Rabobank Australia Limited v Colly Cotton Marketing Pty Limited

[2005] NSWSC 727

CITATION:	Rabobank Australia Limited v Colly Cotton Marketing Pty Limited [2005] NSWSC 727 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	4, 5, 6, 11, 12, 13, 18, 19 April 2005 w/s 6 May 2005
JUDGMENT DATE :	27 July 2005
JURISDICTION:	Commercial List
JUDGMENT OF:	Bergin J
DECISION:	See paragraph 324

CATCHWORDS:	[SECURITIES] - Whether Crop Lien granted to the Bank pursuant to the Liens on Crops and Wool and Stock Mortgages Act 1898 is 'preferential' or has priority over claim for losses on liquidation of foreign currency positions in relation to cotton crop - [CONTRACT] - Identity of contracting parties for forward sales of cotton and currency positions or contracts - identification of terms - nature of the various transactions - Whether breach of warranty - Whether cotton grower required to indemnify cotton merchant for amount it is required to pay the Bank under the Crop Lien - [TRADE PRACTICES] - Whether representations made - Whether reasonable grounds for making representation - Whether misleading or deceptive (s 51A - s 52) - [DUTY OF CARE] - Whether cotton merchant owed a duty of care to cotton grower - scope - whether duty breached - [CONTRACTS REVIEW] - Whether currency contracts should be declared void or varied in whole or in part - [DAMAGES] - whether cotton grower entitled to damages - measure of damages
LEGISLATION CITED:	Australian Securities Commission Act 1989 (Cth) Banking (Foreign Exchange) Regulations Contracts Review Act 1980 (NSW) Conveyancing Act 1919 (NSW) Corporations Act 2001 (Cth) Liens on Crops and Wool and Stock Mortgages Act 1898 (NSW) Liens on Crops and Wool and Stock Mortgages (Amendment) Act 1992 (NSW) Trade Practices Act 1974 (Cth)
CASES CITED:	Attorney General for NSW v Hill & Halls Limited (1923) 32 CLR 112 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 Chiarabaglio v Westpac Banking Corporation (1989) ATPR 40-971 Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 Fraser v NRMA Holdings Ltd (1995) 127 ALR 543 Olsson v Dyson (1969) 120 CLR 365
PARTIES:	Rabobank Australia Ltd (Plaintiff / 3rd cross defendant) Colly Cotton Marketing Pty Ltd (Defendant / 1st cross claimant) John Edward Simmons (1st cross defendant) ACN 073 056 461 Pty Ltd (2nd cross defendant)
FILE NUMBER(S):	SC 50166/03
COUNSEL:	DJ Russell SC (Plaintiff) M Cashion SC and KP Smark (Defendant / 1st cross claimant) Dr AJ Greinke (Cross-defendant / 2nd cross claimant)
SOLICITORS:	Dibbs Barker Gosling (Plaintiff) Kemp Strang (Defendant/1st Cross Claimant) Shannon Donaldson (Gillis Delaney Brown - City Agent) (Cross defendant/2nd Cross Claimant)

LOWER COURT JURISDICTION:

- 80 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BERGIN J

27 JULY 2005

50166/03 RABOBANK AUSTRALIA LIMITED V COLLY COTTON MARKETING PTY LIMITED

JUDGMENT

Introduction

1 This is a rather complicated case in which a cotton farmer, with the purported assistance and guidance of a cotton merchant, entered the heady world of “futures” and “currency” transactions in a complex web of contracts. The identification of the parties to those contracts, the terms of the contracts and their effect has been made less than clear by reason of the rather loose arrangements entered into by the farmer and the merchant. There is also a case brought by a bank to enforce its security in the form of a Crop Lien.

The Claims

2 The plaintiff, Rabobank Australia Limited, formerly Primary Industry Bank of Australia (PIBA), (the Bank), seeks declarations and consequential orders that the defendant, Colly Cotton Marketing Pty Limited (Colly) pay to it $390,571 plus interest. That amount is alleged to be owed to the Bank by ACN 073 056 461 Pty Limited (the Company) in respect of a $350,000 seasonal funding facility provided to the Company in respect of the Company’s 2001/2002 cotton crop, marketed by Colly, and in respect of which the Bank holds a Crop Lien, registered as a Charge under the provisions of Chapter 2K.2 of the Corporations Act 2001.

3 Colly defends the Bank’s claim on the basis, inter alia, that by its conduct the Bank created and/or encouraged in Colly an assumption that the Bank would allow it to exercise its right of set-off against the Company pursuant to a Cotton Marketing Agreement in respect of the proceeds of sale of the 2001/2002 crop and would not enforce its rights in respect of such proceeds in a way that was inconsistent with the exercise by Colly of its right to set-off.

4 At all relevant times Colly was a cotton merchant/marketer of cotton crops and claims to have entered into a contract with either John Edward Simmons (Mr Simmons) a director of the Company, or the Company, in respect of the 2001/2002 cotton crop over which the Bank holds the Crop Lien. Colly’s Cross Claim particularises the contract into which it alleged it entered with Mr Simmons. It is alleged that “in about December 1997” Colly entered into an agreement, referred to in the pleading as “the Marketing Agreement”, with Mr Simmons, alternatively with the Company “for the sale of cotton grown or to be grown” on the property known as “Retro” in Warren, New South Wales for the growing seasons 1998/1999, 1999/2000, 2000/2001, 2001/2002 and 2002/2003.

5 It is alleged that the Marketing Agreement was partly oral and partly in writing, with the oral parts comprising conversations between Mr Simmons and representatives of Colly and the written parts comprising: (a) a fax from Colly to Mr Simmons dated 23 December 1997 (and returned to Colly endorsed by Mr Simmons); (b) a letter from Mr Simmons to Peter Cottle, the Grower Services Manager for Colly, dated 16 January 1998; (c) documents entitled “Colly Cotton Standard Conditions Version 1” and “Colly Cotton Standard Conditions Version 2” (the Standard Conditions); and (d) transactional documents between Colly and Mr Simmons pursuant to which Mr Simmons and Colly recorded the terms for the pricing of the cotton and the exchange rate for the conversion of US dollars to Australian dollars. Category (d), “the transactional documents” was further particularised during the trial and I will deal with those documents in detail later in this judgment.

6 It is alleged that the Marketing Agreement contained a warranty that at the time of delivery of the cotton to Colly, Mr Simmons, or the Company, would have full and beneficial title to the cotton. It is also alleged that it was a term of the Marketing Agreement that Mr Simmons, alternatively the Company, would indemnify Colly in respect of all damages incurred by Colly as a result of any failure by Mr Simmons, alternatively the Company, to comply with the Marketing Agreement. Colly seeks indemnity from Mr Simmons, alternatively the Company, for any amount it might be ordered to pay to the Bank in respect of its claims pursuant to the Crop Lien on the basis that there was a breach of the warranty. Colly also cross claims against the Bank alleging that the Bank knew of that warranty and wrongfully induced and procured Mr Simmons, alternatively the Company, to breach the warranty by giving the Crop Lien to the Bank. There is an alternative claim against the Bank that it engaged in conduct, the substantially certain consequence of which was that the warranty would be breached. The Bank defends Colly’s Cross Claim with a denial that it had any knowledge of the warranty and denies any breach of warranty and alleges that, in any event, Colly waived its rights in respect of such a breach and further that, by its conduct, Colly is estopped from making the claim against the Bank.

7 Mr Simmons and the Company defend the Cross Claim with, inter alia, a denial that there was ever a “Marketing Agreement”; an allegation that a number of the documents relied upon by Colly were documents emanating from a different company, Colly Farms Risk Management Pty Ltd (Colly Farms); and a claim that the fax of 23 December 1997 was a fax from Colly Farms, not Colly, and was “in relation to a forward currency agreement entered into between the Company and Colly Farms”. Notwithstanding this pleading, at trial Mr Simmons and the Company claimed that Mr Simmons signed the letter of 23 December 1997 on his own behalf and not on the Company’s behalf. It is alleged that Colly agreed to the granting of the Crop Lien to the Bank and/or that Mr Simmons, alternatively the Company, assumed that Colly had agreed to the granting of the Crop Lien.

8 Mr Simmons and the Company bring a Cross-Claim against Colly and Colly Farms on the limited basis described in the Cross-Claim as a “set-off to Colly’s Cross-Claim” in the event that Mr Simmons or the Company are held to be liable to Colly. The Cross-Claim seeks, inter alia, damages for breach of contract (the Contract Claim), damages for negligence (the Negligence Claim); damages pursuant to the Trade Practices Act 1974 (Cth) (the TPA Claim) and relief under the Contracts Review Act 1980 (NSW) (the CRA Claim).

9 It is claimed that in December 1997 Colly, through its agent Robert Luke McKay (Mr McKay), represented that: (a) the Company, or Mr Simmons, “would make substantial profits from taking out forward currency contracts to sell US dollars”; (b) “such profits would be made at little or no risk” to the Company and without the need for any training or education in currency trading or hedging; (c) if any currency was “out of the money” when it fell due, then it could be “rolled” until it was in the money; and (d) currency positions could be rolled into the future (the Representations). It is also claimed that about the same time Colly, once again through Mr McKay, advised the Company, or Mr Simmons, to take out forward currency contracts to sell US$2.5 million over the following five cotton seasons (the Advice).

10 It is claimed that the Company, alternatively Mr Simmons, in reliance upon the Representations and the Advice, entered into a “foreign exchange contract” with either Colly or Colly Farms on 23 December 1997 for the sale of US$2.5 million, extended by US$1 million on 11 May 2000, such contract including the express term that such amount could “be rolled at your discretion”.

11 It is also claimed that as a result of entering into that contract the Company, alternatively Mr Simmons, was required to enter into Commitment Contracts to sell cotton to Colly, later converted into Cash Contracts and On-Call Contracts. It is claimed that in breach of the contract, from about 2000/2001 Colly, or Colly Farms, (a) refused to allow any further rolling of the currency; and (b) closed out the currency position then outstanding, being a total of US$1.65 million at a loss of $382,745.29. Notwithstanding this pleading, at trial it was claimed that the Cotton Contracts were between the Company and Colly and the currency contracts were between Mr Simmons and Colly Farms.

12 In the TPA Claim it is alleged that the Representations and the Advice were misleading or deceptive within the meaning of s 52 of the Trade Practices Act 1974 (Cth), that the Representations were as to future matters within the meaning of s 51A of that Act, and that Colly did not have any reasonable grounds for making the Representation. In the Negligence Claim it is alleged that Colly owed a duty of care to the Company and Mr Simmons to take reasonable care in making the Representations and giving the Advice and that it failed to take such reasonable care.

13 In the CRA claim it is alleged that the FEC and the cotton contracts were unjust within the meaning of the Contracts Review Act 1980. It is alleged that there was an inequality of bargaining power, the presence of a position of special disadvantage, an inability to negotiate certain terms and the presence of an unusual and onerous term not brought to the attention of Mr Simmons. There are also allegations of a failure to encourage the taking of legal advice and unfair pressure being applied to enter into the cotton contracts with Colly. There is also a claim that neither Colly nor Colly Farms was authorised by the Reserve Bank of Australia under the Banking (Foreign Exchange) Regulations (the Regulations) to buy, borrow, sell, lend, exchange, or otherwise deal with foreign currency and, in those circumstances, the FEC was in breach of the Regulations. This last mentioned claim is limited to discretionary matter in the CRA claim.

14 Colly and Colly Farms deny the Representations were made and deny that the Advice was given. Although it is admitted that neither company was authorised under the Regulations, it is denied that either company breached the Regulations. It is denied that there was any misleading or deceptive conduct or the existence of a duty of care or breach thereof. It is admitted that from 2000/2001 there was a refusal to roll “certain currency positions”, but it is claimed that the Marketing Agreement included the terms that: (a) for each of the crop years US$500,000 of the forward currency position was to be used; (b) in the event that there was insufficient crop value to use the entire amount, the surplus up to US$500,000 would need to be traded out in that year; and (c) the balance of the currency position would be rolled forward to the following years. It is admitted that the outstanding currency positions were closed out in 2002 at a loss of $382,745.29 with a claim that such conduct was pursuant to rights under the Marketing Agreement. It is admitted that there was no encouragement of Mr Simmons or the Company to take legal advice, however there is a claim that there was never discouragement of such conduct. It is claimed that the Company is unable to rely upon the Contracts Review Act 1980 because it is a corporation, and in those circumstances it is claimed that the cross claim should be dismissed.

15 The proceedings were heard on 4, 5, 6, 11, 12, 13, 18 and 19 April 2005. Leave was granted to file written submissions, the last of which were received on 6 May 2005 when judgment was reserved. Mr DJ Russell SC appeared for the plaintiff, Mr M Cashion SC leading Mr KP Smark, of counsel, appeared for Colly and Colly Farms, Dr AJ Greinke, of counsel, appeared for Mr Simmons and the Company.

Cotton industry

16 It is appropriate to describe generally the nature of the cotton industry limited to the relevant issues in this case, before turning later to the analysis of the particular contracts that were entered into by the parties. Cotton is a commodity that is traded on the futures market, the central marketplace for which is the New York Cotton Exchange (NYCE). At the NYCE, contracts are traded for the purchase and sale of cotton in US dollars (USD) for the delivery of specific qualities of US cotton delivered to specific warehouse locations in the USA at specified future dates. The Australian cotton price is determined by reference to the US Cotton Futures Price fixed by the New York Board of Trade and listed on the NYCE.

17 Cotton merchants, or marketers as they are called, in New South Wales, of which Colly is one, purchase cotton from growers and sell it to cotton mills throughout the world. Cotton marketers offer prices to growers for forward delivery of their cotton to be grown in the current season, or future seasons, and growers sell the cotton crop for that season and sometimes future seasons in advance of the harvest.

18 A cotton grower in Australia is subject to a number of risks, financial and otherwise. There are the physical or environmental risks associated with the crop, for instance, the volume of production or crop yield and the quality of the crop. These risks are managed using insurance for protection against crop damage and taking agricultural or agronomic advice to optimise crop yield and quality. The financial risks for the cotton grower flow from the fact that cotton marketers price cotton on the basis of the USD price of cotton. There are three factors for consideration in the financial risks to a cotton grower. They are (1) the USD price of cotton, referred to as “futures”; (2) the difference in price between the US cotton and Australian cotton, known as “basis”; and (3) the Australian dollar (AUD) and the USD exchange rate, referred to as “currency”. The futures, the basis and the currency, when forming part of a process of fixing a price under a cotton marketing agreement are referred to as “legs”.

19 It is apparent that most cotton growers finance the growing of their cotton crops. In the present case it was by way of seasonal facility from the Bank although cotton merchants, including Colly, also offer finance. The cotton industry at the time relevant to the events in this case operated, in the main, with growers selling their cotton to marketers pursuant to “marketing agreements”. At one extreme the grower might simply sell cotton to the merchant at the going rate at the time of harvest. At the other extreme the grower might enter into a fixed price cash contract in which the grower agrees to deliver a fixed number of bales to the merchant who agrees to pay a fixed price in AUD. Between these two extremes the grower might opt for a contract in a combined growers pool in which a group of growers pool their cotton for a marketer to market on their behalf.

20 The types of contracts offered by marketers to the growers in the pool include what are referred to as On Call Contracts (OCC). The theory of OCCs seems to be that during the period up to about the future delivery date but subject to certain time limitations, the grower may call on the merchant to fix the various legs of the OCC so as to hedge the grower’s risk against fluctuations in price and exchange rate. The term “hedge” may be understood in this context to be the putting in place of a transaction to eliminate a risk or to protect against a risk. When the legs are fixed the price for the cotton under the OCC is then able to be determined pursuant to a price fixing formula in the OCC. If a grower fixes currency without fixing futures and basis, there is speculation on the cotton price. A grower who does not fix the legs appropriately will be at risk and may be adversely affected by the volatility of the movement in both the futures and the exchange rate or dollar value. This type of contract is obviously one that requires close scrutiny both in respect of the physical production of the cotton and close analysis of the markets pertinent to the legs.

21 Colly claims that the OCCs with the growers, and in particular with the grower in this case, included Standard Terms and Conditions of Sale (Standard Conditions). Those Standard Conditions that deal specifically with futures, basis and currency will be dealt with in detail later in this judgment.

22 The AUD price per bale of cotton fluctuates considerably. It changes on a daily basis depending upon movements in futures and currency. Price fluctuations, both short term and annually, can cause major uncertainties or risks for cotton growers when deciding whether to plant cotton and when to sell cotton. Fixing prices before harvest is also risky particularly if production levels are uncertain.

23 In New South Wales cotton crops are usually planted towards the latter part of the calendar year, in about October, and harvested in April or May of the following year. The New York Board of Trade Futures Market trades the prices of US cotton for delivery in the months of March, May, July, October and December each year going forward for 18 months. Changes in the futures price, for May and July futures in particular, usually have a high correlation with Australian cotton prices each day. The difference between the Australian cash prices expressed in US cents per pound and the May or July futures price on any day is the basis. This has been broadly defined as the premium or discount to the New York futures price for cotton being sold at any point in time in any particular location, taking into account differences in quality and transport costs between New York and the place where the cotton is being delivered. When marketers, including Colly, fix futures for growers, they adjust the basis factor to allow for the fact that the cotton is Australian cotton, delivered to the marketer in Australia rather than in the US. The basis fluctuates according to market conditions and is expressed in US cents per pound.

24 The majority of growers in Australia wish to be paid in AUD for their cotton. For that to occur the price of the cotton in the OCC expressed in USD must be converted using foreign exchange transactions. Foreign currency is traded in an over-the-counter (OTC) market with international trading banks for spot (immediate) delivery and also forward (at some future time agreed with the bank) delivery. Colly offers its growers what have been described as forward currency contracts (FCC) to convert USD proceeds of the sale of the cotton to Colly to a payment from Colly to the grower in AUD on delivery of the cotton.

25 Colly trades futures contracts in its own right on the NYCE to offset its dealings with its growers. By doing this, Colly aims to minimise the financial risk of its contracts with growers due to price fluctuation between the time the price is fixed in the contract with the grower and the time the grower has contracted to deliver the cotton. It also enters into foreign exchange contracts, as opposed to FCCc, with its bankers at a margin on the price offered to the grower in the FCCs, once again with the aim of minimizing the financial risks of the contracts it has with growers.

26 The world in which the legs are fixed in OCCs has its own language. The theory of the FCCs is said to be to enable growers to hedge some of the financial risk inherent in OCCs. Unfortunately the conversion of that theory into practice and the analysis of it in this case has been made all the more foggy by a variety of terms that have been used in this case, apparently to describe FCCs, including “foreign exchange contracts”, “forward exchange positions”, “forward foreign exchange contracts”, “forward currency contracts”, “forward currency positions”, “currency positions”, “currency contracts”, “forward contracts”.

27 The linguistic preferences of merchants in this case were elaborated upon when a merchant banker, formerly employed with Colly, gave this evidence in describing a suggested strategy for the grower (tr 170):

Q. Under item 3 there, you are talking about buying some calls and then selling some calls at different target rates, is that what you are doing there?
A. No, we are buying a 51 cent strike call option and selling a 58 strike call option, both of which on that day were trading at 330 and 110 points respectively.
Q. Is the effect of that transaction that there are gains to be made when the final rate lies between 51 cents and 58 cents?
A. Or above 58 cents.
Q. Above 58 cents?
A. It is anything above 51 cents there will be returns to be made.

Q. Now, if the price were to fall below 51 cents, there would be a loss incurred on that transaction, is that correct?
A. But which would be the cost of 220 points. There would be no further losses.

Q. That is because you have arranged the two call options at different rates and you are selling and buying one, is that correct?
A Buying one and selling one. It is the right to buy cotton futures.
Q. It is that called a collar in the industry, or am I thinking of a wrong derivative?
A. No, it's not a collar. It is a - it is called a bull call spread.

28 Further aspects of the language were exposed when the merchant banker continued his evidence (tr 170-171):

Q. What is the 220 points?
A. The grower would be buying 300 - buying one option for 330 points and selling another option and would receive 110 points so the net difference was 220 points. That is 2.2 cents per pound.
Q. And the use of the term "points"?
A. Points.
Q. Is why?
A. Is an industry term to describe the price of cotton.
Q. But it is a 51 cent - -?
A. 51 cent, point zero zero points.
Q. And 58 cents?
A. Yeah, it is 3.30 cents and 1.10 cents, so the cost is 2.20 cents and we - we in the industries, in the financial industries, in the cotton industry, call that 220 points per pound.
Q. Equal to 2.20 cents per - -
A. Per pound.

29 Some of the other terms used, “stacking a hedge”, “rolling a hedge” and “spread risk” were explained by one of the experts in this case, Stephen Wyatt, in the following evidence (tr 206-208):

Q. Isn’t it the case then that if a grower takes out currency the grower, at least from the outset, becomes exposed to a futures risk, that’s right, isn’t it?
A. It is.
Q. And the currency along with that is based on an assumed number of bales that will be produced, isn’t that right?
A. It is.
Q. So if the grower does not produce that number of bales, then there is going to be an excess currency element in there?
A. Yes, yes.
Q. And that excess currency is of itself speculative, isn’t it?
A. Yes.
Q. And if the futures price were to fall between entering into the on-call contract and the harvesting of the cotton, even if the grower produces the number of bales, it may well be that the price that they receive also doesn’t cover the currency is that right?
A. Yes.
Q. In that case, it will also be a speculative excess currency, is that right?
A. Yes.
Q. You talked about taking out futures for more than three years would involve stacking a hedge, is that right?
A. Yes.
Q. And stacking a hedge involves, in a sense, taking out a hedge as far as you can go and then once you reach the end of that, moving forward again, do I have that correct?
A. Yes.
Q. Now when you roll the hedge forward, there is no guarantee that you are going to obtain the same futures price on the roll as what you found when you did the first hedge, is that right?
A. That is correct.
Q. Because the futures may have risen or fallen during that time?
A. The risk when you are rolling a futures position from time one to time two, from May 2000 – and as time goes by, you might be in 1999, you are rolling it and as May 2000 becomes close, you can then – the liquidity will be there in 2001. You can roll that May 2000 futures position to 2001. The risk that you incur is called a spread risk between those two futures positions and spread risks are not dissimilar to basis which is a price differential and spread risks aren’t nearly as volatile as outright cotton price movements.
Q. But you have to be closer to the point of rolling to, I suppose, diminish that volatility?
A. In a sense that’s correct. The – the spread risk – the – as you get closer to the May 2000, it is simply that the liquidity develops in the 2001 futures contract so you can – you can certainly assess what that spread risk is at that time.
Q. Better than you would have been able to earlier?
A. Indeed, yes.

The Facts

30 Mr Simmons was born on 7 February 1957. He married Diana Mary Simmons in 1980 at which time he was living and running the family farm, “Retro”, situated about 50km north of Warren in the State of New South Wales. Mr Simmons was educated to the equivalent of Year 10 and returned to the land soon after he completed his schooling. He went up to the Northern Territory and did some general cattle work before returning to the Warren area and obtaining a Wool Classing Certificate. Mrs Simmons worked as a secretary for a year and a half after her schooling before she married Mr Simmons in 1980.

31 Mr and Mrs Simmons and their six children live on Retro, and from 1980 to 1994 Mr and Mrs Simmons operated Retro as a mixed sheep, cattle and grain farm. The total land area of Retro was about 5,000 acres of variable open plain soil. In 1994 Mr and Mrs Simmons purchased the property “Charlievale”, north of Retro on the Marthaguy Creek, comprising about 2,560 acres for the specific purpose of growing cotton. At that time Charlievale had a 1,306 mega litre allocation of water from the Burrendong Dam on the Macquarie River and only required some land levelling to be ready for cotton growing. They had a share farming arrangement in respect of Charlievale and the first crop of cotton was planted in October 1994.

32 Charlievale became a member of Marthaguy irrigation scheme, of which there were 20 members. Water was pumped directly out of the river and through head ditches into the property. Over the years the water allocation for Charlievale dwindled as a result of competing claims on the water, including environmental issues and drought. Water allocation dwindled from 1,100 megalitres in 1994 to approximately 684 megalitres in 2004. Mr and Mrs Simmons generally budgeted on receiving 565 megalitres a year in the latter part of this period because water is lost as it is conveyed to the property.

33 It takes approximately 8 megalitres a year to grow 1 hectare of irrigated cotton so that the “safe irrigated” cultivation area of Charlievale is probably in the order of 70 hectares or 180 acres. There was an expectation to yield about 2.8 bales per acre with a probable reliable production of about 500 bales.

34 In the 1994/1995 cotton season Mr and Mrs Simmons engaged in a share farming arrangement with “Reality Cotton”. They had a 20 per cent share of a share farming arrangement that planted 330 acres and yielded to them 183 bales of cotton. That was sold for a cash price of $585.26 per bale with Cotton Trading Corporation (CTC), a cotton marketer. In the 1995/1996 cotton season the share farmers planted about 70 acres but then left the farm due to financial troubles. Mr and Mrs Simmons subsequently took over growing the crop that ultimately yielded 160 bales which was sold for a $485 per bale with CTC.

1 July 1996 - The Company takes over the operations

35 From the commencement of the cotton growing operations and up to 30 June 1996, Mr & Mrs Simmons traded in partnership under the name “J & D Simmons”. From 1 July 1996, as a result of accounting advice, the Company, as trustee of a family trust, the Retro Pastoral Trust, conducted all the farming operations, including the growing of cotton.

1996/1997 season

36 In the 1996/1997 cotton season, the cultivation area on Charlievale was expanded to about 540 acres. In that season there was some trouble securing water and only 152 acres were planted yielding 473 bales. It was in this season that Mr and Mrs Simmons and the Company first began dealing with Robert Luke McKay, a long standing friend of Mr Simmons and a second cousin of Mrs Simmons.

37 Mr McKay is a director of AgFarm Marketing Pty Limited (AgFarm), an agency business that acts for agricultural marketers in their dealings with growers or producers. Mr McKay had worked as a farmer between 1979 and 1992 growing, amongst other things, cotton and wheat. He established AgFarm in 1992 and worked in the business until 2000. From August 2000 until June 2004 he continued as an owner of AgFarm but did not work in the business. He returned to work at AgFarm in June 2004. In about 1996 AgFarm commenced operating as an agent for Colly Cotton Limited in its dealing with growers for the purchase of cotton.

First contracts with Colly – 10 February 1997

38 It was in early 1997 that Mr McKay, as Colly’s agent, completed one of Colly’s “New Grower Notification Forms” in relation to Mr Simmons. That form identified Mr Simmons as the grower “trading as J & D Simmons” with the grower number, 676. Mr McKay arranged Mr Simmons’ first transactions with Colly in early 1997. On 22 February 1997 Mr and Mrs Simmons signed two documents. The first was entitled “Confirmation On Call Contract” and the second was entitled “Confirmation Fixed Bale/Cash Price Contract”.

39 The Confirmation OCC was between Colly Farms Gin Pty Limited, the predecessor to Colly, and J & D Simmons trading as J & D Simmons as the grower. The contract number was 973177-02 dated 10th February 1997 and was signed by Colly on 12 February 1997 and by Mr and Mrs Simmons as the Grower on 22 February 1997. It included the following:

1. THIS CONFIRMATION MUST BE READ TOGETHER WITH COLLY’S STANDARD TERMS AND CONDITIONS FOR ON CALL CONTRACTS. THOSE STANDARD TERMS AND CONDITIONS ARE CONTAINED IN A SEPARATE BOOKLET, COPIES OF WHICH HAVE BEEN PROVIDED TO THE GROWER AND EACH INTERESTED PERSON.
2. ANY CAPITALISED WORDS OR EXPRESSIONS USED BUT NOT DEFINED IN THIS CONFIRMATION HAVE THE MEANINGS RESPECTIVELY ASCRIBED TO THOSE WORDS OR EXPRESSIONS IN COLLY’S STANDARD TERMS AND CONDITIONS FOR ON CALL CONTRACTS.
COLLY WILL NOT MAKE ANY PAYMENT AGAINST THIS CONTRACT UNLESS THIS CONFIRMATION IS COMPLETED, SIGNED AND RETURNED TO COLLY.

40 The Contract also included the following:

AGREEMENT TO BUY AND SELL:	Colly agrees to buy, and the Grower agrees to sell 400-550 standard 227 kg bales of Lint Cotton (“the Specified Bales”) for the price and on the terms and conditions stated in this Confirmation read together with Colly’s Standard Terms and Conditions for On Call Contracts (“the Standard On Call Conditions”).
BASE PRICE: (Note: The base price may vary across different lots of Specified Bales – see Clauses 8 & 9 of Standard On call Conditions)	An amount per Specified Bale calculated in accordance with the formula: AUD$ price, Basis quoted C + F Japan a = [( b + c ) x 500] - f WHERE a = the Base Price per Specified Bale b = the Futures Price (expressed in US cents per 1b), established pursuant to clause 8 of the Standard On Call Conditions c = the Basis (expressed in US cents per 1b), established pursuant to clause 9 of the Standard On Call Conditions f = the AUD$ Marketing Charge, established pursuant to clause 11 of the Standard On Call Conditions such Base Price stated on the basis that the Lint Cotton comprising the Specified Bales will meet the Standard Classification
BASE PRICE ADJUSTMENT:	The Base Price is subject to adjustment for Quality in accordance with Colly’s Premium and Discount Schedule, a copy of which is available upon request.
BASIS OPTION:	TO BE ADVISED
PAYMENT TERMS:	POOL PAYMENT TERMS
DELIVERY OPTION:	Lint Cotton Delivery Option
SEASON:	1996/97
GIN:	TO BE DETERMINED
GINNING CHARGE:	Not Applicable
SEED EQUIVALENT RETURN PROCEDURE	Not applicable
SEED REBATE:	Not applicable
INDICATIVE MARKETING CHARGE:	AUD $70.00 per Specified Bale.
DISTRIBUTION OF NETT SALE PROCEEDS:	To be made in accordance with the Payment Schedule attached.
LOAN FUNDING	The Grower will require/will not require loan funding from Colly.
SPECIAL CONDITIONS:
ACKNOWLEDGEMENT:	ALL THE SIGNATORIES TO THIS CONFIRMATION ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE STANDARD ON CALL CONDITIONS

Standard Conditions

41 The Standard Conditions referred to in this Confirmation as the Standard On Call Conditions provide for rather complex and detailed steps to be taken in respect of the legs to be fixed under an OCC. The first of the legs is the futures or the US dollar cotton price. The grower is able to lock in or fix the futures price by giving notice to Colly. The time for locking in the futures is “at any time and from time to time” prior to what is referred to in the Standard Conditions as the “First Notice Day of the Key Contract Month”. That is the 5th working day in New York prior to the beginning of the month designated by Colly as the Key Contract Month and, if not so designated, then prior to the beginning of July of the relevant season (the relevant date) (cl 10.1).

42 If the grower does not, or fails to, lock in the futures by the second last trading day prior to the relevant date, the grower will automatically be locked in to the settlement price quoted on the NYCE on the day prior to the relevant date (cl 10.2). If the grower locks in the futures price prior to the relevant date, the grower is permitted to “roll its futures position forward” from month to month prior to the relevant date (cl 10.3(a)). If the grower has not rolled the futures position in any given month, the grower is deemed to have rolled the futures position on the first notice day of the relevant month, subject to what occurs if a grower has a position in a May Cotton Futures Contract, where the grower may “close-out” the position rather than rolling it forward (cl 10.3(b) & (c)). The roll over pricing is based on the futures price then being offered by Colly for the relevant month and any gains or losses made as a result of rolling forward or closing out are to the account of the grower (cl 10.3(d) & (e)). The locked in futures price, whether directly or by roll over, is the variable “b” in the Base Price formula set out in the OCC Confirmation extracted above.

43 The next leg to be fixed is the difference in price between US cotton and Australian cotton, and as explained earlier is known as basis. The choices available to the grower in an On-Call Contract are the Fixed Basis option or the Average Pool Basis option. If neither is chosen the Fixed Basis option is fixed by default (cl 11.1). The Fixed Basis is the basis quoted by Colly from time to time for cotton during a particular month. If the Fixed Basis option applies the grower could, up to the 7th business day in July of the season, notify Colly in writing to lock in the Fixed Basis then being offered by Colly for all or any (in this instance up to 100 bales) of the specified bales. If the Fixed Basis option applies and the grower does not lock in the Fixed Basis then the Fixed Basis offered by Colly on the 8th business day of July applies. The Fixed Basis or the Average Pool Basis is the variable “c” in the base formula set out in the Confirmation Extracted above.

44 The third leg to be fixed is the currency. The Base Price is expressed in US dollars but the grower is given the choice to direct Colly in writing to pay the whole or any part of the Nett Sale Proceeds in US dollars and/or hedge the whole or any part of the grower’s US dollars/Australian dollars exposure in relation to the Nett Sales Proceeds (cl 12). The Nett Sale Proceeds of any specified bales is the aggregate Adjusted Base Price (being the Base Price adjusted for quality and applying the spot rate as determined by Colly on the day the bales are classed) less ginning charges, marketing charges, taxes, charges, brokerage fees and the like (cl 34).

45 A Currency Selection Notice or a Hedge Notice may be given by the grower to Colly subject to certain conditions. No notice is able to be given in respect of bales already the subject of a notice. Notices are only able to be given to Colly in relation to so much of the estimated Nett Sale Proceeds attributable to cotton futures contracts expiring in May or July of the season. Notices in respect of a May contract may be given by close of business on the second last New York business day of May. Notice in respect of a July contract may be given by close of business on the 7th New York business day in July. Notices must be given in minimum tranches of US $100,000 unless the Notice relates to all of the bales.

46 When a Hedge Notice is given to Colly it is required to hedge so much of the grower’s US dollars/Australian dollars (USD/AUD) exposure specified in the Notice at the Hedged Rate of Exchange, being the rate offered by Colly from time to time for such conversion of USD to AUD at a particular time in the future. That rate is “to be set by reference to current market pricing in the foreign exchange markets”. If there are unallocated bales as at certain specified dates then Colly is obliged to hedge the grower’s exchange exposure on the bales at the hedged rate of exchange applicable; in respect of May contracts on the last New York business day in May; and in respect of July contracts on the last New York business day in June. However Colly is not obliged to hedge the grower’s exchange exposure pursuant to a Hedge Notice if it is unable to execute a trade in the market to cover its own currency risk.

47 If the grower requests Colly to provide an estimate of the Nett Sale Proceeds to facilitate the giving of a Hedge Notice, Colly was obliged to provide such estimate to the grower. The provision of such estimate is on the basis that Colly does not warrant the accuracy of the estimate and will not “under any circumstances” be liable to any loss, damage or expense suffered by the grower.

48 Mr Simmons gave evidence that at the time he signed the OCC he did not understand the expression “on call” as meaning that the grower fixed various aspects of price of the cotton. Mr McKay gave evidence that he did not recall any currency hedging involved in this transaction. Indeed there are no Colly records suggesting that any legs were fixed in respect of the OCC dated 10 February 1997. It is probable that this OCC was treated as a Fixed Bale/Cash Price Contract at AUD500 per bale (tr 161). In any event the crop was delivered mid 1997.

Fixed Bale/Cash Price Contract

49 The Fixed Bale/Cash Price Contract no 983178-01 and dated 10th February 1997 was signed by Colly on 12 February 1997 and by Mr and Mrs Simmons as the Grower on 22 February 1997. It included the following:

THIS CONFIRMATION MUST BE READ TOGETHER WITH COLLY’S STANDARD TERMS AND CONDITIONS FOR FIXED BALE/CASH PRICE CONTRACTS. THOSE STANDARD TERMS AND CONDITIONS ARE CONTAINED IN A SEPARATE BOOKLET, COPIES OF WHICH HAVE BEEN PROVIDED TO THE GROWER AND EACH INTERESTED PERSON.
COLLY WILL NOT MAKE ANY PAYMENT AGAINST THIS CONTRACT UNLESS THIS CONFIRMATION IS COMPLETED, SIGNED AND RETURNED TO COLLY.

50 The Contract recorded that the cotton was sourced from “Retro” and included the following:

AGREEMENT TO BUY AND SELL:	Colly agrees to buy, and the Grower agrees to sell 400- 500 standard 227 kg bales of Lint Cotton (“the Specified Bales”) for the price and on the terms and conditions specified in this Confirmation read together with Colly’s Standard Terms and Conditions for Fixed Bale/Cash Price Contracts (“the Standard Conditions of Sale”).
SEASON	1997/98
BASE PRICE:	$500 Australian dollars Specified Bale, stated on the basis that the Lint Cotton comprising the Specified Bales will meet the Standard Classification.
BASE PRICE:	Gross (i.e. without allowing for Ginning Charge and Seed Rebate)
BASE PRICE ADJUSTMENT:	The Base Price is subject to adjustment for Quality in accordance with Colly’s Premium and Discount Schedule No.5, a copy of which is available upon request.
PAYMENT TERMS:	14 DAYS FROM CLASSING
DELIVERY OPTION:	Lint Cotton Delivery Option.
GIN:	TO BE DETERMINED
DISTRIBUTION OF NETT SALE PROCEEDS:	To be made in accordance with the Payment Schedule attached.
LOAN FUNDING:	The Grower will require/will not require loan funding from Colly.
SPECIAL CONDITIONS:
ACKNOWLEDGEMENT:	ALL THE SIGNATORIES TO THIS CONFIRMATION ACKNOWLEWDGE THAT THEY HAVE READ AND UNDERSTAND THE STANDARD CONDITIONS OF SALE APPLICABLE TO THIS CONFIRMATION.

51 Although this Contract had the years “1996/1997” typed in the section next to the word “season”, that was crossed out and the years “1997/1998” were inserted in handwriting, and initialled by Mr McKay but not by Mr and Mrs Simmons. This Contract related to the Crop to be harvested in the first half of 1998.

Standard Conditions for Fixed Bale/Cash Price Contract

52 The Standard Conditions for a Fixed Bale/Cash Price Contract provided that the sale of the committed bales was at the Base Price offered by Colly on the day on which the grower allocated the committed bales to the contract. That price was deemed to be stated gross, unless expressly agreed otherwise, with payment due within 20 days of classing or as otherwise agreed. The mechanism for payment by Colly was the grower completing and delivering a Payment Schedule to Colly.

December 1997 Conversation

53 In December 1997 Mr Simmons had a conversation with Mr McKay, the terms of which are in issue. It is clear that Mr Simmons had been speaking with other clients of Colly in the area that were serviced by Mr McKay about their dealings with Colly and their experiences in dealing with currency with Colly. Mr Simmons telephoned Mr McKay to discuss his interest in becoming involved in foreign currency. Mr Simmons claims that in this telephone conversation Mr McKay informed him that it was a “good idea” to get into “currency” and there was “easy money” to be made by taking out currency. Mr Simmons also recalled that Mr McKay said “you’d be good at this, Simmo” and informed him that he could always “roll out” if the currency was “out of the money”.

54 There was then a discussion about “taking out “ US$1 million to “cover” his wheat and cotton by taking out a foreign exchange contract for US$1 million “cover” in each of the following five years. Mr Simmons claimed that Mr McKay said that he would have to speak to Colly’s people in Sydney before he could do that. Mr Simmons claimed that Mr McKay telephoned him later that day and said that Sydney would not allow him to do US$1 million a year, but that they would “let us take out” US$500,000 a year. Mr McKay also informed Mr Simmons that he was not able to do any currency in relation to his wheat crop.

55 Mr McKay’s version of the conversation is different. He claimed Mr Simmons telephoned him and said: “I have been speaking with some growers who have been hedging currency and they have been doing well out of it. I want to get involved in that myself. I am looking to hedge my currency exposure for the next 5 years. I am selling cotton and wheat in US dollars and I want to take out hedging positions for both of those crops”. Mr McKay gave evidence that he spoke with Colly’s Grower Services Manager, Peter Cottle, who informed him that Colly would not take out currency in relation to wheat.

56 Mr McKay said that he telephoned Mr Simmons after speaking to Mr Cottle and informed him that he was unable to “hedge currency” in relation to his wheat crop. He said that he asked Mr Simmons what his “likely production” was going to be per season and that Mr Simmons informed him that he would be growing 400-500 acres producing about 1500 bales per season. Mr McKay said: “For 1500 bales you will be able to take currency positions for US$500,000 per season”. Mr Simmons asked him whether he could possibly hedge currency for five years and Mr McKay informed him that Colly would only do currency for five years “if you commit five seasons’ production”. Mr Simmons said that he would make that commitment. Mr McKay claims that he then informed Mr Simmons that he would need to use US$500,000 of the currency position each year for the crop and if there was any surplus currency he would need to trade it out. He also claimed that he advised Mr Simmons that if he made a profit he would get it but if he made a loss he would have to take that loss. Mr McKay also claimed that he asked Mr Simmons whether he was “sure” he wanted to go ahead and that Mr Simmons advised him that he had spoken to other growers and that they had said that there was good money to be made and he wanted to go ahead.

57 Mr Simmons claimed that in this conversation Mr McKay did not ask any questions of him in relation to his financial situation or the ongoing water allocation for the property. Indeed Mr McKay does not claim to have asked Mr Simmons about those matters. Mr Simmons also denied that he was asked about expected production in terms of bales of cotton. He claimed that Mr McKay told him that he was unable to take out currency for five years in advance and that he would arrange for it to be taken out initially for two or three years and that “we could then roll some of it out into the later years at that time as we needed it”. Mr Simmons was not cross examined on his evidence that Mr McKay had advised him that he would arrange for the currency to be taken out initially for two or three years.

58 Mr McKay agreed in cross-examination that he did not give Mr Simmons any kind of risk disclosure document. He said that apart from explaining that if he did not utilise the amount of currency in the year that he would be responsible for any profits or losses, there was nothing else that he said about the risks involved in currency. He knew that Mr Simmons did not have any experience in currency and he also knew that Mr Simmons was concerned not to sign anything that had a commitment for 1500 bales.

First letters re currency

59 After the conversation with Mr McKay, Mr Simmons received a series of letters, not from Colly, but from Colly Farms. On 23 December 1997 Mr Simmons received a facsimile from Colly Farms, directed to him, trading as J & D Simmons, in the following terms:

We confirm having placed the following Foreign Exchange order your behalf:
You sell USD$2,500,000 against AUD at spot 0.6500 to be rolled at your discretion
Please confirm your agreement by signing and return this facsimile

Mr Simmons signed and returned this document as requested.

60 On 5 January 1998 Mr Simmons received a fax directed to him “trading as J & D Simmons” from Colly Farms in the following terms:

We confirm having Dealt the following FX deal on your behalf:
Details
You Sell USD 2,500,000.00 against AUD at spot of 0.6500 to mature on 6th January 1998
Please confirm your agreement by signing and returning this facsimile.

Mr Simmons signed and returned that fax as requested.

61 On 6 January 1998 Mr Simmons received a further fax from Colly Farms directed to him trading as J & D Simmons in the following terms:

We confirm having Extended the following FX deal on your behalf:
Original Details:
You Sell USD 2,500,000.00 against AUD at spot of 0.6500 to mature on 6th January 1998
Extended Details:
You Sell USD 2,500,000.00 against AUD at spot of 0.6500 to mature on 6th January 1999 at an outright forward rate of 0.6562
Please confirm your agreement by signing and returning this facsimile.

Mr Simmons signed and returned that document.

Purchase Confirmation 1998

62 On 6 January 1998 Mr Simmons signed a “Lint Cotton Purchase Confirmation” which included the statement “Colly Farms Gin Pty Limited is pleased to confirm the following lint cotton purchase pertaining to our verbal contact on 6/1/98”. That document recorded: Contract Type - “Balance of Crop with Ceiling”; Payment Terms - “Pool Payment Terms 70% July, 15% Sept and 15% Dec”; Crop Year – 1998; Number of Bales – “Production off 450 acres in excess of 1100 bales to a maximum of 1450 bales [tolerance] 350 bales”; Price – “$516”. The document included the statement, “Formal contracts for your signature will be forwarded shortly”. This was not an OCC. It was, it seems, a fixed bale/cash price contract.

Colly advised of Company

63 It was at the top of the Purchase Confirmation of 6 January 1998 that was returned to Mr McKay that Mr Simmons wrote, “P.S. Bob our trading name is Retro Past Co ACN 073 056 461”. It was from this time that Colly was aware that the Grower of the crops was the company.

Commitment letter

64 It was in early 1998 that Mr McKay prepared a letter for Mr Simmons to give to Colly in respect of the commitment for five years production of cotton. That letter was addressed to Colly for signature by Mr Simmons and was dated 16 January 1998. It was in the following terms:

This is to confirm a commitment for production off “Retro” for the next five years. I understand Colly will send Commitment Agreements for the years 1999, 2000 and 2001. This letter acknowledges the extra commitment for the years 2002 and 2003.

65 Although that letter is dated 16 January 1998, Mr Simmons gave evidence that it was some time later that he signed it. He said that in February 1998 Mr McKay came out to the property to see him with some paper work to be signed and gave him some Colly stubby holders and some Colly caps for the children. Mr McKay asked Mr Simmons to sign a bale commitment to Colly for 1,500 bales, however Mr Simmons refused to commit to 1,500 bales. Mr McKay expressed his concern about that position and also about his own position and blamed “Head Office” in Sydney, claiming that he was “in trouble” for not obtaining a cotton commitment from Mr Simmons.

66 Mr Simmons informed Mr McKay that he was not willing to commit to a definite number of bales unless he could be sure he could grow it. It was in those circumstances that the letter of 16 January 1998 was prepared and ultimately signed without any commitment to a specific number of bales. At the time Mr Simmons signed the letter he understood that it was a promise to sell whatever he could actually grow through Colly without any commitment to any particular number of bales. He gave evidence that at that time he did not appreciate the interaction between the cotton commitment and currency. Mr Simmons was not cross-examined in relation to his evidence about the circumstances of the signing of this letter.

Fixed Bale/Cash Price Contract 1998/1999 season

67 A further Fixed Bale/Cash Price Contract no 995033-01 dated 16th June 1998 between the Company and Colly, signed by Colly but without a date on the signature, and signed by Mr Simmons on behalf of the grower, without a date and unwitnessed, and included the following:

AGREEMENT TO BUY AND SELL:	Colly agrees to buy, and the Grower agrees to sell 400 standard 227 kg bales of Lint Cotton (“the Specified Bales”) for the price and on the terms and conditions specified in this Confirmation read together with Colly’s Standard Terms and Conditions for Fixed Bale/Cash Price Contracts (“the Standard Conditions of Sale”).
SEASON:	1998/99
BASE PRICE:	$508 dollars per Specified Bale, stated on the basis that the Lint Cotton comprising the Specified Bales will meet the Standard Classification.
BASE PRICE:	Gross (i.e. without allowing for Ginning Charge and Seed Rebate)
BASE PRICE ADJUSTMENT:	The Base Price is subject to adjustment for Quality in accordance with Colly’s Premium and Discount Schedule No.6, a copy of which is attached.
PAYMENT TERMS:	14 DAYS FROM CLASSING
DELIVERY OPTION:	Lint Cotton Delivery Option.
GIN:	TBA
DISTRIBUTION OF NETT SALE PROCEEDS:	To be made in accordance with the Payment Schedule attached.
LOAN FUNDING:	The Grower will require/will not require loan funding from Colly.
SPECIAL CONDITIONS:	Colly to cover yield risk
ACKNOWLEDGEMENT:	ALL THE SIGNATORIES TO THIS CONFIRMATION ACKNOWLEWDGE THAT THEY HAVE READ AND UNDERSTAND THE STANDARD CONDITIONS OF SALE APPLICABLE TO THIS CONFIRMATION.

Commitment Contracts 1998

68 There are in evidence two “Confirmation Commitment Contracts” the first numbered 995059-05 dated 30th June 1998 is signed by Colly with a date 10 July 1998. Mr Simmons signature appears on the document unwitnessed and without a date. That Contract was between Colly and the Company and provided:

AGREEMENT TO COMMIT AND TAKE COTTON:

The Grower agrees to commit, and Colly agrees to take

APPROX. 1500 standard 227kg bales of Lint Cotton (“the Committed Bales”)

on the terms and conditions specified in this Confirmation read together with Colly’s Standard Terms and Conditions for Commitment Contracts (“the Standard Commitment Conditions”).

SEASON:

GIN: 

TO BE DETERMINED

DELIVERY OPTION:

Lint Cotton Delivery Option

DECISION:

First Notice Day (July, ’99) or a later date if previously negotiated.

DEADLINE FOR PLAN SELECTION:

SPECIAL CONDITIONS:

This Commitment Agreement offsets a currency position held on your instructions and on your behalf by Colly Cotton. In the event you the Grower elect to liquidate the position prior to or at expiry, with all profits or losses being on your account, your existing commitment to deliver bales will be cancelled by mutual agreement.

ACKNOWLEDGEMENT:

The grower acknowledges that it has read and understands the standard commitment conditions applicable to this confirmation.

The grower also acknowledges that it is familiar with the terms and conditions of the following contractual arrangements offered by Colly, namely:

1. Fixed bale/cash price plan
2. On call plan
3. Seasonal pool plan
4. Floor price seasonal pool plan
5. Irrigated hectare plan

Depending on the choices that the grower makes under this commitment contract, one or more or all of those plans will ultimately apply as between Colly and the grower.

69 The second Commitment Contract is also dated 30th June 1998, no 005058-05, signed by Colly on 10 July 1998. Mr Simmons’ signature appears on the Contract unwitnessed and undated. It is otherwise identical to the above Commitment Contract 995059-05, except that the section “Decision” records “First Notice Day (July, ’2000) or a later date if previously negotiated”.

Standard Conditions for Commitment Contracts

70 The Standard Conditions for Commitment Contracts provided that where the “Confirmation” specified that the Agreement was a “Commitment Contract”, Colly agreed that, in consideration of the grower committing the bales to Colly, it would allow the grower to defer its selection of the Plan or Plans to govern the terms of sale of the committed bales to Colly (cl 4). The selection of Plans available to the Grower included an On Call Plan and a Fixed Bale/Cash Price Plan. The Grower was required to advise Colly in writing by a specified date the Plan to which the grower wished to allocate the bales of cotton the grower had committed to Colly in the Commitment Contract (cl 5).

On Call Contract 1998/1999 season

71 A Confirmation OCC between Colly and the Company for the 1998/1999 season no 995147-02 was signed by Colly on 2 September 1998 and by Mr Simmons on 7 September 1998. It included the following:

AGREEMENT TO BUY AND SELL:	Colly agrees to buy, and the Grower agrees to sell 300 standard 227 kg bales of Lint Cotton (“the Specified Bales”) for the price and on the terms and conditions stated in this Confirmation read together with Colly’s Standard Terms and Conditions for On Call Contracts (“the Standard On Call Conditions”).
BASE PRICE: (Note: The base price may vary across different lots of the Specified Bales – see Clauses 8 & 9 of Standard On call Conditions)	An amount per Specified Bale calculated in accordance with the formula: AUD$ price, Basis quoted C + F Japan a = [( b + c ) x 500] - f WHERE a = the Base Price per Specified Bale b = the Futures Price (expressed in US cents per 1b), established pursuant to clause 8 of the Standard On Call Conditions c = the Basis (expressed in US cents per 1b), established pursuant to clause 9 of the Standard On Call Conditions f = the AUD$ Marketing Charge, established pursuant to clause 11 of the Standard On Call Conditions such Base Price stated on the basis that the Lint Cotton comprising the Specified Bales will meet the Standard Classification
BASE PRICE ADJUSTMENT:	The Base Price is subject to adjustment for Quality in accordance with Colly’s Premium and Discount Schedule No. 6 a copy of which is attached.
BASIS OPTION:	TO BE DETERMINED
PAYMENT TERMS:	POOL PAYMENT TERMS
SEASON:	1998/99
DISTRIBUTION OF NETT SALE PROCEEDS:	To be made in accordance with the Payment Schedule attached.
LOAN FUNDING	The Grower will require/will not require loan funding from Colly.
SPECIAL CONDITIONS:
ACKNOWLEDGEMENT:	ALL THE SIGNATORIES TO THIS CONFIRMATION ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE STANDARD ON CALL CONDITIONS

The 1998/1999 Crop

72 Mr Simmons planted 197 acres yielding 579 bales of cotton. In that year the Company received $528 per bale and all of the cotton was sold through Colly. Mr Simmons’ evidence was that at about harvest time Mr McKay arranged for a “partial close out” of his currency by which he made a profit of $3,679.51.

73 As a result of receiving the $3,679.51, Mr Simmons gave Mr McKay a carton of Tooheys Extra Dry beer when they were at a cross-country carnival at Warren. Mr Simmons thanked Mr McKay for “making this profit” which, he said, he assumed had resulted from Mr McKay’s trading strategy. He remembered that there was another profit along the same lines of $1,200 but could not recall how that came about. He said that at one point Mr McKay informed him that he thought the dollar had gone down a bit and then suggested that it would jump a couple of cents in the following fortnight. This occurred and Mr Simmons was impressed that Mr McKay seemed to be able to “get it right”.

297 I am satisfied that Colly and Colly Farms owed Mr Simmons (and later the Company) a duty of care in respect of the currency transactions, which required explanations to be given as to the nature of the risks involved, the discretion given to Colly in clause 35.2, the nature of the relationship between OCCs and currency and the need to fix the various legs of the OCC, and the dangers and risks associated with failing to fix those legs in a timely and appropriate manner.

298 I am satisfied that Colly and Colly Farms breached their duties of care.

The CRA Claim

299 It was submitted that as a result of entering the foreign currency positions, Mr Simmons was exposed to the consequence of considerable losses due to changes in the exchange rate in circumstances where there was no contractual mechanism to protect against the cotton price risk until OCCs were taken out. The fact that there was no matching off of bales against the currency until many months later, and indeed in respect of the latter years currency no matching off at all, did not allow the fixation of the other legs, futures and basis, to protect Mr Simmons’ position.

300 It was submitted that Mr Simmons was not in a position to negotiate any alteration or reject any provisions of a currency position. It is unknown what the provisions of that arrangement were, as there were only the currency letters sent to Mr Simmons.

301 I am satisfied that Mr Simmons did receive copies of the Standard Conditions in 2000. I do not accept that he was provided with a copy by Mr McKay at any time prior to that. Even if that be wrong there is no suggestion by Mr McKay that he took Mr Simmons through the Standard Conditions or explained any of those conditions to him in a general way. Mr Simmons was not in a position to negotiate any changes because they were not brought to his attention, particularly in respect of the way in which currency could be hedged under clause 12 of the Standard Conditions or ordered under clause 35 of the Standard Conditions.

302 The relative economic circumstances and educational background of Mr Simmons are not in issue. He was educated to year 10 and described himself as “not a great scholar”. Mr Simmons found reading difficult and gave evidence that he was unable to “motor through” complex documents (tr 270). His evidence that he did not read the documents, and would not have read the documents, is not evidence upon which I would find that he was in some way recalcitrant. He was cross-examined by Mr Cashion SC in respect of each contract as to whether he had read various parts of it. He indicated, I believe truthfully, that he read those parts that were in bold and were referring to the number of bales that he had to produce, but otherwise did not read the material.

303 It was submitted that this conduct, knowing the documents contained important contractual provisions in the commercial and legal relationship between the parties, was irresponsible. I am satisfied that Colly Farms and Colly knew that Mr Simmons was not a reader of the Standard Conditions. They knew that he had not signed an SFE Statement prior to 2000. Even what that was signed there was no proper, or any, explanation of that document.

304 A corporation may not be granted relief under the Contracts Review Act 1980: s 6(1). Thus the only claim to be considered under the Act is the contract between Colly Farms and Mr Simmons personally. It is clear that Mr Simmons did not obtain any independent legal or financial advice and that he relied upon what Mr McKay told him. In contrast when Colly entered into syndicated banking facilities to offer foreign exchange contracts, it took legal advice. Mr Butler agreed that legal advice was needed as the transaction was complex (tr 94). I am of the view that there was no accurate explanation of the legal and practical affects of currency transactions and any exposure that may result from the various risks being adverse to Mr Simmons.

305 It was submitted that Colly Farms acted in breach of the Banking (Foreign Exchange) Regulations (the Regulations). Regulation 5 provided that except with the authority of the Reserve Bank, “a person shall not, either on his own behalf or on behalf of another person, buy, borrow, sell, lend or exchange in Australia, or otherwise deal in Australia with, foreign currency”. It was admitted on the pleadings that Colly Farms did not have authority from the Reserve Bank to so act. It is further submitted that the foreign currency positions or contracts were prohibited by the Regulations.

306 As I have said earlier in this judgment Mr Butler gave evidence that the foreign currency was merely a pricing mechanism for cotton. This position does seem to be contrary to the statements made in the Colly Farms letters confirming “FX deals” for certain amounts of currency. Additionally the letters from Mr Starling to Mr Simmons in October 2001 seem to be far more than simply a fixation of cotton price. It does appear that those letters referred to actual transactions or trades.

307 All that flows from such a finding, if it were to be made, in this case is a submission by Mr Simmons that such a breach should be taken into account in deciding whether to exercise a discretion in his favour in the CRA Claim. I do not intend to decide this question without a proper expert analysis of all the documents upon which it is claimed such a breach occurred. Such an analysis has not been made in this case and in any event this is not a necessary matter for me to decide on this aspect of the Cross-Claim.

308 Mr Morison informed Mr Simmons that he was no longer allowed to roll any currency because “the banks had stopped Colly rolling their currency”. It appears that the Bank had changed its policy and prevented Colly or Colly Farms from rolling the currency. The fact that Colly or Colly Farms had been prevented by the banks from rolling their currency, did not mean that Mr Simmons was unable to roll his currency positions. Rather that was a commercial decision made by Colly and Colly Farms to ensure that they would not be disadvantaged by Mr Simmons being able to roll his currency positions against which Colly/Colly Farms were not able to roll their contracts.

309 Colly recouped all its losses by embedding rollover rates into Mr Simmons’ currency reflecting its own losses, with interest; using currency to price cotton; closing out positions and financing the resulting losses; and in 2002 recouping the closeout losses and grower finance from cotton proceeds. It was submitted that Colly acted in self-interest to set-off the proceeds of the cotton against Mr Simmons’ positions, whilst still putting forward a suggestion that they were in a negotiating mode. It was submitted that Mr Morison well knew that Mr D McKay and Mr Simmons were gathering information as requested by him.

310 There has not been proved in any evidence the existence of any provision that would entitle Colly Farms or Colly to close out the future years currency positions. Having regard to the above, it is clear that if such a provision existed, it would in my view be appropriately the subject of relief under s 7 of the Act, declaring that provision unjust and void.

311 Clause 35.2 was a clause in an OCC between the Company and Colly and did not apply to the future years currency positions. It is not amenable to a claim under the Act.

Quantum

312 The calculation of the quantum of damages payable to Mr Simmons and/or the Company is the subject of evidence from two experts, Professor Stephen F Gray, Professor of Finance at the University of Queensland called by Mr Simmons and the Company and Stephen Wyatt who is presently the China correspondent with the Australian Financial Review, who holds a Master of Economics from the University of Sydney and has had previous experience in risk management and in the cotton industry for merchants, called by Colly.

313 Mr Simmons gave evidence admissible in relation to each of the claims in the cross-claim, other than the negligence claim: s 5D 3 Civil Liability Act 2002; that, had he been advised or as he put it, given what he now knows about marketing and currency, he would have entered into cash contracts only and would not have entered into any contracts involving currency or foreign exchange.

314 Mr Simmons gave evidence that he generally does not consider selling cotton at less than A$500 per bale and refers to it as a “trigger price”. He said that if the price is rising quickly he would often hold off marketing, or selling, until it seemed to him that the price had peaked and he would then sell off a future crop. He believed that he would have tried to market all of the 2000 production at a price of A$550 per bale, having regard to the Australian dollar cash price of cotton that had reached A$600 per bale in that period. He also gave evidence that he believed he would have been quite prepared to sign a fixed price contract for 1,000 bales at $550, with a balance of crop contract at the same price.

315 Mr Simmons calculated that, but for his dealings with Colly, he would have marketed the 1406 bales he grew in the 1999/2000 season by a balance of crop contract of 1406 bales at $550 or 1000 bale at $550 per bale and a balance of crop contract of 406 bales at $550. He did similar calculations for the seasons 2000/2001 and 2001/2002. Professor Gray analysed this approach in his report and calculated the resulting net loss incurred by Mr Simmons by having the currency in place as the difference between what his net income would have been as per the assumed marketing scheme just referred to and what he actually received for the various years.

316 Mr Wyatt on the other hand was rather critical of the assumptions made by Professor Gray on the basis of Mr Simmons’ evidence. He agreed in his report that Mr Simmons’ evidence disclosed “very good marketing” because $550 plus was historically a very high cotton price. There is of course an element of retrospectivity in all of this, but Mr Wyatt said in his report:

To be blunt, given that, in reality, Simmons did such a poor job marketing his cotton, it is a stretch to assume he would have marketed near perfectly in different circumstances.

317 Mr Wyatt suggested that Professor Gray’s assessment, that Mr Simmons would be assumed to have sold in cotton rallies, is not a valid one and gives to Mr Simmons a more generous assessment of the quantification of any damage than that to which Mr Wyatt suggested he was entitled. Mr Wyatt also suggested that there was no need to make any assumptions about the prices with which Mr Simmons would sell for this quantification process, because there is an actual record of the amounts at which Mr Simmons sold the cotton. Mr Wyatt took Mr Simmons actual US dollar cotton sales and converted them into AUD at the actual spot exchange rates that existed on the day that Mr Simmons made most of the sales.

318 Mr Wyatt was also critical of Mr Simmons not fixing the futures leg in his contracts. Mr Wyatt referred to this as a “simple procedure”. There is no correspondence other than in late 2001 giving Mr Simmons any advice in respect of fixing legs or otherwise. Mr Starling seems to have been the first person to write to Mr Simmons in any professional way in October 2001 advising that the futures leg had been fixed in respect of that crop. It does not seem to me a valid criticism of Mr Simmons, when he had not been given advice, either orally or in writing, in respect of fixing those legs. Of course Mr Morison gave some evidence relating to some advice given to Mr Simmons for a strategy, once Colly refused to let Mr Simmons roll his currency any further. That strategy is one that does not seem to me have been explained carefully or simply to Mr Simmons in the circumstances. Mr Wyatt reached the conclusion that Mr Simmons’ financial position may have been improved by $294,762 if he adopted the similar assumptions as adopted by Professor Gray. He then concluded that the loss of $294,762 is the futures profit forgone by Mr Simmons because of his inaction to price his futures leg.

319 Mr Wyatt also assumed that Mr Simmons sold cotton futures each year at 10% below the high. That is a less aggressive assumption than Professor Gray’s $A550/bale forward sales into the two price windows. Mr Wyatt also assumed that Mr Simmons sold forward 1500 bales of futures each year, allegedly the same quantity that he hedged on the foreign exchange market. In conclusion Mr Wyatt claimed that there were no damages because Mr Simpson’s losses were as a result of his failure to sell cotton futures.

320 The parties have not approached the quantum question on the basis of what may have been the case if the 2003, 2004 and 2005 currency positions had not been closed out, in other words, what the position may have been if the contract had not been breached. There is no such assessment.

321 The assessment of damages should be made on the basis of what the Company did earn in the years referred to below being 1999/2000, 2000/2001 and 2001/2002, taking into account the losses on the close out of the future years. The assessment should be made using the method adopted by Professor Gray on Mr Simmons’ evidence, but with the adjustments to the bale prices that I have concluded are appropriate to take into account some of the caution expressed by Mr Wyatt in relation to the luxury of hindsight.

322 It seems to me that the bale prices assessed by Mr Simmons and Professor Gray are too generous in the circumstances of this case. I am satisfied that had Mr Simmons been provided with the appropriate advice in the form that he best understood he would not have agreed to taking currency of $2.5 million in December 1997.

323 I am satisfied that had Colly or Colly Farms advised Mr Simmons of the risks of currency, it is reasonable to conclude on all the evidence that Mr Simmons would have taken a far more cautious approach to the currency positions than was taken in December 1997. I am satisfied that for the years 1999/2000 and following the Company would have only sold cotton pursuant to a Fixed Bale/Cash Price Contract. I am of the view that in all the circumstances of this case, and taking into account the inherent risks in the industry, both environmental and financial, including a subsequent decline in the exchange rate, a reasonable figure for the bales for the crop year 1999/2000 is $510 per bale, for the crop year 2000/2001 $490 per bale and for the crop year 2001/2002 $475 per bale. Otherwise, I am satisfied that the method of calculation used by Professor Gray is to be adopted. Interest should also be calculated at the rates suggested by Professor Gray. Although I was provided with an excel document on CD to assist with the quantification of the damages, I am satisfied that the preferable course is to have the parties make this calculation to be included in the Short Minutes to be brought in.

Orders

324 The Bank is entitled to the relief it seeks. Colly’s Cross-Claim is dismissed. Mr Simmons and the Company are entitled to declarations that Colly’s conduct in closing out the currency positions maturing in 2003, 2004 and 2005 was in breach of contract; that Colly and Colly Farms are in breach of s 52 of the TPA; that Colly and Colly Farms owed to Mr Simmons and the Company a duty of care and that such duties were breached. The Company and Mr Simmons are entitled to damages as assessed in accordance with the calculations performed by Professor Gray with the adjustment to the bale price referred to in this judgment.

325 The parties are to bring in Short Minutes of Order, including an agreed costs order, at 9.30 am on 1 August 2005. If the parties are unable to agree on a costs order I will hear argument on that day.

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27/07/2005 - Typographical error - Paragraph(s) 324