Evidence of Mr Doherty
97In addition to the documents referred to, the plaintiff called a Mr Stephen Doherty as to the negotiations and practice amongst other issues. He is a manager employed by FXA but holds the position as manager of FXF. He provided two affidavits to the court and was cross examined. He is highly qualified holding the degree of Bachelor of Science (Information Systems). He is also a certified public accountant (2002 - 2010) and holds a Master of Commerce Degree (Professional Accounting) which he acquired in 2002. He has worked for FXA from about 1994. His evidence is clearly of importance on any number of issues and I need to deal with it in some little detail.
98Mr Doherty purports not only to describe in some detail the process which was undertaken from time to time in relation to agreements with customers but also his intentions and/or state of mind in relation to overs. He describes how FXF provided financing services to its customers through CSG and other dealers. Customers were given a number of options where they could obtain the use of equipment through the FXA dealers. The options would include purchasing the equipment outright from those dealers or renting the equipment from FXF or an alternative financier. He says (and there was no issue about this) that the usual practice was that customers would typically enter into a separate full service and maintenance agreement known as FSMA with one of FXA's dealers. Where customers made an outright purchase the FXA dealers would purchase the equipment from FXA and in turn on supply it to the customer for a profit. Where customers entered into a rental agreement with FXF the usual practice was that FXA dealers purchased the equipment from FXA (or another distributor) and then on sold the equipment to FXF for a profit. FXF would then rent the equipment to the customer under the terms of the rental agreement. Under the FXF rental agreement FXF retained the title and the equipment. None of this was controversial.
99It is accepted that a customer has (or as Mr Doherty put it) is "treated as having" a right to terminate an agreement upon the expiration of the minimum agreement term or upon the customer reaching the maximum impressions volume or maximum copy volume specified in the agreement. He gave evidence (which is uncontroversial) that it was part of FXF's marketing and sales program to approach customers (usually through FXA or FXA's dealers) offering to upgrade or replace the equipment prior to the expiration of the agreements. This was an important part of the business model as it permitted FXF to continue its relationship with the customer and make new and ongoing sales. This process he believed assisted FXF in preserving its client base and gave it a competitive edge so as to enable it again through its agents or dealers to sign new customers up to new agreements. He said that many customers exceeded their minimum impression volumes in respect of one or more billing periods such that if the levels were maintained they would have reached their maximum impression or maximum copy volume well in advance of the expiration of the "minimum agreement term". Mr Doherty expressed the opinion that in practice the expiration of the agreement was very uncommon. This was no doubt because, watchful of the progress of a particular client's arrangements, it was the practice of the dealer with the active encouragement of FXF to approach the customer and hopefully churn the customer into new equipment. Again this cannot be disputed.
100Mr Doherty stated quite explicitly that FXF relied on CSG and the dealers to ensure that agreements with customers in fact did not reach expiration. The usual practice was to approach customers (via CSG) before expiration occurred. Clearly FXF was satisfied when arrangements were harmonious to leave all or most of the client contact to CSG but would collaborate and assist it with information it may require about customers from time to time. Most importantly FXF was the source of payout amounts. I accept this evidence.
101Occasionally, during harmonious times, where a customer wished to churn prior to the expiration of the agreement, FXF would consent to such an arrangement, provided the customers either paid the termination value of the contract (the payout figure) in cash or as part of a new deal in respect of new financed FXF equipment. Again this was, it seems, uncontroversial.
102Where a customer sought new equipment financed by a competitor of FXF and it was clear the customer wished to churn, but into the equipment of a competitor, FXF would provide what Mr Doherty described as a "standard payout figure". The standard payout figure was calculated as the net present value with a discount factor of 5% per annum of the future minimum charges per billing period for the remainder of the agreement term, plus other costs and an administration fee. Some of the earlier agreements had a discount factor of 6% per annum. Where however a customer sought to churn their equipment for new equipment under a lease with FXF, the usual practice was to calculate what Mr Doherty described as a "concessional payout" figure. This was determined in the same manner as the standard payout figure but with a higher discount factor. The concessional payout did not include an administration fee. Again this was not controversial.
103Mr Doherty described in some little detail the position in relation to overs. In many cases customers exceeded the minimum impression volumes in respect of one or more billing periods. That of course had the consequence that CSG would receive payments in excess of the customers minimum payment obligations per billing period.
104Mr Doherty stated in his affidavit of 5 April 2012 that whilst CSG received, or was likely to receive overs in each billing period "FXF did not have a practice of invoicing CSG or the dealers, as part of the Rentals to be paid over by them to FXF" [92]. He argued however that the excess monies were held by CSG although they were monies "due to FXF", [93]. He said that in the past FXF did not call on CSG to pay the overs "directly" to FXF. He went on to say that as FXF only received from the dealers the "financial" portion of the minimum impression volume commitment per billing period, the payout figure "calculated by FXF did take into consideration any rental overs paid by the customers" [97]. I will return to this aspect of Mr Doherty's evidence, because it was controversial.
105Mr Doherty accepted that from his experience in the equipment finance industry, with particular reference to FXF's internal practices, it would be more difficult to offer a competitive and profitable new deal which did not provide a discount to the customer to reflect any "overs" that the customer had paid under a previous agreement. He said that it was the practice of FXF's own sales team to reduce, by the whole of the overs previously paid by the customer, the amount of capital to be paid by that customer in the form of the finance charges due under the agreement in respect of the new equipment. "This is the way in which FXA uses and has always used Rental Overs generated by customers", [96]. Again I will return to this.
106It is clear that FXF (Mr Doherty in particular) not only knew that overs were being received by CSG but that they were being used from time to time in various proportions to provide discounts to structure commercially attractive propositions for customers. It is also clear, I think, that some of the overs were used for advertising or marketing the plaintiff's and CSG's business. In any event Mr Doherty said he was content for CSG to have the ability to use the overs because it was commercially advantageous to FXF that the customers remain loyal and continue to buy new equipment in advance of the expiration of their agreements.
107However he provided a further reason for his satisfaction with the process. Namely he asserted that the calculation of the payout figure, either standard or concessional, involved the "Rental Overs" paid by the customer being "realised by FXA upon the early termination of an agreement", [102]. In addition he opined that "Rental Overs" could be regarded "at one level" as pre payments of capital. Again I will return to this as it was controversial.
108He expressed the view that because the standard payout figure was calculated as the net present value of all finance charges yet to be received by FXF for the balance of the term of an agreement, that amount "by definition" included the value of the pre-paid capital constituted by the "Rental Overs" paid by the customer, [108]. He asserted that "the practice" that developed between FXF and CSG "always ensured that the Rental Overs, far from being retained by CSG for all purposes, were ultimately remitted to FXF, albeit in the form of a payout figure either standard or concessional" [109]. This evidence needs careful scrutiny.
109On this basis Mr Doherty said he was "content" to allow the dealers to utilise the overs in order to structure competitive deals. "This was implicitly allowed on a case by case basis", [110]. He therefore explained that by reason of this "practice" FXF did not have any need to request details of the overs so that it could invoice CSG for the payment of them. "This was because the above practice operated to FXF's benefit", [111].
110It is plain that the change of heart so to speak on the part of the plaintiff was because CSG in mid April 2010 started to negotiate with Canon Australia (Canon) to become a Canon dealer in Sydney, Melbourne, Perth and Canberra. The negotiations lead to Canon and CSG entering several agreements in May 2010. Relations between the plaintiff and CSG and the other defendants broke down, leading to the termination by the plaintiff of the relevant agreements in 2010.
111It is also plain such overs as have been received but not expended on new deals with the plaintiff will no longer, as a matter of practical reality (unless the subject of the trust arrangements) be used in the plaintiffs commercial interest. I should observe in passing that the history of the events leading to the termination of the agreements and the legal consequences thereof are set out in the judgments of McDougall J in Fuji Xerox Australia Pty Ltd v CSG Ltd [2010] NSWSC 1258, and the Court of Appeal in CSG Ltd v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335.
112Mr Doherty was the subject of a good deal of cross examination.
113There was little doubt that in his affidavit material and to some extent in cross examination Mr Doherty attempted to insist that at all relevant times, (that is, during the course of for example the negotiations of the DFA) it was always his understanding that monies which CSG received by way of overs from customers were to be held on trust for the plaintiff. He accepted that one of the reasons why he never actually asked the defendants to inform him of precisely how much money was being held on "trust" was because he believed it was being used to the mutual benefit of both the plaintiff and CSG. He had to accept however that no request was ever made of CSG to either account for monies or to identify precisely what was being held in relation to monies paid by way of overs, even where for example a churn occurred and FXF lost the commercial relationship and the customer went to one of its competitors. He agreed in that situation (although he insisted that this situation was rare) the plaintiff did not seek to invoice CSG for anything other than a payout figure. [T33]
Q: And in the payout amount there is no account taken of overs, is there?
A: No there is not
114Mr Doherty appeared to insist that somehow, notwithstanding this evidence, overs were included in the payout figure. (T39)
Q: You are trying to say I think that somehow buried in the payout figure itself you can find the overs. Is that what you are trying to say?
Objection
Q: Is that what you are saying
A: The payout includes, as I've said, all the amounts owing under the finance agreement. So if there are prepaid rentals at that point in time when we issued the invoice that's when they get paid
Q: But when you calculate the amount of money that you get paid you don't take into account the overs, do you?
A: We take into account the, the full requirement of the contract.
115He was also asked the following, (T40 - 41):
Q: May we take it therefore that you understood that sometimes CSG would not use the rental overs to structure a competitive deal so as to allow a churn process?
A: It was my understanding that they were always using it and the "if necessary" is if it is a competitive deal or if it's a non competitive deal in the terms of their engagement with the customer
Q: The words "if necessary" clearly indicate that what you were trying to convey in paragraph 99 was you knew that sometimes CSG would not use the overs to structure a competitive deal?
A: Well, they may not have
Q: It is obvious, isn't it? CSG to your understanding was trying to make as much money for itself as it could, correct?
A: Correct
Q: So when it was trying to structure a deal with a customer it was trying to structure a deal that would get the customer over the line but also a deal that would get as much profit as possible into CSG's pocket?
A: Correct....
...
Q: I see. So we should read paragraph 99 as you saying that when there was a churn involved it was a matter for CSG whether they used the overs at all to structure a competitive deal?
A: Correct
Q: And if they could structure a deal that involved the overs being pocketed by them, good on them. Is that your position?
A: Well, my position is the payout that is involved in the churn encapsulates the overs but the amount of money in total that CSG makes on a deal is, as you say, good on them.
116A little further in the cross examination the following exchange took place, (T 47):
Q: Would you have His Honour believe that you are sitting there happily thinking those overs, whatever they might be, are being held on trust for FXF?
A: Yes
Q: You are then asked to give a payout figure?
A: Correct
Q: Which is calculated not by reference to past, present or future overs, correct?
A: Correct
Q: You accept the payout from the customer and that is the end of that contract with the customer, correct?
A: Well, when we are churning
Q: Yes?
A: We accept the payout, we give the payout to CSG
Q: But in fact the customer is paying out CSG who in turn...
A: Yes
Q: But you are also saying that you are accepting the payout as full discharge of CSG's trustee obligation in relation to the past overs, aren't you?
A: Once a contract is terminated it is finalised, so yes.
117The following exchange occurred, (T65):
Q: And you never issued invoices for any overs did you?
A: No
Q: The invoices you issued to both the customer and CSG were for the standard payout figure?
A: Yes
Q: And you didn't at this time, ask CSG for details of the amounts of any overs held, did you?
A: No
Q: And once again if it was your state of mind at this time that CSG were holding monies on trust for FXF you were content for the payout figure when received to deal with that obligation, yes?
A: Correct.
118It was put quite bluntly to Mr Doherty that insofar as he was asserting that at all relevant times he believed monies were being held on trust in respect of the overs, that was simply made up for the purposes of the case. He rejected that notion.
119He was asked specifically to accept that at no time had FXF accounted for the "so called trust monies as an asset". He gave the following answer, (T69):
A: Well as I said, we accounted for the asset in its entirety, in the entire amount of future rentals that was due, and if the customer paid overs, pre-paid rentals or finance amounts, then our asset didn't change because of it because the term of the agreement actually shrinks. So the paying of the overs doesn't give us a larger asset than that we had already accounted for.
It was put to Mr Doherty that what he had just said was "gibberish". He rejected that notion.
120Again the following exchange is insightful, (T97 - 98):
Q: So all you are saying is you knew they would have collected overs on some contracts and you were happy for them if they chose to use those overs to sweeten the deal?
A: Correct
Q: If they chose not to you were happy for them not to use the overs in that way?
A: Yes
...
Q: So any overs that they didn't tip into the deal, as far as you're concerned whether they were held on trust beforehand or not, they are no longer held on trust. Is that right?
A: Once this deal is struck, yes
Q: Once the payout figure is received?
A: Yes
121And the following took place, (T105 - 106):
His Honour
Q: Mr Doherty I'm just going to ask you one or two questions about paragraph 108 and 109 so that I understand what you are saying.
At the very end of 108 you say that the balance, etc, that you are talking about there, "that the amount by definition included the value of the pre paid capital constituted by the rental overs paid by the customer".
...
"In this way the practice which was developed" etc. Then the monies that you were talking about, the rental overs, were ultimately remitted to FXF albeit in the form of a payout figure.
Is that what you are saying that you regarded when a payout figure was made, that the overs were in fact notionally received by FXF?
Is that what you mean in accounting terms?
A: Yes
Q: And therefore the obligation in relation to those overs was then discharged, was it?
A: Correct
Q: On the part of CSG?
A: Yes
Q: Even though at the time you constructed the payout figure you had no knowledge whatsoever of the precise amounts of overs, if any, that might be included?
A: Correct
122During a series of exchanges Mr Doherty was asked a number of questions as to whether or not in negotiating the DFA he was intending to change any previously existing practice in relation to the treatment of overs. For example in terms of what, if any, practice existed at the time. For example with regard to the period when negotiations for the DFA were being undertaken, he gave somewhat confused evidence, (T117 - 188):
Q: And it's obvious, isn't it, that what you were trying to achieve by the words you were using was a continuation of that commercial practice. It's as simple as that isn't it?
A: Well, the change in definition from the shorter version to the longer version was as a result of conversations with Kim saying that, well, we're the service provider so we want to make sure that the service portion is carved out of the trust arrangements, and we agreed to that
Q: Weren't you trying to document the very arrangement the parties were performing throughout the whole of the eight or nine months that the negotiations took place? You weren't trying to change it were you?
A: I wasn't trying to change the practice. This was about...
Q: You were...
...
His Honour
Q: I think you said you weren't trying to change the practice?
A: No I was trying to make sure that any finance or rentals that were collected by CSG in relation to our FXF agreements are held on trust and anything that relates to service is not
....
Newlinds
Q: The practice at the time was that CSG you thought was using the overs to inject into deals to do good deals?
A: Correct
Q: You certainly didn't want to, by the terms of the contract, stop that practice, did you?
A: No
123He was also asked, (T119 - 120):
Q: It was obviously the practice at the time that if a payout figure was received in relation to a contract, that was the end of the matter as far as FXF was concerned?
A: Correct
Q: You intended that practice to continue after the agreement was signed?
A: Correct
Q: And, indeed, the agreement had to capture that practice because it covered a period of many months when that had been going on?
A: Correct
Q: And that practice continues to this very day; Correct?
A: Correct...
Q: You weren't trying to craft a contract that immediately put CSG into breach, were you?
A: No
Q: You intended on the day after the contract had been signed for the practice that we have discussed to continue on?
A: Correct
124At another point in his cross examination the following exchange occurred, (T121):
Q: And you were trying to capture that practice, not to change it, by the contract you were negotiating; Correct?
A: No. We were trying to capture all finance amounts. We weren't necessarily informed....
His Honour
Q: Mr Doherty, it is a direct question. I would like you to answer it for my benefit. Were you trying to change the practice with this agreement or not?
A: Well, yes
125Following the above exchange counsel for CSG put to Mr Doherty that when he had answered that he intended to change the practice he was making this up. His answer to that was, (T122):
A: Well, I guess I wasn't intending to change the practice, I was intending to make sure that the trust related to all finance amounts so that as a contract shrinks as customers do overs, we are not, I guess, left short by the overs, we are not disadvantaged.
...
His Honour
Q: It was put to you that the evidence you gave a moment ago was not true. You may not agree with that.
A: Well, I guess I was looking at slightly differently in terms of the contract rather than the practice, but the practice didn't change.
Newlinds
Q: When you said a few minutes ago that you intended by the contract to change the practice, you made that up, didn't you?
A: Well, I was incorrect.
Q: When you said a few moments ago, that you intended by the contract to change the practice, you made that up, didn't you?
A: I was incorrect
126Mr Doherty is clearly a highly qualified accountant. He holds a senior position with the plaintiff. He conceded readily that during all relevant contracts no invoices were ever sent to CSG in relation to overs. There was never any separate accounting required of CSG, nor was there any accounting practice apparently adopted by the plaintiffs in relation to the overs. In other words it was never accounted for as an asset in its own books and records, not the least because the plaintiffs never had the faintest idea from month to month precisely what order of overs (if any) existed. The suggestion in his evidence that somehow or other overs were taken into account in certain circumstances when a payout occurred is in my mind fanciful and indeed implausible. I found his explanation in that regard incomprehensible. Apart from his merely asserting that overs were taken into account in my opinion he completely failed to explain satisfactorily in accounting terms how it could be that they could be taken into account.
127I am satisfied on the evidence that for a considerable period of time, indeed for some years, but certainly during the period when the DFA was being negotiated, the parties had a practice whereby the plaintiff never requested or invoiced CSG for the payment of overs. Further the plaintiff never required information about the extent if any of any overs held from time to time. It was well aware that CSG from time to time were using some, perhaps all, of the overs in order to advance both CSG's commercial interests and that of FXF.
128The plaintiff was also aware and was content with CSG as it were using for their own purpose portions of the overs from time to time. In particular the plaintiff at no time required overs to be paid to it, even in circumstances where a churn occurred whereby a customer was lost and customers entered arrangements for the acquisition or rental of a competitors product.
129These facts in my mind are tantamount to an admission that FXF never treated the overs as its property (or held on trust) and CSG well understood that and conducted its business accordingly. To the extent Mr Doherty asserted to the contrary I reject his evidence. There was of course no express obligation for CSG to use overs in FXF's commercial interest but it was accepted a proportion probably would be.
130It is also clear that FXF only had an interest when an upgrade or churn occurred to ensure it received its full pay out figure under the Docu/mation agreement and it displayed not the slightest interest in the overs.
131The documentation or deal sheets by which FXF approved new deals set out the payout for the existing Docu/mation agreement and the amount to be financed in the new deal. No provision was made in this documentation to record or deduct the amount of overs collected by CSG at any point in time. Equally nothing was stated in this documentation about CSG using any portion of the overs to enhance the deal.
132The monthly invoice for rental was fixed at the outset of the arrangement in the deal sheet. That monthly rental amount never varied, nor was it, the evidence would suggest, intended to be varied by reason of the number of impressions made by the customer during the relevant period.
133The calculation of the payout figure when requested clearly in my view could not as a matter of fact take into account the amount (if any) of overs paid by the customer. Early payout would have perhaps heavily hinted at overs but FXF never sought any details of overs for the purposes of calculating the payout figure.
134There is no doubt the above practice of FXF was adhered to, as I find from the earlier agreements, but certainly during the 9 months or so of the negotiations of the DFA ultimately signed on 18 February 2009.
135Although his evidence is conflicting in parts the better view is that Mr Doherty who was responsible for negotiating the DFA from FXF's perspective did not intend that practice (of not claiming entitlement to overs etc) to change by entry into the DFA, and I so find. Of course this is evidence of Mr Doherty's subjective intentions. That clearly can have no effect whatsoever on the construction issue. It potentially goes to the rectification claim of the defendants and perhaps the estoppel claim but his conduct before and during the negotiations and execution of the DFA is consistent with what was a mutually recognised practice and is of considerable relevance in that regard.
136It was simply not contemplated by FXF or CSG, that CSG would be in breach of any trust arrangements by it using any portion of the overs to enhance a new deal with a customer or to pocket a portion as commission.
137The most telling aspect of the surrounding circumstances hence is the practice that I have found existed. I do not consider the co-branded Docu/mation agreement or the deal sheets affect that position.
138My findings above in relation to the surrounding circumstances fortifies my view that the terms of the DFA should be construed as excluding overs from the trust otherwise described in clause 3(4) or item 9(5).