NSWNSWSC

Barry Smith Grains Pty Limited (in liquidation) v Riordan Group Pty Limited

[2010] NSWSC 1291

Supreme Court of NSW|2010-10-28|Before: Hammerschlag J, Einstein J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2010-10-28

Before

Hammerschlag J, Einstein J

Source

Original judgment source is linked above.

Judgment (19 paragraphs)

[1]

INTRODUCTION AND BACKGROUND 1 HIS HONOUR: This is an appeal, brought pursuant to s 38(2) of the Commercial Arbitration Act 1984 (NSW) ("the Act") on a question of law arising out of an arbitral award. It is brought with leave granted by the Court (Einstein J) on 17 September 2010.

[2]

2 I shall refer to the appellant as "BSG" and to the respondent as "Riordan". The contracts and their close out 3 At all material times the parties were grain traders. They entered into seven contracts for the purchase and sale of grain at fixed prices for future delivery. Each contract was assigned a multi-digit number, but for ease of reference in the arbitration and in these proceedings the parties numbered them 1 to 7. I shall do the same. 4 Each contract was entered into through a commodities broker who acted for both parties. Each contract incorporated as terms the Trade Rules of the National Agricultural Commodities Marketing Association ("NACMA"). The NACMA Rules govern all disputes of a mercantile, financial or commercial character connected with grain, feed, oilseeds or other agricultural commodities arising between members and are stated to be the basis of arbitration on such controversies. 5 BSG was the buyer and Riordan the seller under contract numbers 3 (contract P201829 dated 16 March 2007), 4 (contract S11117 dated 2 May 2007), 6 (dated 23 August 2007) and 7 (contract S11530 dated 3 September 2007). 6 BSG was the seller and Riordan the buyer under contract numbers 1 (dated 14 September 2006), 2 (dated 7 March 2007) and 5 (dated 2 May 2007). 7 NACMA Rule 17.6 provides for the closing out at fair market price of contracts where, before their fulfilment, a party commits an Insolvency Event (which includes, in respect of a person, an order being made for its winding up). NACMA Rule 26 requires disputes arising out of or relating to contracts subject to the Rules to go to arbitration. 8 The NACMA Rules incorporate the NACMA Dispute Resolution Rules. Article 25.1.f of the NACMA Dispute Resolution Rules provide as follows: Article 25: Power of Arbitrational Tribunal 1. Unless the parties at any time agree otherwise in writing, the Tribunal shall have the power to do anything, on the application of any party or of its own motion, but in either case only after giving the parties a reasonable opportunity to state their views, including: […] f. To decide whether or not to apply strict rules of evidence as to admissibility, relevance or weight of any material tendered by a party on any matter of fact or expert opinion; and to determine the time, manner and form in such material should be exchanged between the parties and presented to the Tribunal; 9 On 26 September 2007, the Court appointed Messrs Peter Marsden and David Kerr to be provisional liquidators of BSG.

Barry Smith Grains Pty Limited (in liquidation) v Riordan Group Pty Limited - [2010] NSWSC 1291 - NSWSC 2010 case summary — Zoe

[3]

10 On 27 September 2007, the provisional liquidators wrote to Riordan in relation to contracts 3 and 4 asserting that an insolvency event under Rule 16 of the NACMA Rules had occurred by their appointment. 11 On 2 November 2007, the provisional liquidators wrote to Riordan separately in regard to each of contracts 3, 4 and 7 ("the 2 November letters") claiming that they had been closed out at fair market price under the NACMA Rules as a result of the insolvency event and that on close $223,000 was owing to BSG under contract 3, $217,000 under contract 4 and $70,000 under contract 7, making a total of $510,000. The 2 November letters are further referred to below. 12 On 11 February 2008, Messrs Marsden and Kerr were appointed joint liquidators to BSG. The arbitration 13 On 25 September 2008, BSG (represented by the liquidator) called for arbitration. 14 In its written Claim, BSG alleged that it was the trustee of two discretionary trusts being the Barry Smith Family Trust ("Trust 1") and the Barry Smith Family Trust No 2 ("Trust 2"). It alleged that it had entered into contract 7 as trustee of Trust 1 and contracts 3 and 4 as trustee of Trust 2. (In par 2.3 of its Claim it pleaded that documents recording those contracts were generated by BSG and Riordan). 15 In its written Points of Defence, Riordan pleaded, relevantly, as follows: 2.2C It says further that each of Transactions 1 to 7 referred to above was entered into between Riordan and BSG in its own capacity, and not in the capacity of trustee of any trust, and in that regard it refers to the brokers' notes of the Transactions. 2.2D It says further or alternatively, that if it is held that Transaction 7 was entered into between Riordan and BSG in its capacity as trustee of the Barry Smith Family Trust as alleged (which is denied), BSG entered into Transactions 1, 2, 5 and 6 also in that same capacity. 2.3 It: (a) refers to paragraphs 2.1A to 2.2D above; (b) says that each Transaction was concluded through a broker and evidenced by a broker's note, signed by the broker only; (c) says that any confirmations issued by the parties in respect of a Transaction do not constitute contractual documents, and specifically none of the confirmations annexed to the Points of claim is signed by both parties; (d) refers to Trade Rule 1.2.3, which reflects the common understanding of the domestic grain industry that a contract negotiated through a broker is principally evidenced by the contract confirmation created by the broker (known in the trade as the 'broker's note'); (e) says that in respect of each Transaction, it was the broker's note that constituted the contract and recorded its terms, and the broker's note prevailed to the extent of any inconsistency with any confirmations of that Transaction by the parties; (f) says that at no time during the course of dealings (which took place over a number of years) between Riordan and BSG did BSG or any broker disclose to Riordan that BSG was acting as trustee of any trust; and (g) otherwise denies all the allegations in paragraph 2.3. 16 Riordan's Points of Defence went on to plead that BSG owed it money on the close out of contracts 1, 2, 5 and 6 and that its claims were to be set-off under s 553C of the Corporations Act 2001 (Cth) ("Corporations Act") against any amount payable by it to BSG. 17 NACMA Rule 1.2.3 provides for the issue by a broker through whom a trade is made to send written "Contract Confirmation" to each of the principals, for them to check the specifications and upon finding any difference to notify the other party to the contract. It provides further that, absent notification, the document shall be fulfilled in accordance with the terms of the "Contract Confirmation" issued by the broker. 18 Section 553C(1) of the Corporations Act provides as follows: 553C Insolvent companies - mutual credit and set-off (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. 19 Riordan asserted a total set-off of $369,465.64, made up of $8,465.64 in respect of contract 1, $223,000 in respect of contract 2 and $138,000 in respect of contracts 5 and 6. 20 In its Points of Reply, BSG took issue with Riordan's claimed set-off in respect of contracts 3 and 4. It pleaded that s 553C of the Corporations Act did not apply because the debts and dealings asserted to give rise to the set-off were not mutual as the section requires, in that contracts 3 and 4 were entered into by it as trustee of Trust 2 whereas contracts numbers 1, 2, 5 and 6 were entered into by it as trustee of Trust 1.

[5]

23 In a joint award issued on 30 April 2010, the arbitrators upheld Riordan's claimed set-off. After taking all contracts into account, they awarded BSG $140,534.40 plus interest and costs. 24 The arbitrators dealt with set-off as follows: 2.2 Set-off under the Corporations Act We cannot deal with the point as quickly and it is necessary here to set out some of the background. In issue are 7 contracts between the parties. The Claimant has put 3 in issue. The Respondent puts a further 4 in issue. The Respondent has identified the contracts as Transactions 1-7. We have adopted that description in the annexed spreadsheet which lists the various contract documents tendered by the parties with reference to the underlying Transaction. There does not appear to be any dispute that there were seven Transactions. What is material is the identity, or possibly the capacity, of the parties to the contracts. The Claimant says that it was the trustee of 2 discretionary trusts, being the Barry Smith Family Trust (Trust 1) and the Barry Smith Family Trust No. 2 (Trust 2). The Claimant puts 4 documents in evidence of the 3 contracts; 1. "Barry Smith Grains" Purchase Contract Confirmation no. S11530 dated 3 September 2007 for 1000mt barley, "track" Port Kembla for delivery 1 December 2007 to 31 January 2008 at $385mt ("Document 1"); 2. Riordan Grain Services Sale Contract no. S11530 dated 1 September 2007 for 1000mt barley, "track" Port Kembla for delivery 1 December 2007-31 January 2008 at 385mt ("Document 2"); 3. "Barry Smith Grains-Moree" Purchase Contract Confirmation no. P201829 dated 16 March 2007 for 1000mt barley "track" Newcastle for delivery 1 November 2007-31 December 2007 at $217mt ("Document 3"); 4. "Barry Smith Grains-Moree" Purchase Contract Confirmation no. S11117 dated 2 May 2007 for 1000mt barley "track" Newcastle for delivery 1 November 2007 to 31 December 2007 at $223mt ("Document 4"). Documents 1 and 2 appear to evidence the same contract (that is, Transaction 7). Document 1 is headed "Barry Smith Grains", and includes "ABN:76 872 775 831" and a Temora address. The Buyer is identified as "Barry Smith Grains". Document 2 identifies the Buyer as "Barry Smith Grains" with a Temora address. Document 1 is unsigned. Document 2 appears to be signed by the Buyer. Documents 3 and 4 are headed "Barry Smith Grains - Moree" and includes "ABN: 50 549 765 502". They both identify as Buyer "Barry Smith Grains - Moree". They are both unsigned. ABN 76 872 775 831 relates to "The Trustee for Barry Smith Family Trust." ABN 50 549 765 502 relates to "The Trustee for Barry Smith Family Trust No2". The Respondent puts 7 documents in evidence. They are all brokers' notes issued by Woodside Rural Brokers, Woodside Commodities, Max Perkins Commodity Broker or Teague Australia Pty Ltd. The broker's notes issued by Woodside Rural Brokers or Woodside Commodities identify "Barry Smith (Grains) Pty Ltd" with a Temora address as the buyer or seller respectively. Both Perkins and Teague identify "Barry Smith Grains", with a Temora address, as buyer or seller as appropriate. In our view it is reasonably clear that the Barry Smith entity which contracted in each case was the Claimant, Barry Smith Grains Pty Ltd, as principal and not as trustee or agent for any trust. We do not doubt that it was a trustee. However there is no evidence that at the time the brokers bound the parties to the contracts the brokers were at all conscious of the differing capacities in which the Claimant may have been acting. We agree with the Respondent's submission that the primary document for each Transaction is the broker's note and not any subsequently prepared contract confirmation, or invoice. How the Claimant chose to account for those contracts in its own books and records is not really the issue here. We find that in each of the seven contracts the Respondent contracted with the Claimant, each as principal. (emphasis added) Save for what we say below, it follows that we prefer the Respondent's submissions in relation to the issue of set off. 2.3 The Quantum of Set-Off The Claimant claims A$510,000 pursuant to Transactions 3, 4 and 7. The Respondent claims a set-off of $138,000 in respect of an agreed wash-out of Transactions 5 and 6. The Respondent is entitled to further set-offs as follows; 2.3.1 Transaction 1 37.13mt remained to be delivered as at 28 September 2007. The contract price was $257mt ($239mt plus 8 months of carries of $2.25mt/month). The close out price was $485mt, leaving a balance in favour of the Respondent of $8465.64 (37.13 x $228). 2.3.2 Transaction 2 1000mt undelivered as at 28 September 2007. The contract price was $213mt. The wash-out price was $436mt resulting in a balance in the Respondent's favour of $223,000 (1000mt x $223).

[6]

FINDINGS Accordingly, we find: · All open contracts between the parties need to be considered. The "Trust 1" and "Trust 2" status was not clear at the time of trading or contract confirmations. It appears to be an internal audit issue in any event; · As per clause 17.6 all contacts are to be taken into account and "washed-out" at the Fair Market Price as at 28 September 2007 (which we note was not challenged by either party); · As per section 553C of the Corporations Act, the parties are entitled to mutual credit and set-off. · After all contracts are taken into account, $140,534.40 is payable by the Respondent to the Claimant. THE APPEAL 25 Under s 38(2) of the Act, an appeal lies (either by consent or with leave) to the Court on any question of law arising out of an award. 26 Section 38(5) of the Act provides, relevantly, that leave is not to be granted unless the Court considers that there is a manifest error of law on the face of the award. 27 Section 38(3) of the Act provides as follows: 38 Judicial review of awards […] (3) On the determination of an appeal under subsection (2) the Supreme Court may by order: (a) confirm, vary or set aside the award, or (b) remit the award, together with the Supreme Court's opinion on the question of law which was the subject of the appeal, to the arbitrator or umpire for reconsideration or, where a new arbitrator or umpire has been appointed, to that arbitrator or umpire for consideration, and where the award is remitted under paragraph (b) the arbitrator or umpire shall, unless the order otherwise directs, make the award within 3 months after the date of the order. 28 By Summons and Commercial Arbitration List Statement sued out of the Court on 7 June 2010, BSG sought leave to appeal. It asserted the following manifest error of law on the face of the award:

The Arbitrator's error appears under the heading "2.2 Set off under the Corporations Act" and is found in particular in the third and fourth paragraphs on page 4 of the determination.
The Arbitrators erred, in considering for the purposes of s553C of the Corporations Act the capacity in which the Plaintiff held the benefit and burden of contracts entered into between the Plaintiff and the Defendant, by looking to the knowledge of the counter party to the contracts (i.e. the Defendant and/or the brokers though (sic) which the contracts were negotiated) rather than the conduct of the Plaintiff in allocating the contracts to different trusts.
The Arbitrators: (a) failed to recognise that a trust may be created by unilateral action of the settlor without the need for agreement or acceptance by any other person (Mallott v Wilson [1903] 2 Ch 494). (b) failed to recognise that to be the subject of set off pursuant to s553C Corporations Act, debts must be owed between the same persons in the same capacities and that the time at which the capacity in which each party owes or is owed a debt is to be determined is the date of liquidation, not the date of entry into the contracts pursuant to which the debts arose (Gye v McIntyre (1991) 171 CLR 609, 623 and 626-627).

[7]

29 The third and fourth paragraphs on page 4 of the award are those paragraphs of the award quoted above to which emphasis has been added. 30 On 17 September 2010, Einstein J gave leave to appeal for the following reasons extracted from his Honour's judgment: 18 It is apparent from the above-extracted passage of the arbitral award that the arbitrators: relied on the brokers' lack of knowledge of the plaintiff's various capacities at the time of contracting; focussed on the brokers' notes as the relevant contractual documents; and dismissed how the plaintiff chose to account for the contracts in its own records as irrelevant. 19 In my view this part of the arbitrators' reasoning in question contains a manifest error of law on the face of the award- in the sense of an error that is evident or obvious and supported by powerful reasons - for the following reasons. Firstly, the arbitrators plainly focussed upon the situation at the time of contracting, but s 553C applies to "an insolvent company that is being wound up". Thus the relevant focus is on the situation at the time of the plaintiff's liquidation, not at the time of contracting. Secondly, the arbitrators clearly placed weight on the brokers' lack of knowledge of the capacity in which the plaintiff may have been acting. However, such knowledge is not a relevant consideration when applying s 553C. Rather, the focus is on the capacity in which the plaintiff held the contracts at the time of liquidation (irrespective of some other party's knowledge of that capacity). The arbitrators further incorrectly dismissed how the plaintiff chose to account for the contracts in its internal records as irrelevant - and this error was repeated in the findings of the award where the distinction between trust 1 and trust 2 was dismissed as "an internal audit issue" - when in fact that evidence would appear to go to the capacity in which the plaintiff was acting at the point of liquidation. 20 The defendant submitted in this Court that the arbitrators' finding that the plaintiff was contracting as a principal was a finding of fact and thus did not disclose an error or question of law. However, in my view the arbitral finding does disclose a manifest error of law in that by misconstruing s 553C the arbitrators did not make the proper inquiry required of them by the relevant principles.

[12]

46 It may be accepted that the answer to the question whether BSG's rights under contracts 3 and 4 were held by it other than beneficially would not be affected by whether BSG or its agents knew of the trust. However, in my view, sensibly and reasonably viewed, the arbitrators did not proceed on a contrary footing. 47 The starting point was that each contract was evidenced by a broker's note, of the type contemplated and required by NACMA Rule 1.2.3, in which BSG was referred to as "BARRY SMITH (GRAINS PTY LTD)" or "BARRY SMITH GRAINS" with an address at Temora NSW. There was nothing in any of the broker's notes which evinced the existence of any trust capacity. On their face therefore, the broker's notes reflected mutuality in dealings. 48 The primary evidence apparently relied upon by BSG to establish the existence of the trust was the reference on the Purchase Contract Confirmations to ABN numbers which the arbitrators recorded respectively "related to" Trust 1 and Trust 2. 49 In the Purchase Contract Confirmations for contracts 3 and 4 Barry Smith was shown as: BARRY SMITH GRAINS - MOREE ABN: 50 549 765 502 PO BOX 1531 MOREE NSW 2400 50 In the Purchase Contract Confirmation for contract 7 Barry Smith was shown as: BARRY SMITH GRAINS NGR 11133255 ABN: 76 872 776 831 P.O. BOX 187 TEMORA NSW 2666 NGR 11133255 51 In my view, the arbitrators' reference to the absence of evidence that the brokers were conscious of the asserted differing capacities reflected in lay and commonsense terms the well-known principle stated in Hampton Court Ltd v Crooks (1957) 97 CLR 367 at 371 that a failure to adduce evidence must be evaluated in the light of the power of a party to adduce it. 52 The arbitrators were faced on the one hand with primary contractual documentation reflecting BSG as the contracting entity and giving no inkling that BSG was acting other than in its own right, and on the other hand with a dearth of evidence from BSG (which it had the power to adduce) that when it contracted, it did so as trustee. 53 Despite it being within its own power to do so, BSG adduced no direct evidence of the origin and existence (or continued existence) or terms of the trust. It tendered no trust deed or constituent documents. It identified no beneficiary. It adduced no evidence of any communication with any beneficiary or any counterparty before or at the time of the contract which might have gone to establishing that it contracted in any capacity other than in its own right. 54 The arbitrators' reference to there being no evidence that the parties' brokers knew of BSG's differing capacities is, in my view, to be read in this light and in the context that BSG had adduced no evidence pertinent to the date of contract that it was acting in a trust capacity. Knowledge on the part of the brokers might have constituted such evidence.

[18]

Bank: Macquarie Bank BSB & Account No: 182-222 Account Name: 255592412 69 The letter in relation to contract 4 concluded in the same way but referred to the sum of $217,000. 70 The letter in relation to contract 7 was captioned: BARRY SMITH GRAINS PTY LIMITED (PROVISIONAL LIQUIDATOR APPOINTED) ABN 37 003 151 166 BARRY SMITH FAMILY TRUST (RECEIVER AND MANAGER APPOINTED) ABN 76 872 775 831 Contract Number: S11530 71 It enclosed a tax invoice on BSG letterhead and requested a cheque made payable to "Barry Smith Family Trust (Receivers and Managers Appointed)". 72 It seems to me that these documents hardly prove the existence of any trust let alone that BSG contracted as trustee. The 2 November letters make no assertion in express terms that BSG did so. Even accepting that their contents might rationally (in this case positively) affect (directly or indirectly) the assessment of the probability that BSG contracted as trustee, the fact remains that the primary contract documentation prima facie shows mutuality and BSG, as I have said earlier, adduced no evidence of the origin or terms of any trust or of any dealings which might have established that it contracted as trustee. 73 Approaching the matter on the footing that the weight of evidence is to be considered in the light of the power of the parties to produce it, I would reach the same conclusion that the arbitrators reached. Put another way, it seems to me that once the primary contract documentation was in evidence, there lay on BSG an evidentiary burden to establish that it contracted as trustee, which burden it failed to discharge. CONCLUSION 74 The appeal is dismissed with costs. 75 In Gordian Runoff Ltd v Westport Insurance Corporation (2010) 267 ALR 74 at [116] the Court of Appeal reiterated that for the purposes of s 38(5) of the Act a manifest error on the face of the award must be more than arguable; it must be evident or obvious; there must be powerful reasons leaving little or no doubt on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law. 76 I should observe that it necessarily follows from the conclusions which I have reached that I do not consider that there was manifest error on the face of the award justifying the grant of leave to appeal, and would myself have refused it. **********

Barry Smith Grains Pty Limited (in liquidation) v Riordan Group Pty Limited

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