David Securities P/L v Commonwealth Bank of Australia

Re: DAVID SECURITIES PTY LIMITED; A & T RAHME & SONS PTY LIMITED;
ANTOINE RAHME and THERESE RAHME
And: COMMONWEALTH BANK OF AUSTRALIA; DON CRAIG; DONALD PAGE MORGAN;
RONALD ALAN SMITH and KEVIN ANDREW VEALE
No. G234 of 1988
FED No. 208
Trade Practices - Negligence and Contract - Equity - Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Hill J.(1)

CATCHWORDS

Trade Practices - Foreign currency loan - loss incurred due to exchange rate fluctuations - whether lending bank's conduct misleading or deceptive - consideration of representations and silence in the context of entirety of advice given.

Negligence and Contract - Foreign currency loan - content of duties of care owed by lending bank and by independent accountant retained by borrowers to "look after" loan - whether duties owed under contract and tort are coterminous - question of reliance where act constituting breach is an omission to advise - onus of proof of causation - whether causation test subjective or objective - whether loss suffered by borrowers due to exchange fluctuations "caused" by accountant's breach of duty to advise of risk minimization techniques.

Equity - Foreign currency loan - whether lending bank or accountant in breach of fiduciary duty owed to borrower - whether fiduciary obligations of bank extended beyond those under common law.

Practice and Procedure - Expert witness - ultimate issue rule - admissibility of evidence to establish content of duty of care owed by professional.

Trade Practices Act 1974 - s.52

Kabwand Pty Ltd v. National Australia Bank Ltd 21 April 1989 Full Federal Court (unreported)

Rhone-Poulenc Agrochimie SA & Anor v. UIM Chemical Services Pty Ltd & Anor (1986) 68 ALR 77

Henjo Investments Pty Ltd v. Collins Marrickville Pty Ltd (1988) ATPR 40-850

Hargrave v. Goldman (1963) 110 CLR 40

Codelfa Construction Pty Ltd v. State Rail Authority of NSW (1981-2) 149 CLR 337

Hawkins v. Clayton (1988) 164 CLR 539

Rylands v. Fletcher (1866) LR 1 Ex 265

Norton Australia Pty Ltd v. Streets Ice Cream Pty Ltd (1965) 120 CLR 635

Australia Mutual Provident Society v. Dowell Australia Ltd 8 November 1988 NSW Supreme Court, Commercial Division (unreported)

Brickhill v. Cooke (1984) 3 NSWLR 396

Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank Ltd (1986) AC 80

San Sebastian Pty Ltd v. Minister Administering Environmental Planning & Assessment Act 1979 (1986) 162 CLR 340

Sutherland Shire Council v. Heyman (1985) 157 CLR 424

Woods v. Martins Bank Ltd (1959) 1 QB 55

Catt v. Marac Australia Ltd (1986) 9 NSWLR 639

James & Ors v. ANZ Banking Group Ltd (1985-6) 64 ALR 347

Hedley Byrne & Co. Ltd v. Heller & Parkes Ltd (1964) AC 465

McEvoy v. ANZ Banking Group Ltd 1 October 1987 Brownie J. NSW Supreme Court (unreported)

Davkot Pty Ltd v. Custom Credit Corp Ltd & Ors 27 May 1988 Wood J. NSW Supreme Court (unreported)

Stafford v. Conti Commodity Services Ltd (1981) 1 All ER 691

Lloyd v. Citicorp Australia Ltd (1986) 11 NSWLR 286

Kullack v. Australian & New Zealand Banking Group Ltd (1988) ATPR 40-861 and appeal 8 July 1988 (unreported)

Commercial Bank of Australia v. Amadio (1982-3) 151 CLR 447

Browne v. Dunn (1893) 6 R 67 HL

Allied Pastoral Holdings Pty Ltd v. Commissioner of Taxation (1983) 1 NSWLR 1

Foti v. Banque Nationale de Paris 17 March 1989 (unreported)

Pacific Acceptance Corp Ltd v. Forsyth (1970) 92 WN 29

Sills v. Brown (1840) 9 CAR & P 601

Haynes v. Doman (1899) 2 Ch 13

Midland Bank Trust Co Ltd v. Hett Stubbs & Kemp (1979) 1 Ch 384

Quigley v. Commonwealth (1980) 35 ALR 537

Duyvelshaff v. Cathcart & Ritchie (1973) 1 ALR 125

City of Kamloops v. Nielsen (1984) 10 DLR (4d) 641

Canterbury v. Spence (1972) 464 F(2d) 772 (Circuit Court of Appeals for the District of Columbia)

Ellis v. Wallsend District Hospital 16 September 1988 (unreported)

Gover v. South Australia & Perriam (1985) 39 SASR 543

Bolam v. Friern Hospital Management Committee (1957) 1 WLR 582

Chatterton v. Gerson (1981) QB 432

Smith v. Auckland Hospital Board (1965) NZLR 191

Reibl v. Hughes (1980) 114 DLR (3d) 1

Betts v. Whittingslowe (1945) 71 CLR 637

HEARING

SYDNEY

#DATE 11:5:1989

Counsel and Solicitors Mr W G Hodgekiss and Mr S Y for Applicant: Reuben instructed by Messrs

Gould & Shaw

Counsel and Solicitor Mr A R Emmett Q C, Mr A J for First & Second Meagher and Mr J Marshall Respondents: instructed by Mr L C Hollis

Counsel and Solicitors Mr D A Wheelahan Q C and for Third Respondents: Mr P M Jacobson instructed

by Messrs Tress Cocks & Maddox

ORDER

The application be dismissed.

The applicants bear the costs of the first, second and third respondents.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

Introduction

When the deregulation of the Australian financial system occurred, including the float of the Australian dollar and the virtual abolition of exchange controls, it became possible for the first time for Australian residents to be offered by banks, carrying on business in Australia, loans or other financial accommodation denominated in currencies other than the Australian dollar.

The availability of overseas funds at what appeared to be relatively low interest rates as compared with the rates of interest applicable to loans denominated in Australian currency seemed particularly attractive to the Australian borrower who, unlike his counterpart in many other countries, had no experience in the foreign exchange market. Many borrowers, it would seem, failed to appreciate that the reason for the low rate of interest applicable to loans in the hard currencies such as the Swiss franc ("CHF") and the deutschmark as compared with the high rate of interest payable on like loans in Australian currency lay in the perception of the foreign exchange market of the likely depreciation per annum of the Australian dollar during the term of the loan. Further, while the exchange rate of the Australian dollar was fixed it had generally (although there had been some exceptions) been stable against the rates applicable to other currencies. With the float of the Australian dollar came a high level of volatility in the rate of exchange.
Among the individuals and corporations who took advantage of the ability to borrow in overseas currency were the applicant companies whose unhedged borrowings continued during the period of the substantial depreciation of the Australian dollar to the CHF in 1985-86, with the result that, if those loans were repaid, a considerably greater number of Australian dollars would be required to make the repayment than were represented by the original borrowings. In fact, however, the loan facilities in the present case are presently denominated in United States dollars and remain unrepaid so that the loss has not, except to a minor extent referred to subsequently, crystallised.
The applicants claim relief from the respondents by way of damages for the loss they claim to have suffered. Their claim is not only against the Bank which made available to them the foreign currency facility but also against a firm of accountants (the third respondents) to whom the Bank referred the applicants and who it is alleged were retained to manage, monitor or look after the loan. All parties have agreed that the Court should hear and determine the issue of liability as a separate matter leaving to a later date the assessment of the damages, if any, which the applicants may have suffered. Although conscious that the splitting of the issue of damages from the issue of liability may have some disadvantages, and particularly that findings made on the issue of liability might impinge upon findings on the issue of damages, should such findings become necessary, I acceded to the agreement of the parties having regard to the costs that might be unnecessarily incurred by the applicants should it turn out that one or more of the respondents had no liability at all in law to the applicants.
The Parties
The corporate applicants, David Securities Pty Limited and A & T Rahme & Sons Pty Limited are both companies of which the third and fourth applicants, Mr and Mrs Rahme are directors. A solicitor, Mr D'Apice, was also a director of each company but played no part in the events with which we are concerned. The shares of A & T Rahme & Sons Pty Limited are owned by Mr and Mrs Rahme and their children. That company carries on business in its own right. David Securities Pty Limited is the trustee of a family trust settled for the benefit of the Rahme family.
Mr Antoine Rahme was born in Lebanon and educated there until the age of 18 years. Subsequently he worked as a builder in Lebanon until coming to Australia in 1956, not having previously learned English in Lebanon. He initially worked in Australia as a labourer and a builder but over the past 20 years his principal activity was property development and building on behalf of A & T Rahme & Sons Pty Ltd and David Securities Pty Ltd which had been incorporated by 1969 and 1972 respectively. Mr Rahme married his wife in 1958, she also having been born in Lebanon and having migrated to Australia. Among their children is Mr David Rahme, the eldest child, who was born and educated in Australia, having graduated with the degree of Bachelor of Engineering in 1983 from what is now known as the NSW University of Technology. After graduation, except for a short period as an engineer in the Public Works Department, David has worked for the family companies assisting in the construction side of the business, although as will be obvious, he participated in financial decision making and was held out in one document to the Bank to be a director and was a signatory on the bank accounts of the corporate applicants. Although there was some reference in the evidence to another child or children such child or children had no part to play in the present events.
The Witnesses of Fact for the Applicants
Before recording my findings on the evidence, I wish at the outset to record my impressions of the Rahmes as witnesses. Mr Rahme (I will hereafter refer to him as "Mr Rahme" and to his son as "David") was in my view a person whose English was quite limited. Although an interpreter was sworn, he was requested to answer questions in English where able to do so. As a consequence he did not have resort, except on a few occasions, to the interpreter although it was quite clear that he had difficulty in understanding questions that were put to him. This is not to say that Mr Rahme was unable to deal with day to day matters in English; or that his English was not good enough to enable him to become a quite successful builder and property developer. But he clearly would not, in my opinion, have been able to understand a conversation held in the English language to discuss the concepts of hedging, parity adjustment, stop loss orders and other matters of a technical nature which loomed large in the course of evidence.
Mr Rahme asserted in the witness box that he could not read English and I have no reason to doubt that he was telling the truth. Thus correspondence between the Bank and the Rahmes was unintelligible to him unless, of course, translated. The fact that Mr Rahme had executed many legal documents written in the English language or that he might be able to write particular words in Roman script did not, despite the submissions of counsel for the Bank cause me to resile from my conclusion that Mr Rahme could not read English and I accept what he said when called upon to look at a document in English shown to him. He said: "If I read English look like I am speak Chinese".
However I am also satisfied that Mr Craig, the second respondent and the manager of the Dee Why branch of the Commonwealth Bank at the time the negotiations for the facility occurred, had no knowledge of Mr Rahme's inability to read English and that Mr Craig believed, if his belief be relevant, that Mr Rahme understood what Mr Craig said to him in the course of their business meetings. Their association had dated back many years and in day to day financial matters Mr Rahme had never appeared to have any difficulty of comprehension.
Mr Rahme's recollection of the various conversations that took place with Mr Craig and other officers of the Bank and with Mr Morgan was generally poor. This may well have been because Mr Rahme did not understand much of the import of what was discussed at meetings where it can be inferred that David or possibly Mrs Rahme did most of the talking or it may be that Mr Rahme has, as a result of age, a poor recollection. Either way I found his evidence generally unsatisfactory so far as it went to matters of detail and where his evidence conflicted with that of Mr Craig in the account of the facts that follows I have preferred the evidence of Mr Craig to that of Mr Rahme.
Mrs Rahme impressed me as a very astute and intelligent woman. Her English was extremely good, at least in day to day matters and I find it extremely unlikely where matters were explained to her that she would fail to understand the explanation. Indeed, she impressed me as the sort of person who, if she had a query or failed to understand something, would continue with some persistence with her enquiries until satisfied. If would seem that, before at least David became active in the business, financial negotiations between the Bank or finance companies and the applicants were conducted by Mrs Rahme. Mrs Rahme admitted to being able to read English although she asserted that she had no understanding of legal and financial words. Mrs Rahme was the company secretary of each applicant company.
Mrs Rahme was clearly apprised of the issues in the case and took every opportunity to ensure that she reiterated those matters which she saw as important, even when to do so was totally unresponsive to the questions put to her. By way of example, when asked by her counsel whether she recalled what was said in the course of a particular conversation with Mr Craig she replied: "Not really. We went down to sign the documents for the loan. I cannot remember exactly what was said, but there was - I remember clearly there was nothing mentioned about this loan or explained properly or read to us. That is clearly, I remember that; nothing was read." Presumably the word "read" was wrongly transcribed for "said".
Again in cross-examination when asked whether she remembered whether there was some discussion about what was meant by "parity adjustment" she replied: "No, I did not, actually, I do not know what it means." (at p 205)
When asked whether upon receiving a particular letter from the Bank, which she had said she did not understand, she made enquiries about what the letter said, she replied: "That is the whole point. I myself trusted the Bank. I have faith in Mr Craig and the Bank."
I have little doubt that Mrs Rahme understood far more of the matters discussed with the Bank, or the subject of correspondence with the Bank, than she was prepared to admit before me. She is not, so far as I could see, at all a naive person and I can not accept that she failed to understand the meaning of such ordinary words as "currency" as she asserted or that, as she said in evidence she did not understand there was a difference between the American and the Australian dollar. This is not to say that she necessarily understood all the technical terms used in discussion or correspondence with the Bank. However it casts doubt upon that part of her evidence and indeed, upon her evidence in general.
Mrs Rahme was at pains in her evidence to emphasise that she was totally unaware that there was any risk in borrowing in foreign currency (other than such risks as arise generally from any borrowing) and that in everything the family did it placed the utmost trust upon the Bank. However, it appears that she had been twice back to Lebanon, the first time in 1973 and the second time in 1980. She gave evidence that she had not observed any particular change in exchange rates between the Australian dollar and the Lebanese pound over the period from 1973 to 1980 although subsequently she conceded that the civil war in Lebanon which she said broke out in 1975 did make a big difference to the number of Lebanese pounds that could be obtained for an Australian dollar.
Thus I find that Mrs Rahme did understand, at least from the time the loans were drawn down, the dangers of exchange fluctuation inherent in loans denominated in foreign currency, although I accept that her understanding was limited in so far as techniques of loss minimization were concerned.
Mr David Rahme is clearly intelligent. He has obtained a degree in engineering and is a bright and articulate young man. He was born and educated in Australia, completed his Higher School Certificate in 1976 and graduated in 1983. He has had no formal business training and studied no business oriented subjects during the course of his engineering degree. Obviously he suffers no difficulty of understanding, reading or communicating in English.
Both Mr Rahme and David gave evidence the effect of which was that David was unable to communicate with his father in Arabic, although Mr and Mrs Rahme communicated in that language. Thus it was suggested that when an explanation was given to David or indeed when the occasion otherwise arose when it was necessary to do so David, if he understood, would attempt to explain the matter in English to his mother who in turn would translate the meaning to Mr Rahme in Arabic. The inability of David to communicate with his father was described graphically by Mr Rahme as follows: "Well actually my son he speak English and I speak Lebanese. He does not speak Lebanese and I cannot speak English. He tried to explain to me. I cannot understand him and he cannot understand me." (p 106)
My general understanding of ethnic households in Australia would have suggested that Mr Rahme was at the very least overstating the position. Since it was clear from the evidence that the Rahme family was a close one and since David had been brought up in a Lebanese (Arabic) speaking family it would be hardly credible that he could not communicate with his father. However, I have no need to rely upon my own understanding to which otherwise it could be argued the Rahmes presented an exception. Mr David Rahme was overheard outside the court room speaking to the applicants' solicitor in Arabic. He was recalled for cross-examination by counsel for the third respondent and the event and the cross-examination upon it have a considerable bearing upon his credit. He denied that Arabic was his language of choice but conceded that he "may have" conversed with the solicitor outside the court in Arabic. That he did was not denied. He agreed that it was his intention to convey when giving evidence that he only tried to converse with his father in English. The corollary of that evidence was that he did not attempt to, nor could, converse with his father in Arabic.
Subsequently, he suggested that he had become more fluent in Arabic since the events in 1984-5 with which the case was concerned by having undertaken a couple of Arabic classes to improve his language. The explanation was unconvincing in the circumstances.
This matter, coupled with a tendency on David's part to give unresponsive answers which seemed designed to assist his parents' case has led me to treat David's evidence with great caution. To the extent that it conflicts with that of Mr Craig I would prefer the evidence of Mr Craig and that is reflected in my findings of fact.
However, I have greater difficulty when David's evidence is in conflict with that of Mr Morgan and I will defer consideration of that matter until I have commented upon Mr Morgan's testimony.
The Witnesses of Fact for the First and Second Respondents

So far as the events most critical to the resolution of the factual matters before me, Mr Craig was the most significant witness for the first and second respondents. He had been the manager of the Dee Why branch of the Bank for almost eight years during which time the Rahmes had been good customers of the Bank and he had enjoyed excellent relations with them. He left the Bank on 28 May 1985 on leave prior to his retirement in June of the same year.
In accordance with the practice of the Bank Mr Craig kept detailed diary notes of many, although not all, of the meetings he had with the Rahmes or Mr Morgan in connection with the facilities which the Bank agreed to make available to the corporate applicants. No attack was sought to be made upon Mr Craig's credit and I accept that what is contained in the diary notes represents an accurate account of the substance of the discussions which are there recorded. Where no record of a conversation was kept Mr Craig's recollection was, as is not surprising, sometimes unclear and I formed the impression that there was some reconstruction involved in giving his evidence. Nevertheless he attempted to give his evidence truthfully and where there was a conflict between the evidence of Mr Craig and the evidence of any of the Rahmes or Mr Morgan I prefer to accept the evidence of Mr Craig.
Other officers of the Bank also gave evidence. Mr Horne, who was employed in the Bank's treasury area and was involved in the Bank's risk advisory service, had kept no diary notes of matters on which his evidence was required. He gave his evidence honestly but had no real recollection of the forward exchange contracts which he had carried out for the applicants. This is hardly surprising since they, presumably, were merely isolated individual transactions among countless similar transactions. Similarly, Mr Osmond, a loans officer, gave evidence, but apart from identifying diary notes of conversations in which he participated, I am satisfied that Mr Osmond had no independent recollection of the events in question. Mr Stone who was the senior loans officer at the Dee Why branch at the time the loans were negotiated and who left the Bank in August 1985 had likewise no recollection of the events in question. Thus the evidence upon which I would rely so far as concerns the Bank's case is largely documentary although in some places it is fleshed out by the oral evidence of Mr Craig.
The Witnesses of Fact for the Third Respondent
Mr Morgan and Mr Veale, two of the three persons named as the third respondents in the pleadings, also gave evidence before me. Mr Morgan was somewhat evasive in his answers and in respect of one matter of significance gave evidence which seemed in conflict with a prior statement made by him. There is conflict between evidence of Mr Morgan and that of Mr Craig, particularly as to the subject matter of a conversation of some importance alleged to have occurred between them on 12 October 1984. Having regard to Mr Craig's diary note of the conversation and on the probabilities I prefer Mr Craig's version of the conversation to that of Mr Morgan.
There is also a conflict between the testimony of Mr Morgan and that of the Rahmes on the vital matter of Mr Morgan's retainer. Mr David Rahme asserted and Mr Morgan denied that Mr Morgan had, some time between 17 October 1984 and the drawing of the second tranche of the Bank's financial accommodation in March/April 1985 been requested to manage or look after loans. Had the only evidence supporting the holding of that conversation been that of David Rahme I would not have been satisfied that the conversation took place. However, having regard to the conversation that took place between Mr Craig and the Rahmes on 17 October 1984 which I find to have taken place substantially in accordance with Mr Craig's diary note of it, I think that on the balance of probabilities and notwithstanding the unsatisfactory features of David's evidence it is more probable than not that by January 1985 Mr Morgan had been asked to take over the entire accounting work of the Rahmes and that he had agreed to "look after" the loan with whatever consequences may be seen to have flowed out of that retainer.
I find Mr Veale to be a witness of truth and I have no hesitation in accepting his evidence. However, on the critical question of the retainer between the applicants and the third respondents there was nothing on which Mr Veale's evidence could cast light.
The Statement of Claim
The statement of claim in its final amended form was a lengthy and in some ways confusing document. The difficulty arose in part from a failure to distinguish between pleading of facts and pleading of the evidence from which conclusions of fact are sought to be drawn and in part from a confusion between matters that should be pleaded and matters of particulars.
Against the Bank it was alleged that the Bank owed the applicants a duty of care to advise the applicants of:

"(a)The foreign exchange risks associated with borrowing in currencies foreign to Australia by a weakening of the Australian dollar in relation to the currency of the loan.

(b) The mechanism (sic) available to a borrower to guard against adverse currency movements."

It was further alleged that the Bank had failed properly to advise the applicants of such risks and "failed to advise of the mechanisms" (sic) so available in breach of such duty.
The claim of the applicants against the Bank in tort was repeated in the statement of claim as a claim sounding in contract and requires no further elaboration.
Third, the applicants sought to rely upon s.52 of the Trade Practices Act 1974 in its claim against the Bank. It was alleged that the misleading or deceptive conduct of the Bank was to be found in a representation by Mr Craig that it would be advantageous for the applicants to borrow in foreign currency because of the low interest rate that would be payable on the loan from the Bank. This representation it was alleged induced the applicants to take up the loan as a result of which damage was suffered.
It was also alleged that the Bank's failure to advise of the mechanisms available to guard against adverse foreign currency movements was itself misleading and deceptive "in that the Bank knew or ought to have known that same represented a holding out by the Bank that the loan was unattended by" foreign exchange risks.
A further count alleged in the alternative was that the Bank and Mr Craig owed to the applicants a duty to take reasonable care in the management, maintenance, administration and advising in respect of the loans and that there had been a breach of that duty.
Finally, against the Bank it was alleged that by agreeing to act as the applicants' advisers in relation to the foreign currency loans the Bank came under a fiduciary duty to the applicants to act bona fide in the interests of the applicants and not in its own interests, and that such fiduciary duty had been breached.
Although it would have been possible to construe the statement of claim as asserting that the Bank breached its duty of care to the applicants by recommending Mr Morgan as being a competent adviser when he was not, that obligation was not pressed before me and I have accordingly not considered it.
The claim against Mr Craig was essentially one of aiding and abetting the Bank in its contraventions of the Trade Practices Act, although against him, it was alleged that he personally owed to the applicants a duty of care in the management, maintenance, administration and advising in respect of the loans and that he had breached that duty. An allegation of fraud against Mr Craig was not pressed.
Against the third respondents it was alleged that Mr Morgan owed the applicants a duty of care to advise of the exchange risks of borrowing and the mechanisms available to guard against adverse foreign currency movements and that he had breached that duty. It was further alleged that Mr Morgan owed to the applicants a duty to take reasonable care in the monitoring and advising upon the loan and had breached that duty. These claims in part were repeated as claims for breach of contract relying upon an implied term that Mr Morgan would exercise reasonable care, skill and diligence in providing accounting and advisory services to the applicants in relation to the foreign currency loans.
Breach of fiduciary duty was also alleged against the third respondents in terms similar to that alleged against the Bank, that fiduciary duty being said to have arisen out of the third respondents agreeing to act as the applicants' advisers in relation to the loans.
Findings of Fact - the Events Prior to the First Drawdown
Since coming to Australia Mr Rahme had been a customer of the Commonwealth Bank and since about 1979 he had dealt with the Dee Why branch of that bank. Finance for development projects had initially been obtained from finance companies but between 1974 and 1984 such finance was obtained through the Bank either by way of commercial bill facilities or fully drawn loan accounts, the sums borrowed being drawn down progressively as needed.
About May of 1984 the Rahmes commenced building work on a project at Gurrigal Street, Mosman which was to comprise four offices and five town house units, the project being estimated to cost about $900,000. Their need for finance for the project was estimated at the time to be in the vicinity of $700,000 and it would seem that the Bank agreed to provide finance for the project. Thus some $300,000 to $400,000 of finance had been made available to the applicants prior to the draw down of the overseas loans. Initially the Mosman project was undertaken for the purpose of resale although it would seem that Mr Rahme was interested in retaining it as an investment if this were financially viable. What militated against the project being so retained was the high interest rates prevailing at that time in Australia for loans denominated in Australian dollars.
On 25 or 27 July 1984, most probably the former, Mr Rahme went with David to the Bank to sign some papers. By accident they saw Mr Craig arrive at the Bank and engaged in casual conversation with him. Mr Rahme mentioned to Mr Craig the Mosman project, his desire to keep it, and the difficulty of high interest rates. Mr Craig at that point mentioned the possibility that the Rahmes could get a foreign loan which after bank charges would work out at about 7% interest.
Mr Craig gave evidence that he said: "The only cheap money available comes from overseas. The Bank does arrange loans from this source but there are stricter guidelines than for normal borrowing." He then said that he proceeded to explain how such a loan worked indicating for Swiss francs that the interest rate would be 5% together with a fee to the Bank. This compared with the rate of 16.5% that was being charged to the applicants on a fully drawn facility at that time. Mr Craig's evidence is that at this first meeting he said:

"During the loan you pay interest each six months in the currency you borrow and any principal reductions are also made in that currency. This is the reason why a stable currency must be selected otherwise adverse fluctuations could seriously affect you. Nevertheless the Bank gives you options, namely, changing currencies; hedging your borrowing; coming back on shore and taking fully drawn loan facilities; clearing the debt at any time."

The applicants deny that this was said but I think that it is probable that Mr Craig did mention the possibility of adverse exchange fluctuations and something about the complications of borrowing in overseas currency and I so find. This then explains his recommendation made at the same meeting and repeated on a number of occasions thereafter that the Rahmes consult an accountant well versed in the intricacies of foreign loans, a recommendation which all parties agree was made. It is possible that at this meeting Mr Craig mentioned hedging, but if he did I accept that the Rahmes had at that time no understanding of what the term meant and that Mr Craig offered no explanation at that time of the concept.
Shortly thereafter the Rahmes indicated to Mr Craig their interest in pursuing a foreign borrowing. Mr Rahme indicated his dissatisfaction with Mr Clouten his then accountant who was not, he said, familiar with foreign currency loans, whereupon Mr Craig asked Mr Rahme whether the Rahmes would like Mr Craig to suggest another accountant. Three names were suggested, one of which was Mr Morgan of Messrs Morgan Pitt & Associates, a local accountant, and with whom in the meantime Mr Craig had spoken. Mr Rahme indicated his preference for Mr Morgan as being a local accountant and Mr Craig thereupon telephoned Mr Morgan and arranged an appointment for the Rahmes to attend upon him.
Mr Morgan had been a client of the Dee Why branch of the Bank for some years and had a friendly professional relationship with Mr Craig. Earlier in 1984 Mr Craig had been involved in a discussion at the head office of the Bank where the topic of a particular foreign currency borrowing for another customer of the Bank was discussed. He had mentioned the meeting in passing to Mr Morgan who commented that he had been involved in acting for a client who had such a loan. When Mr Craig was made aware of an appointment having been set up for the Rahmes to discuss with him the possibility of the companies applying for a foreign currency loan, Mr Craig phoned Mr Morgan. Mr Craig told Mr Morgan that it was possible that the Bank would be proceeding with a new foreign loan application. According to Mr Craig he then said: "As you know I need an accountant who is familiar with foreign currency lending to look after them" (i.e. the customers). He asked Mr Morgan whether he was interested and Mr Morgan replied that he was.
At one stage in his evidence Mr Craig suggested that in this conversation he described the proposed role of Mr Morgan as being "to monitor and control and look after and assist them with the foreign currency loan". I am not satisfied that Mr Craig mentioned all these matters in this early conversation with Mr Morgan. It is, in my view, more probable that Mr Craig spoke at this meeting of assistance and looking after the loan.
There appears to have been at this early stage, some confusion as to what it was that Mr Craig expected Mr Morgan to do for the applicants. David Rahme alleges that after telephoning Mr Morgan Mr Craig indicated that a meeting had been arranged with Mr Morgan "about the application for a foreign currency loan". It is quite likely that Mr Craig did say something along these lines, meaning thereby that Mr Morgan would advise in connection with the application which the Rahmes intended making to the Bank. For his part David Rahme appears to have understood the reference to an accountant to have been necessary for the purpose of the accountant preparing a formal application to the Bank for the foreign loan.
The initial meeting between Mr Morgan, Mr Rahme and David took place on 27 July 1984. At that meeting David Rahme outlined the activities of the two companies, the plans for the Gurrigal Street development and a proposal to buy property for a town house development. He referred to his meeting with Mr Craig and Mr Craig's recommendation of Mr Morgan and asked Mr Morgan to prepare an application to the Bank for a foreign currency loan. Mr Morgan accepted this retainer and asked David Rahme to provide cash books, bank statements and financial records to enable him to prepare the application and a cash flow forecast to support it.
In his written witness statement, to the correctness of which he attested, Mr Morgan swore that Mr David Rahme had told him that the Commonwealth Bank had recommended the borrowing to be in Swiss francs rather than other currency and that the Rahmes had accordingly decided to borrow in Swiss francs "because the business cannot service a loan of $1,700,000 if it has to pay Australian interest rates." He further swore that David Rahme had said: "The Bank has indicated that it would not require us to hedge and we won't because we understand the cost of hedging would negate the benefit of borrowing foreign currency." David denied making these comments; his father had no detailed recollection of the discussion.
I prefer the evidence of David Rahme in this respect. First, it seems clear from a hand written note of Mr Morgan written at the time (Ex.118) that the discussion revolved around the possibility of a loan of AUD850,000 to AUD1,000,000 rather than a loan of $1,700,000. The decision to borrow more was made later. Second, while it is likely that Mr Craig had discussed the borrowing in terms of a Swiss franc facility (he was familiar with the interest rate applicable because of the affairs of another client) it is unlikely that he would have mentioned other international currency. Thus it is unlikely Mr Rahme volunteered this to Mr Morgan. Third, I do not believe that David Rahme mentioned hedging at this meeting. I accept David's evidence that at this time he did not understand what hedging meant and that at a much later time David asked Mr Morgan to explain what hedging was. Thus it is unlikely David mentioned hedging at all in this first meeting.
What is however, clear is that at this stage of the relationship between Mr Morgan and the Rahmes the only work which the Rahmes had requested Mr. Morgan to perform and which Mr Morgan had agreed with the Rahmes to perform was the preparation of an application to the Bank with supporting financial statements and providing to the Bank such information as it might require concerning the proposed loan.
Thereafter David collected some of the material requested by Mr Morgan. Mr Morgan visited Mr Clouten, the Rahme's then accountant and collected other material to enable the preparation of the application. A further meeting took place between Mr Morgan and the Rahmes (Mr Rahme and David) on 2 August 1984 at which Mr Morgan was given further instructions concerning the business affairs of the applicants to enable him to complete the application, following which Mr Morgan prepared a draft of a loan application for submission to the Bank.
On 16 August 1984 Mr Rahme and David met with Mr Morgan and Mr Veale (Mr Morgan's partner) at Mr Morgan's office to discuss the loan application. By this date it is clear that the Rahmes had decided to make application to the Bank for a loan of AUD1,700,000 to meet the costs of construction of the Mosman project, to repay an existing commercial bill of $150,000 due for repayment in January 1985 and to provide funds for the acquisition and construction costs of six town houses to be built in Mosman, the sum of $700,000 being required for five years and the balance to be repaid in two and a half years. It may be inferred that the increase in the loan sought was at least in part influenced by the Rahme's belief that the terms of the foreign currency loan were advantageous to them.
The cash flow statement prepared by Mr Morgan in support of the application provided for amortization of the overseas loan. The statement was explained to David Rahme and his father although I am satisfied that Mr Rahme did not understand the explanation. At the meeting Mr Morgan explained in particular an item "overseas loan amortization provision" in the cash flow statement. He explained to them that he had provided in the cash flow statement for moneys to be placed overseas where practicable in order to endeavour to offset movements in the currency and in particular to offset adverse currency fluctuations that would increase the debt. The provided sum was to be invested overseas in Swiss francs pending repayment of the principal of the loan. The first of the amounts to be set aside was scheduled for October 1985 (AUD100,000) with subsequent amounts of AUD300,000 being provided in August, September and December 1986. Mr Morgan in commenting on the provision for amortization in the cash flow statement pointed out that the provision was a sort of hedge against adverse currency fluctuations, that it was certainly not a complete offset but that the cash flow did not allow for any further appropriations.

At the meeting the discussion centred around Swiss francs rather than other currencies and I find that all parties contemplated at this stage a borrowing in that currency. Although Mr Morgan was aware at the time of preparing the cash flow statement that the Commonwealth Bank loan documentation required payment of a "parity adjustment" in the event of a fall in the Australian dollar the cash flow forecast did not take this into account save by reference to the amortization provision.
At some time, either in a prior telephone call between Mr Morgan and David Rahme or at this meeting the question of Mr Morgan's fee was raised. Mr Morgan quoted the sum of $800 to cover his work in preparing the application and answering any queries which the Bank might have of him in connection with it.
The loan application was handed by Mr Morgan personally to Mr Craig who expressed himself to be surprised that Mr Morgan had prepared it. The normal bank procedure was apparently that the manager prepare the application for forwarding to Head Office. Mr Morgan replied to the effect that the application was done anyhow. Mr Craig expressed surprise that the amount sought to be borrowed had increased to $1,700,000. On 27 August 1984 Mr Craig prepared his own form of application for submission to Head Office. In it he referred to the Rahmes having "sought guidance" from Mr Morgan and his understanding that "accountant Morgan intends borrowing in Swiss francs".
A small difficulty arose between Mr Craig and Head Office concerning the amount of the facility required as it appeared that the application was for $150,000 too much. This matter was discussed between Mr Craig and Mr Morgan and between Mr Craig and David Rahme and a revised application was submitted to Head Office by Mr Craig seeking $850,000 as one drawdown plus an increase in the existing bill discount facility of $650,000 (but with an overseas currency option) to $800,000, the $850,000 to be used as to $300,000 to clear an existing fully drawn loan, $500,000 to complete the construction of the Mosman project and $50,000 to reduce an overdraft limit.
The discussion between Mr Craig and Mr Morgan concerning the arithmetical error would have been of no moment save that Mr Morgan gave evidence that this was the subject of a meeting with Mr Craig on 12 October and sought thereby to cast doubt upon the correctness of a diary entry made by Mr Craig on that day and oral evidence given by Mr Craig as to the conversation that took place that day. I prefer however, the evidence of Mr Craig which is consistent with the contemporaneous diary notes and documentation.
On 8 October 1984 Head Office notified Mr Craig that it had approved the revised application and a letter dated 11 October 1984 was forwarded by Mr Craig to Mrs Rahme as Secretary of David Securities Pty Ltd informing her of the approval which was conditional upon securities being given and personal guarantees of Mr and Mrs Rahme. Prior to forwarding that letter Mr Craig rang Mr Morgan and advised him that the approval had been obtained and asked him to attend at the Bank which Mr Morgan did shortly thereafter. At this meeting on 12 October Mr Craig agreed to make available to Mr Morgan a copy of the loan documentation then in use by the Bank so that he could explain any items to the Rahmes and to supply him with a list of names and extensions at the Bank's International Division so that Mr Morgan could check exchange rates and fluctuations at any time. A diary note of this meeting made by Mr Craig records: "we have made it very clear to Morgan that the Bank expects that he guide Rahmes in the handling of international borrowing." The note records that Mr Morgan was to meet with the Rahmes after the interview between Mr Craig and Mr Morgan.
According to Mr Craig he advised Mr Morgan on 12 October that the Bank expected Mr Morgan to hold the hands of the Rahmes, to select the currency of draw down, to monitor the loan to ensure that there were no adverse currency movements, to answer any questions they had, to advise them on hedging or other similar action if that were needed and to see if it was advisable at any time for them "to come on shore" (i.e. to convert the facility to an Australian dollar facility), assist in selecting the period of each roll-over and generally to look after the loan.
Mr Morgan denied Mr Craig's version of the conversation which is supported in part by the diary note. He asserted that at this meeting Mr Craig discussed a reduction in the sum approved from $1,700,000 to $1,650,000, that is to say the matter which I find to have been dealt with in the discussion of 25 September 1984. According to Mr Morgan, Mr Craig merely asked whether Mr Morgan was going to be involved with the loan to which Mr Morgan replied that he would be available for discussions. However, in cross-examination Mr Morgan conceded that Mr Craig had told him that it was important that the Rahmes had some guidance and that he, Mr Morgan, made it clear that he would be available to give that guidance and further that he had signed a statement not in evidence that there had been on that date a discussion with Mr Craig concerning guidance of the Rahmes. I am satisfied on the balance of probabilities that the conversation occurred as deposed to by Mr Craig.
Mr Morgan's version of the conversation was only put by leave to Mr Craig after the cross-examination of Mr Craig by Mr Morgan's counsel had been initially completed, and I agree with the suggestion put by counsel for the Bank to Mr Morgan that it was only when Mr Morgan began to see the significance of the diary note of Mr Craig made on 12 October that Mr Morgan first suggested that the matters he had deposed to in his oral evidence took place in October rather than September.
On 17 October Mr and Mrs Rahme and David called upon Mr Craig to discuss the approval conditions of the loan. Mr Craig's diary note of that day records the points raised as being:

"We clarified that first drawdown of $850,000 would be available once documentation, investigation etc is completed - we said that this would take say one month.

Established fee $4000 - they were satisfied with this reduction from the earlier figure quoted of $6000.

They intend to pursue their connection with accountant Morgan - they will now offer him all of their business. The matter of Morgan was raised by the branch during our making it positively known that one of the Bank's requirements for this approval was that competent guidance must be sought relative to the exchange rate exposure. The matter of the "10% parity adjustment" was briefly explained and further clarification of this aspect will be required - David Rahme sought to establish that provided the Australian dollar value of the loan (following currency variation) remained within margins on security held that no cash payment by borrowers might be necessary. We clarified the matter of payments at the end of each interest period together with the likelihood/possibility of variation in the off-shore borrowing rate on each occasion."

Mrs Rahme recalled that the expression parity adjustment had been used by Mr Craig but asserted that she neither understood the meaning of the expression nor sought clarification to it. She denied any discussion concerning exchange rate fluctuations. David denied being aware as at the date of this meeting even of the possible danger of borrowing in a foreign currency and could not recall any discussion concerning parity adjustment at all.
Mr Craig in oral evidence deposed that in connection with the parity adjustment requirement he said:

"As you are aware the movement of the currency that I talked to Mr Rahme and David about can cause problems, that is why we need to have such close surveillance over the account because should that currency move against you with the result that your debt increases, then the Bank can ask you to put in cash funds to regularize the amount owing and such request is made by the Bank in the event of the debt increasing over what you have initially borrowed by 10% ..."

As the documentation subsequently evolved a parity adjustment was necessary if the exchange fluctuation exceeded 5% not 10%. The figure of 10% mentioned by Mr Craig apparently came from the documentation used for a foreign currency loan already in place relating to another client of the Bank. In cross-examination (T.655) he gave another version of the same conversation which while marginally different in the words used was substantially similar in effect.
Having regard to Mr Craig's diary note and my assessment of the witnesses I accept Mr Craig's evidence as to the substance of the discussion of the parity adjustment. There was no real dispute that each of the other points referred to in the diary note were the subject of discussion by Mr Craig at the meeting.
David Rahme gave evidence that after the meeting of 17 October he contacted Mr Morgan by telephone and said that his parents had decided that they should let him take over all the "finances" meaning presumably financial affairs of the companies and he said, "Okay, I will take care of that and also look after the foreign loan of course too." This telephone conversation was denied by Mr Morgan although it was common ground that at some stage before the end of January 1985 Mr Morgan had been requested to take over all of the Rahme's accounting work from Mr Clouten. Mr Morgan put the conversation in which he was instructed to take over the management of their (i.e. the Rahmes') personal and companies' accounting and tax affairs as probably being 31 January 1985.
Although, as I have already indicated, there were unsatisfactory aspects of the evidence of both Mr Morgan and David Rahme, I am of the view that on the balance of probabilities David Rahme did have a conversation with Mr Morgan after the meeting of 17 October 1984 in which Mr Morgan agreed to look after the loan. It is true, as will be seen from what follows that Mr Morgan's involvement in the transactions with the Bank through until he was ultimately replaced as the accountant for the Rahmes at the end of April 1986 was not great. Nevertheless it does appear that he did from 1985 negotiate with the Bank on behalf of the Rahmes and he was involved in the decision making process in relation to the loan at least as to roll-over periods, consistent with an agreement that he look after the loan. Further, although it would seem that Mr Clouten continued to perform work for the Rahmes and was not advised of his replacement until June of 1985 it seems that he was engaged in completing the work for the previous year, so that the delay in his being advised until June 1985 does not throw doubt upon the conclusion I have reached particularly as, even if one accepts Mr Morgan's evidence that the retainer to take over the Rahme's accounting and tax work was probably 31 January 1985 there was, on any view of the matter, a long delay between Mr. Morgan's acceptance of that retainer and the notification of Mr. Clouten.
On 3 December 1984 Mr Craig signed a letter to the Rahmes the form of which had been prepared by the Head Office of the Bank. This letter formally offered a foreign currency loan of $850,000 in the name of David Securities Pty Limited to take over existing facilities and an increase in the Bills Discount Facility (with Foreign Currency Loan Option) by $650,000 taking total Bills Discount Facility to $800,000 in the name of A & T Rahme and Sons Pty Limited. The letter set out the terms and conditions of the facilities including the securities required, fees payable to the Bank and draw down amounts and purported to enclose two copies of the loan documentation which was explained in part in the letter.
Relevant extracts from the letter are as follows:

"FOREIGN CURRENCY LOAN

The loan may be raised in any freely convertible and readily available major foreign currency (eg United States dollar, Japanese Yen, Swiss Francs, Sterling and Deutschemarks). Provision will exist for the loan currency to be switched at the end of each interest period. ...

Funding Margin

1.25% pa above SIBOR/LIBOR/NYIBOR on any foreign currency loan. The interest rate at time of funding may be fixed for periods of three or six months with interest payable in arrears. REPAYMENT ARRANGEMENTS

...

Term of 2 years but movement in and out of local bills to foreign currency loan will be permitted. Should the foreign currency loan option be taken up the loan may be repaid early without penalty provided repayment coincides with the end of an interest period. All interest and principal payments are to be effected in the currency in which the loan is denominated and are to be made free and clear of any taxes (including withholding tax). ...

EXCHANGE RISK

On the understanding that the exchange risks associated with borrowings in foreign currencies are fully recognised and that any adverse exchange rate movements are for the borrower's account, the Bank is prepared to allow the loan to proceed on an unhedged basis.

However, in these circumstances, it is the Bank's normal practice to require the borrower to regularly meet any sizeable increases in the Australian dollar value of the loan resulting from exchange rate movements in order to maintain a satisfactory security/debt ratio. In this regard, the Bank will require you to meet any increase in excess of 5% in the Australian dollar value of the loan. These adjustments will take place at the end of each interest period or at the expiry of twelve months from drawdown at the Bank's option should the interest period arranged for you exceed twelve months.

As you are aware exchange risks may be eliminated at any time during the life of the loan by entering into a hedge contract and the Bank would be happy to provide information in this regard on request. WITHHOLDING TAX

Withholding Tax of 10% on interest payments to an Offshore Lending Centre must be met by you at the end of each roll-over period. We again point out the potential risk involved in borrowing in a foreign currency without covering your foreign currency exchange exposure and would like to remind you that any adverse exchange rate movements are for your account. As you are aware, your foreign currency exchange exposure may be eliminated at any time during the life of the loan and in this regard we suggest you make regular enquiries about foreign currency movements and the price for hedging the loan amount outstanding. Similarly, we stress the importance of your thoroughly investigating with your accountant (tax consultant) the ramifications of foreign currency borrowings particularly the tax treatment of any exchange rate profits/losses." The letter explained the loan documentation as follows: "Clause 2 which stipulates that five banking days' notice is required for drawdown of the Foreign Currency Loan and any subsequent roll-overs and that the loan must be drawn down in minimum amounts of AUD250,000. Specimen drawdown and roll-over notices are also attached and these should be delivered to this office at the appropriate times; Clause 5 which stipulates that the Foreign Currency Loan may be denominated in any one freely convertible foreign currency and that the currency denomination of the loan may be switched at the end of an interest period;

Clause 6 which stipulates that if an adverse exchange rate movement in excess of 5% occurs, a cash adjustment of the variation is to be made. No adjustment is necessary if the variation is less than 5%.

Should the exchange rate move in your favour by an amount in excess of 5%, cash adjustment by the Bank will only be made to the extent of cash adjustments previously made by the borrower to cover adverse exchange rate movements and remain outstanding. Exchange gains in excess of payments referred to in the previous sentence will be held as a buffer against possible future adverse exchange rate movements and in the long term as a reduction against the final repayment amount. Clause 8 which stipulates that all interest and principal payments to our Dee Why NSW branch must be made free and clear of any taxes, including Australian withholding tax. In this latter regard, we again remind you of the need to produce to the Bank a Section 128 Exemption Certificate prior to the first interest payment date. As previously mentioned, changes in tax laws may make you ineligible for this exemption, however we assume you have discussed this matter with your accountant."

Both Mrs Rahme and David gave evidence that they did not understand the full import of the Bank's letter, in particular the references to switching currencies, the warnings as to exchange risk, the reference to hedging and the references to the elimination of the exchange risk. While I am satisfied that Mrs Rahme may have failed to understand some of the terms used in the letter I do not believe her when she asserts that she did not understand that the Bank was warning her about the risks of borrowing in foreign currency. Further, I believe that David Rahme understood the substance of the letter, despite his protestation to the contrary, certainly by the latest after his discussions with Mr Veale and Mr Morgan.
David, after reading the letter discussed it with his parents and tried to explain it to them. I am satisfied that he explained to his parents the exchange risks that the Bank was warning about although I accept that it is possible that he still did not understand what hedging was at the time the letter was received, although the word had probably been used in his presence by Mr Craig on at least one prior occasion and possibly also by Mr Morgan.
Following the receipt of the letter David spoke to Mr Veale, Mr Morgan's partner by telephone. David said that the Bank had the loan documents ready and that he would like Mr Veale to get them from the Bank and have a look at them. Subsequently, Mr Veale obtained a set of documents, whether from Mr Craig or David is unclear, and went through them and the 3 December letter making notes which were in evidence before me. These notes formed the basis of a subsequent telephone conversation between Mr Veale and David Rahme where Mr Veale explained inter alia the provisions of clause 6 of the loan documentation (the parity adjustment clause). Mr Veale said:

"David, I am looking at clause 6. It says that you must immediately pay in any adverse currency exchange rate movements greater than 5% in a given period. I cannot immediately see if this means that you have to pay in the whole of the fluctuation or just the margin above 5%. You had better watch this as it could really upset your cash flows. On the other side of the coin, if exchange rate movements go in your favour greater than 5%, you do not receive these. They are held by the bank, which I think is a bit rough."

Subsequently David again telephoned Mr Veale (Mr Morgan still being unavailable) with further questions which had occurred to David after he had read the documentation. Mr Veale noted these questions which had to do with commercial matters such as term, fees, time of drawdown and the like and promised to give them to Mr Morgan on his return from vacation.
On 14 December Mr Rahme, David and possibly Mrs Rahme met with Mr Morgan at his office to discuss the Bank's letter of 3 December. According to Mr Morgan he went through the letter item by item and discussed in particular the points which Mr Veale had noted for Mr Morgan's consideration. Mr Morgan says he explained parity adjustment in words to the following effect:

"Assume that you borrow the equivalent of $850,000.00 in foreign currency and there is a 12.5% reduction in the value of the Australian dollar - that is $106,250.00. Under the terms of this loan offer you would then have to immediately repay the bank the amount by which the loss exceeds 5% of the principal. Using this example $63,750.00 is needed to overcome this. The idea is to amortize the loan by investing offshore in Swiss Francs when funds become available. If necessary you can then reduce the borrowed amount by applying these funds."

At this meeting David Rahme, referring to the comment in the Bank's letter of 3 December that the loan would be allowed to proceed "unhedged", asked Mr Morgan to explain "hedging". Mr Morgan explained that hedging was a type of insurance, that it would cost about $150,000 and that the Rahme's would not need it anyway because if they followed the cash flow forecast and provided funds overseas in Swiss francs that would offset any problems with adverse currency fluctuations. David conceded that at this meeting he told Mr Morgan that he had considered the risk of currency fluctuations but had concluded that the risk was worth taking. Mr Morgan denied saying that there was no need to hedge the loan but conceded that he told the Rahmes that it would not be economical to hedge the loan. Where the figure of $150,000 came from is not clear to me.
On 17 December the loan agreements for the facilities were executed and a drawdown notice for the draw down of the CHF equivalent of AUD850,000 was given, the drawdown being in fact effected on 21 December 1984 to be rolled over on 21 June 1985 i.e. six months later. On 17 December Mr and Mrs Rahme and David attended at the Bank and met with Mr Craig and Mr Chia, another officer of the Bank. At this meeting Mr Rahme said words to the effect that he trusted the judgment of the Bank and was grateful for its assistance. There is dispute which I find it unnecessary to resolve as to whether at this meeting Mr Rahme said that he did not understand the foreign currency loans.
Mr Craig at the meeting on 17 December went through his letter of 3 December and also explained the loan agreement to the Rahmes. Mr Craig gave evidence of a detailed explanation of the loan agreement. While I am satisfied that Mr Craig did explain the basic provisions of the agreement, I think that the account he gave of the explanation in evidence was substantially a reconstruction rather than his actual recollection. However, I think that it is more probable than not that Mr Craig did refer to the options given in the loan agreement for bringing the loan back on shore in the event of adverse exchange movements and that hedging was discussed, probably in the context that a hedging agreement would eliminate the exchange risk but that the cost of hedging would eliminate the interest rate advantage of the foreign loan.
The rate of exchange at the time of the first drawdown was AUD1.00 = 2.1280.
Findings of Fact - Events after the First Drawdown and Prior to 29 April 1986
In March 1985 David Rahme telephoned Mr Chia at the Dee Why Branch (Mr Craig had by this time left the Branch) to enquire whether the Rahme's could draw down the $800,000 bills discount facility with foreign currency option directly in foreign currency. The Bank, having signified its agreement, an amount of the Swiss franc equivalent of AUD800,000 was drawn down on 10 April 1985, the rate of exchange then being AUD1.00 = CHF1.7708. In other words by the time of the second drawdown there had already been a significant deterioration in the exchange rate (in fact almost 17%) and this deterioration in the exchange rate was noted by David who discussed it with Mr Morgan.
In June 1985 when the roll-over of the first loan was due to be made the exchange rate was around AUD1.00 = CHF1.6867. At the instigation of a Mr Pendlebury who was at the Head Office of the Bank, Mr Porter, then a loans officer with the Dee Why Branch, on 31 May 1985 called Mr David Rahme prior to the roll-over date and advised that a parity adjustment of approximately $223,000 would be required on roll-over and enquiring whether the borrowers wished to roll over and if so for what period or whether they wished to take the bills discount facility and thereby presumably bring the loan back on shore.
David Rahme alleged in evidence that he did not at the time of that conversation understand what was meant by parity adjustment, but I do not accept this evidence. The concept had been explained by Mr Craig, by Mr Veale and by Mr Morgan long before and I formed the impression that David's evidence was presented in this way to endeavour to persuade me that he had no idea that currency fluctuations were possible before this date.
Following upon the telephone conversation with Mr Porter, David Rahme consulted Mr Morgan both as to the Bank's request for the $223,000 adjustment and as to the period for the next roll-over. Thereupon Mr Morgan spoke to Mr Pendlebury and arranged with him that the Bank absorb the parity adjustment. The amount of the parity adjustment in fact absorbed was $245,000 and this was notified to the Rahmes by letter dated 2 October 1985. Upon Mr Morgan's advice the next roll-over was for a term of twelve months expiring on 21 June 1986 and this period of roll-over was arranged by Mr Morgan with Mr Pendlebury. In the course of the same conversation but as a separate matter it would seem that Mr Morgan acting on David's instructions made representations for a further loan of $300,000 to assist with development expenses for a home unit project at Dee Why. This further $300,000 was to be also in the form of a foreign currency loan.
The second drawdown amount of $800,000 fell due for roll-over in October 1985. By late September the exchange rate had fallen to AUD1.00 = CHF1.5115 and a parity adjustment of $137,241 was required under the terms of the loan documentation in respect of the second drawdown. However, Mr Morgan again prevailed upon the Bank to absorb this and the amount was in due course rolled over for a term of twelve months to 10 October 1986. The additional facility of AUD300,000 was drawn down in Swiss francs on 25 October 1985 when the rate of exchange was AUD1.00 = CHF1.538, the period for roll-over being set to expire on 10 October 1986 being not quite twelve months.
By April 1986 the Rahmes, on behalf of their companies, had sought further financial accommodation and indeed had been granted approval for bridging finance of $150,000 in connection with the purchase of a vacant lot of land in Neutral Bay. On 18 April, Mr Rahme and David met with Mr Porter. They advised they did not wish to proceed with the bridging finance and sought the Bank's approval of the release of the proceeds of sale of some units secured to the Bank to enable the purchase of the vacant land to proceed. Mr Porter pointed out to them the serious financial state they were then in as a result of the adverse movements in the Australian dollar as against the Swiss franc, and suggested that the Rahmes and Mr Morgan attend a meeting with the Bank's Risk Management Advisory Service at the Head Office of the Bank.
Little is known of this Service save that it was established some time in 1985, is part of the Treasury Division of the Bank and that Mr Horne who gave evidence joined that division of the Bank in March of 1986.
Following the discussion with Mr Porter it would seem that some meeting took place between the Rahmes and Mr Morgan prior to the meeting with the Risk Management Advisory Service on 29 April 1986. Whether it was at that meeting or on the next day is not clear, but at some time at the end of April 1986, Mr Morgan expressed to David that nothing could be done to help the Rahmes and that they should sell assets and thereby reduce their foreign exchange exposure. Mr. Clouten rather than Mr Morgan attended the meeting with the Bank on 29 April and it would seem that by the end of the month of April 1986 the retainer of Mr Morgan's firm was terminated.
Findings of Fact - The Meeting at the Bank on 29 April 1986 and Subsequent Events
Mr and Mrs Rahme and David attended a meeting at the Head Office of the Bank on 29 April 1986. Representing the Bank were Messrs Horne and Osmond of Head Office and Mr Porter from the Dee Why Branch. The purpose of the meeting as recorded in a note made contemporaneously by Mr Osmond was to discuss the predicament of the Rahmes and to improve their situation.
It would seem that by this stage the Rahmes were in a state of panic - Mr Rahme was angry. Mr Horne suggested the use of forward exchange contracts in an attempt to reduce the loss to the applicants, the effect of which would be to switch the liability out of Swiss francs and into some other currency: in the event into US dollars. While Mr Horne said that the Bank would not manage the exposure he indicated that the Rahmes or Mr Clouten were free to call on a daily basis if necessary to obtain exchange rates. The proposal put to the Rahmes was that they consider swapping currencies in an attempt to regain some of the losses. To enable the Rahmes in effect to trade in foreign currencies the Bank established for them a dealing limit.
The possibility of the loans being brought back on shore was also discussed at the meeting of 29 April but having regard to the high interest rate then applicable to Australian loans this was regarded as unsatisfactory by the Rahmes.
Following the meeting of 29 April 1986 the Rahmes in May 1986 entered into forward exchange contracts converting the liabilities to US dollars. On 30 May 1986 further forward exchange contacts were entered into to reconvert the US dollar exposure back to CHF. These transactions resulted in a loss of approximately $250,000. Subsequently on 3 July 1986 the loans were switched again to US dollars. By this time the exchange rate was AUD1.00 = CHF1.11 and the amount of liability if brought onshore would have been $3,726,000 as compared with the amount of AUD1,950,000 drawn down under the facilities.
In December 1986 discussions took place between the Bank and the Rahmes concerning a stop loss agreement, the purpose of which was to set an upper limit of the AUD equivalent of the Rahme's foreign exchange exposure. Once that limit was reached the exposure would then be converted automatically to Australian dollars, thereby crystallizing the loss incurred to that time but preventing further loss or currency fluctuations.
For present purposes it is not necessary to analyse the result of the currency switches. Suffice it to say that on the first hedging transaction there was a loss and on the second, a profit.
By letter dated 29 October 1987 following a default alleged to have occurred on 2 October 1987 the Bank advised the Rahmes that the loan would remain denominated in US dollars until repaid and that they could no longer switch currencies. The Bank sought full repayment of the principal and interest outstanding from the applicants and in the present proceedings the Bank seeks by way of cross-claim to recover from the applicants the outstanding liability for principal and interest. To that cross-claim the applicants have lodged a defence. However as matters concerning the cross-claim were not argued before me I propose to defer consideration of these matters until a further stage in these proceedings should that then become necessary.
The Expert Evidence of Foreign Exchange Dealings
The applicants called Mr Butler, Managing Director of Pacfin Forex Pty Limited a company providing foreign exchange advisory and debt management services for clients on a fee for service basis, who in the years 1983-86 had been the Service Manager of the Foreign Exchange Division of Lloyds Bank. In the period 1984 to 1986 with which the present case is concerned Mr Butler had not been engaged in advising long term borrowers on their foreign exchange risks so that he was unable to say what at the time he did advise clients. His evidence was directed to what advice he believed should have been given in the period in question by a reasonably competent foreign exchange adviser. Without disrespect to him, in giving his evidence, he had the benefit of hindsight.
The respondent Bank called Professor Valentine who is and was at all material times the Director of the Centre for Studies in Money, Banking and Finance at Macquarie University in Sydney, who teaches a course at that University called the Treasury Dealing Course, who was a contributor to the Campbell Committee Report and an author of various articles on the foreign exchange market.
Professor Valentine's experience is largely academic although he had ventured into the market on his own account unsuccessfully on at least one occasion. It would seem that Professor Valentine had advised some borrowers of foreign currency loans although the extent of that advising was not explored.
The substance of Mr Butler's evidence was that while it was not unreasonable to advise a borrowing in Swiss francs prior to the drawdowns in December 1984, there were three or four occasions when action should have been recommended by a reasonably competent foreign exchange adviser by way of selective or short term hedging to minimize the applicants' currency exposure. In the case of the David Securities Pty Limited loan the first was early to mid-March 1985 when there should, in Mr Butler's opinion, have been a hedging against the Swiss franc, which protection should have been removed during mid to late April. Action on such a recommendation would have produced, according to Mr Butler's calculations, a net profit of US$136,411.
The second was in early October 1985 when Mr Butler was of the view that it would have been reasonable to hedge the CHF/USD exposure by buying Swiss francs/selling US dollars in a foreign exchange contract with a maturity of 23 June 1986, reversing the hedge in about May of 1986. To have acted in accordance with such a recommendation would have produced, according to Mr Butler's calculations, a net profit of US$110,698.
The third occasion was in mid-1986 when the AUD fell as against the US dollar to about 0.7050. According to Mr Butler a reasonably competent adviser would have advised to hedge from Swiss francs to Australian dollars, the hedge to have been left in place until the roll-over maturity on 23 June 1986. This would have produced a hedge profit of A$110,398.
The final hedge would have been put in place at the roll-over date in June 1986 switching to Australian dollars, terminating the hedge in July 1986. This would have produced a profit according to Mr Butler's calculations of $A160,804.
A subsequent switch of the liability into US currency was in Mr Butler's view reasonable. The end result of Mr Butler's recommendations would have been in the case of David Securities Pty Limited a currency profit of $565,753. Three corresponding strategies were selected for the liability of A & T Rahme & Sons Pty Limited which if implemented would have produced a profit for that company of $478,864. In Mr Butler's view the initial drawdown in March 1985 should have been in Australian dollars not Swiss francs.
The occasions for hedging or cancelling hedges as the case may be were, in Mr Butler's view, the minimum occasions where hedging should have been undertaken. In support of his analysis Mr Butler discussed the economic fundamentals (e.g. current account deficit, inflation rate and the like) affecting the Australian dollar at relevant times as well as to particular events of the day well documented he said in headlines or comments of the financial papers of the time, for example the famous "Banana Republic" speech delivered by Mr Keating on 14 May 1986. I see no point in summarising the numerous political and economical events of the period 1985 and 1986 to which Mr Butler referred and which cumulatively present a sorry perspective of Australia's economic woes of the time.
In cross-examination, Mr Butler, while conceding that it may be difficult for someone outside the foreign exchange dealing rooms to predict market movements, was adamant that the periods referred to in his report summarized above were periods "where it was almost impossible not to know what was happening in the financial market and be able to predict which way the currency was going to move." He rejected the suggestion that involvement in the foreign exchange market was a gamble, preferring to call it "making informed judgments" notwithstanding that there were unpredictable factors and that people sometimes made mistakes.
Mr Butler conceded that there was no scientific basis upon which accurate forecasts of foreign exchange movements could be made and that no one could sensibly predict how far the market would go in any direction. He accepted that it was a valid argument that during the period from March 1985 to December 1986 there were, in addition to the occasions nominated by him, other occasions where a reasonable adviser might have taken the view that it was appropriate to hedge and as a result would have incurred losses which eliminated any profits made by hedging on the three occasions nominated by him.
It was put to Mr Butler that where there had been, for example, as in March 1985 a substantial fall of the Australian dollar, to commence to hedge then would have been to do so when it could not be assumed that the Australian dollar would fall further. This was rejected by Mr Butler because, in his view, the current account imbalance made it necessary for Australian traders to buy AUD and therefore to force the Australian dollar further down.
Professor Valentine agreed with Mr Butler that economic factors such as interest rate differentials, commodity prices, inflation rate and domestic economic activity all played a part in exchange movements but stated that economists and market participants had generally little success in predicting movements in exchange rates. He referred to an article by P W Lowe and R G Trevor published in the Australian Economic Review 4th Quarter 1987 in which weekly forecasts of foreign exchange dealers published in 1985 by the "Australian Financial Review" were analysed. Individual forecasts seemed little better than chance although the mean forecasts did predict the correct directional movement approximately two thirds of the time. The article concluded that "forecasters of the exchange rate have much about which to be modest". Professor Valentine admitted that the forecasts upon which the article was based were short term forecasts and not forecasts of long term trends although he suggested that such research as there was of longer term predictions (he described it as "very sporadic") came to a similar conclusion.
Professor Valentine rejected Mr Butler's view that as at March 1985 it was clear that the Australian dollar would depreciate because he said that by that time it had already suffered a severe depreciation. He supported his argument by some forecasts printed in the "Australian Financial Review" at the time. He challenged Mr Butler's views that in October 1985 the market thought that the Australian dollar would appreciate against the US dollar. Again he supported his view by press clippings from the period. He pointed out that some persons in the market predicted that it would go up and others that it would go down. He pointed out that there were periods when the economic fundamentals pointed to a lower exchange rate of the AUD but where the opposite had taken place, although he agreed that with careful management, losses in the foreign currency market could be limited.

It may be that the nature and extent of the advice required from a foreign currency exchange adviser will vary with the known commercial experience of the client. It seems to me likely that the advice to be given to the treasurer of a multi-national incorporation in relation to dealing in foreign currencies will be minimal compared to that required to be given to a farmer in Western New South Wales who, to the knowledge of the adviser, is entering the foreign exchange market for the first time.

Accordingly, it seems to be that one of the matters to which attention needs to be paid is the commercial and financial background of the borrower and lender at the time of the transaction."

In Davkot Pty Ltd v. Custom Credit Corporation Ltd & Ors 27 May 1988 (unreported) Wood J. of the Supreme Court of NSW expressed agreement with the comments of Rogers J. set out above.
So too Brownie J. of the Supreme Court of NSW in McEvoy v. ANZ Banking Group Ltd 1 October 1987 (unreported) found no breach of the duty of care inter alia because:

"To venture into the foreign currency market and then from time to time be either covered or uncovered (or hedged or unhedged) disqualifies the activity from having any relationship with any accepted notion of prudence. It is simply a form of speculation." (at p 39 of unreported judgment)

In this Court Pincus J. in Kullack v. Australian & New Zealand Banking Group Ltd (1988) ATPR 40-861 (affirmed on appeal 8 July 1988 (unreported)) held the defendant not to have been negligent by not informing the applicant of the specialized services of the bank to minimize loss.
In Foti & Ors v. Banque Nationale de Paris 17 March 1989 (unreported) Legoe J. of the Supreme Court of SA in finding for a plaintiff against a bank held that the bank had in the circumstances of the case a duty of care which his Honour expressed as follows:

"The duty in this case, as I see it, was that of a large banking organisation who represented itself to have world-wide branches and knowledge of foreign currencies and foreign exchange rates. Further, that it was stated to the plaintiffs that such a large organisation as the defendant Bank could control and monitor loans which were drawn down in the currency of another country - in this case, Swiss francs. The whole transaction imposed on the plaintiffs the obligation to repay the principal amount of the loan at the end of the term in that foreign currency. Because of the Bank's involvement with the plaintiffs by negotiating a loan of this particular kind and by arranging the draw down of the Swiss francs, and by submitting the facility offers which were accepted by the plaintiffs, and by opening and operating the Torrensville Shopping Plaza rental account with the relevant charges and financial benefits to the Bank, I am of the opinion that the defendant Bank had involved itself far more closely with the plaintiffs than a mere arm's length agreement to lend a sum of money. Furthermore, the relationship was not just that of acting as a banker on behalf of its customer. There was both the professional banking element in the transaction and the personal rights and duties of a bank lending money to a group of people in the particular way in which this transaction was set up. The proximity of the parties to each other in their respective rights and duties arising from the negotiations, letters, respective executed mortgages, guarantees, deeds and verbal agreements, was as to the actual performance of the several transactions, clearly giving rise to a duty of care in the circumstances. The putting in place of either a hedge or forward exchange contract required specialist knowledge which the Bank possessed and held itself as an organisation capable of putting in place such a contract for the plaintiff. Clearly the plaintiff relied upon the defendant Bank in this regard." (pp 122-3 of unreported judgment)

Each of these cases however depended upon its own facts. As Legoe J. in Foti points out, evidence of the availability of hedging or forward exchange cover including what services were available from the French bank was not before Brownie J. in McEvoy. The evidence of the foreign exchange experts given before Legoe J. in Foti clearly differed from that given before me.
I derive little assistance from these cases in the resolution of the present case, although, with respect, I would not disagree with the formulation of the standard of care in Stafford v. Conti Commodity Services Ltd (supra) as adopted by Rogers J. and with his Honour's doubts as to the content of that duty.
On the evidence before me, the two expert witnesses are in conflict as to whether it was reasonable as at March 1985 when the decision to borrow in Swiss francs was presumably made, or for that matter at any time before 10 April 1985 when the drawdown was made, to draw down in Swiss francs. Mr Butler was, as I have indicated above, of the view that the economic fundamentals were such that to borrow in Swiss francs at this date would have been a dereliction of duty. Professor Valentine, on the other hand, when asked what considerations would have guided a choice in currency at that time said:

"The first week of April was a dreadful week for the Australian dollar as against the Swiss franc and I shared a view which I think is prevalent in the market and which is in fact a fairly accurate one over a long time period, that sharp movements like that are normally reversed, at least to some degree; that they over-shoot, they go beyond the level that is sustainable in the longer period. Consequently I would have been happy to advise somebody at that time to draw down the loan in a foreign currency, in particular Swiss francs, if that was a currency they were interested in."

I see no reason to prefer Mr Butler's evidence to that of Professor Valentine. Both are clearly competent in their field and have great experience in the operation of the foreign exchange market. The conflict between them reflects, I would say, a fundamental truth about the foreign exchange market at least as it operates in Australia. The very nature of a market is that it has persons standing in it to buy and sell. Although, as Mr Butler points out, there are persons in the market who for commercial reasons must buy or sell at whatever price, speculators or those who operate on informed guesses are also, except perhaps in times of great financial upheaval, standing in the market to buy or sell. No one, despite Mr Butler's apparent suggestion to the contrary, can know when a currency which has suffered a large depreciation will have reached its lowest or highest rate. Because the market's reaction will depend on value judgments formed having regard to economic fundamentals, views will differ as to what the consequences for the exchange rate of a currency will be. The weight given to any particular economic factor will vary from expert to expert. In these circumstances it is not surprising that experts will differ in their views as to whether a currency will appreciate, depreciate or remain stable. Particularly will this be so when a currency has undergone a sharp depreciation such as occurred with the Australian dollar between January and March 1984.
I do not doubt that Mr Butler, although he had the benefit of hindsight, honestly believed in March 1984 that the Swiss franc would continue to depreciate just as I am sure that Professor Valentine would at the same time have been happy to advise a Swiss franc borrowing on the basis that the decline would not continue. But it follows from this divergence of evidence that the applicants have not satisfied me on the balance of probabilities that to advise a Swiss franc borrowing in April 1985 was negligent. It has turned out to be wrong, but that is a different matter.
From the time of the second drawdown until the termination of Mr Morgan's retainer in April 1986 it is alleged that Mr Morgan, and through him the third respondents, breached their duty of care or their contractual duty by failing to advise on appropriate risk management techniques.
It may be conceded, for present purposes, having regard to the terms of the retainer as I have found them, that Mr Morgan was in breach of his duty to advise with due skill and diligence particularly with regard to monitoring and advising of the hedging of the loan in that he virtually failed to give any advice at all.
Such a concession was not made however by counsel for the third respondents who pointed to the initial cash flow forecast with its provision for amortization over the term of the loan of amounts to be invested in Swiss francs which represented a rough sort of hedge. For some reason not explained in the evidence this proposal was never implemented. However, it is clear that Mr Morgan did not regularly, or at all, monitor the loan and certainly he did not understand the mechanism of selective hedging through forward exchange contracts ultimately adopted after April 1986, and so would not have been able to advise the Rahmes on such a course. Indeed, Mr Morgan sat by and did very little to assist the Rahmes at all. Although ultimately not relevant to the outcome of the case, accounts prepared by Mr Morgan to enable management decisions to be made by the Rahmes continued to show the foreign denominated loans as a liability in Australian dollars at the rate of exchange at the time of original drawdown, despite the considerable change in value of that liability during the period in which Mr Morgan acted for the applicants. These accounts would clearly have been misleading if intended to give a full and true view of the affairs of the applicants but the applicants' case was not that they had been misled by the accounts.
Mr Paton's Evidence and Admissibility
At this point some reference should be made to the evidence of Mr Paton who was called as an expert witness by counsel for the third respondent. Mr Paton was a chartered accountant and partner in the firm of Messrs Arthur Andersen & Co. He is particularly concerned in that firm with small business matters. Mr Paton had had a number of clients in 1984 who had borrowed in overseas currencies but could not recall whether he had given any advice to those clients about fluctuation in the Australian dollar.
During the course of his evidence Mr Paton was asked by counsel for the third respondent the following question:

"If you were asked in July 1984 to monitor a foreign currency loan what steps would you have taken?"

Objection was taken both by the applicants and by the second respondents to this question on the ground that either the question was in essence a question which the court itself had to decide or alternatively it merely asked the witness a question, the answer to which would have been irrelevant.
I allowed the question to be put and gave reasons in an extempore judgment. It is convenient here to set out those reasons in revised form.
There is no dispute at all that an expert witness may not be asked a question which the court itself has to decide. Thus it is obvious enough where an issue arises as to whether or not an accountant is negligent it would be improper for a witness to be asked the question whether the accountant's behaviour was in fact negligent because that ultimately is an issue to be determined by the court.
The learned authors of Cross on Evidence, 3rd ed., in their discussion of the problem at paragraphs 15.22 to 15.26 indicate:

"There is now a greater willingness than there was in former times to recognize the necessity of allowing such a question in certain circumstances."

Reference was made to a number of cases and it may well be that some of the cases present difficulties of analysis if a strict view of the rule is to be adopted.
In Pacific Acceptance Corporation Limited v. Forsyth (1970) 92 WN 29 at p 75 Moffitt J said:

"Much so-called expert evidence given in the case and not subject to objection was not proper to be relied upon, but came before the court because of the virtual impossibility of hearing the acceptable expert evidence without receiving the other intermingled material... When the conduct of an auditor is in question in legal proceedings it is not the province of the auditing profession itself to determine what is the legal duty of auditors or to determine what reasonable skill and care requires to be done in a particular case although what others do and what is usually done is relevant to the question of whether there had been a breach of duty."

The first part of what his Honour says is clearly without controversy, namely, that the auditing profession could not itself determine what in law is the duty of an auditor. Thus it would clearly be an inadmissible question to ask an auditor what in fact the legal duty of the auditor is.
The second part of what his Honour says is more difficult. One view of it is that his Honour intended to say merely that it would be improper to ask an auditor what as a matter of law reasonable skill and care requires to be done given the facts of a particular case. If that is what his Honour meant then there can be no difficulty about it.
I say that because that too would determine the issue which the court has to decide. If, on the other hand, the witness, being an expert, were asked what in his opinion, given the facts of a particular circumstance, is required to be done, the answer to this question would not preclude the court from arriving at its own conclusion; and in principle would not seem to be in conflict with the general rule.
Of course there is a question which will always arise as to what weight the answer may have, and it may very well be that the answer will not be of great assistance to the court.
On the whole I think that his Honour did not intend to indicate that a question such as I have lastly described was inadmissible. I say this because at page 74 of his judgment his Honour had said, looking at the question of the approach to expert evidence:

"It is relevant to know if others at the relevant period adopted or did not adopt particular procedures in like circumstances. It is relevant to consider what course an experienced auditor might reasonably adopt in practice to deal with a particular aspect of an audit or as to the reasons of an expert for the framing of a procedure in some particular way or omitting some step as serving no reasonable audit purpose."

It would seem that his Honour regarded it as relevant and was not suggesting that it would be inadmissible to ask an expert auditor what course an experienced auditor might reasonably adopt in practice, given particular circumstances which arise during the course of the audit.
If one were to read what his Honour says later as precluding a question of what a witness believes ought to be done in a particular case, then it would not seem that his Honour would have suggested that it was relevant to consider what course an experienced auditor might reasonably adopt in practice to deal with a particular aspect of an audit.
I should point out that Moffitt J. continued after the passage which I have quoted:

"There is some difficulty however in applying evidence directed to these matters because, in the end, the propriety of taking or not taking a particular audit step depends on the circumstances met in the particular audit."

I do not however read his Honour as suggesting that the evidence that he had previously indicated would be admitted was for the reason now given inadmissible, but rather that there are difficulties in the manner in which that evidence might be used which difficulties ultimately go to matters of weight.
In Cross on Evidence two cases are referred to among others as indicating the circumstances in which the strict rule may be mitigated. The earliest of these cases is the decision of Coleridge J. in Sills v. Brown (1840) 9 CAR & P 601, 173 ER 974, a case which the authors of Cross refer to as being "the leading case".
At issue in that case was whether the owner of a brig was responsible in damages to the plaintiff in circumstances where the captain of the brig carried the anchor in a position which was contrary to the bylaws of the River Thames at the time of a collision. An expert was called who was a ship's captain and the expert was asked whether having heard the evidence in the cause, he thought the conduct of the captain of the brig was right or not. Not surprisingly that question was rejected. However, the report indicates that the question objected to was not put:

"But the opinion of the witness was obtained by his being asked, what was the duty of a captain under certain specified circumstances."

Although the report, as is not unusual in reports of that time, is not complete, I do not think that the case can be so easily dealt with as submitted to me by counsel for the second respondent by saying that the question may have been admitted without objection. Although that of course might well be a possible situation one would have thought that Coleridge J., having regard to his Lordship's previous ruling, would have not permitted the question to be put if his Lordship had regarded the question in that form as objectionable.
Reference is also made to the judgment of Lord Lindley MR in Haynes v. Doman (1899) 2 Ch 13. That was a case which concerned the reasonableness of a covenant in restraint of trade and what is said by his Lordship on the matter relevant to the present problem is clearly enough dicta. However, dicta of Lord Lindley is deserving of great respect. His Lordship says, dealing generally with evidence from persons in a trade:

"Evidence from persons in the trade is admissible to inform the court of its nature, and of what is customary in it, and of anything requiring attention in the mode of conducting it, and of any particular dangers requiring precautions, and what precautions are required in order to protect a person carrying on the business from injury by a person leaving his service. But the reasonableness of a contract depends on its true construction and legal effect, and is consequently a question for the court, and on such a question the opinion of witnesses is out of place."

Although that passage is not directed to precisely the same issue as that before me, it certainly suggests that an expert witness could properly be asked what in his opinion were the dangers which required remedial action and what remedial action in his opinion should be taken.
Finally, reference is made to the decision of Oliver J. in Midland Bank Trust Co Ltd v. Hett, Stubbs & Kemp (1979) 1 Ch 384 at 402. That case concerned expert evidence being given in a case where a claim was made against a firm of solicitors for damages for negligence or breach of professional duty. His Lordship says of expert evidence given in that case, presumably without objection, from a number of practising solicitors:

"I must say that I doubt the value, or even the admissibility, of this sort of evidence which seems to be becoming customary in cases of this type. The extent of the legal duty in any given situation must, I think, be a question of law for the court. Clearly, if there is some practice in a particular profession, some accepted standard of conduct which is laid down by a professional institute or sanctioned by common usage, evidence of that can and ought to be received. But evidence which really amounts to no more than an expression of opinion by a particular practitioner of what he thinks that he would have done had be been placed, hypothetically and without the benefit of hindsight, in the position of the defendants, is of little assistance to the court; whilst evidence of the witness's view of what, as a matter of law, the solicitor's duty was in the particular circumstances of the case is, I should have thought, inadmissible, for that is the very question which it is the court's function to decide."

It seems to me that what is said by his Lordship in that passage is not greatly different from what is said by Moffitt J. in the passage which I have earlier quoted from Pacific Acceptance. It is to be noted that Oliver J. distinguishes the hypothetical question, the answer to which he indicates is of little assistance to the court, and the other question which in his Lordship's view was inadmissible.
In the present case, the question as asked does not seem to me in any way to pre-empt the obligation of the court to make its own decision on the content of the legal duty of care owed by the third respondents to the applicants. It is rather in the category described by Oliver J. as being of little assistance. In my view the question is not as such inadmissible.
Mr Paton thereafter gave evidence that a reasonably skilled accountant retained to monitor a loan would provide his client with periodic calculations of the local currency equivalent of the liability. Mr Paton deposed that he would not have been competent to advise on a particular programme aimed at minimizing the risk in a foreign currency borrowing, that at the time he would have advised his client as to the availability of hedging but that he would not have attempted to anticipate which way the foreign currency would go or which way the AUD would go against the CHF. In Mr Paton's view for an accountant to advise on hedging was tantamount to advising on currency speculation and went far beyond the normal operation of skilful and competent accountants.
At the end of the day Mr Paton's evidence was of little assistance. While the content of Mr Morgan's duty of care and his contractual duty may have been difficult to ascertain if the retainer were limited to "looking after the loan" without more, the antedecent conversations between Mr Morgan and Mr Craig provide, in my view, a dictionary for the meaning of the retainer although that meaning substantially accords with Mr Paton's evidence of what a reasonably competent and skilled accountant would have done.
I am satisfied that Mr Morgan was in breach of his duty to the applicants, both in failing to advise them of the continuing depreciation of the Australian dollar against the Swiss franc and in failing to advise them of techniques such as selective hedging.
However, it does not follow from this conclusion that on the evidence the applicants should succeed. Reliance upon the recent decision of Legoe J. in the South Australian Supreme Court in Foti v. Banque Nationale de Paris (supra) where his Honour found that a breach of a duty to manage a loan gave rise to an award of damages to the plaintiff is misplaced for two reasons. First, in that case the evidence before his Honour appears only to have been evidence given by Mr Butler, and another witness, Mr Barlow, to the effect that at various times hedging should have been undertaken, and as his Honour records the experts were in substantial agreement. That is not the case here. Second, the particular issue of causation that arises in the present case apparently did not arise in Foti.
Whether the applicants' claim falls to be considered in contract or in tort, for the applicants to succeed they must show that the breach by the third respondents of their duty to the applicants gave rise to such loss, if any, as may have been suffered by the respondents. For present purposes, it will be assumed that there is no reversal of the rate of exchange between the AUD and the US dollar such that ultimately the amount of AUD needed by the applicants to purchase US dollars at the time of repayment is greater than the initial number of AUD received at the time of the first drawdowns.
In cases where the breach of duty alleged consists of the giving of negligent advice the issue of causation will seldom arise. It will readily be inferred that the plaintiff relied upon the negligently wrong advice with the consequence that damage was suffered. Provided the damage was reasonably foreseeable the plaintiff will thus be entitled to succeed. Where, however, the breach of duty alleged is, as here, the failure to advise, the question is more difficult.
In some cases the Court will readily be able to infer that if the advice had been given in accordance with the duty to do so that advice would have been taken and the loss avoided: Quigley v. Commonwealth (1980) 35 ALR 537, p 546. So if the breach of duty is a failure to advise the use of a protective device such as a safety belt, it would ordinarily be easy to draw the inference that had the advice been given the belt would have been used, although as is demonstrated by the facts in Duyvelshaff v. Cathcart & Ritchie (1973) 1 ALR 125, p 143 the evidence might show that the plaintiff would or might not use such a belt. In the former case the plaintiff would fail, as the plaintiff in Duyvelshaff did, because the real cause of the accident would not be the failure to provide a seat belt but the plaintiff's adoption of an unsafe system of his own. In the latter case the onus of showing a causal relationship between a breach of duty and the damage suffered will lie on the plaintiff, and if not satisfied the plaintiff will fail.
In other cases the court will be less ready to draw inferences. The problem becomes more acute in a case where the negligent failure to advise does not of itself amount in effect to advice of the contrary (e.g. as in cases of advice by councils or statutory bodies where a failure to warn will generally signify the representation that all is well.)
In Sutherland Shire Council v. Heyman (1984-5) 157 CLR 424, pp 444, 446 Gibbs C.J. referred to the case of City of Kamloops v. Nielsen (1984) 10 DLR (4d) 641 a decision of the Supreme Court of Canada in which it was held that a municipal council was in breach of its duty to the plaintiff in failing to give proper consideration to the question whether it should take legal proceedings or other action to prevent the completion of a house which the council knew was erected on defective foundations. His Honour commented that he was unsure whether the distinction between causing damage and failing to avert it was fully examined and continued:

"If a building inspector negligently fails to carry out an inspection which, if properly made, would have revealed defects, and the building is completed, it does not seem right to say that the inspector's negligence caused the defects, although had the inspector not been negligent he might have prevented the building from being completed in a defective state. The question of causation was not fully argued in the present case and for reasons which will appear I need not discuss it further."

The facts of the present case illustrate the dilemma. Absent the advice which as I have found the third respondents were obliged but failed to give, the applicants suffered damage. That damage arose directly out of the borrowing in foreign currency, so that it could not be said that the failure to give the advice led directly to the damage that was suffered. At best all that can be said is that the failure to advise may have led the applicants to remain exposed to the risk of an AUD decline as against the CHF.
In these circumstances it seems to me that the onus will be on the applicants to show that their failure to act arose out of the breach of the third respondents' duty and that it was this breach which led to the loss suffered by the applicants.
The third respondents point to the fact that in April 1984, after a significant devaluation had already occurred, the Rahmes were content to continue to borrow in CHF; they point to the fact that in October 1985 the applicants made a new borrowing of $300,000 still in CHF. They also point to the fact that to hedge in Australian dollars would have been too expensive and inconsistent with the desire of the Rahmes to keep the Mosman property. They simply, it is said, could not have afforded it.
Am I satisfied on the balance of probabilities that if Mr Morgan had monitored the loan and advised of the possibility of selective hedging (at a cost to the Rahmes if the selective hedging were unsuccessful) the Rahmes would have taken the next step and taken action which would have prevented the loss from the risk which, without the intervention of Mr Morgan, they had assumed when drawing down the first loan in December? It is not something which I can easily infer, and in the end I am left uncertain by the evidence what would have happened.
In addition to the matters peculiar to the Rahmes to which I have referred, the problem arises as to what advice the Rahmes would have been given if they had sought advice. In my view it is clear that Mr Morgan's retainer would not have extended to advising as to the precise timing to undertake selective hedging. In my view, it could not be inferred that an accountant would undertake such a responsibility. At best, having advised on hedging techniques and kept the Rahmes informed of exchange movements it would be up to the Rahmes to decide whether to hedge and how. They could have sought expert assistance but might just as easily have sought advice from Professor Valentine or another expert of like mind, as from Mr Butler or another expert of like opinion to him. Why is it more probable than not that the Rahmes would have received the one kind of advice rather than the other? And even if they had received Mr Butler's advice, qualified no doubt by an explanation of the risk involved and the cost if the strategy turned out to be wrong, would the Rahmes have done anything at all?
On the evidence I am unable to form a view one way rather than the other as to the answer to these questions. Since the onus lies on the applicants to prove their case it follows that, in my view, the applicants must fail.
In partial answer to the issues discussed above the applicants submitted that it was unnecessary to tie the issue of causation to the subjective mind of the applicants. It was said that causation should be decided on an objective basis in terms of what a prudent person in the applicants' position would have decided if suitably advised, cf. Canterbury v. Spence (1972) 464 F (2d) 772 (Circuit Court of Appeals for the District of Columbia).
Counsel for the third respondents relied upon the decision of Cole J. of the Supreme Court of NSW in Ellis v. Wallsend District Hospital 16 September 1988 (unreported) in support of the proposition that the correct test of causation is subjective rather than objective. However in Ellis, although expressing a preference for the subjective test rather than the objective test, his Honour indicated that he would have reached the same conclusion on either test. Like his Honour and like Cox J. of the Supreme Court of South Australia in Gover v. South Australia and Perriam (1985) 39 SASR 543 at p 564 I believe, contrary to the submissions of the applicants, that the correct test is the subjective test. As Cole J. observes:

"The causative link critical to success of a plaintiff is what the plaintiff who suffered the change would have done, not a hypothetical reasonable man."

As pointed out by Cox J., the English authorities apply the subjective test: Bolam v. Friern Hospital Management Committee (1957) 1 WLR 582 at p 590; Chatterton v. Gerson (1981) QB 432 and a similar view seems to be taken in New Zealand in Smith v. Auckland Hospital Board (1965) NZLR 191. In Canada it would seem that the objective test prevails: Reibl v. Hughes (1980) 114 DLR (3d) 1.
However the subjective approach seems to me consonant with the decision of the High Court in Duyvelshaff v. Cathcart & Ritchie (supra) and, perhaps too, consistent with Betts v. Whittingslowe (1945) 71 CLR 637 at p 649 and Quigley v. Commonwealth (supra). Accordingly I would adopt the subjective test of causation. However, I doubt if even in the present case it would matter which test were applied. Even if the test were wholly objective I would be left in doubt as to what the hypothetical reasonable man would have done if advised of the daily exchange rates and with the knowledge of hedging possibilities. Presumably the hypothetical man would likewise be faced with the competing views of Messrs. Butler and Valentine and might equally have remained inactive. On the evidence it is impossible to say.
It follows that I would dismiss the application against the third respondents.
There remains the question of the cross claim made by the Bank against the applicants for judgment in respect of the amount outstanding under the Bank's securities. That matter has been deferred for further argument on 24 May next.

[1989] FCA 208

11 MAY 1989