NIRAD PTY LTD v COMMONWEALTH BANK OF AUSTRALIA SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL McHuGH, SAMUELS and Hope JJA 7 June 1988, 17 November 1988 [1988] NSWCA 104 CONTRACT — forward exchange contract — instruction by customer to bank to purchase US dollars at rate of 0.6626 = $1.00 — instruction accepted by bank officer — bank's foreign exchange dealer had to confirm the rate to another officer who had to prepare written forward exchange contract for signature by customer — bank intending to sell at rate of 0.6606 $41.00 — written contract containing rate of 0.6606 sent to customer — not signed — Held: no contract between parties. McHugh JA This appeal is brought by Nirad Pty Ltd against an order made by Yeldham J sitting in the Commercial List of the Supreme Court. His Honour held that Nirad was obliged to pay the respondent, Commonwealth Bank of Australia (the Bank), damages for breach of a contract made on 26 June, 1985 by which Nirad agreed to buy from the Bank the amount of $1,514,610.10 in US Dollars. The question in the appeal is whether in the circumstances of the case the statement, "Hedge the full amount for one month" and the reply "I will arrange that for you" constituted an immediately binding contract between the parties. The nature of the proceedings In 1985 the Bank agreed to provide Nirad with a "Bills acceptance and discount facility" for the United States dollar equivalent of $2,300,000. This money was required by Nirad to discharge a debt owed to a foreign creditor. Under the agreement, the facility was to be reduced by the United States equivalent of $1,500,000 within three months of the date of the first draw-down and the balance was to be repaid twelve months after that payment. The agreement also made provision for earlier repayments. On 28 June the first and only draw-down occurred. The amount involved was the United States equivalent of $2,260,612.10. Before entering into the agreement Mr Darin, the controller and principal shareholder of Nirad, discussed with officers of the Bank the desirability of hedging against the possibility that, when the time came to repay his borrowing from the Bank, the Australian dollar had declined as against the United States dollar. He was particularly worried about the effect of the Tax Summit which was to take place on 1 July 1985. On 25 June 1985, Mr Wilson, the Chief Manager of the Bank, advised Mr Darin against hedging explaining that the cost of hedging his US dollar commitment would equate the cost of borrowing in Australian dollars. However, Mr Darin said that he wished to enter into a hedging contract. He said that he was uncertain whether he would repay the full amount of the US dollar loan at the end of July. He said that he would probably repay part of the borrowing at the end of July but was uncertain about the balance. Despite Mr Wilson's advice against hedging, Mr Darin said, "I want to borrow the funds in US dollars. I want to hedge the US dollars for one month and I want the deal 2 UNREPORTED JUDGMENTS to be with your Singapore office". At the conclusion of their meeting Mr. Wilson told Mr Darin that he would ask Mr Wallin, a Bank officer, "to get some prices for you and contact you". At the trial there was a conflict between Mr Darin and officers of the Bank as to the use of the term "hedging". Mr Darin maintained that he had understood the term, and used it in conversations with the Bank officers in a context where it was understood, to mean "insuring". His Honour rejected Mr Darin's evidence on this point. The appeal was conducted on the basis that the parties understood hedging to mean that the Bank would sell Nirad an amount of US dollars for delivery at a future date at a rate (the forward cover rate) which was fixed at the date of sale. His Honour also found that on 26 June 1985 a conversation took place between Mr Darin and Mr Wallin. After speaking to Mr Wilson, Mr Wallin had spoken to Mr John O'Brien, a foreign exchange "risk adviser". He obtained information from Mr O'Brien and then spoke to Mr Darin. He told Mr Darin that Mr Wilson had asked him to get "certain information regarding hedging of the loan" and that he had the information for Mr Darin. Mr Wallin told Mr Darin "that the forward cover, forward amount for 30 days was 0.6626". The figure of 0.6626 was the conversion rate for Australian dollars to United States dollars. After further discussion Mr Darin asked Mr Wallin "to obtain the cost of forward cover" for 60 days, 90 days and 180 days. Mr Wallin again telephoned Mr John O' Brien and was put on to a Mr Jovan Knezevic. He then telephoned Mr Darin again and gave him the information which he had requested. After a pause Mr Darin said to him, "Hedge the full amount for one month". Mr Wallin replied, "I will arrange that for you". Mr Wallin then spoke to Mr R Lorking, who worked in the Bank's International Division and dealt "with the administration of the Bank foreign currency loans". Earlier, on 24 June, Mr Wallin had prepared a memorandum for the Lending Section of the International Division at Head Office of the Bank together with copies of the Loan Agreement, the approved application and the approval letter to Nirad. On 26 June he added to the bottom of the memorandum: "PS: Borrower has requested a hedge contract for 30 days for the amount of initial drawdown (UNITED STATES DOLLAR equivalent of AUD 2,260,612-10)." He then forwarded the memorandum to Mr Lorking. Nothing in the memorandum indicated that Mr Darin had agreed to a rate of 0.6626. Nor at any relevant time did Mr Wallin communicate this fact to Mr Lorking or to any other Bank officer. According to the Bank's Internal Instructions, when approval is granted by the Bank to a forward exchange transaction, "a forward contract will be written with the customer on the same day". When a forward exchange rate is not available on the day approval is granted, the contract has to be written with the customer within one working day of the date of approval. The Instructions provide that a forward contract in a specified form is to be completed by the customer in duplicate. The manager, or an officer delegated by the manager, is to verify the customer's signature on the forward contract form. The rate of exchange to apply to a new forward contract is to be "agreed with the customer as soon as possible after the application has been approved". The Instructions provide information as to the means by which the forward exchange rate is to be obtained. The forward contract form is entered in a Forward Exchange register. The manager is to check that all details on the contract are correct and that all requirements for approval have been met before the forward contract form is completed by the Bank. After URJ NIRAD PTY LTD v COMMONWEALTH BANK OF AUSTRALIA (McHugh JA) 3 completion of a Foreign Exchange Transaction Advice, the contract details are to be advised to a particular section of the Bank "on the day the forward rate is agreed to the customer". In his evidence, Mr Wallin said that the person whose duty it was to prepare the forward exchange contract was a person in the Overseas Trading Payment Section. In June 1985 Mr Wallin had not read the Bank's instructions concerning forward exchange contracts. This was the first and only forward exchange contract with which Mr Wallin had dealt. It was not part of his duties to prepare the documentation for forward exchange contracts. He said that his "responsibility at that stage was to obtain rates from the dealers and convey those rates to the client". He asserted that if the client "accepted and gave the instruction to cover I was empowered to accept those or make the contract". No contract was prepared on 26 June 1985. But on 22 July 1985 the Bank sent a forward exchange contract for execution to Nirad recording a rate of 0.6606. Nirad did not sign it. The reason for recording a rate of 0.6606 was that, on 28 June 1985, Mr Knezevic received from Mr Lorking the memorandum dated 24 June which Mr Wallin had prepared. It was normal procedure for the Bank to cover itself in respect of a hedging contract by entering into an equivalent transaction in the foreign currency market. Accordingly, the Bank purchased an amount of US dollars equivalent to the amount which it had agreed to sell to Nirad for delivery on 31 July 1985. It is unnecessary to pursue the details, but the result of Mr Knezevic's operations in the market was that from the Bank's point of view, the rate at which it was selling US dollars to Nirad was 0.6606. Indeed, it was not until May 1986 that the Bank ever asserted that there was an agreement between itself and Nirad concerning a rate of 0.6626. After the parties had been unable to resolve their differences, the Bank issued a Statement of Claim on 19 December 1985. The Statement of Claim alleged, inter alia, that Nirad would accept the rate obtained by the Bank's "foreign exchange dealers on 28 June, 1985 applicable to forward exchange (sale) contract for USD1,514,610.10 commencing on 28 June, 1985 and ending on 31 July, 1985 ie US$0.6606=AUD1". However, on 2 May 1986 the Statement of Claim was amended to plead an alternative agreement based on a rate of 0.6626 made on 26 June 1985. No contract was made. Upon these facts the question arises as to whether or not there was a binding agreement between the Bank and Nirad on 26 June. I have come to the conclusion that there was no contract between the parties. I have no doubt that Mr Darin on behalf of Nirad made an offer by which he intended to bind Nirad. But I do not think that what Mr Wallin did amounted to an acceptance of Mr Darin's instruction which immediately bound the Bank. I appreciate that Mr Wallin had not read the Bank's Internal Instructions and that he asserted that, if the client gave an instruction to cover, that he was "empowered to accept those or make the contract". But he said in evidence that the foreign exchange dealers booked the deal in and that they confirmed the rate to the person in the Overseas Trading payments Section. Indeed, it is open to doubt whether Mr Wallin, despite his assertion, had authority to bind the Bank to the rate of 0.6626. I think that the better view of the evidence is that he probably had authority only to give to the client what in evidence was described as an indicative rate. However, even if Mr Wallin had authority to reach a consensus with a client in respect of the exchange rate, I do not think that he had authority to make an immediately binding contract. He himself recognised that the contract had to be in writing, that it had 4 UNREPORTED JUDGMENTS to be prepared by the Overseas Trading Payment Section, and that the foreign exchange dealers had to confirm the rate to the person preparing the contract. The test for determining whether a contract has been made is an objective one. Certainly, Mr Darin intended to make an immediately binding contract to buy the US dollars at the rate of 0.6626. But I do not think that construction should be put on Mr Wallin's conduct. So far as he was concerned a written agreement had to be prepared by another person. The rate of exchange for that agreement had to be given or confirmed to the person preparing the agreement by one of the foreign exchange dealers. At no relevant stage did Mr Wallin communicate the figure which he had given to Mr Darin to those drawing the agreement. He simply forwarded his memorandum to Mr Lorking. That memorandum stated that Nirad had requested a hedge contract for 30 days for the amount of the initial drawdown. It was understood and reasonably understood by those to whom it was addressed that cover would be required from the drawdown date (28 June). The latter day was the last trading day of the month and the 30 day period was understood, according to the terminology of the trade, as a reference to the last trading day of the next month. That is why the Bank's purchase of US dollars took place on 28 June for delivery on 31 July 1985 and the "contract" sent to Nirad specified the date of the purchase of the US dollars as 28 June, the delivery date as 31 July, and the exchange rate as 0.6606. The proper construction to be placed on Mr Wallin's conduct is that the acceptance of Mr Darin's instructions was subject to a written agreement In substance the case is a variation of the third category of contracts mentioned in Masters v Cameron (1954) 91 CLR 353 at 360. It is a case where the intention of one of the parties was not to make a concluded bargain at all, unless and until they execute a formal contract". The conversation between Mr Darin and Mr Wallin under which Nirad agreed to purchase US dollars from the Bank at a rate of 0.6626, therefore, did not have binding effect, cf Sinclair, Scott and Co Ltd v Naughton (1929) 43 CLR 310. Nirad's offer to enter into an open contract to purchase US dollars at a rate of 0.6626 was never accepted. At no stage did it agree to purchase dollars on 28 June at a rate of 0.6606 according to the terms and conditions of the forward contract form. Indeed the forward contract form containing that rate was not even forwarded to Nirad until 22 July 1985. Nirad did not accept it. In point of legal theory, either Nirad's offer lapsed or the offer forwarded on 22 July 1985 was a counter offer which rejected Nirad's offer. Accordingly, the parties never had a legally binding agreement. In my opinion the appeal should be allowed. The order made by Yeldham J should be set aside. In lieu thereof judgment should be entered for the defendant. The respondent-plaintiff should pay the Costs of the appeal and of the action. Counsel for the Appellant: Mr AM Gleeson QC and Mr R Sackville Solicitors for the Appellant: Jennifer E Darin Counsel for the Respondent: Mr B O'Keefe QC and V Gray Solicitors for the Respondent: L C Hollis