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[2010] FCAFC 100
Federal Court of Australia (Full Court)
2010-08-13
Besanko J, Bennett JJ
Original judgment source is linked above.
WHERE MADE: BRISBANE (VIA VIDEO LINK TO ADELAIDE) (HEARD IN ADELAIDe)
PLACE: brisbane (via video link to adelaide) (HEARD IN ADELAIDE)
INTRODUCTION 1 On 10 June 2009 the applicants gave notice of motion seeking leave to appeal from orders made by Besanko J on 3 June 2009. On 24 June 2009 the applicants purported to file a notice of appeal. On 1 July 2009 Mansfield J ordered that the application for leave to appeal be referred to the Full Court with the intention that, in the event that leave is granted, the appeal be heard and determined instanter. 2 In these proceedings the applicants sue a number of respondents including the two respondents to the present application, ABB Grain Ltd ("ABB Grain") and Glencore Grain Pty Ltd ("Glencore Grain"). The original statement of claim, filed on 4 August 2008, was superseded by an amended statement of claim filed on 18 November 2008. On 23 December 2008 the primary Judge struck out the amended statement of claim as against Glencore Grain. On 21 November 2008 Glencore Grain filed a notice of motion seeking orders:
THE PROCEEDINGS 5 As against ABB Grain, the proceedings concern three contracts for the purchase of grain from the applicants. One contract is described in the reasons for judgment as the "ABB Grain basis contract". The other two contracts are described as the "ABB Grain first forward contract" and the "ABB Grain second forward contract". As against Glencore Grain, the proceedings also concern a contract for the purchase of grain from the applicants. It is described in the reasons as the "Glencore forward contract". On 3 June 2009, in connection with the ABB Grain first and second forward contracts, the primary Judge entered judgment for ABB Grain and struck out the amended statement of claim in so far as it concerned the basis contract. His Honour refused leave to file the proposed second amended statement of claim as against both ABB Grain and Glencore Grain. The overall effect is that the proceedings against ABB Grain have been, in part, dismissed and otherwise left without a viable statement of claim. As against Glencore Grain the order of 3 June 2009 also left the proceedings on foot, but again without a viable statement of claim. However, on 16 June 2009, the primary Judge gave judgment in those proceedings for Glencore Grain against the applicants. 6 The applicants' notice of motion seeks leave to appeal from the whole of the decision dated 3 June 2009. However they actually seek only to appeal in connection with the ABB Grain first and second forward contracts and the Glencore forward contract. The proposed appeal does not concern the basis contract. As we have said, on 16 June 2009 the primary Judge made a further order dismissing the proceedings as against Glencore Grain. At the hearing of this application for leave to appeal, the applicants indicated that they also wish to seek leave to appeal against that order. 7 The following summary of the facts of the case is taken from the reasons of the primary Judge at [9]-[28]: 9. It is not disputed that ABB Grain has experience and expertise in Australian and international grain markets, and prices in those markets. [ABB Grain] entered into three contracts with the [applicants], and the details of those contracts are as follows: 1. On 16 April 2007, [applicants] and ABB Grain entered into what is referred to as a basis contract. … 2. On 18 April 2007, the [applicants] and ABB Grain entered into … [the] ABB Grain first forward contract [which] placed an obligation on the plaintiffs to deliver 1230 tonnes of barley to ABB Grain at Port Lincoln in the period from 1 November 2007 to 31 December 2007 for $AUD173 per tonne. 3. On 4 June 2007, the [applicants] and ABB Grain entered into … the ABB Grain second forward contract [which] placed an obligation on the plaintiffs to deliver 600 tonnes of wheat to ABB Grain at Port Lincoln in the period 1 November 2007 to 31 December 2007 for $222 per tonne. 10 The [applicants] were not able to deliver the required quantities of wheat and barley under the three contracts with ABB Grain because of a production failure. As I understand it, a small quantity of barley was delivered under the first forward contract, but the precise details are not relevant for present purposes. The contracts were "washed out", a process whereby the [applicants] indicated to ABB Grain that they could not meet their obligations under the contracts, ABB Grain elected to cancel the contract and liquidated damages became payable. The [applicants'] liability to ABB Grain under the "washout" agreements is said to be as follows: 1. The ABB Grain basis contract: $31,492. 2. The ABB Grain first forward contract: $158,628. 3. The ABB Grain second forward contract: $173,340. 11 The [applicants] allege that they are not liable to ABB Grain for these amounts because ABB Grain failed to comply with various obligations placed on it under the Corporations Act and because it was in breach of a duty of care it owed to the [applicants]…. 12 … 13 … 14 ... 15 In relation to the ABB Grain first forward contract, the [applicants'] claim is that [ABB Grain] was required to provide a [product disclosure statement ("PDS") as required by the Corporations Act] to them. They allege that the ABB Grain first forward contract was a financial product within the meaning of ss 761D, 763A and 763C of the Corporations Act, that a PDS was required by reason of s 1012B(3)(i) and (ii) and that the Corporations Act required the PDS to be in the form and contain the matters specified in ss 1013A, 1013B, 1013C, 1013D and 1013E. The [applicants] allege that, had they been provided with a PDS, it would have contained information that the price of barley "might rise substantially" and that, if they were unable to deliver the required quantities, they would suffer a large loss. They also allege that it would have contained information to the effect that there was a "strong likelihood that the prices of wheat and barley would increase significantly". They allege that, had they been given a PDS, they would not have entered into the ABB Grain first forward contract. 16 … 17 In its defence, ABB Grain alleges that the ABB Grain first forward contract fell within the terms of s 761D(3) of the Corporations Act and was not a derivative or financial product within ss 761D, 763A and 763C of the Corporations Act. ABB Grain admits that it did not provide a PDS to the [applicants]. 18 ... 19 In relation to the ABB Grain second forward contract, the [applicants'] pleas and ABB Grain's responses are the same as they are in relation to the first forward contract. 20 In relation to both of the ABB Grain forward contracts, the [applicants] allege that ABB Grain owed them a duty of care to take reasonable steps to inform itself of matters identified in paragraph 51 of the [amended statement of claim] and "to convey that information in the PDS which should have been given to the [applicants]". The matters in paragraph 51 are matters which the [applicants] allege indicated that prices of wheat and barley would rise. It is unnecessary to set them out. ABB Grain denies that it owed a duty of care to the [applicants] in relation to the ABB Grain forward contracts. 21 … 22 There is no existing pleading against Glencore Grain. The relevant pleading for present purposes is the proposed [second amended statement of claim]. Glencore Grain has not filed a defence. 23 It is not disputed that the [applicants] entered into a forward contract with Glencore Grain whereby the [applicants] were under an obligation to deliver 1070 tonnes of barley to Glencore Grain at Port Lincoln in November/December 2007 at $203 per tonne. I will refer to this as the Glencore Grain forward contract. 24 The [applicants] allege that Glencore Grain should have given them a PDS. They allege that the Glencore Grain forward contract was a financial product within the meaning of ss 761D, 763A and 763C of the Act, that [Glencore Grain] was required by s 1012B(3)(i) and (ii) to provide a PDS to the [applicants] in the form required and containing the information specified in ss 1013A, 1013B, 1013C, 1013D and 1013E of the Act and that none of the [applicants] were given a PDS. 25 The [applicants] allege that, had they been given a PDS, they would have been provided with information known to Glencore Grain that the price of barley was "now much more likely to rise than fall", and that the [applicants] were likely, if unable to deliver the required quantity, to suffer a "much larger loss". The [applicants] further allege that there was a "strong likelihood that the prices of … barley would increase significantly". The [applicants] allege that they would not have entered into the Glencore Grain forward contract had they been given a PDS. 26 … 27 The [applicants] allege in the alternative that, if Glencore Grain did not know the information identified in the proposed [second amended statement of claim], Glencore Grain owed them a duty of care by reason of the fact that Glencore Grain was obliged to provide the [applicants] with a PDS to ascertain the information and to convey that information to the [applicants] in the PDS. The [applicants] allege that Glencore Grain acted in breach of the duty of care by failing to provide a PDS at all and, in particular, by not providing the [applicants] with a PDS which warned of the risk that the price was now much more likely to rise than fall and in failing to provide the [applicants] with an appropriate measure of the risk. 28 The [applicants] allege that they suffered a production failure and were unable to deliver the required quantity of barley under the Glencore Grain forward contract. The [applicants] and Glencore Grain entered into a "washout agreement" on 30 August 2007 whereby the plaintiffs became liable to Glencore Grain for the sum of $173,340. The plaintiffs allege that the washout agreement discharged the Glencore Grain forward contract.
LEGISLATION 8 Section 1012B(3) of the Corporations Act 2001 (Cth) (the "Corporations Act") provides that a regulated person who issues, offers to issue or arranges to issue a financial product to another person must, before or at the time of such offer or issue, give that person a Product Disclosure Statement ("PDS"). Pursuant to s 1012B(4), if a person offers to acquire a financial product from a regulated person, the latter person must give a PDS to the former person. The term "regulated person" is defined in s 1011B and seems to include any issuer or seller of a financial product. The requirements contained in ss 1012B(3) and 1012B(4) only apply if the financial product is to be issued to a retail client. Although it may be necessary to consider other parts of Ch 7, the proposed appeal focusses primarily upon the applicants' assertion that the forward contracts were financial products. The provisions which define that term are complex. It will be more helpful if we summarize their content rather than set them out in full. A useful starting point is s 762A. According to that section:
THE FORWARD CONTRACTS 13 On or about 18 April 2007 the applicants entered into the first forward contract with ABB Grain. His Honour identified the date of the contract as 16 April 2007. The difference is of no importance. The contract is contained in a document described as a "Confirmation of Purchase". It records the purchase by ABB Grain from TD & EJ Keynes (who acted for themselves and the other applicants) of: … the undermentioned goods subject to the terms, stipulations and conditions written and/or endorsed hereon: 1 Commodity: Australian barley season 2007/2008. 2 Quality assessment: Commodity must meet Bulk Handler receival standards at the time and place of delivery. 3 Quantity: 1230.00 tonnes. 4 Weight: based upon: Bulk Handler. 5 Payment: Cash. Payment terms: 15 days, end of Week of Delivery/transfer, Natural Terminal Port. 6 Delivery period: From 1/10/2007 to 31/12/2007.
7 LOCATION Description Valid from Valid to Price
PORT LINCOLN ZONE FEED BARLEY 1 1/10/2007 31/12/2007 173.00
less applicable statutory levies/tolls 8 GST: The amount payable as specified in this agreement does not include Australian Goods and Services Tax (GST). If GST is payable on a supply under this agreement, the amount specified as payable is increased by the same amount of GST that is payable on the supply. This relates to the price payable and any other amounts payable in relation to this agreement including, but not limited to storage, financing, grain risk costs and default charges. 9 SPECIAL CONDITIONS: RD 15329 10 NON PERFORMANCE: Failure to deliver product to the delivery point(s), in accordance with clauses 1 through 9 above will result in ABB, buying in against the shortfall at the Sellers cost. (Refer Clause 12 overleaf). Further conditions of sale on reverse side have been accepted by the Seller. 14 Later, it may be necessary to refer to other terms and conditions, but of primary importance is cl 12 on the reverse side of the document ("cl 12"). It concerns "Contract Cancellation" and provides: In the event a Seller suffers production failure this Contract may be cancelled following negotiation and financial settlement with ABB as described hereafter. The Seller may initiate partial or complete cancellation of the Grain tonnage by formally requesting for a Contract Washout with ABB. The Washout payment will be calculated from the difference between the price on the Contract and a price reflecting market value at the time of Washout as negotiated between ABB and the Seller. The cancellation is completed by payment to the Seller by ABB or upon receipt of payment by ABB from the Seller depending upon the circumstances. 15 The ABB Grain second forward contract was dated 4 June 2007. Again, ABB Grain agreed to buy, and TD & EJ Keynes agreed to sell grain for delivery from 1 November 2007 until 31 December 2007. The contract is in a different form from that of the ABB Grain first forward contract. However it contains similar information. There is no provision equivalent to cl 12. However cl 11 provides: Trade Rules to Govern: As per NACMA. 16 The NACMA Rules are those of the National Agricultural Commodities Marketing Association Limited. Rule 17.1 ("NACMA r 17.1") deals with default by the seller. It provides: 1) Subject to Rule 17.5, when the Seller finds that they are or will be in default on fulfillment of contract, they shall notify the Buyer at once. Upon receipt of such notice, the Buyer shall, within twenty-four (24) hours thereafter, notify the Seller, declaring which of the following options they elect to exercise: (a) agree to extend the Delivery or Shipment Period, and/or accept the quality and/or condition of the commodity tendered; or (b) Repurchase of all or any part of the defaulted portion of the Delivery or Shipments; or (c) cancel all or any part of the defaulted portion of the Delivery or Shipments at Fair Market Price based on the close of the market the next business day. 2) If the Seller fails to notify the Buyer of his default, the liability remains in force until the Buyer, by the exercise of due diligence, can determine whether the Seller has defaulted. Upon the Buyer's determination of the Seller's default, the Buyer shall notify the Seller at once of such finding, and promptly thereafter, notify the Seller which of the options (a) or (b) or (c) above they elect to exercise. 3) If the Seller defaults on the contract, they are liable for all reasonable costs and expenses as shall have been incurred up to and including the day the Buyer exercises one of the three options. 17 Rules 17.2 ("NACMA r 17.2") and 17.3 ("NACMA r 17.3") deal with default by the buyer. Rule 17.4 ("NACMA r 17.4") provides, apparently with respect to default by either buyer or seller: Failure to perform in keeping with the Terms and Conditions of a contract shall be grounds for the refusal only of such Delivery(ies) or Shipment(s) in default, and not for the recission of the entire contract or any other contract between the Buyer and the Seller. 18 Rule 17.5 ("NACMA r 17.5") provides: In the case of Default, the party in Default must pay within 7 business days of demand by the non-defaulting party, by way of liquidated damages, an amount equal to the undelivered contract quantity of the commodity multiplied by the difference between the contract price and the Fair Market Price of the commodity. For the avoidance of doubt, nothing in these Rules shall be construed as requiring the party not in default to make any payment of compensation or damages to the party in default. 19 The terms "Fair Market Price" and "Repurchase" are defined in Rules 17.7 ("NACMA r 17.7") and 17.8 ("NACMA r 17.8"). NACMA r 17.8 provides: The term "Repurchase" shall be construed as meaning an actual bona fide purchase of a commodity of like kind and quantity on the open market. 20 The Glencore forward contract is dated 4 June 2007 and is in a different form from that of the ABB second forward contract. It shows Glencore as the buyer and TD & EJ Keynes as the seller. It also adopts the NACMA Rules.
THE APPLICANTS' CASE 21 The applicants plead two causes of action against both ABB Grain and Glencore Grain in connection with each forward contract. The first is that they did not receive a PDS in connection with any of the contracts. The information to be provided in a PDS is limited to information known to the provider. See s 1013C(2). The applicants do not know whether ABB Grain or Glencore Grain knew of the information which the applicants, in their pleading, identify as relevant and not disclosed to them. They therefore plead, in the alternative to failure to provide a PDS, that each supplier had a duty of care which required each of them to discover information which should have been included in each PDS, had it been known to the seller. The alleged duty is said to arise from the fact that the various parties entered into each contract, and that ABB Grain and Glencore Grain were required to provide a PDS at or before the time at which each contract was made. Thus, as the primary Judge pointed out, the cause of action based on the alleged duty of care must necessarily fail if there was no obligation to provide a PDS. As his Honour also observed, even if there were an obligation to provide a PDS, it may not be reasonably arguable that there was a duty of care to ascertain information in order to include it in the PDS, such a duty being arguably inconsistent with the statutory scheme which limits the obligation to the disclosure of known information.
SECTION 761D 22 As we have said, the operation of s 761D(3) is of substantial importance in this case. If the forward contracts fell within s 761D(3) of the Corporations Act, then they were neither derivatives nor financial products for the purposes of Ch 7. Section 761D provides: Meaning of derivative (1) For the purposes of this Chapter, subject to subsections (2), (3) and (4), a derivative is an arrangement in relation to which the following conditions are satisfied: (a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and (b) that future time is not less than the number of days, prescribed by regulations made for the purposes of this paragraph, after the day on which the arrangement is entered into; and (c) the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following: (i) an asset; (ii) a rate (including an interest rate or exchange rate); (iii) an index; (iv) a commodity. (2) Without limiting subsection (1), anything declared by the regulations to be a derivative for the purposes of this section is a derivative for the purposes of this Chapter. A thing so declared is a derivative despite anything in subsections (3) and (4). (3) Subject to subsection (2), the following are not derivatives for the purposes of this Chapter even if they are covered by the definition in subsection (1): (a) an arrangement in relation to which subparagraphs (i), (ii) and (iii) are satisfied: (i) a party has, or may have, an obligation to buy, and another party has, or may have, an obligation to sell, tangible property (other than Australian or foreign currency) at a price and on a date in the future; and (ii) the arrangement does not permit the seller's obligations to be wholly settled by cash, or by set-off between the parties, rather than by delivery of the property; and (iii) neither usual market practice, nor the rules of a licensed market or a licensed CS facility, permits the seller's obligations to be closed out by the matching up of the arrangement with another arrangement of the same kind under which the seller has offsetting obligations to buy; but only to the extent that the arrangement deals with that purchase and sale; (b) a contract for the future provision of services; (c) anything that is covered by a paragraph of subsection 764A(1), other than paragraph (c) of that subsection; (d) anything declared by the regulations not to be a derivative for the purposes of this Chapter. (4) Subject to subsection (2), an arrangement under which one party has an obligation to buy, and the other has an obligation to sell, property is not a derivative for the purposes of this Chapter merely because the arrangement provides for the consideration to be varied by reference to a general inflation index such as the Consumer Price Index. 23 The term "arrangement" is defined in s 761A as follows: arrangement means, subject to section 761B, a contract, agreement, understanding, scheme or other arrangement (as existing from time to time): (a) whether formal or informal, or partly formal and partly informal; and (b) whether written or oral, or partly written and partly oral; and (c) whether or not enforceable, or intended to be enforceable, by legal proceedings and whether or not based on legal or equitable rights. 24 Section 761B provides: If: (a) an arrangement, when considered by itself, does not constitute a derivative, or some other kind of financial product; and (b) that arrangement, and one or more other arrangements, if they had instead been a single arrangement, would have constituted a derivative or other financial product; and (c) it is reasonable to assume that the parties to the arrangements regard them as constituting a single scheme; the arrangements are, for the purposes of this Part, to be treated as if they together constituted a single arrangement. 25 The primary Judge understood the relevant "arrangements" to be the forward contracts, although his Honour also recognized that the applicants were seeking to find some support for their case in s 761B. That section provides that in certain circumstances, two or more "arrangements" may be treated as, together, constituting a single arrangement. Before us, the applicants assert that the relevant "arrangements" might include "arrangements or undertakings" as to performance or breach of the contracts occurring after they were made. Given that the applicants' case depends upon the existence of an obligation to give a PDS at or before the making of each contract, it is difficult to see how events after the contract date can be relevant. In any event, it is fairly clear from paragraphs 31, 32, 41 and 42 of the amended statement of claim that the relevant financial products, as there pleaded, are the forward contracts. Similarly numbered paragraphs in the proposed second amended statement of claim are to similar effect. The applicants' written submissions also proceed generally on that basis. See para 6. It is at para 12-16 that they implicitly seek to establish a wider case, but without alleging any specific additional aspects of the relevant "arrangements". In the absence of any pleaded or otherwise identified arrangements going beyond the forward contracts, we proceed on the basis that they are the relevant arrangements. 26 One may doubt whether such contracts satisfy the requirements of s 761D(1) so as to be derivatives, quite apart from the operation of s 761D(3). Clearly, the amount of the consideration will not vary. The applicants rely on the words "the value of the arrangement". The meaning of that expression is obscure. One immediately asks: "The value to whom?" It may be arguable that if prices rise, the value of the contract to the buyer will rise. It may similarly be arguable that if prices fall, the value to the seller will rise. In each case, the value depends upon the enforceability of the contract. If the arrangement in question is not a contract, then how is it to be valued? Yet the definition of the term "arrangement" clearly contemplates non-contractual arrangements. This line of reasoning might provoke questions concerning the meaning of the term "consideration" in a non-contractual arrangement, leading in turn to an inquiry as to how a party might be required to provide consideration for the purposes of s 761D(1)(a) in a non-contractual context. It may be that it is impossible to work out the actual operation of s 761D(1) other than for a specific "arrangement". If his Honour was correct in concluding that s 761D(3) was decisive of the matter, it will not be necessary further to consider that question. 27 Section 761D(3), as applied by s 765A(1), plays a significant role in the operation of Ch 7, the object of which is set out in s 760A as follows: The main object of this Chapter is to promote: (a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and (b) fairness, honesty and professionalism by those who provide financial services; and (c) fair, orderly and transparent markets for financial products; and (d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities. 28 The term "financial product" is critical to the operation of the chapter. The express exclusions contained in s 765A are designed to ameliorate the effect of the very broad language used in the other definition sections which seek to capture many kinds of financial transactions. Section 765A narrows the operation of Ch 7 so as to keep it within the intended bounds. Section 761D(3) is important because it leads to the exclusion of a very large number of everyday transactions, namely sales of tangible property for future delivery. Such transactions are not generally thought to be financial transactions. However it is well-known that there are markets in which contracts for the sale and purchase of "tangible property" are traded. Such markets are more readily seen as being "financial" and therefore appropriately regulated. Where the price of tangible property fluctuates significantly over time, there is always the likelihood that people will seek to profit from such fluctuations. For that reason s 761D(1) catches "arrangements" for the supply of tangible property where the prices are not fixed or the "values" of the arrangements may fluctuate. However s 761D(3) narrows that effect. Broadly speaking, it does so by excluding from the definition of "derivative" arrangements for the supply of tangible property where one of the parties is actually expected to deliver the relevant property, and where rights and obligations under such arrangements are not usually traded, or not traded in a recognizable market. 29 The question, then, is whether, assuming that the forward contracts satisfy the requirements of s 761D(1), they are nonetheless excluded from the definition of the word "derivative" by s 761D(3)(a). It is common ground that those contracts satisfy the requirements of s 761D(3)(a)(i). Section 761D(3)(a)(ii) requires that the relevant arrangement "not permit the seller's obligation to be wholly settled by cash, or by set-off between the parties …". The applicants submitted at first instance that it was arguable that the applicants' obligations under the forward contracts could be wholly settled by cash because the buyer's remedy for default would be in damages and not specific performance, the applicants' paying such damages in cash. Alternatively, they submitted that the so-called "washout provisions" meant that their obligations could be wholly settled by cash. The term "washout provisions" refers to both cl 12 and NACMA r 17.1. 30 As to the first submission, the primary Judge concluded that the availability of a remedy in damages for breach of contract did not mean that the relevant contract permitted a party's obligations to be wholly settled in cash rather than by performance. His Honour referred to the observation of Windeyer J in Coulls v Bagot's Executor & Trustee Co Ltd (1967) 119 CLR 460 at 504 that: The primary obligation of a party to a contract is to perform it, to keep his promise. That is what the law requires of him. If he fails to do so, he incurs a liability to pay damages. That however is the ancillary remedy for his violation of the other party's primary right to have him carry out his promise. It is, I think, a faulty analysis of legal obligations to say that the law treats a promisor as having a right to elect either to perform his promise or to pay damages. 31 In other words, an award of damages for breach of contract is compensation for failing to meet one's obligations. It does not reflect an implied contractual arrangement which permits an obligation under the contract to be wholly settled in cash. It may be rare for a court to order specific performance of a contract for the sale of goods, but the theoretical availability of that remedy also says much, in principle, against the applicants' argument. 32 His Honour then considered the "washout provisions". He noted that in the ABB Grain first forward contract cl 12 only operated if the applicant suffered production failure. His Honour also noted that NACMA r 17.1 only applied if the seller discovered that it was going to be in default, and that, "in essence, the washout provisions operate at the option of the buyer, not the seller". Thus the seller was not "permitted" by the contract to discharge its obligations by paying cash. Thirdly, his Honour pointed out that the washout provisions "result in a measure of damages similar to that specified in s 50(3) of the Sale of Goods Act 1895 (SA)". His Honour characterized the washout provisions as "contractual provisions as to the buyer's remedies in the case of breach and the measure of damages or compensation payable to the buyer in those circumstances". His Honour concluded that s 761D(3)(a)(ii) was satisfied. 33 His Honour then considered s 761D(3)(a)(iii). Both sides led evidence concerning this matter. The operation of s 761D(3) was not addressed in the amended statement of claim or in the proposed second amended statement of claim. In many ways both pleadings are unsatisfactory in dealing with the complex statutory regime which we are discussing. However it was probably appropriate for the applicants to leave the operation of s 761D(3) to be raised by the respondents. ABB Grain filed an affidavit by Stephen Anthony Howells, a senior employee with substantial experience in the grain industry. In para 24 he swore that: There is no market in which Forward Contracts are traded or can be traded. Because there is no market, there is no usual market practice". 34 Superficially, this statement may appear to be an inadequate basis for asserting that s 761D(3)(a)(iii) was, from the respondents' point of view, satisfied. Whilst the affidavit excluded any relevant market practice and, perhaps, the existence of any licensed market and, therefore, the existence of any rules of a relevant licensed market, it said nothing about the rules of a licensed CS facility. That term is defined to mean "a clearing and settlement facility the operation of which is authorized by an Australian CS facility licence". It may be that a clearing and settlement facility which deals in derivatives would be within the meaning of the word "market" as used by Mr Howells in his affidavit, but the matter is not absolutely clear. However the applicants appear to have dealt with the matter on the basis that the operation of s 761D(3)(a)(iii) had been raised and had to be addressed. To do so, they relied upon the affidavit of Timothy Douglas Keynes filed on 17 February 2009. 35 Mr Keynes at least implied that there was a market for grain in the Port Lincoln "zone" or "area", and that in that zone, area or market, he could deal with liability under a forward contract in a particular way which could be accommodated within the grain storage systems operated by ABB Grain and others in that location. He gave an example which postulated a forward contract for the sale of grain which he could not honour. He said that he would go to another grower in order to acquire the necessary grain. Assuming that such grain had been delivered to ABB Grain or a similar body, he would then direct it to deliver the acquired grain in satisfaction of his obligation under the earlier contract. He would do this in order to "close out my position". Mr Keynes' example postulates a sale price under the earlier contract of $400 per tonne, a fall in the price to $300 per tonne, and a purchase by him at $310 per tonne. Of course, if the price rises, and the structure of the transaction is similar, Mr Keynes would be out of pocket. It is also possible that he would not be able to find sufficient grain for sale at a price which he could pay. 36 As the primary Judge understood the applicants' case, it was that s 761D(3)(a)(iii) would not be satisfied if: … it is possible, or known, or not uncommon, for a seller who is facing a production failure to agree to buy an amount equivalent to what he has agreed to sell, thereby capping a loss in a rising market or making a profit in a falling market. 37 His Honour concluded that Mr Keynes was not describing a usual market practice permitting the closing out of the seller's obligations. Rather, he was describing "a means of making a profit or capping a liability in a market where goods are readily obtainable". His Honour observed that, "(i)t is the nature of the goods, not usual market practice, which permits the seller to act in the way specified". The primary Judge considered that s 761D(3)(a)(iii) contemplated the termination, "for all practical purposes", of the seller's obligations under the original contract. Such termination was not a feature of the arrangement identified by Mr Keynes. It rather assisted him to perform his obligations.
SECTION 761D(3) - ON APPEAL 38 We have already said something about paras 12-16 of the applicants' submissions in which they seek to raise a case based upon an assertion that the relevant financial products might include elements other than the forward contracts. We do not accept that such an argument is raised by the amended statement of claim or the proposed second amended statement of claim. Further, the applicants' submissions lack particulars of such further elements. The applicants seem to submit (applicants' submissions at paras 13 and 14) that for the purposes of s 761D(3)(a)(ii) the fact that all three forward contracts were, in the event, wholly or substantially "cash settled" should be taken into account as part of the relevant "arrangements". They also submit that the word "permit" should be given its "ordinary meaning which would include not only when a person has a right to washout but also where washing out the contract is within the contemplation of the parties as the likely, and for that matter, the only practical consequence of a production failure". 39 We cannot see how the actual consequence of a production failure can be taken into account in determining whether a proposed transaction will engage s 1012B of the Corporations Act. As to the understanding of the parties at the time of contract, it is possible that such understanding might go beyond the terms of the contract, but no such case has been pleaded or appears from the evidence. In reality, the submission merely alleges that the parties expected that in the event of operational failure, the washout provisions would operate. This seems to be little more than an argument as to the proper construction of the washout provisions. 40 The applicants seem also to submit (applicants' submissions at paras 15 and 16) that even if the relevant arrangements are limited to the contracts, some other "understandings" may be grafted onto them so that the overall effect is to engage s 761D(3). Alternatively or additionally, they submit that "universal practice" or the dictates of "common sense" may be part of a relevant "arrangement" for the purposes of s 761D(3)(a)(ii). We simply do not understand those submissions. 41 In our view, the appeal ground concerning the engagement of s 761D(3)(a)(ii) must fail. Absent the washout provisions, there can be no sensible basis for asserting that a contract which binds the seller to deliver a fixed quantity of grain at a particular time permits him or her to "settle" that obligation in cash. We take the word "settled" to mean "honoured" or "discharged". In this regard we adopt the observations of Windeyer J in Coulls set out above and those of the primary Judge. As to the washout provisions we consider that cl 12 of the ABB Grain first forward contract, read as part of the contract as a whole, does not permit a seller to discharge its obligations wholly in cash or by way of set-off. The statutory provision contemplates an "arrangement" which permits, in the sense of authorizing, such settlement. That permission must be, in effect, an alternative form of performance contemplated by the contract and at the seller's election. In our view, it cannot be merely a possible alternative means of performance after cancellation of the obligation to deliver under the contract, dependent upon the buyer's concurrence. Clause 12 allows a party other than the seller to exercise options in the event that the seller cannot, or does not perform. Such a provision cannot be described as permitting performance of an obligation to supply grain by the payment of money or by set-off. Further, even if one assumes that the seller may insist upon washout, that entitlement only arises in the event of production failure. It would not permit the seller to discharge its obligations in cash in any other circumstances. 42 It seems unlikely that cl 12 has the effect of imposing upon ABB Grain any part of the loss attributable to the seller's production failure. The purpose seems to be to facilitate the quantification of the seller's liability. Fairly clearly, ABB Grain will not pay for undelivered grain. The clause provides for the quantification of the loss which will be suffered by ABB Grain in buying in grain to make up for the seller's shortfall. Once that amount has been quantified, it will be either paid by the seller or set-off against other amounts payable to the seller pursuant to the contract. An important aspect of such quantification will be the time of washout. The ultimate payment will depend upon the market value at that time. It seems that both price and the time of washout are to be "negotiated" between the parties, although the price is to "reflect" market value. To the extent that the buyer's assent is necessary to fixing either matter it is, again, difficult to describe cl 12 as permitting a cash payout. Admittedly, cl 12 contemplates a limited set-off of the amount payable by the seller to the buyer, but that can hardly be described as permitting settlement of the seller's obligations wholly in cash or by set-off. 43 It is possible that any payment calculated pursuant to cl 12 will not fully compensate ABB Grain for loss flowing from the seller's failure to deliver. For example, the process may result in delay which causes further loss to ABB Grain, or there may be additional transport costs. Whilst cl 12, if engaged, may excuse further performance of the contract, it may not exclude a claim for damages incurred apart from the additional cost of purchasing alternative grain supplies. As we have observed, payment of damages for default is not a permitted mode of performance of a contractual obligation. 44 NACMA r 17.1 assumes actual or potential default, requires notification by the seller, and confers options on the buyer. The words "finds" and "default" suggest an inability to perform rather than a free choice between supplying grain or paying cash. We doubt whether the rule would permit notice of default or expected default by a seller who simply wished to sell at a higher price to another buyer. It is not clear whether, in the event of such a notice, the three options are exhaustive of the buyer's rights, or whether it may also insist upon its contractual entitlements. NACMA r 17.5 might suggest that such a course is available. On the other hand NACMA r 17.1(2) seems to contemplate that exercise of the option will terminate the seller's liability to make further deliveries. The second sentence also suggests an obligation on the seller to choose from amongst the three options. Option (a) precludes the proposition that NACMA r 17.1 permits the seller to discharge its obligation wholly in cash. Option (b), when read with NACMA r 17.8, allows the buyer to buy other grain in the market. NACMA r 17.1 does not provide for any payment by the seller to the buyer of the additional cost to the latter of so doing. Presumably, such an amount will be recoverable pursuant to NACMA r 17.8 as damages for default. For reasons which we have given, provision for the payment of damages does not permit discharge of the seller's obligations wholly in cash or by set-off. NACMA 17.5 also preserves any other claim for damages by the buyer against the seller. NACMA r 17.1 does not permit a seller to discharge its obligations in cash. 45 Finally, we should say something about the reference in s 761D(3)(a)(ii) to settlement wholly by set-off. It seems unlikely that this reference is to set-off in the pleading sense of setting off one claim for money or damages against another similar claim. Rather, it refers to setting something off against the obligation to deliver grain. The parties might agree that in certain circumstances, the obligation to supply grain should be discharged by the discharge of some other obligation. We doubt whether such an arrangement would be properly characterized as buying and selling for the purposes of s 761D(3)(a)(i). Buying and selling usually involve a monetary payment. In any event, there is no such arrangement in these contracts. 46 In our view none of the forward contracts permit the seller wholly to discharge its obligation to deliver grain in cash or by set-off. 47 We turn to s 761D(3)(a)(iii). Although the applicants submit that the term "close out" is a term of art in financial markets, there seems to be little evidence as to its meaning. The matter was apparently discussed at length at first instance. In its written submissions in this Court, the applicants refer to pages in the appeal book at which that term and the term "cash settlement" are said to be discussed, but we derive little (if any) assistance from those references. The page references are to a document concerning derivatives. As far as we can see the document discusses closing out only in connection with a proposal to allow "netting". This seems to involve the setting off of rights and obligations under different contracts. 48 The term "close out" is defined in the Shorter Oxford English Dictionary (6th ed, 2007) as: (N. Amer.) clear out (stock etc.), bring (a business etc.) to a close, dispose of, discontinue. 49 The Macquarie Dictionary (4th ed, 2005) is rather more helpful. It defines the term as: to nullify one's position in the futures market either by selling (from a bought position) or buying (from a sold position). 50 It seems likely that the term is used in that sense in s 761D(3)(a)(iii). We have previously referred to the evidence concerning the factual matters potentially raised by that provision. There is no evidence concerning the rules of any licensed market or licensed CS facility. Before us, and apparently at first instance, the applicants have conducted the case upon the basis that they rely upon allegedly usual market practice rather than upon any such rules. Undoubtedly, had the case been otherwise, the rules in question would have been produced. As we have observed, the primary Judge disposed of the matter upon the basis that Mr Howells had sworn that there was no relevant market for the forward contracts, and no relevant usual market practice. His Honour considered that the applicants' evidence did not establish such a practice. 51 Before us the applicants' submission is more a discussion of broad financial market issues than an attack on the correctness of the decision below. Much of the submission invites speculation about how his Honour's views may apply in other markets. It is not always clear that the submissions are based on evidence actually given in the case. The applicants' speculation focusses on his Honour's view that closing out involves practical termination of the seller's obligations. First, they submit that a "commodity future" is a forward contract made between a trader and a futures exchange (applicants' submissions at para 17). It is said that in such a contract there is no provision for cash settlement. Closing out can only be effected by entering into a matching arrangement. The applicants then speculate as to whether a seller's obligations are, in those circumstances, brought to an end. Of course, in the present case, there was no sale to a futures exchange. 52 The applicants then speculate (applicants' submissions at para 18) as to whether the primary Judge was drawing a distinction between the risk of default in "over the counter" transactions (which these contract may have been) and transactions on futures exchanges. They conclude that the risk in "over the counter" transactions is greater than in futures exchange transactions. The point of these submissions appears at para 19. It is there submitted that if his Honour was not distinguishing between respective risks then there is no significant difference between "over the counter" transactions and futures exchange transactions. They then submit that his Honour's conclusion that the forward contracts were not derivatives meant that futures exchange transactions were also neither derivatives nor financial products. This outcome, it is said, cannot have been contemplated by Parliament. The consequence, in the event that his Honour was distinguishing on the basis of risk, is not disclosed. 53 We find it difficult to identify the logic of these submissions. In any event we consider that they fail to address the fact that at least one purpose of s 761D(3)(a)(iii) is to distinguish between transactions on futures markets and transactions which are, in fact, merely contracts for the sale and purchase of grain. The former category of transaction is to be subject to the provisions regulating financial products including derivatives, but the latter category is to be exempted from such regulation. The primary Judge was seeking to construe the section in order to determine the category into which the forward contracts fell. The applicants' submission really begs the question posed by the section. 54 The applicants then submit (applicants' submissions at para 20) that his Honour erred in distinguishing between the nature of the goods traded and "usual market practice". It is difficult to understand how any comparison could be drawn between those matters. The applicants' point seems to be that the nature of goods traded in a market will affect the extent to which transactions are settled in cash or by closing out. Again, it is difficult to understand the relevance of the submission. 55 Finally, the applicants postulate a possible concern that their arguments will result in Ch 7 having too wide an application, a possibility to which we have already referred. The applicants then seek to dispel that concern. To some extent they seem to address, or rely on the distinction between the amount of consideration and the value of the arrangement in s 761D(i)(c), a subject to which we have referred. They suggest that a futures contract is, in effect, a means of managing financial risk. They then submit that if price goes down, "the forward contract itself assumes a positive value independent of the commodity which is being sold under it". If the price goes up, "the contract will assume a negative value, being, at the very least, an opportunity cost, or in the event of non-delivery, the cost of cash settlement". Whatever this means, it is said to lead to the conclusion that an arrangement will only be a derivative if it "was entered into by the parties in anticipation that there would or could be subsequent price movements and that fact was the principal motivation for why that arrangement was concluded at the time it was". We see nothing in s 761D which leads to this conclusion. 56 The applicants also submit (applicants' submissions at para 25) that if the range of transactions caught by Ch 7 proves to be too wide, transactions may be excluded by use of the exempting power in s 765A(2). We accept that the existence of such a power may, in some circumstances, militate against a narrow construction of Ch 7 based on the alleged inconvenience of a wider construction. The applicants then seek to compare the application of Ch 7 to, on the one hand, an insurance policy against the cancellation of an airline ticket and, on the other, its application to a forward contract. This submission seems to be directed to the scale of loss likely to be suffered by a grain farmer under a forward contract as opposed to the scale of loss on a cancelled airline ticket. The comparison is of no assistance. 57 The evidence of Mr Howells that there is no market in which forward contracts are traded, and therefore no relevant usual market practice, squarely challenged reliance on s 761D(3)(a)(iii) as a basis for denying the exempting effect of s 761D(3) upon the forward contracts. It was for the applicants to respond by identifying the relevant usual market practices. They presumably advanced their best case in that regard. That case was that Mr Keynes as a grain farmer supplying his grain to storage facilities in the Port Lincoln zone, could buy grain from another grower to meet his own contractual obligations if he could not do so from his own produce. 58 No consideration has been given to the meaning of the term "market" in s 761D(3)(a)(iii). The term may be used to denote an identifiable market in which traders participate. It is unlikely that the term is used in the sense in which it is used in the economic context as a construct for economic analysis. It is possible that any relevant market (not being licensed or having rules) may only be identifiable by reference to its usual practices. Mr Keynes said little more than that grain producers, ABB Grain and others sell, collect and dispatch grain in the Port Lincoln zone. He gave no real explanation of the limits of any alleged market. It is also possible that the words "usual market practice" describe marketing practice, that is the way in which grain is "marketed", rather than the practice of any identifiable market. In either case, a practice must be more than a way in which a seller seeks to minimize loss or potential loss under a contract into which he or she has entered. The word "practice", according to the Shorter Oxford English Dictionary, means: The habitual doing or carrying out of something; usual or customary action or performance … . A custom; a habit; a habitual action". 59 According to the Macquarie Dictionary, a practice is: habitual or customary performance … a habit or custom. 60 There has been no attempt to identify any usual market practice, whether those words describe marketing practices or the usual practice of a market. A possible approach to solving a problem is not a usual practice. Nor is it sufficient to assert that one might be able to lead a stronger case at trial. On an application pursuant to s 31A, it is not always appropriate to enter into the full trial of an issue. However, once there is evidence which leads to the inference that a particular cause of action is not viable, the party propounding that cause of action must advance a factual basis for rejecting that inference, or risk the Court's drawing it. In this case, the applicants advanced the case which they proposed to propound at trial. His Honour concluded that it was not viable. We agree. 61 In our view the primary Judge correctly concluded that s 761D(3)(a) was engaged so that the forward contracts were neither derivatives nor financial products. In those circumstances, the alleged causes of action against ABB Grain and Glencore Grain could not succeed, depending as they did upon the contracts being financial products. No alternative cause of action was proposed. Orders 1, 2 and 3 of the orders made on 3 June 2009 were correctly made. It also follows that order 1 of the orders made on 16 June 2009 was correctly made. In those circumstances none of the other orders made on either day may be challenged.
OTHER MATTERS 62 Two other matters are raised by the proposed notice of appeal. The first is whether, for the purposes of s 761D(1)(c), the values of the forward contracts were determined, derived from or varied by reference to the price of wheat and/or barley. His Honour disposed of the matter as a construction point. We are inclined to the view that if the value of an arrangement (whatever that term means) may vary with fluctuations in the price of the grain in question or some other grain, then the provision may be satisfied. However, given the difficulties in construction to which we have referred, and the evidentiary matters which are necessarily involved, it is better that we not finally determine this question. 63 The second issue is the applicants' assertion that they entered into the forward contracts in order to manage financial risk. The proposed notice of appeal asserts that the primary Judge decided that the applicants did not do so. This assertion is incorrect. His Honour conceded that a forward contract might be used for that purpose but concluded that, in the absence of appropriate pleadings, it was inappropriate that he decide the question. We agree and adopt the same course. 64 Finally, ABB Grain submits that the forward contracts are not readily treated as financial products, at least partly because of the difficulty in describing a contract as being a product issued by one party and acquired by the other. Section 1012B is engaged by the issue of, or offer to issue a financial product, or an offer to acquire such a product. Pursuant to s 761A the meanings of the words, "issue" and "acquire" are "affected" by s 761E. For present purposes we need only observe that the way in which a financial product is, or is to be "issued", or is to be "acquired" may vary according to the nature of the product. As we have observed, the range of financial products is very wide. We doubt whether it is possible to attribute any meaning to the terms "issue" and "acquire" other than by reference to the nature of the relevant financial product. In those circumstances, it would be misleading to allow perceived difficulties in applying the terms "issued" and "acquired" to a particular arrangement to influence the decision as to whether it was a financial product. We suspect that similar considerations apply to the construction of s 1012B(3)(b) in the context of s 761G. It is not necessary that we further consider these aspects.
LEAVE TO APPEAL 65 In effect, the orders pursuant to s 31A finally disposed of some of the applicants' claims. It is therefore appropriate that they have leave to appeal against the orders made on 3 June 2009 and order 1 of the orders made on 16 June 2009. There will be leave to amend the notice of motion seeking leave to appeal filed on 10 June 2009 by inserting in paragraph 1, after the date "3 June, 2009", the words "and order 1 of the orders made by Besanko J on 16 June, 2009". There will also be leave to amend the notice of appeal by adding, on page 1, after the date "3 June, 2009", the words "and order 1 of the orders made on 16 June, 2009". 66 There will be leave to appeal in accordance with the amended notice of appeal.
ORDERS ON APPEAL 67 The appeal is dismissed with costs, including the costs of the notice of motion for leave to appeal. The parties should have liberty to apply as to the forms of order.
Keynes
Rural Directions Pty Ltd
(1967) 119 CLR 460