Primus Telecommunications Pty Limited v Kooee Communications Pty Limited & Anor [2007] NSWSC 91 | Case summary

Primus Telecommunications Pty Limited v Kooee Communications Pty Limited & Anor [2007] NSWSC 91 | Case summary | Zoe

50004/06 Primus Telecommunications Pty Ltd v Kooee Communications Pty Limited & Anor JUDGMENT The Proceedings 1 Primus Telecommunications Pty Ltd brings these proceedings to secure its claims in contract made against Kooee Communications Pty Ltd and its holding company S P Telemedia Ltd. The material contract[s] were for the supply by Primus of telecommunications carriage services to Kooee, which was a retailer of telecommunications services. Primus [in the name of Kooee] supplied the subject services to customers of Kooee [a process sometimes referred to as "badging"]. 2 The sole role of S P Telemedia was as guarantor to Primus of the sundry contractual obligations of Kooee so that no further mention of S P Telemedia requires to be made as part of these reasons. 3 The initial contract [known as the "Virtual Service Provider Agreement" or "VSPA"] was entered into in about July 2000 and was thereafter varied on occasion. Whilst the VSPA has some relevance to issues in the proceedings, the crucial contract for present purposes is the contract by which Primus and Kooee agreed to terminate the VSPA, this contract being known as the "Separation Deed". There has been some debate between the parties as to the date when the Separation Deed was signed and the parties have agreed that it can be taken for the purpose of the proceedings, that it was signed at some stage between the 20th and the 27th of April 2005. 4 The Separation Deed was itself varied from time to time. In general terms it provided mechanical provisions to enable the parties to terminate their anterior contractual arrangements, hence to permit a company known as B Digital Ltd to take over and to provide, or to arrange to provide, the services previously provided by Primus to Kooee. The background was one where the shareholding of Kooee was to be sold by S P Telemedia to B Digital. 5 A complicating factor which besets the present proceedings concerns the fact that the parties to the original VSPA continued in dispute about a particular contractual matter through periods whilst that contract was on foot. This anterior dispute was still raging at the very time when the Separation Deed was entered into. One of the issues concerns whether or not these anterior disputes had by the time the Separation Deed was entered into, been in part settled by an agreement that at least a particular amount was clearly owed and accepted as owed by Primus to Kooee: the issue raising questions as to the reach of releases provided for in the Separation Deed. The cross-claims 6 The cross-claims pursued by Kooee are in contract as well as pursuant to a cause of action alleging misleading and deceptive conduct. These will be referred to as appropriate in the reasons which follow. The remaining matters in issue 7 The parties have sensibly reduced the matters in issue considerably. The matters which were litigated were as follows:

[71] Gibbs J's statement in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 that "the court should construe commercial contracts "fairly and broadly, without being too astute or subtle in finding defects", finds reflection in the statement in International Fina Services AG v Katrina Shipping Ltd ("The Fina Samco") [1995] 2 Lloyd's Rep 344 at 350 per Neill LJ (with whom Roch and Auld LL.J agreed) that the primary focus is the agreement itself which "must speak for itself, but … must do so in situ and not be transported to a laboratory for microscopic analysis". [72] Consistently with this approach, it has been held that if detailed semantic and syntactical analysis of a written contract lead to a conclusion that flouts business commonsense the contract must be made to yield to business commonsense: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock; applied by Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd , above, at 198. 27 There is, it seems to me, clear substance in the submission put by Primus to the effect that the contentions of Kooee in relation to the net debtors issue, present a strong aura of commercial unreality. This is because the submission involves Primus selling all of the relevant class of debts without payment at all for any of those for which it had made some provision in its books. I accept that this presents as a somewhat startling commercial outcome which would effectively mean that very large sums were simply being in effect given away in the context of an agreement that was sought by the defendants to go on their own way in selecting a new commercial carrier and to enable the selling of the shares in the first defendant to B Digital. This permits the Court, cognisant of the circumstances in which the Separation Agreement was entered into and as a matter of commercial reality, to read the words "less any of those debts in respect of which Primus has made provision" [in the definition of 'Debtors Amount'], as meaning "less any part of those debts in respect of which Primus has made provision". 28 In the broad, the primary scheme generally set out in clauses 2.1, 2.3 and 2.4 was accurately summarised by Mr Garrett QC, leading counsel for Primus, in the following summary [Transcript 10.26]:

2.3, Kooee must pay Primus one-half of the amount equivalent to the net debtors and unbilled revenue as stated in the notice pursuant to clause 2.2 within three business days of receipt of such notice. Kooee must pay the remaining amount equivalent to one-half within thirty business days." 29 The Separation Agreement clearly throws up the purpose of bringing an end to the VSPA and to the commercial relationship between Primus and Kooee. That may be regarded as a policy of severance. 30 However a related purpose was to transfer all debts owed by Kooee customers [to Kooee Telecom] to Kooee Communications as at the Termination Time. Those matters seem to have been progressed in first the definition of debts and then in clause 2.1. The definition of debts is in clause 1.1, the general definition clause which stipulates that "debts" means the amounts properly owing by customers to Primus in respect of charges for Primus services to customers. 31 When one comes to focus upon the related purposes of first, the determination of the business, and then the transfer of debts or the collection of debts, I accept that the business commonsense of what was occurring involved "debts" in this context as plainly meaning all debts of the kind falling within the description and would include debts for which provision may have been made by Primus in its books. Approaching the matter in another way, what is intended is that given that Primus may have made provision under its bad debt policy for ageing debts, all debts including those, were from the termination time, to be collected and only collected by Kooee Communications. 32 The Kooee construction is I accept, unrealistic and commercially unreasonable. It would depart dramatically from the ordinary approach to debt provisioning which allows for the writing off an increasing proportion of debts as they age. Further it produces a result that bears no resemblance to the result produced by applying the policy in the ordinary way. 33 The Kooee construction would make most of the terms of Primus' policy irrelevant, in particular the percentage rates of provisioning for various aged debts. The only term of relevance would be the earliest age at which some provisioning is made [90 days]. 34 These are the primary reasons for acceptance of the construction put by Primus. Assistance from Schedule 1 35 Whilst I accept that the following proposition may well be debatable, there is an argument that the inclusion in Schedule 1 of the requirement for Primus to include [in the information and services it was to provide for migration of customers], detail of the debtors ledger with an aged debtor breakdown as to current 30 days, 60 days, 90 days and more, is a pointer supporting the construction pursued by Primus. The proposition is that this form of information was to be supplied in terms of all debts being purchased. [I note that in using the word 'provide' in the parenthesis in the first sentence of this paragraph, the matter of the basis on which the information and services were to be provided is examined in the section of these reasons where the Deficient Information Losses are dealt with: the point there emphasised is that Primus agreed to provide the information only on the basis that it was released from all claims in so providing]. 36 The proposition was put by Mr Garrett in the following terms:

In our submission, that again is such an extraordinary conclusion that one rejects it and so one arrives, simply by the text of the agreement, at the conclusion that we say the concept was used with the same meaning in both places: That which you are using as the measure of payment, in other words, the face value including provisioned face value of all debtors, is also the yardstick for that which you are providing information for. All debts, whether they have been provisioned for or not. There is no basis for approaching those two different but related matters, information about debtors and payment for debtors, in a different way. [Transcript 240] 37 The contra submission put by Mr Foster SC, leading counsel for Kooee, was that clause 8 of Schedule 1 was not provided in accordance with the debtors provisioning policy but to the contrary, was provided to give to Kooee some insight as to whether it could collect the debts in order to permit it to better manage the situation. 38 Whilst the matter is by no means clear, on balance it does seem to me that the presence of clause 8 of Schedule 1 lends some support to the basal proposition put by Primus in terms of the 'net debtors' issue. Admissibility of extrinsic material 39 Early during the final hearing it emerged that although primarily submitting that its construction of the words "debtors amount" was tolerably clear [hence requiring the amounts written off by the provisioning policy to be deducted from the total debts], Primus sought to further submit in the alternative, that evidence of "surrounding circumstances" was admissible to resolve the ambiguity: Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 per Mason J at 352. 40 Although Kooee strongly disputed the contention that the particular alleged surrounding circumstances were admissible [for the reason that no ambiguity was said to exist], the parties sensibly agreed to a regime whereunder the evidence sought to be adduced by Primus was taken on the voir dire with the ruling as to admissibility to be given in these reasons. 41 The proposition pursued by Primus was that the evidence in contention should be admitted as 'a body', because it went to establishing a common assumption as to a matter of fact said to have been known to the parties prior to and on entering into the contract, namely that the debts of Kooee customers would be purchased by Kooee Communications at a price reduced by the application of Primus' bad and doubtful debt policy [Primus contending that Kooee's construction produced a dramatically divergent result].

iv. in essence Primus was seeking to go outside of that which was permissible on the authorities and to do no more and no less than to give evidence of negotiations or of the party's intentions and to go beyond evidence of the factual background known to the parties at or before the date of the contract, that is to say to go beyond evidence of the 'genesis' and objectively, the 'aim' of the transaction. Decision on admissibility 48 In my view the above-described authorities justify the admissibility of the evidence sought to be adduced by Primus and set out above. Whilst the matter is a close one, a careful analysis discloses that the evidence put forward by Primus is indeed evidence of surrounding circumstances amounting to objective background which can and indeed here does "stamp upon a contract a … looser meaning" than the strict legal meaning. 49 Hence the ruling is that this evidence is allowed. 50 In my view however the letter written by Mr Simmons on 18 May 2005 [said to demonstrate that there was common ground that the debts would be subject to ordinary provisioning] is not admissible having been written after the date on which the Separation Agreement was entered into. I do not accept as correct the contention by Primus that events occurring after formation of a written contract can demonstrate "as a matter of retrospective factual inference", what was the common assumption and factual background to the dealings of the parties for the Separation Deed. 51 The evidence thus before the Court clearly assists in serving to underpin the correctness of the construction of the phrase "Net Debtors" appearing in the Separation Deed put by Primus. 52 It is appropriate to again repeat that even if this evidence had been rejected, the construction put forward by Primus would have been upheld by reference to the above described 'primary route' to that construction. Revenue Share 53 This is another area where the parties are divided on whether or not it is permissible for the Court to go outside of the terms of the Separation Deed to resolve the dispute. Hence as appropriate, material was treated with on the voir basis. 54 Although there was a deal of oral as well as documentary material adduced on the subject, the evidence can be addressed quite shortly. In short:

"The change in the system of pleadings has not altered its continuing operation. The injunction by the Act that the tribunal here should have regard to 'equity, good conscience and the substantial merits of the case' would quite readily take the tribunal to such a principle. It has obvious good sense. If a deed of release is signed by a party, perhaps as a compromise as in Grant and here, it should be open to a party to contend that the generality of the language of the deed of release was not, in the circumstances, intended to cover a particular matter. Deeds of release are usually expressed in very wide terms, as in Grant and here. In the days of Grant , such deeds came out of the conveyancer's collection. Nowadays, they come rolling off the word processor. Most people, at least in the position of these respondents, execute them without attention to the detail and to the generality of their expression. It is thus entirely legitimate to consider what is the subject matter to which such a deed was directed if it is later contended that, despite the generality of its language, the parties at execution had something more confined in mind. Such is a rule of equity. Unsurprisingly, given the origins of that rule, it is a rule which 'equity, good conscience and the substantial merits of the case' would have made relevant to the present litigation before the tribunal." 69 In my view upon careful examination, the evidence before the Court taken on the voir dire makes clear that neither party intended that the general words of the release were to cover that which had consistently been the position taken as a given by each of them: namely that at the least, the amount of $1,263,205.40 was accepted as owing to Kooee [calculated as 10% of the amount of the debts collected by Primus]. 70 In those circumstances the principled approach set by the authorities dictates a finding that there was no intent that the general words of the release were to cover the amounts which Primus had accepted was at the least, payable by it to Kooee by way of Kooee's revenue share. It has to be recalled that the evidence demonstrated the importance of that revenue share to Kooee, it being the sole source of Kooee's income. Deficient Information Losses 71 There is no substance to the cross-claims pursued by Kooee for a number of disparate reasons. 72 In relation to many of the matters in issue, the submissions of Primus were of substance and are generally adopted in what follows. 73 The gravaman of the claims comprise an allegation of breaches by Kooee of the terms of clause 5.3 (d) of the VSPA and of clause 3 of the Separation Deed [whereunder the cross claimant contends that Primus was obliged to provide the information referred to and to perform the actions set out in Schedule 1]. 74 The information was referred to in Schedule 1 [as well as elsewhere] as the "Migration Data". It was, in short, information to enable the "migration" of customers from being subject to a billing process managed by Primus to one managed by Kooee [or associated entities]. 75 The claims are not only put in contract but also as having constituted misleading and deceptive conduct within the meaning of s 52 of the Trade Practices Act. 76 The contractual analysis requires the Court inter alia, to analyse and deal with the interplay between the VSPA and the Separation Deed. Other matters are raised importantly including the failure of Kooee to discharge its burden of proving loss, even had an extant contractual obligation or a s 52 Trade Practices Act breach been made out. 77 In the first place, Clause 3 of the Separation Deed does not create any obligation to provide the information by any particular time. In the circumstances, if, as is alleged, Primus sent information which was deficient but later rectified, there has been no breach of the clause. 78 Importantly this information was only due to be provided after the Transition Period had ended. Kooee already had information in respect of its customers, and had had access to information under the VSPA.

iii. to the extent that any part of this aspect of the cross claim could be considered to be based on something other than Clause 3 obligations, it must be defeated by the release in Clause 7. 81 Whilst I acknowledge that this analysis often leaves Primus with no more than a discretion to assist [recognised by the reference to its entitlement to take into account the practical circumstances of its own business], the express words make clear that this was the bargain. 82 However even if some of the above analysis were to be incorrect the evidence fell far short of establishing that there were such inaccuracies or deficiencies in the information provided as was sufficient to constitute any breach of a contractual obligation which Primus may have had, to provide information. Likewise the evidence fell far short of establishing misleading and deceptive conduct as alleged. 83 The allegations by Mr Farrington and Mr Scherp by way of complaints of shortcomings [by way of the suggested inaccuracies or deficiencies in the information supplied by Primus] were carefully addressed in the affidavit made by Ms Maguire of December 2006 and in the evidence which she gave and upon which she was cross-examined. 84 Her propositions as to the reasons why B Digital may have had difficulties with migration [in particular that information proving inaccurate may have been as a result of becoming out of date through no fault of Primus] remain unanswered. Moreover the evidence falls short of placing the Court in a position to distill what proportion of the difficulties and associated costs, if any, maybe sheeted home to Primus. The subject is one of particular technicality and specialist knowledge. 85 Mr Farrington had never had any position with Kooee but was employed by B Digital. His function was not to say how the Kooee customers and their debts were incorporated into the business at B Digital as a result of the transfer. 86 His cross-examination established that a number of the matters to which he had deposed had simply been grounded upon information which he received from others. On other occasions he had taken figures from the records of B Digital. 87 Mr Farrington gave the following evidence:

In regards to paragraph 38, I rang Mr Scherp because I became aware I believe from something I came across on the internet that Kooee had incorrectly churned some customers." 91 That information proved inaccurate may, as Primus has submitted, have been as a result of becoming out of date through no fault of Primus. Furthermore, the evidence does not establish that any perceived deficiencies were greater than what could reasonably be expected for the transfer of very large quantities of a broad range of constantly fluctuating data. 92 Finally and notwithstanding the above disparate grounds for rejecting the "Deficient Information" claims as not made out, there is a separate area entirely which falls for consideration. This is no more and no less than that the evidence adduced by Kooee fails to reach the minimum standard to establish that financial losses have been suffered [see Atkinson v Hastings Deering (Qld) Pty Ltd (1985) 8 FCR 481; JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237], or to quantify such losses. 93 The following table put forward by Primus in explaining this matter treats seriatim with Kooee's schedule of damages and points up some of the difficulties in the manner in which the evidence has been left: Increased call costs Unclear as to what proportion if any resulted from incorrect information rather than migration itself Additional call centre staff costs Unclear what cost if any incurred. Unclear as to what proportion if any resulted from incorrect information rather than migration itself - speculation involved. Additional external call centre staff costs Unclear as to what proportion if any resulted from incorrect information rather than migration itself TIO Unclear as to what proportion if any of complaints resulted from incorrect information rather than migration itself Legals Insufficient evidence that legal work necessary to deal with Telstra. Some of solicitor's accounts pre-date and plainly not related to any migration difficulties. Not reasonable foreseeable as a loss [Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310]. Credit reversals Unclear how this is an actual cost to B Digital. Loss of accounts No evidence as to how many if any loss of accounts resulted from incorrect information. Migration Credit Discretionary decision to incur loss. Not foreseeable. Defendants failed to mitigate. Unclear as to any real connection with incorrect information.

94 As Primus has submitted, the only evidence that Kooee, rather than a third part, [B Digital Ltd], sustained losses, was that of Mr Farrington. Mr Farrington had the view that B Digital was incurring the costs "on behalf" of its subsidiary, but conceded that he did not know how, if at all, this was accounted for [T 190.37-49 and T 202.40-50]. He thought that Kooee might have had a bank account after its acquisition by B Digital, but could not give details or say that any of the moneys claimed had been debited to that account. He also thought that there may have been accounting records of Kooee maintained after its acquisition by B Digital which could have shown some of the moneys claimed as expenses of Kooee, but none was produced. 95 Nor was any agreement between B Digital and Kooee produced to show that after Kooee's acquisition by B Digital, there was some continuing commercial activity between them or of the allocation between them of the costs and expenses of servicing the Kooee customers making up the class of Net Debtors. 96 When regard is had to all these matters, including the references in the evidence to a merger of the Kooee customers into the business of B Digital [see paragraph 4 of Mr Farrington's affidavit, and paragraph 3 of the affidavit of Mr Scherp ], it appears at the least probable that the Kooee debtors were integrated directly into the business of B Digital and that B Digital thereafter carried on business with them and incurred all expenses of the integration and subsequently on its own account. 97 Kooee failed to produce evidence within its control of the accounting for the claimed losses. 98 Kooee clearly failed to procure a migration of its customers by the end of the Transition Period. The responsibility for this occurrence is extraordinarily difficult to unravel from the state in which the evidence was left. 99 The claimed breaches cannot be treated with in the broad. And although the Court's task of assessing damages may often be difficult but must nonetheless be discharged, there are cases, of which the present is one, where the exercise becomes purely speculative: cf Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 125-126 per Deane J. 100 For these reasons the cross claim in both of its parts [the alleged breach of contract as well as the alleged misleading and deceptive conduct] are to be dismissed. 101 It is appropriate in passing to observe that there was very little mention at all of the misleading and deceptive conduct claim at any stage through the whole of the final hearing, so much so that the Court would have been justified in regarding the claim as not pressed. Certainly the claim was not made out on the evidence. Rulings on evidence 102 The reasons given earlier in this judgment have already treated with explanations as to certain evidence accepted as admissible and as to other evidence which is rejected as inadmissible. It is also appropriate to make express the ruling allowing the particular evidence earlier referred to in paragraph 46 [where a note made by Mr Simmons on 7 April 2005; a portion of the cross examination of the same witness and a reference to a Deed of Undertaking with B Digital were identified]. 103 The parties conveniently furnished the Court with an index to Court Book MFI 3 which made provision for the Court to identify its rulings where objections had been taken to the admissibility of documents on the basis of the need to await the voir dire rulings. The rulings in each case have now been completed on to a further copy of MFI 3 which is marked "MFI P3 (rulings)". In a number of instances the documents are of little real materiality and are treated with in terms of their weight. In other instances as the reasons will have already made clear, documents of particular significance are admissible: either by the Court's entitlement to examine what were the circumstances with reference to which the words were used and what was the object appearing from those circumstances which the persons using them had in view [cf Prenn v Simmonds, Lakatoi v Walker as well as Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 referred to earlier in these reasons, or by the Grant v John Grant entitlement to discern the true purpose of the release transaction as ascertained from the nature of the instrument and the surrounding circumstances including the state of knowledge of the respective parties concerning the existence, character and extent of the liability in question and the actual intention of the releasor. 104 In terms of the reservation of the rulings noted during the transcript as to whether or not evidence taken on the voir dire would be admitted [save to the extent already dealt with in these reasons and rejected], all of that evidence is admitted. 105 Where particular objections had been taken to the admissibility of sections of affidavits the reasons given above certainly do as to particular segments, make clear which are and which are not admitted into evidence. There are some areas where rulings on evidence were reserved which are not yet spelled out in this judgment. If the parties require more precise clarification they may make this clear after the publishing of this judgment and of course such clarification will be forthcoming as requested. The fact is that there was such a plethora of areas of controversy that it is somewhat difficult to shortly and exhaustively identify all of these areas without further assistance from the parties. The way forward 106 Effectively and as earlier explained these reasons do not dispose of the whole of the proceedings. The parties will be given an opportunity to address on the way forward and as appropriate may need further Court time if a consensus on matters such as interest is unable to be reached. 107 The proceedings will be stood over for a few days to permit the parties to assess their positions. Naturally costs up to this point in time are reserved for the time being.

Primus Telecommunications Pty Limited v Kooee Communications Pty Limited & Anor

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