SCHRODERS AUSTRALIA Ltd v QINTEX AUSTRALIA FINANCE Ltd (RECEIVERS and MANAGERS APPOINTED) SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, KIRBY P and CLARKE JA 19 August 1992, 8 October 1992 [1992] NSWCA 225 CONTRACT — contracting parties — purchase of foreign exchange by broker on behalf of group of companies — supervening insolvency of companies in the group — assertion by broker that contract was with solvent and not insolvent company — assertion rejected by Rogers CJ Comm D — on appeal to the Court of Appeal — held: (per Gleeson CJ; Kirby P and Clarke JA concurring): (1) The identification of the contracting parties within the group was to be determined by reference to the intention of the parties imputed to them, objectively. Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 (CA); ABC v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 (CA) applied; (2) The rights and interests of the parties required attention to distinctions which were regarded as unimportant at the time of the transactions. Walker v Winbourne (1976) 137 CLR 1 applied; (3) Upon the facts, the trial judge had correctly determined that the dealing in question was with a company which became insolvent and not with a solvent company in the group; (3) The alternative arguments (a) that the insolvent company acted as agent for an undisclosed principal (the solvent company), (b) that the broker was acting on behalf of all companies in the group and (c) that the broker was entitled to choose and assign to any company in the group as it determined should be rejected as inconsistent with the contemporaneous facts; (4) Appeal, accordingly, dismissed. Gleeson CJ In August 1989 the appellant, Schroders Australia Ltd, entered into a forward exchange contract with a member of the Qintex group of companies. The contract was made orally, in a telephone conversation, but it was later made the subject of written memoranda. Under the contract the appellant agreed that, on 4 December 1989, it would exchange 1.2 billion yen for an amount in Australian currency in excess of $12,000,000. In late November 1989 receivers and managers were appointed to the Qintex group of companies. A number of the companies in the group were insolvent. In early December 1989 the appellant closed out the forward exchange contract at a loss. An amount in excess of $1.3 million became owing to the appellant. Various members of the Qintex group had accounts with various departments of the appellant. One member of the group, the respondent (QAFL), had substantial credit balances in some of its accounts. The appellant asserted that QAFL was liable to it under the forward exchange contract and appropriated the credit balances in reduction of that indebtedness. At no time between August and early December 1989 had the appellant ever asserted that QAFL was the member of the Qintex group which had entered into the forward exchange contract, or was otherwise liable under that contract. The appellant's internal records, and its communications with the Qintex group concerning the transaction, identified another company, Qintex Television Ltd (QTL), as the company which had entered into the forward exchange contract. QAFL commenced the present proceedings asserting that the appellant was not entitled to appropriate the amounts standing to the credit of the various QAFL 2 UNREPORTED JUDGMENTS accounts mentioned above. The issue in the case was whether QAFL was liable under the forward exchange contract. Rogers CJ CommD resolved that issue in favour of QAFL. That gave rise to this appeal. The evidence indicated that in August 1989, when the contract was entered into, the officers of the appellant and of the Qintex group who arranged the transaction paid no particular attention to the identification of the member of the Qintex group which was to be a party to it. The evidence also showed that there were a large number of companies in the group, and that accounting practices were adopted which treated their separate interests in a somewhat cavalier fashion. The resolution of the present problem depends upon inferences to be drawn from the conduct of the parties, considered in the light of the background of their previous dealings, and the practices which they adopted in relation to those dealings. As not uncommonly happens, the result turns upon an intention to be imputed to the parties which does not necessarily correspond with any subjective intention that was actually entertained. (Taylor v Johnson (1983) 151 CLR 422 at 429; Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, ABC v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540). The truth of the matter is that nobody adverted to what has now become the central issue until it became of significance by reason of the insolvency of the relevant members of the Qintex group. Whilst those in charge of the affairs of the Qintex group may have found it convenient to disregard on occasion the separate interests of the individual companies in the group, the supervening insolvency of some of those companies, and the differing rights and interests of their various creditors, make it necessary now to attend to distinctions which were regarded as unimportant at the time. (Walker v Wimborne (1976) 137 CLR 1). The department of Schroders Australia Ltd which dealt with foreign currency transactions had various established clients who were extended credit, subject to certain limits. Prior to August 1989 QTL, and another member of the Qintex group, Qintex Finance Ltd (QFL), were established foreign exchange clients of that department. Both of those companies had entered into forward currency transactions with the appellant. QAFL had never done so. That company had no account with the relevant department of the appellant, and the department's computer did not acknowledge its existence. The employee of the appellant who entered into the forward exchange contract in the course of a telephone conversation with an officer of the Qintex group had no particular interest in differentiating between the various members of that group. In the course of the conversation in which the contract was made there was reference only to " Qintex", and no mention of any particular Qintex company. She then processed the transaction in accordance with the appellant's established procedures, and, as a result of the way in which the appellant's computer was programmed, the contracting party was identified in the documents as QTL. The contract was confirmed in a telex addressed to " Qintex Television Ltd" (although it was also confirmed in a fax addressed to " Qintex group of companies"). In the appellant's internal records relating to the "foreign exchange deal" the client was identified by reference to a code that referred to QTL. By a letter dated 16 August 1989, addressed to QTL, the appellant confirmed a "spot transaction" which preceded the forward exchange contract. Further reference will be made below to that spot transaction. \REHRODERS AUSTRALIA Ltd v QINTEX AUSTRALIA FINANCE Ltd (RECEIVERS an@ MANAGERS APPOINTED) (Gleeson CJ) There were tendered in evidence at first instance, as part of an agreed bundle of documents, and without objection, a series of statements addressed by the appellant to QTL. Those statements covered, amongst other things, the transaction in question. I would infer that the statements were sent to, and received by, QTL. There is no suggestion of any protest or objection on the part of any officer of the Qintex group of companies to this manner of recording the transaction. Thus, as between the appellant and the Qintex group, and in the appellant's internal records, the transaction was identified as a contract between the appellant and QTL. The appellant's motive for asserting, in December 1989, that the other party to the transaction was QAFL, is simple enough, and was frankly acknowledged during the course of argument. QAFL had the money to meet the obligation in question and QTL did not. However, the principal ground upon which the assertion was supported in the present litigation seems to have been discovered after the commencement of the proceedings and turned upon internal entries in the accounts of the Qintex group. In order to explain those entries it is necessary to consider in more detail the background to the forward exchange contract. The forward exchange contract was intended to be a hedging transaction. A Japanese member of the Qintex group, referred to as QJKK, borrowed an amount of Japanese currency. That borrowing had to be repaid in yen, and it was expected that, between August and December, when repayment was due, the yen would strengthen as against the Australian dollar. A substantial part of the proceeds of the borrowing were used to meet obligations of QAFL. The funds were converted from yen to Australian dollars by means of the spot transaction earlier referred to, and that transaction was effected by the appellant. At the same time, it was instructed to enter into the forward exchange contract for the purpose of hedging earlier mentioned. The proceeds of the spot transaction were paid by the appellant by way of a cheque which was drawn in favour of QTL, but which was banked to a bank account in the name of QAFL. Entries in the accounts of the Qintex group showed QAFL as indebted to QJKK, and as obliged to pay an amount in yen in December. From that point of view, it was QAFL that needed hedging protection. The matter was, however, more complicated. First, it appears that it was QTL that paid interest to QJKK on the loan. Secondly, the evidence showed that the entries that were made in the Qintex accounts in respect of matters of this nature were made on the basis of expediency rather than accounting principle. Furthermore, whilst it was clear that QAFL was involved one way or another in the Japanese borrowing and on lending, it was not the only Qintex company that was involved, and the precise nature of its involvement was never the subject of any clear documentation. Mr Pratt, who was employed at the time in the Treasury Department of the Qintex group gave the following evidence: "Q: It was often the case if a forward contract was preceded by a spot transaction a direction might be given for the payment of the proceeds of the spot transaction to be paid to another company within the group. A: That's correct. Q: It all depended upon whether, for the purpose of the group as a whole, you wanted to move money on a particular day? A: Depending on the circumstances at that point in time. 4 UNREPORTED JUDGMENTS Q: The considerations which lay behind the needs of different subsidiaries for funds on a particular day were separate considerations than those which lay behind the reason why the contract might be entered into with company A or company B? A: In respect to foreign exchange, that's correct." Mr Pratt went on to say that he regarded it as a mistake that the proceeds of the spot transaction were paid into a bank account in the name of QAFL, and that subsequent accounting entries recorded QAFL as being indebted to QJKK. However, he agreed that, once the entries were made, they were irreversible. Having regard to the communications that were sent by the appellant to the Qintex group following the telephone conversation of August 1989, and the fact that the description of the contracting parties contained in those contracts both accorded with previous dealings between the parties and was not the subject of any objection on the part of Qintex, I consider that the proper conclusion is that the contracting parties were the appellant and QTL. However, it is argued on behalf of the appellant that, even if that be so, it should be inferred that QTL entered into the forward exchange contract as agent on behalf of an undisclosed principal, that is to say, QAFL. This argument is put primarily upon the basis that the transaction was a hedging transaction, and that, as the internal records of the Qintex group show, it was QAFL that was in need of the protection of hedging because of its indebtedness to QJKK. There are a number of answers to this argument. The first is that the evidence made it clear that, even if it be the case that it was QAFL that bore the risk of an adverse currency movement, that would be a very insecure basis for concluding that, in the way in which the affairs of the Qintex group were conducted, it was intended on the part of Qintex that QTL would contract with the appellant as an agent for QAFL. It was evidently by no means uncommon for foreign exchange transactions to be entered into by entities which were different from the entities whose exposure required, from the point of view of the group, protection against adverse currency fluctuations. It is one thing to conclude from the evidence that it might have been a good idea for QAFL to have entered into a hedging transaction. It is another thing to conclude that, in relation to the contract in question, there existed the relationship of principal and agent between QAFL and QTL. An alternative argument was put to the effect that it should be concluded that QTL was acting on behalf of all the companies in the Qintex group. There were many such companies, most of whom had no possible connection with this transaction. I see no basis for drawing such an inference. Finally, and somewhat faintly, it was argued that, by reason of a conversation that had occurred between officers of Qintex and the appellant before August 1989 the appellant was entitled to choose which member of the Qintex group would be treated as a party to a forward exchange contract. There was a conversation which might have been taken to have that effect. The difficulty in the way of this argument, however, is that, insofar as the appellant had such a right to select the other contracting party, the documents which it issued in relation to this contract identified, as the chosen party, QTL. There is no suggestion that the appellant had the right to make a choice and then change it from time to time depending upon its view of the financial strength of individual companies within the Qintex group. \REHRODERS AUSTRALIA Ltd v QINTEX AUSTRALIA FINANCE Ltd (RECEIVERS an@ MANAGERS APPOINTED) (Clarke JA) In my view Rogers CJ CommD was correct to conclude that it had not been shown that the forward exchange contract was made between the appellant and QAEFL. The respondent sought leave, at first instance and in this Court, to rely upon a further argument by way of answer to the appellant's claim. Put shortly the argument was to the effect that, because receivership intervened between the arising of the credits in the QAFL account earlier mentioned and the incurring of liability under the forward exchange contract, it was not open to the appellant to make the set off which it attempted. At first instance leave was refused to advance this argument because it might have required evidence going beyond that which had been adduced at the hearing. I see no error in this discretionary decision on the part of the trial judge, and I do not consider that this Court should interfere with it. The appeal should be dismissed with costs. Kirby P I agree with Gleeson CJ. Clarke JA I agree with the learned Chief Justice. Appeal dismissed with costs. Counsel for the Appellant: BC Oslington QC/R Angyal Instructed by: Mallesons Stephen Jaques Counsel for the Respondent: M Pembroke Instructed by: Blake Dawson Waldron