New South Wales Supreme Court CITATION : Evans & Associates v Citibank Ltd & Ors [2007] NSWSC 1004 HEARING DATE(S) : 13/08/07, 14/08/07 JUDGMENT DATE : 20 September 2007 JUDGMENT OF : Gzell J DECISION : Judgment for 8th defendant against plaintiff. CATCHWORDS : PROCEDURE - Undertakings as to damages - Stay of judgment for approximately US $8.7 million due to the 8th defendant, a foreign bank that dealt exclusively in foreign currencies upon the plaintiff's undertaking as to damages - Inquiry as to compensation - 8th defendant argued would have converted the US dollars to euros if not frozen at greater return on investment - Whether 8th defendant would have done so - Whether the loss of earnings occured but for the order - Whether the natural consequence of the order - Whether in circumstances of which the plaintiff had notice - Whether 8th defendant failed to mitigate its loss - Whether an order for compensation just within the meaning of a usual undertaking as to damages in the Supreme Court Rules 1970, Pt 28 r 7, now Uniform Civil Procedure Rules 2005, r 25.8 - How should quantum of loss be determined Supreme Court Regulation 2000 LEGISLATION CITED : Civil Procedure Regulation 2005 Supreme Court Rules 1970 Uniform Civil Procedure Rules 2005 Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1979-1981) 146 CLR 249 Victorian Onion and Potato Growers' Association v Finnigan (No 2) [1922] VLR 819 Hoffmann-La Roche v Trade Secretary [1975] AC 295 Smith v Day (1882) 21 Ch D 421 Griffith v Blake (1884) 27 Ch D 474 Schlesinger v Bedford (1893) 9 TLR 370 CASES CITED : Douglass v Bullen (1913) 12 DLR 652 Di Ferdinando v Simon, Smits & Co Ltd [1920] 3 KB 409 The Despina R [1979] AC 685 Hadley v Baxendale (1854) 9 Ex 341 (156 ER 145) Kollman v Watts [1963] VR 396 Motor Accident Mutual Insurance Pty Ltd v Kelly (1999) 10 ANZ Insurance Cases 61-420 Sellars v Adelaide Petroleum NL (1992-1994) 179 CLR 332 Norris v Blake (1997) 41 NSWLR 49 Robb Evans & Associates - Plaintiff Citibank Ltd - Frist Defendant Benford Ltd - Second Defendant JK Publications, Inc - Third Defendant MJD Service Corp - Fourth Defendant PARTIES : TAL Services Inc - Fifth Defendant Kenneth Taves - Sixth Defendant Teresa Taves - Seventh Defendant European Bank Ltd - Eighth Defendant Citibank NA - Ninth Defendant Discreet Bill Inc - Tenth Defendant FILE NUMBER(S) : SC 4999/99 COUNSEL : Mr T Martin SC - Plaintiff Mr R Webb SC/ Mr J Halley - Defendants SOLICITORS : Deacons Lawyers - Plaintiff Baker & McKenzie - Eighth Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J THURSDAY 20 SEPTEMBER 2007 4999/99 ROBB EVANS & ASSOCIATES v CITIBANK LTD & ORS JUDGMENT The issue 1 Upon Robb Evans, the plaintiff, giving the usual undertaking as to damages, the Court of Appeal on 18 May 2004 ordered that an amount of US $8,731,023.73 that was to be paid by Citibank Ltd to European Bank Ltd, the eighth defendant, be paid into court in lieu of an injunction to abide the outcome of proceedings in the High Court. Upon payment into court, the amount was to be invested by the Prothonotary in an interest bearing deposit with Westpac Banking Corporation. 2 European Bank seeks compensation from Mr Evans under his undertaking. It claims that if the moneys had not been paid into court, it would have converted the US dollars to euros and received a higher amount on that investment than the interest it received on the Prothonotary's investment in US dollars. 3 The funds invested by the Prothonotary were rolled over from time to time. On 24 February 2005, they were rolled over until 24 March 2005. Mr Evans' application for special leave to appeal to the High Court was dismissed on 11 March 2005. On 18 March 2005, Handley JA ordered that the Prothonotary funds be paid to European Bank together with any interest earned on the funds subject to the Supreme Court Regulation 2000, reg 13, now Civil Procedure Regulation 2005, reg 19. It provided that 2.5% of the amount received by way of interest or dividends on funds paid into court was to be deducted and paid into the Consolidated Fund. In accordance with that provision, on 24 March 2005, US $3,077.71 was deducted and the balance of the funds, inclusive of interest, in the amount of US $8,852,897.45 was paid to European Bank. 4 The usual undertaking as to damages was defined in the Supreme Court Rules 1970, Pt 28 r 7(2), now the Uniform Civil Procedure Rules 2005, r 25.8 in the following terms: "The usual undertaking as to damages , if given to the Court in connection with any interlocutory order or undertaking, is an undertaking to the Court to submit to such order (if any) as the Court may consider to be just for the payment of compensation, to be assessed by the Court or as it may direct, to any person, whether or not a party, affected by the operation of the interlocutory order or undertaking or of any interlocutory continuation, with or without variation, of the order or undertaking." The Principles 5 In Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1979-1981) 146 CLR 249 an injunction had been granted restraining the Commonwealth and the Secretary of the Department of Transport from issuing permission to Air Express to import freighter aircraft into Australia. Ansett gave an undertaking as to damages in usual terms. Air Express applied for damages pursuant to the undertaking. Aickin J, at first instance, considered that it was probable that once the action was commenced, the Secretary would not have issued permission. Hence, Air Express had not established that the loss it had incurred from its inability to import the aircraft flowed from the grant of the injunction. On appeal, by majority, it was held that there was no ground for interfering with the decision. There is a distinction between damage caused by the grant of an injunction and damage that flows from the fact of the litigation itself. Damages are recoverable only with respect to the former. 6 In Victorian Onion and Potato Growers' Association v Finnigan (No 2) [1922] VLR 819 at 822, Cussen J took the view that the word "damages" in the usual undertaking as to damages was to be given a very general meaning and was not necessarily to be given the same meaning when used in connection with breaches of contract. 7 On the other hand, Lord Diplock in Hoffmann-La Roche v Trade Secretary [1975] AC 295 at 361, said that the assessment of damages for breach of an undertaking was made on the same basis as that upon which damages for breach of contract would be assessed if the undertaking had been a contract and the plaintiff would not prevent the defendant from doing that which he was restrained from doing by the terms of the injunction. 8 In Smith v Day (1882) 21 Ch D 421 at 424-425, Jessel MR said that an order for damages pursuant to an undertaking as to damages given when an injunction was granted would only be made when the injunction was obtained by some false statement or suppression of information and would not be made where the injunction issued because of some mistake of law by the court. 9 In Air Express at 261, Aickin J pointed out that that proposition had been rejected by the Court of Appeal in Griffith v Blake (1884) 27 Ch D 474. At 266-267, his Honour referred to what Cotton LJ had said in Smith at 430 that damages must be confined to loss that is the natural consequence of the injunction under the circumstances of which the party obtaining the injunction had notice and to the adoption of that decision by the Court of Appeal in Schlesinger v Bedford (1893) 9 TLR 370. His Honour gained little assistance from the expression "real harm" adopted by Cussen J in Finnigan. His Honour said that in a proceeding of an equitable nature it was generally proper to adopt a view that was just and equitable, or fair and reasonable, in all circumstances and the view that the damages should be those that flow directly from the injunction and that could have been foreseen when the injunction was granted was one that would be just and equitable in the circumstances of most cases. 10 Barwick CJ agreed with what Aickin J had said at first instance. At 310 the chief justice said there was reason to support the view taken by Jessel MR in Smith, but it was far too late to re-open the decision reached in Griffith and subsequent cases. 11 Gibbs J observed at 312 that the generally accepted view is that the damages must be confined to loss that is the natural consequence of the injunction under the circumstances of which the party obtaining the injunction had notice. But in the case before the court the question was not whether loss caused by an injunction was a natural consequence of making it, but whether any loss that the appellant suffered was caused by the making of the injunction. His Honour found it unnecessary to deal with the conflict between Finnigan and Hoffmann-La Roche because the issue before the court in Air Express was different. 12 Stephen J at 319 endorsed the view of Cussen J in Finnegan. His Honour said it was appropriate in claims under undertakings as to damages to rely upon analogies drawn from the common law in matters of remoteness of damage. But it was quite a different thing to seek to apply common law rules of causation to a claim under such an undertaking. At 320, his Honour concluded that, it was only if damage was suffered because of the grant of the injunction and would not have been suffered but for it, the court should compensate a defendant who claimed damages under the undertaking. The grant of the injunction must be shown to be the causa sine qua non of the damage. Only then will the defendant have suffered such "real harm" of which Cussen J spoke in Finnegan. 13 Reference was made to Douglass v Bullen (1913) 12 DLR 652 in which the Ontario Supreme Court drew the distinction that was the gravamen of the decision in Air Express: on an injunction undertaking, damages will not be awarded in relation to matters not within the scope of the injunction order, ie, loss of time incident to the litigation generally, and not specially to the injunction. European Bank's operations 14 European Bank is a small financial institution operating in Vanuatu. The evidence of its activities was given by Kely Ihrig the manager, operations. Typically of a bank, European Bank accepted deposits from customers and invested them on deposit with counterparty banks in various currencies. The decision as to where European Bank's funds were deposited or invested was made weekly at senior management meetings at which Ms Ihrig was present. 15 In cross-examination it emerged that the procedures adopted were less formal than those specified in her first affidavit. She had said that the decision as to where and in which currency the funds of the bank were invested was made in accordance with the Bank's formal policies, practices and procedural strategies that had been prepared to ensure the Bank complied with its statutory, regulatory and prudential guideline obligations. Those obligations required the Bank to ensure that it had sufficient liquidity available in its investments to meet its obligations to pay customers as and when those obligations fell due. European Bank was required to have readily accessible liquidity in all currencies in which it invested. 16 In her first affidavit Ms Ihrig did say that European Bank's executive had the power under its liquidity management policy to authorise and carry open positions from time to time provided that the liquidity risk levels were not breached. An open position is the difference in any currency between the assets and liabilities of that currency, the assets being the Bank's investments, liabilities being the customer deposits. Ms Ihrig said that the difference in any currency was compared to the limits set in the Bank's liquidity management policy and any other authorised position in the Bank's policy guidelines. 17 A major criticism of Ms Ihrig's evidence was that the executive did not comply with the limits set in European Bank's liquidity management policy nor statutory liquidity guidelines. Whether European Bank would have converted US dollars to euros 18 Mr Evans raised a number of arguments in support of the submission that European Bank had not overcome its onus of establishing that but for the order that the funds be paid into court, it was likely to have converted the funds to euros. 19 First, Ms Ihrig agreed that it was the usual practice of the Bank to take deposits and place them out on investment in the same currency. Having taken the funds in question as a deposit by Benford Ltd, the second defendant, in US dollars it would have been an abandonment that usual practice to place them on deposit in any currency other than US dollars. 20 Secondly, European Bank's liquidity management policy stated that while normal banking practice was to borrow short and lend long, it adhered to the strategy of borrowing and lending short because of the nature of its diversified and stable customer base, size and type of operations. Thus, the Bank's policy, irrespective of whether the currency was locally domiciled or foreign, was to retain a liquid matching currency and term book. To convert the Benford account funds from US dollars to euros would breach the Bank's policy. 21 The liquidity management policy provided that the manager, operations was responsible for daily monitoring and reporting of the Bank's liquidity position with reference to a mismatch term deposit and investment table both for term and currency and a treasury position summary. Breaches of approved currency liquidity limits between assets and liabilities, reviewed and set by executive management, were to be immediately referred to the chief executive officer for discussion and action as required. 22 In January 2000, European Bank established foreign currency open position limits with accumulated authorised limit of US $90,000. European Bank had a share capital of only US $750,000 and total equity of approximately US $2.7 million. Its profit for the 2004 year was US $15,174 and for the 2003 year, US $277,874. A US $90,000 accumulated authorised limit of open positions represented 12% of capital. Provision was made for temporary excesses of the limits for a maximum of three days. Temporary excesses over an accumulated total of US $150,000, that might be for more than three days, could be authorised prior to the excess by at least two members of the executive committee. Ms Ihrig agreed that European Bank would not expose itself to a currency risk beyond the authorised limits for an extended period of time. 23 The limits were altered on 18 January 2005. The individual limit for euros was the equivalent of US $20,000. The aggregate authorised limit became US $350,000. It was noted that substantial funds in foreign currencies were frozen. The Bank was unable to sell to reduce the positions to a reasonable level. Once funds had been released, the levels would be reviewed and significantly reduced. In the meantime, temporary excesses of more than three days and over US $500,000 had to be authorised by at least two members of the executive committee. Ms Ihrig agreed that these limits were unrealistically high and the greater was the potential exposure to currency risk run by the Bank. 24 If European Bank had converted the Benford account funds from US dollars to euros it would have exceeded its foreign currency open position limits. 25 Mr Evans obtained a report from Sean Gregory Russo, the principal of a risk consultancy business that specialised in advising companies with high levels of risk in financial markets, including the international foreign exchange market. Mr Russo was not cross-examined. 26 In Mr Russo's view, the conversion of US $8,732,866.93 into euros would have created a foreign currency open position in an amount exceeding US $8.7 million. That would have created a gross breach of the Bank's foreign currency open position limits of US $90,000 by a multiple of 97 and US $350,000 by a multiple of 24. Mr Russo opined that such an exposure would have placed European Bank at a substantial risk of its profitability being eliminated and a substantial part of its capital being lost. A 5% adverse movement, that would not be regarded as a significant event, would result in a potential loss of US $435,000. A loss substantially in excess of the combined profitability of the Bank for the previous two years of US $293,048. The loss would have resulted in a reduction of capital of the order of 15%. Mr Russo said the size of such an open position would be entirely inconsistent with the usual banking practices in international currency markets and contrary to the usual banking practice of the European Bank. With its limited capital and profitability it would not concentrate its currency risk in euros in the magnitude of US $8.7 million. 27 Such an open position, it was submitted, would also be contrary to the guidelines of the Reserve Bank of Vanuatu. European Bank conducted a banking business as a local bank. The Reserve Bank of Vanuatu formulated supervision policy guidelines with respect to procedures for managing liquidity. Guideline 3, cl 15(e) provided that a bank should assess the convertibility of individual currencies, the timing of access to funds, the impact of potential disruptions to foreign exchange markets and exchange risks before assuming that surplus liquidity in one currency could be used to meet a shortfall in another currency. It was submitted that to take an open position with respect to euros in excess of US $8.7 million, a bank of the size European Bank could not properly have assessed the exchange risk associated with that convertibility. 28 The retention of the Benford account in US dollars was consistent with the history of that account. As Palmer J found in Evans & Associates v Citibank Ltd & Ors [2003] NSWSC 204 at [29]–[30], funds on deposit in the Benford account were combined with other funds and placed on deposit in US dollars. Thereafter the funds were placed on deposit with other banks and rolled over from time to time but retained in US dollars. When the funds were released to European Bank by the Prothonotary, they remained in US dollars for over a year. It was not until 24 April 2006 that they were converted to euros. European Bank still owed US dollars to Benford. It was submitted that that history supported the contention that it was unlikely that European Bank would have converted the funds to euros and that the only reason for the conversion in April 2006 was to meet the views expressed by Mr Russo in his report some five days earlier on 19 April 2006. 29 In that report, Mr Russo said there were two ways in which European Bank could have taken advantage of the increased return from euros as against US dollars. 30 First, it could have entered into futures contracts on a futures exchange. As Mr Russo explained in a later report, this would have involved European Bank entering into 69 to 70 standard futures contracts at US $125,000 each, rolling the position forward, at most, five times, the security being 3% of face value. European Bank had sufficient funds to meet the security and brokerage commissions. 31 Secondly, European Bank could have entered into forward exchange contracts with another bank. As Mr Russo explained in a later report, the security for such contracts would have been between nil and 5% of face value with no direct charges. European Bank had the funds to meet such security. 32 It was submitted that there was a third way in which European Bank could have proceeded. It had in excess of US $16 million in US deposits and it could have made the conversion to euros from those funds. It was submitted that European Bank having taken none of the three alternative courses, it was unlikely that it would have converted the Benford account funds to euros but for the order of 18 May 2004. European Bank's response 33 Ms Ihrig maintained that the liquidity management policy was only a guideline and the executive was permitted to exceed accumulated total open position limits and for periods in excess of three days. Since close attention was paid to daily European Bank treasury position summaries, currency exposure was closely monitored at each Friday executive meeting and daily by her and her staff. 34 Had the funds not been paid into court, Ms Ihrig said the US dollars would have been converted into euros, placed on deposit with a counterparty bank, coupled with a forward exchange contract to sell Euros and buy US dollars at a 2%, or around that percentage, stop loss. Ms Ihrig explained that if the Euros were on a term deposit for one month, the forward exchange contract would have a like maturity date. Ms Ihrig said the forward exchange contract would be for no more than 30 days. 35 A stop loss order is an instruction given to a counterparty bank with which the forward exchange contract is taken out that, should the market move against the currency of the term deposit by the specified percentage, the counterparty bank is authorised to sell that currency under the forward exchange contract thereby closing out any further risk of movement in the one currency against the other. In the transaction envisaged by Ms Ihrig, if the value of the euro against US dollars fell by 2%, the counterparty bank would have sold the euros for US dollars. 36 Ms Ihrig maintained that this course of action would not infringe European Bank's foreign currency open position limits because it would constitute a temporary excess for more than three days authorised prior to the excess by at least two members of the executive committee. This was because the initial investment was for no longer than 30 days and it remained an investment for no longer than 30 days each time the executive determined that the investment should be rolled over. In the interim, daily attention was paid to the question whether the open position should remain or should be closed out under the stop loss order. 37 European Bank did invest amounts in access of US $8 million in euros in April/May 2006 and again in early 2007. The Bank had earlier taken the position that it should move from US dollars to euros. Pacific Capital Growth Funds Ltd held a portfolio of investment funds in various currencies. It was managed by Pacific Fund Managers Ltd of which Ms Ihrig was the fund manager. European Bank invested funds through it. One of Ms Ihrig's responsibilities was to assist Philip Tremethick with the preparation of the quarterly performance report of Pacific Captial Growth Funds Ltd. 38 The market report for the US dollar managed currency fund in the report of 30 June 2004 recorded that despite the rebound in the US dollar since January 2004, Pacific Captial Growth Funds Ltd still had reservations as to its sustainability. It reported that the euro was quickly earning a reputation as a rival to the US dollar as the international reserve currency. Euro zone GDP was not so much smaller than that of the US, but unlike the US, the euro zone ran current account surpluses. Pacific Capital Growth Funds Ltd favoured the euro and recommended a currency distribution of 100% in euros for the US dollar managed currency fund. 39 That currency distribution was maintained in the Pacific Capital Growth Funds Ltd quarterly performance reports of 30 September 2004, 31 December 2004 and 31 March 2005. In the report for the quarter ended 30 June 2005, about the time the funds were released by the Prothonotary, the currency distribution in euros for the US dollar managed currency fund had fallen to 80% with 20% in NZ dollars. In the 30 September 2005 report it had fallen to 20% with 40% in NZ dollars and 40% in US dollars. 40 Consistent with the preference for euros, the solicitors for European Bank wrote to the solicitors for Mr Evans on 6 July 2004 seeking his consent to portion of the funds invested by the Prothonotary being converted into euros. On 15 July 2004, the solicitors sent a further letter requesting Mr Evans to consent to converting the whole of the funds to euros. On 21 July 2004, Mr Evans refused to agree to the conversion on the basis that while a slightly higher interest rate was possible, if there was adverse exchange rate fluctuation, the loss could be significant. On 26 July 2004, Mr Evans was put on notice that if he failed to obtain special leave to appeal to the High Court, or if an appeal to the High Court was unsuccessful, a claim would be made on his undertaking as to damages. 41 To Mr Russo's suggestion that European Bank could have entered into futures contracts through a futures exchange, Ms Ihrig said that European Bank did not enter into any futures contracts. She had no experience of such transactions nor, to her knowledge, had anyone at the Bank entered into a futures contract. 42 So far as forward exchange contracts are concerned, Ms Ihrig explained that European Bank did utilise forward contracts on a regular basis and this was disclosed in the extracts from its FX register. They were spot contracts of two days duration. Forward exchange contracts for longer periods were utilised by Pacific Capital Growth Funds Ltd in placing investments including investments placed with it by European Bank. The problem was that with other than spot contracts, the counterparty bank required Pacific Capital Growth Funds Ltd to maintain the full amount of the face value of the forward exchange contract on deposit in the currency it agreed to sell. 43 The suggestion to Ms Ihrig in cross-examination that European Bank had sufficient funds in its US deposits to take up a US $8.7 million conversion to euros was explained by Ms Ihrig in her fifth affidavit. A varying amount of approximately US $3.5 million was frozen as a result of a court order in New Zealand. A varying amount of approximately US $0.74 million was frozen as a result of a court order in Hong Kong. The balance included client loan and overdraft accounts and funds required to meet the day-to-day demands of the Bank's call and current account clients. Of a suggested balance of available funds in US dollars of $7 million in the Bank's treasury position summary for 27 May 2004, Ms Ihrig pointed out that over US $4 million was required to discharge customer loans. 44 There was also an open position in Australian dollars of $20.83 million. Ms Ihrig explained that a large proportion of those funds were also frozen and since counterparty banks required the currency being sold as security under forward exchange contracts, any surplus funds in Australian dollars could not be used as security for a forward exchange contract selling euros for US dollars. Credit issues 45 It was submitted that Ms Ihrig's evidence should not be accepted. First, it was argued that Ms Ihrig had changed her evidence of the way in which she would have converted US dollars to euros. In her first affidavit she said she would have converted the funds to euros and placed the euros on deposit. In her third affidavit she said that in accordance with her usual practice she would have taken out a forward exchange contract for no more than 30 days and immediately put in place a stop loss order of around 2%. It was submitted that this latter evidence did not involve any physical deposit of funds in euros and that Ms Ihrig had changed her evidence to include reference to a stop loss order after reading the first report of Mr Russo. 46 I do not regard Ms Ihrig to have changed her evidence. It was that euros would be physically deposited on a term deposit coupled with a forward exchange contract to sell euros for US dollars protected by a stop loss order. In cross-examination this exchange occurred at p 58 of the transcript: "Q: When you converted the funds and placed them on deposit the funds were physically placed in a third party bank on deposit, weren't they? A: In Euro dollars and we would have put in place the deal with that counterparty to sell the Euro to buy US at a two percent stop loss or around about." 47 The proposition was put to Ms Ihrig that she changed her evidence to include a stop loss contract having read Mr Russo's report of 19 April 2006. She denied the suggestion. It was also put that the investment in euros of April/May 2004 was made after reading that report to bolster European Bank's position. Ms Ihrig denied that suggestion. She denied that the decision to convert US $8 million to euros was part of any litigation strategy. 48 The question of a stop loss contract did not arise in Ms Ihrig's evidence until her fifth affidavit of 10 August 2007 in response to Mr Evans' persistence with the contention that the investment of the Benford account funds in euros was inconsistent with European Bank's own policies, practices and prudential strategies. If the investment was part of any litigation strategy one would have expected it to have been raised by Ms Ihrig in an earlier affidavit. 49 In his first report of 19 April 2006, Mr Russo mentioned the use of stop loss orders at [12.7]. The order for conversion of US $4 million to euros was made on 24 April 2006 notwithstanding the date of 21 April 2006 in the Bank's manual record of foreign currency trades. But the matter was discussed by Ms Ihrig with Heather Lindsay Sandell, an employed solicitor with the solicitors for European Bank at approximately 9.00 am on Friday 21 April 2006. Ms Sandell made a diary note of a request to obtain selling and buying rates for conversion from US $4 million to euros with a stop loss in place. Ms Ihrig sent Ms Sandell an email confirming the telephone conversation at 9.17 am on 21 April 2006 which included a request to put a stop loss contract in place. Ms Sandell did not send Mr Russo's report of 19 April 2006 to European Bank until 10.24 am on 21 April 2006. Ms Sandell was not cross-examined. 50 It is clear from the evidence that European Bank was contemplating converting US $4 million to euros with a stop loss provision before Mr Russo's report of 19 April 2006 was received by the Bank. I reject the suggestion that the investment was a contrivance to aid European Bank's litigation prospects. And I reject the suggestion that a stop loss contract was not part of the ordinary course of Ms Ihrig's investment procedures as she said. I reject the submission that Ms Ihrig mentioned stop loss contracts in her fifth affidavit only because of her reading of Mr Russo's report. 51 The euro deposit matured on 10 May 2006. On 2 May 2006 a further conversion of US $4 million to euros was made with a maturity date of 10 May 2006. 52 It was submitted that if stop loss contracts were in contemplation, the solicitors' correspondence seeking Mr Evans' consent to the conversion of US dollars to euros would have mentioned the protection from adverse movements in exchange rates available by means of a stop loss contract, and there was no mention of stop loss contracts in the correspondence. That is so, the mechanics of the conversion were not explained. What was sought was, simply, an agreement to a conversion. I would not infer that Ms Ihrig's proposed conversion did not involve stop loss contracts. In view of Ms Sandell's evidence no such inference could be drawn. 53 Ms Ihrig was criticised because while she did not record forward exchange contracts in treasury position summaries until settlement, on 10 May 2004 when both of the euro deposits from the respective US $4 million conversions matured, no reference was made to them and that continued to be the position until an offsetting transaction was entered into. While there may be some criticism of the recording processes of the Bank, it was a small operation in which the persons in control were aware of each other's responsibilities and they met frequently to decide investment issues. It does not support the theme that ran throughout the closing submissions on Mr Evans' behalf, that Ms Ihrig's evidence should be rejected because the mention of stop loss contracts and the decision to convert the two lots of US $4 million to euros stemmed from Ms Ihrig's reading of Mr Russo's first report. 54 In her third affidavit of 31 May 2006 in response to Mr Russo's suggestion that European Bank might have entered into futures contracts, Ms Ihrig said that the Bank did not have the volume of business to justify the costs of setting up futures contracts. She was cross-examined about this. She said that she had not herself carried out any determination of what volume of business was required to justify the costs. Nor had she investigated what the costs were. She said she based the observation on the first report of Mr Russo. When it was pointed out to her that Mr Russo did not mention the costs of setting up futures contracts in his first report, Ms Ihrig said that it was an assumption she had made based upon his observations. 55 It was submitted that this was indicative of the fact that when Ms Ihrig was confronted with a particular position she moved away from it and tried to concoct a story that was more plausible. I reject that submission. Ms Ihrig was subjected to an extensive and detailed cross-examination of matters that had occurred some years ago. She stood up to that cross-examination. In my view it is plausible that she was confused in her initial answer. She freely admitted that she had not done any costing analysis or analysis of the volume of business required to justify setting up futures contract. I reject the suggestion that this small aberration was indicative of Ms Ihrig concocting evidence. 56 An inconsistency in recording transactions was also relied upon as indicating that Ms Ihrig was prepared to conceal the true position of the Bank. The settlement of the transactions on 10 May 2006 were not entered because Ms Ihrig said she had not received confirmation that the Bank had received the deposits. On the other hand, the offsetting transaction was recorded before Bank confirmation was received. That inconsistency may lead to questioning the accuracy of the Bank's records. But it does not show that the transactions did not occur. It shows, merely, that the timing of the transactions in the Bank's records was inaccurate. It does not support the contention that Ms Ihrig's evidence should be rejected. Resolution 57 I accept the evidence of Ms Ihrig. She explained why European Bank would not adopt the alternative strategies of Mr Russo. Ms Sandell's evidence corroborates Ms Ihrig's statement that the placing of stop loss contracts was part of her general practice. And it establishes that the two conversions of US $4 million to euros in April/May 2006 were not made as a result of Ms Ihrig's perusal of Mr Russo's first report. 58 Ms Ihrig did not change her evidence of the mechanics by which the conversion to euros would take place. What occurred was that a general statement of converting US dollars to euros and investing the euros on term deposit was explained in more detail involving the forward exchange contract to sell euros for US dollars protected by a stop loss contract at about 2% as more details were called for in answer to Mr Russo's reports. 59 I find it probable that European Bank would have converted the funds invested by the Prothonotary from US dollars to euros but for the order of 18 May 2004. In my view this conversion was likely to have occurred in early July 2004 following the management meeting of late June 2004. Natural consequence of the order 60 It was submitted that the damages claimed by European Bank were not the natural consequence of the making of the interlocutory order. Reference was made to Di Ferdinando v Simon, Smits & Co Ltd [1920] 3 KB 409 at 415. Scrutton LJ said that just as a court had to exclude from the calculation of damages the subsequent change in the value of goods after the date of breach so, also, it had to exclude the subsequent change in the value of currency after the date of the breach. 61 But that was a case in which the defendants contracted to carry goods to be delivered in Italy on a specified date and in breach of their contract the defendants converted the goods. The court fixed damages as the value of the goods in Italy on the specified date. The Court of Appeal held that in arriving at the proper equivalent in British currency, the rate of exchange when the breach was committed, and not that prevailing at the date of judgment, was to be adopted. 62 That is a vastly different situation from that of a bank that dealt exclusively in foreign currency transactions. Furthermore, Di Ferdinando was overruled by the House of Lords in The Despina R [1979] AC 685 at 701. 63 It was submitted that the damages in this case were not the natural consequence of the order of 18 May 2004 because European Bank had not entered into a currency transaction of the order of US $8.7 million previously. Ms Ihrig agreed that the Bank had not entered into a transaction in an amount of $8.7 million but said that it had entered into transactions for amounts close to it. 64 The activities of European Bank were to take foreign currency on deposit from customers and to place those deposits with counterparty banks, not necessarily in the same currency. 65 Peter Middleton Simpson made a statement in which he investigated the ability of European Bank to place a euro deposit or deposits to an aggregate sum equivalent to US $8.73 million throughout the relevant period. He concluded the Bank could do so. He was not cross-examined. 66 Once it is accepted that European Bank could have converted US $8.7 million to euros, its loss of the greater return on funds by its being deprived from doing so by the interlocutory order means that the losses flowed naturally from that order. 67 Furthermore, not only was Ms Ihrig aware of currency conversions of the order of US $8.75 million in the past, the Bank did convert two lots of US $4 million to euros in April/May 2006. Circumstances of which Mr Evans had notice 68 In terms of the second limb in Hadley v Baxendale (1854) 9 Ex 341 (156 ER 145), it was submitted that European Bank's losses were not foreseeable from the circumstances known to Mr Evans on 18 May 2004. 69 If it is appropriate to apply Hadley to losses that are compensable under an undertaking as to damages, the conclusion that the losses arose naturally according to the usual course of things from the interlocutory order, within the first limb of that decision, makes it unnecessary to consider the second limb - such as may reasonably be supposed to have been in the contemplation of both parties at the time the order was made as the probable result of it - as that is an alternative. 70 In Air Express, however, Aickin J, with whom Barwick CJ agreed, spoke in terms of the damages being those that flow directly from the injunction and that could have been foreseen when the injunction was granted (146 CLR at 266-267) and Gibbs J spoke (at 312) in terms of damages confined to losses that are the natural consequence of the injunction under the circumstances of which the party obtaining the injunction had notice. Those approaches appear to require both limbs of Hadley to be satisfied. It was Stephen J who posed the single "but for" test (at 320). 71 It was submitted on behalf of Mr Evans, correctly in my view, that the second limb in Hadley is to be determined at the date of breach of contract and not at the date of judgment by the court (Kollman v Watts [1963] VR 396 at 400, Motor Accident Mutual Insurance Pty Ltd v Kelly (1999) 10 ANZ Insurance Cases 61-420 at 74,717-74,718). I therefore leave to one side the correspondence requesting Mr Evans' consent to a conversion of the funds invested by the Prothonotary from US to euros. 72 Ms Ihrig gave evidence that European Bank placed money on investment with group companies including Pacific Capital Growth Fund Ltd. The two lots of investments in euros totalling US $8 million were placed through a group company. 73 It was submitted that because European Bank itself had not made an investment of the order of US $8 million in euros, it could not be said that it was in the contemplation of the parties at the time the order was made that European Bank might convert US dollars to euros. I reject that submission. If it was in the contemplation of the parties that European Bank might cause the Benford account funds to be converted to euros, the mechanism by which that was achieved was irrelevant. The contemplation would be satisfied whether European Bank converted the funds in its own right or caused them to be placed with a group company for conversion. 74 It was submitted that it was not within the contemplation of Mr Evans when the order was made that the US dollar would fall in value against the euro. That, in my view, is too narrow an identification of the relevant contemplation. If it was in the contemplation of Mr Evans that European Bank as a trader in foreign currency, would convert funds from one currency to another in the expectation that the value of one currency would strengthen as against the other, it did not matter that he did not contemplate the particular currency fluctuation of which European Bank would have taken advantage if it was free to convert to a currency of its choice. The effect of the payment into court was to freeze funds in US dollars and deny European Bank the opportunity of converting funds to a currency of its choice. 75 It may be inferred that Mr Evans has reasonable commercial knowledge. He was appointed by a United States court as the receiver of the assets of Mr and Mrs Taves, the sixth and seventh defendants, and of the assets of Benford, JK Publications, Inc, the third defendant, MJD Service Corp, the fourth defendant, TAL Services Inc, the fifth defendant, and Discreet Bill, Inc, the tenth defendant. All those companies were controlled by Mr Taves who, it was alleged, had defrauded some 900,000 credit card accounts of a total exceeding US $47.5 million. 76 It can be inferred that Mr Evans knew that a bank earns its income on the difference between the interest that it pays its customers and the interest it can earn on their deposits and it can be inferred that he understood that the earnings of European Bank, that dealt exclusively in foreign currencies, came not only from interest rates but also from currency differentials. 77 I infer that it was within the contemplation of Mr Evans when the order for the payment into court was made, that it would have the effect of denying European Bank the opportunity to convert those funds from US dollars to other currencies to take advantage of market fluctuations in the value of those currencies. 78 I find that not only were the losses sustained by European Bank by reason of its inability to convert to euros the natural consequence of the payment into court, but also that the losses could have been foreseen when the order was made. Put another way the losses were the natural consequence of the payment into court under circumstances of which Mr Evans had notice. 79 It follows that I reject the submission that the damages claimed by European Bank were too remote. Mitigation 80 It was submitted that European Bank failed to mitigate its loss by taking one or other of the steps suggested by Mr Russo. I reject that submission for the reasons given by Ms Ihrig as to the inapplicability of the courses proposed by Mr Russo. Fairness 81 In terms of the definition of the usual undertaking as to damages in the Supreme Court Rules 1970, Pt 28 r 7(2) it was submitted that it would not be just to require Mr Evans to pay compensation because it would arise from a matter that was not within the contemplation of the parties at the time the order was made. It was not contemplated at that time that European Bank would alter its position by converting US dollars into euros. Furthermore, it was submitted that it would not be just for Mr Evans to compensate any loss that European Bank could have avoided but failed to do so. As I have rejected the underlying arguments, I reject the submission that an award of compensation in favour of European Bank would not be just. The interest deduction 82 The other aspect of the claim by European Bank relates to the amount withheld under the Supreme Court Regulation 2000, reg 13. Clearly, that deduction was the natural consequence of the payment into court under circumstances of which Mr Evans had notice. That loss would not have been sustained but for the payment into court. 83 There is no opposition to a claim for compensation under the undertaking in respect of the commission of US $3,077.71. Quantum 84 In my view, the appropriate period during which Mr Evans should give compensation under his undertaking is from 1 July 2004, just before the first letter seeking Mr Evans' consent to the conversion and just after the management meeting of late June 2004, to 18 March 2005, the date of the order for payment out of court. 85 The loss sustained by European Bank was for deprivation of a commercial opportunity of the type considered in Sellars v Adelaide Petroleum NL (1992-1994) 179 CLR 332 and in Norris v Blake (1997) 41 NSWLR 49. The proper approach, in my view, it to assess what is most likely to have been the return on an hypothetical euro investment during the relevant period and deduct the return actually achieved during that period by the investment in US dollars. Then it will be necessary to consider whether an adjustment should be made for contingencies, including the prospect that European Bank's return on the euro investment might have been greater. 86 Thus, the compensation should first be calculated as the difference between the value of a euro investment on 18 March 2005 calculated as if it had been rolled over from time to time during the period and the value of the US dollars held by the Prothonotary on that date, both converted into Australian dollars at the applicable exchange rates on 18 March 2005. 87 Ms Ihrig prepared some calculations based upon different hypotheses. I think her alternative C is the appropriate one. It is based on an actual investment of approximately EC 3.6 million with the National Bank of New Zealand. The calculation gives an increased return on investment in euros as against US dollars of US $810,298.12 before conversion to Australian dollars. 88 I would make little adjustment for contingencies. This is because Ms Ihrig's calculations if the euro investment had been for 7 day terms was US $810,310.52 and for daily terms at US $790,890.30 and Mr Russo's calculations based on Bloomberg published exchange rates for the period 27 May 2004 to 18 March 2005 varied from US $709,107.27 to US $957,339.27. Because of the close range in the calculations I would simply round Ms Ihrig's calculation based on the National Bank of New Zealand experience to US $800,000. 89 To that figure must be added the US $3,077.71 deduction, and the total is to be converted to Australian dollars at the exchange rate that applied on 18 March 2007. Appropriate orders 90 I will hear the parties on the appropriate orders for compensation including interest and I will hear the parties on costs. I direct the parties to bring in short minutes of order reflecting these reasons. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.