Primebrokers Securities Ltd (recs & m'gers app'td) (in liq) v Fortis Clearing Sydney Pty Ltd [2009] VSC 364

2 Fortis offered execution, clearing and settlement services in relation to all products listed on the Australian Stock Exchange and the majority of products listed on the Sydney Futures Exchange. These services related to the sale and purchase of securities, including the placement of trades and the delivery or receipt of securities in exchange for money. Fortis offered its clients direct access to the Australian Stock Exchange and the Sydney Futures Exchange so that a client could place trades through Fortis without an intervening broker.

3 Fortis also offered its clients securities lending services, finance for trading activity and custody services. The custody service offered by Fortis involved the holding of a client's portfolio in the name of Fortis until the client wished to deal with the portfolio or part of it.

4 Primebroker entered into a Standard Client Agreement (SCA) with Fortis dated 19 December 2006. Under the SCA Fortis agreed to provide a number of services to Primebroker, including settlement; clearing and custody; a credit facility of $A50m; and securities borrowing and lending. Schedule 3 of the SCA contained the terms of the Dealing Loan Facility under which credit was provided. Schedule 11 of the SCA was a separately executed standard form contract entitled Australian Master Securities Lending Agreement (AMSLA), also dated 19 December 2006.

5 Fortis advanced funds to Primebroker under a dealing loan facility and "borrowed" securities from Primebroker under the AMSLA. On 4 July 2008 Primebroker was indebted to Fortis in the sum of $20,811,364.62 and Fortis held borrowed securities with a market value exceeding the loan amount. On that day the Australia and New Zealand Banking Group Limited appointed Stephen Longley and Paul William Kirk as joint and several receivers and managers of Primebroker.

6 On 14 July 2008 the directors of Primebroker resolved to place the company into voluntary administration pursuant to s 436A of the Corporations Act 2001 and appointed Laurence Fitzgerald and Michael Humphries as administrators. On 16 October 2008 the creditors of Primebroker voted to place the company into liquidation and on that date the administrators became its liquidators.

7 The appointment of receivers and managers on 4 July 2008 was an Event of Default, as that expression is defined in the SCA and the AMSLA. When notified of the appointment on 4 July 2008 Fortis immediately the borrowed securities, purporting to exercise powers of sale under cl 17.3 of the SCA. By the close of business on 4 July 2008 Fortis had sold securities to the value of $4,558,476.01.

8 On 7 July 2008 Primebroker requested that Fortis delay liquidating the securities. Fortis did not sell any securities on 7 July 2008 but on 8 July 2008 instructed its brokers to commence selling. Selling continued until 17 July 2008 when Fortis requested its broker to stop. As at the close of the market on that day the total proceeds generated from sales of the securities was $20,986,312.72. Some borrowed securities held by Fortis remained unsold.

9 After deducting the amount of the loan and its other entitlements, Fortis arrived at a balance of a little over $100,000 which it concedes is due to Primebroker, subject to downward adjustment by reference to some legal expenses which are yet to be deducted.

10 Primebroker argued that any adjustment to be made between the parties and the calculation of the amount due to it by Fortis had nothing to do with the amount realised by Fortis from the sale of the borrowed securities. It argued that where securities had been borrowed under the AMSLA an Event of Default required an immediate adjustment to be made between the parties under cl 8.2 so as to arrive at "the balance of the account".[1] Only then might that balance be taken into account by Fortis when exercising default powers under cl 17.3 of the SCA.

11 In order to arrive at "the balance of the account", cl 8.2 of the AMSLA required the netting of accelerated obligations as at the date of default. The amount of the advances were to be set off against the value of substitute securities that Fortis was contractually bound to deliver. In general terms, the value of the substitute securities was their market value on the first business day following the date of default, which was 7 July 2008.

12 It is common ground that the value of substitute securities on 7 July 2008 was substantially more than the amount recovered by Fortis from the sale of the borrowed securities. Primebroker submitted that there was a balance due to it of around $4 million.

13 Fortis argued that the netting provisions in cl 8.2 had no application because of an amendment made to the AMSLA under an Amendment Deed dated 16 April 2008. Accordingly, it was driven back to the exercise of its default powers under cl 17 of the SCA. It argued that the parties had conducted themselves on the basis that the borrowed securities were an asset of Primebroker and as such were available for sale under cl 17.3 of the SCA in the event of a default. If Fortis is correct, it is the proceeds of the sale that are to be applied against the advances repayable by Primebroker and not the higher notional value of substitute securities calculated on 7 July 2008.

This Standard Client Agreement sets out the way in which Fortis will provide third party clearing and ancillary services to the Client.

The governing obligations are set out in the main body of this Agreement, which covers the overall relationship between Fortis and the Client. The definitions and interpretation provisions for the Agreement as a whole are set out in Schedule 1.

Other services are detailed in the Schedules. In particular, all relevant provisions for Dealing services are set out in Schedule 2, the terms of any Dealing Loan Facility is set out Schedule 3, Custody Services are set out Schedule 4 and Securities Lending is covered by the Australian Master Securities Lending Agreement in Schedule 11. In most cases, only schedules relevant to the services provided to the relevant Client will apply.

15 The structure of the SCA and its Schedules, their interrelationship and operation was the subject of much debate. They are obviously intended to form part of a unified set of agreements, although it is not always possible to reconcile operative provisions. The contract documents are intended to be comprehensive, providing an exhaustive definition of rights and obligations. The terms and conditions relating to the particular services set out in the Schedules, are intended to "cover the overall relationship" between the parties and set out "all relevant provisions" for each of the services provided.

16 Within the suite of documents is to be found a confusing degree of overlap between important topics as well as inconsistencies and contradictions. For example, cl 17 of the SCA deals with the consequences of default, as does cl 7 of Schedule 3, the Dealing Loan Facility. An Event of Default, as defined in Schedule 1, Interpretation and Definitions, takes the reader back to cl 16 of the SCA. Events of Default are separately and differently defined in cl 12 of the AMSLA, and yet cl 1 of the AMSLA states that:

The terms defined in clause 26 and in Schedule 1 have the meaning therein specified for the purpose of this Agreement.

17 Part 2 of the SCA relates to dealing services. The provisions of Part 2 are, for the most part, confined to administrative matters such as the establishment and operation of accounts and the application of operating rules. Clause 5.1 provides:

Subject to clause 5.2, if the Client engages Fortis to provide Dealing services on its behalf anywhere in the world, it does so on the terms of this Agreement and the Dealing services set out in Schedule 2. The client acknowledges that the Operating Rules govern the way Dealing services are provided by Fortis.

18 Schedule 2 sets out the terms upon which client trading is to take place, addressing such matters as instructions, payment and settlement. There is relative harmony between Part 2 of the SCA and Schedule 2.

19 Part 3 of the SCA provides for Ancillary Services which include securities lending, a dealing loan facility, custody services and other administrative and reporting services. Fortis provided securities lending services, a dealing loan facility and custody services to Primebroker.

20 Clause 8 of the SCA (under Part 3) assumes that securities borrowing and lending would be undertaken on the terms set out in Schedule 11, although the clause is primarily concerned with third party lending arrangements procured by Fortis. By cl 8, Primebroker acknowledged that Fortis was its agent to make arrangements for the lending and borrowing of securities and that while Fortis might be the legal owner it had no beneficial interest in securities borrowed or lent under the AMSLA. Clause 8 was subsequently amended by an Amendment Deed dated 16 April 2008. The Amendment Deed is of critical importance to the resolution of the issues before the Court and will be dealt with separately.

21 The relationship between the SCA and the AMSLA is ambiguous. While the AMSLA is referred to as Schedule 11 in the SCA, it was obviously intended to be a stand alone agreement or at least capable of application as such. It was separately executed. Clause 25.1 of the AMSLA provides:

This Agreement constitutes the entire agreement and understanding of the Parties with respect to its subject matter and supersedes all oral communications and prior writings with respect thereto.

Reference to "This Agreement", is a reference to the AMSLA. There is a similar, although not identical, provision in cl 27.3 of the SCA.

22 Clause 9 of the SCA and Schedule 3, the Dealing Loan Facility, provide the terms under which Fortis provided credit to Primebroker. Fortis agreed to make advances to Primebroker, who in turn agreed not to use the facility to finance exchange transactions in financial products outside an agreed index which included the ASX200. An advance is defined to mean an amount drawn or deemed to be drawn by the client pursuant to the facility. If the client had an obligation to pay an amount to Fortis and did not pay that amount the client is treated as having drawn an advance equal to the amount owed.

23 The Dealing Loan Facility makes provision for the payment of interest, but there is no mention of security for the advance. Clause 7 provides:

If an Event of Default occurs, Fortis may, without Notice to the Client, combine, consolidate, merge or apply all or any part of any credit balance standing to any account of the Client with Fortis or any amount available to Fortis by way of set-off, lien or counterclaim in or towards satisfaction of any money at any time due and payable or which may become due and payable by the Client to Fortis under this Agreement. Fortis may for this purpose do all or any of the following:

(a) redeem, vary the terms and conditions of, or appropriate all or any part of any account, deposit of funds or other arrangement between the Client and Fortis on or under which Fortis may be indebted to the Client, notwithstanding any prior agreement to the contrary or the fact that the respective liabilities may not be expressed in the same currency;

(b) effect any currency conversion Fortis considers necessary or desirable; and

(c) in the name of the Client, do all such acts and execute and deliver all such documents as may be required to effect any combination, consolidation, merger or application under this sub-clause.

The Dealing Loan Facility does not form part of a separate agreement executed by the parties and relies upon the definitions contained in Schedule 1 to the SCA.

24 An Event of Default, as defined in Schedule 1 and cl 16 of the SCA, includes the appointment of a receiver and manager. If Primebroker committed a default, Fortis was entitled, under cl 17.3, to take Liquidation Actions. Fortis relied upon that power when selling the securities on and after 4 July 2008. The relevant parts of cl 17 are:

17.1 Default in Relation to the Client

If the Client commits a Default, Fortis may do any one or more of the following:

(a) combine, consolidate, merge or apply all or any part of any credit balance standing to any account of the Client with Fortis or any amount available to Fortis by way of set-off, lien or counterclaim in or towards satisfaction of any money due and payable by the Client to Fortis or by Fortis to the Client under this Agreement;

(b) take the Liquidation Actions in clause 17.3 as if on the instructions of the Client; and

(c) give Notice under clause 18.3.

Except that if the Default is a matter set out in paragraphs (h) to (m) inclusive of clause 16.2, Fortis may not take any action (other than realising a sufficient amount from assets held by Fortis on behalf of the Client to discharge any liability of the client to Fortis relating to the Default), unless the Default has continued unremedied by the client for 3 Business Days from the time when the Default first occurred.

17.2 ...

17.3 Liquidation Actions

The Liquidation Actions are:

(a) such actions as Fortis, where clause 17.1 applies, considers reasonable in relation to the Client Portfolio to realise any asset or to discharge any liability in the Client Portfolio;

...

25 Fortis submitted that the securities were an asset in the Client Portfolio. The Client Portfolio is defined in Schedule 1 to the SCA, as meaning any or all constituents of the Net Liquidation Value (NLV), which itself is relevantly defined to mean -

the difference between the total assets of the Client and the total liabilities of the Client to Fortis, held in any account or otherwise under this Agreement, as determined by Fortis on any Business Day, including, without limitation:

...

(e) the balance of the Client's rights and obligations with respect to Securities lent under Schedule 11 on that day taking into account loans of Securities to the Client and for this purpose the obligations of the Client in respect of each terminated Transaction are treated as discharged; and

(i) the Client in respect of each terminated Transaction is liable to pay to Fortis:

(A) an amount equal to the value as at the Termination Date of the Securities lent under Schedule 11 and/or any Equivalent Securities not yet delivered to Fortis in respect of that Transaction; and

(B) any other amounts in respect of that Transaction accrued and due to Fortis under this Agreement;

(ii) Fortis in respect of each terminated Transaction is liable to pay the Client any amounts in respect of that Transaction accrued and due to the Client under this Agreement.[2]

The significance of constituent (e) under the definition of NLV is that it refers to the "balance of the client's rights and obligations", as if to accommodate the operation of cl 8.2(b) of the AMSLA in arriving at "the balance of the account".

26 Clause 17.4 of the SCA authorises Fortis to apply the proceeds from the realisation of assets to client liabilities. It provides:

Liquidation Actions - Fortis and Client Obligations

(a) ...

(b) The total assets realised by the Liquidation Actions must first be used to discharge all liabilities of the Client Portfolio. The balance is the Settlement Amount.

(c) If the Settlement Amount is positive, Fortis must pay the Settlement Amount to the Client as soon as reasonably practicable after calculation of the Settlement Amount subject to the right of Fortis to set off any amount due to it under any other provision of this Agreement against payment of the Settlement Amount.

...

27 Under the SCA Fortis was entitled to call upon Primebroker to contribute cash or collateral in defined circumstances. This was, in effect, a right to make a margin call. The day to day dealings between Fortis and Primebroker involved notification by Fortis to Primebroker of the NLV. If the NLV fell below the Risk Amount it would constitute an Event of Default. The Risk Amount is defined in Schedule 1 as the greater of the following amounts:

(a) 120% of the Correlation Haircut; or

(b) A$250,000

The highest theoretical aggregate loss of all Open Contracts in the Clearing Account, based on a reliable interval of seven standard deviations as determined by Fortis, or such other meaning as notified by Fortis from time to time.

Open Contracts include unsold securities held by Fortis.

29 Mr Parker, the managing director of Fortis, described the Correlation Haircut as an estimate by Fortis, based on certain statistical parameters, of the highest possible aggregate loss of all of Primebroker's open positions. It was a calculation designed to arrive at the amount of any margin call. The Correlation Haircut, once calculated, was sent to Primebroker by email with the LNV calculation. That practice had commenced in December 2006 and continued until 4 July 2008. If the NLV fell below the Risk Amount, Fortis required Primebroker to deposit additional funds or collateral or to close out positions sufficient to increase the NLV to an amount that was more than or equal to the Risk Amount.

30 Fortis relied upon this course of events to demonstrate what it described as a common assumption to the effect that the borrowed securities were treated by the parties as an asset of Primebroker in the Client Portfolio, available to Fortis to sell as if security for the advances, in the event of a default by Primebroker.

All transactions are entered into in reliance on the fact that this Agreement and all Confirmations form a single agreement between the Parties (collectively referred to as this "Agreement"), and the Parties would not otherwise enter into any transaction.

A Confirmation is a Borrowing Request which is defined to mean a request to borrow securities. There were four relevant Borrowing Requests. Two are dated the same date as the Amendment Deed, 16 April 2008. There are two further requests, dated 29 May 2008 and 30 June 2008 respectively.

32 The practice of securities lending is not new. It was described by Finkelstein J in Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Ltd.[3] Having reviewed an impressive array of background sources, his Honour continued:

Securities lending refers to the practice by which securities are transferred from one party (the lender) to another party (the borrower), with the borrower contractually obliged to redeliver to the lender at a later time securities which are equivalent in number and type. Securities lending is an important element of modern financial markets, playing a substantial role in promoting market liquidity and providing stability to securities settlement systems. Although the practice can be traced back to the 19th century, an active market for securities lending did not emerge until the 1960s. The market developed principally to accommodate two growing needs: first, to avoid settlement failure (stock market transactions had to be settled within a short period) and, secondly, to accommodate short selling (the practice of selling shares that the seller does not currently own in the hope of buying them in at a lower price and in the meantime acquiring shares to complete the sale). Securities lending was also spurred by more sophisticated forms of trading strategies, often involving derivatives, which require borrowed stock. For example, traders in equity options, indexed futures, equity return swaps and convertible bonds began selling short to either hedge their positions or exploit arbitrage opportunities.

The modern securities lending market can, broadly speaking, be divided into two markets, one that is defined by the motive of the borrower (the "securities driven" market) and the other by the motive of the lender (the "cash driven" market). In the first category, which is the more common type of transaction, a borrower seeks access to specific securities, usually to cover exposure to a short position. In the second category, a lender of securities seeks access to cash, often for purposes of equity financing at interest rates which are better than the uncollateralised borrowing rate.

Securities lending is typically structured in one of three ways: securities loan transactions, repurchase agreements and sell-buyback arrangements. While the legal forms of the transactions differ, the commercial purposes are the same. In a securities loan transaction in the securities driven market the lender transfers specific securities to the borrower who must return "equivalent securities" to the lender either on demand, on the occurrence of a defined event or at the end of an agreed term. The borrower: (1) obtains an outright transfer of title to the securities, which may then be sold or on-lent; (2) pays a fee for the use of the securities, calculated by reference to the value of the lent securities; and (3) provides collateral to the lender in the form of cash, other securities or other assets (eg government bonds, certificates of deposit, bank letters of credit), title to which passes to the lender. The value of the collateral exceeds the value of the borrowed securities, the difference in percentage terms being referred to as the "margin". At the conclusion of the transaction there is an exchange of "equivalent securities" for "equivalent collateral". In the event of default provision is made for placing a money value on each party's obligations, setting one off against the other, and, if there is a net balance, for payment of the balance. A securities loan in the cash driven market follows the same structure but with important differences. First, the collateral is always provided in the form of cash. Secondly, the amount of cash collateral is less than the value of the lent securities. And thirdly, the lender pays a fee, much like interest, calculated by using a discounted interest rate. By reason of these differences commentators and securities lending participants colloquially refer to the securities rather than the cash as the collateral.

33 The features of the AMSLA in the present case correspond in material respects with the AMSLA described by Finkelstein J in Beconwood, save for the absence in the present case of any obligation on the part of Fortis, as borrower, to give Collateral in return for the securities.

34 Schedule 3 to the AMSLA contained supplementary terms and conditions. Those supplementary terms are paramount in the event of inconsistency with other parts of the agreement. Schedule 3 provides:

This Schedule 3 forms part of and amends the Australian Master Securities Lending Agreement (including Schedule 1) to which it is a Schedule, as follows:

(a) The parties acknowledge and agree that no Collateral will be delivered or deposited under this Agreement. Accordingly, the following terms of this Agreement are of no force or effect:

(i) clause 4.1(c);

(ii) clause 4.1(d);

(iii) clause 5.2;

(iv) clause 6 (Collateral);

(v) clause 11(c);

(vi) clause 12.1(a);

(vii) clause 12.1(b); and

(viii) Schedule 1, paragraph 1 (Collateral).

(b) The parties agree to add the following clause to this Agreement:

"Any provision in this Agreement which is invalid or unenforceable in any jurisdiction is to be read down for the purposes of that jurisdiction, so far as possible, so as to be valid and enforceable, and is otherwise capable of being severed to the extent of the invalidity or unenforceability, without affecting the remaining provisions of this Agreement or offsetting the validity or enforceability of that provision in any other jurisdiction. For the avoidance of doubt, references to Collateral in this Agreement, other than as specified in paragraph (a) of this Schedule, are of no force or effect where the parties agree no Collateral will be delivered or deposited under this Agreement."

35 Clause 4 of the AMSLA provides that when a security is borrowed the lender will deliver all necessary documents and give all necessary instructions to procure that all right, title and interest in the borrowed securities passes to the borrower free from all liens, charges, equities and encumbrances. Thus, the legal and beneficial interest in the securities passes to the borrower. That consequence is, however, inconsistent with the acknowledgement in cl 8 of the SCA - that Fortis has no beneficial interest in securities borrowed or lent under the AMSLA - and with a submission by Fortis that until 16 April 2008, when the AMSLA was amended, Primebroker retained the beneficial interest in the securities.

36 A contractual obligation to deliver Equivalent Securities to the lender is an essential component of the lending transaction. The transfer of all legal and beneficial interest in the securities to the borrower, whose only obligation is to deliver Equivalent Securities, indicates a clear intention that the lender has no right to redeem the loaned securities. In Beconwood, Finkelstein J said:

The term "securities lending" under these agreements is factually incorrect. The transaction that is referred to as "lending" is in terms an outright disposal of the securities lent, linked to a subsequent acquisition of equivalent securities. In other words the agreements provide that title to the securities on loan, as well as to any collateral that is received by the lender, passes from one party to the other. On the other hand, the economic benefits of ownership are "manufactured" back to the lender by the terms of the securities loan agreements.[4]

37 Clause 7 is important. Apart from a general outer limit obligation to deliver Equivalent Securities, mentioned in cl 11(e) of the AMSLA, cl 7 required Fortis to deliver Equivalent Securities should Primebroker call upon it to do so. Under cl 11(e) of the AMSLA the borrower agreed to return to the lender Equivalent Securities not later than 360 days from the date of delivery unless otherwise agreed. Clause 7 provides:

7.1 [Borrower's obligation to redeliver Equivalent Securities] The Borrower undertakes to redeliver Equivalent Securities in accordance with this Agreement and the terms of the relevant Borrowing Request.

7.2 [Lender may call for redelivery of Equivalent Securities] Subject to clause 8 and the terms of the relevant Borrowing Request, the Lender may call for the redelivery of all or any Equivalent Securities at any time by giving notice on any Business Day of not less than the Standard Settlement Time for such Equivalent Securities or the equivalent time on the exchange or in the clearing organisation through which the relevant borrowed Securities were originally delivered. The Borrower shall as hereinafter provided redeliver such Equivalent Securities not later than the expiry of such notice in accordance with the Lender's instructions.

7.3 [Lender may terminate loan if Borrower defaults] If the Borrower does not redeliver Equivalent Securities in accordance with such call, the Lender may elect to continue the loan of Securities; provided that, if the Lender does not elect to continue the loan, the Lender may by written notice to the Borrower elect to terminate the relevant loan. Upon the expiry of such notice the provisions of clauses 8.2 to 8.5 shall apply as if upon the expiry of such notice an Event of Default had occurred in relation to the Borrower (who shall thus be the Defaulting Party for the purposes of this Agreement) and as if the relevant loan were the only loan outstanding.

7.4 [Consequences of exercise of "buy-in" against Lender, as a result of Borrower] In the event that, as a result of the failure of the Borrower to redeliver Equivalent Securities to the Lender in accordance with this Agreement, a "buy-in" is exercised against the Lender, then, provided that reasonable notice has been given to the Borrower of the likelihood of such a "buy-in", the Borrower shall account to the Lender for the total costs and expenses reasonably incurred by the Lender as a result of such "buy-in".

7.5 [Right of Borrower to terminate loan early] Subject to the terms of the relevant Borrowing Request, the Borrower shall be entitled at any time to terminate a particular loan of Securities and to redeliver all and any Equivalent Securities due and outstanding to the Lender in accordance with the Lender's instructions.

38 Clause 8 of the AMSLA deals with the "netting" of obligations between borrower and lender if Equivalent Securities are required to be delivered or in an Event of Default. Clause 8.1 presupposes an exchange of Equivalent Securities for Collateral. The purpose of the clause is to excuse the borrower from its obligation to deliver Equivalent Securities if the lender cannot provide simultaneous delivery of Collateral. In most instances the Collateral will be cash. In the present case, the parties had agreed that no Collateral, cash or otherwise, would be provided.

39 Clause 8.2 operates upon an Event of Default which includes the appointment of a receiver. Thus, the events that occurred on 4 July 2008 constituted an Event of Default for the purpose of cl 8.2 of the AMSLA.

8.1 [Requirement for simultaneous delivery] On the date and time that Equivalent Securities are required to be redelivered by the Borrower in accordance with the provisions of this Agreement the Lender shall simultaneously redeliver the Equivalent Collateral and repay any Cash Collateral held (in respect of the Equivalent Securities to be redelivered) to the Borrower. Neither Party shall be obliged to make delivery (or make a payment as the case may be) to the other unless it is satisfied that the other Party will make such delivery (or make an appropriate payment as the case may be) to it simultaneously. If it is not so satisfied (whether because an Event of Default has occurred in respect of the other Party or otherwise), it shall notify the other Party and, unless that other Party has made arrangements which are sufficient to assure full delivery (or the appropriate payment as the case may be) to the notifying Party, the notifying Party shall (provided it is itself in a position, and willing, to perform its own obligations) be entitled to withhold delivery (or payment, as the case may be) to the other Party.

8.2 [Netting following occurrence of Event of Default] If an Event of Default occurs in relation to either Party, the Parties' delivery and payment obligations (and any other obligations they have under this Agreement) shall be accelerated so as to require performance thereof at the time such Event of Default occurs (the date of which shall be the "Performance Date" for the purposes of this clause), and in such event:

(a) the Relevant Value of the Securities to be delivered (or payment to be made, as the case may be) by each Party shall be established in accordance with clause 8.3; and

(b) on the basis of the Relevant Values so established, an account shall be taken (as at the Performance Date) of what is due from each Party to the other and (on the basis that each Party's claim against the other in respect of delivery of Equivalent Securities or Equivalent Collateral or any cash payment equals the Relevant Value thereof) the sums due from one Party shall be set-off against the sums due from the other and only the balance of the account shall be payable (by the Party having the claim valued at the lower amount pursuant to the foregoing) and such balance shall be payable on the Performance Date.[5]

8.3 [Relevant Value] for the purposes of clause 8.2 the Relevant Value:

(a) of any cash payment obligation shall equal its par value (disregarding any amount taken into account under (b) or (c) below);

(b) of any Securities to be delivered by the Defaulting Party shall, subject to clause 8.4(b) and (c) below, equal the Offer Value thereof; and

(c) of any Securities to be delivered by the Defaulting Party shall, subject to clause 8.4(b) and (c) below, equal the Bid Value thereof.

8.4 [Bid Value/Offer Value]

(a) For the purposes of clause 8.3, but subject to (b) and (c) below, the Bid Value and Offer Value of any Securities shall be calculated as at the Close of Business in the most appropriate market for Securities of the relevant description (as determined by the Non-Defaulting Party) on the first Business Day following the Performance Date, or, if the relevant Event of Default occurs outside the normal business hours of such market, on the second Business Day following the Performance Date (the "Default Valuation Time").

41 On 9 March 2007 Fortis wrote to Primebroker proposing an amendment to cl 8 of the SCA. The effect of the proposed amendment was to change the status of Fortis as agent for Primebroker, when procuring arrangements for securities borrowing and lending, into a relationship where Fortis would act as principle in transactions under the SCA and AMSLA. Primebroker did not sign and return a duplicate of the letter as requested. The proposed change was, however, later incorporated into the Amendment Deed dated 16 April 2008.

42 The change to the relationship between Fortis and Primebroker affected by the Amendment Deed was important. Primebroker did not advance any reason for the amendments. The explanation advanced by Fortis was, in my view, incomplete. Mr Parker deposed that the amendments were exclusive to Primebroker and a related entity.

43 One immediate consequence of the Amendment Deed was that securities already held by Fortis were transferred from a Fortis account, known as the Fortis Nominees Holder Identification Number (HIN), to a new account, the Fortis HIN, which identified the securities as held by Fortis in its own name. The Fortis Nominees HIN, described as the "Settlement HIN", was confined in its use, under ASX rules, to securities held on trust for clients. Fortis was not permitted to hold securities, beneficially owned by it, in the Settlement HIN.

44 The transfer of the securities from the Settlement HIN to the Fortis HIN was achieved by the Borrowing Requests which followed the execution of the Amendment Deed. The Borrowing Requests were made for securities which Fortis already held in its Settlement HIN. Where, in paragraph (f) of each request, provision was made for endorsement of the type of Collateral, the words "not applicable" were typed.

45 Fortis explained the absence of Collateral on the basis that it had already advanced cash to Primebroker. It relied upon an email dated 17 April 2008, responding to a query on behalf of Primebroker and a related entity, Chimaera Capital Pty Ltd, concerning the absence of collateral, in which it said:

Chimaera and PB agreed to lend the securities on the basis that Fortis continues to provide financial accommodation and services to both Chimaera and PB.

Could you please send back today the signed borrow requests.

46 The Borrowing Requests specified the securities to be borrowed by Fortis and the duration of the loan. The agreed outer limit of the contractual obligation to deliver Equivalent Securities was 11 months and 20 days from the date of delivery of the securities under each of the Borrowing Requests. Primebroker could, however, make an earlier request under cl 7 of the AMSLA.

47 Prior to the amendment, Fortis was appointed Primebroker's agent for certain purposes. The Amendment Deed recorded that as from 31 March 2007 Fortis no longer acted as agent for Primebroker. Clause 2 of the Amendment Deed had the effect of deleting cl 8 of the SCA and substituting a new clause, the purpose of which was to change the basis of the relationship between Fortis and Primebroker when borrowing or lending securities. The substitute cl 8(d) provided:

The parties confirmed that Fortis, as either borrower from or lender to, the Client under Schedule 11, does so in its capacity as principle to the Securities loan ...

The new cl 8 also declared that cl 14 of the AMSLA did not apply. Clause 14 made provision for a lender making loans of securities in its capacity as agent for a third party principle.

48 The Amendment Deed went further. By cl 3 a new cl 7B was inserted into the AMSLA. Clause 7B provided:

7B. Redelivery and Payment Obligations are Conditional

The Borrower's obligation to redeliver Equivalent Securities in accordance with clause 7 and to make any other payment required under this Agreement is conditional. Notwithstanding clause 7 or any other provision of this Agreement an obligation on the Borrower to redeliver Equivalent Securities or to make a payment does not arise if, at the relevant time, any of the following exist:

(a) an Act of Insolvency has occurred or is continuing with respect to the Lender;

(b) where the Lender is Primebroker Securities Limited, any client Liabilities under the Standard Client Agreement are outstanding and have not been paid to the borrower and satisfied in full;

(c) where the Lender is Primebroker Securities Limited, less than 7 months has elapsed since the final payment made by the Lender to the borrower in satisfaction of all Client Liabilities;

(d) where the Lender is Primebroker Securities Limited, any Event of Default in relation to the Lender has occurred or is continuing under the Standard Client Agreement; and

(e) where the Lender is Primebroker Securities Limited, any breach by the Lender of the terms set out in paragraphs 2 and 3 of Annexure "A" of this Deed, and this breach is not remedied within a period of 3 Business Days from the date on which the breach occurred.[6]

49 Clause 3 of the Amendment Deed also amended cl 26 of the AMSLA to incorporate a definition of Client Liabilities and amend the definition of an Event of Default which, for the purpose of cl 7B, had the same meaning as in the SCA.

50 Under cl 4 of the Amendment Deed the parties agreed to a number of operational matters. Fortis agreed that it would not make any further changes to the Correlation Haircut parameters other than required in the normal course of its business. Primebroker agreed to reduce its credit line utilisation in illiquid securities to a total value of $A18m by 31 July 2008.

Except as specifically amended by this Deed, all terms and conditions of the SCA and the Australian Master Securities Lending Agreement remain in full force and effect. With effect from the Effective Date [16 April 2008], the SCA and the AMSLA as amended by this Deed is to be read as a single integrated document incorporating the amendments effected by this Deed.

52 The essence of Primebroker's case is that the netting provisions found in cl 8.2 of the AMSLA apply, upon an Event of Default, to accelerate the corresponding obligations of the parties so as to arrive at "the balance of the account", which is an adjustment made as at the date of default by applying the value of Equivalent Securities calculated on 7 July 2008 against the amount of its indebtedness to Fortis.

53 Fortis submitted that the Amendment Deed had the effect of making cl 8 of the AMSLA inapplicable. It argued that the Event of Default relieved Fortis of any obligation to deliver Equivalent Securities. Accordingly, there was no opportunity for the netting provisions to have application. Fortis submitted that cl 17 of the SCA authorised Liquidation Action in respect of the securities and prescribed the manner in which Primebroker's entitlement was to be determined. It submitted that the borrowed securities were an asset of Primebroker in the Client Portfolio, which it was entitled to sell. Fortis also relied on cl 7 of the Dealing Loan Facility (Schedule 3 of the SCA) as an alternative basis to support its sale of the securities and set-off the amount due under the advances.

54 Fortis submitted that the suite of documents must be read as one agreement. Clause 7 of the Amendment Deed required this to be done. It also submitted that the contract documents, including the AMSLA, the Amendment Deed and Borrowing Requests did not fully define the relationship between the parties that existed at the time of the Event of Default.

55 The evidence disclosed that before and after the Amendment Deed Fortis had notified Primebroker on a daily basis of the NLV, cash position, Correlation Haircut and the amount required, if any, to be deposited with Fortis in cash or security. When called upon to provide additional collateral or cash, Primebroker had responded to the requirement. Fortis relied upon those events as a course of conduct to support its contention that the parties had acted upon an assumption that the securities held by Fortis were an asset of Primebroker forming part of the Client Portfolio. This was so because they were regularly taken into account when calculating the NLV and margin calls and, as such, were treated as if an "asset" of Primebroker. Fortis advanced the course of conduct, in part, to support its construction of the documents and, in the alternative, to create an estoppel by convention, precluding Primebroker from contending that the securities were not an asset forming part of the Client Portfolio.

56 Primebroker submitted that upon a proper construction of the documents they plainly established that the borrowed securities were not an asset of Primebroker in the Client Portfolio. They were legally and beneficially owned by Fortis. The sales that took place were not the realisation of an asset of Primebroker under cl 17 but of an asset of Fortis of the SCA. Fortis was not entitled to calculate its liability to Primebroker, for the purpose of a set-off or netting, by reference to the amount it received from selling its own assets.

57 Primebroker submitted that the Amendment Deed did not have the effect of excluding the operation of cl 8.2. It argued that the accelerated obligation to deliver Equivalent Securities did not require actual delivery of Equivalent Securities for the netting to take place. Thus, the conditional nature of the obligation did not exclude the operation of cl 8.2 as the only available mechanism to arrive at an adjustment between the parties in the event of default.

58 It may be accepted that the documents purporting to create and regulate the relationship between the parties did not always clearly define their rights and obligations. Drafting techniques were employed to describe an absolute transfer of legal and equitable title in securities as if a loan. There were inconsistencies and anomalies. The documents, however, constitute agreements regularly employed by sophisticated participants in the securities industry. It was not submitted that they were a sham or artifice designed to disguise the true intention of the parties. The terms of the Amendment Deed recite the intention of the parties that their relationship would continue to be defined and regulated by the contract documents.

59 The parties intended to fully record the substance of their agreement in writing. The suite of documents is substantial. Notwithstanding the inconsistencies and manufactured rights, it remains the duty of the Court to examine the documents to ascertain the meaning of the parties' expressions objectively. The Court will not adopt a narrow or pedantic approach in commercial arrangements.[7] The Court should be astute to give effect to the discernable commercial purpose.[8] Such an approach does not exclude the application of the principles of estoppel and the implication of terms.[9] One thing is, however, plain. The parties intended that the borrowing and lending of securities would be governed by the AMSLA. The evident purpose of the SCA and AMSLA is that the AMSLA provides a complete and integrated framework of rights and obligations under which the securities were borrowed.

60 It was common ground that Fortis was entitled to deal with the securities it held as if its own, to sell or otherwise dispose of them at any time and in any manner it saw fit. The Amendment Deed and the subsequent transfer of the securities under the Borrowing Requests to the Fortis HIN, had the effect of eliminating pre-existing inconsistencies or irregularities in the documents in relation to the capacity in which Fortis held and might deal with the securities. The notion of Fortis acting as agent for Primebroker was inconsistent with its absolute title to the securities. Holding the securities in the Settlement HIN did not accord with ASX rules. It is very likely that one purpose of the Amendment Deed was to remedy that anomaly.

61 When Fortis borrowed the securities there was an outright transfer of property such as occurs in an absolute sale.[10] It did not require an Event of Default to justify a sale by Fortis. Even in the absence of the Amendment Deed it was, in my view, the clear intention of the parties that Primebroker would not retain any equity in the securities loaned to Fortis. Following the Amendment Deed, the contractual obligation of Fortis to deliver substitute securities was limited, although not entirely eliminated. The right of Fortis to sell or otherwise deal with the securities was relevantly unchanged.

62 To characterise the securities as an asset of Primebroker held by Fortis as security for a loan is to ignore the terms of the agreement under which the securities were transferred to Fortis. Primebroker was not a mortgagor of the securities. Fortis was not a mortgagee. Primebroker disposed of its right, title and interest in the securities to Fortis. It only had a conditional contractual right to the delivery of substitute securities. It had no right of redemption.

63 While Fortis valiantly tried to steer its argument away from characterising its interest as that of mortgagee exercising a power of sale, its reliance on cl 17 of the SCA and cl 7 of the Dealing Loan Facility is predicated on the assumptions that Primebroker retained a beneficial interest in the securities and that, upon an Event of Default, Fortis could exercise a power of sale over Primebroker's asset. Both assumptions are foreign to the express provisions of the SCA and the AMSLA. The securities were not an "asset" of Primebroker in the "Client Portfolio". While it was always open to Fortis to sell the securities, having done so in July 2008, it was not authorised to only credit Primebroker with the net proceeds of the sales.

64 Clause 7B of the Amendment Deed was directed primarily to the obligation to deliver Equivalent Securities on request under cl 7 of the AMSLA. The conditional nature of the obligation extended to "any other provision of this Agreement". Those extending words are capable of applying to the agreed outer limit delivery obligation found in each Borrowing Request. In my view, however, cl 7B was only intended to relieve Fortis from the obligation to actually deliver Equivalent Securities at the "relevant time". The "relevant time" is the time for performance of the act of delivery or payment. Upon a request under cl 7, the relevant time is the date for delivery specified in cl 7.2. Under the outer limit obligations in each of the Borrowing Requests, the relevant time is 11 months and 20 days after delivery under the requests.

65 Clause 7B did not purport to limit the right to make a request under cl 7 of the AMSLA, nor did it entirely eliminate the delivery or payment obligation. It made the act of performance conditional. Thus, Fortis was not required to actually deliver securities or to actually make a payment should any of the circumstances described in paragraph (a) to (e) exist.

66 Clause 8.2 of the AMSLA did not require actual delivery of securities in order to arrive at "the balance of the account". The obligation was to be accelerated for the purpose only of arriving at "the balance" as part of an essential step in the process of adjusting rights in the Event of Default. In my opinion, the operation of the netting provisions in cl 8.2 of the AMSLA was unaffected by cl 7B of the Amendment Deed. I am reinforced in this view by the absence of any apparent mechanism to ensure an adjustment between the borrower and lender of securities in the event of a default, unless cl 8.2 can be invoked. Clause 8.2 is the only mechanism under which the value of the conditional right to receive Equivalent Securities can be reflected in a netting or set-off against advances.

67 I reject a construction of the documents which has the effect of depriving cl 8.2 of any operation. Such an approach is inconsistent with the intention, purpose and express terms of the AMSLA and the Amendment Deed. To adopt the interpretation of cl 7B advanced by Fortis would leave Primebroker without any opportunity to receive credit for the value of the Fortis obligation to deliver Equivalent Securities. For the purpose of adjustive rights in the event of a default, the conditional obligation to deliver Equivalent Securities would be worthless.

68 Clause 7 of Schedule 3 gave Fortis the right to combine, consolidate, merge or apply a "credit balance standing to any account of the Client with Fortis, or any amount available to Fortis by way of set-off, lien or counterclaim in or towards satisfaction of any money at any time due and payable ..." While the advances were clearly due and payable to Fortis, it already had an unlimited power to deal with the securities. Clause 7 does not purport to convert the borrowed securities into assets of Primebroker over which Fortis might only then be entitled to exercise a power of sale. It is possible that upon calculating "the balance of the account" under cl 8.2 of the AMSLA, there may be an "amount available to Fortis" for the purpose of a set-off under cl 7 of Schedule 3, although, in the present case, the advances had already been taken into account in arriving at that balance.

69 Fortis relied in particular upon the power in cl 7 to vary the terms and conditions of any arrangement under which "Fortis may be indebted to the client", in an attempt to bypass the netting provisions of cl 8.2 of the AMSLA. Clause 7 does not, however, authorise the unilateral variation of the AMSLA which prescribes the manner in which the value of the conditional contractual obligation of Fortis is to be calculated.

70 The obligation of Fortis to Primebroker arose, in relation to the borrowing of securities, under the AMSLA. It is, therefore, appropriate to look first to that agreement for the consequence of an Event of Default before the more general provisions of cl 17 of the SCA or cl 7 of the Dealing Loan Facility. It is cl 8.2 of the AMSLA which defines the liability of Fortis, prescribing a process under which there is to be an adjustment between the parties which, once calculated as a "balance of the account", may if necessary be transported to cl 17 of the SCA or cl 7 of the Dealing Loan Facility for application under those provisions.

71 This proceeding was commenced by originating motion. There were no pleadings. It was only during trial that the notion of an estoppel by convention emerged. Leave was given to Primebroker to deliver further written submissions in relation to that issue at the conclusion of the hearing. Further helpful submissions were provided. It was not submitted that I should decline to decide the issue.

72 Primebroker submitted that the course of dealing was not sufficient to bring the securities within the description of an asset within the Client Portfolio and thus the power of sale under cl 17.3 of the SCA. The learned authors of Equity and Trusts in Australia define estoppel by convention thus[11]:

Estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them, or made by one and acquiesced by the other.[12] For this purpose, the party claiming the benefit of the estoppel (the proponent) must establish the following:[13]

(1) The parties have proceeded on the basis of an underlying assumption of fact,[14] law,[15] or both, of sufficient certainty to be enforceable (the assumption). (2) Each party has, to the knowledge of the other, expressly or by implication accepted the assumption as being true for the purposes of the transaction. (3) Such acceptance was intended to affect their legal relations in the sense that it was intended to govern the legal position between them. (4) The proponent was entitled to act and has, as the other party knew or intended, acted in reliance upon the assumption being regarded as true and binding. (5) The proponent would suffer detriment if the other party were allowed to resile or depart from the assumption. (6) In all the circumstances it would be unconscionable to allow the other party to resile or depart from the assumption.

73 Primebroker submitted that the course of dealings does not go so far as to establish an assumption of sufficient certainty. But even if it does, that did not detract from the application of the netting provisions of cl 8.2 of the AMSLA as paramount in the determination of the balance, if any, required to be paid by one party to the other.

74 In my opinion the assumption advanced by Fortis is inconsistent with fundamental terms of the AMSLA. By the Amendment Deed the parties reaffirmed the terms of the SCA and the AMSLA. The terms upon which the securities were borrowed did not reserve to Primebroker any beneficial interest or right of redemption. The only obligation Fortis had in relation to the securities, delivered under the Borrowing Requests, was a conditional obligation to deliver Equivalent Securities.

75 The delivery of daily information and the making of margin calls, did not change after the Amendment Deed. The relationship between borrower and lender may have been "manufactured" by the documents, but that of itself is no reason to ignore the intended effect. The documents were intended to and did have the effect of ensuring that the securities were not assets of Primebroker and did not form part of the Client Portfolio, even though "the balance of the account", calculated under cl 8.2 of the AMSLA, may do so.

76 The course of dealings advanced by Fortis to support the estoppel is not inconsistent with the manufactured relationship under the SCA and the AMSLA, including the margin calls. The fact that there were margin calls and the provision of additional securities by Primebroker does not convert the securities held by Fortis into an asset of Primebroker when the parties expressly agreed that they were not.

77 It is also difficult to conceive of any detriment that Fortis suffered as a consequence of it having relied upon any such assumption, if it did so. Fortis was, after all, the party propounding the suite of documents and the Amendment Deed. The documents had been carefully crafted to ensure that Primebroker did not retain any legal or equitable interest in the borrowed securities. Accordingly, the structure and terms of the contractual relationship is and was intended to be wholly inconsistent with the convention Fortis seeks to advance.

78 The Amendment Deed did not render cl 8.2 inapplicable. Clause 8.2 of the AMSLA required a calculation of the value of Equivalent Securities to arrive at "the balance of the account". For the purpose of cl 8.2, there arose only a notional obligation to deliver Equivalent Securities on 4 July 2008. Actual delivery was not required. For the purpose of netting under cl 8.2 the value to be attributed to the conditional obligation of Fortis to deliver the securities was to be calculated according to cl 8.3 and 8.4 of the AMSLA.

[3] [2008] FCA 594.

[7] Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, 437.

[8] Hide and Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310, 313-14.

[9] McEntire v Crossley Brothers Ltd [1895] AC 457, at 463 and 467; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (In Liquidation) (2000) 202 CLR 588, 606; Helby v Matthews [1895] AC 471, 475; Inland Revenue Commissioner v Duke of Westminster [1936] AC 1, 20.

[10] Beconwood Securities (supra) [47].

[11] Fourth Edition [10.45]. G.E. Dal Pont and D.R.C Chalmers

[12] Republic of India v India Steamship Co Ltd (No 2) [1997] UKHL 40; [1998] AC 878 at 913 per Lord Steyn; Ryan v Moore [2005] 2 SCR 53 at [61], [62], [76] per Bastarache J. See generally Harvey, "Estoppel by Convention - An Old Doctrine with New Potential" (1995) 23 ABLR 45; Derham, "Estoppel by Convention" (1997) 71 ALJ 860 (Pt 1), 976 (Pt 2).

[13] National Westminister Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548n at 550 Tipping J (CA) (footnotes added). See also Thompson v Palmer [1933] HCA 61; (1993) 49 CLR 507 at 547 per Dixon J: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226 at 244-245 (FC); Ryan v Moore [2005] 2 SCR 53 at [59] per Bastarache J.

[14] This can include an assumption of fact relating to the existence of a binding contract or as to the validity of an assignment: Riseda Nominees Pty Ltd v St Vincent's Hospital (Melbourne) Ltd [1998] 2 VR 70 at 77 (CA).

[15] Norwegian American Cruises A/s v Paul Mundy Ltd [1988] 2 Lloyd's Rep 343 at 351; PW & Co v Milton Gate Investments Ltd [2004] Ch 142 at [171]-[174]. For example, an assumption as to the meaning and effect of a contract can found an estoppel by convention: Government Employees Superannuation Board v Martin (1997) 19 WAR 224 at 244 per Ipp J.