would be assessed by regard to a substantialtarget level.
123 Linked with this, the “implied term route” (para 672) was not a parallel path to that of the construction of the ASP Agreement. So far as Vodafone failed to determine target levels, it was in breach of contract and there was no need or room for any breach of an obligation to co-operate or an obligation of good faith and reasonableness. So far as Vodafone determined a target level of nil, if on the proper construction of the agreement it was not entitled to do so again there was no need or room for the overlay of an implied term. It was necessary first to ascertain what Vodafone had power to do on the proper construction of the agreement. If it was entitled to determine a target level of nil, an implied term might control the exercise of the power. The construction of the agreement would itself bear upon whether an implied term required that it exercise its discretion by determining a target level other than nil.
124 As to the implied terms, this was not a case of the
Mackay v Dick (1881) 6 App Cas 251 kind, with the question whether each party was obliged to do all that was necessary to be done on its part for the doing of what the contract said should be done. Vodafone had a contractualpower, the question was what it could do in the exercise of its discretion, and the attention given to the obligation to co-operate was misplaced.
125 An obligation of good faith and reasonableness in the performance of a contractual obligation or the exercise of a contractualpower may be implied as a matter of law as a legal incident of a commercial contract (
Alcatel Australia Ltd v Scarcella (1998) 44NSWLR349at369;
Burger King Corporation v Hungry Jack’s Pty Ltd (2001) NSWCA 187 at [159], [164]). The focus in the present case should have been on the pleaded term that Vodafone would act in good faith and reasonably in exercising its powers under the ASP Agreement (see para 680), relevantly the power in cl 18.4, so that even if on the construction of the agreement Vodafone was entitled to determine a target level of nil, the exercise of its discretion in good faith and reasonably called for determination of a target level of some particular number of connections of New Subscribers.
126 What the judge said presents particular difficulty in relation to the number of connections of New Subscribers.
127 The judge considered that it was not open to Vodafone to determine a target level of nil, and that it had to determine a target level of a positive number. But he seems to have held, by his adoption of the “limited reach” rather than the “expansive reach”, that any positive number would suffice. This is not entirely clear, since the “expansive reach” was stated in terms of the number of new subscribers which was reasonably expected by Vodafone, which may not be the same as the number of new subscribers produced by the exercise of good faith and reasonableness; the judge did not, however, otherwise address the reach of the implied terms by the standard of good faith and reasonableness. He emphasized in his paras 589-91 that the court could not fix what was reasonable, even saying (para 691) that
“the court would not require commercial parties such as these to behave reasonably towards each other in the matter of fixing positive as opposed to nil targets ...”.
128 There may be inconsistency. If the court could not require Vodafone to act reasonably towards Mobile in fixing the target level of a positive number, what was the justification for requiring Vodafone to act co-operatively towards Mobile, or in good faith and reasonably, by fixing a target level of a positive number rather than nil? Put another way, if consistently with the exercise of good faith and reasonableness it was open to Vodafone to determine a target level of any positive number, the obligation of good faith and reasonableness had very little content. Why did the exercise of good faith and reasonableness require the determination of a target level not of nil, but of one or ten or any such positive number? Why did it not require the determination of some particular (larger) number of New Subscribers sufficient, in the judge’s language in the penultimate dot point in para 671, to prevent Mobile from stagnating?
129 It may be that, despite generous language such as the references to stagnation (para 671), achievement of Benchmarks (paras 644-5) and intent that Mobile should have an ongoing business (para 657), the essence of the judge’s reasoning on construction was that a target level of nil meant no Business Plan and so stultification of the ASP Agreement; if a target level of a positive number was determined, there could be a Business Plan, however, unreasonable the target level, so as a matter of construction nothing could be said about what the positive number should be. But under the implied terms the reasonableness of the target level, bearing upon the way the Business Plan served the interests of Mobile and Vodafone, should surely have arisen; conversely, if the court could not intervene in the reasonableness of the target level, there was no occasion to imply a term simply that a target level of a positive number should be determined, and no warrant to imply a term by which a particular target level should be determined.
130 The judge found the breaches of contract, it seems, simply in determining target levels of nil and failing to determine target levels at all. So far as he considered that on the proper construction of the ASP Agreement Vodafone
“was not entitled to put forward nil as the target level in respect of the number of connections of New Subscribers”
(para 670), no more than determining a target level of nil was necessary or material. In relation to the obligation to co-operate and the obligation of good faith and reasonableness, he saw the breach in no more than failing to determine a positive number of new subscribers as the target level, the
“limited reach”
rather than the
“expansive reach”.
He encapsulated the breaches found in his paras 757 and 759 in terms of setting nil targets and refusing to set any targets.
131 The significance of this lies in what the judge did not find as the breaches of contract, to which it will be necessary to return later in these reasons in connection with the exercise of a power for an extraneous purpose.
132 Although he referred to exercise of the power to determine target levels arbitrarily or capriciously, the judge did not find that Vodafone had exercised the power arbitrarily or capriciously. This, it seems to me, is the proper reading of the judge’s
“if Vodafone’s discretion could be shown to have been exercised arbitrarily or capriciously” in para 678, “if the discretions were exercised arbitrarily and capriciously”
in para 686 and “if shown to have been exercised arbitrarily or capriciously” in para 692. Allare hypotheses rather than findings. They contrast in particular with the specific attribution of failing to act in good faith and acting unreasonably in para 687 to
“Insofar as it is shown to have been unreasonable for Vodafone to determine a nil target ... ”
. Unreasonable exercise of the power is distinct in the judge’s reasons from arbitrary or capricious exercise of the power.
133 A similar distinction is to be seen in the supplementary judgment of 15 April 2003. The judge said -
“20 ... As the judgment makes plain the real issue concerns the content of an implied term requiring Vodafone to act in good faith and reasonably in exercising its powers under the ASP. The judgment makes explicit, for example, that in certain respects there are limits to the extent to which the good faith or reasonableness implied terms constrained Vodafone from acting in a particular way [cf paragraphs 689, 691].
21 In the circumstances where the extent to which the implied terms requiring Vodafone to act in good faith and reasonably have been tested against particular facts, matters and circumstances, and in that regard are dealt with in the reasons for judgment, there can be no doubt but that the parties are bound by a res judicata. Further those obligations will be breached if Vodafone's discretion to determine the target is exercised arbitrarily or capriciously [cf paragraph 692]; and [see paragraph 678 referable to the implied duty to co- operate].”
134 The judge did not take up for his findings of breach some of what he said in the course of the extensive discussion earlier mentioned. The most material part of the discussion is in the paras 641-2 earlier mentioned -
“641 It is extraordinarily difficult as one follows for example the close evidence given concerning the events of 2001 to follow with precision the moving pattern of stances taken by the parties on a micro basis. What does come through however quite clearly and represents the courts finding of fact is that Vodafone made a clear and conscious and very deliberate decision that it was not able to and did not wish to continue with Mobile as its direct marketing agent or with the ASP and would proceed to force the issue in some fashion by using its entitlement to set the targets as a weapon in this regard. It determined to and in fact then set about what is shown to have been an initially somewhat vacillating set of directions and changes, [Mr Clubb: ‘Due to the integration of Vodac and Vodafone Network we are in a hell of a mess’] [never taking into account, Mobiles legitimate interest in its own financial survival or ability to continue in business as direct marketing agent whilst fettered by Vodafone’s changingreduction of target levels down to zero], but ultimately resolving into a very clear position. This position involved first dramatically reducing previously agreed upon proposed target levels for certain quarters and in due course resulted in purporting to fix a target for a 12 month period instead of for a quarterly period, which target in any event was for such a low number of acquisitions as made it quite plain to Vodafone that Mobile could never survive if obliged to comply with such direction. The sequence of events simply involved a closing of the tap by Vodafone. I reject the proposition that Vodafone is shown on the evidence to have made clear that if and when Mobile might come forward with suggested business plans which would find favour with Vodafone, Vodafone would re- open the tap and return to the ASP template of setting targets and agreeing business plans and the like. Whilst Vodafone or some of its officers may have had in the back of their mind that commercial realities would surely in due course require Mobile to put up high-value business plans [as a matter of having its back to a wall and therefore no longer having any choice], this was not made explicit to Mobile. Mobile was entitled to conduct itself on the basis that Vodafone had and continued to repudiate the ASP. Further, Vodafone was obliged to determine the target in conjunction with the determination of the business plan[s]. Mobile was entitled to invoke the dispute procedures in the event of any failure by the parties acting in good faith to agree upon the business plans. In that event the dispute resolution procedures could be invoked by Mobile and when and if invoked, authorised the Expert to provide a conclusive, final and binding decision in relation to the matter. In determining the targets at nil, Vodafone walked away from such obligation as there was to endeavour to agree upon business plans. Mobile was denied the entitlement to have the expert resolution procedure operate in terms of the matter of selection of business plans. This walking away from its relevant obligations most clearly exhibits a repudiation and breach thereof when one looks at Vodafone's decision [Vodafone’s letter of 7 March 2001 (6/ 775)] to set a yearly target instead of a quarterly target, which decision, setting a 12,000 target for the year 1 April 2001 to 31 March 2002, on examination, meant that at one in the same point in time, Vodafone was announcing that Mobile would have no targets at all for the September, December 2001 quarters and for the March2002quarter. Ms Blake conceded in cross-examination, that Mobile was being given no targets at all for the following September, December and March quarters. This decision clearly flew in the face of the ASP, setting at naught [a somewhat apt word to use in these circumstances], Mobile's clear contractual entitlement so long as the ASP remained on foot, to have Vodafone exercise a discretion during the month prior to the commencement of the relevant quarter, as to what target was to be set for that quarter. Vodafone blatantly and deliberately breached its obligation to exercise that discretion during the period of time stipulated for that exercise by the ASP.
642 That Vodafone approached the contract and business relationship in this way is simply a finding of fact. The reasons for it seem to have been shown to be a continuing anxiety to reduce the acquisitions on low-level plans for financial reasons.”
135 In para 758, part of his consideration of damages, the judge appears to have had these findings in mind when he said -
“758 Effectively the contractual breach was the conduct by Vodafone which in substance prevented the further operation of the ASP - Mobile is seen to have been stopped in its tracks from going forward promoting the Mobile Services by following and working pursuant to business plans. This was the mechanism selected by the parties as the engine of the enterprise.”
136 Notwithstanding what he said in paras 641-2 and the obscure words of para 758, any potential for Vodafone being in breach of contract because it used its power to determine the target levels as a weapon to bring the ASP Agreement to an end, for a purpose for which it was not intended, was not later taken up. It was not later taken up although elsewhere, despite declining to make “a declaration as to repudiation” (para 881), the judge referred to Vodafone’s conduct as repudiatory, inter alia in “the setting of a nil target for the December 2001 quarter” and “the setting of nil targets for the March and June 2002 quarters and the failure to set a target for the September and December 2002 and March 2003 quarters” (para 883). In his reasoning in the assessment of damages the judge accepted that it was open to Vodafone to “use its discretionary power as a pragmatic weapon of persuasion” (para 768), and if use as a weapon was in some other category one would expect further analysis: it is not to be found.
137 The judge did not say that the breaches of contract he found were constituted by or included exercise of the power to determine target levels arbitrarily or capriciously or use of the power for a purpose for which it was not intended. If those breaches were found,theyshouldhavebeenfoundunequivocally. Thebetterviewofthereasons,it seems to me, is that the breaches of contract found by the judge did not extend to arbitrary or capricious exercise of the discretion conferred by cl 18.4, or to abuse of the power by using it for a purpose for which it was not intended.
138 It will be apparent that in a number of respects I do not find satisfactory the judge’s reasoning to breach of contract. It is necessary to consider the matter afresh, but with regard to the judge’s reasons, by asking -
(a) whether on the proper construction of the ASP Agreement Vodafone was obliged to determine target levels at all, and if so whether it failed to do so;
(b) whether on the proper construction of the ASP Agreement Vodafone was not entitled to determine a target level of nil, and if so whether it did so;and
(c) whether Vodafone was obliged by an implied term to act in good faith and reasonably in determining the target level, and if so whether it failed to do so.
139 It is important to distinguish between (b) and (c). The proper construction of the agreement regulates its general operation. The implied term regulates its operation according to the particular facts and circumstances at the time of the determination.
140 Vodafone was obliged by cl 18.4 to determine target levels. It was obliged to determine the target levels in conjunction with the determination of Business Plans. In the determination of Business Plans the parties were obliged by cl 21.1 to use their best endeavours to agree, with the fall-back of the previous Business Plan and the availability of the dispute resolution procedure. Vodafone had a discretion, but the discretion was as to the number of connections of New Subscribers determined as a target level, not as to whetheratargetlevelshouldbedetermined. I do not think this was in dispute.
141 The words
“the target level in respect of the number of connections of New Subscribers”
in cl 18.4 did not of themselves mean a single figure. They could accommodate a range and a split between different plans. However, cl 18.3 suggested that a single figure was meant, because there was a relationship with 12,000 connections.
142 I have referred to some obscurity in what the ASP Agreement, as amended, said about Business Plans. In fact the parties used what they called a CTA worksheet, the initials standing for cost to acquire. Vodafone gave Mobile a target level figure for new subscribers for each quarter. Mobile prepared a CTA worksheet which, using that figure, split the connections between various plans, set out revenue and expenditure in acquiringsubscribers and arrived at a net figure, added figures for Mobile’s overheads and the Base Acquisition Margin, and stated for each plan a cost (to Vodafone) to acquire. There were then negotiations about the CTA worksheet to produce an agreed document, the negotiations including in some instances change in the figure for new subscribers per month. The CTA work sheets were treated as substitutes for the Business Plans, as the judge said “presumably for the reason that the CTA worksheets contained sufficient information to permit them to be used effectively as business plans” (para 38).
143 From the words “in conjunction with” in cl 18.4, there had to be at least a temporal relationship between determining a target level and best endeavors to agree upon a Business Plan. The parties regarded “Within one month prior to commencement of the relevant Quarter” in cl 21.1 as requiring the best endeavors to agree during the month prior to the commencement of the quarter (“the prior month”), rather than by the time theprior month began, and that is how they conducted themselves in their negotiation of the CTA worksheets.
144 The target level could be determined before the prior month began, possibly some time before, as was accepted in the proceedings by the common position that the target level for the December 2001 quarter had been determined by a Vodafone letter of 23 July 2001. From the penultimate sentence of para 641 earlier set out, the judge appears to have thought that the determination of the target level had to be during the prior month. I do not think that is correct.
145 Mobile submitted that the target level could not be determined during the prior month and had to be determined before the month began. The Estimated Acquisition Cost had to be agreed prior to the commencement of the prior month (cl 17.2), and a factor in arriving at it was the number of New Subscribers expected to be connected in the quarter “as agreed in the Business Plan or, failing agreement, as determined by Vodafone”; so,Mobile said, the Business Plan had to be agreed before the prior month began and the target level had to be determined by that time so that the Business Plan could be agreed. However, this conflicted with the parties’ view that “Within one month prior to the commencement of the relevant Quarter” in cl 21.1 required the best endeavors to agree during the prior month. Either the ASP Agreement was internally conflicting or that view was incorrect. In the present case it does not matter, but the Estimated Acquisition Cost can not have been arrived at as the agreement provided. Subject to a limit on how late in the prior month, it would be difficult for Mobile now to complain of a determination during the prior month.
146 I have said, as to a nil determination or a failure to determine, that the judge did not clearly find what occurred for each quarter. No doubt he thought it unnecessary to make specificfindingsbecause,intheviewhetook,settingtargetlevelsofnilandfailing to set target levels were both breaches of contract and the assessment of damages was the same.
147 Mobile’s pleaded case was that Vodafone purported to determine target levels of nil for the December 2001, March 2002 and June 2002 quarters and failed to determine target levels for the September 2002 to March 2003 quarters. It pleaded a letter of 12 March 2002 as the nil determination for the March 2002 and June 2002 quarters. In para 883, as earlier mentioned, the judge saw as repudiatory determinations of nil and failures to determine in accordance with that pleaded case, although he did not earlier or more specifically make findings. But in para 641 earlier set out he referred to Vodafone “announcing that Mobile would have no targets
at all for the September, December 2001 quarters and for the March 2002 quarter”, and to failure to exercise the discretion during the month prior to the commencement of the relevant quarter, apparently meaning those quarters.
148 At least on appeal, Mobile accepted that target levels (albeit of nil) had been determined for the September 2001 and December 2001 quarters, and again at least on appeal it was common ground that the letter of 12 March 2002 was too late as a determination for the March 2002 and June 2002 quarters. Mobile submitted on appeal that there had been failures to determine for each of the March 2002 to March 2003 quarters. While Vodafone drew attention to the pleading, and said that the trial was conducted on the basis that a nil target level had been determined for March 2002 and June 2002, I did not understand it to submit that Mobile should not be permitted to put a case of failure to determine target levels for the March 2002 and June 2002 quarters. No doubt all relevant evidence had been led in order to meet the pleaded case. Vodafone followed its defence pleaded as to the later quarters in submitting, as to all the quarters, that there was not a failure to exercise the discretion but acceptance between the parties that earlier determined target levels of nil flowed on to all of the March 2002 to March 2003 quarters.
149 Following a meeting on 19 July 2001, on 23 July 2001 Vodafone wrote to Mobile -
“We feel that at this stage it is necessary to consider the December 2001 quarter and the target levels for that quarter. In this respect we advise that we have decided to set the target levels for that quarter at nil connections. This will trigger the operation of clause 18.3 of the ASP Agreement and Vodafone will pay to MI the Base Acquisition Margin in accordance with that clause. Therefore, it is not necessary to prepare & review any estimated CTA for the December 2001 quarter.”
150 There was then a further meeting on 2 August 2001. There were some differences in recollection of the meeting. The judge accepted that Mr Maher of Vodafone made clear that Vodafone intended to continue to set target levels at nil, Mr Maher giving as his reason that it was uneconomic to Vodafone to acquire subscribers through Mobile’s direct marketing, and that the response of Mr Marchbank of Mobile was that the setting of nil targets was outside the operation of the ASP Agreement.
151 Mobile filed its summons on 27 August 2001, amongst other things claiming that the purported determination on 23 July 2001 of a nil target level for the December 2001 quarter was contrary to the ASP Agreement and should be set aside. It “restructured” by making staff redundant, closing down retail and warehouse space and stopping all activities directed at acquiring new subscribers.
152 Vodafone wrote to Mobile on 28 September 2001 inviting a proposalfor acquiring customers who were profitable to Vodafone. The letter concluded -
“For the avoidance of any doubt, I should point out that Vodafone’s decision to set a target of zero connections for the December quarter remains in place until I have expressly confirmed in writing to the contrary”.
153 On 20 November 2001 Mobile prepared a CTA worksheet for the December quarterandsentittoVodafone. Asmallnumberofsubscribershadbeenacquired, apparently as a result of earlier direct marketing, and Mobile claimed connection costs and overheads. Vodafone rejected the claim. CTA worksheets were not prepared for any subsequent quarter.
154 On 12 March 2002 Vodafone wrote to Mobile referring to discussion of “proposals regarding our on-going relationship and future acquisition strategies”. So far as presently relevant, the letter said -
“Since the Dec ’01 Quarter, Vodafone and MI have been operating on the basis of a nil target level for connection of New Subscribers.
...
At this point, Vodafone confirms that the target level for connections of New Subscribers is nil for both the March and June 2002 quarters. It is therefore not necessary to prepare and review any estimated CTA for either of these quarters. The target level of nil will continue to apply to these quarters unless otherwise agreed in writing.”
155 On 25 March 2002 Mobile replied combatively, the letter beginning -
“I refer to your letter confirming Vodafone’s intention to continue to set ‘nil’ target levels for acquisitions in the March ’02 and June ’02 quarters. Nil is not a ‘target’ nor a number within the meaning of the ASP Agreement. Therefore a target has, in effect, not been set for the March and June Quarters.”
156 At some point Mobile amended its summons to include a claim that the purported determination on 12 March 2002 of a nil target level for the March 2002 and June 2002 quarters was contrary to the ASP Agreement and should be set aside. At least on appeal, Vodafone said that the letter of 12 March 2002 was “sent too late to set targets for either of those quarters”, meaning the March 2002 and June 2002 quarters. Contrary to its pleading, Mobile agreed. Presumably Vodafone considered that even if a target level could be determined during the prior month, see the earlier discussion, 12 March was too late in the month. There is no reason to decline to act on the joint position.
157 There was no further assertion from Vodafone of determination of a target level or target levels, either for a particular quarter or as a continuing state of affairs, until December 2002. Nor was there complaint from Mobile of Vodafone’s failure to determine a target level for any particular quarter. On 24 December 2002, however, Mobile further amended its summons to claim failure to determine target levels for the September 2002, December 2002 and March 2003 quarters.
158 For each of the March 2002, June 2002 and September 2002 quarters Vodafone paid Mobile the Minimum Base Acquisition Margin in accordance with cl 18.3 of the ASP Agreement.
159 Vodafone submitted thatit was unnecessaryforit to restate,for each of the March 2002 and subsequent quarters, what the parties already knew - that the target level was nil. It said that, as the letter of 12 March 2002 recorded, the parties were operating on the basis that target levels of nil were in place until further notice, and that its letter expressly did no more than “confirm” those target levels for the March 2002 and June 2002 quarters; it said that Mobile accepted the Minimum Base Acquisition Margin payments and until 24 December 2002 did not say that there should have been more particular determinations, and that 24 December 2002 was the first time failure to determine was raised; and it pointed out that in its submissions before the judge Mobile accepted that for the September 2002 and subsequent quarters
“both parties have proceeded on the basis that MI is not required to obtain new subscribers”.
160 Mobile responded that the ASP Agreement required that Vodafone exercise its discretion quarterly, according the factual circumstances at the time and in conjunction with the determination of a Business Plan. Mobile said, in effect, that a global determination of target levels for all ensuing quarters unless otherwise notified was not permissible: rather, it was a failure in the requisite quarterly exercise of discretion.
161 In my opinion, Mobile’s submission should be accepted. Quarterly Business Plans were required and, determined in conjunction with their determination, quarterly target levels. The determinations had to be made in the circumstances pertaining as each quarter approached, and could not be made regardless of those circumstances. Quarterly exercises of discretion and quarterly best endeavours to agree were required, even ifVodafone’s distaste for acquisition of unprofitable subscribers and the likelihood of low target levels (even nil) and failure to agree were known to Mobile. That for its part for the September 2002 and subsequent quarters Mobile proceeded on the basis that it was not required to obtain new subscribers is not surprising, but does not mean some kind of deemed determination of a target level of nil: from Mobile’s viewpoint, that was the consequence of Vodafone’s breach. Accepting the Minimum Base Acquisition Margin payments counts for little – Mobile would hardly have refused the money.
162 It was not an empty exercise, as Vodafone submitted, for it to restate what the parties already knew, since the restatement had to flow from a genuine exercise of discretion at the time. Stating an intention for the future was insufficient, and it was understandable that Mobile did not maintain its establishment or protest quarterly when it had made its own position clear but Vodafone had been unrepentant.
163 I consider, therefore, that Vodafone was in breach of contract because it failed to determine target levels for the March 2002 to March 2003 quarters. What this means for damages is another matter, to which I will come in due course.
164 Although Mobile submitted that nil could not be a target level because nil was nothing, and one could not aim at nothing, as a matter of language I consider that a target level can be nil. In other contexts zero has been held to be an “amount of taxable income”, with acceptance that it is a number (
Federal Commissioner of Taxation v Ryan (2000) 201 CLR 109), and reduction of an insurer’s liability to an “amount” has been held to permit reduction to nil (
Ferrcom Pty Ltd v Commercial Union Assurance Company of Australia Ltd (1993) 176 CLR 332). These do not govern the different words of cl 18.4, still less does
The Eastern Extension Australasia and China Telegraph Co Ltd v The Commonwealth, but it can quite sensibly be said that the target is to acquire no New Subscribers and the “target level” expressed as a number is nil.
165 It is important that cl 18.4 spoke of a target level, not an expectation. A target level and an expectation as to connections are different, and I have earlier adverted to the difference. Recognition of the difference is the key to the construction of the ASP Agreement.
166 The difference is conceptual. A target level for the number of connections of New Subscribers may be determined, to the achievement of which the Business Plan is attuned in the agreement process, but Vodafone and Mobile may expect that the target level will not be reached or will be exceeded. For example, they may believe that, despite striving to increase the acquisition of subscribers to the target level, economic conditions are against it; or that a desire to curb the acquisition of subscribers will be frustrated by the success of earlier marketing.
167 The difference is also dictated by the ASP Agreement itself. In the definition of Estimated Acquisition Cost the number of New Subscribers expected to be connected in a quarter is “as agreed in the Business Plan or, failing agreement, as determined by Vodafone”. Since the expectation is to be agreed and in default determined by Vodafone, it cannot be the same as the target level, which by cl 18.4 is to be determined in the first instance by Vodafone in its sole discretion and in conjunction with the determination of the Business Plan. That an expected number of connections of New Subscribers as agreed in the Business Plan is not the same as a target level is underlined by the cognate concept of a number of New Subscribers estimated to be connected in the definition of Estimated Acquisition Fee, a monthly rather than quarterly number.
168 Although to be determined in conjunction with the determination of the Business Plan, the target level was used in the ASP Agreement only in the calculation of the Base Acquisition Margin and in negating a First Level Breach or a Second Level Breach for failure to achieve the Benchmark net connections or gross connections. While no doubt low or nil target levels would after a short time be likely to lead to low or nil expectations, the different concepts means that construction arguments turning on expected or estimated numbers of connections ofNew Subscribers in the definitions of Estimated Acquisition Cost and Estimated Acquisition Fee, the expected or estimated numbers being found in the Business Plan or otherwise, fall away. It is necessary to focus on target level as used in the agreement.
169 A target level of nil is consistent with the use of the target level in the calculation of the Base Acquisition Margin. Nil is less than 12,000, it can be achieved (and will automatically be achieved, in the agreement over-achievement not negating achievement), and Mobile will be paid the Base Acquisition Margin calculated assuming 12,000 connections of New Subscribers. The evident purpose of ensuring that Mobile is paid a Minimum Base Acquisition Margin if a low target level is determined and is achieved is fulfilled, and there is no reason to say that a low target level of one or ten should bring payment of the Minimum Base Acquisition Margin but to shrink from saying that the lowest possible target level of nil should not bring payment of the Minimum Base Acquisition Margin. While cl 18.3(a) contemplates that the target level may not be achieved, that does not exclude the determination of a target level which will automatically be achieved any more than it excludes the determination of a target level of one or ten if as a matter of fact it will inevitably be achieved. For the calculation of the Base Acquisition Margin, Mobile can hardly complain of the operation of the agreement in the latter situation, still less of its operation in the former.
170 A target level of nil is also consistent with the use of the target level in negating a First Level Breach or a Second Level Breach. Nil is less than the Benchmark net and gross calculations. If a target level of 2,999 or 5,999 is determined, a First Level Breach or a Second Level Breach will “not be deemed to occur”. So also for any lesser number, and there is no reason why the lesser numbers should not extend to nil. The purpose of negating a deemed breach is equally fulfilled, and again Mobile can hardly complain of the operation of the agreement so construed.
171 From the correspondence to which I have referred in relation to failure to determine target levels, Vodafone seems to have considered that a target level of nil meant no Business Plan and no payment of the costs of providing Acquisition Services. It follows from what I have said that, on the construction of the ASP Agreement, that was not correct. The costs of providing Acquisition Services contractually turned on expectations, not target levels, although as I have said after a short time low or nil target levels would be likely to lead to low or nil expectations. If the parties can not agree on the Business Plan, the prior Business Plan applies or there is ultimately an expert’s decision. The agreement copes with the consequences of determination of a target level of nil. It may not do so to the liking of Mobile, or of Vodafone if in the end the expert decides that there should be an expectation of a low number of connections of New Subscribers and Vodafone has to pay a high cost of providing Acquisition Services for very few connections. That is the bargain the parties made, one which could operate to the advantage or disadvantage of either party.
172 As the target level is used in the ASP Agreement, therefore, a target level of nil works, and in significant respects works to the advantage of Mobile. As a matter of language the target level can be nil. Vodafone has a sole discretion (cl 18.4), exercisable in any manner it sees fit (cl 41) and free from review through the dispute resolution procedure (cl 32.6(d)). Nothing in that confines the power, as a matter of construction, to determining one or ten or any other positive number rather than nil.
173 It is appropriate to return to the judge’s reasons, for which purpose I go to the factors set out in para 671 as a sufficient summary.
174 In the first dot point the judge said nil meant no Business Plan, so it could not be a target level. As is apparent, I do not think that nil meant no Business Plan. The evidence did not explore the philosophy of devising a Business Plan, but according to the Operations Manual it involved expected connections. In principle a Business Plan must look to expectation, even if the expectation is moulded by a target level: for example, it should include (and the CTA worksheets did include) revenue from connections, which should be expected revenue rather than a theoretical figure if the target level happens to be achieved. To repeat, a target level and an expectation are different, and the ASP Agreement itself treated them as different and referred to an expected number of New Subscribers as agreed in the Business Plan. While no doubt significant to the Business Plan, but hardly more or less significant than a target level of one or ten, a target level of nil was consistent with reaching agreement on a Business Plan.
175 In the second dot point the judge said that cll 17.3 and 32 would have no application because there would be no scope for agreement on Estimated Acquisition Cost, and in the fourth dot point he said that the formulae in the definitions of Estimated Acquisition Cost and Estimated Acquisition Fee do not operate with a nil target. In the manner I have sought to explain, this is answered by the difference between a target level and an expectation or estimation.
176 In the third dot point the judge said, in effect, that a target level of nil was not consistent with Mobile’s obligation to provide Acquisition Services. By cl 5.1(b) Mobile agreed “to perform the Acquisition Services and the Management Services in accordance with the terms of this Agreement”. This may not have said anything about a number of New Subscribers Mobile had to acquire, and may have operated only in respect to whatever number of New Subscribers was in fact acquired. So far as it obliged Mobile to acquire any particular number of New Subscribers, however, Mobile’s activity was governed by the Business Plan, and the Benchmark provisions meant that Mobile was not in breach if it achieved the target level. There was not the inconsistency seen by the judge.
177 In the fifth dot point the judge said, in effect, that a nil target was not consistent with Mobile’s obligation to promote the Mobile Services. The Mobile Services were Vodafone’s postpaid mobile telecommunications services, and by cl 13.1(a) Mobile agreed to use its best endeavours to promote them “subject to Vodafone’s reasonable directions from time to time”. This did not say anything about a number of connections of New Subscribers Mobile had to acquire. Assuming a target level of 12,000 new connections and a Business Plan in which 11,000, 12,000 or 13,000 new connections were expected, Mobile could not have been in breach if it failed so to promote the Mobile Services that it did not get 20,000 new connections. Mobile’s obligation was plainly subject to the other provisions of the agreement, and again there was not the inconsistency seen by the judge.
178 In the sixth dot point the judge said that a target level of nil was “contrary to various indicators in the agreement”. The first indicator was that the definition of Payment Dates, by which the date on which Mobile would be paid the monthly Estimated Acquisition Fee and the adjustment to Actual Acquisition Costs was arrived at, required the date to be “such as to facilitate the efficient operation of MI’s business”. The second indicator was Mobile’s commitment of its Mobile Direct Marketing Operation exclusively to Vodafone (cl 2.2 earlier set out). The third indicator was “Mobile’s non-compete obligations”, shorthand for a complex cl 4 and definitions by which Mobile agreed not to compete with Vodafone during the term of the agreement. I am not sure how the judge saw in these indicators inconsistency with determining a target level of nil, but it seems that he thought that Mobile could not have an efficiently operating business, or have a business of acquiring subscribers to mobile telecommunications services on a postpaid basis at all, if a target level of nil was determined.
179 I do not think there was inconsistency, although if there were there would be much the same inconsistency if a target level of one or ten or some other low positive number were determined, which the judge seems to have thought was permissible (the “limited reach”). Mobile would still receive the costs of providing Acquisition Services so far as it acquired subscribers, and the Minimum Base Acquisition Margin, as to the former perhaps not for long but as to the latter until the expiry of the ASP Agreement. It would still manage subscribers and receive the Management Fee, perhaps decreasingly as subscribers were lost. So far as its business activity would be confined and its remuneration would be less than if large numbers of New Subscribers were being acquired, that was a consequence of the terms of the ASP Agreement. The ASP Agreement governed the extent of Mobile’s business, not the other way around.
180 In the seventh dot point the judge said that the idea that Mobile was to stagnate can not have been intended. It is not entirely clear what he meant. If what I have said about the sixth dot point captures the judge’s meaning, the point seems to be the same. Maybe Mobile would stagnate just as much, or as little, if a target level of one or ten or some other low positive number was determined, but it would still have the business activity and remuneration last described: why is that stagnation? If Vodafone must pay Mobile a large sum for acquisition costs if only one or ten or some other low number of New Subscribers is acquired, plus a Minimum Base Acquisition Margin, why is that not the agreed extent of preventing stagnation? The appeal to the parties’ intention is, as often, dangerous; the intention is to be found in the ASP Agreement on its proper construction.
181 In the eighth dot point the judge said that by setting a target level of nil Vodafone made it impossible for Mobile to perform its obligations under the ASP Agreement. This was not further explained, and appears to take up earlier dot points, particularly the third and fifth dot points.
182 With respect, I do not find persuasive the factors to which the judge referred. In my opinion, on the proper construction of the ASP Agreement Vodafone was entitled to determine a target level of nil.
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