Busways Blacktown Pty Ltd v Westbus Region 1 Pty Ltd

The 7 October 2005 agreements

1. On 7 October 2005 the Government, the Operator and each of Busways, Busabout and Westbus CDC entered into a suite of contracts to enable the businesses of Busways, Busabout and Westbus CDC to operate, separately, within Area 1.
2. The first was the "Metropolitan Bus Systems Contract" made between the Operator and the Government. The parties referred to this as "the Government Contract".
3. The second was a "Shareholders Agreement" made between the Operator and each of Busways, Busabout and Westbus CDC. The Operator agreed to pass on payments it received under the Government Contract to each of Busways, Busabout and Westbus CDC pursuant to the subcontracts referred to in the next paragraph. It was also agreed that the Operator would make no profit or loss from the Government Contract.
4. Third, the Operator entered into a subcontract with each of Busways, Busabout and Westbus CDC for the provision of bus services in each of their respective regions within Area 1. The parties referred to these documents as the "Busways Subcontract", the "Busabout Subcontract" and the "Westbus Subcontract"; together, the "Subcontracts".
5. There were also direct agreements between the Government and each of Busways, Busabout and Westbus CDC. The parties referred to these as the "Direct Agreements". They play no role in the dispute before me.
6. Each of the agreements was expressed to last for seven years. Each was then extended for 12 months. The arrangements thus endured from 7 October 2005 to 5 October 2013.
7. The Government Contract and the three Subcontracts were "plus costs" contracts. The payments the Operator was to receive from the Government under the Government Contract, and that Busways, Busabout and Westbus CDC were to receive under the Subcontracts, were designed to reimburse each of Busways, Busabout and Westbus CDC for the costs of providing the services plus allow each a margin for profit.
8. When it is convenient to refer to Busways, Busabout and Westbus CDC collectively, I will refer to them as "the Subcontractors".

The clause in question - cl 17.2(e)

1. This dispute concerns the proper construction of a profit distribution clause in the Shareholders Agreement.
2. That clause is cl 17.2(e) which is in the following terms: "From 1 January 2007, Westbus [CDC] must distribute any profits in excess of 12% EBIT to cost (calculated on the same basis as the Bid Template) amongst all Subcontractors in Area 1 in an attempt to equalise the SKR [Standard Kilometre Rate] plus PBP [Patronage Benchmark Payment] based on the AAR [Actual Activity Ratio] of each Subcontractor and the Operator must adjust the SKR [Standard Kilometre Rate] accordingly."
3. It is common ground that the reference in the clause to "the" Bid Template is a reference to the Westbus Bid Template. The clause should be read as if it referred to "its" Bid Template.
4. I have included in square brackets, after the initialisms "SKR", "PBP" and "AAR", the expressions for which they stand. They require explanation, to which I will shortly come.
5. The key issue is whether Westbus CDC made a profit, to be calculated "on the same basis" as in the Westbus Bid Template, "in excess of 12% EBIT to cost" at any time from 1 January 2007 during the term of the Shareholders Agreement; and whether distribution of any such profit would have caused the Operator to adjust the "SKR" (Standard Kilometre Rate) "accordingly".

Usual principles of construction

1. There was no dispute before me as to the appropriate principles to be adopted in constructing the various agreements.
2. Those principles were summarised in Busways' final submissions as follows: "The meanings of the terms of a commercial contract are to be determined by what a reasonable businessperson would have understood them to mean at the time the contract was entered into. Ascertaining that meaning requires consideration of the text, the surrounding circumstances known to the parties, and the commercial purpose or objects of the contract: Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113; [2014] NSWCA 184; [Electricity Generation Corporation trading as Verve] Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]… Where a commercial transaction is implemented by several contracts or documents executed contemporaneously or within a short period, all of the contracts or documents may be read together for the purpose of ascertaining their proper construction and legal effect: EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78 at [104]; Zhang v BM Sydney Building Materials Pty Ltd [2016] NSWCA 166 at [45] (McColl JA; Ward JA and Sackville AJA agreeing)."

The "Monthly Payments" and their integers

1. Under the Government Contract, the Government agreed to pay the Operator "Monthly Payments".
2. Under each of the Subcontracts, the Operator agreed to pay an agreed proportion of those Monthly Payments to each Subcontractor.
3. The formula in the Government Contract for determining the Monthly Payments was complex but included a "Fixed Payment", a "Service Payment", and a "Patronage Benchmark Payment" (the "PBP" referred to in cl 17.2(e)).

The Fixed Payment

1. The Fixed Payment was a specified dollar figure intended to reimburse the Subcontractors for overhead costs incurred in providing the required bus services.
2. It was calculated by multiplying the "Bid Fixed Payment" by a multiplier ("1" in the first year and differing figures in subsequent years).
3. For the financial year ending 30 June 2006, the Fixed Payment to the Operator under the Government Contract was some $8.9 million which was, under the Subcontracts, divided between the Subcontractors as follows: 1. Busways some $4 million; 2. Busabout some $473,000; and 3. Westbus CDC some $4.355 million.
4. For reasons unnecessary to recount, the Fixed Payments increased over the first years of the arrangements, then declined slightly towards the end.

The Service Payment

1. The Service Payment was also calculated in accordance with a formula set out in the Government Contract.
2. A key multiplier within that formula was the "Standard Kilometre Rate" (the "SKR" referred in cl 17.2(e)).
3. The Standard Kilometre Rate represented the variable costs incurred by the Operator on the one hand, and by each of the Subcontractors on the other, of providing the required bus services. It was calculated on a per service kilometre basis.
4. The expressions "service" kilometre and "revenue" kilometre were used interchangeably by the parties. Each refers to a kilometre for which the Subcontractors were entitled to collect a fare. I will refer to them as "Revenue Kilometres".
5. There was a single, fixed Standard Kilometre Rate of $1.6261 per kilometre under the Government Contract. That figure was calculated by reference to the financial positions of each of Busways, Busabout and Bosnjak in operating the bus services as set out in their Bid Templates.
6. The payment received by the Operator from the Government was then distributed to Busways, Busabout and Westbus CDC under each of the Subcontracts. The Subcontracts used the same formula as the Government Contract, but calculated the amounts payable by reference to the individual Standard Kilometre Rates for each of Busways, Busabout and Westbus CDC.
7. Those individual Standard Kilometre Rates were: 1. Busways - $1.3061 per kilometre; 2. Busabout - $1.8257 per kilometre; and 3. Westbus CDC - $1.9488 per kilometre.
8. Those rates reflected the variable costs per Revenue Kilometre of each Subcontractor in providing their bus services. The fact that each had a different Standard Kilometre Rate reflected the fact that their costs varied according to factors such as geography, traffic conditions and the mix of school and standard bus routes in each area.
9. The Standard Kilometre Rate was calculated by dividing the variable costs (less patronage and fuel payments) by the "Forecast [Revenue] Kilometres" of each of those entities, thus: Westbus CDC Busways Busabout Operator Variable costs less patronage and fuel payments $8,829,608 $6,315,898 $782,897 $15,928,403 Forecast [Revenue] Kilometres 4,530,743 km 4,835,673 km 428,825 km 9,795,241 Standard Kilometre Rate $1.9488 $1.3061 $1.8257 $1.6261

1. As this table reveals, Westbus CDC's Standard Kilometre Rate was considerably higher than that of Busways, and somewhat higher than that of Busabout. That meant that at the outset Westbus CDC was to be paid more by the Operator for each Revenue Kilometre its buses drove than either of Busways or Busabout.
2. This was because Westbus CDC had higher variable costs per kilometre than Busways or Busabout.
3. The Standard Kilometre Rates of each Subcontractor were linked. If the Standard Kilometre Rate for one went up or down, the others would be adjusted accordingly so that, on average, the Subcontractors' rates totalled the rate paid to the Operator.

Patronage Benchmark Payment

1. The Patronage Benchmark Payment, or PBP, was a dollar figure reflecting the patronage of buses in Area 1 as a whole and as between each of the Subcontractors.
2. The Patronage Benchmark Payment between the Government and the Operator was some $10.83 million. Between the Operator and the Subcontractors it was: 1. Busways - some $5.088 million; 2. Busabout - some $295,000; and 3. Westbus CDC - some $5.446 million.

Actual Activity Ratio

1. The Actual Activity Ratio (the "AAR" referred to in cl 17.2(e)) was defined in the Shareholders Agreement as being the "shifting measure" for each of the Subcontractors' share of Revenue kilometres. It represented the percentage of the total Revenue Kilometres in Area 1 enjoyed by each of Busways, Busabout and Westbus CDC.
2. As the figures in the table at [49] reveal, the forecast Revenue Kilometres of each Subcontractor, represented the following percentages of the total: 1. Busways - 49.26%; 2. Westbus CDC - 46.25%; and 3. Busabout - 4.38%.

Clause 17 as a whole

1. The arguments require consideration of cl 17 of the Shareholders Agreement as a whole.
2. The relevant provisions within cl 17 (including cl 17.2(e) which I repeat here to place it in context) are: "17 SUBCONTRACT AGREEMENTS 17.1 The Parties agree to enter into Subcontract Agreements with the [Operator] on terms agreed by the [Operator] and each Shareholder including the following terms: (a) Each Shareholder will receive a [Standard] Kilometre Rate which is to be calculated, subject to clause 17.2 in accordance with the agreed Bid Template relating to its individual operations and set out in the schedule to each subcontract. (b) All other payments, including fixed payments, are to be made by the [Operator] to each Shareholder in accordance with the Bid Template paid by the [Government] in accordance with the [Government Contract]; … (e) A term of seven years; … 17.2 Notwithstanding the payments to be made to each Shareholder pursuant to clause 17.1, the Parties agree that the following will take place with respect to such payments: (a) The Parties commit to working closely together in order to achieve the most efficient and effective operation of Services in Area 1. This working relationship must be open, creative and progressive and include; (i) sharing of information between the Shareholders including costs, staffing levels, procedures and supplier information; (ii) reviewing processes and procedures regularly, including onsite visits between Shareholders; and (iii) proposing alternative approaches to procedures, management and staffing, training. (b) The focus of this working relationship will be on areas where there are significant differences in cost structures so that the Shareholders' costs are reduced as far as is possible. (c) From the Service Commencement Date [7 October 2005] to 31 December 2006 each Shareholder will be paid pursuant to its Bid Template. In the above period, the Parties acknowledge that Westbus [CDC] must make all necessary changes to achieve savings including:- (i) drivers' shifts and rosters; (ii) mechanics' overtime and mix of mechanics/apprentices; (iii) spare parts purchases, insurance policies; and (iv) reduction of overall bus overhead costs. (d) From the Service Commencement Date [7 October 2005] to 31 December 2006 Westbus [CDC] and the Operator must [use] their respective best endeavours to achieve the savings referred to in clause 17.2(c). (e) From 1 January 2007, Westbus [CDC] must distribute [its] profits in excess of 12% EBIT to cost (calculated on the same basis as [its] Bid Template)amongst all Subcontractors in Area 1 in an attempt to equalise the SKR plus PBP based on the AAR of each Subcontractor and the Operator must adjust the SKR accordingly. (f) The accounting policies of Westbus [CDC] to be used in its EBIT to cost calculation must be exactly the same as its Bid Template. For the avoidance of doubt, there must be no additional management fees. Operating leases must be treated as finance leases, depreciation of assets must be on the same basis as its Bid Template and Labour Reconciliation payments are to be treated as a cost re-imbursement, i.e. no margin on extra wages. (g) If Westbus [CDC] is unable to achieve a reduction of at least 22.5 cents per total kilometres in drivers' wages and on-costs, the [Operator] must request Busways to undertake building driver shifts and rosters in an attempt to achieve the said reduction and in doing so the Company must ensure that Busways complies with all legal requirements and be approved by the [Government] if required."

Was cl 17.2(e) only enlivened if between October 2005 and 31 December 2006 Westbus CDC effected the cost savings contemplated by cl 17.2(c)?

1. Westbus CDC contended that it was only obliged to distribute its profits under cl 17.2(e) if it achieved the costs savings contemplated by cl 17.2(c); and that this resulted in its profit exceeding 12% EBIT to cost.
2. Clause 17.2(b) recorded the "significant differences in cost structures" between the Subcontractors and that the focus of the parties "working relationship" was on reducing, "as far as possible" the Subcontractors' costs.
3. Clause 17.2(c) provided that from 7 October 2005 to 31 December 2006 (that is, the first 15 months of the various contracts) each of Westbus CDC, Busways and Busabout would be paid, "pursuant to its Bid Template" but that, during that period, Westbus CDC (and not Busways or Busabout) was obliged to make "necessary changes to achieve savings" including reducing its "overall bus overhead costs".
4. However, there is nothing in the wording of cl 17.2(e) to suggest that it was only enlivened if Westbus CDC achieved such savings. As Mr Wood, who appeared with Mr Raffell and Mr O'Brien for Busways submitted, there is no "textual foothold" in cl 17.2(e) for any such implication.
5. On the other hand, cl 17.2(g) was, in terms, only enlivened if Westbus CDC did not make the savings contemplated by cl 17.2(c). It provided that, if Westbus CDC was "unable to achieve a reduction of at least 22.5 cents per total kilometres in drivers' wages and on-costs" then the Operator was obliged to request that Busways "step in" (to adopt the expression used in submissions) as described in the clause. Clearly, the parties contemplated that this clause only be enlivened if Westbus CDC did not make cost savings as contemplated by cl 17.2(c).
6. Had the parties also intended cl 17.2(e) be enlivened upon Westbus making such savings, they would surely have said so.
7. It is true, as Mr Jackman SC, who appeared with Mr Klineberg for Westbus CDC pointed out, that cl 17.2(c) operated to 31 December 2006 and that cl 17.2(e) operated thereafter; from 1 January 2007. I do not see how it follows from that fact that the parties intended that cl 17.2(e) only be operative if the savings required by cl 17.2(c) were made. The temporal relationship between the two clauses simply meant that Westbus CDC had from 7 October 2005 to 31 December 2006 (some 15 months) before it became obliged to distribute profits in excess of 12% EBIT to cost. In the meantime, it was obliged to try to reduce those costs.
8. For those reasons, I do not accept that a reasonable business person in the position of the parties would understand that Westbus CDC's obligations under cl 17.2(e) were conditional on its achievement of the cost savings contemplated by cl 17.2(c).

The structure of cl 17.2(e)

1. Clause 17.2(e) was only enlivened if, from 1 January 2007, Westbus CDC made a profit in excess of 12% EBIT to cost.
2. Whether Westbus CDC achieved such a profit was to be "calculated on the same basis" as the Westbus Bid Template.
3. If such a profit were achieved, Westbus CDC became obliged by cl 17.2(e) to "distribute" that profit "amongst all Subcontractors in Area 1" (that is amongst itself and Busways and Busabout).
4. However cl 17.2(e) is not clearly drafted. It contains no punctuation. Four issues arise regarding its construction.
5. The first issue concerns the phrase "distribute…amongst all Subcontractors".
6. Mr Jackman suggested in opening written submissions that it was common ground that Westbus CDC would, as a practical matter, make any distributions to the Operator, which would then pass that distribution on to the Subcontractors. But that is not what cl 17.2(e) says. The clause required that the distribution is to be made "amongst all Subcontractors"; that is, directly to those Subcontractors.
7. The second issue concerns the phrase "distribute…in an attempt to equalise the SKR plus PBP based on the AAR of each subcontractor".
8. Mr Wood submitted this phrase should, so to speak, be disaggregated and read as directed to two matters. The first is the object of the clause (that the distribution be done "in an attempt to equalise the SKR plus PBP"). The second is the basis upon which any profit was to be distributed ("based on the AAR of each subcontractor"). For the reasons below, I agree that reasonable business people in the position of the parties would read the clause in this way.
9. As to distribution "based on the AAR of each subcontractor", I agree with Mr Wood that this phrase is mechanical and necessary "because one needs the ratio between the three [Subcontractors] to determine how much of the...profits" are allocated to each Subcontractor (to adopt Mr Wood's language in final submissions).
10. Further, it makes commercial sense for Westbus CDC to distribute profit to the other Subcontractors on the basis of their Actual Activity Ratio; being their share of Revenue Kilometres.
11. As to the words "in an attempt to equalise SKR plus PBP", it is clear from the text and commercial purpose of the contract that this should be read as a parenthetical expression.
12. The provisions in cll 17.2 (b), (c), (d) and (g) are directed to the Subcontractors' agreement that Westbus CDC should achieve cost savings.
13. Thus cl 17.2(b) stated that the parties' focus was on reducing differences in the cost structures of the Subcontractors. I have mentioned that Westbus CDC enjoyed a much higher Standard Kilometre Rate than Busways, and a somewhat higher Standard Kilometre Rate than Busabout (see [49] above). Clauses 17.2(c) and (d) acknowledged Westbus CDC's and the Operator's obligations to use their best endeavours to achieve cost savings by Westbus CDC. Clause 17.2(g) contained the "step in" provision to which I have referred.
14. Those provisions suggest that the Subcontractors sought to achieve greater parity between their Standard Kilometre Rates and that this was to be achieved by the profit distribution contemplated in cl 17.2(e).
15. The words "in an attempt to equalise the SKR plus PBP" reflect this intention. Those words would be regarded by a reasonable business person in the position of the parties as being a recitation of the object sought to be achieved by such a profit distribution; rather than a statement of the method by which the distribution was to be made.
16. For those reasons, my opinion is that a reasonable business person in the position of the parties would understand the relevant words to be read as if they were in parentheses thus: "(in an attempt to equalise the SKR plus PBP)".
17. The third issue is that cl cl 17.2(e) contemplated that there could be a sum of two concepts referred to; the Standard Kilometre Rate "plus" the Patronage Benchmark Payment. But the first is a rate ($x per kilometre) and the second is a fixed dollar figure. Presumably, what was sought to be achieved was equalisation, as between the Subcontractors, of the sum of the Service Payment (calculated by reference to the Standard Kilometre Rate) and the (fixed) Patronage Benchmark Payment.
18. Mr Wood produced two tables which illustrated how a hypothetical distribution of profit from Westbus CDC to Busways and Busabout could lead to approximate equalisation of the sum of the Standard Kilometre Rate and the Patronage Benchmark Payment.
19. The tables illustrate the process by calculating a "Patronage Benchmark Payment per Revenue Kilometre" rate for the purposes of adding it to the relevant Standard Kilometre Rate, and thereby achieving a "rate plus rate" figure.
20. The result of the process is to show how a hypothetical profit distribution might bring about an (approximate) equalisation of "SKR + PBP".
21. The first table illustrates the position on 7 October 2005, the date of each of the agreements. It is based on the Revenue Kilometres forecast for the 12 months to 30 June 2006 in the various Bid Templates, and the Patronage Benchmark Payment and Standard Kilometre Rate in the three Subcontracts.
22. The first table is in the form attached (Table 1 (5.28 KB, pdf)).
23. The table illustrates that, at the outset, the "SKR plus PBP" of each of Westbus CDC, Busways and Busabout was far from equal. That of Westbus CDC ($3.1508) was considerably more than Busabout ($2.5145) or Busways ($2.3583).
24. This appears to reflect the statement in cl 17.2(b) that there were "significant differences in cost structures" between Westbus CDC on the one hand and Busways and Busabout on the other.
25. That appears also to reflect the acknowledgment in cl 17.2(c) that Westbus CDC "must make all necessary changes to achieve savings", including reducing its "overall bus overhead costs" (cl 17.2(c)(iv)); and also the requirement in cl 17.2(g) that the Operator must request Busways to "step in" if Westbus CDC were unable to "achieve a reduction of at least 22.5 cents per total kilometres in drivers' wages and on-costs".
26. The second table illustrates the effect on "SKR plus PBP" for each Subcontractor if, for the period 1 January 2007 to 30 June 2007, Westbus CDC made a profit in excess of 12% EBIT to cost of $1,358,956. This figure was adopted as an example from one of the "scenarios" proposed by Busways' accounting expert, Mr Andrew Ross.
27. The second table is in the form attached (Table 2 (5.93 KB, pdf)).
28. The table illustrates the adjustment that would need to be made to the Standard Kilometre Rate (the "Standard Kilometre Rate Adjustment" in the fifth column) assuming there was required to be a profit distribution of $1,358,956.
29. The effect of the adjustment to the Standard Kilometre Rate was to come close to equalising the sum of the Standard Kilometre Rate and the Patronage Benchmark Payment per Forecast Revenue Kilometres; the "SKR plus PBP" referred to in cl 17.2(e).
30. On this hypothesis Westbus CDC's "SKR plus PBP" rate is reduced from $3.1508 to $2.7829, Busways rate is increased from $2.3583 to $2.655 and Busabout's rate is increased from $2.5145 to $2.7872.
31. The tables are illustrative only but reflect, in my opinion, how the parties intended cl 17.2(e) would operate.
32. The fourth issue concerns the word "accordingly" at the end of cl 17.2(e). Once Westbus CDC distributed any profit it made, the Operator was obliged to adjust the Standard Kilometre Rate "accordingly". Such adjustment would, necessarily, have the result that Westbus CDC's Standard Kilometre Rate was reduced and that of Busways and Busabout was increased.
33. As I have said, I do not see the words "distribute…in an attempt to equalise the SKR…" as specifying the means by which the Operator was to adjust the Standard Kilometre Rate. Rather it recited the parties' intended result of any profit distribution Westbus CDC might be obliged to make. Accordingly, I do not accept Westbus CDC's submission that the Operator's obligation to adjust the Standard Kilometre Rate "accordingly" carried with it an obligation itself to "attempt to equalise the SKR plus PBP". The Operator's obligation was to make such adjustment to the Standard Kilometre Rate as necessarily flowed, as an accounting matter, from the required distribution of profit.
34. As Mr Wood's hypothetical calculations show, this would be an essentially mechanical exercise.
35. The Operator would be obliged to calculate the Standard Kilometre Rate adjustment that would achieve the same results as that attained by a profit distribution, namely: 1. the reduction required to Westbus CDC's Standard Kilometre Rate so that it would not have earned the profits had it made the required distribution to Busways and Busabout. This would be calculated by dividing those profits by Westbus CDC's Revenue Kilometres for the period. This calculation would be "based on the [Actual Activity Ratio] of each Subcontractor" as required by cl 17.2(e), because Actual Activity Ratios are simply a proportionate measure of Revenue Kilometres; and 2. what increase would be required to Busways' and Busabout's Standard Kilometre Rates so that they would have earned the profit that would have resulted had the profit distribution from Westbus CDC been made. Again, this would be calculated by dividing those profits by the Revenue Kilometres of Busways and Busabout for the period.

From 1 January 2007, did Westbus CDC make profits in excess of 12% EBIT to cost?

Westbus CDC profit to be calculated on the same basis as the Westbus Bid Template

1. It is common ground that, for the purposes of considering whether Westbus CDC made a profit in excess of 12% EBIT to cost, its profit was to be calculated "on the same basis" as in the Westbus Bid Template.
2. Further, the "accounting policies" of Westbus CDC to be used in the EBIT to cost calculation "must be exactly the same as in its Bid Template": cl 17.2(f). Neither party suggested this relevantly required any different consideration from that called for by cl 17.2(e).

On what "basis" was profit calculated in the Westbus Bid Template?

1. As I have mentioned, the Westbus Bid Template was prepared by Bosnjak's administrators, Deloitte. Deloitte was assisted by Pitcher Partners. The Bid Template concerned Bosnjak's "Westbus" business in Area 1. It contained profit forecasts for the 6 months to 30 June 2005, for FY2006 to FY2011 and for the 6 months to 31 December 2011.
2. Debate before me focussed on the inclusion of a forecast for "[a]dmin and management salaries & wages" in the Bid Template as a "Bus Overhead Cost". It forecast $657,553 for the 6 months to 30 June 2005; and $1,354,558 for each of FY2006 to FY2011 (slightly more than double the 6 month figure).
3. Mr Jackman accepted that there is nothing in the Bid Template itself to suggest that the "[a]dmin and management salaries & wages" figure included costs which were not directly associated with the "Westbus" business in Area 1.
4. However, Mr Jackman submitted that "workings" produced by Saha International in February 2007 cast further light on the question.
5. The Westbus Bid Template was subjected to a process of verification by Saha on behalf of the Government. It liaised with Westbus CDC, Busways and Busabout and reviewed the costs the Operator had included in its Bid Template.
6. The Saha verification process commenced in March 2006.
7. On 1 February 2007, the Government sent the Operator what it described as "the SAHA workings for Wages and Ticketing for [Area] 1".
8. Included in those workings was a table in the form attached (Table 3 (7.14 KB, pdf)) headed "Allocation of Head Office (Bosnjak Investments) Wages/Salary for the 6 months to June 2005".
9. Other entries in Saha's workings show that the figures in this table were actual figures, rather than forecast figures.
10. The table showed Saha's workings as to how Bosnjak allocated "indirect labour costs" not only in relation to its "Westbus" business in Region 1, but also in relation to its other businesses in "Region 3", "Region 4" and "Hunter Valley".
11. That allocation was 25.69% for the "Westbus" business in "Region 1", and 13.2%, 38.9% and 22.2% for Region 3, Region 4 and Hunter Valley respectively.
12. Saha evidently ascertained this allocation from Bosnjak's management accounts. Hence, the note to the table reads: "Allocation of HO overhead according to Westbus' 2004 Management account provided to the [Ministry of Transport] on 16 November 2005".
13. The total "Allocation of Head Office…Wages/Salary…", including the 25.69% allocation of "indirect labour costs" to the "Westbus" business, was $622,945; slightly less than the forecast of $657,553 in the Bid Template.
14. However, the close correspondence between those figures suggests they relate to the same line item in the Bosnjak accounts. The "actual" figure is slightly lower than the forecast.
15. Mr Wood pointed to the minutes of a meeting of the board of the Operator held on 2 February 2007; the day after the Government sent it Saha's workings. According to those minutes a representative of the Government stated that various matters were "now verified" but that the Government required "clarification or agreement" about "an apparent $1.26 m overbid in wages". The outcome of that concern was not developed in the evidence or in submissions.
16. I do not see it as a reason to doubt that Saha's table reflects the manner in which Bosnjak allocated "indirect labour costs" in its accounts between the four businesses it was then operating.
17. Saha's table is also consistent with an email that Mr Wayne Jeff, then the Manager of Contracts and Compliance at Westbus CDC, sent to Mr Stephen Thorne, another officer of Westbus CDC, on 7 August 2006. That email was headed "Overhead allocation" and read: "Hunter 22% Area 1 25.6% Area 3 13.0% Area 4 39.4%".
18. That points to the probability that the overhead costs figure of $657,553 for "[a]dmin and management salaries & wages" in the Westbus Bid Template also included an allocation of 25.69% for Bosnjak's "indirect labour costs". After all, that Bid Template was prepared by Bosnjak's administrators from, I would infer, Bosnjak's financial records.
19. That was the "basis" on which the Westbus Bid Template was prepared. Bosnjak incurred labour costs which were generally referable to its four bus businesses, but not specifically referable to any one of those businesses. Bosnjak allocated those costs amongst its four bus businesses by its assessment of how those costs generated income in those businesses.
20. I do not see this as constituting a "Related Party Transaction" such as would have required specific mention in the Westbus Bid Template by reason of the instructions the Government circulated as to how the bid templates were to be prepared.

On what "basis" was Westbus CDC's profit actually calculated during the life of the Government Contract?

1. CDC Australia allocated to Westbus CDC 25.7% of its head office costs throughout the life of the Government Agreement. This was evidently a rounding up of Bosnjak's internal allocation of 25.69% of its indirect labour costs to its "Westbus" business.
2. Correspondingly, Westbus CDC included in its overhead costs an amount equal to 25.7% of CDC Australia's head office costs.
3. This is despite the fact that, during the life of the Shareholders Agreement, CDC Australia acquired 11 other bus businesses; 4 in New South Wales and 7 in Victoria.
4. Mr Jeff, by now the Chief Operating Officer of CDC Australia, explained the matter this way: "...the appropriate proportion of CDC Australia's head office costs that should be attributed to Westbus' costs base (as opposed to the other CDC Australia operators) was 25.7%. This attribution was based on the proportionate number of buses in each of CDC Australia's contract regions at the time. During the period of the [Government Contract], the 25.7% head office costs attribution was maintained even though Westbus increased the bus fleet operating in Region 1. CDC Australia's bus numbers also grew as a whole due to business acquisitions in other areas and therefore this proportion was considered appropriate in light of the growth of the Westbus business and CDC Australia's other businesses overall."
5. Thus, Mr Jeff sought to justify attribution of 25.7% of CDC Australia's head office costs to Westbus CDC on the basis of Westbus CDC's proportion of total bus numbers within CDC Australia. However, Westbus CDC's proportion of total CDC Australia bus numbers was never 25.7%. It was at most 21.5% (in FY2006) and as low as 9.3% in FY2012.
6. It is also hard to see how the attribution of 25.7% of CDC Australia's head office costs to Westbus CDC could be justified on the basis of Revenue Kilometres. During the period of the Government Contract, Westbus CDC's Revenue Kilometres, when taken as a proportion of the total kilometres travelled by CDC Australia's entities in NSW, was significantly less that 25.7%. It was 19.4% for the second half of FY2007, 17.9% for FY2008, 17.3% for FY2009, 18.7% for FY2010, 17.3% for FY2011, 16.3% for FY2012 and 15.1% for FY2013. Those percentages do not include kilometres travelled by CDC Australia entities in Victoria. If they were included, Westbus CDC's share would be significantly less.

Was profit so calculated, "calculated on the same basis" as in the Westbus Bid Template?

1. By cl 17.2(e) the Subcontractors agreed that Westbus CDC's profit was to be calculated "on the same basis" as in the Westbus Bid Template.
2. The "basis" of the Westbus Bid Template was the Bosnjak business structure. The Bid Template contained forecasts for the "Westbus" business as it was then operating: as one of four businesses conducted by Bosnjak. The template thus allocated 25.69% of Bosnjak's head office costs for indirect labour to the "Westbus" business.
3. However, the "Westbus" business operated in different structural circumstances when it came to be run by Westbus CDC.
4. Westbus CDC had a parent company, CDC Australia. CDC Australia acquired the four Bosnjak businesses as at 30 September 2005. CDC Australia then caused Westbus CDC to be incorporated exclusively to operate the "Westbus" business. It also caused to be incorporated three other entities to operate each of the remaining Bosnjak businesses (none of which operate in Area 1). Later it caused 11 other subsidiaries to be incorporated to operate the other bus businesses it acquired.
5. How, then, was Westbus CDC to allocate its head office costs (for the purposes of calculating its profit) "on the same basis" as in the Bid Template?
6. Westbus CDC was 1 subsidiary amongst 11 held by its parent company; whereas Bosnjak was a single entity. Westbus CDC conducted only one business (the "Westbus" business); whereas Bosnjak conducted the "Westbus" business along with three other businesses.
7. Westbus CDC's answer is to include 25.7% of CDC Australia's overhead costs as its costs. This was said to be consistent with Bosnjak's allocation of the same percentage of its indirect labour costs to its "Westbus" business.
8. Busway's answer is to exclude any allocation of CDC Australia's overhead costs to Westbus CDC. That is despite Bosnjak's allocation of indirect labour costs in the Westbus Bid Template.
9. I see a difficulty with both of these approaches.
10. In order that Westbus CDC's profit be calculated "on the same basis" as Bosnjak's "Westbus" business in the Westbus Bid Template, costs which were incurred to generate that profit, but which were not incurred directly by Westbus CDC itself, should be brought to account.
11. Although it is not conceptually precise, these costs would correspond to 25.69% of the indirect labour costs that Bosnjak incurred in relation to its business generally.
12. The indirect labour costs brought to account in the Westbus Bid Template were those incurred by Bosnjak and attributable to Bosnjak's bus businesses in all of the four regions in which it operated.
13. It follows, in my opinion, that in order that Westbus CDC's profit be calculated "on the same basis" as the profit calculation in the Westbus Bid Template, 25.69% of indirect costs incurred by CDC Australia referable to the businesses being conducted by the four CDC Australia subsidiaries (including Westbus CDC) in the four regions in which Bosnjak formerly operated should be brought to account. But not indirect costs not so referable. That is, not indirect costs referable only to one or more of the numerous other bus businesses that CDC Australia came to operate during the life of the Government Contract.
14. To the extent that CDC Australia's head office costs can be so characterised, allocation of 25.69% of those costs to Westbus CDC would result in Westbus CDC's profit being calculated "on the same basis" as in the Bid Template.
15. I will invite further submissions on this aspect of the matter and as to what Westbus CDC's profit would have been if CDC Australia's head office costs had been allocated to it on this basis.

The periodicity issue - should a financial or calendar year be adopted?

1. A further issue arises as to the periods of time to which cl 17.2(e) relates.
2. The question is whether Westbus CDC's profits are to be calculated by calendar year (which would accord with the manner in which Westbus CDC's accounts were prepared) or in accordance with financial years.
3. Mr Wood informed me that Busways' recovery would be slightly less if Westbus' profits were calculated by reference to calendar years rather than financial years.
4. In my opinion, notwithstanding the fact that Westbus CDC's accounts were prepared on a calendar year basis, its profits should be calculated on a financial year basis for the purposes of cl 17.2(e).
5. The Westbus Bid Template was prepared on the basis of financial years, save that the first and last periods to which it refers are the 6 months to 30 June 2005 and 31 December 2011. Otherwise its forecasts are expressed to be in respect of FY2006 to FY2011.
6. The requirement that Westbus CDC's profit be calculated on the same basis as in Westbus Bid Template thus points to the conclusion that the parties intended its profit is to be calculated on the basis of financial rather than calendar years.
7. Further, the payments made to the Operator under the Government Contract, and to the Subcontractors by the Operator under the Subcontracts, were to be calculated on a financial year basis.
8. For example, the formulae for calculating Fixed Payments, Service Payments and Patronage Benchmark Payments in schedule 4 to the Government Contract are all expressed to be in terms of financial years as are the payments themselves.
9. The corresponding figures in each of the Subcontracts are also, in effect, expressed in respect of financial years.
10. These factors confirm the parties intended Westbus CDC's profit to be calculated on a financial year basis.

The "Operator must adjust the Standard Kilometre Rate 'accordingly'"

1. When Westbus CDC was required to distribute profits, the Operator was required to adjust the Subcontractor's Standard Kilometre Rates "accordingly".
2. Mr Jackman submitted that, as this was an obligation of the Operator, any damages claimable by Busways for a breach of that obligation were claimable against the Operator, and not against Westbus CDC.
3. I do not accept that submission.
4. If Westbus CDC made a profit in excess of 12% EBIT to cost, it was obliged by cl 17.2(e) to distribute that profit to the other Subcontractors based on their Actual Activity Ratio (see [73] - [75] above).
5. Once that occurred, the Operator was required to make corresponding adjustments to the Standard Kilometre Rates of each Subcontractor. The manner in which the Operator would make that adjustment is illustrated by the hypothetical example set out above at [84] - [101].
6. As I have said (see [99] above), I do not accept that the Operator's obligation to adjust the Standard Kilometre rate "accordingly" required the Operator to do so "in an attempt to equalise the SKR plus PBP". The words "attempt to equalise the SKR plus PBP" did no more than recite the object the Subcontractors sought to achieve. It was not a statement of the method by which the Operator was to adjust Standard Kilometre Rate.
7. Consideration of what the Operator would have done, had Westbus CDC made a distribution of profit, is governed by questions of causation and remoteness.
8. Mr Wood submitted that, had Westbus CDC distributed profit under cl 17.2(e), there could be "no doubt" that the Operator would have made the requisite adjustments to the Standard Kilometre Rates.
9. Mr Jackman on the other hand drew attention to the manner in which, between 2008 and 2013, the board of the Operator in fact dealt with the "relatively simple" question of whether Westbus CDC had achieved a profit excess of 12% EBIT to cost. Mr Jackman submitted that the board procrastinated and deferred making a decision; and that it was likely the board would have acted similarly if faced with the "more difficult" question of how to adjust the Standard Kilometre Rates following a distribution of profit by Westbus CDC.
10. Each of the Subcontractors had representation on the board of the Operator.
11. The board met on 19 June 2008. The board considered financial statements circulated by Westbus CDC for the year ended 31 December 2007. Those statements appeared to show that for that year Westbus CDC's EBIT to cost ratio was some 23% and that there was a distributable profit for the purpose of cl 17.2(e) of some $2.3 million. However, Mr Jeff informed the board that the financial statements contained inaccuracies and that consequent adjustments would show that the true EBIT to cost ratio was less than 12%. Busabout's representative on the board, Mr Calabro, gave evidence that he understood these accounts had been provided in error and that he thought it would be "almost impossible" for Westbus CDC to have achieved such a profit.
12. The board resolved that Mr Jeff should "review and adjust" the accounts. At a later meeting the board resolved to engage Pitcher Partners to review Westbus CDC's overhead cost allocations.
13. Thereafter, although the matter was mentioned in the minutes of 13 subsequent board meetings between January 2009 and November 2013, the issue was allowed by the board to drift unresolved.
14. As Mr Jackman submitted, it appears that the board had little appetite to progress the question.
15. However, had Westbus CDC informed Busways and Busabout that it had made a profit in excess of 12% EBIT to cost, and had Westbus CDC distributed that excess profit to Busways and Busabout in accordance with their Actual Activity Ratio, the task facing the board would have been altogether different.
16. In that circumstance, to adopt a metaphor offered by Mr Wood in final submissions, the "trigger" would have been pulled. The board would then be left to engage in the relatively mechanical task of making consequential adjustments to the parties' Standard Kilometre Rates.
17. Busways and Busabout would have had a vital financial interest in ensuring that task was carried out. I see no reason to doubt that those companies' representatives on the board of the Operator would have ensured that the Operator did all that was needed to make the appropriate adjustments. I see no reason to conclude that Westbus CDC's representative on the board would have opposed the Operator taking this course.
18. I am satisfied that it is more likely than not that, had Westbus CDC made a profit of the kind referred to in cl 17.2(e), and distributed that profit to its fellow Subcontractors, the Operator would have, without undue delay, adjusted the Standard Kilometre Rate "accordingly".

Conclusion

1. I invite the parties to confer and agree on the orders necessary to give effect to these reasons and as to what further steps are necessary to bring the proceedings to a conclusion.

Amendments 10 December 2018 - Word "labour" deleted from decision on Coversheet and in [142]: see Busways Blacktown Pty Ltd v Westbus Region 1 Pty Ltd (No 2) [2018] NSWSC 1901 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 December 2018