State of New South Wales v NatWest Markets Australia No 2 Pty Limited & ors

Supreme Court of NSW|2006-07-20|Before: Windeyer J, Deane J

CITATION : State of New South Wales v NatWest Markets Australia No 2 Pty Limited & ors [2006] NSWSC 751

HEARING DATE(S) : 14, 15, 16, 17, and 20 March, 12 May and 20 July 2006

DECISION : Judgment for the defendants on the claim of the plaintiff.

Cheney v Duncan [2001] NSWCA 197; Downey v Bruce (unreported Supreme Court of South Australia 17 December 1992); Gorton v Commonwealth of Australia [1992] 2 Qd R 603 at 607; Grundy v Lewis (1995) 62 FCR 567 at 576; CASES CITED : Hawkins v Clayton (1987) 164 CLR 539 Pace v Westpac Banking Corporation [2001] QSC 415 at paragraph [46]; GMU Australia Pty Limited v Davidson [2003] NSWSC 311 at 197. Pittaway v W H Tutt & Quinlan [2003] QCA 365; Sampson v Zucker (NSWCA 11 December 1990, BC9606395); Walmsley v Cosentino [2001] NSWCA 403 McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579

State of New South Wales (Plaintiff) PARTIES : NatWest Markets Australia No 2 Pty Limited (First Defendant) State Bank of New South Wales Limited (Second Defendant) Rawson Place Pty Limited (Third Defendant)

Mr M Einfeld QC with him Mr M Green (Plaintiff) COUNSEL : Mr M Dicker (First Defendant) Mr A G Bell SC with him Mr N Owens (Second Defendant) Submitting appearance (Third Defendant)

Bruce Stewart Dimarco (Plaintiff) SOLICITORS : Allens Arthur Robinson (First Defendant) John O'Sullivan (Second Defendant) Thompson Eslick (Third Defendant)

3 - IN THE SUPREME COURT0 OF NEW SOUTH WALES EQUITY DIVISION

3438/03 STATE OF NEW SOUTH WALES V NATWEST MARKETS AUSTRALIA NO 2. PTY LIMITED, STATE BANK OF NEW SOUTH WALES LIMITED and RAWSON PLACE PTY LIMITED

JUDGMENT Outline 1 The question for decision is whether there has been an unwinding of certain derivative swap transactions as a result of which moneys became payable to the plaintiff under the terms of a document called in these proceedings "the Payment Indemnity Agreement" (PIA). The amount in question has not been quantified but it is accepted that it is some millions of dollars. Facts 2 The facts are somewhat complicated but really depend on an understanding of a series of documents brought into being, it seems, for the purpose of enabling the State of New South Wales (the State) to sell an asset and lease it back yet be entitled to reacquire it or be required to reacquire at the end of the term it as a result of rights or obligations under put and call options. 3 So that the parties can be understood, the first defendant, NatWest Markets Australia No 2 Pty Limited (NatWest) previously called County NatWest Australia Limited was a counterparty to the swap transactions. The documents stand in the name of County NatWest Australia Limited, but I will refer to that company by its present name. The second defendant, the State Bank of New South Wales (SBL) was a financier in the transactions, an agent for the financiers and a reinvestment bank under a reinvestment agreement; and Rawson Place Pty Limited (RPPL), the third defendant, was the purchaser from the State of the building known as the McKell Building in Rawson Place Sydney and a party to many of the transactions. It filed a submitting appearance and took no part in the hearing. No relief is sought against it. 4 There is no dispute about the various transactions and documents which gave rise to the disputes for determination. The dispute is about their meaning and effect. The intention and effect of the documents was to bring about a sale by the State to RPPL of the McKell Building; a lease back by the State from RPPL of that building; for RPPL to borrow all of the funds required for the purchase and to service the loan repayments through the rent receipts. RPPL was described as a special purpose vehicle: the intention was for some unexplained reason, that it should remain in what was described as a cash neutral financial state having only sufficient income to discharge its loan payments. As its rental income was fixed but its loan interest rates were floating it was necessary to enter into a swap transaction with a counterparty to exchange fixed income payments from rent for floating interest payments due under the loan transaction. There were many documents involved, but the relevant ones are most conveniently set out in part of the written submissions of Mr Adam Bell SC, senior counsel for SBL which I incorporate hereunder: Factual Background

On 28 June 1991 a series of transactions concerning a building at 2-24 Rawson Place in Sydney (known as the "McKell Building") were entered into between, amongst other parties, the State, RPPL, NatWest and SBL. Those transactions included: a. First , the sale of the McKell Building by the State to RPPL;

b. Secondly, the lease of the McKell Building for a term of 15 years (with options to renew) by RPPL to the State (the "Lease");

c. Thirdly , the grant of options to permit or require the State to repurchase the McKell Building at the termination of the Lease (for an amount equal to the amount of the outstanding principal on the loan at the date of termination);

d. Fourthly , the loan, by SBL and Nippon Credit Australia in syndicate, to RPPL of the money required to fund the purchase of the McKell Building. The loan was a floating rate loan (at the bank bill rate plus one per cent), and was made pursuant to an agreement known as the "Syndicated Loan Agreement";

e. Fifthly , the entry by RPPL and NatWest into an interest rate swap master agreement. The Swap was a swap transaction entered into under that master agreement. Under the Swap, RPPL agreed to pay fixed-rate interest on the outstanding principal amount of its loan under the Syndicated Loan Agreement to NatWest, and NatWest agreed to pay the amount of interest due under the Syndicated Loan Agreement to RPPL;

f. Sixthly , the agreement by RPPL to pay to SBL all rental that it was paid by the State (rent was paid monthly), in return for SBL paying to RPPL the amount RPPL was obliged to pay NatWest under the Swap (payments under the Swap were made semi-annually). The terms of that agreement are contained in a document known as the "Reinvestment Agreement"; and

g Seventhly , the entry into the PIA by the State. RPPL, NatWest and SBL. (Note: the PIA is the Payment Indemnity Agreement to which I will return.)

It was always contemplated that those arrangements might be modified or changed. To take but one example, cl. 24.9 of the Lease contemplated the refinancing of the loan made under the Syndicated Loan Agreement.

Indeed, the financing arrangements were subsequently amended on two occasions relevant to this litigation. In each case, the arrangements were amended to reduce the cost of funding to RPPL.

On 2 January 1992, RPPL's financing arrangements were restructured, with SBL retiring both as a financier and as agent for the financiers. SBL was replaced (in both capacities) by Prime Asset Vehicle Limited ("PAV" ). The finance provided by PAV was cheaper than that provided by SBL. That is to say, the terms offered by PAV only required RPPL to pay interest at the rate of the bank bill rate plus three fifths of one per cent.

The effect of this new financing, without more, would have been to increase RPPL's income (for the simple reason that its receipts would have remained constant while its outgoings diminished).

In anticipation of the revised funding arrangements, however, the Swap was amended (on 27 December 1991) to take into account the terms of RPPL's new finance (the "Amended Swap" ).

Under the Amended Swap, NatWest was still obliged to make floating rate interest payments to RPPL at the rate of the bank bill rate plus one percent.''' RPPL was, however, required to make certain additional payments to NatWest (described as "arrangement fees"), and NatWest was required to deduct certain amounts (also described as "arrangement fees)" from its payments to RPPL.

The effect of those payments and deductions was to equalize RPPL's cash flows, so that the saving in finance costs did not accumulate in RPPL.

The second set of amendments took place in September 1994.

On 30 September 1994, RPPL issued a note with a face value of $85 million bearing interest at a fixed rate to PAV. PAV paid approximately $65 million for that note.

PAV then sold that note to Rawson Place Funding Pty Limited ("Rawson Funding"). Rawson Funding in turn obtained the proceeds to purchase that note by issuing bonds to the NSW Treasury Corporation (which is known as "T-Corp"). 23. With the proceeds it obtained from the sale of the note, RPPL paid down a substantial portion of its debt to PAV. PAV then retired as agent for the financiers under the Syndicated Loan Agreement, being replaced by Rawson Funding.

The interest rate payable on the outstanding portion of the PAV facility was reduced from the bank bill rate plus three fifths of one per cent to the bank bill rate plus one quarter of one per cent.

The effect of this series of transactions was that whereas previously all of RPPL's funding had been charged interest at a floating interest rate, it was now:

a. primarily fixed rate funding (through the note issued to PAV and on-sold to Rawson Funding); and

b. partially floating rate funding (through the portion of the PAV facility that was not paid down).

The result was that RPPL's funding costs decreased again. As such, once more, if the other components of the transaction were left unaltered, RPPL's income would have increased.

The Amended Swap was thus amended (the "Further Amended Swap"), so that the spread on the floating interest rate payable by NatWest was reduced from 1 % to 0.25%. NatWest also agreed to make payments of principal to RPPL, and RPPL agreed to make payments of principal as well as interest to NatWest.

I note that while Mr Bell speaks of amended swaps one of the issues is whether these were amended swaps or new swaps. Provisions of the relevant documents

Lease provisions 5 The lease from RPPL to the State does not feature largely in this action. However, it contains certain definitions and provisions which are carried forward to the PIA, to which I have referred. The lease was subject to a mortgage to SBL. The relevant clauses are: Part 1: INTERPRETATION 1.1 Defined Terms "Agent Bank" means the State Bank of New South Wales Limited; its successors and assigns.

"Break Benefits" means any amount which the Lessor is entitled to receive or have credited to it in respect of any profit or gain resulting from the unwinding of any swap, forward rate or other similar agreement entered into in connection with the financing of the Lessor's acquisition and holding of the Land.

"Break Costs" means, subject to clause 24.9, in respect of a Casualty Distribution Date the amount certified by the Agent Bank to be the cost to the Lessor of terminating the lending arrangements undertaken to finance the Lessor's acquisition and holding of the Land (including any swap or forward rate agreements whether entered into by the Lessor or the Agent Bank or any financier for whom the Agent Bank is agent) earlier than their specified repayment dates on that Casualty Distribution date including without limitation:

(a) any "break costs" however described including without limitation the costs of the Agent Bank or any other financier redeploying funds for the balance of the Term (disregarding any termination of the Lease including without limitation under clause 19); and

(b) the penalties or other amounts payable under any swap or forward rate or other similar agreement for early cancellation whether payable by the Lessor, the Agent Bank or reimbursable by them in respect of their respective funding arrangements,

but for the removal of doubt shall not include any prepayment fee.

"Casualty Distribution Date" means the last Business Day in each six monthly period, the first of which periods start on the Commencement Date and each subsequent period starts the day after the end of the previous period

(a) If the Premises are damaged or destroyed or if there is interruption to the normal access to the Premises so as to render the Premises wholly or substantially: (i) unfit for the occupation or use of the Lessee; or (ii) inaccessible by the normal means of access,

(b) then the Lease may be terminated by the: (i) Lessor if permitted under clause 19.3; (ii) Lessee if permitted under clause 19.4;

(c) but not otherwise and no abatement of Rent for any period will apply in respect of any event described in clause 19.1(a).

If the Lessor, the Agent Bank and the Lessee do not agree within 3 months of the relevant event occurring to:

(b) make them fit for occupation and use of the Lessee; or

THEN the Lessee may within a further period of 3 months serve a notice on the Lessor and the Agent Bank notifying them that it intends to exercise its right to terminate the Lease and the Option Lease and provisions of clause 19.5 will apply.

If the circumstances set out in clause 19.4 occur, then: …

(g) the Agent Bank agrees to provide an estimate of the Break Costs and Break Benefits applicable on the Casualty Distribution Date next to occur and details of how they are calculated as soon as possible after the events specified in clause 19.1(a) occur.

If the Lessor's estate and interest in the Land is proposed to be resumed by any Government Agency or Government Department pursuant to a bona fide proposal intended to be implemented, THEN the Lessor and the Agent Bank may terminate the Lease and if the Lessee's option under Part 5 has been exercised, the Option Lease:

(1) on the earlier of the actual date of resumption and the date 3 months after written notice to the Lessee signed by both the Lessor and the Agent Bank expiring on any day is served on the Lessee;

(2) without liability to the Lessor, the Agent Bank or the Lessee from such termination and neither party will have any further liability under the Lease or the Option Lease.

If the circumstances set out in clause 19.9 occur, then:

… (e) the Agent Bank agrees to provide an estimate of the Break Costs and Break Benefits applicable on the Casualty Distribution Date next to occur and details of how they are calculated as soon as possible after the resumption event specified in this clause occurs; …

The Agent Bank enters into this document as a party for the sole purpose of protecting its security as mortgagee of the Land and for no other purpose. The Agent Bank incurs no responsibility for any default by the Lessor of the Lessor's obligations nor is the Agent Bank responsible for compliance with the Lessor's obligations except if a notice is served under section 63 of the Real Property Act, and then only to the extent set out in section 63 and except to the extent that the Agent Bank is bound by the Lease including without limitation by virtue of its consent to it and sections 42, 43, 43A and 53(4) of the Real Property Act or the equivalent provisions of relevant legislation having application to this Lease and/or the Premises.

Notwithstanding anything else set out in this document:-

(a) no variation to the terms of this document or Lease is effective unless approved by the Agent Bank;

(b) in each instance where the Lessor's approval is required, no approval given by the Lessor is effective unless the approval of the Agent Bank is also given;

(d) all payments due to the Lessor must be made to the Agent Bank or as the Agent Bank directs to be received by the Agent Bank on account of the Lessor's obligations to the Agent Bank;

(e) any release by the Lessor of any Lessee's Covenant shall not affect any such obligation owed to the Agent Bank.

Clause 24.2 is included for the sole benefit of the Agent Bank and may be waived in writing in part or in whole by the Agent Bank.

If the Agent Bank transfers its mortgage over the Land the Lessee and the Lessor, if requested by the Agent Bank, will at no cost to the Lessee execute such documents as the Agent Bank reasonably requires to permit the transferee to have the benefit of the Agent Bank's rights under the Lease as if it were a party to this document and the Agent Bank agrees to procure that the transferee executes that document for the benefit of the Lessor and the Lessee.

The Lessor and the Agent Bank covenant with the Lessee that where the lending arrangements referred to in the definition of Break Costs existing at the Date of Commencement are restructured for any reason other than the act or default of the Lessee, then any additional Break Costs or other costs in connection with the provision of financial accommodation under those arrangements associated with such restructuring which would not have arisen had the restructuring not occurred shall not be included within the definition of Break Costs. This clause 24.9 does not apply to a restructuring referred to in clause 6.3.

Payment Indemnity Agreement dated 28 June 1991 (PIA) 6 This is the document sued upon. It is made between RPPL (in the document called "the Company"), the State Bank of New South Wales in its capacity as agent for the financiers (in the document called "Agent"), the State Bank of New South Wales in the capacity as reinvestment bank (in the document called "Bank") and NatWest the counterparty to the State in the swap transactions, and Her Most Gracious Majesty Queen Elizabeth II in right of the State of New South Wales (in the document called "the Lessee"). The PIA contains a recital as follows: The parties hereto have agreed to enter into this agreement for the purpose of directing certain payments due by the Lessee under the Lease. 7 It incorporates the definitions of break benefit and break costs in the lease and includes the following provisions:

These clauses have been scanned in so that the handwritten amendment to Clause 2 can be seen.

Reinvestment agreement 28 June 1991 8 This was an agreement between SBL and RPPL authorising SBL to take as its own moneys rent moneys received by RPPL from the State, after payment of bank fees, and to pay these surplus moneys into a reinvestment account for the purpose of making the fixed interest payments to NatWest in accordance with the swap agreement. To complicate matters it has its own definition of "break costs" in this agreement being loss or costs incurred as a result of termination of the agreement.

Inter-bank indemnity 28 June 1991 9 This agreement seems to have gained its title on the basis that NatWest was a bank. Under it SBL, as reinvestment banker, agreed to make six monthly fixed interest payments due to NatWest by RPPL under the swap, to which I will come, and NatWest agreed to pay to SBL as agent bank the floating interest payments due under the swaps to enable those payments to be passed on by SBL as agent bank to the relevant financiers. It has a different definition of Break Costs summarized as any liability or loss to NatWest as a result of termination of any swap agreement

Interest rate and currency exchange agreement (IRCEA) 28 June 1991 10 The International Swap Dealers Association Inc and its members habitually use a standard form of general conditions of agreement relating to swap transactions. The preamble to the deed relevant to the particular transaction under discussion here is as follows: County NatWest Australia Limited Rawson Place Pty Limited A.C.N. 002 910 652 and A.C.N. 050 536 046

have entered and/or anticipate entering into one or more transactions (each a "Swap Transaction"). The parties agree that each Swap Transaction will be governed by the terms and conditions set forth in this document (which includes the schedule (the "Schedule")) and in the documents (each a "Confirmation") exchanged between the parties confirming such Swap Transactions. Each Confirmation constitutes a supplement to and forms part of this document and will be read and construed as one with this document, so that this document and all the Confirmations constitute a single agreement between the parties (collectively referred to as this "Agreement"). The parties acknowledge that all Swap Transactions are entered into in reliance on the fact that this document and all Confirmations will form a single agreement between the parties, it being understood that the parties would not otherwise enter into any Swap Transactions. Additional provisions, some of which vary the standard terms are contained in a schedule which is referred to in the preamble. The only one which appears to be of significance varies the definition of "termination events" so far as RPPL is concerned so as to entitle RPPL to terminate the agreement without cause at any time but only upon payment in full to NatWest of all moneys payable to it under the general terms in the event of termination. There are then provisions for calculating the termination payment which need not be gone into at this stage. First swap transaction dated 28 June 1991 11 The confirmation issued by County NatWest is stated to supplement, form part of, and be subject to the IRCEA including the schedule. It sets out the fixed rates of payment to be made by RPPL to NatWest as counterparty and the floating payments to be made by NatWest to RPPL based on notional principal sums set each six months. It sets out a trade date of 28 June 1991, an effective date of 1 July 1991, a maturity date of 30 June 2006, and a floating rate of interest for each calculation period being AUD-BBR-BBSW with a spread of one percent. The spread means that the interest will be the floating rate fixed by the relevant Bank Bill Swap rate plus one percent. The NatWest reference on this confirmation document is A00869. Second swap transaction dated 27 December 1991 12 The evidence shows that this transaction or alteration occurred as a result of RPPL being able to obtain better borrowing terms than were originally available to it from the original financiers. The document is in letter form, the first three paragraphs being as follows:

The purpose of this letter is to set forth the amendments to the terms and conditions of the Swap Transaction entered into between County NatWest Australia and yourselves on 28 June 1991 (the "Swap Transaction"). This letter constitutes the "Substitution Confirmation" as a result of the Payment Agreement in Relation to the McKell Building dated 25 December 1991. The definitions and provisions contained in the 1991 Interest Rate and Currency Exchange Definitions (as published by the International Swap Dealers Association Inc) are incorporated into this Substitution Confirmation. In the event of any inconsistency between those definitions and provisions and this Substitution Confirmation, this Substitution Confirmation will govern.

This Substitution Confirmation supplements, forms part of, and is subject to, the Interest Rate and Currency Exchange Agreement dated as of 28 June 1991 (the "Agreement") between yourselves and County NatWest Australia. All provisions contained in the Agreement govern this Substitution Confirmation except as expressly modified below. 13 It then sets out the same reference number A00869, and the same trade, effective, and maturity dates as the first confirmation. The effect of the document is that while it expresses the payments to be made by NatWest to RPPL as being at the same specific rate plus one percent, by means of additional fixed interest payments and decreased floating rate payments (described as arrangement fees), the required neutral position so far as income and outgoings of RPPL is preserved. I will return to this. The effect of the deductions from the floating rate payments confirmation or transaction was to reduce the spread from one percent to 0.6 percent or in the language of this community, by 40 basis points. Novation agreements 2 January 1992 14 There were two novation agreements of this date. The purpose of one was to remove SBL as agent bank of the financiers and to replace it with Prime Asset Vehicle Limited (PAV). This was envisaged by clause 3.6(b) of the PIA. The novation agreement released SBL as agent bank of its obligations under the PIA as agent for the financiers. The second novation agreement substituted PAV for SBL as agent bank under the lease. Third swap confirmation 15 This document was issued on 30 September 1994 also in letter form. The first and second paragraphs are as follows. This confirmation is given pursuant to the Interest Rate and Currency Exchange Agreement dated 28 June 1991 between County NatWest Australia Limited ("County") and Rawson Place Pty Limited ("Rawson Place") (the "Agreement"). From the Effective Date, this confirmation replaces the confirmation dated 27 December 1992, being the previous confirmation issued pursuant to the Agreement. 16 There is a new reference A2868, different trade and effective dates, namely 28 September and 30 September 1994 respectively, and it provides for the floating rate payments to be based on the BBSW rate plus 0.25 percent. This was a reduction of 35 basis points from the previous floating rate. The payments set out in the schedules to the confirmation provided for the six monthly fixed payments including interest and principal plus certain arrangement fees and floating rate payments calculated on reducing notional principal sums together with certain principal payments which were to commence on 1 July 1999. This swap arrangement came about as a result new and more beneficial loan moneys becoming available to RPPL through the intervention of the New South Wales Treasury Corporation as a result of which the borrowed funds in part carried interest at a fixed rate and in part only on a floating rate. 17 In October 1998 the State became aware of the financial accounts of RPPL for the year ended 30 June 1995. Those accounts included the following note: 9. MANAGER

The manager of the company pursuant to the management deed is County NatWest Corporate Finance Australia Limited. The immediate and ultimate holding companies of the manager are County NatWest Australia Limited and National Westminster Bank Plc respectively.

The manager of the company undertakes general administrative, secretarial and financial advisory functions. All costs and expenses of the company are paid by the manager. The manager is entitled to receive management fees on the maturity date of each tranche of Program Securities.

The amount actually paid or due and payable to the manager during the period was $327,726 (1994: $335,261).

The company has entered into interest rate swap transactions with County NatWest Australia Limited. Such transactions are conducted on normal commercial terms and conditions. Amounts included in the balance sheet in relation to these transactions are disclosed in Notes 4 and 5. Swap interest revenue and expense relating to the above transaction are disclosed in Note 2.

During the period the company's financing arrangements were restructured by the manager. A benefit of $1,190,000 accrued from restructuring the swap with County NatWest Australia Limited which was paid to the manager County NatWest Corporate Finance Australia Limited in consideration for its assistance in locating the new financier. 18 The accounts came to notice in litigation between RPPL and the State over claimed breach of covenant in the lease. The solicitor acting for the State in that action came upon the note when considering documents produced by RPPL pursuant to a notice to produce. By letter dated 8 December 1998 the solicitors for the State, namely Bruce & Stewart, wrote to NatWest demanding payment of the sum of $1,190,000 claimed to be due under clause 2.3 of the PIA. The evidence does not establish any response. There was then a delay of about four years until letters of demand were sent to NatWest and PAV on 15 January 2003 demanding a statement of break benefits be provided. PAV responded stating that it had no liability. The evidence does not establish any response from NatWest. These proceedings were commenced by summons on 24 June 2003 and the statement of claim was filed on 3 September 2003. An amended statement of claim was filed during the proceedings. 19 It is desirable to put Note 9 to rest. Whether or not it was an admission by RPPL it is not evidence against NatWest or SBL. Expert accounting evidence in the proceedings was that it was not possible to establish from the working papers used for the audit any basis for the figure in the note. The plaintiff did not rely on it other than to show when the State was first alerted to its possible claim after which it slept on its claimed right for four years. Claims of the plaintiff 20 The plaintiff seeks:

A. A declaration that SBL and NatWest are each obliged to provide to the State pursuant to clause 2.1 of the PIA a statement of break benefits and that they are jointly and/or severally liable to pay to the State such break benefits.

B. An order for specific performance of the obligation to provide the statement.

C. An inquiry, said to be alternative to B above, to determine the amount of break benefits together with an order for payment of the amount so determined. D. Damages in lieu of or in addition to specific performance. 21 While it is not entirely clear from the form of orders sought by the State in the amended statement of claim, counsel for the plaintiff made it quite clear in opening that the claim for damages, at least included an independent claim under clause 2.3 of the PIA which did not rely on the claim for specific performance. Defences 22 The defendants each say that no break benefits were payable to the plaintiff pursuant to the PIA; that if there were break benefits they are not covered by clause 2.1 of the PIA; that clause 2.3 does not give rise to any separate claims; but if it does then any such claim is barred by the Limitation Act 1969 or if an equitable claim by laches and by analogy.

Reply 23 In reply to the limitation defence the plaintiff pleads s23 of the Limitation Act and further insofar as the claim is a claim at law for breach of contract covered by s14 of the Limitation Act says that the cause of action did not arise until 23 October 1998 "prior to which" - in the case of NatWest the failure, and in the case of SBL its and/or NatWest's failure - "to report and pay pursuant to clause 2.1 and 2.3 of the PIA effectively precluded the institution of these proceedings by the plaintiff". Questions for decision 24 The questions can be postulated in a number of ways depending on how many sub-divisions it is thought will assist. It is helpful however to separate the claim for specific performance which requires interpretation of clause 2.1 of the PIA and equitable claims following that claim from the claim for breach of contract. On that basis the questions can be set out as follows:

Were there break benefits payable or allowable to the State pursuant to clause 2.1 of the PIA? 25 This gives rise to a number of subsidiary questions namely (a) whether there was an unwinding of any of "any swap forward rate or other similar agreement"; (b) whether RPPL was entitled to receive or have credited to it any profit or gain resulting from the unwinding; (c) the proper interpretation of clause 2.1 including whether its effect is limited to the events listed in (a), (b) and (c) of that clause.

The proper construction of clause 2.3. 26 This involves the following additional subsidiary questions:- (a) Whether clause 2.3 gives rise to an independent obligation; (b) If it does, is the obligation such that for example SBL is obliged to pay to the State an amount equal to any break benefit payable to RPPL by NatWest?
Is the claim of the State barred by the Limitation Act and should the defence of laches succeed?
Is any defence available to SBL not available to NatWest? 27 Most of these questions are pure construction matters. However, the question of whether there has been an unwinding of the swap has resulted in expert evidence being called on both sides. All parties have produced helpful written submissions, although those of NatWest were so long (97 pages) and detailed that to some extent they were rather more like a textbook on the case than submissions. There is little point in producing written submissions including statements that the word "entitled" in a legal document means "legally entitled" and quoting six authorities and the Shorter Oxford Dictionary to establish such a basic proposition, particularly as there was never any argument about it. 28 It is desirable for me as trial judge to determine all or nearly all of the questions listed; however I have come to the conclusion the case can be decided by answering two questions. The first of those questions is the proper construction of clause 2.1 of the PIA on the assumption that break benefits were payable or allowable to the RPPL under the lease and PIA; and the second is the limitation question on the assumption clause 2.3 of the PIA gives rise to an independent claim. First Question 29 It is accepted that no break benefits are payable by virtue of clause 19.5 or 19.10 of the lease; and that no break benefits are payable in connection with the termination of the lease under clause 21.2. It has not been terminated. It is also accepted that no break benefits are payable in connection with a breach of a covenant in the lease. 30 In those circumstances no obligation to provide a statement of break benefits "in connection with that event" arises. The only counter to what appears to be an obvious construction is that the words "or this deed" inserted in handwriting lead to a different conclusion. I agree that those words appear to add nothing to the clause but there is no basis for construing the clause in a way contrary to its literal meaning. The words can perhaps be explained by overcaution and the terms of clause 2.2. and 2.3. This is not a suit for rectification; the proper construction gives rise to no absurd result even if the words seem unnecessary. It is clear that the word "event" refers to the three possibilities. It follows that there was no obligation to provide a statement of break benefits under that clause. The claim for specific performance must fail. The second question. 31 Once the claim for specific performance fails, there is no equitable relief available. The claim is a claim for damages for breach of contract for failure to pay break benefits. This is a claim in contract. As such breach gives entitlement to nominal damages and as the claim is in the Equity Division it is not unusual to have a question of damages dealt with separately by a Judge or an Associate Judge. 32 The cause of action for damages for breach of contract arises on breach. In this case the breach, if any, occurred on failure to make payments under clause 2.3. The second swap transaction took place on either 27 December 1991 or 2 January 1992. The limitation period in respect of this transaction therefore expired, at the latest, on 2 January 1998 or perhaps a few days later. The third swap took place on 30 September 1994. The limitation period expired on 30 September 2000. At least so far as the second swap is concerned, the State in October 1998 had notice of a possible claim. It is, however, an accepted principle in contract claims that it is a breach which gives rise to the cause of action and not knowledge of breach. 33 To overcome this general proposition, the plaintiff relies upon some passages in the judgment of Deane J in Hawkins v Clayton (1987) 164 CLR 539 and particularly at page 589 et seq. That was a case for damages for negligence, a majority finding that the defendant's solicitors were negligent in failing to inform the executor named in a will which they held of the existence and contents of the will. At page 589 His Honour said in discussing a Limitation Act defence: There is a more general answer to that defence. Its basis is to be found in the circumstance that, in the present case, the negligent failure of the firm to inform Mr. Hawkins of the existence and contents of the testatrix's last will not only caused the damage which was sustained by him in the capacity of executor of the testatrix's estate but also effectively concealed from him, for so long as he remained unaware of the contents of the will, the existence of the cause of action in negligence against the firm.

It is inevitable that a Statute of Limitations will, on occasion, lead to injustice in the special circumstances of particular cases. Such injustice, when it occurs, is an unavoidable cost of the benefits involved in ensuring that plaintiffs act promptly and that defendants are not subjected to the litigation of stale claims. The present case falls, however, in an anomalous category where the applicability of a limitation provision such as s.14(1) would invariably involve prima facie hardship and injustice and where any compensating public benefit, apart from protecting the courts from being required to determine issues of distant fact, is absent. If a wrongful action or breach of duty by one person not only causes unlawful injury to another but, while its effect remains, effectively precludes that other from bringing proceedings to recover the damage to which he is entitled, that other person is doubly injured. There can be no acceptable or even sensible justification of a law which provides that to sustain the second injury will preclude recovery of damages for the first. It would, for example, be a travesty of justice and common sense if the law provided that a cause of action lay for damages for false imprisonment but then went on to provide that that cause of action would be lost if the false imprisonment continued for six years after the cause of action first accrued. Likewise, it would be a travesty of justice and common sense if the law imposed a duty upon a solicitor to take positive steps to inform a third person of the contents of a document of which the solicitor was alone aware and then provided that any cause of action against the solicitor for damage caused by a negligent failure to perform that duty would be lost if the negligence continued for six years. It is arguable that the notion of unconscionable reliance upon the provisions of a Statute of Limitations which provides the foundation of the long-established equitable jurisdiction to grant relief in a case of concealment of a cause of action until after the limitation period has expired (cf. s.55(1) of the Limitation Act) should, by analogy, be extended to cover cases such as these where the wrongful act at the one time inflicts the injury and, while its effect remains, precludes the bringing of an action for damages. It seems to me, however, that the preferable approach is to recognize that it could not have been the legislative intent that the effect of provisions such as s.14(1) of the Limitation Act should be that a cause of action for a wrongful act should be barred by lapse of time during a period in which the wrongful act itself effectively precluded the bringing of proceedings. On that approach, the reference in s.14(1) of the Act to the cause of action first accruing should be construed as excluding any period during which the wrongful act itself effectively precluded the institution of proceedings.

34 As Powell JA pointed out in Walmsley v Cosentino [2001] NSWCA 403 it is not altogether clear what weight of authority should be given to this passage as the other two judges in the majority based their decision on the limitation question by determining that the cause of action did not arise until a grant of probate was made because until that time there was nobody in a position to take any action. 35 For obvious reasons judges of lower courts, when considering limitation questions, at least where the claim is for damages for negligence, would proceed on the basis that the reasoning of Deane J is correct. Damage is an integral component of actions on the case in tort. Damage is assumed in actions for breach of contract. It could never be said that there was any obligation on one contracting party to inform the other contracting party of the first party's breach. This is entirely different from the case in Hawkins where the negligent act was the failure of the defendant firm of solicitors to inform Mr Hawkins of the existence and contents of the will in circumstances where it was this failure which caused the damage to Hawkins in his capacity as executor. 36 Counsel for the plaintiff in written submissions, referred to various passages in other judgments in support of his argument that the observations in Deane J in Hawkins should be followed and applied in this case. Those cases were: Sampson v Zucker (NSWCA 11 December 1990, BC9606395); Downey v Bruce (unreported Supreme Court of South Australia 17 December 1992); Cheney v Duncan [2001] NSWCA 197; Pittaway v W H Tutt & Quinlan [2003] QCA 365; Gorton v Commonwealth of Australia [1992] 2 Qd R 603 at 607; Grundy v Lewis (1995) 62 FCR 567 at 576; Pace v Westpac Banking Corporation [2001] QSC 415 at paragraph [46]; GMU Australia Pty Limited v Davidson [2003] NSWSC 311 at 197. 37 Two of these cases included claims both in negligence and for misleading conduct under the Trade Practices Act. Apart from Downey v Bruce the others dealt with limitation defences raised to actions for negligence, for the most part, professional negligence. Downey v Bruce was a claim for damages for negligence and breach of contract. It was an appeal to the full court from a decision of a Master. The judgment of Mulligan J proceeds on the basis that the observations of Deane J in Hawkins apply to claims both in contract and in tort. It was, however, not necessary for His Honour to decide that: he said at BC9200157 at 11 "It is not the negligence or breach of contract of the respondent, assuming negligence or breach of duty for that purpose, which effectively precludes the appellants from bringing proceedings. There was no relevant representation or conduct of the respondent which caused the appellants failure to institute the action on time". While I do not consider that the passage in the judgment of Deane J could bear on limitation periods in contract claims, if it does it cannot I think do so unless there is a requirement to advise when a particular obligation under a contract falls due. It may be that failure to provide a statement under clause 2.1 of the PIA could form a peg upon which to found an argument based on the Hawkins passage; without there being any such obligation, the cause of action arose on breach. The Limitation Act defence succeeds. 38 It follows from the answers to these two questions that the plaintiff's claim fails. I will however proceed to deal with the other questions argued. Was the State entitled to receive or have credited to it any profit or gain resulting from the unwinding of any swap forward rate or other similar agreement? 39 It is necessary to construe the definition of break benefits in the lease and to decide whether there was an unwinding of any swap; whether there was a profit or gain result from the unwinding; and whether RPPL was entitled to receive the amount of such profit or gain. 40 There was an argument that break benefits ought to be construed in light of the definition of break costs in the lease so that break benefits would only arise if there were a benefit to RPPL on terminating the lending arrangements undertaken to finance the purchase of the McKell Building. I do not think that is correct. There may be difficulties about the meaning of certain expressions such as "unwinding", but that does not mean the words do not have a meaning to be ascertained on a reading of them. No recourse to surrounding circumstances is necessary; I add that if it were, it would not help.

41 Mr Travers, the plaintiff's expert, said that "unwinding" meant termination; Mr Das, the defendants' expert accepted that. This meant that the question was whether there was a termination of both or either of the first and second swap. 42 It is necessary to deal with the preliminary argument on behalf of NatWest, namely that the ISDA of 28 June 1991 remained in force governing all three confirmations so that there was no unwinding of the swap, that being the agreement in terms of the break benefit definition. This was not put directly to either expert. In the arcane world of swap dealings I consider it clear that "swap" at least included the particular transaction subject to a confirmation. The whole case proceeded on the assumption that there could be a termination at least by an equal or opposite swap between the same parties. It was not suggested, nor was it realistic to consider, in these circumstances, there would be a requirement for a new ISDA agreement. 43 The evidence of Mr Das was that for a termination there were three requirements, namely that future cash flows were cancelled; that there was a payment between dealer and customer based on values of the swap at termination; and that there was a termination notice. As to the last of these requirements, no termination notice was put into evidence and on that basis I think it safe to conclude one was not issued. Obviously none was discovered. Mr Das eventually agreed that while termination notices were almost universal there could be occasions when one was not issued. Nevertheless the absence of a termination notice does support the contention there was no termination. As to the requirement for payment, Mr Das accepted that there could be termination by swap reversal in which case no payment was required. However, there was no swap reversal here so that is irrelevant. Mr Travers said that payment for the value of the swap at termination could be taken up in a new transaction. His evidence was that the first and second swaps could not co-exist and neither could the second and third swaps co-exist, which I take to mean that future cash flows on the superseded swaps were cancelled. He said that if there were a significant alteration to net cash flows, there was a termination. 44 The difficulty about that last statement is that Mr Travers agreed that significant alteration to net cash flows was a subjective rather than objective test which to some degree was affected by the swap book of the counterparty and whether there was a requirement to adjust that book as the result of alterations to cash flow. As Mr Travers agreed it was important in the industry to know when a swap had terminated I conclude that a subjective view as to what is a significant alteration to cash flows could not be regarded as a determining factor on the question of termination. As to taking up a swap value on termination in a new transaction rather than making a money payment I accept his evidence that is possible. Mr Das appeared to agree with that. Mr Travers said that that was what was done with the second and third swap. 45 There is some difficulty with that statement. At first I thought that Mr Travers was speaking of the gain to RPPL arising out of reduced interest rates but the following passage from page 119 of the transcript makes it clear that is not the position: Q. So that there would have been, but for the second swap, an amount payable if the first swap were terminated by Rawson Place to County NatWest in the order of some several millions of dollars; is that correct? A. That's correct.

Q. If you assume for the purposes of this question that no such payment was made, are you able to tell by looking at the two swaps in front of you what happened to that value in the swap? A. Yes.

Q. What happened to it? A. The value moved from the first interest rate swap into the second interest rate swap.

Q. What, it was taken up or absorbed in the second swap, was it? A. Yes, it was. 46 However, to take the figures from the second swap confirmation the arrangement fees which were deducted from the floating rate payments from NatWest to RPPL, according to the unchallenged evidence of Mr Travers, represented a reduction in the spread from 1 percent to .6 percent on the new borrowing arrangements. That is conceded by the State. When one looks then at the arrangement fees on the fixed payments under the swap from RPPL to NatWest, it is reasonably clear that the amounts do not represent the "several millions of dollars" being the value of the swap in favour of NatWest at 27 December 1991. 47 In his evidence in chief at page 115, Mr Travers referred to changes in the cash flows between RPPL and the lenders at the time of the second swap, one of which changes was that a fee payable under the original syndicated loan agreement was no longer payable. That is correct. The syndicated loan agreement dated 28 June 1991, pursuant to which the original claim was made, provided for payment by RPPL to SPL of a one off transaction fee and of commitment fees in amounts and dates as set out in a schedule. The loan amendment agreement of 2 January 1992 cancelled the requirement for commitment fees as from that date. That was a benefit to RPPL. 48 Mr Bell, senior counsel for SBL submitted that the arrangement fees added to the fixed interest payments approximated the commitment fee and agency fees payable by RPPL to SBL under the syndicated loan agreement and the reinvestment agreement. He argued that when that requirement was cancelled it was necessary to take the surplus funds out of RPPL which was done by means of the arrangement fees onto fixed interest payments. I should say that this argument was only put forward when the matter was listed for supplementary submissions and all that can be said that if the agency fees taken from page 918 of Exhibit A are added together, the difference between that total and the total arrangement fees on the fixed interest side is about $4,300, so this is likely to be correct. 49 The value of the swap means the mark to market figure, as was agreed by everybody. That value is determined by interest rates at the commencement of the swap and interest rates or expected interest rates at the date of termination. As the commencement date under the second swap was the same as the first, it could be said on that basis its value was carried forward to the second swap. Mr Bell argued accordingly and said that was what Mr Travers meant. It is unfortunate that the evidence did not bring this to any conclusion but whatever the position I do not accept the value of the first swap at the date of the second swap is represented in the arrangement fees attached to the fixed interest payments by RPPL to NatWest. From the evidence a far greater change to cash flows would have been required. 50 There is a difference between termination with a new contract and amendment of an existing contract. There is a difference between cancellation of cash flows and adjustment of cash flows. I conclude that the second swap did not result in a termination of the first swap, but a variation of it. Insofar as the evidence of Mr Travers was that the value of the first swap on 27 December 1991 was taken up in the second swap and if by that he meant that its value in money terms was represented by the increased cash flows on the fixed interest payments from RPPL to NatWest I do not accept that even though there was no real cross-examination on this. In any event this was not what Mr Travers meant. 51 In cross-examination of Mr Travers at transcript page 147 at line 57 to 148 at line 6 the following appears: Q. "That consideration is the value of the swap at the time the swap is unwound or amended"? A. Yes.

Q. Is it your opinion that even if a swap is only amended and not unwound that there is still the potential for money to have to be paid between the parties to the swap? A. In my experience if one is amending a swap, typically it means that there won't be any value exchanged because the amendment to the swap won't have an impact on the value of the swap. which would tend to support the argument of Mr Bell that at least so far as the swap concerned there was no termination. 52 The third swap is different. There are far more significant changes to cash flows. This was of course because a substantial sum of the borrowed moneys became subject to fixed interest and not floating interest, so that to the extent the loan funds were borrowed at fixed interest, there was no need for any swap protection. 53 While the arrangement fees under the third swap remained the same, there was of course the reduction in the fixed interest payments and a substantial reduction in the floating rate payments which would be applicable because the loan funds secured on which a floating rate was payable were considerably reduced and because the spread was reduced to .25. I have come to the conclusion that if there were a payment of value at the date of the third swap, there would have been a termination. A substantial change in the cash flows and the change in effective date leads to this conclusion. In the long run I conclude from reading Mr Travers' report in reply that when he is speaking of a swap value he is not speaking of the value of the swap to either RPPL or NatWest at the particular time, which is what Mr Das is discussing. At page 370 of Exhibit A Mr Travers states that he did not attempt to value the interest rate swaps but rather "sought to estimate the value of the decline in the credit spread in the funding facilities". He appears to accept that it is this value, namely the value of the lower cost funding which was transferred by RPPL to NatWest. 54 While there is no evidence that there was a payment to NatWest at the time of the third swap, it is fair to say that there is no evidence that there was not any such payment, although no one suggested there was a payment. I do not think the conclusion should be drawn one way or the other. I find that the third swap was a termination. I do so because there was a substantial change in cash flows and because the commencement date changed which would indicate a new commencement date to be applied in valuation. Entitlement of RPPL to receipt or credit 55 This finding on the unwinding question does not assist the plaintiff. The reason for the amendment or termination was that RPPL was able to obtain better borrowing rates. It was a benefit for RPPL. The evidence is that a reduction in interest rates caused the value in the swap to rise from the point of view of NatWest as counterparty. In colloquial terms NatWest was in the money. If interest rates had risen the value in the swap would have been positive to RPPL. To gain the benefit from the interest rates and keep the cash flows even, it was necessary to vary the swap, or if I am wrong about unwinding to unwind it. If there were an unwinding the value in the swap could only be taken up by either increasing payments to NatWest or reducing payments by NatWest to RPPL. It is clear that happened on the second swap; NatWest received more money and paid less, but it did not get the value of the swap to it. What it got was the benefit of the reduced interest rates to RPPL. Although it is not quite so clear, this happened in the third swap after taking into account the reduced loan funds subject to a floating interest rate. Whatever happened NatWest did not end up "out of the money" as a result of the third swap. In neither case was RPPL entitled to have money paid or credited to it as a result of the unwinding. Money was paid to NatWest not to RPPL. 56 Leaving aside the swap transaction RPPL received a benefit as a result of a reduction in interest rates. Mr Travers said with reduced interest rates and no change in the swap both RPPL and NatWest would have obtained a benefit, and that seems to be correct. Mr Das accepted that without a change of the swap RPPL could not obtain that benefit; I find it difficult to understand why, but perhaps this was because it seems to have been accepted that there was some basic requirement to keep RRPL in a position where it acquired no assets other than the building. On no basis however did any profit or gain arise from the unwinding of the swap. Any gain was from the reduction in interest rates. The gain went to NatWest. Neither was RPPL entitled to receive or have credited to it any such profit or gain. It was required to pay less interest: it did not receive an amount of less interest. Counsel for the plaintiff argued that one transaction could result in both a loss and a gain such as a capital loss on shares but a gain by way of an increased dividend. On that basis the gain - which, I point out, was not receivable - was the lower interest rate, and the loss the negative value to RPPL in the swap. Whatever the meaning of unwinding there was no break benefit to which RPPL was entitled as a result. Does clause 2.3 of the PIA give rise to an independent obligation? 57 When considering the construction of the PIA and particularly clause 2, it is necessary and permissible to do this in the context in which it came into existence and the objects it was intended to secure. McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at 589. The PIA was, according to its recital, entered into for the purpose of directing payments due by the lessee, namely the State, to RPPL as break costs to either SBL or NatWest. Clause 2.3 does not sit well with the recital but that does not mean that the recital is to be ignored. The document was a directing document. 58 The PIA is a poorly drafted document. I was asked to take into account the pre-contract documents on the basis of an ambiguity. The material was let into evidence on the basis that it was admissible if there were found to be an ambiguity. I consider there is an ambiguity. However a memo from one partner in a firm which seems to have been acting at least for lessor and lessee to another partner in that same firm is really a firm writing to itself and can be of little assistance. The material however makes it clear it was suggested at a late stage that a definition of break benefits be included in the lease which inclusion brought about the reference to those benefits in the other documents. The material does not establish break benefits is the mirror reverse of break costs. 59 The question of construction of clause 2 is not easy to determine. There are arguments both ways. However, the clause should be read as a whole with the sub-clauses in order. If this is done, I conclude that the obligation as to break costs under clause 2.2 flows directly from the obligation to provide a statement under 2.1 and that the preferable construction of 2.3 is that the obligations as to break benefits flows in the same way from 2.1 and does not give rise to an independent obligation. This is supported by the fact that the purpose of the agreement was to direct payments not to impose separate obligations. 60 Whether or not clause 2.3 does impose an independent obligation I consider that the proper construction of that clause requires it to be read as if the words "by it" were inserted after the word "payable" where that word first appears. The words "each" and "severally" point clearly to that construction. It would be an absurd result to construe the clause as requiring SBL to make a payment where it held no amount of money on behalf of RPPL which had it not been for the direction given in the PIA it would have been obliged to pay to RPPL rather than to the State. There is some questions as to whether any documents other than the PIA imposed any obligation on the State as to break benefits. Mr Bell argued that Part 3 of the Reinvestment Agreement and clause 4.1(a) of the Interbank Indemnity Agreement provided for such obligation. As it is not necessary I think it best not to determine that matter. It relies on an intricate argument turning an indemnity interest for break costs into an obligation to pay break benefits. Whatever the purpose of the agreement was, it was not to require parties to make gifts. I find that in any event there was no liability on SBL under clause 2.3 of the PIA. 61 This I think deals with all the matters in respect of which a decision is properly required of me. The following is a summary of my findings:

(a) There are no break benefits payable to the State pursuant to clause 2.1 of the PIA.

(b) Therefore the claim for specific performance fails.

(d) RPPL was not entitled to receive or have credited to it any profit or gain resulting from this unwinding; and if the first swap was, contrary to my decision, unwound the same result follows.

(e) Clause 2.3 of the PIA does not give rise to an independent obligation outside the context of clause 2.1.

(f) If there were an independent obligation on NatWest there was not one on SBL.

(g) The Limitation Act defence succeeds. Proposed Orders

Judgment for the defendants on the claim of the plaintiff.

Order the amended statement of claim be dismissed.

Order that the plaintiff pay the costs of the first and second defendants of the proceedings. No order as to costs of the third defendant.

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