It concluded with an invitation for questions about any aspect of the facility.
105 With this letter was included the final PBSA client statement for 1 -26 January 1999, and the Equities client statement for January and February 1999. Each was addressed to SC. The last mentioned statements record the Facility limit of $400,000.00 and share transactions on 26 January and various dates in February 1999.
106 On 24 March 1999 Mr and Mrs Morgan, as directors of SC, requested that the limit of the facility be increased to $1,000,000.00 and, as the statement dated 31 March 1999 shows, the request was approved. Thereafter SC traded in shares and options with the benefit of a facility for that amount.
107 The evidence shows that all client statements concerning the operation of the facility and the share and options trading were issued monthly to SC. It also shows that, for the whole of the period until trading ceased on 17 August 2001, Mr Morgan traded through and to the account of SC, that all shares were acquired and held in its name, and no trading was undertaken in the names of Mr and Mrs Morgan or either of them. Private also allowed SC to trade in shares and options with the benefit of a dual pledge arrangement similar to that provided by PBSA so that shares acquired by SC were available to secure borrowings under the facility and were also available to cover Private's obligations to the OCH for SC's options trading.
108 In about early June 2000 Mr Charles Knights, a client advisor at Private, informed Mr Morgan that the dual pledge arrangement would not be allowed to continue. However, after he threatened to take his business to a firm which would provide such arrangement, Mr Morgan received advice from Equities on 7 July 2000 which identified SC with the facility and advised that the dual pledge arrangement would continue. This arrangement remained in place until 17 August 2001.
Novation
109 At this point it is convenient to refer to Mr Svehla's submissions that, if it was found that originally Mr and Mrs Morgan were the borrowers under the loan agreement, there was a novation whereby SC was substituted for them and they were discharged from liability. It was contended that the novation was brought about by the acceptance by Equities of SC's request for an increase of the limit of the loan. In addition the novation was to be inferred from the subsequent course of conduct which involved Mr Morgan's instructions to Private on behalf of SC, the issuing of all client statements to SC, the apparent operation of the facility as if SC was the only party and the implementation of the dual pledge arrangement for SC's share and options trading.
110 Mr Svehla submitted that this evidence was sufficient to establish that from March 1999 SC had become the borrower by novation and Mr and Mrs Morgan were no longer liable in respect of the facility.
111 In response, Mr Seib's submission for BNP was that the evidence did not prove novation. He referred to the structure of the arrangement upon which the facility was provided which included the terms of the guarantee and indemnity, the equitable mortgage and the application itself which contained information of obvious significance to Equities in deciding whether to approve a loan and the limit thereof. He contended that the underlying common commercial purpose of the arrangement was that Mr and Mrs Morgan would have a facility which entitled them to trade through, and to the account of, SC with a loan secured by shares held by SC and/or themselves, and that the way in which the parties conducted themselves was at all times in accordance with this arrangement.
112 It followed that if the Plaintiffs' submissions were correct, it would mean that Equities had accepted SC as the borrower without a guarantor.
113 The relevant principles are summarised in Fightvision Pty Ltd v Onisforou & Ors (1999) 47 NSWLR 473 at 78:
"Novation is a transaction by which all parties to a contract agree that a new contract is substituted for one that has already been made: Olsson v Dyson (1969) 120 CLR 365 at 388 per Windeyer J … Novation involves the extinguishment of one obligation and the creation of a substituted obligation in its place. Intention is crucial to show a novation: See eg, Vickery v Woods (1952) 85 CLR 336 at 345, per Dixon J … A novation may be expressed or implied from the circumstances".
114 It is fundamental to keep in mind that the loan agreement was one of several interlocking and interdependent documents described in cl 1.1 thereof as "transaction documents". These included the application form, the guarantee, the equitable mortgage of shares, each other document contemplated by or required in connection with any of them or the transactions which they contemplate (cl 1.1(f)), and each document entered into for the purposes of amending, novating, restating or replacing any of those documents (cl 1.1(g)). I have referred to this in para 60 above.
115 In my opinion the evidence does not prove novation. The acceptance by Equities of the request to increase the facility did not establish its intention to substitute SC for Mr and Mrs Morgan as the borrowers, and to release them from all liability under the loan agreement and related documents. Nor did it establish the intention to proceed on the basis that SC's future borrowings were neither guaranteed nor secured. Likewise, the course of conduct relied upon is insufficient to establish novation. Indeed, in my opinion, all the documents referred to by the Cross-Defendants on this issue properly fall within the class described in cl 1.1(f) of the loan agreement as they are, at least, documents contemplated or required in connection with the transactions which the "transaction documents" themselves contemplate. The letter of 24 March 1999 may also be described as an amending document within cl 1.1(g).
116 For the Cross-Defendants' submission to succeed clear and cogent evidence would be necessary to demonstrate that Equities agreed to provide the facility for future trading on a basis substantially different from that on which the parties began trading but a few weeks earlier, which involved the provision of a guarantee and mortgage to secure the borrowings. There is no such evidence. The submission is rejected.
Estoppel
117 Alternatively, it was submitted that the course of dealing from 14 December 1998 was evidence that the parties proceeded on a common assumption that the only party liable under the loan agreement and related documents in respect of the facility was SC. It was put that in the circumstances an estoppel operated to preclude BNP from denying that SC was the only party so liable, and from claiming that Mr and Mrs Morgan were liable.
118 In my opinion the evidence does not establish the basis for a finding that there was at any time a departure from the arrangement pursuant to which the facility was originally provided. There is nothing in the evidence which points to any conduct on the part of BNP which would cause Mr and Mrs Morgan and SC to reasonably assume that from about March 1999 the facility would be provided to enable SC to trade free of any requirement for a guarantor or security. Nor does it establish any rational basis for the conclusion that BNP had willingly dispensed with any of the several components of the arrangement made on 22 December 1998 upon which the facility had been made available including, of course, the personal liability of Mr and Mrs Morgan.
119 The evidence falls far short of establishing the circumstances which give rise to an estoppel by convention in accordance with the principles in, for example, Amalgamated Investment & Property Co Ltd; Walton's Stores (Interstate) v Maher (1988) 164 CLR 387; Austotel Pty Ltd v Franklins Selfserve Stores Pty Ltd (1989) 16 NSWLR 582. Accordingly, I hold that this submission is without substance and is rejected.
The letter of 4 July 2001
120 The letter of 4 July 2001 (the July agreement) from Equities to SC evidenced the agreement by which a dispute as to the liability of Mr and Mrs Morgan and SC for the sum of $274,365.00 for SC's purchase of BHP shares in December 1998 was settled. The construction of this agreement is considered later in these reasons.
121 As SC's claim for damages in the Summons relies upon an alleged breach of this agreement it is necessary to consider its terms in detail. The following narrative of events, not in dispute, provides some background to the formation of the agreement.
122 In December 1998 SC acquired a parcel of BHP shares for $13,114.50 and another parcel of BHP shares for $274,365.00. PBSA's statement to SC dated 25 January 1999 records that SC's loan balance under its margin lending facility was $250,216.33, and that there was outstanding the sum of $287,459.50 payable for the parcels of BHP shares.
123 On or about 26 January 1999, as part of the transfer process and under the loan agreement with Mr and Mrs Morgan, Equities paid PBSA the sum of $250,216.33 being the amount due under its facility. On about 26 February 1999 Equities paid PBSA the sum of $287,459.50 being the other sum claimed in its statement and, again, under its facility for Mr and Mrs Morgan and SC.
124 It is common ground that no payment was made to Equities by SC in respect of either amounts attributable to the BHP share purchases.
125 Equities then debited SC's account under the facility in the sum of $13,114.50 in respect of one parcel of BHP shares, but omitted to do so in the sum of $274,365.00 in respect of the other parcel of shares. Thus the statement from Equities to SC dated 31 January 1999 records only the debit of $13,114.50 as an "Unsettled Transaction".
126 A reconciliation of accounts resulted in the discovery of the omission. The matter was discussed between Mr Morgan and Mr David Holmes of Equities at a meeting on 15 October 2000. Mr Holmes explained the situation and foreshadowed an arrangement whereby the sum of $274,365.00 would be repaid whilst SC continued trading.
127 Mr Morgan then arranged for Mr Halliday to audit SC's share trading records. In December 2000 Mr Halliday was unable to establish that Equities' claim was incorrect and advised Mr Morgan that he could not disprove it.
128 By letter dated 27 December 2000 (sent again on 30 January 2001) Mr Morgan, on behalf of SC, informed Mr Holmes that he had relied upon Equities' statements in deciding the volume of options trading which could be undertaken between March and June 1999. He asserted that had the February 1999 statement correctly recorded its position SC would have traded at a lower rate with the result that losses would have been significantly reduced. He claimed that Equities was responsible for the loss and denied its entitlement to payment of the amount claimed.
129 Equities' statement to SC dated 31 December 2000 records under "Portfolio Details" the holding of 274,365 shares described as "Unlisted XXX" with a market price of $1.00, a portfolio market value of $274,365.00, a lend ratio of 85%, and a portfolio lending value of $233,210.25. Similar entries appeared in later statements.
130 On 6 February 2001 Mr Holmes explained to Mr Morgan that the entry recorded an arrangement by which SC's account was debited with the BHP trades with an off-set purchase of shares which equated with the disputed amount so that the account would not go into margin call under the facility, thereby enabling SC to continue trading.
131 By letter dated 23 February 2001 Equities replied to Mr Morgan in which the error was explained thus:
"… BNPPML took over the operations of Prudential-Bache Margin Lending between November 1998 and February 1999. During this period an error was made on SCC's Margin Lending Account, where the loan balance was understated by $274,000.00. It was not until recently that the error was properly identified. Rectification of the error required entries on SCC's Margin Lending Account to be reversed, which had the effect of increasing the account's loan balance. It should be noted that as a result of the mistake, SCC has enjoyed a $274,000.00 loan, interest free for a period of almost 2 years. It should also be noted that BNPPML has recognised this error and so as not to prejudice SCC, has made no claim for interest on the full amount for that period which would amount to approximately $40,000.00".
132 Thereafter there was correspondence between the parties in which each adhered to its position. On 19 June 2001 there was a meeting attended by Mr Morgan and Mr Guy Hedley, Mr Knights and Ms Chlebnikowski for BNP at which a proposal for settlement was discussed.
133 The agreement subsequently made between Equities and SC is recorded in the letter from Equities to Mr Morgan dated 4 July 2001. Relevantly, it provides:
"We refer to our recent correspondence in relation to this matter and to our meeting on 19 June 2001.
BNP Paribas Equities (Australia) Limited ("BNPPE") acknowledges the error ("Error") which occurred in understating the margin loan balance of Sydney Concrete and Contracting Pty Ltd ("SCC") by $274,365 (the "Understated Amount"). BNPPE has also foregone interest on that amount for a period of 22 months, equating to $43,341 (the "Foregone Interest"). BNPPE's total loss compromises the Understated Amount plus the Foregone Interest, totalling $317,706 ("BNPPE's Loss"). BNPPE asserts that BNPPE's Loss is payable by SCC, which is denied by SCC.
SCC asserts that it has relied on BNPPE's statements which included the Error, when trading in options and equities, and asserts that as a result it has suffered losses and damages in excess of approximately $460,000 ("Trading Loss"). SCC will also be required to pay interest on its trading profits some of which profits will be paid to BNPPE in accordance with the terms of clause 3 below. SCC estimates that the amount of interest that it will have to pay on its trading profits which will be paid to BNPPE under clause 3 below will be $100,000 (the "Interest on trading Profits"). SCC's total loss comprises the Trading Loss and the Interest on Trading Profits, totalling $560,000 ("SCC's Loss"). This is denied by BNPPE.
The parties wish to resolve this dispute in a manner that allows BNPPE to recover BNPPE's Loss and that allows SCC to recover SCC's Loss, on the following terms:
1. SCC will continue to trade through BNP Paribas Equities Private (Australia) Limited ("BNPPEP") with its adviser Charles Knights.
2. Subject to paragraph 4 below, should SCC be required to lodge margin cover in excess of $400,000 with the Options Clearing House in connection with its options trading, BNPPE will provide this margin cover to OCH on behalf of SCC, to a maximum of $1.5 million. SCC will pay interest on this amount to BNPPE at the interest rate charged by BNPPE on margin loans to its clients from time to time.
3. Until an amount equal to BNPPE's Loss is recovered by BNPPE, SCC will forward to BNPPE on a monthly basis:
(a) $10,000; and
(b) if after the above payment has been made to BNPPE, SCC's remaining trading profits are in excess of $18,000, 50% of the amount by which those trading profits exceed $18,000,
such payments to be credited against BNPPE's Loss.
4. The amount paid to BNPPE pursuant to item 3 and the arrangement in item 2 will be reviewed by BNPPE and SCC at six monthly intervals. At the six monthly reviews a comparison will be made between the amount which has been paid up until that time and the payment targets of $158,853 after a period of eighteen months and $317,706 after a period of three years (each period to commence on the date of execution of this letter by SCC). If taking into account the amounts paid up until the review time, market conditions and any other factors which the parties agree to be relevant, the parties agree that it is unlikely that the 18 month or three year (as applicable) repayment target will be met, the parties may discuss and attempt to agree on reasonable alternative payment arrangements, such as requiring a fixed dollar sum to be paid on a monthly basis so as to ensure that the entire amount of BNPPE's Loss is recovered by BNPPE within three years from the date of the execution of this letter by SCC.
5. Subject to the 6 monthly and eighteen monthly reviews as described in paragraph 4 above, the facility described in paragraph 2 above is to remain available to SCC for a period of 3 years to facilitate SCC's recovery of SCC's Loss.
6. The parties agree that they will also meet to discuss the payment arrangements if Charles Knights leaves the employment of BNPPE or if either Charles Knights or SCC do not wish to continue their present relationship of securities adviser and client".
Payments after 4 July 2001
134 As has been observed (para 30), there was an arrangement under which payments were made to SC from the options account or the margin lending facility account. Mr Morgan's evidence was that during July 2001 he telephoned Mr Knights and requested him to arrange for the usual payments to be made to SC from its options account. He also said that at the same time he requested him to organise the payment of $10,000.00 to BNP due under the July agreement.
135 In accordance with the request Mr Knights arranged on 2 August, and again on 7 August 2001, for $10,000.00 to be withdrawn from SC's option account No. 2855 with Private and paid to its Westpac bank account.
136 It is common ground that no payment was made to BNP under the July agreement. In issue was whether Mr Morgan's evidence that he requested such payment be arranged should be accepted because submissions were put on behalf of SC that the failure to make the payment was attributable to BNP and was not a breach of the July agreement on its part.
137 Some support for Mr Morgan's assertion is in Mr White's evidence, which I accept, that during their conversation on 17 August 2001 Mr Morgan stated that at about the end of July on three separate occasions he had requested Mr Knights to transfer the $10,000.00 but it had not occurred. Mr Morgan thereby suggested that he was unaware that the payment had not been made.
138 Mr Knights' evidence, which I accept, confirmed that Mr Morgan requested him to arrange the payments to SC and he did so. However, it was silent as to any request for a payment to BNP. He said he did not understand it to be part of his function to cause such a payment to be made, and he did not do so.
139 My finding on the evidence, and taking into account my finding about him as a witness, is that, on the probabilities, Mr Morgan did not request Mr Knights to make the payment to BNP. Mr Knights had been his advisor for some time and the importance of their relationship is reflected in clauses 1 and 6 of the July agreement. Had the request been made it is highly likely that Mr Knights would have informed Mr Morgan that it was not his role to arrange it and/or he would have recalled it, particularly if, as Mr Morgan told Mr White, he had been so requested on three occasions. In contrast was Mr Knights' evidence as to his recollection of, and action upon, the request to transfer funds to SC. In my opinion, that no such request was made is consistent with Mr Morgan's contention that he was not obliged to pay anything to BNP as the July agreement provided only for profit sharing. The fact that he told Mr White he had requested the payment be made to BNP does not persuade me that, in truth, he did so.
4 July - 17 August 2001
140 On 11 and 12 July 2001 as part of its option trading SC wrote a total of 650 September 2001 $5.75 Telstra put options American style. As such, the options could be exercised at any time up to the last trading date in September 2001. Telstra shares were to be ex-dividend from 17 September 2001 which meant that holders of the put options could hold them until then, receive the dividend, and then put the shares to SC. The evidence was that it was probable that this would happen with consequential loss to SC.
141 The evidence also proves, and I find, that from the time these options were written their market price fell below the strike price of $5.75. As the options might be exercised at any time against it, SC was thereafter exposed to immediate risk of loss at any time. The situation is illustrated by the graph which records the fluctuation in the Telstra share prices over the period 4 July 2001 to 27 September 2001 (TB 936). Mr Knights agreed that from about late July until 17 August 2001 (when the share price was about $4.89) SC was losing money on these options, and I am satisfied that this was, in fact, the case. It is also clear that it would have lost money if it continued to hold the options open.
142 On 15 August 2001 a conversation took place between Mr Hedley and Mr Morgan during which their different views as to the requirements of the July agreement were expressed. Mr Hedley advised Mr Morgan that SC was required to provide stock as collateral for its margin cover with the OCH for its options trading and requested that SC's options position be collateralised no later than Friday, 17 August 2001. After initially stating his disagreement with this proposal Mr Morgan agreed, reserving SC's right to enforce the July agreement.
143 Later that day Mr Morgan gave instructions for the purchase of 26,000 Telstra shares which brought SC's total shareholding in Telstra to 100,000 which then represented all the shares in its portfolio.
144 I find that the effect of Mr Hedley's demand was that a margin call under the facility was made to be met by 17 August 2001. I also find that Mr Morgan's statement to Mr Knights later that day that Mr Hedley had told him that SC had to collateralise the margin cover for the options with stock is evidence that Mr Morgan understood that Mr Hedley was making such a call, and by buying the shares he acted upon it.
145 At this point it is convenient to consider SC's submission that the effect of the discussion with Mr Hedley was to vary the July agreement so that the $1.1 million facility referred to in cl 2 would be available for use by SC to fund the purchase of shares for margin cover with OCH in respect of the options trading.
146 In my opinion the submission is without substance and must be rejected. The evidence relied upon by SC in support of this contention is in Mr Morgan's affidavit (Exhibit D paras 296-297). It is unnecessary to recite it. As it was not challenged I accept it. The reasonable construction to be placed on Mr Hedley's words is that he was exercising Private's right under cl 9 of the options agreement to require SC to provide security for margin cover for its options trading which was then showing a substantial loss. He suggested Telstra as one of several appropriate stocks for this purpose. Mr Morgan subsequently decided to purchase 26,000 Telstra shares for the purpose, and drew upon the margin lending facility under the loan agreement for funds for that purchase. Mr Hedley's demand was not one which could reasonably be taken to have been made under cl 2 of the July agreement.
147 In my opinion nothing said by Mr Hedley provided a reasonable basis for Mr Morgan to think that the July agreement was to be varied so that Equities undertook to lend to SC, without security, money to the specified limit for the purchase of shares for margin cover with OCH in lieu of cash. As evidenced by that conversation and the subsequent conversations with BNP representatives, it seems clear that Mr Morgan's understanding of the July agreement was fundamentally flawed.
148 On 16 August 2001 Ms Antoinette Garside of BNP had a telephone conversation with Mr Morgan in which she, inter alia, enquired as to the collateral security to be provided and as to the purchase of the 26,000 Telstra shares. Mr Morgan expressed his annoyance at the call and said that the shares were purchased on Mr Hedley's instructions. I find the effect of this conversation was to confirm the call made by Mr Hedley the day before.
149 Mr Knights' evidence, which I accept, was that as at 17 August 2001 if the Telstra put options were exercised against it SC did not have funds available through either the margin lending facility or the options trading account to meet the purchase price of the 650,000 Telstra shares of about $3.7 million. Further, in the market during this period the Telstra share price was falling and, as they were to go ex-dividend on 17 September 2001, prospects for improvement were unfavourable.
150 On 17 August 2001 a meeting took place at the Defendants' offices attended by Mr Morgan, Mr Halliday, Mr White and Mr Ronald Schaffer, the Defendants' solicitor. In my opinion the versions of each do not differ in substance so far as is relevant.
151 A conversation then took place the effect of which I find to be as follows: Mr White informed Mr Morgan that he was in default under the margin loan facility and the payment of $10,000.00 to BNP under the July agreement had not been made and was due. He went on to say that further trading would not be permitted unless cash or stock was provided as security for SC's exposure under the facility, and the money due under the July agreement was paid. Mr Morgan said that he would not make any payment as, on his understanding of the July agreement which provided only for profit sharing, he was not obliged to do so, and would not provide cash or stock as security. Thereupon, Mr White advised him that as the contracts had been in default for some time there was no choice but to close down all exposures and seek a settlement. There was some discussion about settlement with no result.