Johnstone v Knight [2006] QCA 322

[1]

[1] de JERSEY CJ: I have had the advantage of reading the reasons for judgment of Jerrard JA. I agree that the application should be dismissed with costs, for the reasons expressed by His Honour.

[2]

[2] McMURDO P: The applicant has not established that this is a suitable case for the granting of leave to appeal under s 118(3) District Court of Queensland Act 1967 (Qld). The case does not raise any substantial question of law of wider importance than between the present parties. As Jerrard JA demonstrates in his reasons the applicant has not shown any error on the part of the District Court judge whose order is the subject of this application. The application for leave to appeal should be refused with costs.

[3]

[3] JERRARD JA: This is an application for leave to appeal from a judgment of the District Court delivered on 12 May 2006, allowing an appeal from a judgment in the Magistrates Court given on 15 December 2004. In 2001 Mr Knight gave Mr Johnstone $30,000, which Mr Knight claimed in the proceeding was a loan repayable by Mr Johnstone in accordance with a written document signed by both of them on 4 March 2001. Mr Johnstone claimed in defence that the $30,000 was a contribution by Mr Knight to a joint venture which failed, and is not repayable. The learned Magistrate found in Mr Knight's favour, and the learned District Court Judge reversed that decision on appeal.

[4]

[4] Mr Knight argues that leave should be granted by this Court to appeal from that decision because of errors by the learned District Court Judge, who misinterpreted the written document and who failed to take relevant matters into account. Further, the judgment was against the evidence. If Mr Knight established those matters on the appeal, he would satisfy the test described in Pickering v McArthur [2005] QCA 294[1], namely that "[l]eave will usually be granted only where an appeal is necessary to correct a substantial injustice to the applicant, and there is a reasonable argument that there is an error to be corrected."[2]

[5]

[5] Mr Knight and Mr Johnstone were the only witnesses at the trial. The reasons for judgment of the District Court recorded that they had been friends for a long time, and that Mr Knight had engaged in 1995 in an unsuccessful venture in futures trading, in which he had lost about $5,000 of $10,000 invested in that pursuit. He told Mr Johnstone about it, and the latter became interested in trading himself. Mr Johnstone had a computer, with internet access and an office in his home, and he set up a futures account with a broker. A few days before 4 March 2001, they spoke about Mr Knight putting money into that account.

[6]

[6] As it happened, each man had inherited about $30,000 at the same time, and Mr Knight had his $30,000 available by early March 2001. Mr Johnstone was expecting a similar amount, but he actually got his in September 2001, because of a delay in the administration of his father's estate. Mr Knight's evidence at the trial before the Magistrate was that he had agreed to lend $30,000 to Mr Johnstone on certain conditions, and that handwritten terms were agreed. There was further oral agreement about other matters:

[7]

• Mr Johnstone would pay 50 per cent of any profits generated to Mr Knight;

• that a "stop loss order" would always be used in every case to minimise the impact of losses;

• that Mr Johnstone's trading and accounting had to be open to inspection by Mr Knight;

• that Mr Knight had the power to veto any particular trade;

• there could be a partial repayment of the $30,000; and

• Mr Johnstone's trading would always be done according to "the golden rules", those being some trading principles upon which the two men had agreed.

[8]

[7] The written agreement, signed by both, of 4 March 2001 reads as follows:

[9]

"I, Peter Keith Johnstone, of 104 Glen Retreat Road, Mitchelton, do hereby solemnly swear that my friend Mark Knight has offered me a loan of thirty thousand dollars ($30,000) which he intends to deposit to my account with Ord Minnett, to be used at my discretion, and to be repaid, whatever balance is owing, according to our agreement, whenever Mark desires, provided there is five (5) business days notice given.

'PK Johnstone' 'M Knight.'"[3]

[10]

[8] Ultimately the decision in each of the courts below turned on the phrase "and to be repaid, whatever balance is owing, according to our agreement". The learned District Court Judge recorded that it was well understood by both men that trading in futures was something that would generate either profits or losses, and that they expected to make profits. Mr Johnstone's evidence included a reason for describing $30,000 as a loan when, according to him, it was not; that was that Mr Johnstone knew he could not act as an unlicensed securities adviser and that he had spoken to Mr Knight about that, and said "call it a loan because I am not an investment advisor and I wasn't making trades for you, I was making them on our behalf at our risk, not for you." However, Mr Johnstone's evidence did not include that there was an oral agreement to split profits and losses 50/50, although he did swear that:

[11]

"We were doing everything 50/50. We put in the same amount of money to begin with, we took out about $1,000 each."[4]

[12]

Later he said, regarding who would pay for the brokerage fees:

[13]

"[W]ell both of us, we were going 50/50 in everything; the profits, the costs and the losses. It was very simple."[5]

[14]

[9] Mr Knight deposited his $30,000 into Ord Minnett's futures account on 5 March 2001. Mr Johnstone said he opened a separate account with his broker, and Mr Knight said that Mr Johnstone told him that the account at Ord Minnett's was under the name of "Dangerous Investments". Mr Johnstone paid in his $30,000 some time after the September 11 attacks on the World Trade Centre in New York, which had caused the market to decline sharply. In December 2001 Mr Knight asked for $1,000 back, which was returned to him, and Mr Johnstone then also withdrew $1,000 on his own behalf. Mr Johnstone's evidence was that he had done that to:

[15]

"keep the books square... so that there wouldn't be any tricky mathematics later on we both took out $1,000...I just did that to keep the accounting simple."[6]

[16]

[10] Around July 2002 Mr Knight asked Mr Johnstone to supply more regular information about the state of the account, and asked to be emailed once a week. He then got regular reports up to April 2003. On about 17 May 2003 he went to see Mr Johnstone in person, and tape recorded the conversation; Mr Johnstone was apparently unaware it was being recorded. The transcript was put in evidence, and it records Mr Johnstone explaining that the account had gone down (to zero) very quickly, and Mr Knight contradicting him by the statement that the account had gone from $25,000 to $4,000 or $5,000 over a period of months: "I looked at the accounts". It also records Mr Knight reproving Mr Johnstone with the observation that they had had two paramount agreements, of which one was that Mr Johnstone would always tell him if there was a loss of 10 per cent or any substantial loss in the account; the other was that Mr Johnstone would always use stop loss orders. Mr Johnstone agreed that he had not told Mr Knight, for example, that he had lost $7,000 in one trade, that he was not keeping Mr Knight fully apprised "to avoid you being stressed", and Mr Johnstone explained his version of the stop loss method.

[17]

[11] In that conversation Mr Johnstone said that Mr Knight could bear with him or pull out at any time in the future, and Mr Knight replied that "It's been two years and 60,000 dollars", that "[e]verything has been lost", and that it was foolish to say that he could pull out. Mr Johnstone said that by using his own funds he would claw his way back to profit; if at any time Mr Knight thought the situation was hopeless in the future, and (if) there was money in the account, and Mr Knight wanted to get out, he could do so, withdrawing $1,000, $2,000 "or $3,000 or $4,000, or whatever".

[18]

[12] Mr Knight, who knew the conversation was being recorded, never claimed a categorical right to immediate repayment of $30,000, or claimed that it was Mr Knight alone who had lost $60,000. The recorded conversation includes Mr Johnstone's express assertion that Mr Knight's opportunity to recover his $30,000 depended on "When I get it back, you can, yeah. Or 14, or 20, or 10, or 2, or 8, or whatever."[7] Mr Knight did not then challenge at all that statement, that repayment to him depended upon the state of the trading account. Instead, he said, amongst other things:

[19]

"You're telling me I can pull out. Everything has been lost!"

...

"We've lost 100 percent."[8]

[20]

[13] The learned District Court Judge noted that the recorded exchanges did not amount to any admission by Mr Johnstone that he owed $30,000, and was to the contrary, and nor did Mr Knight make any clear demand for his $30,000, although the exchange showed that Mr Knight expected to recover the $30,000. On Mr Knight's evidence, the day after the recorded conversations he telephoned Mr Johnstone and demanded the return of $30,000, in full, as soon as Mr Johnstone sold his house. Mr Johnstone refused to pay the money, saying that Mr Knight had agreed to share any losses, that led to the litigation.

[21]

[14] The learned District Court Judge considered it important that each of the two men fully understood the risks in futures trading, and that Mr Johnstone had told Mr Knight at the beginning that Mr Johnstone had insufficient funds himself for futures trading, had no equity to get a loan anywhere else, and that it was because the loan was unsecured that Mr Knight had taken care to impose the conditions that he did to reduce the risk of large losses. The Judge considered, in my opinion correctly, that those were important background facts known to both parties.

[22]

[15] The learned District Court Judge went on to hold that the critical words were "whatever balance is owing, according to our agreement," remarking that as the learned Magistrate had observed, less than $30,000 might be owing because of the agreement that a partial repayment could be requested by Mr Knight, who had in fact been repaid $1,000. The Judge held, however, that there was no reason why the agreement could not also refer to the balance of the account after trading, and that the most natural meaning of the words was a reference to the balance in the trading account, apart from any moneys which might have been repaid. The Judge considered a reference to a balance owing was more likely to refer to a balance fluctuated because of trading than one left after a partial repayment, and that was consistent with the short - five days time - allowed for repayment. Both parties knew Mr Johnstone was not in a position to promise to repay $30,000 on five day's notice, but if their agreement was about the balance of a trading account, repayment could readily be made from that account.

[23]

[16] For those reasons the Judge considered that the learned Magistrate had erred in construing the document as a promise to repay moneys lent, and the Judge construed it instead as a promise to repay from the balance of a trading account. That construction was consistent with the background facts known to both parties, and consistent with the parties' subsequent conduct. As the learned Judge held, while that subsequent conduct could not affect the proper construction of the written agreement, it could point to other terms of their agreement and to what was the real agreement between the parties.[9]

[24]

[17] A good deal of the argument advanced by Mr Knight, who represented himself on the application to this Court, relied on matters he described about his actual intention when entering into the agreement. But Mr Knight needs to understand that his own intention or purpose is not what matters, and that what does is what he said, wrote, and did. In Toll (FGCT) v Alphapharm Pty Ltd (2004) 219 CLR 165[10] the High Court wrote:

[25]

"This Court, in Pacific Carriers Ltd v BNP Paribas,[11] has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction." [12]

[26]

[18] Evidence of those surrounding circumstances, already described, is admissible to assist in the interpretation of the agreement, particularly the written document, if its language is ambiguous or susceptible of more than one meaning, as this one is.[13] A court may admit evidence of surrounding circumstances in the form of mutually known facts to identify the meaning of a descriptive term and it may admit evidence of the genesis and objectively the aim of a transaction to show that the attribution of a strict legal meaning would make the transaction futile. But it cannot receive oral evidence from one party as to (his) intentions and construe the contract by reference to those intentions.[14] I agree with the learned District Court Judge that the conduct of the parties and the terms of the document would objectively lead a reasonable person to understand that Mr Knight was investing capital, intending to share profits and to guard himself against losses; because he would share those as well. The District Court Judge was correct in the construction of the written agreement, did not err in that or misinterpret it, and was not shown to have failed to take relevant matters into account or reached a conclusion against the weight of the evidence. Accordingly, the application for leave to appeal should be dismissed, with costs assessed on the standard basis.

[27]

[1] Appeal No 4013 of 2005, 16 August 2005.

[28]

[2] [2005] QCA 294 at [3].

[29]

[3] Quoted at Johnstone v Knight (unreported, District Court at Brisbane, Brabazon DCJ, BD No. 91 of 2005, 12 May 2006), at [15].

[30]

[4] Quoted at Johnstone v Knight (unreported, District Court at Brisbane, Brabazon DCJ, BD No. 91 of 2005, 12 May 2006), at [18].

[31]

[5] Quoted at Johnstone v Knight (unreported, District Court at Brisbane, Brabazon DCJ, BD No. 91 of 2005, 12 May 2006), at [19].

[32]

[6] Quoted at Johnstone v Knight (unreported, District Court at Brisbane, Brabazon DCJ, BD No. 91 of 2005, 12 May 2006), at [25].

[33]

[7] Quoted at Johnstone v Knight (unreported, District Court at Brisbane, Brabazon DCJ, BD No. 91 of 2005, 12 May 2006), at [29].

[34]

[8] Quoted at Johnstone v Knight (unreported, District Court at Brisbane, Brabazon DCJ, BD No. 91 of 2005, 12 May 2006), at [31] - [32].

[35]

[9] Winks v WH Heck & Sons Pty Ltd [1986] 1 Qd R 226 at 233.

[36]

[10] [2004] HCA 52.

[37]

[11] [2004] HCA 35; (2004) 208 ALR 213; 78 ALJR 1045.

[38]

[12] [2004] HCA 52; (2004) 219 CLR 165 at 179 at paragraph [40].

[39]

[13] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352, per Mason J.

[40]

[14] DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 429 per Stephen, Mason and Jacobs JJ.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (40 paragraphs)

Parties

Cases Cited (4)