Morgan and Others v BNP Paribas Equities

CASES CITED: Hide & Skin Trading Pty Limited v Oceanic Meat Traders Limited (1990) 20 NSWLR 310

Robert John MORGAN (First Appellant) Dene Lurline MORGAN (Second Appellant) PARTIES: SYDNEY CONCRETE & CONTRACTING PTY LIMITED (ACN 054 377 409) (Third Appellant) BNP PARIBAS EQUITIES (AUSTRALIA) LIMITED (ACN 002 580 832) (First Respondent) BNP PARIBAS EQUITIES PRIVATE (AUSTRALIA) LIMITED (ACN 003 307 873) (Second Respondent)

COUNSEL: R S ANGYAL, SC (Appellants) R G KAYE, SC/ M A C PAINTER (Respondents)

SOLICITORS: Young Attorneys (Appellants) Piper Alderman (Respondents)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT MEDIUM NEUTRAL CITATION: [2004] NSWSC 530

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40560/05

GILES JA SANTOW JA McCOLL JA

24 JULY 2006 MORGAN and Others v BNP PARIBAS EQUITIES (AUSTRALIA) LIMITED and Another Judgment 1 GILES JA: I agree with Santow JA. 2 SANTOW JA: INTRODUCTION The central issue in this appeal can be shortly stated. It is whether, as concluded by the trial judge, Nicholas J, a bank, through its stockbroking and financing affiliates, was entitled in the events that happened, to terminate and close out lending and options trading facilities of its client, a share and options trader, on the basis of a disputed failure to meet a margin call or calls. 3 The appellants, Mr and Mrs Morgan, and their family company Sydney Concrete and Contracting Pty Limited ("SCC"), challenge the trial judge's conclusion that it was so entitled. They do so on the essential basis that no margin call was ever effectively made, but if held otherwise, that such call as was made was actually met. The resolution of this appeal turns upon what the relevant agreements required validly to effect a margin call, what was required from the client in response, and what actually transpired. 4 The relevant events are concentrated in the period 4 July 2001 to 17 August 2001 when close-out and termination occurred. They need to be viewed against the earlier background of arrangements between bank and customer. The bank affiliates and respondents were BNP Paribas Equities (Australia) Limited ("Equities"), which provided the loan facilities to their client and BNP Paribas Equities Private (Australia) Limited ("Private") which carried out the share and options trading for their client. (I shall refer to the two affiliates collectively as "BNP"). 5 The relevant agreements comprise an options trading agreement of 22 December 1998 between SCC and Private ("the options trading agreement"), a margin lending agreement of the same date between Mr and Mrs Morgan with Equities ("the loan agreement") and a letter agreement of 4 July 2001 between Mr Morgan/ SCC and Equities ("the July Agreement"). In addition, though not featuring in any detail in this appeal, there were these further agreements: (a) an equitable mortgage of shares between Equities on the one hand and Mr and Mrs Morgan with SCC on the other securing the obligations of Mr and Mrs Morgan ("the equitable mortgage"), (b) a guarantee and indemnity between Equities and SCC in respect of the obligations of Mr and Mrs Morgan ("the guarantee and indemnity"), and (c) a charge over the property of SCC ("the charge"). 6 In the course of argument in the appeal, the issues were refined and factual matters in dispute substantially narrowed. 7 The issues on appeal can therefore be stated more precisely, as follows. In the events that happened, and having regard to the terms of the trading and loan agreements of 22 December 1998 and, to the extent relevant, the letter agreement of 4 July 2001 (a) was a call effectively made by BNP on 15 August 2001 and if so (i) pursuant to which of the relevant agreements, and (ii) was it met by the appellants? (b) if not met, was a further call effectively made and not met on 17 August 2001 and if so, pursuant to which of the relevant agreements? (c) depending on the answers to (a) and (b) above, was BNP entitled to terminate the relevant facilities and close out any outstanding options? 8 It is accepted by the respondents that no relevant issue now arises as to whether the appellants were in breach of the July agreement. It was never part of the respondents' pleaded case nor argued that any breach by the appellants of the July Agreement entitled the respondents to treat that agreement as repudiated. It is also accepted by the respondents that only if a valid call was made by BNP on 15 August 2001, and not met, does any issue arise as to whether a further call was made on 17 August 2001.

SALIENT FACTS 9 A dramatis personae of the relevant persons and companies is set out below: Person / Party Position Description / Title Antoinette Garside BNP, Risk Management (Employee). BNP Paribas Equities (Australia) Limited (ACN 002 580 832), "Equities." Manager of the Margin Lending Facility, the First Defendant and the First Cross-Claimant. BNP Paribas Equities Private (Australia) Limited (ACN 003 307 873), "Private." Manager of the Options Trading Facility, the Second Defendant and the Second Cross-Claimant. Charles Knights Senior BNP Client Advisor (level 3 certification) to Sydney Concrete and Mr and Mrs Morgan David Holmes BNP, Business Director, BNP Paribas Equities(Australia) Limited, "Equities" (Margin Lending) Dene Morgan Wife of Robert Morgan and party to the Margin Lending Agreement / Account. The Fourth Cross-Defendant. Guy Hedley BNP, Business Director, Head of BNP Paribas Equities Private (Australia) Limited ("Private"), Options Trading Oliver Rousseau Managing Director, BNP Paribas Equities (Australia) Limited Prudential-Bache Predecessor Broker for Options and Equities Trading to BNP Robert Morgan Husband of Dene Lurline Morgan and party to the Margin Lending Agreement / Account. The Third Cross-Defendant. Stephen White BNP, Head of Risk Management Sydney Concrete and Contracting Pty Limited, (ACN 054 377 409). Family company of Robert Morgan and Dene Morgan, and party to the Options Trading Agreement / Account. The First Plaintiff and the First Cross-Defendant.

10 The essential background stated in uncontroversial fashion is as follows. 11 Mr Morgan is an experienced trader who has operated SCC for many years. Mr and Mrs Morgan are directors and shareholders of SCC which operates as a family company. Prior to the trial, their income was primarily through SCC's activities. From approximately 1997 Mr Morgan started to trade in shares and options on his own account and continued thereafter. Around the 1999 tax year Mr Morgan through SCC undertook that trading activity. That activity became SCC's principal, and in effect only, business activity. 12 Initially SCC's Margin Lending Facility was with the company called Prudential-Bache. The Prudential-Bache facility had a limit of $400,000. 13 In October 1998 Mr Morgan was informed that the stockbroking operations of Prudential-Bache were to be transferred to Private. The relevant correspondence said that "If you have a margin lending facility with [Prudential-Bache], unless you are notified otherwise [Prudential-Bache] will assign its rights and obligations under the facility (and any outstanding margin loans) to [Equities] with effect from 17 November 1998". 14 On 28 October 1998 Mr and Mrs Morgan as directors of SCC executed the Client Agreement for ASX Derivative Products and Risk Disclosure Statement for derivatives trading. 15 Following further background events not presently material, on 22 December 1998 a number of documents were executed by the parties, including the options trading agreement and the loan agreement, along with an equitable mortgage of shares and guarantee and indemnity as earlier described. 16 Also in about December 1998 SCC was required to purchase at least 22,000 BHP shares at $13 per share following the exercise of a Put Option on options that it had written. The total cost of that purchase was $287,479.50. 17 At around that time, pursuant to the Morgans' loan application, a margin facility of $400,000 was provided under the loan agreement. 18 Following the transfer from Prudential-Bache to BNP on 26 January 1999 of the former stockbroking business, though the BHP trades had not been settled, yet when the Client Statement of 28 February 1999 was received, it recorded a portfolio market value of $686,700, which included 50,000 BHP shares, but a loan liability (after "unsettled" transactions) of only $9,518.45. The effect of this was that the client SCC had been credited with the ownership of 21,000 BHP shares but not debited with their cost, paid on its behalf. 19 Subsequently in March 1999 there was an increase in the limit of the margin lending facility. 20 In due course, Mr Knights became SCC's client adviser, Mr Knights being a senior BNP client adviser. 21 In July 2000 the so-called dual pledge arrangement earlier made was reviewed. It was an arrangement by which shares held by SCC could be used as collateral both for the margin facility under the loan agreement and for its options trading. After negotiations, the dual pledge arrangement was permitted to continue as "an individual arrangement particular to [Mr Morgan's] Margin Lending Facility …"; see Blue 3, 728-9. 22 In October 2000, following an internal "investigation" by BNP, the failure to charge against (debit) the margin lending facility with the sum of $274,365 (being the original cost of the 22,000 BHP shares of $287,479.50, less $13,114.50) was identified. (The latter figure was the cost of 1,000 BHP shares.) The effect of the entries dated 8, 9 and 26 February 1999 was that the cost of 1,000 shares was properly debited against the margin lending facility, while the cost of 21,000 shares was not. This error was communicated to Mr Morgan. 23 Mr and Mrs Morgan and SCC have not challenged the trial judge's finding that a liability of $274,365 (plus interest) existed for the unpaid BHP shares. 24 The "dispute" concerning these BHP shares continued and on 4 July 2001 the July agreement was signed which settled that "dispute" on terms. The July agreement, of which paras 2, 3 and 5 are particularly significant, stated: "Dear Mr Morgan

We refer to our recent correspondence in relation to this matter and to our meeting on 19 June 2001.

BNP Paribas Equities (Australia) Limited ("BNPPE") acknowledges the error ("Error") which occurred in understating the margin loan balance of Sydney Concrete and Contracting Pty Ltd ("SCC") by $274,365 (the "Understated Amount"). BNPPE has also foregone interest on that amount for a period of 22 months, equating to $43,341 (the "Foregone Interest"). BNPPE's total loss comprises the Understated Amount plus the Foregone Interest, totalling $317,706 ("BNPPE's Loss"). BNPPE asserts that BNPPE's Loss is payable by SCC, which is denied by SCC.

SCC asserts that it has relied on BNPPE's statements which included the Error, when trading in options and equities, and asserts that as a result it has suffered losses and damages in excess of approximately $460,000 ("Trading Loss"). SCC will also be required to pay interest on its trading profits, some of which profits will be paid to BNPPE in accordance with the terms of clause 3 below. SCC estimates that the amount of interest that it will have to pay on its trading profits which will be paid to BNPPE under clause 3 below will be $100,000 (the "Interest on Trading Profits"). SCC's total loss comprises the Trading Loss and the Interest on Trading Profits, totalling $560,000 ("SCC's Loss"). This is denied by BNPPE.

The parties wish to resolve this dispute in a manner that allows BNPPE to recover BNPPE's Loss and that allows SCC to recover SCC's Loss, on the following terms:

SCC will continue to trade through BNP Paribas Equities Private (Australia) Limited ("BNPPEP") with its adviser Charles Knights.

Subject to paragraph 4 below, should SCC be required to lodge margin cover in excess of $400,000 with the Options Clearing House in connection with its options trading, BNPPE will provide this margin cover to OCH on behalf of SCC, to a maximum of $1.5 million. SCC will pay interest on this amount to BNPPE at the interest rate charged by BNPPE on margin loans to its clients from time to time.

Until an amount equal to BNPPE's Loss is recovered by BNPPE, SCC will forward to BNPPE on a monthly basis: (a) $10,000; and

(b) if after the above payment has been made to BNPPE, SCC's remaining trading profits are in excess of $18,000, 50% of the amount by which those trading profits exceed $18,000,

The amount paid to BNPPE pursuant to item 3 and the arrangements in item 2 will be reviewed by BNPPE and SCC at six monthly intervals. At the six monthly reviews a comparison will be made between the amount which has been paid up until that time and the payment targets of $158,853 after a period of eighteen months and $317,706 after a period of three years (each period to commence on the date of execution of this letter by SCC). If, taking into account the amounts paid up until the review time, market conditions and any other factors which the parties agree to be relevant, the parties agree that it is unlikely that the 18 month or three year (as applicable) repayment target will be met, the parties must discuss and attempt to agree on reasonable alternative payment arrangements, such as requiring a fixed dollar sum to be paid on a monthly basis, so as to ensure that the entire amount of BNPPE's Loss is recovered by BNPPE within three years from the date of the execution of this letter by SCC.

Subject to the 6 monthly and eighteen monthly reviews as described in paragraph 4 above, the facility described in paragraph 2 above is to remain available to SCC for a period of 3 years to facilitate SCC's recovery of SCC's Loss.

The parties agree that they will also meet to discuss the payment arrangements if Charles Knights leaves the employment of BNPPEP or if either of Charles Knights or SCC do not wish to continue their present relationship of securities adviser and client.

Any disputes between the parties in relation to the arrangements set out in this letter of offer which are unable to be resolved by them will be determined by the Chairman of the Australian Commercial Disputes Centre or by his delegate.

Both parties will treat these terms with strict confidence and will not disclose them to any other party with the exception of their legal and/or financial advisers and as required by law.

David George Lesnie Director BNP Paribas Equities (Australia) Limited" 25 In mid-July 2001, as part of its options trading, SCC wrote 650 September 2001 $5.75 Telstra American style Put options (corresponding to 650,000 Telstra shares). Being American-style, the options could be exercised at any time up to the expiry date, namely about 27 September 2001. Telstra was to go "ex-dividend" from 17 September 2001. The effect of these transactions was that SCC granted to the takers of the Put options the right, but not the obligation, to require SCC to purchase 650,000 Telstra shares at $5.75 (for which it was paid a premium of $322,355). At the time SCC wrote the Put options, they were "in the money" meaning that the market price of the Telstra shares was substantially below the strike price of the options. The market moved against SCC's positions (in that the Telstra share price declined during the option period). The commitment which SCC entered into had the potential of requiring it to fund a total purchase price of $3,737,500. I interpolate here that SCC's true exposure, if not covered, should be measured by the difference between the Put price which SCC was obliged to pay, if the Put was exercised against it, and what it would derive by selling the Telstra shares at the (lower) stock market price, with the premium being available as a (partial) offset. That exposure was, according to the appellants but disputed by the respondents, sufficiently covered when on 15 August 2001 a further 26,000 Telstra shares were made available as collateral, using funds made available by BNP's loan facility. I deal with those competing contentions under "Disposition" below. 26 SCC was therefore losing money on the Put options from mid to late July 2001. 27 In the period 4 July 2001 to 17 August 2001 SCC withdrew payments totalling $30,000 from its options account. In that period, SCC did not forward any cash payments to BNP. 28 As of 31 July 2001, SCC's net premium on its Options Trading Accounts for July was about $88,000; Blue, 24. On the basis of clause 3 of the July Agreement, even if the first $10,000 was required to be paid out of monthly trading profits, Equities was entitled to that $10,000, plus 50% of the remaining trading profits in excess of $18,000 with SCC entitled to the other half. 29 On 15 August 2001 BNP purported to make a margin call, though under which agreement and whether an effective call is in dispute. Also disputed is whether, as the appellants assert, if and to the extent another call was made, it was met by the provision of collateral in the form of 26,000 Telstra shares purchased in the name of SCC using the Margin Lending Account. I elaborate on the detail of the events of August 2001 under "Disposition" below, insofar as necessary to resolve these competing contentions. 30 The question of whether a further call was made on 17 August 2001 would only arise if the first call of 15 August 2001 had not been met. 31 Finally, the culminating event of 17 August 2001 occurred when Messrs White, Hedley, Cook and Schaffer of BNP, having agreed that the client risk was unacceptable and that in their opinion the agreement had been operated in bad faith, decided to liquidate all exposures and settle with the client, a process carried out by the following. On 17 August 2001 BNP matched out SCC's options positions and realised the securities pledged (a total of 100,000 Telstra shares). Equities thus claims the balance due at 17 August 2001 of $600,568.55 together with $11,921.70, making a total of $612,490.25 said to be owing under the Margin Lending Account. In addition, Private claims the balance due of $571,725.12 under the relevant Options account. These sums total $1,184,215.37 and are gross of the proceeds of sale of the Telstra shares the subject of the dual pledge, $490,105.80, leaving a net sum of $694,109.57. 32 When payment was refused to BNP, SCC sought declarations, damages and a taking of accounts alleging that the BNP parties breached the 4 July Letter and wrongfully closed out its positions. BNP, by cross-claim, sought payment of the balances they said were outstanding in the Margin Lending and Options Tradings Accounts. The claims of Mr and Mrs Morgan and SCC were dismissed and the BNP cross-claim upheld. Mr and Mrs Morgan as principals and SCC as guarantor were found jointly and severally liable for the outstanding balance on the Margins Facility and SCC was found liable for the outstanding balance of the Options Trading Account.

First instance judgment 33 So far as relevant to this appeal, I need only summarise the findings of the trial judge. These included a finding, clearly supported by the evidence, that Mr Morgan was an experienced trader in shares and options who followed the Market closely and was well aware of the commercial risks involved, there being no reason to doubt that he had a sound working knowledge of the terms of the Margin Lending Facility; Judgment [41]. The trial judge formed an adverse view of Mr Morgan as a witness concluding that his evidence should not be relied upon where it was contested, unless corroborated or consistent with independent and accepted documentary or other evidence. He found various parts of Mr Morgan's evidence unconvincing; Judgment [42]-[43]. The trial judge did however accept Mrs Morgan's evidence though noting that she left it to her husband to make the decision to about SCC's trading; Judgment [45]. 34 The trial judge concluded that Mr and Mrs Morgan and SCC were estopped from denying the relationship evidenced by the loan agreement, the guarantee and indemnity and the equitable mortgage, and hence from denying their respective liability in accordance with the terms and conditions contained in those documents; Judgment [73]. 35 Because this matter is not in issue on this appeal, it is not necessary to deal with the trial judge's findings with respect to whether or not Mr Morgan was obliged to pay $10,000 pursuant to clause 3(a) of the July Agreement nor whether he in fact sought to do so by instruction to Mr Knights. 36 Insofar as the construction of the July Agreement remains relevant to the issues in this appeal, I should note the following conclusions of the trial judge. First, when referring to various matters said by Mr Hedley, he concluded that "[147] In my opinion nothing said by Mr Hedley provided a reasonable basis for Mr Morgan to think that the July agreement was to be varied so that Equities undertook to lend to SC [SCC], without security, money to the specified limit for the purchase of shares for margin cover with OCH in lieu of cash. As evidenced by that conversation and the subsequent conversations with BNP representatives, it seems clear that Mr Morgan's understanding of the July agreement was fundamentally flawed." 37 Second, in construing the July Agreement, the trial judge concluded that: "[160] Clause 1 provided that SC will continue to trade through Equities with its advisor Mr Knights. In my opinion it shows that the parties intended continuing performance of the existing arrangement with the effect that SC's trading would continue in accordance with the terms and conditions of the options agreement, the loan agreement and the other documents related to the margin lending facility including the dual pledge arrangement. There is nothing in the language of the July agreement which indicates the intention of the parties to depart from those terms and conditions by which trading had been conducted until then. Indeed, a reasonable reading of the document shows that the provision of the facility under cl 2 is predicated on the assumption that trading in shares and options will continue in accordance with them." 38 The trial judge construed clause 2 of the July Agreement, read with clause 1, as "that SC would continue its options trading as before for which Equities would provide margin cover if required in excess of $400,000 to the specified limit, thereby affording SC the opportunity to increase its trading and, if profitable, to recover its loss"; Judgment [164]. 39 However, noting that Private was not a party to this arrangement, the trial judge concluded "that the July Agreement does not operate to relieve SC from the application of any terms and conditions of its agreement with Private"; Judgment [165]. In particular his Honour concluded that "there is nothing in the July Agreement which restricts or qualifies the entitlement of either [Private or Equities] to make a call and require collateral under those agreements"; Judgment [165]. 40 These conclusions concerning the proper construction of the July Agreement as in no way qualifying the capacity to make a margin call under the options trading agreement and, to the extent relevant, the loan agreement, underpinned the trial judge's conclusion that on 15 August 2001 a margin call had been made under, it would appear, the options trading agreement, which was required to be met by 17 August 2001; Judgment [142]-[144]. 41 Then at Judgment [150]-[151] the trial judge found that the following conversation took place on 17 August 2001: "[151] A conversation then took place the effect of which I find to be as follows: Mr White informed Mr Morgan that he was in default under the margin loan facility and the payment of $10,000.00 to BNP under the July agreement had not been made and was due. He went on to say that further trading would not be permitted unless cash or stock was provided as security for SC's exposure under the facility, and the money due under the July agreement was paid. Mr Morgan said that he would not make any payment as, on his understanding of the July agreement which provided only for profit sharing, he was not obliged to do so, and would not provide cash or stock as security. Thereupon, Mr White advised him that as the contracts had been in default for some time there was no choice but to close down all exposures and seek a settlement. There was some discussion about settlement with no result. Mr White explained, and I accept, that the effect of this exchange was that a margin call was made which Mr Morgan would not meet, and the demand for payment was rejected." 42 Although not explicitly spelt out, one can infer from the trial judge's reasoning that he was satisfied that (a) the margin call on 15 August 2001 was validly made and had not been met including by the purchase of the further 26,000 Telstra shares, presumably because purchased with monies provided by Equities under a loan facility that his Honour concluded required security; and (b) a further margin call was validly made on 17 August 2001 which had not been met. 43 The trial judge at Judgment [176] and [177], quoted below, attributed entitlement to make what he concluded was a margin call made on 17 August 2001 as arising: (a) under clause 9 of the options trading agreement thereby giving rise on refusal to meet it to an event of default under clause 10.1(a), with consequential entitlement to close out open contracts and to refuse to permit continued trading, and (b) under clause 7.1 of the loan agreement, thereby giving rise on refusal to meet it to an event of default under clause 7.3 entitling Equities under clause 11 to terminate any obligation to make further advances and to take other action to enforce the agreements. I quote the relevant paragraphs below: "[176] The events which resulted in the termination of the relationship between the parties on 17 August 2001 have been described. Analysis of those events shows that on 17 August 2001 a call was made for the provision of security under cl 9 of the options agreement. The refusal to meet the call was an event of default under cl 10.1(a). Thereupon Private was entitled to take any action it considered reasonable in the circumstances including closing out the open contracts under cl 10.2(a). In the circumstances it was entitled to refuse to permit continuation of trading if the call was not met.

[177] Furthermore, under the loan agreement, the circumstances gave rise to a margin call under cl 7.1, and refusal to comply entitled Equities to sell SC's portfolio as it believed it was necessary or desirable to do so (cl 7.3). The failure to meet the margin call was also an event of default under cl 7.3, upon which Equities was entitled under cl 11, inter alia, to terminate any obligation to make further advances, and to take any action it considered to be necessary or desirable to enforce the agreements evidenced by the transaction documents in order to remedy the event of default." 44 Under "Disposition" below I deal with the appellants' challenge to these conclusions. It is based on a close consideration of the events of August 2001 insofar as they bear on whether a margin call was validly made under the relevant agreements, properly construed, and whether if validly made, such call was actually met.

DISPOSITION 45 The first question is whether a margin call was made by BNP on 15 August 2001. If so, the question is whether such call: (a) was made pursuant to one or other of the relevant agreements; and if so which, and (b) was such call if validly made actually met. 46 If the answer to the last question is in the affirmative, it is not necessary to consider the further question of whether a margin call was made and not met on 17 July 2001, having regard to the concession properly made by the respondents in that regard. 47 It is convenient to start with the agreements themselves insofar as they deal with margin calls.

The options trading agreement between SCC and Private 48 Clause 9 of the options trading agreement, being an agreement between SCC and Private, the relevant "Clearing Member" under the "Options Clearinghouse Rules", is in the following terms: "Clearing Member may call for funds or security.

The Clearing Member may call for payment of money or the provision of other security which the Clearing Member considers, in its absolute discretion, appropriate in connection with the obligations incurred by the Clearing Member in respect of contracts registered in the Client's Account. The time by which the Client must pay any amount called or provide security is of the essence and, if no other time is stipulated in the Client Agreement, the Client must pay the amounts, or provide the relevant security, within 24 hours of the call for payment." 49 Relevantly, under "Default", clause 10.1 stipulates the event of default relied upon in the following terms: "(a) (Failure to pay or provide security) The Client fails to pay, or provide security for amounts payable to the Clearing Member." 50 Under clause 10.2, at any time after an Event of Default has occurred, the Clearing Member may without giving prior notice close out any Open Contracts in accordance with the relevant Rule and otherwise take such action as it considers reasonable in the circumstances in connection with Open Contracts. 51 Given the breadth of the power to call for funds or security, I consider that the options trading agreement must be construed as impliedly requiring Private to inform SCC as the Client what money was to be paid or what security provided such that it could satisfy a demand made in terms of clause 9. Otherwise the clause could have no practical operation. The fact that an event of default follows for failure to pay or provide the relevant security with the severe consequences under clause 10.2 emphasises that need. It is of course correct, in accordance with the principles of contractual interpretation, to apply the clause as presupposing on the client trader's part the background knowledge that would be expected of an experienced trader and on Private's part similarly. A client like SCC having that capacity would be expected to bring to bear its knowledge in construing any call made upon it, so long as the call was sufficiently specific to be capable of being so understood by a sophisticated trader.

The loan agreement between Mr and Mrs Morgan and Equities 52 A similar approach must be taken in construing the loan agreement between Mr and Mrs Morgan with Equities, being different though related parties to those of the options trading agreement. 53 The critical clause is clause 7 in particular clauses 7.1 and 7.2(a) and 7.3, along with the relevant definitions in clause 1. I quote those provisions below: "7. Margin Calls

(a) a 'margin call' occurs if the sum of your loan balance and any outstanding settlements exceeds the margin call buffer amount. If, however, this sum exceeds the margin call buffer amount by at least 15% of the total security value there will be no margin call but a changed circumstance will have occurred (see clause 11 for the consequences of a changed circumstance);

(b) A margin call may happen because BNP has: i. determined that a share, stock or other marketable security in your portfolio is no longer an approved security;

ii. reduced the security percentage of an approved security in your portfolio; or

iii. reduced the percentage amount for the purpose of the definition of margin call buffer amount;

(c) BNP may notify you of the margin call and of details of the actions which can be taken to satisfy the margin call.

(d) You must satisfy each such margin call by 1.00pm (Sydney time) on the next business day after the margin call occurs. You must do so even if BNP does not give you a notice requiring you to do so.

(a) You may satisfy a margin call by: i. repaying all or part of the money you owe - you can do this by selling or redeeming approved securities or by depositing funds by bank cheque direct deposit or electronic transfer (but not by cash) into your margin lending account;

ii. depositing funds by cheque (or if BNP requires, a bank cheque), direct deposit or electronic transfer into your mortgaged cash account;

iii. adding further approved securities (that you do not purchase using an advance under this agreement) to your portfolio;

iv. providing BNP with other additional security that is acceptable to BNP; or

v. doing some or all of these things, so that after you have done this, the sum of your loan balance and any outstanding settlements does not exceed your facility limit.

a share, stock, unit or other marketable security which is acceptable to BNP as security for the purposes of this agreement."

(a) (non-payment) you or any guarantor fails to pay on time any amount which is due and payable under any transaction document; … …"

(a) the amount that BNP has told you is the maximum amount it will lend you under this agreement; and

(b) such percentage as BNP may specify from time to time of the total market value."

for an approved security in your portfolio, the market value of that approved security multiplied by its security percentage (expressed as a decimal); and for your mortgaged cash account, the credit balance (if any) of that account." 54 The definition of "Transaction documents" includes not only the loan agreement itself but also the application form and "each other document contemplated by or required in connection with any of the above or the transactions which they contemplate …". 55 The respondents submitted that a margin call did not require any notice or notification to the client. It took place if the event in clause 7.1(a) occurred, that is to say if the formula within the 15% cap were triggered, under any of the circumstances in clause 7.1(b) or indeed any other circumstance that might bring that result about. 56 Interpolating the factual position here, there was, following the earlier events in relation to the BHP shares, in the monthly statements provided by BNP to the client an entry referring to that transaction. Under "code" appears "XXX". Under "description" appears "unlisted XXX" with a stated portfolio market value of $274,365 and a portfolio lending value of $246,928.50 and with a lending ratio of 90% implying that a corresponding percentage of that value was available for loan facility purposes from BNP. 57 By the week starting 6 August 2001, it had been appreciated within BNP that there was an error in the statements for SCC because BNP had still not debited the margin lending account for the cost of purchasing the BHP shares. 58 Accepting that this error should also by then have been appreciated by SCC and the Morgans, it is nonetheless undisputed that they did not have any awareness of what then occurred on 9 August 2001. On that day, Mr White directed Ms Garside "to cause the XXX code in the Morgans' margin lending statements to be reversed", no one telling Morgan that this had been done; see White affidavit at para 21, Blue 6,1580, Black, 184.12-.36 and Black, 164.1-.25. I shall refer to this as "the reversal". 59 It is as, I have said, common ground both that the reversal took place and that at no time in the events leading up to and including 17 August 2001 was SCC or the Morgans made aware of this. 60 It is also common ground that the effect of the reversal was to put the Morgans, and (insofar as one may equate SCC with the Morgans though the former was not an actual party in their own right to the loan agreement), SCC, in a position where, under the formula in cl 7.1(a) the sum of SCC's loan balance and any outstanding settlements exceeded the margin call buffer amount, though only because of that reversal. That excess, as again is common ground, did not cause there to be what clause 7.1(a) deems "a changed circumstance" with its different contractual consequences. 61 Notwithstanding the background knowledge and expertise of Mr Morgan, he, being ignorant of the reversal, could not have been aware that the formula in clause 7.1(a) had been triggered so as to give rise to a margin call or any capacity to make one. On the facts, no explicit margin call was made on 15 August 2001 in terms of clause 7. The respondents, however, simply submit that this is irrelevant as the clause was triggered by the undisclosed reversal of the XXX entry thus giving rise to a margin call without more being required on anyone's part. 62 As Kirby P observed in Hide & Skin Trading Pty Limited v Oceanic Meat Traders Limited (1990) 20 NSWLR 310 at 313-4, "Whoever may be the parties to the agreement, it is the fundamental rule, that a Court should give the words of a written agreement the natural meaning that they bear. Subject to that rule, in giving meaning to the words of an agreement between commercial parties, Courts will endeavour to avoid a construction which makes commercial nonsense or is shown to be commercially inconvenient. This is because Courts will infer that commercial parties would not themselves normally agree in such a way." 63 When one turns to the natural meaning of the words used, the interpretation pressed by the respondents is not a necessary consequence of the natural meaning of the words used. I am satisfied that the better view is to the contrary of the interpretation pressed by the respondents; a margin call cannot be made sub silentio as it were, in circumstances where the Morgans were ignorant of the happening of the trigger event of cl 7.1(a). 64 Consider clause 7.2, setting out "how you can satisfy a margin call". If the respondents' interpretation were correct it would lead to the consequence that in the absence of any communication at all from Equities, the Morgans (or SCC) would not know what amount was needed to be paid or repaid to satisfy the uncommunicated "call" or what further approved securities needed to be added. It is true that under clause 7.2(a)v there is also a formula. It says that after doing "some or all of these things" (repayment of money owed, depositing further funds or having further approved securities or additional security acceptable to BNP) "the sum of your loan balance any outstanding settlements does not exceed your facility limit". But to comply, one must first know, or at the very least be in a position to know by the exercise of reasonable diligence, that the trigger for the margin call under cl 7.1(a) has occurred. There is no basis for assuming any awareness on the part of the Morgans (or SCC) of that trigger event, as they did not know of the reversal which brought it about. 65 A further problem with that interpretation is that the elements of the formula in cl 7.2(a)v are themselves dependant on further information from BNP. Thus the definition of "facility limit" is dependant on quantification of "the total security value". It is in turn "the sum of the security value of each approved security in your portfolio and the security value of your mortgage cash account". That in turn depends upon the market value of an "approved security" multiplied by its "security percentage". The latter is the discount which BNP would impose. Unless the client knew what that percentage was at the time, the client could not be confident that it had brought itself into compliance with the formula in cl 7.2(a)v. Moreover, even compliance with that formula in cl 7.2(a)v does not mean that the margin call trigger clause (7.1(a)) is no longer operative, though one might imply that it was not. 66 All of this strongly indicates that when clause 7.1(c) states that "BNP may notify you of the margin call and of details of the actions which can be taken to satisfy the margin call", "may" in effect means "shall" when it comes to making a margin call in terms of the loan agreement. Otherwise, the client would simply not know what were the actions which should be taken to satisfy the margin call. Nor would the client know, in the absence of knowing a margin call existed, that actions were required to be taken in the first place. 67 That then leads to the proper interpretation of clause 7.1(d) with its concluding sentence, "You must do so [that is satisfy each such margin call] even if BNP does not give you a notice requiring you do so". The words are ambiguous and are capable of meaning, read literally, that no notice of the margin call is required before the obligation to satisfy arises. But the more plausible meaning, and one which avoids a commercially unreasonable result, is that what is excused of BNP is the necessity to give notice that the margin call must be satisfied; it is enough to give notice of the call itself. Here it could not be said that even a person of Mr Morgan's expertise was obliged to act upon a margin call when he was not aware that there had been one, nor of circumstances that would allow him to conclude that the trigger event in cl 7.1(a) had occurred. This was because he was not made aware at the critical time of the reversal. 68 I now turn to the other relevant events as they bear on any margin call. 69 Part of the background information which BNP through its officers brought to the interpretation of the relevant agreements was that there was dissatisfaction both with the July Agreement as being outside the normal and standard arrangement that BNP had with its clients and, with the double pledge agreement. The latter came about because the options clearing house had first rights over the same shares that also provided margin cover to Equities for the share trading. Equities were therefore at risk that it would not have any security when needed; White's evidence at Black, 142.16-.49 and 144.26-146.31. That realisation on BNP's part in the second week of August, led to discussion taking place internally within BNP on 13 August, see Orange, 63-65. There was a desire within BNP to collateralise the relevant loan facility, but without any spelling out of the degree of collateral to be lodged nor how it was to be determined. There was no notification to the client then or subsequently that dual pledging was to be suspended. The client SCC and the Morgans were entitled to assume continuance of that arrangement, as reflected in the July Agreement. 70 On 14 August 2001, Mr Hedley sent an email to Mr Knights concerning SCC saying, "Further to my discussion yesterday, we need to ensure that the clients Margin Lending facility is operated with sufficient collateral buffer. Can you please ensure that no additional liability is incurred on the account until such time as this occurs. We require the position to be operating under our normal margin lending requirements no later than this Friday, 17 August. I am happy to discuss with Bob [Morgan] if he wants."; Blue 1, 27 and 75. 71 Mr Knights replied to Mr Hedley's email saying "I have spoken to Bob yesterday and I believe this can be sorted out by the client buying stock. The client would prefer to clarify this with you. Grateful if you would ring him …". 72 This provides the background to the critical conversation that occurs at about 9.50am on 15 August 2001 as set out in paras 296-7 in Mr Morgan's affidavit (Blue, 405-408 and Blue, 917). "296 At around 9.50am on 15 August 2001 Hedley telephone me and we had a conversation to the following effect: Hedley said: 'The Bank wants the margin on the special $1.1 million facility collateralised.' I said: 'What do you mean?' Hedley said: 'The Bank wants you to purchase stock with this special facility as happens in the normal way of a margin lending account. The present management is too difficult. The Bank will not continue to lodge cash at the OCH for the margin cover. The Bank has no ability to control the cash. The Bank can control stock through margin lending.' I said: 'But what about the agreement Sydney Concrete has with the Bank? That makes no mention of Sydney Concrete putting up stock. It's a cash facility.' Hedley said: 'I interpret the agreement different from you. The Bank never had in mind for Sydney Concrete's margin at the OCH to be covered without collateral.' I said: 'I don't see the agreement as that. That's not what's written.' Hedley said: 'I've gone into bat for you with "Hong Kong". They want to liquidate Sydney Concrete. I've got them to agree not to do this. If you don't agree, the Bank will fight in court and that seems like a waste of time as I thought we would be able to work this out.' I said: 'What's the Bank going to do about Sydney Concrete's loss? Under the agreement Sydney Concrete has the ability to recoup its loss?' Hedley said: 'The Bank is giving Sydney Concrete time.' I said: 'I don't agree with what you are now proposing.' Hedley said: '"Hong Kong" want to liquidate Sydney Concrete. I've gone into bat so that this won't happen, but you have got to collateralise with stock. Sydney Concrete's options position must be collateralised by Friday.' I said: 'I don't want to buy stock at their current prices.' Hedley said: 'Well as I have said, if you don't agree the Bank will take you to court.' Hedley and I then discussed stock. Hedley said: 'The Stock that would be appropriate to collateralise with is Telstra, Westpac, Commonwealth Bank. I think each of these stock will appreciate.' Hedley then gave his views on each of these stocks and why he thought the [sic] would go up.

297 The discussion continued in words to the following effect: I said: 'I don't want to buy these stocks at their current prices. I would buy in a dip. CBA is presently at $31.10. I would want it to go down to between $30 to $30.50. Westpac is at $14.30. I would want it to be at $14 to $14.10. Telstra would need to be below $5.10.' Hedley said: 'The positions must be collateralised no later than Friday.' I then said: 'Given what you've said to me, I'll give this a try for the first six months, but I reserve Sydney Concrete's right to enforce the agreement.' The conversation ended there." 73 The trial judge in summarising the conversation at Red, 124 at [142] appears to accept that account in its essential aspects. He records that later that day Mr Morgan gave instructions for the purchase of 26,000 Telstra shares which brought SCC's total shareholding in Telstra to 100,000 which then represented all the shares in its portfolio; Red, 124 at [143]. 74 It was those events that led to his finding that the effect of Mr Hedley's demand was that a margin call under the facility was requiring to be met by 17 August 2001. 75 It also appears from the earlier quoted part of the trial judge's judgment (Red, 129 at [176]), that while he concluded that a call had been made under both the options trading agreement and loan agreement on 17 August 2001, it is clear from the earlier part of his judgment (Red, 125 at [142]) that the margin call here made was made under the options trading agreement. There is no suggestion that a call was made also under the loan agreement. That appears to be accepted by the respondent in argument on appeal, though in any event I consider that to be the correct conclusion. 76 The question then becomes whether under the options trading agreement and in particular clause 9, a margin call had in fact (a) been made and (b) met. 77 Mr Morgan in fact acted as if he did understand what was required by collateralising. He acted upon what was said and purchased 26,000 Telstra shares utilising the special 1.1 million facility under the July agreement, he having been actually instructed by BNP to purchase stock "with this special facility" and being entitled under the July agreement so to do. Mr Hedley of BNP ratified the order. Moreover, if one looked at the context of what exposure then existed to the knowledge of both parties, it was the exposure from the 650 put options over Telstra shares. This, as at 15 August 2001, represented $151,053 (according to the document handed up without objection on appeal). 78 The value of the 26,000 Telstra shares, bought at $5.08 per share was approximately $132,000. 79 No argument was put that, were the Telstra shares brought in at their value of $132,000, that value would fail to cover sufficiently the exposure of approximately $151,000. Rather, what was contended was that, because the Telstra shares were bought with a loan facility provided by BNP, the corresponding liability should have been taken into account. Therefore, it was said that the further Telstra shares purchased would have a nil value when the reciprocal liability was taken into account. 80 Clearly enough, the trial judge accepted that argument, in rejecting any construction of the July agreement that would indicate a position to the contrary. 81 I must however respectfully disagree. First, it is clear beyond doubt that the Bank's instruction was to utilise the special facility provided by the July agreement. That is precisely what Mr Morgan caused SCC to do. It matters not whether the July agreement contemplated a secured loan as distinct from an unsecured loan, with the dual pledge arrangement (described under Salient Facts above) still continuing. The Bank's actions in requiring that the call be met by utilising the special facility, consistent with the terms of the July agreement, foreclosed any argument that the Telstra shares could not be given any value as collateral because of the reciprocal liability under the loan made available by Equities. 82 Second, in the context of the dual pledge arrangement, though the Telstra shares did stand as further security under the options trading agreement, they happened also to be security under the loan agreement. That fact does not in my view detract from there having been compliance with such call as was made.

Conclusion 83 It follows that I would conclude: (a) a margin call was made pursuant to the Options Trading Agreement on 15 August 2001, utilising the additional facility provided under the July agreement, and (b) SCC and Mr Morgan complied with that margin call such that there was no refusal to meet it and thus no event of default under the Options Agreement; to the extent that the trial judge concluded to the contrary at [176] he was, with respect, in error.

Subsequent events 84 I have already dealt with whether the removal of the "XXX" entry from the statements gave rise to a margin call under the loan agreement, concluding to the contrary, for the reasons stated. 85 It is accepted by the respondents that only if a valid call was made by BNP on 15 August 2001 and not met that any issue arises as to whether a further call was made on 17 August 2001. Given my conclusion that a call was made on 15 August 2001 and met, this issue does not arise. It is therefore unnecessary to deal with the submissions of the appellants of 25 April 2006 at 2.4 to 2.8 on that matter.

OVERALL CONCLUSION 86 In my judgment the appellants succeed in their appeal and the cross-claim of Equities and Private should be dismissed with costs. It was common ground if that result occurred, the matter should be remitted to a Justice of the Supreme Court in the Equity Division for the purposes of determination of any damages for which SCC are entitled to recover from Equities and Private. Accordingly I would propose orders as follows: (1) Appeal allowed. (2) Judgment for Sydney Concrete & Contracting Pty Ltd under its Statement of Claim against BNP Paribas Equities (Australia) Limited and against BNP Paribas Equities Private (Australia) Limited filed in proceedings 50185/01, with damages to be assessed by remitting their assessment to a Justice of the Supreme Court in the Equity Division. (3) That the cross-claim of BNP Paribas Equities (Australia) Limited and BNP Paribas Equities Private (Australia) Limited be dismissed with costs. (4) The respondents to pay the costs of the appellants in the court below and on appeal. 87 McCOLL JA: I agree with Santow JA.

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