Tabruby Pty Limited v Bain Refco Commodities Limited [1986] ACTSC 79 (29 August 1986)

SUPREME COURT OF THE ACT

TABRUBY PTY. LIMITED v. BAIN REFCO COMMODITIES LIMITED
S.C. No. 338 of 1986
Contract

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Sheppard J.(1)

CATCHWORDS

Contract - trading on futures exchange - third party authorized to trade on plaintiff's behalf - he also trading on his own account and on account of other persons - defendant appropriating profits allocated by third party to third party's account and accounts of persons on whose behalf he traded including plaintiff - term said to be implied in contract between plaintiff and defendant entitling defendant to offset losses incurred by third party on his own account against profits appropriated to accounts of persons on whose behalf third party dealt including plaintiff - third party's ostensible authority.

HEARING

CANBERRA
29:8:1986

ORDER

Judgment be entered for the plaintiff in the sum of $14,304.65.

The defendant pay the plaintiff's costs of the proceedings.

NOTE: Entry of judgments is dealt with in Order 42 of the Supreme Court Rules.

DECISION

This is an action in which the plaintiff sues the defendant for $11,108.93 for moneys had and received by the defendant for the use of the plaintiff, for damages for breach of an agreement between the plaintiff and the defendant dated 10 May 1984 and for moneys said to be due from the defendant to the plaintiff on accounts stated between them. There is also a claim for interest pursuant to s. 53A of the Supreme Court Act 1933 from 9 August 1984 to the date of judgment.

2. The defendant is a company carrying on business as a commodity broker and trades on futures exchanges both in Australia and overseas. It is a member of the Sydney Futures Exchange. The plaintiff is a company incorporated in Queensland carrying on business in Toowoomba in that State. It is a trading trustee and carries on business for a trust known as the Campbell Family Trust. Until the transactions in question in this case it had no experience of dealing in futures. Its transactions with the defendant arose because it had money to invest and was advised by its secretary, Mr Walker, who carries on practice in Toowoomba as an accountant, that there were opportunities for investing in futures.

3. Mr Walker, himself, through his company, John Walker Services Pty Limited, was an investor. He has a brother-in-law, Mr. J.E.N. Swinson, who, between July 1983 and July 1984, traded in futures on the New York Exchange through the defendant. On 31 August 1983 he entered into an agreement with the defendant to enter into commodities contracts on his own behalf. In the course of his dealings he invested approximately $120,000 of his own money. In addition, he was authorized to trade on behalf of a number of parties including the plaintiff and Mr. Walker's company. Altogether, there were approximately 20 other people on whose behalf he traded. His practice was to allocate trades into which he entered on a particular day to those parties' accounts. In the long term Mr. Swinson's trading was not successful. He became indebted to the defendant on his own account in the sum of approximately $136,000. According to his evidence, the loss he suffered was his own and not that of any of the persons on whose behalf he traded.

4. One of the directors of the plaintiff is Mr. John Campbell. Mr. Campbell is a newsagent in Toowoomba. Mr. Walker is frequently in contact with Mr. Campbell in connection with Mr. Campbell's business affairs. Over a number of months they had discussions about futures trading. In April 1984 Mr. Campbell told Mr. Walker that he would be interested in entering into a trading agreement with the defendant. Mr. Walker obtained an agreement for Mr. Campbell through Mr. Swinson. The agreement was headed, "Bain Refco Commodities". Below that name appeared the words, "Client Agreement Overseas Exchange". The agreement was dated 10 May 1984. The parties to the agreement were the defendant, the plaintiff and Mr. Campbell who was described as "Covenantor". Mr. Swinson was not a party to it.

5. Clause 1 of the agreement contained a number of definitions. Clause 2 was headed "Appointment". It provided that in consideration of the defendant agreeing, at the request of Mr. Campbell, to enter into the agreement, the plaintiff and Mr. Campbell agreed that all contracts and any other transactions requested by the plaintiff were to be subject to and in accordance with the terms and conditions of the agreement and, except insofar as they might conflict with the terms and conditions of the agreement, in accordance with the constitution, rules, regulations, customs and usages of the relevant futures exchange. Clause 2 also provided that the plaintiff acknowledged that trading in futures contracts involved the risk of loss as well as the prospect of profit and that the defendant accepted no responsibility for the accuracy or consequences of advice or information supplied and was not to be held liable upon any ground for any loss whatsoever caused by the plaintiff acting on such advice or information. Clause 3 provided for payment, Clause 4 for the events which would involve the plaintiff being in default, Clause 5 for delivery, Clause 6 for indemnity, Clause 7 for the obligations of Mr. Campbell as covenantor and Clause 8 for a number of general matters.

6. Except in the respects later to be mentioned, it is not necessary to refer to the detail of these clauses. Suffice it to say that the agreement contained the terms and conditions upon which futures trading would be carried out by the defendant for the plaintiff. The agreement did not oblige the plaintiff to engage in any such trading; but if it did so, the agreement provided for the terms and conditions upon which that trading was to be done.

7. At the end of the agreement appeared the words, "To be traded by John Swinson". These words were added to the agreement by Mr. Walker before he sent it to Mr. Campbell for execution. It is apparent that Mr. Walker inserted these words because he wished to entrust the decisions of what futures trading should be engaged in by the plaintiff and the nature of that trading to Mr. Swinson. In other words, Mr. Swinson was to be the agent of the plaintiff who would give the defendant instructions as to the futures contracts which were to be entered into.

8. After the agreement was executed by the plaintiff it was returned to the defendant under cover of a letter from Mr. Walker in which he said that the directors of the plaintiff requested that the account be traded by Mr. John Swinson. The letter enclosed a cheque for $10,000 payable to the defendant and drawn by the plaintiff.

9. Statements of account sent the plaintiff by the defendant show that the plaintiff's cheque was received by the defendant on 16 May 1984. Between then and some time in July 1984 a number of futures contracts were entered into on the plaintiff's behalf by Mr. Swinson. A statement of account sent to the plaintiff by the defendant showed that as at 31 August 1984 the defendant was indebted to the plaintiff in the sum of $11,108.93, that being the amount for which it sues in this case.

10. I should interrupt this account of the facts of the matter and of the cases of the parties to mention that the plaintiff made demand on the defendant for the amount for which it now sues. Eventually a demand purporting to be pursuant to s. 364 of the Companies Act 1981 was served. The defendant thereupon commenced proceedings in this Court (No. S.C. 755 of 1985) seeking an injunction to restrain the plaintiff from presenting a winding up petition against it and from advertising that petition. The proceedings were commenced on 15 July 1985. Undertakings were given which preserved the status quo and, so I understand, attempts were made to settle the matter. These were unsuccessful and the proceedings instituted by the defendant were fixed for hearing on 24 February 1986. The hearing proceeded on that day and on the following day. Consequent upon suggestions made by me, the defendant in those proceedings, that is, the plaintiff in these proceedings, decided to institute proceedings to recover the amount in an ordinary action relying on the causes of action earlier mentioned. The proceedings for an injunction were stood over pending the outcome of these proceedings.

11. The advantage of the course that was that taken was there was removed from the issues between the parties the question of whether the resolution of the indebtedness or otherwise of the defendant to the plaintiff was an appropriate matter to be determined in the injunction proceedings. I gave directions enabling the evidence which had been used in the injunction proceedings, so far as it was relevant, to be used in the new proceedings, that is to say these proceedings, which the plaintiff has instituted. Unfortunately the matter could not continue on 25 February 1986 because the defendant in these proceedings wished to interrogate the plaintiff. The matter was eventually heard on 26 May 1986 when I reserved my decision.

12. The plaintiff's case is a simple one. It says that it had an agreement with the defendant setting out the terms on which futures trading would be conducted by the defendant on its behalf. The fact that the various contracts which were to be entered into were to be nominated by Mr. Swinson was not to the point. The agreement was one between the plaintiff and the defendant directly. On the face of the defendant's own accounts, the defendant acknowledged it owed the plaintiff the amount claimed. Whether the matter be looked at as one involving moneys being received by the defendant for the use of the plaintiff, as one involving a breach of contract by the defendant or as one involving there being an account stated between the parties, the plaintiff was plainly entitled to recover the sum of $11,108.93 which the defendant's account showed to be due.

13. The defence to the claim raised by the defendant is not without its complexity. In order to understand it, it is necessary to refer to some of the detail of the manner in which Mr. Swinson traded in futures both on behalf of himself and on behalf of other people. It is also necessary to understand a little of the way in which the futures market operates. The trading in which Mr. Swinson engaged both on his own behalf and on behalf of others, was in futures in silver. As mentioned, the trading was done on the New York Exchange. The defendant employed a night order clerk and it was through him that Mr. Swinson placed his orders. Mr. Swinson appears to have got into trouble when a fall in the price of silver, which he foresaw, proved to be greater than the fall for which he had allowed. As I understand his evidence, that is why he failed financially.

14. Any person operating on a futures market, whether as a speculator or as a person seeking to hedge against the risk of a loss when dealing in a separate transaction in an actual commodity, first of all acquires either a bought or a sold contract. Such a contract obliges the person acquiring the contract to supply or deliver a specified quantity of the commodity, in this case silver, at some future time at a price which is provided for in the contract. In order to close out the transaction, he needs either actually to deliver or actually take delivery of the specified quantity of the commodity on the due date (a course which is rarely followed), or to acquire a contract the reverse of which he holds. Thus if he has acquired a bought contract, he may close out by acquiring a matching sold contract.

15. Brokers such as the defendant, whether they operate on the Sydney market only, or on other futures markets as well, trade on the market as principals. They are obliged as principals to make up losses which they or their clients may make in the course of trading. Traders make profits or losses depending upon whether the contracts they acquire in order to close out a transaction are acquired for less or more than the contract originally purchased. Because brokers act as principals, they, in the event of default by their clients, are entitled to close out for them and thus crystallize the client's position, whether it be one of profit or loss.

16. It was Mr. Swinson's practice each evening to reach conclusions on the new transactions into which he wished to enter on behalf of himself and his clients and also to determine which transactions he wished to close out. His instructions would be given to the defendant's night order clerk who would carry out his instructions on the New York Exchange. The defendant did not know at the time the orders were placed whether they were being placed on behalf of Mr. Swinson personally or on behalf of one or other of the variety of people for whom Mr. Swinson acted. But what he did approximately 24 hours after each series of transactions was to allocate transactions either to himself or to particular persons from amongst those for whom he did business. Until Mr. Swinson lost a substantial amount of money these allocations were accepted by the defendant and given effect to.

17. The way in which the allocations were given effect to was to create a number of separate accounts in its books. One account was Mr. Swinson's personal account. Another account was known internally in the defendant's office as the "Broker 10 Account". Still other accounts were kept in the names of persons on whose behalf Mr. Swinson traded. This occurred in the case of the plaintiff and also appears to have occurred in the case of Mr. Walker's company. Notwithstanding the keeping of separate accounts in the names of persons who had entered into agreements with the defendant such as the plaintiff here and Mr. Walker's company, the transactions also appeared in the Broker 10 Account.

18. No one of the persons on whose behalf Mr. Swinson dealt had any dealings directly with the defendant except insofar as they may have entered into separate agreements with the defendant, paid money to the defendant or received accounts from it. What it now seeks to do is to offset credit balances in the accounts of those on whose behalf Mr. Swinson traded against Mr. Swinson's personal losses.

19. The general thrust of the submission made on behalf of the defendant was that the plaintiff, by nominating Mr. Swinson as the person to give orders on its behalf and entrusting him generally with the trading which the plaintiff wanted carried out, was bound by that trading and by the whole of the relationship and circumstances which surrounded the dealings between Mr. Swinson and the defendant. In the course of his submissions, counsel for the defendant said that he acknowledged that for his client to succeed, two questions had to be answered in the affirmative. These were:-

1. Was the trading arrangement between the defendant and Mr.
Swinson one which permitted the defendant to offset credit
balances in individual accounts with debit balances in other
individual accounts?
2. If yes, whether or not the plaintiff was bound by the trading
arrangements between the defendant and Mr. Swinson in a
contractual sense or, alternatively, whether the plaintiff
was estopped from denying that the trading was subject to the
arrangement between Mr. Swinson and the defendant?

20. In support of his submissions, counsel said that Mr. Swinson was given by the plaintiff a general authority to trade in circumstances where it knew of Mr. Swinson's method of trading including the allocation of profits and losses. If this was not known by Mr. Campbell, it was certainly known by Mr. Walker.

21. The specific submissions relied upon by counsel for the defendant were as follows:

1(a) An implied term of the Swinson/defendant trading
arrangements was that the defendant would have the right to
appropriate moneys from accounts traded by Mr. Swinson which
were in credit to accounts which were in debit.
(b) Notwithstanding the express terms of the contract, in
circumstances where Mr. Swinson was held out by the
plaintiff as having authority to trade on its behalf and
where the plaintiff knew that such trading included ex post
facto allocations, the implied term between Mr. Swinson and
the defendant became part of the arrangements between the
plaintiff and the defendant.

2. Mr. Swinson had ostensible authority from the plaintiff to
bind it so that his arrangements with the defendant became
part of the contract between the plaintiff and the
defendant. Counsel acknowledged that this submission
depended on there being the implied term referred to in the
first submission between Mr. Swinson and the defendant.
Counsel said that the plaintiff, by giving Mr. Swinson
authority to trade, clothed Mr. Swinson with authority to
trade in the same way as he had traded on behalf of himself
and other clients in regard particularly to ex post facto
allocations and, therefore, was bound by Mr. Swinson's terms
of trading.

3. The plaintiff knew that Mr. Swinson was trading outside the
terms of the agreement into which it had entered with the
defendant because the agreement related in terms to
contracts entered into by the defendant at the request of
the plaintiff. The trading was not therefore in accordance
with the contract. Reference was made to the definition of
"Contract" in the agreement. It is there defined to mean
any contract or option "which is entered into by Bain Refco
at the request of the Client for the purpose or sale or for
the right to purchase or sell or to require any other person
to purchase or sell commodities on any Exchange outside
Australia, being a contract or option which matches a
contract or option entered into between Bain Refco or (sic)
the Client". Counsel referred to the evidence which
established that the instruction to enter into a particular
transaction came from Mr. Swinson without specifying whether
he was entering into the transaction on his own behalf or on
behalf of another person. The allocation of the trading did
not come until afterwards. Counsel also referred to
evidence which established that Mr. Swinson's practice was
to divide profits equally amongst those on whose behalf he
had traded. It followed, in counsel's submission, that
losses incurred in respect of the totality of Mr. Swinson's
trading should be divided equally also.

4. Notwithstanding the terms of the contract, the plaintiff was
estopped by its conduct from asserting that it was entitled
to the whole of the profits allocated to it. The conduct
relied upon was the plaintiff's conduct in giving a general
authority to Mr. Swinson to trade in circumstances where it
was known to the plaintiff that trading allocations were to
be made after the transactions had been entered into.
Counsel acknowledged that this submission would not mean a
total failure of the plaintiff's claim but recovery by it of
a reduced amount.

22. I asked counsel for the defendant to specify precisely the implied terms upon which he relied. He did this in written submissions lodged after the conclusion of the hearing. The term which he contended should be implied into the contract between the defendant and Mr. Swinson was one of two alternatives set out in the submission. These were:-

"(a) The defendant was entitled to set off
against any losses incurred by John Swinson
in futures trading with it whether on its
own behalf or on behalf of persons who had
deposited money with the defendant and on
whose behalf John Swinson was authorised to
trade during the period that the losses were
incurred, such profits or other monies held
by it to the credit of either Mr. Swinson or
those persons on whose behalf Mr. Swinson
was entitled to trade, during the period
that the losses were incurred."

or

"(b) The defendant was entitled to set off
against any losses incurred by John Swinson
in futures trading with it whether on its
own behalf or on behalf of persons who had
deposited money with the defendant and on
whose behalf John Swinson was authorised to
trade during the period that the losses were
incurred, such profits or other monies held
by it to the credit of either Mr. Swinson or
those persons on whose behalf Mr. Swinson
was entitled to trade, during the period
that the losses were incurred pro rata to
the extent that any such profits had been
allocated to their account during the period
that the losses were incurred."

23. The term which counsel contended should be implied into the contract between the plaintiff and defendant was as follows:-

"That the plaintiff in authorising John Swinson to
trade on its behalf without limitation agreed
with the defendant to accept and be bound by the
terms and conditions upon which the said John
Swinson was entitled to trade with the defendant
whether such terms and conditions were express or
implied save only to the extent that such terms
were inconsistent with the agreement of 10th May,
1984 between the plaintiff and the defendant."

24. The circumstances in which a term will be implied into a contract have recently been the subject of judicial consideration in a number of cases. For present purposes it is sufficient to refer to what was said by the Privy Council in B.P. Refinery (Westernport) Pty Limited v. Hastings Shire Council (1977) 52 ALJR 20, namely (p. 26):-

"(1) it (the implied term) must be reasonable and
equitable; (2) it must be necessary to give
business efficacy to the contract, so that no term
will be implied if the contract is effective
without it; (3) it must be so obvious that it
goes without saying; (4) it must be capable of
clear expression; (5) it must not contradict any
express term of the contract."

25. This passage has been applied by the High Court of Australia in Codelfa Construction Pty Limited v. State Rail Authority of N.S.W. [1982] HCA 24; (1982) 149 CLR 337 and in Hospital Products Limited v. US Surgical Corporation (1984) 58 ALJR 587. The principles so stated are those which bind me in the consideration of the present case. I am of the clear view that no term of the kind contended for by counsel for the defendant should be implied in the contract between the plaintiff and the defendant. In my view such a term would not be reasonable and equitable, is not necessary to give business efficacy to the contract and is not so obvious that "it goes without saying".

26. It will be recalled that the plaintiff deposited with the defendant the sum of $10,000. If the defendant's submissions be correct, immediately that money was deposited with the plaintiff, the whole $10,000 became available to be offset against any losses which may have been incurred prior to the agreement between the plaintiff and the defendant by Mr. Swinson either on his own behalf or on behalf of other persons. I fail to see how a term having such an effect could be thought to be reasonable, necessary to give the contract business efficacy or obvious in the sense in which obviousness is required in this field of the law.

27. There are further considerations. What needs to be emphasised is that the plaintiff and the defendant did enter into an agreement themselves and did thereafter engage in a course of dealing which included the sending by the defendant of statements of account showing the plaintiff's position from time to time directly to the plaintiff. The agreement itself expressly refers in clause 2.2 to the risk of trading in futures. That clause in part provides that the client acknowledges and agrees that trading in futures contracts involves the risk of loss as well as the prospect of profit. A person trading in futures, if he is acting wisely, would need to know his current position at all times. The defendant recognized this; that is why it made sure that statements of the plaintiff's position were sent at regular intervals.

28. Both Mr. Campbell and Mr. Walker are business men, but are engaged in activities removed from the futures market. Both were unfamiliar with futures trading until their contact with Mr. Swinson. Both were at all material times well aware of the volatile nature of the market and the risk, emphasized in the agreement signed by both of them with the defendant, of losses as well as profits.

29. The agreement which the plaintiff signed did not, as I have earlier mentioned, require the plaintiff to engage in any futures trading. But, if it did, the trading would be engaged in in accordance with the terms of the agreement and in accordance with Mr. Swinson's instructions. The fact that he was to give the instructions was endorsed on the agreement itself and was part of it. Such endorsement qualifies the meaning of the definition of "Contract" in clause 1 of the agreement. Where the expression "at the request of the client" is used, it must be modified to mean "at the request of the Client through Mr. Swinson". In any event the parties soon established a course of dealing which involved overnight trading by Mr. Swinson and the allocation by him of profits to himself and the various persons on whose behalf he dealt with the consent of the defendant. That was done within the following 24 hours and was accepted by the defendant as the appropriate allocation for the adjustment of clients' accounts. The position may or may not have been different in relation to trading done by Mr. Swinson on behalf of other people who had no agreements directly with the defendant. It is not material to consider that question. But, so far as the plaintiff was concerned, there was an agreement and there was a direct accounting by the defendant to the plaintiff. The position may have been uncertain until Mr. Swinson's allocations were made and accepted by the defendant, but once they were accepted, as they were in fact accepted, the defendant became bound by the appropriation specified in its accounts and its statements. The fact that it had another account, the Broker 10 Account, and the fact that it had liability as a principal to other brokers, may have been important if a problem as to the liability of one client or another had arisen before any allocation and acceptance by the defendant. But that is not this case.

30. During the course of the argument reference was made to clause 8.1(c) of the agreement which provides that all statements of account as rendered to the Client from time to time are acknowledged to be correct unless written notice is given to the defendant within two days after receipt thereof. The provision, as counsel for the defendant submitted, is obviously included for the benefit of the defendant and not for the benefit of a client such as the plaintiff. But the provision serves to emphasize the importance in this field of statements of account and the need which parties have to know their position at any given time so that they may, if the market is moving against them, close out with the least possible loss.

31. In all the circumstances I am satisfied that on no basis should a term of the kind contended for by counsel for the defendant be implied into the agreement between the parties.

32. With these general matters in mind I can now approach the submissions made on behalf of the defendant. I deal with them as follows:-

1. This submission must fail because, whatever term may be
implied in the contract or contracts between Mr. Swinson and
the defendant, there is, for the reasons I have given, no
warrant for implying any term of the kind formulated by
counsel for the defendant in the contract between the
plaintiff and the defendant.

2. This depends on the implied terms relied upon by the
defendant in the contract or contracts between Mr. Swinson
and the defendant and upon there being ostensible authority
in Mr. Swinson to bind the plaintiff. I think there is a
serious question as to whether terms of the kind contended
for by the defendant were part of the relationship between
Mr. Swinson and the defendant. Terms of that kind may have
existed if they were qualified to relate only to the period
down to the time when the defendant committed itself to a
particular client such as the plaintiff by sending a
statement showing its then current trading position. Be that
as it may, I do not consider that Mr. Swinson had the
ostensible authority from the plaintiff for which the
defendant contends. The plaintiff had an agreement directly
with the defendant. The defendant dealt with Mr. Swinson who
acted on its behalf, but once appropriations were made by Mr.
Swinson, it accepted those appropriations and sent statements
direct to the plaintiff giving effect to them. To find the
plaintiff had clothed Mr. Swinson with the ostensible
authority relied upon by the defendant would be to cut across
the direct dealings which the plaintiff and the defendant
themselves had had. Furthermore, Mr. Swinson himself did not
at any time purport to exercise such an authority. On the
contrary, his course of dealing was such as to indicate quite
clearly to the defendant that he was irrevocably
appropriating particular profits to the accounts of those on
whose behalf he traded including the account of the
plaintiff. The defendant accepted those appropriations.

3. This submission really depends upon the meaning to be given
to the word "Contract" in clause 1 of the agreement.
Whatever the words may have meant in the absence of the
written words at the end of the contract indicating that
trading was to be done through Mr. Swinson, they must be
qualified to accommodate those words which the parties
intended to be part of the agreement.

4. I see no reason why the defendant should not be held to its
statement. It told the plaintiff, which had deposited with
it $10,000, that the $10,000 had grown to a little over
$11,000. There is absolutely no reason why that statement
should not be given effect to.

33. It follows that I reject each of the submissions made on behalf of the defendant. It also follows that the two questions posed at the outset of his submissions by counsel for the defendant should be answered favourably to the plaintiff.

34. The remaining matter is the question of interest. Counsel for the defendant conceded that the plaintiff was entitled to interest at the usual rate for the period for which it was claimed. The usual rate of interest awarded in the Supreme Court of the Australian Capital Territory in a matter such as this is 14 per cent per annum. Accordingly, there will be added to the amount of the judgment to which the plaintiff is entitled the sum of $3,195.72 for interest.

35. I direct the entry of judgment for the plaintiff in the sum of $14,304.65. I order the defendant to pay the plaintiff's costs of the proceedings.