Sapphire (SA) Pty Ltd (trading as River City Grain) v Barry Smith Grains Pty Ltd

30On the appeal, Mr J A Watson and Ms F T Roughley of counsel appeared for the plaintiff and Mr M T McCulloch SC appeared for the defendant. 31The parties provided comprehensive written submissions. With the benefit of debate, the issues narrowed significantly and the parties refined (perhaps even reformulated - without objection) their positions. 32Both parties eschewed the suggestion that any issue which remained to be decided should be remitted to the tribunal. Their common position was that all outstanding issues should be determined by the Court. 33At the outset, it is appropriate to record that there was evidence before the tribunal that the Fair Market Price in the week ended 26 September 2007 was lower than the Fair Market Price on 28 September 2007. 34The plaintiff put that on 19 September 2007 the defendant ceased to carry on all or a material part of its business, being or becoming otherwise insolvent, and that this was an Insolvent Event either within the meaning of Rule17.6.1(g) or Rule 17.6.1(l). 35Its starting position was that the defendant was obliged immediately to give the plaintiff notice of the event, and that it breached that obligation with the result that notice had "not [been] given as required" within Rule 17.6.2b). It put that the consequence of the failure to give notice was that it had the option to declare each contract closed out or not (that is, to leave it on foot notwithstanding the occurrence of an Insolvency Event) and that if it chose to declare the contract closed out, it had the further option to declare either the first business day after when it first learnt of the Insolvency Event or the first business day after the date that event occurred, as the date for the determination of the Fair Market Price at which the contracts would be closed out. 36However, ultimately (and correctly, in my view) the plaintiff did not press for a finding that it had an option to declare the contracts either not closed out or closed out. The proposition is unsustainable. In my view, Rule 17.6.2 envisages two factual scenarios where an Insolvency Event occurs, both of which have the inexorable result that the contract is closed out. 37Where the defaulting party complies with its obligation to notify of the Insolvency Event immediately, the contract comes to an automatic end. Where the defaulting party fails to give notice as required but the non-defaulting party learns of the Insolvency Event (before either fulfilment or the contract is otherwise closed out), the non-defaulting party has one of two options. It can declare the contract closed out on the first business day after the date the Insolvency Event occurred or on the date when it first learns of the event, but it must do one of those things. This option affords it protection against, or enables it to take advantage of, movements in price in the interim, that is, from the date it should have received notice to the date on which it actually learns of what it should have been told. 38The plaintiff (also correctly, in my view) did not press for a finding of an entitlement to declare the contracts closed out as at the first business day after it first learnt of earlier Insolvency Events, that is, either on 28 July 2009 when it first learnt of the Barlow-Smith conversation or on 23 March 2010 when it received Mr Smith's affidavit. 39Rule 17.6.2 requires a party who, in any case, commits an act of insolvency to give notice of it. The invariable operation of the Rule when this obligation is complied with, is that the contract is closed out at the Fair Market Price on the business day following the giving of the notice. An undoubted commercial motivation for this is to ensure that a commodity trader does not have an insolvent counterparty to unfulfilled contracts. It is also to be remembered that ordinarily there will be a ready market for the commodities concerned and immediate notice and closing out enables a party to act in that market to protect its own interests. 40However, what the Rule does not contemplate is an Insolvency Event occurring, of which the defaulting party fails to give notice, and then a later and further Insolvency Event occurring of which it does give notice. That is what happened here if an Insolvency Event occurred on 19 September 2007. 41If an Insolvency Event occurred on 19 September 2007, two pivotal questions, both of contractual construction, arise. The first is, did the notifications given on 27 September 2007 have the effect of closing out the contracts? The second is, if those notifications did have that effect, what is the date upon which the Fair Market Price is to be determined? 42Before considering these questions, it is appropriate to consider whether an Insolvency Event occurred on 19 September 2007, a matter in respect of which the arbitral tribunal did not make any finding. The defendant put that the evidence did not establish such an event. 43The plaintiff did not press for findings either that an Insolvency Event should be found to have occurred sometime in June 2007 based on Mr Smith's "caretaker mode" utterance, or on 24 September 2007 on the basis of the Barlow-Smith conversation. As to the former, the term used by Mr Smith is not of sufficiently certain import to sustain a finding that what he described was an Insolvency Event. As to the latter, the defendant persisted (albeit rather faintly and perfunctorily) with a submission that Mr Barlow's statutory declaration was not admissible against it for the reason that it attracted confidentiality, having been prepared for other proceedings. In my view, the evidence of the Barlow-Smith conversation is admissible and Mr Smith's statements reported by Mr Barlow are sufficient to warrant a finding that the defendant was suspending payments of its debts or ceasing to carry on business because it was insolvent. 44The defendant put that Mr Smith's statement that the defendant's business effectively ceased trading as at 19 September 2007 was unclear and that more was required for the plaintiff to establish that the defendant in fact ceased carrying on its business at that time. It drew attention to a submission which it had made to the arbitrators that when the provisional liquidators took possession of the defendant and its businesses, the defendant continued to operate from premises it had occupied for some time, continued to employ staff who continued to maintain accounts and take other steps necessary to carry on the defendant's businesses. 45It is to be remembered that Mr Smith's affidavit was sworn for the purpose of persuading the Court to appoint provisional liquidators precisely because of the defendant's insolvency. 46Mr Smith's statement that on 19 September 2007 the defendant effectively ceased trading is a clear statement that it was ceasing to carry on all, or a material part, of its business. This is not inconsistent with the defendant continuing to operate, employing staff to maintain accounts or taking other steps necessary to carry on what was left of its business, but nevertheless ceasing to trade. 47Mr Smith's statement was not made in a vacuum. On 18 September 2007, the defendant had an immediate cash flow deficit of $300,000, a clear indication that it was unable to pay all of its debts as and when they were due, the hallmark of insolvency. More and more creditors were emerging and statutory demands were anticipated. The following day the defendant effectively ceased trading. 48Had the arbitral tribunal (which was not bound to apply strict rules of evidence) considered the question, it is hard to see how it would have reached any conclusion other than that the defendant had, on 19 September 2007, ceased to carry out all or a material part of its business, being insolvent as contemplated by Rule 17.6.1(g)(i). 49I find that an Insolvency Event occurred on 19 September 2007. 50It is not necessary to consider whether there was also an event or events analogous to other events identified in Rule 17.6.1, within the meaning of Rule 17.6.1(l). 51But for the defendant's failure to meet its contractual obligation to give notice, the contracts would have been closed out earlier, at which time the Fair Market Price was lower. The defendant would benefit through its own wrong if the higher Fair Market Price as at 28 September 2007 applied. 52I turn to whether the notifications of 27 September 2007 had the effect of closing out the contracts and if so, at what price. 53As I have said earlier, patently Rule 17.6.2 does not in terms contemplate what happened here. It is nevertheless necessary to determine how the Rules operate, on their proper construction, in the face of the events that have occurred. 54The meaning of words used in the Rules is to be determined by what a reasonable person would have understood them to mean. This requires consideration of the language used, the surrounding circumstances known to the parties, the purpose of the transaction and the objects which it was intended to secure: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160, [8]. 55The whole of the instrument has to be considered. Preference is given to a construction supplying a congruent operation to the various components of the whole of an instrument: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 529, [16]. 56If the words used are unambiguous, the Court must give effect to them. If the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109; Western Export Services Inc v Jireh International Pty Ltd [2010] NSWSC 622; Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137; Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1 . 57The Rules are also to be construed in accordance with the well-established principle that a party will not be permitted to take advantage of its own wrong; see Alghussein Establishment v Eton College [1991] 1 All ER 267 at 270 and following; Brothers v Park [2004] ANZ Conv R 451 at [82]; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 147. 58Rule 17.6 makes it inevitable that a contract will be closed out when an Insolvency Event occurs and notice of it is given by one party to the other party or the other party otherwise learns of it. It does not leave open the possibility that a contract is not closed out at all. 59The Rule has application if, before the fulfilment of a contract, the buyer commits an Insolvency Event. Such an event did occur on 26 September 2007 and albeit that the defendant was in breach of an obligation to give notice of an earlier Insolvency Event, notice was given but not "given as required", as described by Rule 17.6.2b). 60It would be inimical to the commercial rationale underlying Rule 17.6 as a whole to construe the failure to give notice of an earlier Insolvency Event as having the effect that the contracts stayed on foot until the plaintiff learnt of that earlier Insolvency Event, despite the occurrence of an intervening Insolvency Event of which notice was given. 61The result is, in my view, that subject to the further operation of Rule 17.6.2b), the contracts were closed out on 28 September 2007. 62The defendant accepted that if an Insolvency Event had occurred earlier than 26 September 2007, it became obliged to notify the plaintiff of it but had failed to do so. The defendant also accepted that the contracts should be given operation so as not to permit it to take advantage of its own wrong. 63Had the defendant given immediate notice of the 19 September 2007 Insolvency Event, the contracts would have been closed out at a Fair Market Price lower than that ruling on 28 September 2007. It follows that if the defendant has the benefit of a close out on the later date, it would be advantaged by its own wrong. 64The rule that a party may not reap benefits by its own wrong is one of contractual construction. Accordingly, the express terms of the contract must accommodate its application. In the present case, as the following analysis reveals, not only do the Rules do so, but their application to the facts that have occurred enable the party who should have received notice but did not, to ensure that mischief is avoided. 65Where notice is not "given as required" - which is the case here - the non-defaulting party is given the option of declaring the contract closed out at the Fair Market Price on two alternative dates, that is, the Fair Market Price on the first business day after the date when it learnt of the act of insolvency or the Fair Market Price ruling on the first business day after the Insolvency Event occurred. These are different dates to that which applies where notice is given. 66Obviously a contract cannot be closed out unless it is on foot. Thus, the options given are clearly predicated on the assumption that the contract was on foot as at the date upon which it is declared to be closed out. 67In the present case, the plaintiff could have no option to declare the contracts closed out with effect from when it learnt of the 19 September 2007 Insolvency Event in 2009 or 2010. By then the contracts were already closed out. 68But the plaintiff still had another operative option as the non-defaulting party. It could still declare the contracts closed out at the Fair Market Price ruling on the first business day after the date the 19 September 2007 Insolvency Event occurred, at which time the contracts were still on foot. The defendant's conduct did not, and could not, deprive the plaintiff of this. 69If the plaintiff chose not to exercise this option, then the Fair Market Price on the first business day following the giving of the notices, i.e. 28 September 2007, would apply. 70The selection of the appropriate date is in the hands of the non-breaching party and the mischief that the breaching party may be advantaged by its own wrong is avoided. 71Arguably this requires the plaintiff to exercise an option to declare the contract closed out on the earlier date to avoid 28 September 2007 being the close out date. 72As mentioned above, in its submissions to the tribunal the plaintiff purported to close out the contracts as at 24 March 2010. I have concluded that the plaintiff did have an option, but not the one it purported to exercise. 73Whilst detailed attention was given during argument as to how the clause operated and a submission was made by the defendant in the context of options which the plaintiff may have had, that it had lost them because of the effluxion of time, no attention was focused on whether it was necessary for the plaintiff to exercise an option by way of selecting 20 September 2007 as the close out date and, if so, whether it has done so (for example, by way of the way in which it formulated its argument before me), can still do so, or can no longer do so. I will accordingly invite the parties to make further submissions on these questions. 74Depending on the conclusion which the Court ultimately reaches on those questions, it will be necessary for the Court to determine the Fair Market Price prevailing on 20 September 2007. 75The parties agreed that if Fair Market Price needed to be determined, this should be done by the Court itself and not by way of remittal to the tribunal. They agreed that they should be given the opportunity to reach agreement and failing which, the Court should be asked to determine the matter with each party being given an opportunity to put on evidence. 76In the interests of expedition, the directions which I propose to make will accommodate the parties being given this opportunity in the meantime. 77I will hear the parties on the form of the appropriate directions. 78It is apparent from what I have said earlier that those responsible for the form of the NACMA Rules should give consideration to appropriate amendments to facilitate clarity. In addition, although neither party took the point, I draw the attention of those concerned to the fact that Rule 17.7 does not make the definition of Fair Market Price expressly applicable to close out under Rule 17.6.2.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 July 2012