QUESTION 3: WHAT IS THE PROPER CONSTRUCTION OF THE EXPRESSION 'NET CALL REVENUE' OR 'NCR' IN THE IVR LICENCES?
84 Clearly enough, the means of a customer ordering and paying for the download of a Monster ringtone or other service involved a number of interrelating relationships between Monster, the telecommunication companies and its own supplier of telecommunication services Telstra on the one hand, and the customer on the other. Monster advertised that a IVR service would cost, say, $3.96 per minute. A customer who telephoned and placed an order accepted liability for that charge in return for the service of receiving, among other things, the download. But the relationships were far more complex, as the definition of gross call revenue recognised, although few customers would have appreciated this themselves. First, the customer's telecommunication service provider's network would be used to collect from the customer the charge of $3.96. The telecommunication service provider may or may not have been Telstra. That service provider would have had to pay Telstra or Telstra would have had to account for that money internally. Needless to say, each telecommunication service provider participating in this arrangement would be expected to take some part of the $3.96 per minute fee for itself. Then, pursuant to the contract between Telstra and Monster, Telstra had to account for an agreed sum to Monster.
85 It is clear that the commercial purpose behind the definition of gross call revenue was to capture the fact that the customer of Monster would be paying more than ultimately would be made available to Monster after it had passed through the complex of telecommunication company service providers. Next, net call revenue was to be calculated by making 2 deductions about which the parties disagree.
86 The first issue is this. When the definition of net call revenue referred to deducting 'bad debts actually written off' the parties recognised that some allowance needed to be made to take account of the difference between the revenue which accrued from customers making orders and those customers who, in due course, would not pay for those services. Monster contends that this phrase should be construed as requiring a calculation in each quarter that identifies every defaulting customer to the telecommunications suppliers which must then be deducted from the gross call revenues. On the other hand, APRA and AMCOS point to the fact that in Monster's contract with Telstra an allowance or provision of 5% for bad debts is made in each account Telstra sends. Mr Mallett's evidence was that all other licensees have similar arrangements with their telecommunications provider. In the other licensees' returns to APRA and AMCOS they deduct the contractual allowance or provision percentage for bad debts in their contracts with their telecommunications supplier. Again, it is common ground that if Telstra ultimately made an adjustment to the amount of bad debts the subject of the 5% provision in each bill, that adjustment could be reflected in a calculation of net call revenue at the time it was made.
87 The effect of Monster's construction of the requirement to calculate net call revenue has to be considered in the commercial context in which the parties were dealing. Mr Mallett said that the industry reported bad debts written off by applying, universally in his experience, the bad debt provision charged in the telecommunication services provider agreement with the licensee, in the matter in which it is sought by APRA and AMCOS to apply the 5% provision actually charged by Telstra on Monster's telephone services.
88 Mr Mallett said that APRA and AMCOS had never had a licensee who had sought to have a later adjustment, based on actual bad debts, made to the contractual percentage figure used as a provision for bad debts by the telecommunication service providers and licensees. He said that the amount of the provision might vary from licensee to licensee and from month to month for licensees. He said that it was a rolling provision and that it provided the best way of calculating the sum. And so far as Mr Mallett was aware neither APRA or AMCOS had ever been provided with a figure other than the contractual provision (T87.1-.42). But he said that if the actual experience were different to the amount of the provision, then there might be an adjustment further down the track (T86.45-87.15).
89 The use of the provision in the telecommunication service providers contract, which is actually the subject of a payment or an actual deduction from the revenue of the licensee by the provider, makes good business and commercial commonsense. Moreover, it appears, from Mr Mallett's evidence, to be the practice in the industry. After all, he was the person who was responsible within APRA and AMCOS for dealing with these issues from time to time. I accept his evidence.
90 A consequence of Monster's argument is that no deduction should be made from gross call revenue for the 'provision' being the actual money deducted from Monster's receipts by Telstra. Rather, Monster says that the net call revenue should be increased, hence increasing the quantum of its prima facie liability for licence fees, by adding back the 5% provision. Monster would then be assessed for royalty on the false basis that it had received money in fact when Telstra had retained it Monster would thus pay royalty on money it did not receive. Unless and until Telstra ultimately provided some definitive calculation of the actual adjustment, Monster would be out of pocket. That would postpone contractual certainty as to what was due and payable as a licence fee for, perhaps over 12 months until, for tax or other purposes, a decision was made by Telstra and possibly Monster, to write off particular debts. And, Monster's construction involves difficulty of calculation and inconvenience which again suggests that it is not likely that a reasonable person in the position of the parties would have adopted it as against the one which in my opinion is appropriate.
91 I am of opinion that the proper construction of the expression 'bad debts actually written off' in the definition of net call revenue is the sum for bad debts which Monster was required to pay to Telstra under its contract as and when Telstra issued bills for that amount. There is no doubt that Telstra actually reduced the amount of the money it paid to Monster pursuant to its contract by the amount of 5% in accordance with the bad debt write off provision. That being so, Monster actually incurred and paid to Telstra that 5% for bad debts.
92 Like all provisions in accounts, bad debts having been provided for they reduced the amount of profit or revenue in the period of account. But in the way in which Monster's contract with Telstra actually worked, Monster paid cash (by receiving 5% less) when Telstra accounted to it. Because it was in the nature of a provision, the bad debt payment was capable of being reversed when, perhaps happily, the debtor paid even though at the time of the original write off, it was not expected that such a result would occur. Telstra had bargained with Monster for the provision of its services subject to the 5% deduction from every payment Telstra made for the supply of the ringtones and other downloads which Monster had sold to consumers. Telstra was, in effect, a collection agency for Monster entitled to take its own share of revenues and bearing some risk as to uncollectible debts from Monster's end customers (hence the concept of gross call revenue to which I have referred).
93 The second disputed question of construction is the meaning of the words 'the connection fee actually charged by the telecommunication service provider responsible for providing the carriage of the IVR service'. It is common ground that Telstra retained 15˘ per call for every IVR service and that this sum should be deducted in the calculation of gross call revenue. APRA and AMCOS say that that 15˘ charge was within the definition of the connection fee so as to be a deduction from gross call revenue to produce net call revenue. Mr Mallett said that APRA and AMCOS calculated gross call revenue after deducting the 15˘ (T 85.16-.35).
94 Monster contends that there are four further sums which fall within the definition of a connection fee. Each of those is found in the schedule of charges in the info [sic] call service provider agreement between Telstra and Monster.
95 The first two are against the marginal heading 'Connection Charge'. They are the new info call service provider establishment charge of $1,000 and the cost of $50 per number for the allocation of each new info call plus number. The info call numbers were the 1900 numbers. I am of opinion that charges to establish the telephony service through which the business is conducted which are described in the agreement itself as connection charges within are the ordinary and natural meaning of the words 'connection fee actually charged' in Schedule 1 of the IVR licences. Accordingly, I find that each of the amount of $1,000 as an establishment charge and the $50 per number for each 1900 number used by Monster was a connection fee actually charged by Telstra to Monster and should be deducted from gross call revenue to calculate net call revenue.
96 The third item which Monster argued falls within the meaning of connection fee in Schedule 1 is the call the charge of $0.003 per second for an info call service excluding the first 24 seconds. Of its nature this charge could only be incurred 24 seconds after a connection was made. Connection of a call to Telstra's service thus was not a consequence of and did not depend upon the payment of this charge. It was simply payable after a certain time elapsed (24 seconds) for the duration of the subsequent part of the telephone call. I do not consider this to be within the ordinary and natural meaning of a connection fee. The call would be free of this charge if it lasted for less than 24 seconds.
97 The fourth item which Monster said should be included as a 'connection fee' was described in its written submissions as 'non-telecommunications service charges, calculated according to a scale of average monthly gross revenue for a 3 month period'. This referred to charges which the info call service provider agreement described as including Telstra's expenses for billing, marketing and administration. These charges are not within the meaning of a 'connection fee'. Their nature is accurately described as 'non-telecommunications service charges' - that is, as a charge for services outside telephony connection.
98 Had the parties intended that charges of the latter kind should be excluded from net call revenue, it would have been easy to do so by leaving out the word 'connection' from the description of the amount to be deducted. Then all the telecommunications service provider's fees actually charged would be excluded from net call revenue. General fees payable to the providers for their overall services in relation to provision of telephony services are not within the meaning of 'the connection fee actually charged'.
99 The commercial context in which APRA's and AMCOS' IVR licences operated was one in which the consumer was being charged by Telstra (or other telecommunications service provider) on a time basis for IVR calls. The charge was at a rate advertised by Monster in connection with the pricing of the download services Monster was offering to customers. Moreover, it was known to both parties at the time the licences were entered into that there were connection charges which were readily identifiable and easy of calculation. They were the 15˘ per call or like fee charged by the telecommunications provider directly to the customer (which it is common ground should not be included in net call revenue) and what the telecommunications carrier said was such a fee.
100 Monster's expert accounting witness, Mr Peter White, was a partner of Bentleys MRI Sydney. He was instructed to use Monster's construction of 'connection fee actually charged' in calculating the net call revenue. He said that to calculate the actual net call revenue for the 3 years ended 30 June 2006 using this construction would involve in excess of 10,000 calculations and he had not had time to do that exercise. More revealing was his observation that it was not possible to calculate that net call revenue '… as it is unclear what charges have been made by Telstra'.
101 Mr White's evidence showed that if net call revenue were to be calculated so as to take account of the third and fourth items suggested by Monster, the exercise would be commercially and practically highly inconvenient if not impossible.
102 The words 'connection fee' were used in the commercial context of a telecommunications service provider's fees for IVR services for the purpose of retaining, all revenue on which royalty was chargeable gained from end customers that both the licensee and its telecommunication service provider earned from selling the downloads on a time cost for the phone call to the end customer except for two items. The first, bad debts actually written off, excluded revenue not received by the licensee. The second exclusion was what the telecommunications service provider was entitled to retain as, in effect, flag fall charges to Monster and the end customer for establishing the connection by which it and the licensee then earned revenue from the duration of the call. It would be contrary to the purpose of the IVR licences to exclude as a 'connection fee' any portion of the time based earnings of the licensee and its telecommunications service provider derived from the exploitation of the copyright works. Moreover, the complexity and difficulty of calculating Monster's last two suggested deductions tells against an objective intention that they be included in the concept of a 'connection fee'.
103 In my opinion Monster's construction would lead to a result contrary to common sense (cf: Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 at 400 citing Oliver LJ in Exxon Corporation v Exxon Insurance Ltd [1982] Ch 119 at 144 where recourse to commonsense in construing an expression in a statute was allowed). A similar approach is apposite in construing agreements: cp: Miramar Maritime Corporation v Holborn Oil Trading Ltd [1984] AC 676 at 682E-F per Lord Diplock). As Lord Diplock said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201E:
'… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense'.
104 Lord Reid once said that in arriving at the proper construction of a contract:
'The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear: L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251E.'
105 Monster submitted that this was not an available approach to construction and that I was bound to follow what it argued was the different approach in Fitzgerald v Masters (1956) 95 CLR 420. In that case, of course, there was an obvious mistake. The question was how should the Court construe the language used. McTiernan, Webb and Taylor JJ said (95 CLR at 437):
'It is trite law that an instrument must be construed as a whole. Indeed it is the only method by which inconsistencies of expression may be reconciled and it is in this natural and commonsense approach to problems of construction that justification is to be found for the rejection of repugnant words, the transposition of words and the supplying of omitted words(cf.Norton on Deeds 2nd ed (1928) p 98)' (emphasis added)
106 Their Honours' approach is not inconsistent with Lord Reid's or Lord Diplock's approaches. After all, the purpose of construction of contracts is to ascertain by reference to the words used in the factual matrix in which the parties dealt with one another what an objective person would reasonably understand the parties to have intended. And, as Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ said in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436 at 439 [10]; 186 ALR 289 at 293:
' [10] In Codelfa, Mason J (with whose judgment Stephen J and Wilson J agreed) referred to authorities (In particular, speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1381-1383-1385; [1971] 3 All ER 237 at 239-241; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 261; and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-997; [1976] 3 All ER 570 at 574-576) which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract: (Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-996; [1976] 3 All ER 570 at 574)
"… presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."
Such statements exemplify the point made by Brennan J in his judgment in Codelfa: ((1982) 149 CLR 337 at 401)
"The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used."'
107 Gleeson CJ, Gummow and Hayne JJ said in Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 210 CLR 181 at 188:
'Interpretation of a written contract involves, as Lord Hoffmann has put it (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114. See also the remarks of Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW)(1982) 149 CLR 337 at 350-352, and of Lord Bingham of Cornhill in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at 259): "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." That knowledge may include matters of law, as in this case where the obtaining of intellectual property protection was of central importance to the commercial development of Mr Allen's ironing board (cf Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at 282, per Lord Clyde).'
108 It is necessary to construe an agreement so as to avoid making it commercial nonsense or working commercial inconvenience. The commercial purpose of the definitions, that is to say the purpose of a reasonable person in the position of the parties to the contract, is relevant. That in turn requires attention to the genesis of the transaction, the background, the context, the market in which the parties were operating, as known to both parties: Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at 559 [82].
109 Accordingly, the $0.003 per second and non-telecommunications service charges should not be deducted from net call revenue.