Atlantis Network Pty Ltd v Lala Dipak Kumar
[2002] NSWLC 1
•09/20/2002
Local Court of New South Wales
CITATION: Atlantis Network Pty Ltd v Lala Dipak Kumar [2002] NSWLC 1 JURISDICTION: Civil PARTIES: Atlantis Network Pty Ltd
Lala Dipak KumarFILE NUMBER: 133091 of 2000 PLACE OF HEARING: Downing Centre Local Court DATE OF DECISION:
09/20/2002MAGISTRATE: Magistrate CATCHWORDS: Contract - Damages - Measure of damages for breach by wrongful sale of futures LEGISLATION CITED: Corporations Law 1989 s 72 CASES CITED: Ogle v Vane (1867) L.R 2 Q.B 275
Wilson v London and Globe Finance Corporation (1897) 14 T.L.R 15
Shaw v Holland, (1846) 15 M & W 136
Alexander v Cambridge Credit Corporation, (1987) 9 NSWLR 310
Barnes & Ors v Hay [1988] 12 NSWLR 337
March v Stramare Pty Ltd (1991) 171 CLR 506REPRESENTATION: Mr P Glissan of Counsel
Mr M Henry of CounselORDERS:
- 32 -In its Amended Claim the plaintiff sues for breach of agreement. The plaintiff is a futures broker, and had an agreement with the defendant, a medical doctor practising at Penrith, by which the defendant was liable for 'margin' payable in respect of his trades, and the plaintiff simply says he did not meet that margin. The plaintiff traded as a secondary broker, actual trades being placed by its principal, the State Bank of N.S.W., which later became the State Colonial and still later was taken over by the Commonwealth Bank.
Mr. P. Glissan of counsel appeared for the plaintiff, and Mr. M. Henry of counsel for the defendant/cross-claimant. The hearing was handled very capably by each of them, and I was greatly assisted by their careful submissions.
Contracting directly with the principal broker, the defendant bought nine contracts on Saturday, 15th April, 2000, becoming liable for a margin of $2,500.00 in relation to each. He had a pre-existing agreement with the plaintiff by which it became the broker which dealt directly with the bank on his behalf, and when he purchased the contracts direct they automatically became subject to the terms of that agreement.
Margin is really a deposit of funds with the bank as security in case the bank becomes liable to pay out following movement in the market. Clause G.3 of the General By Laws, which form part of the parties' agreement, provides that the initial margin is the amount which the bank requires to be paid by a client, and a variation margin is the difference between the value of a futures contract as shown in the contract, and the current value of that contract at any given time.
It was undesirable for the plaintiff to allow the defendant to trade in the red, because it could not guarantee it would itself have the funds with which to pay the bank. Notwithstanding that, it did in fact allow the defendant to trade in the red before the events of 17th April, 2000 which gave rise to the dispute. As appears from the deposit sheets attached to the statement of Mr. Weymouth, it also allowed several other clients to trade in the red.
The defendant cross-claims for breach of his agreement with the plaintiff, saying that he would have held onto his contracts until 20th April and sold them then, by which time the market had gone up. He says that the plaintiff wrongly created a ‘mandatory’ or non-cancellable stop order which in its own terms required the bank to sell the contracts when the SPI dropped below a pre-set figure, ultimately 2940. The defendant had lifted the stop order by a phone call to the bank at 10:51 p.m. on Monday, 17th April, but four minutes later the bank, purporting merely to reflect the direction of the plaintiff earlier that afternoon, reinstated the stop order and sold the contracts. Remarkably, it did so without ringing the defendant back and, it says, without first ringing anyone from the plaintiff.
Exhibit 12 is a letter which states that "acting on instructions from (the plaintiff) (the bank) reinstituted the order". That was the mandatory stop order which is an order to sell. At page 29 of the transcript of 14th May it is put to Mr. Williams, one of the officers of the plaintiff, that in the late evening of 17th April he had instructed the bank to reinstitute the stop order.
One possible view of what occurred is indeed that Mark Curtis from the bank rang Phillips or someone else from the plaintiff and followed that person's instructions to sell. Curtis, as well as Williams and Adam Phillips who were officers of the plaintiff, denied this is what happened. The “instructions” referred to in exhibit 12, by which the plaintiff told the bank to reinstitute the stop order, were contained, according to the bank, in a 5:10 p.m. fax, not a later phone call. Mr. Curtis spoke in his evidence of a phone call having come in from Mr. Phillips, presumably a little before a 5:10 p.m fax, although it might have been later. The call was not taken by Curtis himself. It is the call which is said to have instructed the bank that the stop loss order was mandatory. The fax was from the plaintiff to the bank, and it too provided for a stop loss order, but made no mention of it being a mandatory one.
In his statement and in oral evidence the defendant said that, amongst several other telephone conversations with Phillips on 17th April, he had indeed spoken with him on two occasions on that day, obtaining Phillips’ agreement to fix a stop loss figure of 2940, and that Phillips expressly told him that it would be acceptable for him to reduce that stop loss. The
defendant, of course, was thinking of the possibility of telephoning the
bank's night desk at hours when the plaintiff's office was closed. Phillips says he told the defendant the stop loss order could not be modified. One or the other of them is being untruthful.
The plaintiff claims the defendant was in margin breach, having failed to lodge sufficient funds to secure his trading, and sought to argue that this entitled it to sell up his contracts. The agreement provides for a margin to be due when instructions to buy or sell are executed (although the central question remains whether the plaintiff, which under their agreement had a duty to act on the defendant's instructions, properly did act on his instructions when directing sale of the contracts. It will only be if it is accepted that Phillips expressly told Dr. Kumar that the stop order was mandatory that it did act on his instructions). Strangely, under the agreement, the plaintiff was only entitled to close off the contracts if there had been a call, and the evidence established that there was no call. Consequently, neither the plaintiff nor the bank was entitled to rely on this provision as authority to sell the contracts as they did. This is a wholly different question from the question whether the defendant's failure to pay margin meant he was in breach of his agreement, so attracting a right in the plaintiff to damages. I consider that later on.
The nature of the futures contracts
I am entitled to take judicial notice of the meaning and general nature of futures contracts, and to have regard to publicly available knowledge to do so.
Investopedia ( defines a futures contract as:
"An exchange traded agreement to buy or sell a particular type and grade of commodity for delivery at an agreed upon place and time in the future. Futures contracts are transferable between parties."
That website helpfully offers the view that:
"Commodity futures very rarely lead to delivery of a commodity because positions are closed out before the delivery date. Whereas forward contracts often lead to delivery."
And adds:
"Futures are a financial contract that encompasses the sale of financial instruments or physical commodities for future delivery. Trading is done on a commodity exchange. Futures contracts try to predict what the value of an index or commodity will be at some date in the future. You are basically agreeing to buy something that a seller has not yet produced. The futures contract will state the price that will be paid and the date of delivery - more on this later. Futures are not always a physical commodity, there are also futures contracts on indexes like the S&B500 and Nasdaq 100. "
(Italics are mine).
It also appears from Investopedia that futures contracts have a fixed period, usually expressed in months, over which the commodity may be traded, and an expiration date at which all obligations cease. A further standard term is that there will be a delivery location where the commodity is to be delivered and a settlement mechanism which will provide for the terms of the physical delivery or of the cash price to be paid.
The only nonstandard item of a futures contract would appear to be the price of an underlying unit, which is determined in the trading arena. It is a feature of futures contracts, compared with ordinary forward contracts, that the terms are standardised rather than customized as between parties who actually produce and buy traded items. Another feature of futures is that they are guaranteed by the clearing house of the financial exchange.
The technical definitions in the 1989 Corporations Law, which was in force when this agreement was on foot, broadly give effect to the descriptions set out above.
Section 72 defines a futures contract:
(1) A futures contract is:
(a) a Chapter 8 agreement that is, or has at any time been, an eligible commodity agreement or adjustment agreement;
(b) a futures option; or
(c) an eligible exchange-traded option;
other than:
(d) a Chapter 8 agreement:
(i) that is:
(A) a currency swap;
(B) an interest rate swap;
(D) a forward interest rate contract; and(C) a forward exchange rate contract; or
(ii) to which an Australian bank, or a merchant bank as defined by subsection (4), is a party; or
(e) a Chapter 8 agreement that, when entered into, is in a class of agreements prescribed for the purposes of this paragraph.
Terms such as ‘Chapter 8 agreement’ are also defined, but don’t add much to one’s understanding of what is a futures contract. The most helpful of the definitions given in that Law is that of an adjustment agreement. The definition section of the Law provides:
Adjustment agreement means a standardised agreement the effect of which is that:
(a) a particular person will either be under a Chapter 8 obligation to pay, or will have a Chapter 8 right to receive, an amount of money;
(b) whether the person will be under such an obligation to pay, or will have such a right to receive, the amount of money will depend on a particular state of affairs existing at a particular future time, including, without limiting the generality of the foregoing, a state of affairs that relates to fluctuations in the value or price of a commodity or other property, or in an index or other factor; and
(c) the amount of money will be calculated in a particular manner by reference to that state of affairs;
whether or not the agreement has any other effect or is capable of being varied or discharged before that future time.
(My italics).
Eligible exchange-traded option means a contract that is entered into on a futures market of a futures exchange and under which a party acquires from another party an option or right, exercisable at or before a specified time:
(b) to be paid by that other party an amount of money to be determined by reference to the amount by which a specified number is greater or less than the number of a specified index, being the Australian Stock Exchanges All Ordinaries Price Index or a prescribed index, as at the time when the option or right is exercised.(a) to purchase from, or to sell to, that other party a specified quantity of a specified commodity at a price specified in, or to be determined in accordance with, the contract; or
What was the nature of Dr. Kumar's contracts? They appear to be adjustment agreements, as defined in the Corporations Law.
They are not a Forward Contract, in that they do not involve a specific tailored contract by any producer to supply physical product, unlike Forward Contracts. They are also not like Futures Commodities Contracts in that those are also based on contracts to supply physical product. (Athough it appears the product is rarely supplied. Instead, investors just buy and sell the contracts, and presumably underlying contracts to take physical product are passed off at the end to those in the market who actually want the product). Interestingly enough, clause 24 does allow the plaintiff and the bank to enter into exchange for physicals transactions on his behalf, and presumably that means that a virtual parcel of interest in the SPI could be exchanged for a bundle of stock equal to the $685,375.00 value of the nine contracts. That sounds quite theoretical to me, and unlikely to actually occur.
The bank’s obligation is just a promise by the bank to pay up if the index goes up, and if it goes down the bank looks to the plaintiff, and indirectly to Dr. Kumar, to pay it the amount by which the value of the index went down.
Futures contracts centred on the movements in the Share Prices Index would appear to be in part something of a gamble, and in part something involving skill in predicting the rise or fall in the SPI, and not to be associated at all with any contract to supply physical product. Dr. Kumar's gamble was that the index would rise. Instead it went down, and through the plaintiff he was required to make good the loss. The 'loss', so far as it impacts on the bank, appears to be wholly artificial. The bank is the principal, and if the index goes down it seems that the bank does not have to pay anybody anything. If it goes up, the bank would have to find a buyer or itself buy out the defendant should he choose to 'close out' his position by selling.
Presumably, the bank takes the view that if it has a risk of having to pay out when the market goes up, it should be able to recoup something when it goes down. Since, over time, the market always goes up, it would appear at first blush that the bank would always have to pay out, except in the case of those investors who panic when there is a temporary drop and sell up. On this view the bank will therefore only make money if more investors panic or run out of cash with which to meet margin calls than those who hang on. However, if it were able to find some other investor to buy that product at the higher price the bank would not have to use its own funds to pay out investors whose 'product' had gone up in value. In that sense, one assumes the bank really acts as a guarantor to meet the liability if a buyer cannot be found. Assuming that there will always be someone to buy at that higher price (after all, the market says that is what the product is worth at the time so one assumes there might be a buyer) the bank will not have to pay out from its own funds. It would be surprising if any bank put itself in a position where it was more likely to pay out than to make money.
I cannot see how the bank could lose when the SPI goes down, and one wonders why the fuss when it did drop below 2940. I can understand that the plaintiff would be concerned, because it has to pay the bank, but it is odd that in the case of a drop in value where there is no risk to the bank that the plaintiff would have, as it did, an obligation to reimburse the bank. That suggests to me that there are likely to be some controls imposed by the Exchange on the bank, perhaps limiting its right to offer contracts, or some other controls, and the existence of those controls or other sanctions would be what made the bank require compensation from the plaintiff in such a case. In any case, whatever the reason, the bank did require the plaintiff to reimburse it where the contracts were closed out at a loss position.
General Overview of Arguments
There is one preliminary point bearing on Dr. Kumar's cross-claim which I need to get out of the way. Mr. Glissan, for the plaintiff, argued that because (in his submission) the defendant was in breach of the agreement, the defendant could not succeed against the plaintiff for a breach by the plaintiff. I am unable to accept that submission. Unless the agreement had been brought to an end by some legally effective means, such as termination, accepted repudiation etc., each party was entitled to claim or cross-claim against the other for damages for any breach. Even if their agreement had been brought to an end because the defendant's position had been closed off, on his case it was the wrongdoing of the plaintiff which brought that about, and the plaintiff cannot rely on its own wrongdoing. The defendant's breach, if he was in breach, did not have the effect of disentitling him to sue for the plaintiff's breaches.
There are two possible views of the claim as a whole which in my view are much more likely to represent the true position than any other. On the one hand, the defendant might have been unfinancial and unable to pay his margin on Monday 17th April, or busy in his medical practice and unable to get down to the bank in time to put money in the segregated account he held with the bank. He might have thought later on in the evening that he would just tell the bank's night desk to cancel the stop loss, believing that the market would rise fairly quickly and he would get away with it, and perhaps not knowing that Phillips had warned the bank that the stop loss was non-cancellable.
On the other hand, the plaintiff’s officers might also have been busy, and having allowed the defendant to trade in the red on other occasions might have let the afternoon slip by without adequately protecting its position - ie: without having got the margin safely in the bank, and realising its loss the next day sought untruthfully to say that it had warned Dr. Kumar that the stop loss was irreversible, and hoped that in that way it could recover its losses from him. If indeed this is what happened, it follows that officers of the bank who supported the plaintiff's position must be conspiring to conceal the truth.
There are a number of credit questions within the evidence which offer some hope of divining where the truth might lie, and I now turn to discuss them.
I should also say that there are some legal questions involved, including the question whether the plaintiff had any right under its agreement with the defendant to make stop loss orders non-cancellable.
What was Dr. Kumar told in the 17th April conversations?
The most critical question of all is whether or not in two telephone conversations with the defendant in the mid afternoon of 17th April, 2000, and particularly in the second of those two conversations by which the final stop order of 2940 was fixed on, Phillips informed him that it could not be cancelled, something with which he said the defendant agreed. If that conversation did occur, and if there is a power under the agreement to make the stop order mandatory, Dr. Kumar would be bound by it. If not, it would constitute an oral variation of the parties' written agreement, and, subject to their being shown to have been some consideration for the variation, it would still follow that the telephone conversation by which the defendant cancelled the stop order late that night when he rang the State Colonial Bank was in breach of the agreement as varied. All other things being equal, the plaintiff would be entitled to damages against the defendant for that breach and for not paying margin. Since the plaintiff did have to pay out the bank the measure of its damages would doubtless be the amount it had to pay.
However, I am unable to see that there was any consideration for that variation, other than just the past consideration embodied in his existing obligations, even if it did occur in the way the plaintiff alleges.
Moreover, what power does the plaintiff have to give directions of that sort? Apart from the very general provisions of clause 3 which I discuss later on (a clause which allows the plaintiff to act generally as the agent of the defendant) there is no express power in the agreement. And clause 3 does not permit the plaintiff to act inconsistently with the defendant’s instructions. I discuss later on the plaintiff's lack of power to impose mandatory stops.
The plaintiff might argue that there doesn't need to be any fresh consideration, or indeed any variation of the agreement, and that because it is entitled to give directions to the bank based on the defendant's instructions it is able, with his agreement and on his instructions, to tell the bank the stop loss was not to be cancelled. I think that is probably not right, because if indeed the plaintiff had the right to pass on his instruction to the bank that the stop loss was not to be cancelled it would not prevent either he or the plaintiff cancelling it anyway. Once it was cancelled the bank would have to follow that instruction as much as the earlier one asking that it not be cancellable. It could only be locked in as a completely mandatory and unalterable stop order if there was power to make it so in their agreement or if their agreement was varied to allow of that power being exercised.
If there is a custom within the trade allowing for the imposition of mandatory stops, it would have to give way to the express terms of the parties' agreement. I am not overlooking clause 4.5 of the parties' agreement, which provides for them to be bound by the customs and usages and practices of the Exchange and Clearing House. However, a general provision such as this must give way to the more particular provision that the plaintiff is obliged to follow the defendant's instructions, so that even if such a custom did exist it would still have to yield to that provision. For that and other reasons explored below it follows that the plaintiff must fail in its claim. It remains, however, important to determine whether Phillips did ring and tell Dr. Kumar the stop would be mandatory, because it is such an important credit question when one comes to consider the defendant's cross-claim.
The parties' versions of the critical phone calls on Monday the 17th can be seen from the following comparison, from which it can be plainly seen that the defendant, if he is believed, was very much alive to what the market was doing and was in contact with Phillips all day:
Plaintiff's Version Defendant's Version
8:30 a.m. Dr. Kumar telephoned Adam
Phillips, mentioned that he had bought
contracts and that they were in a loss
- position. He was told that he could change the stop .
Plaintiff's Version Defendant's Version
10:00 a.m.
Dr. Kumar says that he again
telephoned Phillips and they agreed to sell
two of the contracts at 2989.
11:00 a.m.
Dr. Kumar says he rang
again and Phillips agreed he would buy
back two contracts.
12:00 noon
Dr. Kumar telephoned Phillips
and asked that the stop loss be reduced to
2940. He says Phillips agreed.
12:30 p.m.
Dr. Kumar says he rang Phillips
and that the latter confirmed he had reduced
the stop loss.
3:00 p.m.
Phillips says he had a conv'n 3:00 p.m. Dr. Kumar says that he once
with Dr. Kumar when he told him that his again had a telephone conversation with
position was well out of the money and that Phillips, and amongst other things, said to
he would have to run a stop and that it would him: "Adam, if the SPI goes below 2940
be a mandatory stop which could not be can I still change the stop loss", and was
changed overnight. He says Dr. Kumar agreed told he could.
and that there would be a 2960 stop.
3:30 p.m.
Phillips says that Dr. Kumar rang
and they agreed to move his stop down to 2940,
but that he told Dr. Kumar it could not be changed
again and that Dr. Kumar said: "O.K.".
[About 4:00 p.m. – 5:00 p.m. This is most likely
the time when, so say the plaintiff and Curtis
from the bank, Phillips rang the bank and told
them the stop was mandatory. The time is unclear].
5:10 p.m
. Phillips says a fax was sent to the 10:45 p.m. Dr. Kumar, being unable to
bank which included a mandatory stop, and reach Phillips, says he contacted the
said it was not to be cancelled. [However, in its Principal Broker, and spoke with Mark,
terms the fax did not make the stop mandatory].
Curtis and cancelled the stop.
The question whether the 3:00 p.m. and 3:30 p.m. phone calls took place in the terms alleged by the plaintiff falls to be determined against a background, in my opinion, of very good and confident evidence to the contrary given by the defendant. The manner of his evidence was good and believable. Evidence for the plaintiff was generally also quite good, except that Phillips got his facts mixed up and admitted he was in error in his calculations. He later retracted and claimed he was right. His manner was good and believable, but it must be kept in mind that he used to work for the plaintiff and is therefore less than independant.
In the plaintiff's favour is the fact that, assuming he is believed, Mr. Weymouth, a director of the plaintiff, told Phillips on 17th April that Dr. Kumar's account was in margin breach and that Phillips must instruct the bank to run a mandatory stop loss order for the night's trading, and he fixed
on 2970 as the floor below which figure the futures must be sold. If indeed Weymouth did tell Phillips such a thing it would seem very likely that Phillips was telling the truth when he gave evidence that he told the defendant of it that afternoon.
Lack of tapes of conversations
It tells badly against the plaintiff that there are no tapes kept by the plaintiff of the telephone conversations at 3:00 p.m. and 3:30 p.m. which Phillips says he had with the defendant, nor of those between Phillips and the officer at the bank whom he allegedly told the stop orders were non cancellable. He refers in his evidence to a call which presumably does not mean the fax from the plaintiff supposedly sent to the bank at about 5:00 p.m. saying the stop could not be cancelled. Similarly, Phillips also had no notes of his conversations, having lost them. Tapes were normally retained, but not on this occasion, and that is odd to say the least. They are vital where these telephone transactions take place. It is quite possible that Phillips was simply being untruthful and that there were tapes but their production would not have helped him or the plaintiff.
Williams, who was another officer of the plaintiff, deals with this question over pages 26 - 28 of the 14th May transcript. His evidence is quite weak. He said he wished there was a tape and that there normally would be one, and lamented its absence.
The defendant says Phillips told him that he had listened to the tape of he (Dr. Kumar) having cancelled the stop loss (and indeed, there is no dispute about that). It is tapes of other conversations which would have helped. It is implausible that there were no tapes of the defendant's conversation with Phillips when supposedly in the afternoon of 17th April Phillips told the defendant he could not countermand the stop order. It is also worrying that no other tapes were sought from the bank itself until this year, by which time they no longer existed.
It is possible that both Mr. Weymouth and Phillips are being untruthful in this regard. In the more critical points of difference between the parties, this is not a case of misunderstanding between them. As I indicated on the last day of hearing, I believe that one side or the other is being generally untruthful. If the defendant were really told in plain terms, as the plaintiff says he was, that the stop order would be a mandatory one, especially given that the market had fallen and he was already at risk, and given also that the plaintiff had allowed him to trade 'in the red' for some time before 17th April, he would not misunderstand. He would likely be annoyed with the plaintiff for applying that discipline. If not annoyed, he would at least be apprehensive that he stood to lose a good deal of money, and his attention would have sharply focussed on the risk he faced. Accordingly, he would not misunderstand or misremember. In my view, either the plaintiff's witnesses are lying outright when they say the conversation occurred (ie: Phillips is lying when he says that he told the defendant the stop order would be mandatory, and Weymouth is also lying when in paragraph 13 of his statement he says that he told Phillips to do so) or the defendant is himself lying outright.
What might be drawn from the fact of Phillips having travelled to Penrith to see Dr. Kumar?
In determining who is being truthful I think it is reasonable to have regard to the fact of Phillips having visited the defendant at his surgery at Penrith on 19th April. Mr. Glissan says that Phillips, who says he went out there to ask for money to meet the margin, would have done just that. Another possibility is that Phillips went out to Penrith because he felt guilty, having allowed the defendant to trade in the red and having exposed his employer to considerable risk of loss, and in that spirit went out to try to find out from the defendant what action he intended to take.
Mr. Glissan says that one would not go so far to visit the defendant just out of a feeling of guilt or anxiety, but would make such a trip to try to obtain funds to put the trading account back in the black.
I tend not to agree with that view. People who believe someone else is in the wrong (as Phillips would have done, if he is believed) are inclined to be annoyed and to deal at a distance. If Phillips thought that the defendant had wrongfully cancelled a stop order which he had been twice told he could not cancel, and owed the company a considerable sum, Phillips would have been more inclined to raise the defendant on the telephone, remind him tersely that he had been asked not to cancel the stop order and to have asked him to put his account in credit.
If, on the other hand, Phillips had said nothing at all to the defendant on the 17th relating to inability to cancel the stop order, and the defendant having in the interval done no more than he was entitled to do in cancelling it) and what he had done several times before (that is, trading in the red) Phillips would have been quite apprehensive, fearful of losing money for the company and anxious to secure some funds for the plaintiff, but very apprehensive of the reaction of the defendant to the unilateral cancellation of the stop order made without even consulting the defendant. He might indeed have intended to ask for money, or hoped to persuade the defendant to put his account in the black, but his primary concern would be to apologize for what had occurred, in the hope of keeping the defendant on side, and to that end might have thought a personal visit was more likely to be successful.
I therefore think that Phillips' visit to the defendant at Penrith is one indicator that Phillips himself was not being truthful when he told the Court that he had expressly informed the defendant the stop order could not be cancelled. As a matter of weight, I do not believe that on its own it is by any means decisive, but it is of some weight and has significance when considered with other pointers to be found within the evidence.
I am also uneasy at Phillips having noted that at 4:30 p.m. on the 17th Dr. Kumar was "still in margin breach". Getting the margin in would seem to be more important than providing for a stop loss to be mandatory. He claims that he had told Dr. Kumar at 3:00 p.m. and 3:30 p.m. that the stop loss orders could not be changed. But one might think that, provided Dr. Kumar had paid up on his margins, Phillips wouldn't have required anything more. The plaintiff would have been secure, or at least at risk only as to further movements in the SPI. The 17th was a Monday, so what little risk there was for the plaintiff in the defendant possibly dealing direct with the bank overnight would only be a short-lived risk. The next day, a Tuesday, was a working day, and the plaintiff would have been able to contact Dr. Kumar at very short notice on the phone if the market had continued to move down. Is
it really likely that Phillips or anyone from the plaintiff would have been so concerned as to require a mandatory stop loss, something which Phillips said even the bank found unusual?
I rather think that the plaintiff, if anxious at all about a man who it had allowed to trade in the red before and about whom it must have felt reasonably secure, would have been more concerned to ensure that Dr. Kumar paid his margin than to prevent his lowering the stop loss figure.
There is not much point to an investor in being allowed to trade if his broker can require him to sell up when the market goes down. Dr. Kumar's money is his own, not the plaintiff's, and as an investor he is entitled to put it at risk if he chooses. I am puzzled why on the Monday, instead of trying to put a floor under his trading, Phillips didn't simply ask Dr. Kumar to put some money in the bank, rather than impose stop loss orders on him which he could not alter. I am inclined to think he didn't seek payment of the margin on the Monday because he thought Dr. Kumar was a good risk. And if he was a good risk, and the plaintiff did not want to press him too much for money, it would have been unlikely to restrict his ability to lower the stop loss.
These considerations suggest to me that Phillips and Weymouth are not being truthful when they say that they did restrict his ability to lower the stop loss. Again, it is not a matter of great moment - it might be only that they trusted him as far as the losses which had accumulated, but didn't want him to plunge further into the red. However, it is one factor which tends to make the plaintiff's version of events a little less credible.
Significance of mandatory stop orders not having been explained to Dr. Kumar; flexibility in stop orders in that they were reduced a couple of times on 17th April
Another matter which tells against the plaintiff is that Mr. Weymouth, at paragraph 13 of his statement, provided for a stop order at 2970. If that stop order was to be inflexible, why was it changed to 2940? The change is suggestive of some flexibility on the part of the plaintiff, and hence is not consistent at all with any notion of the level being mandatory.
Moreover, if Mr. Weymouth told Phillips to pass on to the defendant that the level of 2970, or 2940 or any level, was to be mandatory, one would expect Phillips to have given some evidence of having explained to the defendant what a mandatory stop order was and how the plaintiff was entitled to invoke it under the agreement. There was no evidence of that sort. The defendant had been accustomed to trade in the red, and since there was no evidence that he had ever before been told a stop order would ever be 'mandatory' or non-cancellable, it would be expected that Phillips would have explained to him the nature of such an order; one would expect Phillips to have gently taken the defendant to the terms of the agreement (if for no other reason than that otherwise he would have expected an explosive reaction from the defendant to whom such a notion would have been alien), or if he did not take him to the specific terms he would at least have alerted the defendant that the agreement did provide for such a thing, if it did).
Did the plaintiff have a power to sell anyway?
Clause 3 of the agreement between the parties provides that the plaintiff is the agent of the defendant and is responsible for giving instructions to the principal broker (the bank). An argument was put that by invoking the stop order and causing sale of the contracts the plaintiff was doing what it was expressly empowered to do by clause 3, and could not be liable for that action. However, the recitals to the agreement note that the plaintiff will act on the defendant's instructions, and clause 3.6 expressly provides for it to do so, and in my view clause 3 does not permit the plaintiff to act against those instructions. Neither the agreement itself nor the Rules incorporated in it allow for a stop order to be made mandatory. This argument should not succeed.
Failure of Mark Curtis to ring back Dr. Kumar and alert him to the fact of the stop order being mandatory
Running adversely to the credibility of Phillips and Weymouth is the reaction of Mark Curtis, the man from the bank who gave evidence on 9th July last. The defendant had told him on the phone at 10:51 p.m. on the 17th that the stop order was to be cancelled, and Curtis had agreed. According to him though, within a minute or two he spoke to another bank employee, one Moloney, who supposedly relayed to him Phillips' earlier instructions (given that afternoon) that the stop orders were non cancellable.
Astoundingly, Curtis sold up the contracts only four minutes after having told Dr. Kumar that the stop order was lifted. I would have expected Curtis to ring back the defendant, even though late at night, having spoken to him only four minutes earlier, and to appraise him of Phillips' instructions, and I would have expected him to ring Phillips. He did ring someone from the plaintiff but only after he had sold the futures contracts; it was too late by then - the damage had already been done.
This consideration makes that man's evidence quite unlikely, and if it is untrue he and officers of the plaintiff, people with whom he plainly dealt on a daily basis and therefore knew quite well, got together to cobble up a story which would enable them to recover their losses from the defendant.
Operation of exclusion clause
Clause 4.20 of the agreement reads:
The Introducing Broker ... shall not be liable for any damage, loss or injury ... in connection with:
...
4.20.5 any action or failure by the Introducing Broker and the Principal Broker to place and activate a stop loss order.
On the face of it, this clause would prevent the plaintiff being held liable on the cross-claim for Dr. Kumar's loss suffered as a result of activating the stop order. However, a proviso to that clause provides that it has no operation in the case of negligence. I think the plaintiff's action in activating the stop order was in breach of Phillips' assertion to Dr. Kumar that he could change the stop order, and was in breach also of its obligations under their agreement to act according to his instructions. Those actions constituted a negligent breach of agreement, and as a result clause 4.20 does not save the plaintiff.
Clause 5.5 is another exclusion clause, excluding liability for delays or errors in the execution of the client's instructions, but it also in its own terms does not apply where the plaintiff has been negligent.
Was Dr. Kumar in margin breach?
Even if one accepts Dr. Kumar, the question has to be asked whether he failed to pay margin when it had fallen due, which for ease of reference I will call being in margin breach, and whether by not doing so he was in breach of the parties’ agreement. Technically, Dr. Kumar was indeed in margin breach in the sense that he hadn’t paid. By clause 8 of their agreement the plaintiff might make a call and the defendant would be obliged to meet it within 24 hours. There was no call, but clause 8.4 provides that the liability to pay initial margin accrues when the dealing takes place. The dealing occurred when Dr. Kumar bought the contracts through the bank, and so an initial margin would have been payable. Clause 8.5 provides that the liability to pay a margin accrues whether or not a call is made.
By not paying the margin Dr. Kumar could be said to be in margin breach, but according to the evidence of Phillips there was no immediate demand that he rectify the position. (Instead, Phillips says that he told the defendant that because he was in a loss position he would have to suffer a mandatory stop order).
When the contracts were sold late on the night of the 17th, the defendant's position was closed out. The plaintiff became entitled to demand the margin payable. Even without a call the margin was payable. The measure of the plaintiff's damages for breach of agreement could well be the amount of the margin, and any loss over and above what might have been covered by the margin. Apart from anything else though, a party cannot rely on its own breach to establish its loss, and it was the plaintiff's own action in telling the bank the stop loss order was non-cancellable which caused the loss. The plaintiff is not entitled to rely on its own breach, a breach constituted by ordering a mandatory stop loss in defiance of its obligations to follow Dr. Kumar's instructions, to trigger its right to claim for Dr. Kumar's own breach. I return to this argument below.
Yet, there is a difficulty in that Dr. Kumar arguably could have paid on the Monday. Did his breach occur when he failed to pay the initial margin, even on the 17th which was a Monday and a working day and he therefore could have physically made the payment? Clause 8 expressly distinguishes between on the one hand an obligation to pay and when it accrues, and on the other actual time for payment. Clause 8.5 provides that "liability to pay margin accrues when the margin comes into existence ... whether or not a call is made." And the clause also provides in sub-clause (4) that initial margin is payable immediately irrespective of when a call is made.
If Dr. Kumar was obliged to pay the margin immediately on purchase by him of the contracts during the weekend and failed to do so, would he automatically be in breach? I think he would not be automatically in breach, because the establishment of liability to pay, achieved by force of clause 8, is one thing; the placing of the defendant as a party breaching a term of his agreement is another. He could not be in breach for merely not paying instantaneously because that is impractical when he purchases on a weekend (unless he had an electronic link to his segregated account and could have made the payment over the phone, but there is no evidence of that). Further, he would not be in breach of the agreement for not paying immediately, because the General By laws of the Exchange, clause G.2(a)(vi), implies that he has a reasonable time to pay the initial margin, and the common law implies a reasonable time for other later margins. Whatever a reasonable time might be, it is not on a Saturday straight after an out of ordinary hours purchase.
What then of the Monday, which was the 17th, the very day in the evening of which all the fuss occurred? He certainly could have paid up on the Monday. If the Monday was a "reasonable time" he would be in breach for not having paid during that day. In the case of margins other than initial margin clause 8.3 provides that if the introducing broker does not specify a time the time for payment is 24 hours. That provides some guidance, in that it makes it plain that the parties agree on 24 hours generally as a reasonable time for the making of similar payments.
Dr. Kumar had bought the contracts on the Saturday morning, 15th April. Monday was therefore more than 24 hours later. He had a reasonable time to pay the initial margin, and did not do so. Because he had been in credit before the purchase some of the initial margin was met, but not all. Was he in breach of his agreement? My view is that he was in breach, because he should have paid the due margin by the close of business on the Monday.
But the non-payment by Dr. Kumar was not a breach of an essential term. It sounded only in damages. It is worth noting in passing that it did not entitle the plaintiff to end the contract. (And, what's more, the plaintiff did not seek to end the contract, but impliedly affirmed it).
In determining whether the plaintiff is entitled to succeed in its claim, timing and the cause of the plaintiff’s loss are, I think, all important. The plaintiff had elected not to repudiate the agreement, something which might perhaps have been open to it because the defendant had not paid his margin on the Monday, if indeed that failure could be seen as a breach of an essential term or of a fundamental term, although for it to constitute such a breach the plaintiff probably would first need to have made a call. Of course, it had not abandoned its ongoing entitlement to have the margin paid. The defendant’s failure to pay it was in my view a breach of a warranty, a non-essential term entitling the plaintiff to damages if it could otherwise prove its case. But merely establishing that the defendant had breached the agreement does not establish that the plaintiff is entitled to succeed.
To determine whether the plaintiff can recover for any loss it suffered it is necessary to first ask what was that loss, and, most relevantly of all, what caused it to come into being.
I think the plaintiff’s loss was mainly its obligation to pay certain monies to the bank following the sale of the contracts. That obligation came into being because the contracts were sold. They were sold because the plaintiff wrongfully instructed the bank to do so, in breach of its obligations to the defendant to follow his instructions. That action of the plaintiff was the real cause of its own loss, and the loss in no way flowed from Dr. Kumar’s breach in failing to provide margin to the bank.
The parties’ agreement did not entitle the margin to be paid to the plaintiff. It was paid into a segregated account with the bank. If the plaintiff were to suffer loss at all, it would be because it had to make good a loss to the bank when the contracts were closed out. When the plaintiff caused the stop order to be filled and the sale to occur, it directly caused its own loss. It also plainly thereby repudiated the agreement, and Dr. Kumar, equally plainly, accepted that repudiation.
As I indicate below, one should take a common sense view of causation, and in my view the only real cause of the plaintiff’s loss was its own wrongful action in directing sale of the contracts. Dr. Kumar was indeed in breach of his agreement on the Monday, by not having paid the margin, but the plaintiff had not yet then suffered any loss. It would have suffered loss if a sale occurred in the ordinary way below the purchase price of the contracts. But once the sale occurred that night because of a wrongful insistence by the plaintiff the plaintiff’s own losses were thus also incurred, and incurred because of the plaintiff’s own actions.
I am therefore not prepared to accept that the plaintiff can rely on Dr. Kumar's breach constituted by he having failed within a reasonable time to pay the initial margin, or for that matter the later variation margin which fell due.
If for no other reason, I would also be reluctant to accept that Dr. Kumar had breached his agreement by not paying margin, because there is an argument that he could not pay due to the plaintiff's computers being down. In his statement he says that Phillips told him the computers were down and that as a result couldn't tell Dr. Kumar the amount he had to pay. It might also be the case, of course, that it was up to Dr. Kumar himself to work out the amount owing and pay it into his segregated account. I don't need to finally determine this question because I believe the loss suffered by the plaintiff was due to its own actions in causing the contracts to be sold up, and did not flow from Dr. Kumar’s breach in not paying margin.
Nor can the plaintiff rely on any other alleged breach by Dr. Kumar, such perhaps as Dr. Kumar having cancelled the stop loss. Not merely is there once again a causation problem with any such argument, but in respect of any breaches on the defendant’s part, if they occurred, the plaintiff’s actions in selling him up constituted a repudiation which was accepted by the defendant and which overtook all that went before, thereafter excusing the defendant from his obligations under their agreement. The plaintiff’s actions in selling up the defendant also had the effect of rendering his further performance impossible.
Was it only the fault of the bank that the contracts were sold?
An argument was put that if anyone was at fault, other than Dr. Kumar, it might be the bank, and that he should perhaps have sued the bank. On this view, the bank wrongfully failed to give effect to Dr. Kumar’s withdrawal of the stop loss, or gave effect to it briefly and then countermanded it. Further, on this argument, it should not have implemented the stop loss. It is said to have relied on the earlier fax and not on the alleged afternoon phone call from the plaintiff telling it the stop loss was mandatory. If there was in fact an afternoon phone call from the plaintiff making the stop mandatory one can scarcely blame the bank for acting on it. If there was no such call it would be different, but this question is a little academic since I believe there was either such a call or (more likely) there was a phone call, probably initiated by the bank, in the four minutes between Dr. Kumar’s cancellation of the stop and its execution.
I am therefore not willing to accept this argument either. The bank was entitled to accept instructions from the plaintiff as well as from Dr. Kumar himself, but it should not have accepted a mandatory stop loss and was obliged to have followed Dr. Kumar’s instructions to cancel it. In my view its actions merely made the bank liable along with the plaintiff.
That argument too is a causation argument. According to this argument, the plaintiff’s action in sending the fax was ineffectual and the bank was bound to follow the plaintiff’s later cancellation of the stop order. It followed, so this argument runs, that the plaintiff’s imposition of the mandatory stop did not cause the defendant’s loss.
I am unable to accept that view. One should take a common sense view of causation and not be too concerned to apply dubious philosophical tests to determine who caused what. In March v Stramare P/L (1991) 171 CLR 506, the High Court, in assessing liability for an accident and being confronted with an attempt to apply the old-fashioned “but for” test, said that there were conceptual difficulties with a “ but for..” approach and added that a common sense approach to causation was to be adopted: it is for the Court, having examined all the relevant evidence, to ask “What, as a matter of common sense, was the cause of the accident?”
Similar observations were made by the Court of Appeal (Per Glass & McHugh JJA), in Alexander v. Cambridge Credit Corporation, (1987) 9 NSWLR 310, followed by Hope and Priestly JJA., in Barnes & Ors. v. Hay [1988] 12 NSWLR 337: "few judges have the time to plumb these philosophical depths by giving a full consideration to the conceptual issues involved. What happens in practice and what we think the law requires is that the court decides whether the connection of the negligent act or omission of the defendant to the plaintiff's loss was such that the defendant should be made liable for it."
It would be a very strange thing if the bank acted on its own motion when it sold the contracts. Given that the plaintiff asserts that it told Dr. Kumar the stop loss was mandatory, it seems very unlikely that it did not tell the bank so. The bank found it unusual that there should be a mandatory stop. Should one then believe that the bank acted alone? It can't be that it acted on the 5:10 p.m. fax from the plaintiff, because that fax did not in its terms make the stop mandatory. It is possible that it acted on a phone call from the plaintiff or one of its officers, received in the afternoon a little while before or a little after the fax. However, the bank permitted a cancellation of the stop and then reinstated it four minutes later. It is likely that if there was a call from someone from the plaintiff it was in those four minutes. It is very probable that indeed Curtis from the bank did ring someone from the plaintiff, and that person told him to sell up anyway. I do not believe the bank acted alone. It is a curious argument anyway, given that Mr. Glissan's argument is precisely that Phillips rang the bank – that will be the afternoon call - and told it that the stop couldn't be cancelled.
The plaintiff’s actions in telling the bank that the stop loss was not to be cancelled directly caused the bank to do what it did in filling that order, and as a result the plaintiff should be seen in a common sense way as responsible for its own breach in that regard, whether or not the bank is also liable.
Plaintiff unlikely to put itself at risk
In favour of the plaintiff on the general question of credibility is that it would have wished not to put itself at risk. It was one thing, perhaps, for the plaintiff to have allowed the defendant to trade in the red in the past, but the losses which threatened on 17th April were of a different magnitude. Wary that it might have to pick up the tab if the values continued to go down, and knowing that its obligation to the bank might be in the order of tens of thousands of dollars, the officers of the plaintiff, on one view at least, would be likely to have sought to control the defendant's capacity to cancel stop orders. If it did not do so that would likely be through inadvertence, everyone being busy because trading was hectic on the 17th. Yet, the plaintiff was not so inadvertent that it neglected to impose the stop orders themselves. Having addressed that question - the need to impose the stop orders - one might think the plaintiff would indeed have also told the defendant he could not change them. I think that as an indicator of credibility this does carry some weight.
It is not however, overwhelming, if only because Dr. Kumar's evidence (at paragraph 5 of his statement) was that the stop orders were addressed in a calculated way, some of the contracts being contemplated to be sold and some bought back at a lower price, with a stop order only on the remainder. That is a calibrated approach rather than panic or anything approaching panic, and it might be that having done that much the parties went on with other work and the officers of the plaintiff never got around to taking up the issue with the defendant again.
Indeed, if the officers of the plaintiff were themselves being untruthful it is very likely that others, including the chap from the bank, were collaborating in that lie. I wouldn't shy away from a finding like that, because I generally take the view that people will often lie where their interests would be advantaged by doing so, and there is nothing remarkable about the prospect of those from the bank telling some fibs.
When the defendant intended to sell
Dr. Kumar said that he intended to sell at a pre-determined "pressure date", which was April 20th, and of course that date happened to be a date when the contracts were in a profit position. This is relevant not only to quantum of damages but also to his general credibility. The difficulty I have is that if he really intended to sell at such a pressure date, why did he agree with Phillips to have two stop loss positions fixed? The fact that he was willing to sell at a loss tends to suggest he was not being truthful when he says that he would sell at a pressure date.
This too is not a matter of overwhelming importance, but is one small indicator of untruthfulness on his part. It is only of slight value, because it seems likely that he was influenced by Phillips and not himself especially desirous of putting a stop loss order on the contracts.
Conclusion
Not only should the plaintiff fail, but I believe Dr. Kumar should succeed on his cross-claim. Dr. Kumar's cross-claim, although not strictly pleaded as such, really sounds in damages for repudiation. Looking objectively at what the parties said and did, it is plain that the plaintiff evinced an intention to repudiate. The repudiation was accepted. Their agreement then came to an end and with it the parties' obligations under it, including any obligation of the defendant to pay margin.
Whether the plaintiff was entitled to act as it did fell to be determined by resolving the question whether the plaintiff was authorised by the agreement between them to sell up the contracts. As I have said above, that turns in part on construction of the agreement, from which it appears the plaintiff had no legal power to direct a mandatory stop loss, and in part on whether Dr. Kumar was told by Phillips and accepted that he could not modify the stop loss. The latter question is one of fact, and turns on what clues to the parties' credibility might be found in the evidence.
Considering the various indicators of credibility, I am struck more than anything else by the unlikely event of the plaintiff being bereft of tapes and notes of calls and by the bank’s tapes not being available. I also think it is very unlikely that Mark Curtis, the man at the bank who took Dr. Kumar's 10:51 p.m. call to cancel the stop loss, would have sold him up only four minutes later without first ringing him back. It is more likely that, as Dr. Kumar asserted, Curtis had communication with someone from the plaintiff in those four minutes, rather than just relying either on a 5:10 p.m. fax from the plaintiff or on a phone call from the plaintiff some time in the afternoon. I am not at all sure there ever was a fax. But if there was, I think it was sent without having first told Dr. Kumar a stop would be mandatory. I think that the plaintiff simply believed it had the right to impose a mandatory stop without regard to what Dr. Kumar might say. In my view, it is most likely that Curtis from the bank spoke with someone from the plaintiff in the four minutes after speaking with Dr. Kumar and before his contracts were sold up and was asked by that person to sell up, but if someone from the plaintiff did indeed ring in the afternoon of Monday the 17th and make the stop loss mandatory he had no right to do so and did it without the knowledge of the defendant.
It is also, as Mr. Henry submits, unlikely that Dr. Kumar had been told that it was indeed a mandatory stop which was imposed, given that the 5:10 p.m. fax made no mention of the stop loss being mandatory. Since Phillips had been talking with Dr. Kumar in the course of the day, if he had really told him the stop would be mandatory one would expect the fax to reflect that.
There are other credit considerations too, but these are the more telling ones. I prefer Dr. Kumar to the evidence of Phillips and others who gave evidence for the plaintiff. As a result, I do not believe that Dr. Kumar was ever told by Phillips that he could not change the stop loss, but was expressly told he could, and there cannot be any question of Dr. Kumar being stuck with any agreement that he not do so. As I have said, the plaintiff did not have the power to impose a mandatory stop loss on him.
The question of his damages is another question altogether, and is a difficult one.
Damages
Mr. Glissan says that if the defendant were to be successful in his cross-claim, the measure of loss is nil - because a proper view is that the value of the loss is the difference between the value of the contracts when sold, which of course is the price for which they were in fact sold, and that same price for which they were sold, and the difference is nil. I do not accept that view, although I accept there must be mitigation of loss by the defendant.
Mr. Glissan relied on cases cited in chapter 23 of McGregor on Damages, including in particular one decision (the 1846 decision in Shaw v. Holland, 15 M & W 136). I think that because the sale occurred near midnight on the 17th and because other things happened on the Tuesday and Wednesday, including a visit to the defendant at Penrith by Mr. Phillips on the Wednesday, the measure of loss is the difference between the sale price and the price at which the defendant would in fact have sold the futures if he had mitigated his loss by selling on the Wednesday, as I think he should have done.
However, it is necessary to explore the defendant’s argument that he is entitled to damages assessed by reference to when he intended to sell the contracts on 20th April, a time when the SPI had risen significantly.
A good starting point is Shaw v. Holland itself, it being a case of wrongful refusal to deliver shares contracted to be sold. It ruled that the measure of damages is the difference between what they were to be contracted to be sold for and their true worth at that very time. This, of course, is what Mr. Glissan argues for.
Our own matter is plainly distinguishable. If Mr. Glissan's argument is accepted and the loss is assessed as nil, it would mean that anyone in the plaintiff's position could breach his agreement with impunity, selling up an investor's contracts without regard to that investor's instructions, and could never be brought to account for it because the loss would always be nil.
The 16th edition of McGregor on Damages discusses Shaw v. Holland at paragraphs 1102 - 1104, and refers back to its own discussion of the analogous area of sale of goods. At paragraph 832 McGregor discusses the question in the context of the statutory regime applying to damages for sale of goods cases when the market price has risen between the time of breach and the time of judgment, and offers the view that "it is arguable that the buyer should be entitled to the higher value at the time of judgment in order to put him into the position he would have been in had the contract been performed". McGregor points out that there are authorities for and against, but takes heart from favourable views in sale of land cases (see in particular paragraph 967 of his book) and offers the view that where the purchaser has already paid the purchase price one might well argue successfully for the higher value. The sale of land cases were based on the galloping inflation of the 1970s, and the consequent unfairness to a buyer when the price of the contracted for land has gone up dramatically since the contract.
A contrary view is expressed at para. 17/007 of Benjamin on sale of goods, where the following passage appears:
" Damages when price paid in advance . It could possibly be argued that the time specified in section 51(3) [A provision of the English Sale of Goods Act,identical to our own, which provides for statutory recognition of the rule in Hadley v. Baxendale .] is not appropriate when the buyer has paid the price to the seller in advance of the time fixed for delivery, and the market price rises between the time when the seller fails to deliver and the judgment in favour of the buyer. The buyer might say that only the amount of the higher market value at the time of judgment would put him into the same financial position as he would have been in if there had been no breach by the seller: since he has already paid the price, his financial position at the date of the seller's breach is to that extent worse than the normal situation where the price would be paid only if delivery were made. Although some support for this argument may be found in old decisions on the defendants' failure to replace stock and in an early case on the sale of goods, in another early case on sale of goods the court refused to follow the cases on the purchase of stock and thus refused to award the buyer damages in respect of the higher market price at the date of its judgment. It is submitted that the latter case should be followed, since the buyer should normally be able to borrow to finance a purchase in the market at the time of the seller's breach ."
(My italics).
The competing view to that put by McGregor is thus based on the obligation to mitigate. The argument is that the buyer (for which, in our case read 'investor') ought to borrow funds and buy substitute goods (or futures). That is something which can easily be done even on a Monday night at near midnight, but the defendant did not know until the Tuesday that his contracts had been sold. What then, is a reasonable time? Is it Thursday, the day Dr. Kumar said he intended to sell? Dr. Kumar could have bought on the Tuesday morning. Sales of shares cases would be just as likely to involve volatility and sudden falls or rises in value as would futures. I believe that unless one is entitled to look at the time of judgment, Dr. Kumar would be entitled only to a reasonable time in which to re-purchase substitute futures contracts.
The sale of land cases cited by McGregor show that in that area too, at least where a plaintiff buyer has seriously attempted to get specific performance, he will not be stuck with the old lower price for which he bought, but might well obtain higher damages based on the value of the land at judgment. And McGregor, as noted above, also cites authorities in the area of sale of goods for the view that, where a buyer has actually paid the purchase price, he might well obtain damages based on the value at judgment, the rationale being that he is out of pocket and can't use the money to buy substitute goods because the seller has his money.
It thus seems that on all fronts requirements of mitigation which created problems posed by authorities in sale of goods and sale of land matters, are in retreat. McGregor himself notes those changes which I think auger well for some retreat from the Shaw v. Holland principle, and at least in the case of buyers who have paid over purchase price there would seem these days to be an excellent chance that they will recover damages based on the value as at judgment. It is true that, at paragraph 1104, McGregor does say that such a view is appropriate in sale of goods cases, and in the case of sale of shares there is no call for such a rule because the buyer can seek specific performance, where of course he will get the shares themselves and hence be able to realise their increased value.
However, a buyer will not usually get specific performance in sale of shares cases, because there are similar shares usually available. Meagher, Gummow & Lehane, Equity, Doctrines and Remedies, 3rd edition, page 499, reads as follows:
"[2008] (b) Contracts for the sale of personalty. A contract for the sale of shares, stock or other securities is, generally speaking, specifically enforceable if the securities are not readily obtainable in the market ... [but] not if anyone can go and buy them ... because damages will be an adequate remedy."
Futures contracts based on the SPI must be taken to have been readily available at all material times. It is a matter of common knowledge that they can be purchased in the futures market. Accordingly, specific performance would not be granted. As a result, the reasoning which McGregor applies to sale of goods, and is reluctant to apply to sale of shares, has full application in the case of sale of futures.
Yet another reason for postponing the date at which one must look to see the value of the futures for the purpose of assessing damages also appears from McGregor's discussion. At paragraph 1104 McGregor, noting similar rules in the case of delays in the delivery of sold goods, cites Wilson v. London and Globe Finance Corporation (1897) 14 T.L.R. 15 (Court of Appeal) for the view that where the date of delivery (of shares) is postponed at the seller's request the date of the breach is postponed until the buyer will no longer grant indulgence and the market price on that date will be the relevant one. He says that the same rule applies in the case of sale of goods, and cites Ogle v. Vane (1867) L.R. 2 Q.B. 275, a case which was applied in Wilson.
Although it might be thought that here there is no parallel to the request of the seller in that case to delay delivery, futures are somewhat analagous to a sale of goods where delivery is postponed. The margin is more like security than anything else. The investor does not pay in advance for the ‘goods’, and does not acquire any physical delivery unless clause 24 is invoked, and if that happens it will be much later, perhaps even when the contract expires when its finite life comes to an end. As I have said, it seems to me to be extremely unlikely that there will ever be any 'delivery' of the futures (ie: the interest in the SPI which presumably underlies the contract, and which under clause 24 can theoretically be reduced down to delivery of "physicals"). It is therefore the case that the subject futures contracts of their very nature provide for delay in delivery at best, and arguably no delivery ever takes place. A sale of shares is not like that. The shares are simply sold and handed over. But a sale of goods or shares too for that matter, could provide for delivery to be delayed. If they do, cases like Ogle v. Vane are authority for the view that the value of the item delayed in delivery should be assessed at the date for which delivery was arranged. Futures contracts like the present ones, being as I have said in their nature something which provides for delivery in a formal sense only at the end of the contract, or at worst providing for delay in any delivery, should arguably have their value assessed at some indeterminate but reasonable future time by which in the ordinary course of events, and having regard perhaps to when the investor would ordinarily have sold, they can be said to have vested in him at the moment of resale and for the purpose of that sale.
It must be conceded that there is a weakness in this last argument, in that many of the cases on delay in delivery of goods proceed on the footing that a buyer is still at risk in the interval pending delivery. The seller could in that interval take action against him under their contract, and might repudiate or fail to deliver. Any number of things could happen, and the buyer must sit it out and wait for the time fixed for delivery. In our own matter, Dr. Kumar didn't have to wait for anything. The bank, at the instance of the plaintiff, had sold him up. Nonetheless, the underlying rationale in the sale of goods cases is partly unfairness to the buyer, who should be entitled to receive the value of the goods contracted for as at the date for which delivery was fixed. Dr. Kumar is in the same position. He expected to sell on the 20th, and that became the delivery date for him - since he must notionally take delivery in order to pass on title to a buyer. It is a reasonable argument that fairness to him requires that if not at the date of judgment the value of his contracts be assessed by reference to their value at that date.
Dr. Kumar did not pay over the margin due by him, but there is an argument that he should be regarded in the same way as one who has. He was out of his funds because he had to hold them on one side to meet any possible claim by the plaintiff, a claim which in fact materialised in the present action. Accordingly, he was no more able to use those funds to buy substitute futures than one who had paid them over to the seller.
Therefore, it is an attractive proposition to look at the date of judgment or the date of the 20th when Dr. Kumar intended to sell to determine the value of the contracts compared with the original purchase price. I found him generally believable, and 20th April is only a few days after the Saturday on which he bought them. If he had claimed he intended to sell them some twelve months later, assuming they did not rise until then, one might be sceptical, but a plan to sell in a time frame of less than a week is not implausible. I would be prepared to take judicial notice of the fact that futures based on the SPI are worth more today than they were on 20th April, 2000.
Yet, although I do believe there are arguments which favour Dr. Kumar’s preferred date of 20th April, and that the law is moving away from its previous strict insistence on immediate mitigation, I think it has not yet moved quite far enough. If Dr. Kumar had been physically out of pocket (ie: if he had paid his margin) I would probably have acceded to his argument that one should look to the 20th see the day on which the value should be determined. But he hadn’t paid the margin, and I don’t think the law allows of that course, although it is moving in that direction.
Dr. Kumar must mitigate, but the date and time for mitigation must be reasonable. I think he must be allowed the whole of the Tuesday and the Wednesday, because having only found out on the Tuesday that his contracts had been sold up, he had to consider his position, before being required to mitigate by buying other futures in substitution. He was also entitled to speak to Phillips who wanted to talk to him, and Phillips came out to Penrith to do so. It is reasonable in my view that Dr. Kumar allowed him that opportunity, which was both a chance for Phillips to put the plaintiff’s point of view and an opportunity for Dr. Kumar to learn whatever Phillips could tell him - something which for all he knew might have impacted on the question whether he should buy substitute futures. I think he was entitled to mitigate as at the close of business on the Wednesday, giving him a few hours after speaking to Phillips to mull things over and to physically get down to the bank.
If I am wrong in this regard, that is, in taking the view that the defendant was entitled to a reasonable time in which to mitigate, and in taking the view that that time was the closing price on the Wednesday, he would be entitled to nominal damages which I would assess at one dollar.
In the result, Dr. Kumar will succeed in his cross-claim, and I will enter judgment in his favour for an amount as calculated below less what would have been the plaintiff's commission if it had continued as broker until a sale occurred on the mitigation date, the time of the closing price on 19th April. There will be liberty to apply as to interest and costs. The parties will need to assist me with what would have been the commission payable.
The amount of Dr. Kumar's damages, apart from commission and apart from his seeking to recover what was in his segregated account, should be calculated as follows:
Contracts Lot size SPI when bought when sold Difference Loss
2 25 2971 3072 101 5,050
4 25 3049 3072 23 2,300
Total loss $ 7,1253 25 3075 3072 -3 -225
The amount in his segregated account was $9,541.28 (reduced from the $16,500.00 odd which was previously argued for). Previously I thought that although not formally pleaded Dr. Kumar had indeed conducted his case as though to seek recovery of the amount in his account. However, as best I can discover on looking through my notes and the transcript and exhibits, he never did seek to include such a claim in his cross-claim nor, until the time came for addresses, did he run his case as though to claim for it.
If Dr. Kumar had included such a claim I would have allowed it. I find that the plaintiff wrongfully repudiated their agreement by causing the contracts to be sold up in breach of its obligation to follow his instructions, a repudiation which was accepted, and was also guilty thereby of making his performance of their agreement impossible. The result is the same in either case. When that repudiation/impossibility happened the parties' rights under the agreement came to an end, and were replaced by a right in Dr. Kumar to damages for that renunciation, and his present cross-claim sounds in damages for it. He has not pleaded his cross-claim that way, but this is not a court of strict pleading.
His damages occasioned by the plaintiff's renunciation or perhaps for money had and received, had he only claimed for them, would include the $9,541.28 which he had in the segregated account, but since there was no
such claim made by him until it came to addresses I think that when I come to enter judgment I cannot include that sum. In those circumstances it would only be fair that he be permitted to withdraw any such claim so that he is not met with a res judicata should he wish to bring a separate claim for that amount at some later date.
DATED this 20th day of September, 2002.
(W. G. Pierce) (Magistrate)
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