Karrawirra Wines Pty Limited v State Bank of South Australia No. SCGRG 89/2714 Judgment No. 4424 Number of Pages 21 Banking (1994) 62 Sasr 1
[1994] SASC 4424
•25 February 1994
COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA MATHESON J
CWDS
Loan by bank in Swiss francs - borrower suffering loss as a result of currency fluctuation - agreement in writing - whether bank officer made oral representations that constituted collateral warranty or term of the agreement - whether bank agreed to manage or monitor loan - whether a relationship of proximity sufficient to give rise to a duty of care established in all the circumstances - claims in contract and negligence dismissed.Hawkins v Clayton
(1988) 164 CLR 539 and Ralik Pty Ltd v Commonwealth Bank of Australia Unrep.Jt. delivered in NSW Supreme Court on 24 August, 1990, applied. Foti v Banque Nationale de Paris (1989) 54 SASR 354 and on appeal 158 LSJS 23; Chiarabaglio and Another v Westpac Banking Corporation (1989) ATPR 40-971 and on appeal Unrep.Fed.Ct. Jt. No. 450 of 1990 and Spice v Westpac Banking Corporation Unrep.Fed.Ct.Jt. No. 487 of 1989 and on appeal (1990) ATPR 41-024, distinguished. Quade v Commonwealth Bank 99 ALR 567; Lloyd v Citicorp Australia Ltd and Anor (1986) 11 NSWLR 286; Commonwealth Bank of Australia v Mehta and Anor (1991) ATPR 41-103 and Westpac Banking Corporation v Potts and Another (1992) Aust.Torts Reports 81-166, considered.
HRNG ADELAIDE, 1-30 November 1993 #DATE 25:2:1994
Counsel for plaintiff: Mr B R Martin QC with
Ms R S Colton
Solicitors for plaintiff: Wallmans
Counsel for defendant: Mr D E Clayton QC
Solicitors for defendant: Barratt Lindquist
ORDER
Claims in contract and negligence dismissed.
JUDGE1 MATHESON J At all material times the plaintiff carried on business as a wine producer. On 10 May, 1984, it entered into a written foreign currency loan agreement ("the agreement") with The Savings Bank of South Australia to borrow foreign currency advances equivalent to $600,000 in Australian currency, the term of the loan being five years. On 28 May, 1984, the loan was drawn down in Swiss francs at an exchange rate of 2.062 Swiss francs to A$1.00. The Savings Bank of South Australia amalgamated with the State Bank of South Australia on 1 July, 1984, and the amalgamated bank is the defendant. By letter dated 7 April, 1987, the defendant advised the plaintiff that it was not prepared to advance further monies to the plaintiff and suggested that the plaintiff consider inter alia selling its winery business. On 29 May, 1987, the loan was brought back on shore at the request of the plaintiff at an exchange rate of 1.0046 Swiss francs to the Australian dollar, and the plaintiff's liability to the defendant was A$1,231,534.94. In order to meet its liability to the defendant, the plaintiff sold its winery business in July, 1987. The plaintiff now claims damages for the loss it alleges it suffered as a result of a breach of agreement and/or warranty and/or negligence of the Savings Bank of South Australia and/or the defendant. Unlike many of the previous decisions to which I have been referred, the plaintiff has not sought to invoke s.52 of the TradePractices Act 1974, but that observation is not intended as a criticism of the plaintiff's case.
2. At all material times Mr Kenneth Kies and his wife, Mrs Iris Kies, were the directors of the plaintiff and of its principal shareholder Kies Pty Ltd. On 19 January, 1984, Mr Kies had an interview with Mr D C Masters, the then Manager, Corporate Lending of The Savings Bank, at the request of Mr Tom Potter, the plaintiff's accountant. They had not met before. They discussed the possibility of consolidating his various borrowings totalling $423,000 (which, incidentally, included a debt to, or a loan from, Potter of $15,000), under one loan. Kies also informed Masters that he would like to establish a new cellar door sales outlet at Lyndoch on land which Kies Pty. Ltd. owned with a main road frontage, the approximate cost of which would be $60-$70,000. Kies offered security, the estimated value of which was $1,760,000. Masters indicated that the Savings Bank would be prepared to consolidate all loans on the basis of providing a long term rural loan, an overdraft and a fully drawn advance. There was no discussion at this meeting about a foreign currency loan. Kies said that he would discuss repayment requirements with his accountant, and to quote from the note made by Masters, he said that if he decided to proceed he would "revert back ... with full financial, projected cash flows and security details". I think Masters did offer to promote the plaintiff's wines in the course of the conversation, but I am quite unable to find that that offer advances the plaintiff's case.
3. At the time Mr and Mrs Kies had four personal savings accounts and a cheque account with the Gawler Branch of the Savings Bank of South Australia, but their company accounts were with the Commonwealth Trading and Development Banks. There is no evidence that the Savings Bank had ever previously provided advice to Mr and Mrs Kies, or that they were approaching the bank for advice (see Quade v Commonwealth Bank 99 ALR 567 at p.595). They were approaching the bank to borrow money. On or about 13 March, Kies again saw officers of the Savings Bank, namely Masters and Mr G Huddleston, a corporate analyst. Kies was this time accompanied by Potter. I find that Kies requested the bank to provide the loan in a foreign currency because of the substantially lower interest rates than those payable on a loan in Australian dollars. I find that it was Potter who first suggested the possibility of borrowing in a foreign currency, and that he had made the suggestion to Kies prior to this meeting. It is convenient to mention here that unfortunately Potter did not give evidence as he had died on 22 January, 1987 aged 63. He had been the plaintiff's accountant for many years, assisting Mr Kies with death duty problems when his father died, and preparing monthly statements and tax returns for the business of the plaintiff.
4. I find that initially Masters actively resisted the suggestion of a foreign currency loan. Foreign currency loans were not a product the bank was promoting, no more than five of such loans having been made by the bank at the time, (cf. Quade's case, supra). Its business at the time was primarily the making of housing loans to private individuals. Masters and Huddleston were not holding the bank out as being in a position to give advice about such loans, but I find that Masters did explain the risks involved in a foreign currency loan, and that he illustrated the risks by giving two examples. He told them that in 1972 Qantas borrowed twenty million and had to pay back forty million, and he told them that Tom the Cheap Grocer became insolvent because of trading in foreign currency loans. Masters told Kies and Potter that such borrowings were really only undertaken by major companies or by people who understand and can read currency movements. I think the low interest rate of a Swiss franc loan or a Singapore dollar loan was so attractive to the financially embarrassed plaintiff that its managing director and accountant thought it was worth the risks flowing from currency movements. I think they were very attracted by the potential savings in interest payments. I find that Potter said that the interest rate differential was of such magnitude that the plaintiff could build up a buffer fund to protect its position when rates dropped. That and other comments made at the meeting by Potter were sufficient to cause Masters and Huddleston to believe that a foreign currency borrowing would be managed by Potter. An offer to provide daily interest rate sheets made by Masters was rejected by Potter. He said he could get the information from daily newspapers. I reject the evidence of Kies that the bank undertook to manage and monitor the loan. The bank was not equipped to manage foreign currency loans, and did not in fact manage any foreign currency loans for customers. In my opinion, and I so find, Potter confidently held himself out as one who understood foreign currency loans. Masters finally agreed to make what the bank called "a foreign currency advance". I find that Masters told Kies and Potter that bank policy would require a hedge fund of $60,000, being 10 per cent of the amount borrowed, the purpose of such a fund being to cover any fall in the exchange rate between rollover periods which were to occur six monthly. I find that Masters said that exchange rate variations should not be more than 10 per cent. I utterly reject the evidence for the plaintiff that he said that the Australian dollar had never fluctuated more than 10 per cent as against the major currencies. I also find that at the same meeting Masters said that if the foreign currency moved downwards the plaintiff could "hedge it out" at a particular date and rate, but that in such circumstances the plaintiff would lose the upside if the currency rose again.
5. Huddleston prepared a diary note about the meeting. It was entitled "Application for Finance", and read in part:
"PURPOSE OF LOAN
Take over existing finance:-
. Commonwealth Trading Bank $95,000
. Commonwealth Development Bank 150,000
. City Mutual Life 100,000
. Mandrake Developments Pty Ltd 35,000
. W.T. Potter and Co. Pty Ltd 18,000
. N.V. Kies Estate 25,000
$ 423,000
Construction of new 'Cellar Door' sales outlet 70,000
Working Capital 47,000
Hedging Fund to be created 60,000
$600,000
FACILITY SOUGHT
Foreign Currency - Swiss francs, and/or Singapore dollars,
to the equivalent of $A600,000.
REPAYMENT ARRANGEMENTS Term - 5 years, bullet repayment
(Subject to six monthly roll-over) with the Bank reserving
the right to convert proceeds to any currency and/or convert
the loan to Commercial Bill Acceptance at roll-over periods.
FEE STRUCTURE Interest Rate: SIBOR/LIBOR plus 2 per cent
margin or Acceptance Fee of 2 per cent if converted to
Commercial Bills.
Establishment Fee: $2,160-00 (.36 per cent)"
6. The diary note then set out the details of the security offered, what the author called "repayment ability" and so on. Under the heading of "Comments", the following comment was included:
"The Directors have recently been approached by two separate
European winerys(sic) with offers to purchase the winery
comprising 12 acres plus buildings and plant for $750,000.
They have accepted the offer and successful negotiations
(e.g. Licences), and final approval from Europe will see
the winery sold, possibly within 12 - 18 months."
7. The diary note concluded as follows:
"RECOMMENDATION It is recommended that the Bank approve the
facility as sought, subject to:
(1) The Bank's Valuers confirmation of security values
applied herein.
(2) Perusal of Memorandum and Articles of Association of the
Borrower and the Guarantor by the Bank's Solicitor.
(3) Establishing the personal financial position of the
Directors to the Bank's satisfaction.
(4) Undertaking by applicants: . that borrowings will be
hedged on the Bank's request (should exchange rates alter
sufficiently to be detrimental).
. that if sufficient funds are not available to repay the
loan by the due date, then property(s) to be sold or loan
refinanced prior to due date to ensure payment in full.
. that in the event of the winery sale being finalised,
that the proceeds be applied to repay this loan in full."
8. I am satisfied that Kies and Potter stressed that the plaintiff expected to sell the winery, and did not expect that they would require the loan for anything like five years. As will appear later, the sale contemplated did not take place. I find that the undertakings under (4) above were made. After the meeting on 13 March, Masters dictated a memorandum to his Chief General Manager, which was subsequently typed and signed by him on 14 March. It recommended approval of the application. There was a debate before me as to the admissibility of this document (which at the time I marked D17 for identification). The debate more particularly related to the second page thereof. I reserved my ruling. I now rule that the document is admissible under s.34C of the Evidence Act 1929, and I indicate that I agree with the observations of his Honour Judge Lunn in "Civil Procedure South Australia" at para. 18,235.10. The memorandum included the following statements:
"I am not too preturbed(sic) about the low profit
performance as wineries are notorious for poor profit, but
they still accumulate large asset bases, which is evident by
this particular submission. Profits are hidden in stock.
It would be a good time to acquire this customer, in view of
the possible sale to a European firm, and potential credit
funds, should this eventuate. Foreign Currency has been
requested by applicants, and the inherent dangers have been
fully explained to them. They will undertake to hedge or
revert to $A upon our request."
9. I accept that the the last sentence of the memorandum accurately records at least part of what was said at the meeting.
10. The plaintiff's formal request to the Savings Bank was tendered. It was undated and read:
" Request for Finance We hereby apply for new/increased
financial assistance from the Bank to the extent of $600,000
on the terms and conditions as set out hereunder:- Type and
Amount of Loan Foreign Currency Advance Term 5 Years Purpose
1. Take over existing finance
2. Construction of new cellar door sales outlet
3. Working capital
4. Hedging fund to be created Security offered to the Bank
Refer attached We acknowledge that the Bank's usual terms
and conditions, including those listed hereunder, will apply
to this application and any loan granted:-
(a) The titles to the proposed security must be to the
Bank's satisfaction and any costs incurred by the Bank in
its investigations will be borne by the applicant(s).
(b) The loan will be secured by the lodgment of such
securities and the execution of documents as the Bank may
require.
(c) The Bank reserves the right to
1. Cancel or vary the overdraft limit at any time.
2. Vary the rate of interest and/or conditions at its
pleasure.
(d) A banking account will be conducted with The Savings
Bank of South Australia during the currency of the loan.
(Signed K I Kies) (STAMPED)
(Signed I L Kies) For and on behalf of KARRAWIRRA WINES
PTY. LTD"
11. On or about 10 May, Mr and Mrs Kies and their son, Mr Michael Kies, and Potter all attended at the premises of the Savings Bank at 97 King William Street, Adelaide. The two relevant company seals were affixed to a number of documents bearing the date of 10 May, 1984, the actual date being handwritten by Huddleston. Seal registers were not discovered or produced, (if in fact they existed). Apart from the agreement, (which I will mention again), Mr and Mrs Kies as directors signed personal guarantees in consideration of the advance made to the plaintiff, a cross guarantee from Kies Pty. Ltd. was signed by them both, and a charge over "the goodwill trade and other debtors, all specific property being plant, equipment and stock operated by the plaintiff" was also signed by them both. Finally, they both signed a document headed "Letter of Set-Off", which as I understand it, related to the $60,000 hedging fund which the bank required and the plaintiff agreed to.
12. The agreement contained a definition clause, one expression in which being "PRINCIPAL CURRENCY", (which is referred to in clause 3 which concerns the drawing of the loan) was defined to mean "the lawful currency for the time being of Switzerland".
13. Interest was payable for each period of six months on demand. The agreement provided that on the request of the customer the whole or any part of the loan could, inter alia, be converted to an alternative currency. Clause 13(a) stated:
"If at any Interest Payment Date after the end of the
Availability Period or after the Loan Facility is drawn in
full (whichever is the earlier) the Equivalent Amount in
Australian dollars of the amount of all Advances outstanding
exceeds the Loan Facility ("the excess") and provided that
the excess is more then 10 per centum of the Loan Facility
the Customer shall lodge with the Bank the amount of the
excess on term deposit in Australian dollars from such date
for the period ending on the next succeeding Interest
Payment Date at the Bank's interest rate for term deposits
of like tenor and amount current on the date of lodgement
(with interest to be paid to the Customer), and any such
term deposit maturing on an Interest Payment Date shall be
applied to meet the Customers's obligation to lodge a term
deposit with the Bank pursuant to this Clause 13.(a) on such
date and on a Repayment Date the Bank shall be entitled to
apply and set off such term deposit against the obligations
of the Customer to repay the Loan Facility."
14. All these documents had apparently been prepared prior to the meeting at the bank, and the attendance of Mrs Kies had been arranged prior thereto. These matters support the defendant's argument that an intention had been formed by Mr and Mrs Kies to enter into the agreement prior to the meeting. Be that as it may, I find that its execution was not induced by any representation of Masters or of any other bank officer, either on or about 10 May or on any earlier occasion. There was no reliance by Mr and Mrs Kies on anything that was said at the meeting or any earlier meeting. The signing ceremony was a formal occasion, and that is all it was. Mr and Mrs Kies had to attend to sign documents. Michael Kies had a close interest in the loan as it was partly to provide funds for a new cellar door sales outlet, and he was responsible for marketing. The whole initiative was Potter's, and it is not in the least surprising to me that he attended to see its fulfillment. Moreover, the plaintiff's debt to his firmwas thereby repaid. I reject the evidence of Kies that he and his son Michael were escorted to a dealing room on the date the agreement was signed. The Savings Bank of South Australia did not have a dealing room at the time. I think it is probable that they were shown the defendant's dealing room many months later, but I reject their evidence that in the course of then being shown it, a bank officer said that the room and its operations demonstrated how the bank could manage or monitor or was managing or monitoring foreign currency loans for customers. It is also convenient to mention here that Mrs Kies was not called as a witness. I accept that she was unwell and that in any event her memory was defective. It is convenient here to state that the agreement did not contain a term that the bank would manage or monitor the loan. I have already found that Masters did not represent or warrant that it would do so. The claim alleging a breach of agreement and/or warranty fails, and is dismissed.
15. The loan was drawn in Swiss francs on 28 May, 1984 at an exchange rate of 2.062 Swiss francs to A$1. The disbursement of the money was set out in Huddleston's memorandum to the Manager of the Gawler Branch of the bank, which reads in part:
"The total sum of $600,000 was dispersed in the following
manner:-
. Commonwealth Trading Bank of Australia $ 75,064-15
. Commonwealth Development Bank of Australia 140,929-81
. Mandrake Developments Pty Ltd 36,893-22
. Commissioner of Succession Duties 25,421-98
. W.T. Potter and Co. Pty Ltd 21,112-66
. National Companies and Securities Commission 55-00
. Registrar General of Deeds 210-00
. Commissioner of Stamps 8-00
The balance, $300,305-18 is remitted herewith by Bank Cheque
and is to be dispersed as follows:-
. Credit $60,000 to Deposit Stock Fixed Term to create a
Hedging Account. An estoppel is to be placed thereon for
the term of the loan.
. Credit $70,305-18 to cheque account; to be used as
working capital. As previously advised this account is to
operate on a credit basis.
. Credit $70,000 to an account of any type to the
satisfaction of yourself and the customer and place an
estoppel thereon. These funds are to be utilized
specifically for the construction of the 'Cellar Door'
outlet. The amount is to be released progressively on
receipt of contractor/s claims and your inspection.
. Credit $100,000, again to any type of account, and place
an estoppel thereon as previously discussed, City Mutual
Life Assurance will not discharge their mortgage at this
time without charging penalty interest. Therefore, these
funds are to be set aside until 24th September 1984 at which
time a settlement will be arranged and the title obtained.
Please diarise, follow up.
Please ensure that the establishment fees and solicitors fee
are debited to the working account. We acknowledge that a
debit was previously raised from this office for $2,090 for
payment of Stamp Duty on mortgage documents. All security
documents and insurance certificates will be retained in
Head Office. As undertaken by the customer Certificate of
Title Volume 4006 Folio 900 is to be lodged for safe custody
at your branch. For your information the funds were
arranged through the Singapore market at an interest rate of
4.5 per cent per annum based on an exchange rate of 2.062
per cent. The first roll-over date will be 26th November
1984, which will be attended to by Head Office."
16. I think the fact that the funds "were arranged through the Singapore market" may have led to some confusion in the minds of Messrs. Kies about the actual foreign currency to be chosen for the advance.
17. Witnesses for both parties were giving evidence before me of conversations and events that occurred more than nine years earlier. Some reconstruction, some inconsistencies, some memory gaps were inevitable with all witnesses. As will already have become apparent, I have had no hesitation, however, in preferring the evidence of the bank officers, and that of Masters and Huddleston in particular, to that of Messrs. Kenneth and Michael Kies. I have carefully considered all of the criticisms of Mr Martin QC, counsel for the plaintiff, of their evidence, for example the fact that Masters did not think Potter was present at the meeting on 10 May (I have found that he was), and the fact that Huddleston could not remember Masters referring to the losses of Qantas and Tom the Cheap (I have found that he did). Some bank documents do appear to be missing, but I am unable to draw any inference adverse to the defendant, bearing in mind the interval of time and the various State Bank enquiries. All bank officers were closely and tenaciously cross-examined by Mr Martin, and if they did not emerge unscathed, I nevertheless found them all to be essentially honest and convincing witnesses.
18. Messrs Kenneth and Michael Kies on the other hand did not impress me. I suspect that when things went bad, Potter sought to avoid blame for himself by, in his turn, blaming the bank officers, as will be seen later in these reasons. I think that in the end they all persuaded themselves, contrary to what I think is the truth, that Masters had agreed that the defendant would manage and monitor the loan.
19. It is convenient to mention here that the plaintiff called a witness who was undoubtedly expert in foreign currency loans, namely, Mr Ian Butler, (he actually gave his occupation in the witness box as "speculator"]) It is noteworthy that he did not say that in May 1984 the bank should have advised against a borrowing in Swiss francs. Be that as it may, his evidence, and his report that was tendered, were based on the assumption, which I have found to be erroneous, that the defendant was managing the plaintiff's foreign currency loan. His evidence is of limited value.
20. Upon the view that I take of the evidence, it is in some respects unnecessary to refer to what happened after the drawing of the loan, but I agree with Mr Clayton QC, counsel for the defendant, that the subsequent correspondence is essentially inconsistent with the plaintiff's case. On 26 November, 1984, the first six months rollover occurred, and the same day the defendant's then Corporate Manager, Mr R C Norris, wrote the following letter to Kies:
"SWISS FRANC - LOAN FACILITY $A600,000
We confirm that rollover of the above facility was effected
on 26th November 1984 as detailed hereunder:
- Principal Amount - CHF 1,237,200-00
Term - 183 days
Maturity Date - 28th May 1985
Interest Rate - 5 3/8 per cent (360 day basis) + 2 per cent
margin Interest Due on 28th May 1985 - CHF 46,382-11
Interest and fees applicable to the first rollover of the
facility have been calculated as follows:
- Interest for 186 days at 4 1/2 per cent per annum on CHF
1,237,200, convert for $A's at 2.116 $13,594-00 Add
withholding tax at 10 per cent 1,359-40 14,953-40 Bank's
margin at 2 per cent on CHF 1,237,200 6,041-78 $20,995-18
We trust that the foregoing is in accordance with your
understanding of arrangements, however, should you have any
queries please do not hesitate to contact us. Yours
faithfully, (Signed for) R C NORRIS, CORPORATE MANAGER."
21. It is clear that there was no management of the loan by the bank during the first six months, and there was no evidence of any query by the plaintiff as to why there had been no management. The plaintiff in fact made a capital profit during this period.
22. Following the first rollover, there was a second loan for a period of six months. The exchange rate remained above the initial drawdown rate until 15th February, 1985. Between 15 February and 29 March the weekly movements were: Dates Rates 15/2/85 2.0660 22/2/85 2.0049 1/3/85 2.O345 8/3/85 2.0091 15/3/85 1.9774 22/3/85 1.8958 29/3/85 1.8099 On 27 March, 1985, the defendant's then Corporate Manager, Mr J. W. Chilton, wrote the following letter to the directors of the plaintiff.
" Re : Foreign Currency Loan
We advise that recent exchange rate movement between the
Australian Dollar and the Swiss Franc, has resulted in a
negative variance between the currencies exceeding ten per
cent of the original conversion rate applied, when the
foreign currency was drawn down. As a result, the ten per
cent hedge fund required by the Bank to cover such movement
on your foreign currency advance, has been exceeded as shown
below. Options available are:-
. To fix the exchange rate at the present level and stop
any further erosion.
. Increase the hedge fund to cover further exchange rate
movement, and await a return to a more favourable position.
. Take a capital loss and convert the loan back to
Australian dollars.
Details of your Swiss Franc borrowing is as follows:-
Original $A Conversion Conversion Hedge Total Negative
Swiss Franc Equivalent Fund Advance Rate at Rate Held
Variance draw as at down 25/3/85 CHF 1,237,200 600,000
2,062 1,872 $A60,000 $A60,897-43
Total $A's required to repay loan at current conversion rate
would be $660,897-43. Please contact the Bank at your earliest
convenience to discuss the above matter further."
23. I agree with Mr Clayton that this letter was timely because the bank did not have any general authority which one would have expected if the evidence of Kies about the bank's undertaking to manage was correct. The bank could not take any action before seeking instructions. The letter informs the plaintiff about the movements in exchange rates and sets out the plaintiff's options. The options which are set out were not criticised by the plaintiff. The letter demonstrates that the bank was not in fact managing the position.
24. On 29 March, Mr Michael Kies spoke on the telephone to the bank. It is not clear whether he spoke to Chilton or to someone else, but the person to whom he spoke offered to send out exchange rate schedules. Chilton says he was directed to send them out by a superior. On 2 April, he wrote the following letter to the directors of the plaintiff:
"RE: FOREIGN CURRENCY LOAN
We refer to previous letter dated 27th March 1985 and
subsequent phone call from Michael on 29th March 1985.
Further exchange rate variances in the Swiss Franc Currency
against the Australian Dollar has seen the situation
deteriorate further whereby the total Negative Variance now
stands at $A 86,951-69. Normally we would now call for an
increased Hedge Fund of say $27,000-00 to cover the exchange
rate movement but we realise that the Company is not in a
position to provide same at this time of the year, nor is it
in a position to take a capital loss of some $86,951-69 to
convert the loan back to Australian dollars. The other
alternative is to fix the exchange rate at the present level
to stop any further erosion in exchange rates next rollover
date in May 1985. Cost to effect the Forward Exchange cover
is $7.50, but the associated costs of effecting same would
negate any saving in interest between the Swiss Franc
borrowing and the present Australian Dollar Interest rate,
when the loan is repaid. Copies of our latest exchange rate
schedules and those applying from 1975 to Dec. 1984 for
Swiss Franc borrowings are attached for your information.
Please let me have your advices on which procedure the
Company proposes to adopt in respect to the Overseas Loan."
25. The letter gives an insight into what may have been discussed on 29 March. It notes that the company was not in a position to increase the hedge fund, nor was it in the position to take a capital loss. Both of those matters are acknowledged by the Messrs. Kies in evidence. The exchange rate schedules were enclosed, and from that time on the plaintiff was fully aware of past movements. The letter, like the letter of 27 March, makes it clear that the bank was seeking instructions from its customer. There is nothing to indicate that the bank was prepared to give advice or to manage the loan. It makes clear that the decision was the customer's.
26. Between 27 March and a conversation between Chilton and Michael Kies on 3 April, Mr Michael Kies undoubtedly discussed the situation with Potter. He admitted as much after exhibit D15 had been tendered. Exhibit D15 was a letter written by the plaintiff's solicitors to their own expert witness, Mr I. A. Butler, on 23 September, 1991, and purported to set out what action was taken by the plaintiff in response to the letter of 2 April. Page 5 contains the following paragraph:
"We are instructed that Michael Kies spoke to Potter, the
accountant, who asked him why he was worried because he
would have paid the amount in interest in any event. Potter
suggested to Kies that he let the loan ride and merely pay
the interest. Mr Kies then instructed the Bank to pay the
interest and rollover the loan."
27. I find that what is there stated is probably what in fact happened.
28. On 3 April, Chilton made the following diary note (he is referring to Mr Michael Kies):
"DIARY NOTE - 3/4/85 A/C - KARRAWIRRA WINES PTY LTD
SUBJECT : FOREIGN CURRENCY LOAN OF CHF 1,237,200 ($A
600,000)
Mr Kies called today to discuss the recent adverse exchange
rate movements in respect to the Companys Swiss Franc Loan.
Total Variance as at 2/4/85 was $104,957-26 against a Hedge
Fund Deposit of $60,000-00. Mr Kies stated that the Company
does not have the resources to boost the Hedge Fund by
$44,957-26 to cover the variance but would try to increase
regular transfers from the Working A/c to a Savings A/c at
Gawler Branch from $4000-00 a month to $6000-00 per month to
build up additional Hedge Funds. The account balance at
Gawler is Credit $20,000-00 but these funds are required to
pay interest on the Swiss Loan at rollover date of 28/5/85.
Overseas Borrowing plus Hedge Fund Deficit of $44,957
represents 57.18 per cent of E.M.V. of Securities and 72.31
per cent of available Lending, so at this time the Bank is
reasonably well secured on total liabilities. The expiry
date on the Swiss Loan is May 1989 and provided the Bank is
in agreeance Mr Kies is happy to ride the present situation
out for another 12 months at least. As I see it we have no
other option than to go along with the Company's offer and
recommend we do so."
29. Under the diary note Masters has handwritten a note, dated and signed 3/4/85, in which he says:
"As security is adequate to cover recent fluctuations I am
prepared to ride with this account provided Hedge Fund is
progressively increased."
30. I accept that Chilton's diary note of 3 April is an accurate account of his conversation with Kies. It indicates that the decision "to ride the present situation out for another twelve months at least" was the plaintiff's decision based on Potter's advice, and not a matter of the plaintiff following the bank's advice. It again confirms that the bank was not required to manage the loan.
31. On 14 May, Chilton wrote the following letter to the directors of the plaintiff:
"RE: FOREIGN CURRENCY LOAN - SWISS FRANCS CHF 1,237,200
AUSTRALIAN EQUIVALENT $A600,000-00
We advise that the above facility is due for rollover again
on 28/5/85. Details of conversion rates for Fees, Interest
and Withholding Tax at rollover will be relayed prior to the
28th May, 1985. Today's conversion rate for $A's is 1.7870.
Please let me have your instructions for rollover or
otherwise by 24th May, 1985."
32. This letter was followed by another letter from Chilton to the directors of the plaintiff dated 28 May, which read:
" Swiss Franc - Loan Facility $A600,000
We confirm that rollover of the above facility was effected
on 28th May, 1985 as detailed hereunder:
- Principal Amount: CHF1,237,200
Term: 184 days
Maturity Date: 28th November, 1985
Interest Rate: 5 per cent plus Bank's margin 2.0 per cent
pa (on 360 day basis)
Interest due on 28.11.85: CHF47,426
Interest and fees applicable to the second rollover of the
facility have been calculated as follows:
- Interest for 183 days at 5 3/8 per cent per annum on
CHF1,237,200 convert for $A's at 1.739 $19,438-71
Add withholding tax at 10 per cent 1,943-87 $21,382-58
Bank's margin at 2.0 per cent on CHF1,236,200 7,233-00
$28,615-58
We trust that the foregoing is in accordance with your
understanding of arrangements, however, should you have any
queries please do not hesitate to contact this office."
33. I think I am entitled to conclude that the instructions from the plaintiff which were sought in the letter of 14 May were forthcoming. In any event a rollover of the facility was in accordance with the instructions given on 3 April. Certainly no complaint was made by the plaintiff that the rollover did occur. On 2 October, Mr P. E. Miller, then Senior Manager, Corporate Accounts, wrote the following letter addressed to the plaintiff's Managing Director:
"Foreign Currency Advance
In the latter half of last month the value of the US Dollar
has weakened against other major currencies and, although
the Australian dollar managed to strengthen against the US
Dollar, the net result has been a further deterioration in
the cross exchange rate between Australian dollars and Swiss
Francs (CHF). Your borrowing of CHF1,237,200 ($A600,000
equivalent at draw down) would require $A820,424 (at current
exchange rate 1.5080) to enable repayment. In addition to
your interest costs there is a potential capital loss as
shown above since the loan was drawn. At present there is
no immediate need for the Bank to seek additional security
or to protect its advance. However, in view of exchange
rate trends it may be prudent for you to again discuss with
the Bank the current position of your foreign currency loan.
It must be pointed out that should it become necessary to
take out forward cover then this action would in fact lock
in your capital loss caused through the depreciation.
Should you wish to discuss the matter of Forward Exchange
protection against further losses, we would be pleased to
advise you on the alternatives available."
34. Miller had a meeting with Mr Michael Kies on 15 October. He cannot recall the specific conversation, but the purpose of the meeting was to discuss the letter of 2 October and the options open to the plaintiff. The facility was rolled over on 27 November.
35. Miller had further meetings with Kenneth Kies on 21 February, 1986 and on 12 May. I now propose to set out two letters to him, the first from Mr C F Box, then Corporate Manager, dated 15 May, which reads:
"Foreign Currency Borrowings
The events of the last few days have again demonstrated the
volatility of the exchange rate between the Australian
dollar and other currencies. On 14th May 1986 the
Australian Dollar fell 1.2 per cent against the US Dollar,
with a commensurable fall against all other currencies. As
you have a foreign currency borrowing from the Bank the
current rate of conversion of your Swiss Franc to Australian
Dollars on 14th May 1986 was 1.305. To repay your loan at
this exchange rate would require payment of $A948,045. The
Bank's position with regard to foreign currency borrowings
is that it is prepared to allow the borrowing to run
unhedged provided the customer can continue to provide
adequate security to the Bank to cover the foreign exchange
risk and that the Bank is totally comfortable that the
customer has the capacity to meet this risk should any
further sudden downturn of the Australian Dollar occur. If
it becomes evident to the Bank that the customer's capacity
to cover the risk factor no longer exists, then the Bank
will not be put in the position of risk taking against
further currency movements. In such circumstances we shall
have no alternative but to hedge the foreign currency amount
and have the advance converted back to Australian Dollars at
rollover. We are sure that you will appreciate our position
in that we are not prepared to take any exchange risk in
providing the type of funding you have elected. In electing
such funding, all risk is borne by you and if such losses
are materialised due to a lack of security then, the Bank
will not accept responsibility for same. The current
position of your loan versus security is: Original Amount
$600,000 Outstandings as at 16/5/86 Current Conversion Rate
1.305 Security to Support $981,003 including Hedge Funds
Based on the security currently held by the Bank, should the
exchange rate between Swiss Franc and Australian dollars
fall below 1.290 then the Bank will require additional
security or further funds deposited to your hedge account.
If such is not effected upon immediate request of the Bank
then it will be necessary for action to be taken as
indicated above."
36. The second letter was from Mr P. E. Byrnes, General Manager Corporate and International Banking, dated 21 May, and reads:
" Foreign Currency Borrowings
The events of the last week have again demonstrated the
volatility of the exchange rate between the Australian
Dollar and other currencies. On 14th May 1986 the
Australian Dollar fell 4.5 per cent against the US Dollar,
with a commensurable fall against all other currencies. The
rate of conversion of your Swiss Franc Advance to Australian
Dollars on 14th May 1986 was 1.2669. To repay your loan at
this exchange rate would require payment of $AUD976,556-95.
The Bank's position with regard to foreign currency
borrowings is that it is prepared to allow the borrowing to
run unhedged provided the customer can continue to provide
adequate security to the Bank to cover the foreign exchange
risk and that the Bank is totally comfortable that the
customer has the capacity to meet this risk should any
further sudden downturn of the Australian Dollar occur. If
it becomes evident to the Bank that your capacity to cover
the risk factor no longer exists, then the Bank will not be
put in the position of risk taking against further currency
movements. In such circumstances we shall have no
alternative but to hedge the foreign currency amount and
have the advance converted back to Australian Dollars at
rollover. We are sure that you will appreciate our position
in that we are not prepared to take any exchange risk in
providing the type of funding you have elected. In electing
such funding, all risk is borne by you and if such losses
are materialised due to lack of security then, the Bank will
not accept responsibility for same. The current position of
your loan is:- Original Amount: CHFl,237,200 Outstanding as
at 20.05.86: AUD924,180-17 Current Conversion Rate: l.3387
Based on the amount of security currently held by the Bank,
should the exchange rate between Swiss Franc and Australian
Dollars fall below 1.290 then the Bank will require
additional security or further funds deposited to your hedge
account. If such is not effected upon immediate request of
the Bank then it will be necessary for action to be taken as
indicated above."
37. I agree with Mr Clayton that the letters should have left Kies in no doubt as to the bank's position. In particular, they reminded Kies that the risk was his, and the bank was not managing the loan.
38. On 4 June, Box advised Kenneth Kies by letter that the facility was rolled over on 30 May. The letter included the following:
"Please contact us on or before 25/11/86 with instructions
covering the advance due 28th November, 1986."
39. On 23 June, a meeting took place at the bank. Messrs. Kenneth and Michael Kies and Messrs. P. E. White and Box attended. In the course of the meeting, Mr Kenneth Kies expressed his view that it was made clear at the initial interview concerning the foreign currency advance that the bank would provide the necessary expert advice on foreign currency management and loan monitoring.
40. The evidence generally is to the effect that by now the bank wanted to hedge to protect its security position, but that the company preferred to keep the loan off-shore. The first 25 per cent of the debt was hedged by the bank on l July. The remaining 75 per cent was hedged on 3 July. A further meeting took place at the bank on 22 July.
41. Messrs. Kenneth and Michael Kies, Mr Jim Irvine, who had taken over the management of the plaintiff's winery on 1 July, and Potter were present, and Messrs. Box and White represented the bank. In a diary note of the same date, Box noted under the heading "Foreign Currency Advance":
"A full background of FCA was given to enable Jim Irvine and
Tom Potter a complete understanding of the current
situation. Tom Potter stated Des Masters agreed at initial
interview to manage FCA change to a different currency or
hedge debt if exchange rates moved against the interest of
Kies. Company informed that matter should be addressed at a
meeting with Mr Masters present."
42. On 28 November, 1986 the facility was rolled over again. Mr Kenneth Kies stated that prior to Christmas in 1986 and prior to Box going on leave, Box said he would hedge the loan if it got to A$1.15. Later Kies apparently claimed that the figure mentioned was A$1.13. No action was in fact taken, and Box denied that there was any discussion between him and Kies in which he agreed to hedge as Kies alleged. I have so little confidence in the evidence of Kies that I am not able to find in his favour on this issue of fact. The loan was hedged late on 13 January, 1987 "when the stop-loss was triggered". On 15 January, the following letter was written to Mr Kenneth Kies:
"Foreign Currency Loan CHF l,237,200
Further to recent telephone conversations between yourself
and Mr Paul Davy of this Office, I confirm that as a result
of the fall of the Swiss franc cross-rate, your Company's
'stop-loss' order was triggered on the afternoon of 13th
January 1987. As a result, your foreign currency advance is
now fully hedged until the next roll-over date. Details
are:- CHF 1,237,200 contract rate 1.0046 maturity 29.05.87
AUD equivalent $1,231,534-94 This action was taken in order
to protect both your Company and the Bank against further
falls in the exchange rate. Under the terms of the Foreign
Currency Agreement, should you be unable to meet the
possible cost of the forward contract at maturity or unable
to meet the interest due at roll-over, the loan may be
transferred into Australian dollars at domestic interest
rates. If you wish the foreign currency advance to
continue, the following options could be available:-
1. Rollover the Forward Exchange Contract for a further
period. This action will result in a premium being charged
on the exchange rate obtained under the existing contract
(this premium approximately equates to the difference
between Australian domestic interest rates and Swiss
interest rates). Demonstration of your Company's ability to
meet this additional cost at maturity would be necessary
before the Bank would agree to this course of action.
2. Close out the Forward Exchange Contract by either payment
of a cost or receipt of a benefit, depending on the
difference between the spot rate on the day of rollover and
the Contract rate. The following example illustrates a
possible scenario for closing out the Contract:-
Forward Exchange Contract CHF 1,237,200
Pay Out 29.05.87 at Contract Rate 1.0046 1,231,534-94 CHF
1,237,200 at Cross Rate 29.05.87 (eg l.0900) 1,135,045-87
Cost to close out contract 96,489-07
Given the situation as detailed in the above example, a
further option exists to lodge additional security to
'top-up' that already held by the Bank, to cover the
increased debt.
We would be pleased to discuss the above matters further.
Should you wish to do so, please contact Mr Box to arrange a
suitable time for a meeting. Yours faithfully, (Signed)
P.J. WHITE, Senior Manager, Corporate Banking."
43. The foreign currency advance was due for rollover on 29 May, but on instructions from Mr Kenneth Kies, it was brought back on shore and debited to the Company's working account in the sum of $1,266,893.88.
44. Some strong judicial views have been expressed on foreign currency loans. For example, in Lloyd v Citicorp Australia Ltd and Anor (1986) 11 NSWLR 286, Rogers J said at pp.287-288:
"... it will be necessary to discuss in the particular
context of cases coming up for decision, the precise extent
of the duty owed (by a financial adviser to a borrower in a
foreign currency). It is sufficient for the present to
point to the incongruity of identifying the duty in terms of
confidence in the movements of the foreign exchange market
or what a 'prudent' financial adviser would or would not do
in that market. It is somewhat akin to suggesting that an
adviser to a player in a game of Russian roulette would tape
up the firing mechanism, unless confident that there was no
bullet coming into the chamber. Similarly, venturing into
the foreign exchange market and from time to time becoming
covered, that is to say hedged, or uncovered, that is
unhedged, disqualifies the activity from having any
relationship with any accepted notion of prudence. In
determining the extent of the duty, it is essential to have
regard to the nature of the market to which the plaintiff
committed his financial future. There is no scientific
basis upon which accurate forecasts can be made of movements
in currency. Although some operators in the market are
better equipped to give advice than others, ultimately it is
a gamble. It is a gamble because unpredictable factors may
have immediate and violent repercussions. A rumour of the
death of the United States President, the MX missile crisis,
dismissal of an oil minister cannot be predicted or guarded
against. Yet they may have immense impact on the foreign
currency market. De-regulation has brought in its train
volatility of proportions previously unknown. As in every
true gamble, returns can be very high but so can losses."
45. On the other hand, in Commonwealth Bank of Australia v Mehta and Anor
(1991) ATPR 41-103, Meagher JA said at p.52,604:
"His Honour" (he was referring to the judgment at first
instance of Rogers CJ Comm D, as he then was)" took a
particularly censorious view of foreign currency loans in
general. He said: 'Nobody in his right mind, after being
told that the possible loss was unlimited, that the
necessary implementation of safeguards would be limited in
their effect and would require continuous attention, which
the bank refused to provide, would contemplate making the
borrowing.'
46. A foreign currency loan is largely a gamble; consequently, it would be unattractive to the timid and the prudent. Nonetheless, there are perfectly rational people who are prepared to gamble; and it is notorious that many borrowers did enter into such transactions at the time without suffering any damage, some of whom actually made a profit. All the experts agreed that it was reasonable for an informed borrower to enter into such transactions. One cannot but have an uneasy feeling that a dogmatic view that such loans are necessarily irrational will lead to the imposition of liability on lenders where justice does not require it." Banks have been found liable for the losses of their customers who have entered into foreign currency loans in a number of cases. They include Foti v Banque Nationale de Paris (1989) 54 SASR
354, and on appeal 158 LSJS 23; Chiarabaglio and Another v. Westpac Banking Corporation, (1989) ATPR 40-971, and on appeal, Unrep.Fed.Ct.Jt. No. 450 of 1990; and Spice v. Westpac Banking Corporation Unrep.Fed.Ct.Jt. No. 487 of 1989, and on appeal (1990) ATPR 41-024. However, I have found such cases only of limited assistance in deciding the case at bar because of dissimilar factual situations.
47. In Foti's case, White J said in the Full Court at p.26:
"The learned trial judge (Legoe J) entered judgment in
favour of the plaintiffs on one ground only. He found that
the bank was in a special relationship of proximity with the
plaintiffs under which it assumed responsibility to manage
or monitor the loan to the extent which gave rise to an
obligation on the part of the bank, when the emergency began
to arise, to be alert to their interests, to act positively,
to call them in and to advise them clearly of the necessity
of putting in place a hedge contract immediately. The bank
was said to be in breach of that duty when it failed to do
so."
48. In Chiarabaglio's case, the evidence included the facts that the plaintiff's grasp of English was very far from perfect, that he had been a long and loyal customer of the bank and that he had developed an attitude of trust towards each of a long line of branch managers. Further the trial judge found that the bank officer in speaking positively about the advantages of foreign currency loans said that it was good business for the applicants to borrow Japanese yen in the sum of $500,000, that there was no significant risk in such an off-shore loan, that hedging an off- shore loan was not worth the cost of doing so and was not necessary, and that the Australian dollar would stay strong as against the Japanese yen. In Spice's case, the plaintiff had asked the bank officer with whom he was discussing a loan in Swiss francs and trying to determine whether or not to enter the loan agreement: "What is the catch?" The trial judge found that the bank officer had replied: "There is no catch. It is very much the thing to do".
49. In considering the plaintiff's claim here, I have found the oft-quoted judgment of Deane J in Hawkins v. Clayton (1988) 164 CLR 539 illuminating. At pp 576-577, his Honour said:
"As has been stressed in a number of recent cases in this
Court (see, e.g., the judgment of the majority of the Court
in Cook v. Cook (1986) 162 CLR 376 at pp 381-382, a
relevant duty of care will arise under the common law of
negligence only in a case where the requirement of a
relationship of proximity between the plaintiff and the
defendant is satisfied. In the more settled areas of the
law of negligence involving direct physical injury or damage
caused by negligent act, the reasonable foreseeability of
such injury or damage is, of itself, commonly an adequate
indication that the relationship between the parties
possesses the requisite element of proximity: ... That
cannot, however, be said of cases in the area where the
plaintiff's claim is for pure economic loss. In that area,
the categories of case in which the requisite relationship
of proximity is to be found are properly to be seen as
special in that they will be characterized by some
additional element or elements which will commonly (but not
necessarily) consist of known reliance (or dependence) or
the assumption of responsibility or a combination of the
two: see, generally, Sutherland Shire Council v. Heyman 157
(1985) CLR 424, at pp 443-444, 466-468, 501-502. As was
pointed out in the judgment of the majority of the Court in
San Sebastian Pty. Ltd. v. The Minister (1986) 162 CLR
340, at p 355: 'The notion of proximity, because it limits
the loss that would otherwise be recoverable if
foreseeability were used as an exclusive criterion of the
duty of care, is of vital importance when the plaintiff's
claim is for pure economic loss. When the economic loss
results from negligent misstatement, the element of reliance
plays a prominent part in the ascertainment of a
relationship of proximity between the plaintiff and the
defendant, and therefore in the ascertainment of a duty of
care. But when the economic loss results from a negligent
act or omission outside the realm of negligent misstatement,
the element of reliance may not be present. It is in this
sphere that the absence of reliance as a factor creates an
additional difficulty in deciding whether a sufficient
relationship of proximity exists to enable a plaintiff to
recover economic loss.' Implicit in that passage is the
recognition that the requisite relationship of proximity
must exist with respect to the allegedly negligent class of
act and the particular kind of damage which the plaintiff
has actually sustained. Thus, to take an obvious example,
it would be irrelevant to a claim for economic damage which
has been sustained by reason of negligent misstatement that
a relationship of proximity with respect to ordinary
physical injury had existed by reason of the fact that, at
the time of the relevant misstatement, the defendant was the
driver of a motor vehicle in which the plaintiff was a
passenger."
50. At p.579, his Honour said:
"The content of the duty of care in a particular case is
governed by the relationship of proximity from which it
springs. It may, in some special categories of case, extend
to require the taking of positive steps to avoid physical
damage or economic loss being sustained by the person or
persons to whom the duty is owed. Apart from cases
involving the exercise of statutory powers or where the
person under the duty has created the risk, the categories
of case in which a relationship of proximity gives rise to a
duty of care which may, according to circumstances, so
extend are, like those in which there is a duty of care to
avoid pure economic loss, commonly those involving the
related elements of an assumption of responsibility and
reliance."
51. I have also derived considerable assistance from the judgment of Cole J in Ralik Pty Ltd v Commonwealth Bank of Australia, delivered in the New South Wales Supreme Court on 24 August, 1990, but for some inexplicable reason unreported.
52. I also refer to the remarks of Macrossan CJ in his dessenting judgment in Westpac Banking Corporation v. Potts and Another (1992) Aust Torts Reports 81-166, where at p 61,318 his Honour said:
"It will not be characteristic of dealings between a banker
and customer that there will be actively in operation a duty
of ... (care) since such parties deal frequently in a
relationship of buyer and seller of the services which banks
usually provide. In the world of commerce vendors are not
thought of as advisers to the purchasers who negotiate with
them. The phrase caveat emptor, or buyer beware, is there
to remind us of this fact. But this more usual banker-
customer stance should not be permitted to obscure the fact
that, in a particular case, these parties may stand aside
from their customary roles and, knowingly on each side, deal
with one another on the basis of a relationship which has a
higher degree of trust and reliance in respect of the
information or advice which is passed between them. Banks
may not be under any obligation to assume the role of
adviser but the finding of the trial judge in this case is
that the defendant bank here chose to do so."
53. Finally, I refer again to the judgment of White J in Foti (supra). At p.31, he said:
"The undertaking of monitoring and management of an offshore
loan is onerous and fraught with danger. The economic loss
can be huge. These awesome responsibilities, (counsel)
said, ought not to be lightly imputed to a bank which is at
arm's length with its customer in an ordinary
lender/borrower situation. I agree with that submission.
The evidence must be clear before the bank is 'saddled' with
this burden of responsibility."
54. In the case at bar, I am simply not persuaded that there was "known reliance (or dependence) or the assumption of responsibility or a combination of the two". I have found that it was Kies and the plaintiff's accountant who approached the bank. The bank was not then even the plaintiff's banker. It was the plaintiff's accountant, Potter, who pressed for a foreign currency loan. The bank was not promoting such loans. So far from undertaking to manage or monitor the loan, I have found that Masters actively tried to discourage such a loan. I do not think it correct that he adopted the role of adviser and I am unable to find that he accepted responsibility for any information he supplied. His offer to Potter to provide interest rate sheets was rejected. I think Kies relied on Potter to manage and monitor the loan. The plaintiff has not proved a relationship of proximity sufficient to give rise to a duty of care. The claim in negligence also fails, and is dismissed.
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