Cirrus Real Time Processing Systems Pty Limited v Jet Aviation Australia Pty Ltd

The issue before the Court is the correct construction of a price adjustment formula contained in a contract (the Contract) by which the plaintiff, Cirrus Real Time Processing Systems Pty Ltd (Cirrus), provides software development services to the defendant, Jet Aviation Australia Pty Ltd, formerly known as Hawker Pacific Pty Ltd (Jet). A claim by Jet that the Contract should be rectified to have the meaning for which it contends was abandoned before the hearing commenced.

The Contract was entered into on 1 August 2018 and expires on 31 December 2024, although cl 2.2 gives Jet an option to extend the contract up until 31 December 2027.

Under the terms of the Contract, Cirrus is required to perform all activities necessary for the provision of “the ACOTS2 Software and Engineering Services”. Those services involve an upgrade of a software management system known as the Air Combat Officer Training System (ACOTS) which is licensed to the Commonwealth for use in training systems for Proline 2 equipped B300 aircraft. The upgrade has been made necessary by the replacement of those aircraft with Proline 21 equipped B300 aircraft. Proline is an integrated avionics system. The work to be performed under the Contract is set out in a Statement of Work (SOW). It is apparent from that document that the work includes engineering, maintenance and training services and the provision of support resources.

The Contract was negotiated over an extended period of time (more than a year) during which it seems various errors, particularly cross-referencing errors, crept into the drafting.

Clause 4.1.1 of the Contract provides:

Clause 1.1.1 provides:

“Contract” is defined (in Attachment C) to mean “the COC [Conditions of Contract], the Details Schedule, the Attachments including the SOW, any S&Q Order and any document expressly incorporated as part of the Contract”. “Recurring Services” is defined to mean “all of the Services, other than Drop 2 development services, any S&Q Services and Task-Priced Services, required to be provided by the Contractor [that is, Cirrus] under the Contract”. “S&Q Services” is defined to mean “the Services identified as S&Q Services in the SOW and such other services requested by the Commonwealth in accordance with clause 3.12 of the COC that are directly related to the Services”.

Attachment B is divided into a number of annexures. Annexure B (sometimes referred to in the Contract as “Annex” B) sets out how the amount for Recurring Services is to be calculated. Essentially, it is a fixed amount payable monthly in arrears together with a performance payment calculated in accordance with Annex C less an “At-Risk Amount”. Annex D sets out how the amount for S&Q Services is to be calculated. Essentially, it is a rate per day for a software engineer. Annex E, which is the critical provision, deals with adjustments to those amounts. It relevantly provides:

Neither “AUS Labour Index Value” nor “Base Date Index Value” is defined in the Contract. The term “Base Date” is defined in Item 3 of the Details Schedule to mean “01 Jan 2018”. It is common ground that the reference to the “AUS Labour Index Value” is a reference to the index described in more detail in cl 1.7. That index measures the average increase in wages paid to private sector employees providing professional, scientific and technical services. It is issued quarterly.

It is Cirrus’s contention that in applying the price adjustment formula each year the APV should be calculated using as the numerator the then current value for the APV index (that is, the value published for the December quarter immediately preceding the review date) and using as the denominator the value for the March 2018 quarter. That approach was adopted by Cirrus and accepted by Jet for the first Price Revision Date of 1 January 2019 and the Subsequent Price Revision Dates of 1 January 2020 and 1 January 2021. Although not required by the Contract, the parties, in accordance with cl 6.3 of the Contract, executed deeds dated 8 April 2019, 7 December 2020 and 9 March 2021, described as Contract Change Proposals, which record the effect of those increases as changes to the Contract. However, on 8 February 2022, Jet issued a Dispute Notice under cl 6.8.3 of the Contract in respect of the price adjustment to be made on 1 January 2022. It claims that the denominator used for calculating the APV should be the value of the APV index for the December quarter of the previous year.

The principles relating to the interpretation of a commercial contract are not in dispute. They were set out by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 in the following terms:

Post contractual conduct is not a legitimate aid to use to construe the words of a written contract: Agricultural and Rural Finance Pty Limited v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [35] per Gummow, Hayne and Kiefel JJ; Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 681 per Campbell JA; [2009] NSWCA 407.

The dispute between the parties largely turns on the meaning of “Base Date” in the definition of “APV”. It is Cirrus’s case that the language of the Contract is clear. “Base Date” is defined to mean 1 January 2018. Consequently, the Base Date Index Value must be the index value for 1 January 2018. That is, it must be the index value for the quarter which includes 1 January 2018 – which is the index value for the March 2018 quarter. On the other hand, Jet submits that “Base Date” must be understood as a reference to the date at the beginning of the period to which the relevant calculation of APV relates. To take the calculation of Pn for the revision date of 1 January 2022 as an example, it is common ground that the numerator in the calculation of APV for that year is the value of the relevant AUS Labour Index for the past year – that is, for 2021. The index is issued quarterly. Consequently, the numerator is the index value for the 2021 December quarter. According to Jet, the Base Date Index Value is the index value for the beginning of that year – that is 1 January 2021. The index value that best reflects the index value as at that date is the index value for the quarter ending 31 December 2020.

I prefer the approach taken by Jet. There are several reasons.

First, there is no reason to think that “Base Date” was defined in the Contract for the purpose of cl 1.1 of Annex E to Attachment B. The expression “Base Date” is defined in Item 3 of the Contract Details Schedule, which includes a cross-reference to clause 3.3 of the Contract, suggesting that Item 3 was included for the purposes of that clause. However, the expression “Base Date” is not used in that clause. Indeed, the only place the expression itself is used is in the definition of “Escalation Date”, which itself appears to be a superfluous definition. The definition of “Base Date” appears to have been a definition left over from a previous draft that once included a clause 3.3 that used that term.

Second, cl 1.1 of the Contract specifically states that in the Contract, defined terms have the meaning given to them “unless the contrary intention appears”.

Third, the relevant expression in the definition of APV is “Base Date Index Value”. The whole expression has been capitalised. The term is not used in any other context, which indicates that it has a particular (albeit not expressly defined) meaning in the context of the calculation of APV. The position might be different if “Index Value” was defined separately or was not capitalised. In that case, “Base Case” would stand apart as a defined term from the separately defined term, “Index Value” or from the undefined expression “index value”. Capitalisation of the whole expression suggests that it should be treated as a single expression. Absent a definition, it should take its meaning from the ordinary meaning of the component words and the context in which they appear.

Fourth, it does no violence to the language to interpret the words “Base Date” as meaning the beginning or start date of the period to which the calculation relates. The definition of “APV” is clumsy. But, as I have said, it is common ground that the description of the numerator (“AUS Labour Index Value (past year)”) is a reference to the value of the relevant index at the end of the year in question. Consequently, it is natural to read the word “Base” in the description of the denominator as a reference to the value of the relevant index at the beginning of that year.

Fifth, cl 1.4 states that “The Subsequent Price Revision Dates shall be 1 January of each year subsequent to the First Price Revision Date and shall be based upon the preceding period index values”. Read literally, the provision makes no grammatical sense. The subject of the clause “shall be based upon the preceding period index values” is the “Subsequent Price Revision Dates”. However, it makes no sense to say that those dates shall be “based on” preceding period index values. The dates are fixed as 1 January each year. Those dates are not determined or based on index values.

In context, however, the clause appears to be saying that the calculation of Pn for subsequent years shall be based upon the preceding period index values. The relevant period is the preceding year. And the preceding index values in the calculation of APV are the immediately preceding index value for the numerator and the index value for the previous year for the denominator. That supports the conclusion that the “Base Date Index Value” in the definition of “APV” is to be understood as the index value at the beginning of the period to which the calculation relates.

Sixth, the interpretation of “Base Date Index Value” contended for by Cirrus has the odd consequence that the price payable under the Contract (or at least the relevant components) increases each year by the percentage increase in wages since the Base Date of the Contract rather than by the percentage increase in wages since the last increase, with the result that prior year percentage increases in wages since 1 January 2018 are applied each year to the amounts already determined by the application of those increases. On the other hand, the interpretation contended for by Jet makes perfect commercial sense. The Contract lasts for a number of years. Cirrus’s principal cost in providing services under the Contract is labour costs. Apart from performance-based payments (and deductions), the fees payable to it were fixed at the date of the Contract. It therefore made commercial sense for the parties to agree to a price adjustment mechanism which adjusts the price payable by reference to the increase or decrease in Cirrus’s principal cost over the life of the Contract. That is what Annex E of Attachment B, understood in the way described, does. Each year it increases (or decreases) the amount that Cirrus can charge by reference to the percentage increase (or decrease) in comparable wages in the previous year.

Cirrus seeks to answer the point of the previous paragraph by submitting that the interpretation for which it contends makes commercial sense because as work was done on the system it became more complex and therefore required additional work. That the system became more complex was said to be apparent from the fact that cl 3.11 of the Contract provides that within the Recurring Services Fee, Cirrus was to provide a “Spiral Upgrade Program”, which involved upgrading the software each year. According to Cirrus, the more complex the system became the more difficult it would become to detect the source of and rectify faults and to test new versions of the software. The compounding price mechanism compensated Cirrus for the additional time those tasks would take.

However, there is nothing in Annex E of Attachment B that suggests that that was the purpose of cl 1.1. There is no direct connection between the increases resulting from the application of Cirrus’s interpretation of the price adjustment mechanism and any increase in the complexity of providing the services. Cirrus accepted in oral submissions that it was unable to point to anything in the surrounding circumstances at the time the Contract was negotiated that suggested that at that time the parties contemplated that it would become more difficult over time for Cirrus to discharge its obligations under Contract because of the increasing complexity of the software. In theory, the price could decrease under the price adjustment clause if wages went down. However, there was no suggestion that the Spiral Upgrade would simplify the system or that any possible simplification of the system was tied to a decrease in wage rates.

Moreover, Cirrus’s submission appears to be inconsistent with other terms of the Contract. The price adjustment mechanism applies to two components of the Contract. There is nothing in the Contract to indicate that the parties expected that it would be necessary for Cirrus to spend more “man days” complying with its obligations to provide those two components as time progressed. Clause 3.11.6 provides:

These clauses and the table referred to in cl 5.5.1 contain no indication that the parties contemplated that Cirrus would be required to devote more man days to the Contract as time went on. The S&Q Services involve the provision of software engineers to undertake specific tasks. The complexity of those services is not affected by the time at which they are performed, and under the Contract, Cirrus is remunerated for those services by reference to the number of hours necessary to perform them. It does not make commercial sense to adjust the price for those services in the way suggested by Cirrus.

Cirrus relies on the fact that Jet accepted its calculation of Pn in the first three years in which the calculation was performed. Nothing turns on the first year, since both interpretations of the formula produce the same result. In relation to the other years, Cirrus submits that Jet’s conduct operates as an admission and so falls within an exception to the principle that subsequent conduct is not relevant to contractual interpretation: see Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [121] per Basten JA. However, as Basten JA points out in that case (at [122]), referring to the statement by Spigelman CJ in County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [7], admissions are not an exception to the principle. Rather, an admission may operate where there is a question of fact concerning what the parties agreed. It is irrelevant or valueless where the admission is in relation to the interpretation of the written words of a contract, which is a question of law: see Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 at 736 (Lord Diplock); Cottonex Anstalt v Patriot Spinning Mills Ltd [2014] EWHC 236 (Comm) at [43]ff (Hamblen J). That is the position in this case.

On the conclusions I have reached, the expression “Base Date Index Value” means the amount shown in the relevant ABS index for the beginning of the year to which the calculation of APV relates (the Base Date). As I have explained, that is the index value for the December quarter of the year before. During the course of oral argument, I was informed by Mr Giles SC, who appeared for Jet, that the parties had agreed on the calculation of the Pn for each year on the basis that Jet’s interpretation is correct and that as part of that agreement they may have agreed that Base Date Index Value for calculating the Pn for a given year was the index value for the first quarter of the preceding year (not the value for the last quarter of the year before that). Mr Giles said that, if that was the position, he did not wish to resile from that agreement, even though it was more logical to use the index number for the last quarter of the year before. It is not clear that the parties have proceeded in the way that Mr Giles suggests that they may have. On 9 August 2021, Jet wrote to Cirrus setting out in detail how Jet thought that the calculation worked. At that time, Jet took the Base Date Index Value in calculating the Pn for a given year to be the index value of the December quarter of the year before the prior year. The declarations sought by Jet in its cross summons to give effect to its interpretation of the Contract do not clearly distinguish between the two positions. Consistently with the submissions made by Mr Giles, I have simply accepted those declarations and not sought to resolve the issue.

It follows that the summons must be dismissed and that Jet is entitled to the declarations it seeks in its cross summons concerning the correct construction of the Contract.

Jet also seeks declarations concerning the amounts owing in respect of prior years. Those amounts were agreed for the revision dates on 1 January 2019, 1 January 2020 and 1 January 2021. Jet accepts that it is bound by those agreements. Consequently, the declaration concerning the amount owing should only be made in respect of the price revision date of 1 January 2022.

There is no apparent reason why costs should not follow the event. However, the parties did not make any submissions on costs. In those circumstances, the appropriate course is to make an order for costs but to reserve liberty to apply to either party to make an application to vary that order within 14 days.

The orders of the Court, therefore, are: