Bill Acceptance Corporation Ltd v National Mutual Royal Bank Ltd [1990] QSC 383

r\ 10 20 30 40 50 60 IN THE SUPREME COURT OF QUEENSLAND COMMERCIAL CAUSES JURISDICTION BEFORE MR. JUSTICE WILLIAMS BRISBANE, 19 NOVEMBER 1990 (Copyright in this transcript is vested in the Crown. Copies thereof must not be made or sold without the written authority of the Chief Court Reporter,Court Reporting Bureau.) BETWEEN: BILL ACCEPTANCE CORPORATION LIMITED -and- NATIONAL MUTUAL ROYAL BANK LIMITED AND BETWEEN: Plaintiff Defendant No. 3410 of 1989 NATIONAL MUTUAL ROYAL BANK LIMITED -and- BILL ACCEPTANCE CORPORATION LIMITED JUDGMENT Plaintiff Defendant HIS HONOUR: Gentleme.n, I have a prepared reasons for judgment for this matter, which I publish. I order and declare that Bill Acceptance Corporation Limited has duly rescinded the Risk Participation Agreement. Further, I order and declare that Bill Acceptance Corporation Limited is not liable to make any payment to National Mutual Royal Bank pursuant to the Risk Participation Agreement. ,t_ Printer, Qld. 1 10 20 30 40 50 60 -- 1 of 86 -- 10 20 30 40 50 60 I further order and declare that pursuant to s.87 of the Trade Practices Act 1974 that the Risk Participation Agreement is void. I dismiss the counterclaim with costs. I order that the defendant pay the plaintiff's costs of and incidental to this action to be taxed. - •wt. Printer, Old. 2 10 20 30 40 50 60 -- 2 of 86 -- IN THE SUPREME COURT OF QUEENSLAND .5 L- 9o/ 383 No. 2262 of 1990 BETWEEN: BILL ACCEPTANCE CORPORATION LIMITED Plaintiff NATIONAL MUTUAL ROYAL BANK LIMITED Defendant JUDGMENT - G.N. WILLIAMS J. Delivered the 19th day of November, 1990. CATCHWORDS: Contract - Risk Participation Agreement between merchant banks - fraud - "misleading or deceptive" conduct within s. 52 of Trade Practices Act non disclosure of material facts responsibilities and obligations on each party under agreement considered. Counsel: Solicitors: D. Jackson Q.C. with H. Fraser Plaintiff. J. Muir Q.C. and T. Hughes Q.C. with T. Kirk for Defendant. Gadens Ridgeway for Plaintiff. Blake Dawson Waldron for Defendant. for Hearing dates: 20th - 24th August, 19th, 22 - 30th October, 1990. -- 3 of 86 -- IN THE SUPREME COURT OF QUEENSLAND No. 2262 of 1990 BETWEEN: BILL ACCEPTANCE CORPORATION LIMITED Plaintiff NATIONAL MUTUAL ROYAL BANK LIMITED Defendant JUDGMENT - G.N. WILLIAMS J. Delivered the 19th day of November, 1990. The plaintiff, Bill Acceptance Corporation Limited ("B.A.C.") and the defendant, National Mutual Royal Bank Limited ("N.M.R.B") entered into an agreement called a "Risk Participation Agreement" ("the Agreement") which bears the date 24th December, 1986, though it was not in fact executed by N.M.R.B. until some time later. The Agreement was entered into against the background commitment of N.M.R.B. to make available a loan facility totalling AUD22 million to Kaloo Pty. Ltd. ("Kaloo"). In terms of the Agreement B.A.C. gave an indemnity to N. M. R. B. with respect to five-elevenths of the total loan commitment but so that its liability would not exceed AUD10 million together with interest and charges thereon. By letter dated 20th April, 1988 N.M.R.B. notified B.A.C. that Kaloo had defaulted under the loan agreement. B.A.C. caused the writ herein to be issued on 4th July, 1989 and in the action it contends that for a variety of reasons it is not liable to N.M.R.B. pursuant to the Agreement; it seeks orders which would -- 4 of 86 -- 2 establish that contention. N. M. R. B. has counter-claimed for AUD12,199,855.21 as being monies due and owing pursuant to the Agreement plus interest on that amount from 5th October, 1989 to date of judgment; alternatively there is a claim for damages. AMENDMENT TO STATEMENT OF CLAIM Before considering further the claims of B.A.C. it is necessary that I deal with an application to amend the stat_ement of claim which was made at the outset of the trial. I heard some argument when the application was initially made, and more substantial argument at the close of evidence; it was agreed that all relevant evidence was before the Court. The existing statement of claim alleges, inter alia, that B.A.C. was induced to enter into the Agreement by certain misrepresentations and non-disclosures. It is then alleged that those misrepresentations or non-disclosures constituted fraud which entitled B.A.C. to rescind the Agreement; further, or in the alternative, it is alleged that the conduct of N.M.R.B. with respect to those misrepresentations and non-disclosures constituted a contravention of s. 52 of the Trade Practices Act 1974 entitling B.A.C. to seek a declaration pursuant to s. 87 of that Act that the Agreement is void. In my opinion when one analyses carefully the allegations contained in paras. 7, 13(j), 15, 16(d), 17(c), 18(b)(ii), and 19 of the statement of claim it becomes clear that B.A.C. is alleging, inter alia, that N.M.R.B. falsely represented that the interest rate under the facilities between N.M.R.B. and Kaloo was the bank bill buying rate plus a margin of 1.25 per cent per annum. What B.A.C. seeks to do by -- 5 of 86 -- 3 the amendment is to add a further paragraph, to be numbered 9A, to read as follows: "In October 1986, the defendant represented to the plaintiff that the interest rate under the facilities between the defendant and Kaloo was the bank bill buying rate plus the defendant's margin of 1.25 per cent per annum. Particulars (a) The representation was made orally by Mr. Heffernan on behalf of the defendant to Mr. Harrison on behalf of the plaintiff in early October 1986; (b) The representation was made in writing by the defendant's letter to the plaintiff dated 10th October, 1986." It also seeks consequential amendments which would insert a reference to para. 9A in paras. 17(c), 18(b)(ii) and 19 of the statement of claim. N. M. R. B. opposed the granting of leave to make those amendments principally because it was said that the allegation in proposed para. 9A raised a new cause of action which was barred by either s. 82(2) ors. 87(1CA) of the Trade Practices Act. In my view the proposed amendment does not raise a new cause of action. The alleged misrepresentation particularised therein can be discerned from a careful perusal of the paragraphs of the statement of claim to which I have previously referred. All that the amendment really does is particularise and highlight the specific representation so that its impact on other facts and circumstances can be clearly evaluated. It was contended by counsel for N.M.R.B. that if such was the case then the amendment ought not to be allowed because it was superfluous. But it does seem to me that it is desirable that further clarity be given to -- 6 of 86 -- 4 the allegations contained in the statement of claim and in consequence I would permit it. It is, in my view, akin to the situation which confronted Jenkinson J. in Stohl Aviation v. Electrum Finance Pty. Ltd. (1984) 56 A.L.R. 716 at 724; he also allowed the amendment to be made. In that case the argument against allowing the amendment was also based on a limitation provision in the Trade Practices Act. The reference therein to the observation of Barwick C. J. in Black v. City of South Melbourne (1964) 38 A.L.J.R. 309 at 310 is also apposite here. Even if the proposed amendment did strictly raise a new cause of action I would nevertheless grant leave to make the amendment relying on the power conferred by 0. 32 r. 1 of the Rules of the Supreme Court. Pursuant to that rule an amendment may be allowed after the relevant limitation period has expired adding a new cause of action which "arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed". That is t~1e case here. Following a number of decisions of the Full Court of this Court which are conveniently collected in Lynch v. Keddell (No. 2) (1990) 1 Qd.R. 10, this would be an appropriate case in which to permit the adding of the new cause of action. I therefore grant leave to B.A.C. to make the amendments particularised above. I would also give N.M.R.B. leave to amend its defence and counter-claim as follows: 1. After 9A. para. 9 add a new para. 9A. In relation to paragraph 9A of the Further Amended Statement of Claim the Defendant does not admit the allegations contained therein. 2. Amend para. 2 by removing "19" therefrom. -- 7 of 86 -- 5 3. Add a new para. 19A. 19A. As to para. 19 of the Further Amended Statement of Claim the Defendant further: (a) denies the allegations contained therein; (b) says that the Plaintiff's cause of action based on contravention of Section 52 of the Trade Practices Act 1974 by reason of the representations alleged in paragraph 9A ofthe Further Amended Statement of Claim (which representations are denied) occurred more than three years prior to the delivery of the Further Amended Statement of Claim; ( c) in the premises the said cause of action referred to in (b) above is barred by Section 82 ( 2) and Section 87 ( 1 CA) of the said Act. THE PLAINTIFF'S CLAIMS It is now convenient to set out in summary form the contentions of B.A.C. In broad terms relief is claimed on five separate bases, but the end result in all would be the same, namely that B.A.C. was not liable under or bound by the Agreement. The following summary is taken from the amended statement of claim, including the amendment permitted above: 1. B.A.C. claims a declaration that it has duly rescinded the Agreement because it was induced to enter into it by the following innocent misrepresentations and non-disclosures: (i) the representation that the "applicable margin" under the loan facilities between N.M.R.B. and Kaloo was 1.25 per cent; (ii) the failure by N.M.R.B. to disclose that in fact the "applicable margin" under the loan facilities between it and Kaloo was 1.35 per cent; (iii) the representation that the purpose of the bill facility in the sum of AUD4.5 million was to enable -- 8 of 86 -- 6 Kaloo to pay for the modernisation of the Lutwyche Shopping Village; (iv) the failure by N.M.R.B. to disclose that it had agreed with Kaloo that monies drawn under the bill facility referred to in (iii) could be applied in part payment of foreign exchange trading losses; (v) the representation that Kaloo's only foreign exchange exposure was as at 10th October, 1986 a maximum of AUD17.5 million under Kaloo's existing facility; (vi) the failure by N.M.R.B. to disclose Kaloo's separate foreign exchange account additional to the foreign currency facility referred to in (v); (vii) (viii) the representation made in early October 1986, which became false before the Agreement was duly executed, that Keefe ( the controlling shareholder in and a director of Kaloo) had a good track record as a borrower; the failure by N.M.R.B. to disclose Kaloo's deteriorating record as a borrower particularly in November-December 1986; (ix) the representation made in early October 1986 that the proposed Agreement only minimal risk involved practically no risk or for B. A. C. , which became false before the Agreement was executed because of the matters particularised in (viii). 2. B.A.C. claims a declaration that it has duly rescinded the Agreement on the ground that the misrepresentations and non-disclosures particularised in paras. (i) to (ix) -- 9 of 86 -- 7 inclusive above induced it to enter into the Agreement and each was fraudulent. 3. B.A.C. claims a declaration pursuant to s. 87 of the Trade Practices Act 1974 that the Agreement is void on the ground that the conduct particularised in 1 ( i) to ( ix) above constituted "misleading or deceptive" conduct within s. 52 thereof. 4. B.A.C. claims a declaration that it has duly terminated the Agreement on account of breaches by N.M.R.B. of an essential condition being either (A) breaches of cl. 4(f) of the Agreement or (B) breaches of cl. 5 of the Agreement. (A) particulars of the breaches of cl. 4(f) are as follows: (i) N.M.R.B. took without the prior consent of B.A.C. mortgages and caveats over land at Southport owned by Sablepan Pty. Ltd. and General Ford Pty. Ltd. thereby reducing security in breach of cl. 4(f)(iii); (ii) the release by N. M. R. B. of the mortgages and caveats over the Southport land referred to above without the prior consent of B.A.C., which constituted the release, reduction or foregoing of a "security" in breach of cl. 4(f)(iii); (iii) N.M.R.B. charged Kaloo an "applicable margin" of 1.35 per cent which was an increase without the consent of B.A.C. as required by cl. 4(f)(i) from the 1.25 per cent originally proposed. (B) Particulars of the breaches of cl. 5 are as follows: -- 10 of 86 -- 8 (i) N.M.R.B. failed to notify B.A.C. of the default by Kaloo in April 1987 under the Eurocurrency facility in that there was a failure to pay interest of $256,782.81 due on 22nd April, 1987 until 27th April, 1987; (ii) N.M.R.B. failed to notify B.A.C. of defaults by Kaloo as follows: (a) failing to pay the undeferred part of foreign exchange losses due on 26th November, 1986; (b) failing to pay the $50,000.00 amounts due on 15th December, 1986 and every month thereafter; (c) failing to pay the deferred foreign exchange losses of approximately $1. 3 million on 29th April, 1987 until the sale of the Southport land in October 1988; such defaults constituting default under the loan documents in consequence of the cross-default clauses; (iii) N.M.R.B. failed to notify B.A.C. of Kaloo's default in failing to reduce progressively total liability under the Eurocurrency option in accordance with the warranty contained in special covenant 14.2(iv) of the relevant loan document; (iv) N.M.R.B. failed to notify B.A.C. of the circumstances surrounding the defaults -- 11 of 86 -- 9 particularised in the preceding sub-paragraphs hereof. 5. B.A.C. claims a declaration that it has duly terminated the agreement on account of the defendant's repudiation of the Agreement evidenced by the breaches particularised in para. 4 above. 6. B.A.C. claims a declaration that it has no liability under the Agreement because the facilities entered into between N. M. R. B. and Ka loo, as varied by the increase in the applicable margin, were not the facilities the subject of the Agreement. The claim asserting rescission on the ground of innocent misrepresentation was not fully argued. In the light of the decisions of the Full Court in Brisbane Unit Development Corporation Pty. Ltd. v. Robertson (1983) 2 Qd.R. 105, of Carter J. in Dorotea Pty. Ltd. v. Christos Doufas Nominees Pty. Ltd. (1986) 2 Qd.R. 91, and of Pincus J. in Byers v. Dorotea Pty. Ltd. (1986) 69 A.L.R. 715, it was conceded by counsel for B.A.C. that I was precluded by authority from holding that the exclusion clause in the Agreement (cl. 8) was ineffective against a claim of innocent misrepresentation inducing B.A.C. to enter into the Agreement; that is, cl. 8 effectively prevented B.A.C. from relying on non-fraudulent misrepresentations as a basis for rescission. Mr. Jackson of Queens Counsel for B.A.C. intimated that at an appropriate time he might submit that, by analogy with the reasoning which has held that such a clause is ineffective against a claim made under the Trade Practices Act, the clause was ineffective against a claim that a party was induced to enter -- 12 of 86 -- 10 into the contract by an innocent misrepresentation. But in the circumstances I need not concern myself further with the first basis on which B.A.C. claimed relief in the action. It is also convenient to record at this point that in addresses counsel referred to a number of authorities in which it had been held that an exclusion clause in the form of cl. 8 was ineffective to prevents. 52 of the Trade Practices Act from operating; reference was made to Byers v. Dorotea Pty. Ltd., Dorotea Pty. Ltd. v. Vancleve Pty. Ltd. (1987) 75 A.L.R. 629, Clark Equipment Australia Ltd. v. Caveat Pty. Ltd. (1987) 71 A.L.R. 367, Henjo Investments Pty. Ltd. v. Collins Marrickville Pty. Ltd. (1988) 79 A.L.R. 83, Keen Mar Corporation Pty. Ltd. v. Labrador Park Shopping Centre Pty. Ltd. (1989) A.T.P.R. 46-048, and Netaf Pty. Limited v. Bikane Pty. Limited (1990) A.T.P.R. 41-011 . It was conceded that I was bound by that line of authority, but Mr. Hughes for N.M.R.B. reserved the right to challenge the reasoning therein if this matter should get to the High Court. Finally, it should be noted here that during his address Mr. Jackson indicated that B.A.C. was not pressing the submission that the allegations made in para. 26 of the Amended Statement of Claim could be relied on in the action as evidencing a breach of cl. 4(f) of the Agreement. As I understood the argument he maintained the facts therein alleged were made out and were relevant when considering the overall conduct of N.M.R.B., but he was conceding the force of the defence submissions that because of conduct, such as accepting risk participation fees after knowledge of what had happened to the security deposit -- 13 of 86 -- 11 account, B.A.C. was no longer in a position to rely on such facts as constituting a breach of condition. BACKGROUND FACTS PRIOR TO OCTOBER 1986 Kaloo was incorporated in 1976 for the purpose of acquiring the Lutwyche Shopping Village. It was for some time a wholly owned subsidiary of Industrial Equity Limited ("I.E.L. "). In about March 1985 Keefe and his then business associate, a man named Ion, became interested in acquiring all the shares in Kaloo. Prior to that time Keefe had been involved in a number of business activities which could broadly be described as successful. In early 1985 Capel Court Corporation Limited ( "Capel Court"), a wholly owned subsidiary of National Mutual Life, carried on merchant banking operations in Australia. At that time G.R. Heffernan held the position of Senior Manager - Banking Division in Brisbane. In March 1985 Keefe approached Heffernan with a view to obtaining from Capel Court an AUD10 million Eurocurrency loan with an Australian dollar option. The purpose of the loan was to enable Keefe and Ion to purchase all the shares in Kaloo. On or about 7th May, 1985 the loan facility was formally approved. By its terms CHF17.52 million (equivalent AUD10 million) was made available to Kaloo for a term of five years, with interest repayments only required in the first two years. The total acquisition price of the shares in Kaloo was $16.926 million, but I.E.L. agreed to carry finance in the sum of $7,626,250.00 secured by a second mortgage; by an agreement between the parties Capel Court was given priority to the extent of $12 million. Subsequently the Keefe family purchased the -- 14 of 86 -- 12 interest of Ion and thereafter Kaloo became in effect a Keefe family company. On 1st July, 1985 J.M. Hollamby, who had had some 16 years previous banking experience, joined Capel Court as Manager Corporate Banking. In about August 1985 the Kaloo account was allocated to Hollamby, and thereafter he was the officer responsible for supervision of the loan facility. On or about 7th May, 1985 the facility was fully drawn down by way of an advance of CHF17. 52 million. At quarterly intervals Hollamby would notionally convert the facility to ensure that the debt did not exceed AUD11 million. As at 7th August, 1985 the loan notionally converted to AUD10,521,258.71. Then in October 1985 Keefe informed Hollamby that he wished to extend the Shopping Village and was interested in making an application to Capel Court for additional finance to enable that work to be carried out. On 15th October, 1985 Kaloo commenced buying and selling foreign currencies through Capel Court's Foreign Exchange Department in Sydney. I am satisfied that one of the motivating factors in Kaloo getting involved in foreign exchange dealings was the desire to hedge against possible adverse movements in the value of the Australian dollar which might affect the Eurocurrency facility. But I am equally satisfied that there were other motives, and that Kaloo engaged in speculative trading in foreign currency that went far beyond hedging. It appears that the foreign exchange trading was not known to the Brisbane office of Capel Court until about November 1985. -- 15 of 86 -- 13 In February 1986 National Mutual Limited and Royal Bank of Canada entered into a joint venture which resulted in the formation of N.M.R.B; thereafter Capel Court was a wholly owned subsidiary of N.M.R.B. The evidence suggests that N.M.R.B. obtained from the Reserve Bank a limited trading bank licence, which restricted lending to a private company to $15 million; it ought not have an exposure to any private company in an amount greater than that. Heffernan and Hollamby occupied similar positions in N.M.R.B. to that which they previously held in Capel Court. For the time being Kaloo's facility with Capel Court remained in place, and the foreign exchange trading continued through N.M.R.B. By 30th June, 1986 net profits totalling AUD1 ,019,721.43 had been achieved from speculative foreign currency trading; during that period losses were incurred on four occasions but specific deposits were made to cover those. In July 1986 Hollamby insisted that profits from the foreign currency trading activities be deposited with N.M.R.B.'s money market operation in Brisbane and withdrawals permitted only with his approval. His purpose in so doing was to ensure that funds were available to cover losses which might occur as a result of foreign currency trading. The memorandum of 3rd July, 1976 referring to the interception of $34,309.00 is not insignificant when assessing the standing of Kaloo as a customer of N.M.R.B. Between July 1986 and October 1986 AUD1, 960,944.81 was deposited to that money market account. But major losses were incurred later in 1986; I will deal specifically with that matter in due course. -- 16 of 86 -- 14 By about November 1985 there had been adverse movements in exchange rates but Hollamby nevertheless considered that the loan facility was safe, particularly given the security. But he recommended that to provide some margin in the security, Kaloo should be required to lodge a cash deposit of AUD250, 000. 00 pending a further review of the facility. On 7th February, 1986 Hollamby notionally converted the facility into Australian dollars and that showed an equivalent debt of AUD12,364,149.61. In consequence on 14th February, 1986 Hollamby required that Kaloo increase the cash deposit charged under a letter of hypothecation to at least AUD364,149.61; those funds were subsequently received by Capel Court. Then on 7th March, 1986 I.E.L. acknowledged that the priority security of N.M.R.B. could be increased above AUD1 0 million. By April 1986 it was confirmed that Capel Court's priority over I.E.L. should be AUD14 million. A notional conversion of the facility into Australian dollars on 7th May, 1986 established an equivalent then of AUD12,917,496.13. At the next notional conversion on 15th July, 1986 CHF17.52 million equated to AUD15,338,819.82. In July 1986 Keefe again contacted Hollamby and discussed a request for additional funds to finance renovations and extensions to the Lutwyche Shopping Village. It was estimated that the total cost would be AUD4 million. In considering that application Hollamby adopted a value of the Shopping Village of AUD23 million. During ensuing discussions the cost of the extensions and renovations was established at AUD4.5 million, and I.E.L. agreed to increase Capel Court's priority to AUD24 million. N.M.R.B. -- 17 of 86 -- 15 received a valuation on 5th August, 1986 from Denis Pie Pty. Ltd. dated 21st July, 1986 indicating a valuation of the Village after completion of the extensions and renovations in the sum of AUD37. 1 million. On 13th August, 1986 N .M.R.B. received from Ingles and Partners, the accountants to both Kaloo and Keefe, a draft Balance Sheet and Profit and Loss Account of Kaloo made up to 31st March, 1986. Those accounts showed that Kaloo had net assets of AUD3,133,764.17 and a net profit for the period to 31st March, 1986 of AUD1,008,266.74. Later in August 1986 N.M.R.B. received additional documentation relevant to Kaloo' s application for further funding. Notwithstanding the fact that approval for further funding had not been granted, Kaloo in June 1986 contracted with F.A. Pidgeon & Son Pty. Ltd. with respect to the carrying out of renovations and extensions to the Village. Pidgeon commenced work in July 1986 and was to be paid by way of five progress payments. The initial progress payment became due on 21 st August, 1986 and as at that date the further funding had still not been approved. Keefe approached Hollamby and received approval to withdraw AUD300,000.00 from the money market deposit of approximately AUD1 . 9 million to meet that first progress payment. Around August 1986 it was decided that the original facility of CHF17.52 million made available through Capel Court should be paid out and replaced with a fresh facility with N.M.R.B. The evidence does not make it clear why that was done, or who first suggested it. Both Heffernan and Hollamby, if anything, appear -- 18 of 86 -- 16 to suggest that the initiative came from Keefe, but it is more likely that it came from N.M.R.B. One can see that it would be more convenient to have all of the facilities in favour of Kaloo made by the one institution. But it is not necessary to decide who was the instigator, the important point is that it was agreed that the Capel Court facility should be paid out through a fresh facility with N.M.R.B. On 15th August, 1986 Hollamby prepared a submission to the Credit Committee of N.M.R.B. with respect to the new proposed arrangements for Kaloo. The proposal put forward in that document was that there be a total facility limit of AUD22 million divided into two tranches. One tranche was to be an AUD Bill Acceptance facility in the sum of AUD4.5 million. Its purpose was to provide funds for the modernisation, expansion and improvement of Lutwyche Shopping Village and was to be progressively drawn down between August 1986 and January 1987. Once fully drawn down it was to attract an interest rate being the sum of the Bank Bill Buying rate plus 1 . 25 per cent per annum; that is, the bank's margin was to be 1.25 per cent per annum. The other tranche was to be a multi-currency Euro-Loan in the amount CHF17.52 million. Its purpose was to repay the existing facility with Capel Court. Again the bank's margin was 1. 25 per cent per annum. With respect to the Eurocurrency facility the submission contained the following notation:- "An absolute limit of AUD1 7,500,000.00 on this tranche of the facility is requested. It is proposed to institute a formal stop loss order so that hedge contracts will automatically be taken out to prevent the debt exceeding the limit of -- 19 of 86 -- AUD17,500,000.00. agreeable to this." 17 The directors of Kaloo are The submission was put forward on the basis that there would be a "sell down" of up to $11 million of the facility. The submission indicated that the "other lender" should obtain $20,000.00 of the establishment fee and that securities should be shared pari passu. The final recommendation was that there be: "Approval of an increase in facilities to $22 million, subject to sell down to $11 million is recommended." That submission was approved by all members of the Credit Committee by the end of August 1986. Letters of offer under the hand of both Heffernan and Hollamby were then sent to Kaloo dated 3rd September, 1986; there was a separate offer with respect to each tranche. The letters reflected the approval by the Credit Committee to the submission from Hollamby. The documents are important and in consequence it is necessary to refer to each in some detail. The offer of "AUD/Eurocurrency option credit facilities" commenced with the statement that N.M.R.B. was "pleased to offer credit to Kaloo" by way of the Facility as described "on the terms and conditions set out in this letter and in the Standard Terms and Conditions enclosed with this letter." The facility offered was classified as a "Cash Advance Facility with Eurocurrency Option", and was to be "used for the purpose of re- financing an existing mortgage facility on the Lutwyche Shopping Village complex." That made it obvious that this facility was to replace the one existing with Capel Court. The offer then stated that the "maximum aggregate amount of the bank's Commitment is AUD17,500,000.00 or its equivalent in -- 20 of 86 -- 18 Eurocurrency." The facility was to last until 31st August, 1988 when it would terminate. There was then a provision dealing with interest which varied according to whether the facility was taken up in Australian dollars or Eurocurrency; but in either event the relevant base rate was "plus the Applicable Margin". The offer then provided that the Applicable Margin would be "the rate of 1 . 25 per cent per annum". Thus it can be seen that in broad terms N.M.R.B. was to receive a margin of 1.25 per cent per annum above the cost to it of the funds. Interest was to be payable each month and the principal amount outstanding was to be repaid on 31st August, 1988. The offer then went on to specify the securities which N.M.R.B. would require. There was to be a registered first mortgage over the Lutwyche Shopping Village with a Deed of Priority between N.M.R.B. and I.E.L. ceding priority to the bank of $24 million. There were also to be joint and several guarantees from Keefe, his wife, and two other companies in the family group, namely General Ford (Aust.) Pty. Ltd. and Sablepan Pty. Ltd. Finally by way of security there was to be a Letter of Charge over a short term money market deposit of AUD1 million. It is also necessary that I set out some special covenants contained in that offer in detail: "1. Before any Drawing is made under this facility:- ( i) The Bank must have received a firm written commitment from another lender (acceptable to both the Bank and the Customer) to participate in the facility to the extent of 50 per cent of the Commitment; and 2. Notwithstanding anything else contained herein or in the Standard Terms and Conditions, the -- 21 of 86 -- 19 following special conditions shall apply to any drawings in a Eurocurrency:- (iv) In accepting this offer, the Customer warrants that the extent to which the Eurocurrency option available under this Facility is exercised will not exceed:- AUD15,500,000.00 from 30th April, 1987; AUD13,500,000.00 from 31st October, 1987; and AUD11,500,000.00 from 30th April, 1988. II Clause 13(b) of the Standard Terms and Conditions provided that moneys owing under the facility would become immediately due and payable at the option of N.M.R.B. upon Kaloo, inter alia, failing "duly and punctually to perform any other agreement" made between it and N.M.R.B., if such failure was not remedied within seven days. The other letter of offer was with respect to what was called "AUD credit facilities" and offered credit to Kaloo "by way of the Facility described below on the terms and conditions set out in this letter and in the Standard Terms and Conditions enclosed with this letter." The facility was called a "Bill Acceptance and Discount Facility" and the bank's commitment was to a maximum aggregate amount of AUD4,500,000.00. The facility was to be used for the purpose of "modernising, expanding and improving" the Shopping Village. It was to terminate on 31st August, 1988. Interest was payable by way of a discount fee on each Bill which was to be the "aggregate of the Bank's Bill Rate plus the Applicable Margin". Again the applicable margin was t9 be the rate of 1.25 per cent per annum after the facility was fully drawn. The condition with respect to the giving of -- 22 of 86 -- 20 securities was in identical terms to that particularised above with respect to the other tranche of the facility. There was also a special covenant requiring a commitment from a loan participant in identical terms to that quoted above from the other off er. The Standard Terms contained a clause 13(b) in identical terms to that quoted above with respect to the other tranche. Kaloo accepted each of those offers on 1 2th September, 1986; each establishment fee was paid on that date. By mid-October all of the securities referred to had been duly executed. In his statement Heffernan dealt with the proposition in each of the letters of offer that they were conditional upon participation by another lender to the extent of 50 per cent of the commitment. He said: "Due to the bank's prudential guidelines it was not desirable for the bank to become exposed to Kaloo for the total amount of the proposed facilities. It was because of these guidelines that it was necessary to sell ciown to another lender." Because of currency fluctuations by about September 1986 the CHF17.52 million facility approximately AUD17,200,000.00. N.M.R.B. was the end of equated to not unduly concerned by that because it had priority on its securities to the extent of AUD24 million. On 12th September, 1986 Capel Court received a request from Kaloo for funds to meet the second progress payment on the work being carried out by Pidgeon on the Lutwyche Shopping Village. AUD862,132.35 was needed to meet that payment. Hollamby recommended that Kaloo be permitted to withdraw that amount from -- 23 of 86 -- 21 the money market deposit, notwithstanding that the balance in that account would then be less than $1 million. On 17th September, 1986 Capel Court approved of that transaction and the funds were withdrawn that day from the money market account. Then in early October 1986 Keefe informed Hollamby that the third progress payment to the builder was due on 13th October, 1986 in the sum of AUD1.15 million. Again Kaloo made a request that Capel Court provide the funds to meet that payment. By that time Kaloo had accepted the offers dated 3rd September, 1986 made by N.M.R.B. but neither facility could be implemented because no sell down to another participant had been arranged. In consequence, on Hollamby's recommendation Capel Court increased its existing facility by AUD500, 000. 00 which, with the money remaining in the money market deposit account, would enable Kaloo to make the third progress payment. That recommendation was accepted by Capel Court and on 13th October, 1986 the transaction was carried into effect. INVOLVEMENT OF B.A.C. B.A.C. is a merchant bank which in 1986 was known to be interested in sub-funding and risk participation agreements. It is a wholly owned subsidiary of Australian Guarantee Corporation and operates in New South Wales and Victoria as well as Queensland. In the latter half of 1986 V.C. Jacob was its Managing Director, I. A. Harrison was the Regional Manager, Queensland, and A.R. Westacott was Manager (Lending) Queensland. After the Credit Committee of N.M.R.B. had approved the proposal to grant facilities to Kaloo, Heffernan and Hollamby began seeking a funding participant. N.M.R.B. preferred a sub- -- 24 of 86 -- 22 funding arrangement and initially that was the proposal put to possible participants. a number of banks, institutions. The sub-funding proposal was rejected by merchant banks, and other financial I am satisfied on the evidence that N.M.R.B. considered that the risk was sound, and a participant was only required because of the prudential guidelines N.M.R.B. had adopted which made it undesirable for it to become exposed to the one borrower for such a large amount (here $22 million). There was reference during the trial (for example, the letter N.M.R.B. to B.A.C. of 10th October, 1986) to the fact that Reserve Bank requirements necessitated there be a funding participant. It was not made clear what the consequences of failing to meet Reserve Bank requirements were, but N.M.R.B. obviously wished to comply with those requirements. Notwithstanding that funding participation was being offered on that basis there appears to have been a reluctance by other financial institutions to become involved (cf. memos Hollamby to the Credit Committee 22nd October, 1986 and 5th November, 1986). Heffernan and Harrison had previously met, and in early October 1986 Heffernan telephoned Harrison and enquired whether B.A.C. would be interested in becoming a funding participant in the facility. I find that the proposition initially put by Heffernan involved a sub-funding arrangement but Harrison stated that B.A.C. would not be interested in that. I am satisfied that Heffernan then raised the possibility of B.A.C. becoming involved in a risk participation agreement on a 50-50 basis, which meant B.A.C. assuming liability for AUD11 million. If those precise -- 25 of 86 -- 23 words were not used by Heffernan, then words to similar effect were. I find that Harrison said words to the effect that B.A.C. could be interested in sharing the risk to the extent of AUD10 million. I am also satisfied that Heffernan used the words "good track record" with respect to Keefe. There is conflict between Heffernan and Harrison as to whether or not Heffernan said specifically that the "good track record" was with Capel Court, or whether he said words to the effect that the good track record was "with us for some time" or words to that effect. I am satisfied that in the course of that conversation Heffernan did say that N.M.R.B. was taking over the facility previously granted to Kaloo by Capel Court, and the reference to "good track record" was clearly intended to include, and taken by Harrison to include, a specific reference to the Capel Court facility. I will deal with possible wider implications of the expression later. There is also a dispute between Heffernan and Harrison as to whether the former said that the participation was "a minimal risk deal" - as alleged by Harrison, or merely "a good risk" as asserted by Heffernan. However, I am satisfied that the description of the risk was given in the context of Heffernan referring to the fact that N.M.R.B. had to sell down part of the facility because of Reserve Bank requirements. Whichever prec:i..se phrase was used I am satisfied that, in the context, it was intended by Heffernan to convey the meaning, and was regarded by Harrison as conveying the meaning, that there was only a minimal risk involved and N.M.R.B. was seeking a risk participant only -- 26 of 86 -- 24 because of credit policy requirements and not because of any risk associated with the transaction. I am further satisfied on the whole of the evidence that in the course of that telephone conversation Heffernan indicated to Harrison that if B.A.C. took $10 million of the facility it would be entitled to a $20,000.00 establishment fee and a margin of 0.5 per cent. I also find that in the course of that conversation Heffernan said that the rate N.M.R.B. was charging the customer was "1.25 per cent above B.B.R. 11 I accept that the conversation ended with Harrison indicating that B.A.C. could be interested and he would refer it to his Managing Director in Sydney. After speaking to officers of B.A.C. in Sydney, Harrison telephoned Heffernan and informed him that B.A.C. was prepared to look at the proposal but would want a margin of 0. 6 per cent. In the course of informing Heffernan of that Harrison probably said that 0.6 per cent was "extremely fine". It should be noted that there is a conflict between Heffernan and Harrison as to whether the phrase "good track record" and the statement by Heffernan as to the "risk" was made in the first or second telephone conversation. It is impossible for me to resolve that conflict because each of the witnesses was unclear as to the point of division between the two conversations which took place within a short time span. But that in my view is of no real importance; the important thing is that I am persuaded to make the findings which I have recorded as to what was said, or not said, during those telephone conversations. -- 27 of 86 -- 25 I am satisfied that an arrangement was made that Harrison should attend at the offices of N.M.R.B. on Monday, 13th October, 1986. On that occasion Harrison met Hollamby for the first time. I find on the evidence that on the occasion of that meeting Harrison was handed the letter of offer of 10th October, 1986. There were certain documents accompanying that letter; there is no doubt Harrison was handed what became ex. 3 at the trial. There are two disputes on the evidence relating to what transpired on 13th October which must be addressed. Harrison is adamant that the meeting on the 13th took place at the offices of N.M.R.B. with both Heffernan and Hollamby present. Hollamby says that the meeting took place at the offices of B.A.C. and only he and Harrison were present. Heffernan does not recall such a meeting. After having considered the evidence of those witnesses I have come to the conclusion that on the balance of probability the meeting took place at the offices of N.M.R.B. and that both Heffernan and Hollamby were present. The second dispute relates to the letter from Ingles and Partners dated 11 th August, 1986 with enclosures (being accounts of Kaloo). In his statement Harrison said that the letter from Ingles and Partners was not delivered with N.M.R.B. 's letter of 10th October, 1986, but under cross-examination he conceded that he was not sure about that. There is no doubt that prior to the litigation commencing B.A.C. had a copy of the Ingles letter, but Harrison appears to be uncertain as to when it was received. On the other hand Hollamby says that the letter from Ingles and Partners was forwarded to B.A.C. with the letter of 10th October. Hollamby does not specifically deny that the letter of 10th October was -- 28 of 86 -- 26 handed over on 13th October. I do not regard this conflict of testimony as reflecting adversely on either Hollamby or Harrison. I was specifically asked to treat Harrison's cross-examination on this point as demonstrating his lack of credibility; but I am not so persuaded. Much of the substance of the letter of 11th August, 1986 was reproduced in a submission which did form part of the letter of 10th October (that also included summaries of accounts prepared by Ingles) and it may well be that therein lies an explanation for the doubts in Harrison's mind. The probability is that the letter of 11 th August, 1986 was not annexed to the letter of 10th October, but was referred to at the meeting at the offices of N.M.R.B. on 13th October and a copy was then given to Harrison. In my view the letter of 10th October, 1986 is of critical importance and it must be considered in some detail. It put forward a proposal from N.M.R.B. to B.A.C. for the latter to become involved as a risk participant in the facility therein described and on the terms and conditions therein set out. It recited that N.M.R.B. was seeking a risk participant for $10 million of the facility "due to Reserve Bank prudential requirements and internal credit policies". It provided details of the multi-currency Euro-Loan in the sum of CHF17.52 million and the AUD Bill Acceptance and Discount Facility in the amount of AUD4.5 million. With respect to the first tranche of the facility it stated that there was "a limit of AUD17.5 million" and went on to say: "AUD1 million is to be held on deposit as a buffer against devaluation of the Australian dollar and under no circumstances will this tranche of the facility be permitted to exceed the aggregate of AUD18,500,000.00. -- 29 of 86 -- 27 To achieve this a firm stop loss order will be in place and the facility will be brought back onshore before the limit is exceeded." It then set out details of the interest rate applicable to each tranche. It is sufficient to say that N.M.R.B. 's margin was clearly stated in each case to be 1.25 per cent per annum. It then showed (towards the top of the second page) that B.A.C. would be entitled as sub-participant to an establishment fee of $20,000.00 and to a participation fee of 0.6 per cent per annum payable quarterly in arrears. I pause here to observe that the letter of 10th October, 1986, which is signed by Hollamby, clearly accepted the .oral statements made by Harrison to Heffernan in the previous telephone conversations that B.A.C. would only be interested in a deal limited to AUD10 million, and at a margin of 0.6 per cent per annum. The original proposals of Heffernan ($11 million and 0.5 percent) were no longer being pressed. The letter of 10th October, in my view, clearly offered B.A.C. participation at the rate of 0.6 per cent per annum out of the total interest rate payable by the borrower which included a margin for the principal lender (N.M.R.B.) of 1.25 per cent per annum. The letter then referred to the securities to be taken by N.M.R.B. in the same terms as set out in the letters of 3rd September to Kaloo referred to in detail above. The letter in question went on to say that such securities would be "shared pari passu with sub-funding participant", that is B.A.C. The letter of 1 0th October also confirmed that the Eurocurrency facility was for the purpose of repaying an existing facility in the same amount with Capel Court, and the AUD Bill Acceptance -- 30 of 86 -- 28 Facility was for the purpose of permitting payment for the modernisation, expansion and improvement of Lutwyche Shopping Centre. Finally it should be noted that the letter specifically referred to the special condition in the facility with respect to the adjustment of the Eurocurrency/AUD borrowings during its life (that is para. 2(iv) of the letter of 3rd September quoted above). There followed a disclaimer of liability in the following terms: "While the information contained herein is believed to be accurate, National Mutual Royal Bank expressly disclaims any and all liability for representations or warranties, express or implied, contained in, or omissions from this letter and attachments." There is a reference in the documents attached to that letter to "profits relating to currency trading" so far as the accounts of Kaloo might be affected thereby. Harrison says that he considered that to be a reference to hedging transactions and not speculative trading. That was not an unreasonable assumption but nevertheless the statement put B.A.C. on notice that Kaloo was engaged in some foreign exchange trading. There was some further contact between Harrison and Westacott on the one side and Heffernan and Hollamby on the other, over the next few days, but it is not necessary for me to refer to that evidence in detail. Harrison inspected the Shopping Village on 17th October a,nd there met Keefe. I am satisfied that nothing was said on that occasion to indicate to Harrison that Kaloo was involved in speculative trading in foreign currencies.through N.M.R.B. Thereafter Harrison made -- 31 of 86 -- 29 some enquiries about Kaloo and Keefe. After all that Harrison put a submission to his Managing Director, Jacob, who in turn put a submission to the Board of B.A.C.; that was approved by the Board on 28th October, 1986. The submission which the Board approved contained the following data which is relevant when one is considering the extent to which B.A.C. was induced to enter into the Agreement by representations or conduct on the part of N.M.R.B. The "source of business" was given as: "Referred by G. Heffernan ( Senior Manager Qld. , . . . N. M. R. B.". The request was described as "pari passu risk participation to the extent of $10 million in a N.M.R.B. facility totalling $22 million.'' There was reference to an establishment fee of $20,000.00 and a participation fee of 0.6 per cent per annum payable quarterly in arrears. The document then set out the purpose of the request as follows: "N.M.R.B. have requested B.A.C. be a risk participant in their $22 million facility with the above borrower, due to Reserve Bank prudential requirements and internal credit policies which put a maximum level on their exposure on private companies to $15 million." The margin over cost of funds was clearly stated with respect to each tranche to be 1.25 per cent per annum. It is not necessary to refer in detail to the remainder of the submission. On the day after approval, 29th October, 1986, Harrison wrote to N.M.R.B. formally offering "to be a risk participant in your facility with your above client on the following terms and conditions". It is not necessary to refer in great detail to the contents of that letter. It did specify a risk participation fee of 0.6 per cent per annum paid quarterly in arrears, but did not -- 32 of 86 -- 30 record the applicable margin of 1.25 per cent per annum to be charged by N.M.R.B. There is endorsed on that letter a formal acceptance for and on behalf of N.M.R.B. by Heffernan and Hollamby dated 17th November, 1986. After receipt of the offer of 29th October from B.A.C., and before acceptance was endorsed thereon, Hollamby prepared a submission dated 5th November, 1986 to the Credit Committee of N.M.R.B. Interestingly the submission commences by referring to the fact that some named financial institutions had just that day declined sub-funding participation or were still considering the proposal. In other words notwithstanding negotiations ·with B.A.C., N.M.R.B. was up until 5th November still hoping to enter into a sub-funding arrangement with some other institution. The submission noted that the "B.A.C. offer expires at 5 p.m. today" and indicated that consideration should be given to approving it. The submission then referred to a number of points "considered worthy of emphasis when considering the relative merits of a risk sell down only"; that is, of course, what was proposed with B.A.C. noted:- What is of critical importance is the third point so "sell down of $10 million of risk at a fee of 0.60 per cent per annum is attractive given the nature of the facilities in terms of the bank's balance sheet and the fact that N.M.R.B. will retain 0.65 per cent per annum for funding that amount." The submission went on to note that N.M.R.B. had "already offered a sub funding participation to seven financiers and we would not wish to be seen to be 'flogging' the proposal around the market~ The main reasons given for declining their proposal are the -- 33 of 86 -- 31 foreign exchange exposure and the already high exposure of other lenders to shopping centres." That submission was sent around the various members of the Credit Committee in turn, and it appears that the last committee member duly signed the recommendation to accept B.A.C.'s offer on 24th November, 1986. For reasons which will become apparent I here stress the fact that the submission put to the Credit Committee, which was under consideration by them until 24th November, was that a fee of O. 6 per cent per annum to the participant with a .65 per cent per annum margin for N.M.R.B. on the $10 million of the risk sold down, was "attractive". On 24th November, 1986 N.M.R.B. sent one letter to Keefe and two letters to Kaloo; the latter two letters were signed by both Heffernan and Hollamby. In the letter to Keefe, signed only by Hollamby, Keefe was advised that N.M.R.B. had accepted an offer from B.A.C. "to underwrite AUD10 million of risk on our facilities to Kaloo". The letter went on: "Unfortunately, the cost of the underwriting will necessitate a small increase in the margin on both facilities, to 1 .35 per cent p.a., effective from the next rollover on 26th November, 1986." The remainder of the letter is unimportant for present purposes. The first of the letters to Kaloo was headed with respect to the "AUD/Eurocurrency option credit facilities". It stated that the letter was written to amend the terms of the offer; it was stated that except as specifically amended by the letter all the terms and conditions of the offer dated 3rd September, 1986 should remain in full force and effect. The first amendment was with respect to the "Applicable Margin" dealt with in para. 7 of the letter of 3rd -- 34 of 86 -- 32 September. That paragraph was amended to read: "The Applicable Margin will be the rate of 1 .35 per cent per annum." The second amendment was to the special covenant which I have already quoted above from the letter of 3rd September, being that contained in para. 1 ( i) . That was to be deleted and replaced with the following provision which reflected the agreement reached between N.M.R.B. and B.A.C.: "the Bank must have received a firm written commitment from another lender (acceptable to both the Bank and the Customer) to underwrite the Bank's risk on the facility to the extent of five-elevenths of the Commitment;" The second letter related to the "AUD Credit Facilities" and was in substance in identical terms. Again the "Applicable Margin" was increased to 1 .35 per cent per annum and the special covenant was amended so that it was in the same terms as that just quoted with respect to the other tranche of the facility. Both Heffernan and Hollamby were cross-examined about the decision to increase the applicable margin with respect to each tranche of the facility from 1.25 per cent to 1.35 per cent per annum. It is desirable that I record some of that evidence. When asked what part did he play in increasing the margin to 1 .35 per cent Heffernan replied: "Well, Mr. Harrison came back at 0.6 impinged on the National Mutual Royal Bank's margin and we went to Mr. Keefe and said we had to up it ten cents to reflect the increased money that Bill Acceptance wanted." A little later, in answer to another question he reiterated that it "was only a consequence of them asking for more in the first place that it was increased." But on being pressed he effectively conceded that it was untrue to say that the cost of -- 35 of 86 -- 33 the underwriting necessitated the increase in the margin to 1.35 per cent over the whole facility. Heffernan's evidence was also clear that he expected that Hollamby would have told B.A.C. of the increase. He agreed specifically with the proposition that a change in the applicable margin is something that the potential risk participant should have been told. Finally I record his evidence under cross-examination that there would have been no real difficulty in increasing the margin only with respect to the five-elevenths of the facility sold down to the participant. Before proceeding further with the narrative I should record a finding that B.A.C. did not become aware of the increase in margin from 1 .25 per cent to 1 .35 per cent per annum until 31st May, 1989 when Hollamby faxed to Harrison copies of the three letters bearing date 24th November, 1986. I am satisfied that nothing was said formally or informally by Heffernan, Hollamby, or Keefe prior to May 1989 which gave notice or which ought to have put B.A.C. on notice that such an increase had been made. Further, I am not satisfied that any document sent by N.M.R.B. to B.A.C. between 24th November, 1986 and 31st May, 1989 gave notice or ought reasonably to have put B.A.C. on notice that some increase in the applicable margin had been made. I specifically reject the evidence of Keefe that he informed Harrison in a telephone conversation some time before April 1988 that Kaloo was paying N.M.R.B. a margin of 1.35 per cent on the facility. Further, I am not satisfied on the evidence that Kaloo sent B.A.C. copies of rollover notes containing that information. -- 36 of 86 -- 34 In evidence in chief Hollamby swore that he did not believe that he ever turned his mind to the question of disclosing the increase in the applicable margin to B.A.C. Under cross- examination he agreed that the interest rate which was put to B.A.C. in the course of negotiations was "the cost of funds of bank bill buying rate plus 1 . 25 per cent." He further agreed that he had been aware from the time of Heffernan' s initial telephone conversation with Harrison that B.A.C. wanted a rate of 0.6 per cent rather than 0.5 per cent. When asked why the margin was increased to 1 .35 per cent overall and not just with respect to the $1 0 million sold down he replied that it "was impractical to try and confine it to the 10 million of risk that was being sold down to Bill Acceptance which would have involved more work than was justified to calculate that difference." According to Hollamby under cross-examination it was Heffernan who directed him that the rate had to go up. Hollamby's answers indicated that it was his view that the increase was to cover extra work involved because of the involvement of a risk participant, but he did not particularise either the extra work or the extra cost. Finally it should be noted that Hollamby agreed under cross-examination that an extra 0.1 per cent in the circumstances could not be described as a negligible sum, notwithstanding his observation to the contrary in his written statement. The letter of offer from B.A.C. dated 29th October, 1986 was conditional upon an independent valuation of the Lutwyche Shopping Village being acceptable to B.A.C. On 1st December, 1986 B.A.C. received a valuation from Hillier Parker which valued -- 37 of 86 -- 35 the shopping centre at $31. 5 million. On receipt of that Harrison telephoned Hollamby and said that the valuation they had received was acceptable and he was seeking approval of the B. A. C. Board to proceed with the transaction. Such approval was given on 5th December, 1986. N.M.R.B. was notified of that by the letter of 8th December, 1986 from B.A.C. under the hand of Harrison. In that letter B.A.C. sought to clarify some aspects of its position if the agreement was formally entered into, and Hollamby indicated his agreement with the matters therein raised by making an appropriate endorsement on the letter. I am satisfied that throughout the negotiation period B~A.C. made it clear that it was not interested in any deal which gave it a foreign exchange exposure; that is why it nominated a maximum liability of AUD10 million or five-elevenths of AUD22 million. That was made clear by Harrison in conversations he had during that period with Hollamby. That thinking was crystallised in the recommendation of the B.A.C. Board in its decision of 5th December, 1986 which produced the letter to N.M.R.B. of 8th December, 1986. Hollamby's acceptance of the contents of that letter indicates, and this is confirmed by the oral evidence, that N.M.R.B. knew that B.A.C. was not prepared to enter into any agreement where liability was subject to foreign exchange fluctuations. Late in November 1986 each party engaged solicitors to negotiate with respect to the terms of the formal risk participation agreement; it will be remembered that a draft thereof was included in the letter of 10th October. Breens, on behalf of B.A.C., suggested a number of amendments in their -- 38 of 86 -- 36 letter of 26th November, 1986, but only some were acceptable to N. M. R. B. as is evidenced by the letter from Blake, Dunn and Armstrong of 28th November, 1986. It should be noted that Breens asserted that B.A.C. had "relied on the extracts of the credit submission, the valuation and the financial statements of Kaloo" and in consequence sought an amendment to cl. 8. N.M.R.B. would not agree to that. B.A.C. executed the Agreement on 24th December, 1986, but it was not returned to N.M.R.B. for execution by that party until 30th December, 1986 (see the letter from Breens of that date). On or about 2nd January 1987 the Agreement was executed by N.M.R.B. The Agreement became ex. 1 . It comprises the formal agreement executed by the parties, and the two offers dated 3rd September, 1986 from N.M.R.B. to Kaloo with accompanying documents ( including in each case the relevant Standard Terms and Conditions). Recital A to the Agreement states: "By offers dated 3rd September, 1986 (copies of which are annexed hereto) made by the Bank and accepted by Kaloo Pty. Limited ( the 'Borrower' ) the Bank has agreed to make available to the Borrower a loan facility (the 'Facility') on the terms and conditions set out in the said offers." Then the expression "Loan Agreement" is defined as meaning "the offers referred to in Recital A as accepted by the Borrower and includes the sqme amended, supplemented, restated or varied from time to time." Clause 2 dealt with the obligation of the participant to pay the appropriate portion of the sum payable by the borrower in default. Sub-paragraph {c), so far as is relevant for present purposes, provides: "Subject to sub- clause 4(f), the liability of the Participant under this -- 39 of 86 -- 37 Agreement shall not be released by any act, matter or thing that the Bank may do or omit to do . . . " Clause 3 then provides that in consideration of the agreement to indemnify in accordance with cl. 2 N .M. R. B. should pay B .A. C. "a fee of O. 6 per cent per annum, payable quarterly in arrears and in any case on termination of the Loan Agreement, calculated on the Percentage Participation of the daily amount of the aggregate principle outstanding under the Loan Agreement from the date of this Agreement until its termination." It also provides for payment of a non-refundable establishment fee to the participant of $20,000.00. Parts of cl. 4 were the subject of much debate during addresses, and it is desirable that the relevant parts be set out in full: "(a) Except as provided in sub-clause 4(f), the Bank shall be entitled to exercise its rights and powers and perform its obligations under or in connection with the Loan Documents in its sole and absolute discretion without obtaining the prior consent of, or delivering any notice to, the Participant. (f) The Bank shall not agree variation to the terms of Documents and no act shall be Bank whereby: to any change or any of the Loan done or made by the ( i) the Commitment or the rate of interest under the Loan Agreement is increased; (iii) the Bank agrees that any Security is waived or released, reduced orforegone; without in each such case the prior consent of the Participant and the Participant shall be deemed to have given such consent if it does not -- 40 of 86 -- 38 convey its written decision to the Bank within seven days of written notification from the Bank of such proposed change, variation or act." Certain parts of cl. 5 are also of material importance with respect to the legal issues raised during the trial. Relevantly it provides that the "Bank . . will promptly notify the Participant of any default under any of the Loan Documents as soon as practicable after it becomes aware thereof and shall thereafter provide the Participant with such information as it may possess about the surrounding circumstances". Clause 9(a) contained an undertaking from B. A. C. "not to communicate directly or indirectly with ... the borrower ... in relation to the Loan Documents or this Agreement unless the prior written consent of the Bank has been obtained." Finally cl. 8 must be noted; again it was central to many of the arguments addressed by counsel at the end of the trial. So far as is relevant it provides as follows: "The Participant acknowledges that:- (a) the Participant has not relied upon information or advice or any appraisal or investigation intothe financial condition, credit worthiness, affairs, status or nature of the Borrower or any Surety provided or effected by the Bank and thatthe Participant has independently of the Bankmade such investigations of those matters as it considers reasonable; (b) save as otherwise expressly provided in this Agreement, the Bank is not under any obligation to provide the Participant with any such information or advice or to make such investigation or appraisal; and (c) the Bank makes no representation or warranty with respect to nor will it have any responsibility for - (i) the execution, value, validityand enforcability, effectiveness or sufficiency of any of the Loan -- 41 of 86 -- 39 Documents or any document executed in connection therewith; (ii) the truth or accuracy of any statement, representation, warranty or opinion made by any person in or in connection with any of the Loan Documents; (iv) the authenticity, validity, accuracy or completeness of any documents or information supplied to the Participant pursuant toclause 5 or otherwise; or II That is how B.A.C. came to be a party to the Agreement and I will leave for the time being the questions of law raised by the action. KALOO FOREIGN EXCHANGE TRADING OCTOBER - DECEMBER 1986 It will be recalled that between July and October 1986 AUD 1 , 9 6 0, 9 4 4 . 81 was deposited by Ka loo in the money market account. That had been depleted on 21st August, 1986 by the withdrawal of $300,000.00 to meet the first progress payment to Pidgeon, and by a further $862,132.35 on 17th September, 1986 in order to make the second progress payment. Both of those withdrawals, as I have already indicated, were with the approval of N.M.R.B. The third progress payment made on 13th October, 1986 was in the sum $1,149,478.54. That was made up of an additional facility from Capel Court of $500,000.00 and the balance from the money market deposit. Thereafter there would have been only about $100,000.00 in the money market account. In late March 1986 Kaloo purchased CHF17. 5 million from N.M.R.B. as part of its foreign exchange trading activities for USD9,123,136.27. The contract, initially due for settlement on -- 42 of 86 -- 40 2nd April, 1986, was rolled over until 9th June, 1986. But on 9th April Kaloo closed out the contract by entering into another contract to sell the CHF1 7. 5 million to N. M. R. B. for USD8, 790,434.66, thus crystallising a loss of USD404, 122. 16 payable on 9th June, 1986. Payment of that loss was deferred until 26th November, 1986 by rolling over the contracts. When paid on 26th November, 1986 the loss had become USD419,088.99; the amount paid to settle the transaction was AUD650,860.37. On 1st August, 1986 Kaloo purchased USDS,951,620.85 from N.M.R.B. at a cost of AUD9,870,017.99. Then on 7th August, 1986 Kaloo purchased another USD4 million at a cost of AUD6,764,755.62. Initial settlement of those contracts was due in mid-August 1986 but they were rolled over until they were closed out progressively by further transactions with N.M.R.B. When crystallised the losses on those two contracts totalled AUD1,680,309.28 which had to be paid by 26th November, 1986. By mid-October 1986 it was clear to N.M.R.B. that Kaloo's loss would be well in excess of AUD1 million. Thus as at 26th November, 1986 Kaloo had to settle total losses amounting to AUD2,331,169.65. It should however be noted that the movement of the Australian dollar against the Swiss franc which occasioned those losses operated to improve Kaloo's position with respect to the CHF17.52 million facility through Capel Court. It was clear to N.M.R.B., and Hollamby in particular, that Kaloo just could not pay approximately AUD2.3 million in November, and in a memo to the Credit Committee dated 22nd October, 1986 Hollamby spoke of a "cash crisis for Kaloo" because -- 43 of 86 -- 41 the new facilities offered on 3rd September could not be implemented given the lack of a loan participant. The fourth progress payment amounting to about $1 million fell due in mid-November, and the foreign exchange trading losses had to be met by the end of that month. In consequence, Hollamby sought by that submission approval "to fully implement the new N.M.R.B. facilities prior to the sell down condition being satisfied." With respect to the foreign exchange trading losses Hollamby expressed the view that after the N. M. R. B. facilities were implemented there was "likely to be a shortfall of up to AUD1 million." The submission went on to record that Keefe was confident he could provide "for the shortfall within a reasonable time". Apparently he had suggested to Hollamby that land owned by another Keefe family company at Southport could be sold with a profit margin in excess of $2 million. The upshot of all that was that Hollamby recommended to the Credit Committee that "Kaloo be allowed until 30/ 4/87 to repay FX losses of AUD1 million subject to execution by Sablepan Pty. Ltd. of a consent Caveat over the Southport land and to repayments of AUDS0,000 per month (commencing 15/12/86) being made pending sale of the land." The Committee approved both the recommendation to implement the new N.M.R.B. facilities prior to sell down if necessary and the recommendation with respect to deferral of foreign exchange trading losses. The financial position of Kaloo as at 28th October, 1986 can readily be seen from a perusal of the memorandum of that date from Hollamby to two members of the Credit Committee, namely Parker and Robertson. -- 44 of 86 -- 42 The decision to defer payment of up to AUD1 million of the foreign exchange trading losses was communicated to Kaloo by letter under the hand of Hollamby dated 5th November, 1986; such deferment was made subject to the following conditions: "payment of Kaloo Pty. trading, on 1986; all other amounts owed to the Bank by Ltd. on account of foreign exchange or before the due date of 26th November, Execution by Sablepan Pty. Ltd. of a consent Caveat, in favour of the Bank, over that company's land amalgamation at Southport, Q. Such Caveat will only be registered in the event that Kaloo Pty. Ltd. defaults on any of its obligations to the Bank; and Kaloo Pty. (commencing account with on or before Ltd. depositing AUDS0,000 per month 15/12/86) to a money market deposit the Bank as provision for the payment due 30/4/87." Hollamby communicated those decisions to N.M.R.B. 's Foreign Exchange Department in Sydney by way of a memorandum dated 24th November, 1986. In that memorandum Hollamby also stated that the Kaloo foreign exchange facilities would be transferred to the Bank and that any future foreign exchange trading by Kaloo "would have to be arranged on a cash covered basis". On 26th November, 1986 there was a draw down under each tranche of the new facility; that was obviously done pursuant to the approval to implement it prior to sell down. I will deal subsequently with the details of the draw downs. For present purposes it is sufficient to sa.y that as a result of the draw down on the AUD Bill Acceptance Facility, AUD811,610.89 became available for part satisfaction of the losses incurred by Kaloo on its foreign currency trading account. But Kaloo was unable to pay the balance of the AUD1,374,724.84 foreign exchange losses which had been deferred -- 45 of 86 -- 43 for payment until 26th November, 1986. According to Hollamby's evidence the Bank then deferred payment of that balance until 30th April, 1987. The $50,000.00 payable on 15th December, 1986 in accordance with the conditions of deferral of payment of foreign exchange trading losses was not paid. The letter from N.M.R.B. under the hand of Hollamby dated 28th January, 1987 noted that payments in that sum due on 15th December, 1986 and 15th January, 1987 had not been paid, and requested payment of $100,000.00 "as soon as possible". Under cover of a letter dated 19th December, 1986 N.M~R.B. forwarded to Kaloo for execution the security documents relating to the Southport land which were a condition of the deferral of payment of the foreign exchange trading losses. The letter asked that the documents be executed and returned. That had not been done by 28th January, 1987; in his letter of that date Hollamby enquired as to the "position with execution of the documents forwarded under cover of our letter dated 19th December, 1986". Hollamby conceded that he did not inform Harrison or anyone else at B.A.C. of the position with respect to Kaloo's foreign exchange trading losses. between early October The evidence clearly establishes that 1986, when Heffernan first spoke to Harrison about this matter, and the end of December 1986, when the Agreement was executed, N.M.R.B. did not disclose to B.A.C. anything about the foreign exchange trading losses. It may well be that both Heffernan and Hollamby had some belief that the foreign exchange trading was separate from the loan facilitie~ the subject of the Agreement and that the losses incurred through -- 46 of 86 -- 44 that trading were not material to the risk the subject of the Agreement. That is a matter on which I will have more to say later. Finally with respect to Hollamby's credit some observations should be made on his statement in so far as it deals with the foreign exchange trading losses late in 1986. In para. 116 of his statement he blandly refers to the payments of $50,000.00 per · month being waived as if that waiver operated from December 1986. That is simply not true as is demonstrated by a consideration of his letter of 28th January, 1987. During a meeting between Hollamby and Keefe on 29th January, 1987 the latter said Kaloo was not able to pay the $100,000.00 and "undertook to come back to us in a few days with a proposal for payment of this monthly commitment". N.M.R.B. considered that Kaloo was in default in not making payments of $50,000.00 on 15th December, 1986 and 15th January, 1987, and the question of waiver of those payments only arose subsequently in 1987. To similar effect is Hollamby's statement in para. 128 when speaking of the security documents forwarded under cover of his letter of 19th December, 1986. Again he baldly asserts: "Subsequently the documents duly executed were returned to myself and the Caveats were eventually registered." That simple statement is quite misleading. As his letter of 28th January, 1987 establishes the security documents were not returned without follow-up pressure being required. The matter was discussed at the meeting on 29th January and Keefe indicated the documents would be executed in the "near future." That was not done and by letter of 24th April, 1987 Hollamby threatened to refuse any -- 47 of 86 -- 45 further rollover of the trading losses beyond 30th April if the Caveats were not delivered. The security documents themselves (which are in fact annexures to Hollamby's statement) show that they were not attended to by Kaloo until late April early May 1987. As the letter of 7th May, 1987 indicates, there were deficiencies in the initial execution of the documents. DRAW DOWN OF FACILITY It is convenient to interpolate here that the fourth progress payment to Pidgeon became due in November 1986. Some weeks prior to the due date Keefe spoke to Heffernan and Hollamby about how the payment was to be met. It was as a result of that conversation that consideration was given to implementing the new facility notwithstanding the fact that an agreement with a participant had not been perfected. The progress payment in question was in the sum of $944,686.92. Ultimately it was agreed that Capel Court should advance that amount as a further temporary excess on the existing facility pending implementation of the new one. That payment was in fact made to Pidgeon on 17th November, 1986. The total of the four progress payments made to that date was $3,256,297.81. As previously indicated as a result of the Credit Committee approving Hollamby' s submission of 22nd October, 1986 there could be a draw down against each tranche of the new facility notwithstanding the absence of a risk participant. On 26th November, 1986 the full amount of the Eurocurrency facility, namely CHF17.52 million, was drawn down and those proceeds were used to pay out the existing Capel Court facility in that sum. The letter of confirmation from N.M.R.B. dated 26th November, -- 48 of 86 -- 46 1986 to Kaloo indicated a margin over cost of funds of 1.35 per cent per annum. Also on that date, 26th November, 1986 there was a draw down against the AUD Credit Facility of $3,256,297.81. It will be seen that that exactly equated the total of progress payments made to Pidgeon by that date. As previously noted the progress payments to date had been made either by withdrawals from the money market account or through additional accommodation from Capel Court. The draw down of $3,256,297.81 was disbursed as follows: ( i ) $1,444,686.92 to Capel Court repaying the $500,000.00 made available to meet in part the payment made on 13th October, 1986, and the $944,686.92 payment made on 17th November; (ii) $1 million into a interest bearing term deposit, (iii) restoring the cash security required as a condition of each offer to Kaloo of 3rd September, 1986. $811,610.89 was paid in part settlement of the foreign exchange trading losses due for payment on that date, 26th November, 1986. It is not clear when B.A.C. first became aware of the making of the progress payments prior to the execution of the Agreement, but the letter of 10th October did specify regular draw downs of the AUD Credit Facility from August 1986. It appears that B.A.C. was not informed at the time that the Credit Committee had approved implementation of the facility without an agreement with a loan participant. -- 49 of 86 -- 47 I should also record that on 26th November, 1986 Kaloo paid $65,252.69 to cover interest on the maturing Capel Court Euro- loan and $42,553.50 being discount interest payable on the first draw down under the AUD Credit Facility. The final draw down pursuant to the AUD Credit Facility was made on 18th December, 1986 when the fifth progress payment was made to Pidgeon in the sum of $1,289,702.00. SUBSEQUENT RELEVANT FACTS As is evidenced by the letters from N.M.R.B. to Kaloo of 24th April, 1987 and to B.A.C. of 20th April, 1988, the loan of CHF17.52 million was converted into a USD loan on 22nd April, 1987. (In the Standard Terms and Conditions Eurocurrency was defined so as to include US dollars.) There was a shortfall of AUD719, 633. 94 in settling that conversion and an equivalent amount was withdrawn by N. M. R. B. from Kaloo' s money market deposit to satisfy that deficiency. An amount of AUD76,731.23 was also withdrawn from that money market deposit to meet part payment of interest due on the matured CHF loan. There was a balance of interest due and payable in the sum of AUD256,782.81, and the letter of 24th April, 1987 sought instructions from Kaloo as to payment. Those withdrawals made by N.M.R.B. from the money market account reduced its balance to AUD280,366.06, and the letter of 24th April, 1987 requested that Kaloo "reinstate the cash deposit to the required level as soon as possible". It is not necessary to refer in detail to certain hedging transactions carried out between January and August 1987. The interest payment of AUD256,782.81 was not made until 27th April, 1987, some five days late. N.M.R.B. charged -- 50 of 86 -- 48 overdraft interest amounting to AUD677.13 and debited Kaloo's money market account with payment of that sum. Those matters are evidenced by the letter from N.M.R.B. to Kaloo of 29th April, 1987. It will be remembered that foreign exchange trading losses had been deferred for payment until 30th April, 1987. The letter of 24th April, 1987 referred to that and stated that the actual amount due for payment on 30th April was AUD1,471,049.74. Kaloo was asked to give that matter "its urgent attention". The letter went on to say that if Kaloo wished to "seek a further deferment ... we shall require your firm undertaking to meet interest, in advance, on any rollovers." It was that letter which also stated that delivery "of the Caveats over the Southport properties, promised on several occasions, is also a precondition to any rollover on 30/ 4/87." There was no response; surprising_ly in view of the statements made N.M.R.B. "arranged a rollover for seven days until 7.5.87" of the outstanding losses of AUD1,471,049.74. That is evidenced by the letter of 29th April, 1987 which indicated that as at 7th May the amount due for payment would be AUD1,477,892.41. There was still no response at all from Kaloo by 7th May and N.M.R.B. unilaterally authorised a further 30 day rollover of AUD1,477,892.41. The letter to Kaloo of 7th May stated: "Interest cost of the rollover is AUD24, 952. 06 and we would appreciate early receipt of your remittance for this amount, which is due for payment today." I have not been able to find in the evidence anything to indicate that the interest in the sum of AUD24,952.06 was paid. -- 51 of 86 -- 49 Further, there is nothing in the evidence to establish a further formal rollover when the 30 day period expired on 7th June. In about October 1987 Keefe informed Hollamby that a contract had been signed for the sale of the Southport land. As Hollamby expected to receive sufficient from the sale proceeds to pay out the foreign exchange trading losses little appears to have been done by N.M.R.B. with respect to the outstanding amount. After that sale fell through the Caveats given by Kaloo in favour of N.M.R.B. were registered; the registration became effective on 22nd June, 1988. Thereafter Keefe informed Hollamby on a number of occasions that the Southport land was about to be sold, but nothing specifically eventuated until early September 1988 when a contract of sale was entered into. N.M.R.B. agreed to lift its Caveats to enable that sale to proceed provided it received AUD3 million on settlement. Suffice it to say that on 24th October the sale of the Southport property was completed and N.M.R.B. received $3 million from the proceeds. N.M.R.B. informed B.A.C. on 4th November, 1988 that it proposed to clear Kaloo's foreign exchange trading account and that the balance of about $1 million would be used to replace the cash security deposit. On 7th November, 1988 N.M.R.B. applied $1,970,397.58 to satisfy the foreign exchange trading loss debt (including interest thereon.) The evidence is not all that specific but there was no challenge during the trial to the proposition that the losses of AUD1,471,049.74 due as at 30th April, 1987 together with all interest thereon, amounted as at 7th November, 1988 to AUD1,970,397.58. -- 52 of 86 -- 50 When the balance of the amount received on settlement of the sale of the Southport property, namely $1,029,602.42, was added to what was left in the security (or money market) account, N.M.R.B. was able to write to B.A.C. on 21st November, 1988 informing it that the balance of the "security deposit" was AUD1,036,398.25. As at 19th January, 1989 the balance in that account was $1,066,177.90 and by letter of that date N.M.R.B. sought confirmation from B.A.C. that such amount should be set off against accrued interest and fees on the loan facilities. B.A.C. agreed to that proposal as is evidenced by its letter of 27th January, 1989. This is an appropriate time at which to make some further remarks with respect to the Caveats and mortgages given by Kaloo over the Southport land ostensibly to secure payment of the foreign exchange trading losses. The minutes of directors' meetings of Sablepan Pty. Ltd. and General Ford (Aust.) Pty. Ltd. of 30th April, 1987 purport to record that the securities in question "were provided by the Company's Comfort to the Bank in relation to some foreign exchange trading losses". But that is in no way conclusive. I have formed a very adverse impression of Keefe as a witness of credit; in my view he was prepared to say anything in evidence which exonerated himself and Kaloo from any responsibility for the disastrous collapse which ultimately occurred. Whilst it is no doubt correct to say that the primary motivation of N.M.R.B. in obtaining the mortgages and Caveats with respect to the Southport property was to secure payment of the foreign exchange trading losses, there is no doubt in my mind -- 53 of 86 -- 51 that at all material times Heffernan and Hollamby were conscious of the fact that such securities were also available to N.M.R.B. with respect to any losses under the facilities evidenced by the offers of 3rd September, 1986. That was fully appreciated by officers of N.M.R.B. in May 1987 when the security documents were lodged for stamping. The letter of 20th May, 1987 requested assessment of duty on the basis that those security documents were collateral to the securities given with respect to the original advance by Capel Court to Kaloo which had, when the new facility was created, been transferred to N. M. R. B. In consequence the Caveats and mortgages with respect to the Southport properties were stamped collateral to the other security documents valued at $14.5 million. That is also established by looking at the stamp duty endorsements on the face of the Caveats and mortgages relating to the Southport property. The true position, in my view, is amply demonstrated by a consideration of para. 165 of Hollamby's statement (ex. 107). That contradicts other parts of his statement and his oral testimony, but I am in no doubt that para. 165 reflects his true understanding of the position. This aspect of his evidence clearly indicates that his evidence must be scrutinised with great care and that he ought not generally be regarded as a person whose testimony could be readily accepted. He said in para. 165: "On 18 April, 1988 I instructed Blakes to register the Caveats over the Southport property. Blakes informed me that the Caveats were lodged for registration on 19 April, 1988, and that registration was effected on 22 June, 1988. This action was -- 54 of 86 -- 52 taken because of concerns I had that Kaloo would not be in a position to make the interest payment due the following day." The interest payment due the following day, namely 19th April, 1988, was interest due to that date under the Eurocurrency facility. Prior to that date Keefe had informed Hollamby that Kaloo might have difficulty in meeting the interest payment due on 19th April, and had also discussed the possibility of converting the Eurocurrency facility into Australian dollars. In accordance with Kaloo's request, on 19th April the loan, then in US dollars, was converted into AUD and rolled over for a term of 134 days to 31st August, 1988. Payment of part of the interest due to that date was effected by drawing the facility up to its approved limit of AUD17.5 million, but there was left due and payable interest in the amount of AUD767,341 .90. Kaloo failed to pay that balance interest and it was capitalised in purported compliance with the terms of the Agreement of 3rd September, 1986. Thereafter that procedure was followed for all future amounts of unpaid interest. But what is of importance for present purposes is that by the statement in para. 165 Hollamby clearly acknowledged that the mortgages and Caveats over the Southport land were securities relevant to the Bank's recovery of interest under the credit facilities granted 3rd September, 1986; it demonstrates the untruthfulness of Hollamby's other statements to the effect that mortgages and Caveats over the Southport property were of no relevance when considering the Bank's securities with respect to the loan facilities. -- 55 of 86 -- 53 It will be remembered that it was a condition of the Eurocurrency facility offered by N.M.R.B. on 3rd September, 1986 that Kaloo warranted that the Eurocurrency option available under the facility would not exceed AUD15.5 million from 30th April, 1987, AUD13.5 million from 31st October, 1987, and AUD11.5 million from 30th April, 1988. Clearly Kaloo did not comply with those conditions. The letter of 24th September, 1987 from N.M.R.B. to Kaloo demonstrates that the amount then outstanding in Eurocurrency was AUD17.5 million (USD12,341,000.00) and that effectively remained the position until 19th April, 1988 when the Eurocurrency facility was converted to AUD. There is no doubt that prima facie Kaloo was in breach of the special condition insofar as it put a limit on the extent to which the Eurocurrency option was available as at 30th April, 1987 and 31st October, 1987. But Keefe gave evidence that compliance with those conditions was waived by N.M.R.B. He said in para. 3 of his statement (ex. 77) : "I recall requesting Mr. Heffernan to waive this requirement and that he stated that he would have to refer the matter to the Bank's Melbourne office. I recall that shortly thereafter (and definitely prior to 30th April, 1987) Mr. Heffernan contacted me and informed me that the Bank did not require Kaloo Pty. Ltd. to progressively reduce the Eurocurrency component of the Eurocurrency facility." I reject that evidence from Keefe. It is not supported by Heffernan's original statements, and is totally unsubstantiated by any documentary evidence. The memorandum from Hollamby to O'Donnell (a Melbourne director of N.M.R.B.) of 15th April, 1987 contains this passage: "Additionally, Kaloo is committed to reduce the -- 56 of 86 -- 54 Euro facility to AUD15,500,000.00 on or before 30/4/87, by converting AUD2 million to onshore borrowing. Mr. Keefe is extremely reluctant to comply with this due to the interest rate differential." There is nothing to indicate that there was any approval given by N.M.R.B. to the waiving of that condition, and no evidence that any such decision was communicated to Keefe. Further, I am absolutely satisfied on the evidence that no notice of any waiver of that condition was given by N.M.R.B. to B.A.C. as would have been required by cl. 4(f) of the Agreement. At best for Kaloo, and N.M.R.B., it could be argued that as a result of the latter taking no action after default on 30th April, 1987 there was an implied waiver of that condition. But B.A.C. can still rely on the breach because it did not give prior consent to such an implied waiver. The limit was not on the AUD amount drawn but only on the Eurocurrency component. B.A.C. had notice throughout the period that the facility was drawn down to the extent of about AUD17.5 million, but the evidence does not establish that it had notice that the Eurocurrency component was in excess of the condition of the Agreement until the letter of 6th June, 1989 was received. Therefore it could not be said that during the currency of the Agreement B. A. C. waived a breach of the condition in question. I have already referred to the transaction on 24th April, 1987 when the Eurocurrency loan was converted to US dollars. As previously noted a shortfall of AUD719,633.94 in settling that conversion was debited to the money market deposit account, as was an amount of AUD76,731.23 to meet part payment of interest -- 57 of 86 -- 55 due on the matured CHF loan. Those two amounts are shown in the statement of that account which forms part of ex. 18 as the withdrawal on 22nd April, 1987 in the total sum of $796,365.17. In the proposal from N.M.R.B. put to B.A.C. in the letter of 10th October, 1986 it was said that one of the securities would be a charge over the short term money market deposit of $1 million. There was some elaboration on that, as already noted, when it was said that the $1 million was to be "a buffer against devaluation of the Australian dollar". After the withdrawal of the $796,365.17 there was left in that account only $280,366.06. Whilst it may well be true to say, as Hollamby did, that the purpose of the money market account was to safeguard against a loss occasioned by a devaluation in the Australian dollar, I have serious doubts as to whether N. M. R. B. was entitled, without notice to B.A.C., to debit that account with payment of a shortfall on a rollover when the principal amount drawn down remained at AUD17.5 million. One would ordinarily consider, in my view, that recourse by the lender to the security deposit in such a way evidenced default on the part of the borrower in meeting its commitment. But N.M.R.B. appeared to be of the view that if it utilised the money market account to settle the shortfall there was no default by Kaloo. In my opinion the conduct of N. M. R. B. in so debiting the money market account demonstrated its contempt of the position of B.A.C. as a risk participant; in effect N.M.R.B. asserted the right to have recourse to a security in order to satisfy a payment due under the facility without regarding Kaloo as being in default. Further, it did not consider the non-reinstatement of the -- 58 of 86 -- 56 security deposit as a default under the facility. The attitude of N.M.R.B. is further demonstrated by the statement made by Hollamby with respect to the AUD76, 731.23. In February and early April a hedging profit of $12,595.10 and interest totalling $64,136.13 were credited to the money market account giving it, as at 22nd April, 1987, a credit balance of $1,076,731.23. When the shortfall of AUD719,633.94 was debited to that account the balance would have been reduced to less than $400,000.00, well below the $1 million figure required. Against that background Hollamby made this statement in ex. 107: "I recall that Kaloo instructed the Bank that interest amounting to AUD76, 731. 23 which had accrued on the· money market deposit be used to partially pay the interest due. As there was no obligation for Kaloo to retain the interest as part of the money market account this instruction was complied with." It is difficult to see how that statement could honestly be made. That amount of $76,731.23 was in the account which was to be well below the required limit on the day in question. To allow it to be further reduced to create a situation where Kaloo was not in default with respect to the payment of interest, totally disregarded the reality of the situation. Hollamby's thinking demonstrates a degree of sophistry surprising amongst bankers. The action could only have been taken because the officers of N.M.R.B. in Brisbane did not want to admit either to their superiors or to their risk participant that in fact Kaloo was in serious default; obviously they were punting on an improvement i.n the foreign exchange market which would absolve them from the unpleasant task of informing B.A.C. of Kaloo's precarious position. -- 59 of 86 -- 57 So juggling with the money market account enabled Hollamby to say in the letter of 6th September, 1988 to Harrison that the "Facility was entirely trouble free until April, 1988". Again I must say that I find it difficult to understand how a person in Hollamby' s position could make that statement. In April, 1987 Kaloo could not meet a commitment to pay $796,365.17 and N.M.R.B. had to have recourse to the money market account held by way of security to satisfy that shortfall. Thereafter there was never more than about $280,000.00 in the money market account, and from August 1987 until April 1988 the balance was only $1,605.48. Clearly from April 1987 Kaloo was in default pursuant tq the Eurocurrency facility in that it did not maintain a security deposit with a balance of $1 million. It was therefore simply not true to say that the facility was trouble free until April, 1988. By letter dated 20th April, 1988 N.M.R.B. gave B.A.C. notice in accordance with cl. 5 of the Agreement "that Kaloo has defaulted on payment of interest amounting to $767,341.90, which was due on 19th April, 1988." In that letter N.M.R.B. gave B.A.C. details for the first time of the use which it had made of the money market account from December 1986. N.M.R.B. offered no explanation as to why it had taken no action when it became obvious that Kaloo could not reinstate the amount in the security deposit account to $1 million. Not surprisingly that bought a rather sharp reaction from B.A.C. In a letter dated 27th April, 1987 Harrison indicated that "B.A.C. was disappointed that the Security Deposit has been dissipated without its prior consen~ being given in accordance with and in breach of para. (f) of -- 60 of 86 -- 58 Clause 4 of the Risk Participation Agreement." He indicated on behalf of B.A.C. that the security deposit should be reinstated to the amount of $1 million within 14 days, and went on to make other suggestions to N.M.R.B. The letter contained a request that B.A.C. be furnished with particulars of events which had occurred between January 1987 and April 1988. Hollamby's response was hardly what one would have expected in the circumstances; he began his letter in reply of 12th May, 1988 by saying: "Frankly, we are surprised at the tone and content of your response. We were simply advising you of a default by Kaloo and not seeking any guidance from you as to what the Bank should or should not do to handle the situation." Apart from an attempt to justify the recourse by N.M.R.B. to the money market account in April 1987 without notice to B.A.C., the letter did little to clarify the situation for B.A.C. Hollamby baldly stated that "Kaloo advises that it is not in a position to reinstate the deposit." There is no need to refer in detail to subsequent correspondence until about May 1989. In May N.M.R.B. wrote to B.A.C. informing it of an anticipated deficiency if a sale of Lutwyche Shopping Village proceeded as anticipated. Harrison checked the figures and could not account for the deficiency. He telephoned Hollamby and expressed his surprise at the amounts involved in the calculation. The two subsequently met and discussed the figures; in the course of that discussion Harrison pointed out that that bank bill buying rates appeared to be higher than they should have been. It was after that meeting that Hollamby reviewed the files of N.M.R.B. and "discovered" -- 61 of 86 -- 59 that B. A. C. had never been notified of the increase in the margin from 1.25 per cent to 1.35 per cent. As previously noted he forwarded copies of the relevant documentation to B.A.C. on 31st May, 1989. The principal response from B.A.C. is to be found in the letter from Harrison to N.M.R.B. of 28th June, 1989. It set out in some detail allegations of breach of contract on the part of N.M.R.B. and asserted that N.M.R.B. had not made full and frank disclosure of relevant matters in its dealings with B.A.C. The letter concluded by saying that N.M.R.B.'s conduct amounted to a repudiation of its obligations under the Agreement, and further that the conduct of N. M. R. B. amounted to misleading conduct entitling B.A.C. to set aside the transaction. Hollamby replied by letter of 30th June asserting that B.A.C. had made "various unfounded assertions against this Bank". N.M.R.B. denied "that its conduct has been other than that which would be expected of any reasonable banker" and stated that it would assert its rights under the Agreement "in the event that a loss is crystallised on this transaction." By its letter of 3rd July, 1989 B.A.C. formally elected to accept the actions of N.M.R.B. as repudiation of the Agreement and returned a cheque for $14,958.80 which had been forwarded by N.M.R.B. under cover of a letter dated 30th June, 1989 being risk participation fees for the period 1st April to 30th June, 1989~ I should here record that N.M.R.B. had forwarded B.A.C. risk participation fees every quarter calculated in accordance with the terms of the Agreement. A cheque had been sent on 31 st March, 1989 covering the period 1st January to 31st March, 1989 -- 62 of 86 -- 60 and that had been banked by B.A.C. But B.A.C. did not accept payment of any fees after 31st May, 1989, the date on which it became aware of the variation in the margin from 1.25 per cent to 1.35 per cent. This action was then commenced with the writ being issued on 4th July, 1989. B.A.C. became aware of additional matters in the course of discovery, and on 19th December, 1989 its solicitors wrote to the solicitors for N.M.R.B. asserting that in the light of documents received on discovery B.A.C. was entitled to rescission ab initio of the Agreement. With that letter B~A.C. returned to N.M~R.B. the amount of $155,090.88 being a refund of all risk participation fees paid to it. It was made clear in the follow up letter of 8th January, 1990 that B.A.C. asserted a right to rescind ab initio on the ground of fraudulent misrepresentation. The correspondence indicated that the pleadings in the action would be amended accordingly. Kaloo went into liquidation in 1989 and is hopelessly insolvent. Keefe is a bankrupt and the guarantees are worthless. The other securities are inadequate. On 2nd October, 1989 N.M.R.B. made a formal demand under the Agreement against B.A.C. for the sum of $12,199,855.21. That is the amount referred to in the counter-claim of N.M.R.B. Interestingly, as established by Hollamby's evidence, that amount is calculated using a margin of only 1 .25 per cent. It was admitted during the trial that if N.M.R.B. succeeded on its counter-claim the judgment should be for $12,199,855.21 with interest from 5th October, 1989. -- 63 of 86 -- 61 CREDIT AND ADMISSIBILITY OF EVIDENCE I have already dealt extensively with the evidence given by the three most important witnesses, namely Harrison, Hollamby, and Keefe. In the course of making findings of fact I have from time to time made observations on the credit worthiness of those witnesses, and in some instances made findings on conduct which reflects on credibility. The remarks I make here are of a general nature and are not intended to override specific comments already made. In the end result I came to the conclusion that most of Harrison' s evidence, particularly the essential parts, were corroborated either by documentary material or oral evidence from other witnesses. He was very closely cross-examined, and in my view emerged as a witness of truth. Understandably counsel for N.M.R.B. was able to point to certain passages in the cross- examination which looked at in isolation could be used in support of a submission that his evidence was lacking in credibility. But having regard to the whole of his evidence, and bearing in mind the extent to which it was corroborated, in general I reject those submissions made on behalf of N.M.R.B. Harrison was an intelligent man who was concerned, particularly under cross-examination, to understand the implications of the question before answering. In the circumstances of this particular case I do not regard that as adversely reflecting on his credibility. I was invited by Mr. Hughes on behalf of N.M.R.B. to accept Keefe as an honest witness notwithstanding his "rather jaundiced view of Banks and N.M.R.B. in particular". Having had the opportunity of observing Keefe in the witness box over a lengthy -- 64 of 86 -- 62 period I have concluded that I ought not to accept any of his evidence, except where it is supported by documentary or other oral evidence. My views on Hollamby as a witness are already reflected in the findings which I have made. Generally I was not impressed with many of the explanations he gave of conduct taken at the time. In many instances I formed the distinct impression that his evidence was not so much his recollection of what actually happened at the time and why, but rather a reconstruction made with the benefit of hindsight. Counsel for B.A.C. sought to lead evidence from "experts" as to practice in the banking industry, and to have those witnesses state an opinion as to how a reasonable banker would have reacted in certain presumed circumstances. Objection was taken to the admissibility of such evidence, but after hearing submissions I decided to receive the evidence and consider its admissibility at the end of the day. In view of that, on the same basis, N.M.R.B. called evidence along similar lines. I have come to the conclusion that the evidence of Nott and Lennon ( called by B. A. C. ) and Hodgson ( called by N. M. R. B. ) is not admissible. The critical issues related to the conduct of the parties to the action in the particular circumstances of the case, and evidence as to how others may have reacted in similar circumstances is not to the point. Though I have arrived at the conclusion that B.A.C. was influenced to enter into the transaction by the margin offered to it and the comparison of that margin to the overall margin charged to the borrower I have not had regard in so concluding -- 65 of 86 -- 63 to the evidence of Nott and Lennon which, if admissible, would support that finding. However I should record that if the evidence be held to be relevant and admissible, then I would accept the evidence of Nott and Lennon as to the materiality of the rate and as to the obligation of the lead bank to notify the risk participant of an increase in the margin in preference to that of Hodgson. CONCLUSIONS It is now necessary to consider the findings of fact recorded above in the light of the issues raised by the pleadings. In my view the most critical is that relating to the increase in the applicable margin from 1.25 per cent to 1.35 per cent; that matter is relied on by B.A.C. with respect to each of the six bases on which it claims relief. In the initial telephone conversations Heffernan put to Harrison that the margin to B.A.C. would be 0.5 per cent from the total margin payable by the borrower of 1.25 per cent. In my view it could not be said that the margin available to the participating bank was not a material consideration; indeed the margin represented the only economic reason for the risk participant entering into the transaction. It is significant, in my view, that the relevant margin was the subject matter of the first counter-proposal which Harrison put to Heffernan in the course of negotiations; B.A.C. would look at a proposal if the margin was 0.6 per cent, a figure which Harrison described as "extremely fine", and .Jacob as "low". As already pointed out that was obviously accepted by N.M.R.B. because the proposal put forward in the letter of 10th October, 1986 was that B.A.C. take -- 66 of 86 -- 64 0.6 per cent of the overall margin of 1.25 per cent. Thus from early October, certainly prior to 1 0th October, B. A. C. , and Heffernan in particular, knew that the deal being considered by B.A.C. involved the participant taking 0.6 per cent out of the margin of 1.25 per cent. As Jacob's evidence indicates, it was on that basis that the Board of B.A.C. approved the transaction. Harrison's reply to N.M.R.B. of 29th October, 1986 specifically referred to a risk participation fee of O. 6 per cent. Then, as already fully canvassed above, Hollamby prepared the submission dated 5th November, 1986 to the Credit Committee of N.M.R.B. That was a month after the initial discussions with B.A.C. about risk participation on the basis of the participant receiving 0.6 per cent out of a margin of 1 .25 per cent. But there was no suggestion in Hollamby' s memorandum that the 1. 25 per cent should be increased to reflect the fact that B.A.C. wanted 0.6 per cent. There was nothing said to the effect that the cost of underwriting necessitated an increase in the margin to 1.35 per cent over the whole facility. Nor was there anything said to the effect that Heffernan had decided that the rate had to go up. Rather, Hollamby went to some length to point out to the members of the Credit Committee that a balance 0.65 per cent was "attractive" given the terms of the facilities. It was a margin of 1 . 25 per cent which the Credit Committee finally endorsed on 24th November. In those circumstances one can well ask the question, why did N.M.R.B. through Heffernan and Hollamby decide to increas~ the margin to 1 . 35 per cent. The justifications advanced in -- 67 of 86 -- 65 evidence and in the letters of 24th November do not stand up to examination. Nothing changed between 5th November, 1986 when Hollamby prepared the memorandum to the Credit Committee and 24th November when the letters were written to Kaloo specifying the increase; nothing that is, provided one ignores the fact that on 26th November, 1986 Kaloo had to settle total losses amounting to AUD2,331,169.65 on its foreign exchange trading account. The Credit Committee's approval to the submission of 5th November must be put in its context. In the earlier memo of 22nd October Hollamby had sought approval to implement the new facilities prior to sell down and that approval was granted. That resulted in the draw down on the facilities being effected on 26th November, two days after the decision to increase the applicable margin. Common sense and the evidence do not support the reasons advanced in evidence by Heffernan and Hollamby in an endeavour to justify the increase. Not only was B. A. C. not informed at the time of the proposed increase in the applicable margin, but it was not informed of the early implementation of the facilities which constituted a variation or departure from the terms of the facilities set out in the letters of 3rd September. Those were matters peculiarly within the knowledge of N.M.R.B., and it could not be successfully contended that it was up to B.A.C. to make enquiries to ascertain such facts. The main thrust of the argument advanced on behalf of N.M.R.B. was that it was through Hollamby's inadvertence that B.A.C. was not informed of the increase in the margin, and that inadvertence cannot amount to fraud. This aspect of the case has -- 68 of 86 -- 66 caused me great concern. But ultimately I have come to the conclusion that the failure to inform B.A.C. of the proposed increase in the applicable rate was not due to inadvertence. In so doing I have had regard to what was said by the High Court in Rejfek v. McElroy (1965) 112 C.L.R. 517 as to the necessity for there to be "an actual persuasion of the mind" before a finding of fraud is justified. In so concluding I have been influenced by the timing of the decision to increase the applicable rate, and by the false evidence given at the trial by Heffernan and Hollamby in an attempt to provide a reason or justification for the increase. It is not necessary for me to make a finding on the evidence as to why the increase was made, but I must say that if it were necessary for me to do so I would find on the balance of probability that Heffernan and Hollamby were influenced by the fact that Kaloo was not in a position to settle the foreign exchange losses totalling AUD2,331,169.65 and in consequence the risks N.M.R.B. was taking in proceeding with the loan facilities were significantly greater than originally contemplated in September. B.A.C. was not told of the increase in the margin because N. M. R. B. wanted to keep from it knowledge of the dramatic change in Kalo.o' s financial position. As I have previously said, the most essential term (if one may use such an expression) from B.A.C. 's point of view was that providing for its profit in return for its accepting the risks. It was accepting potential liability to pay millions of dollars, and its return for agreeing to participate in that way was 0.6 per cent of the total margin of 1.25 per cent. N.M.R.B. was -- 69 of 86 -- 67 aware that B.A.C. considered that its margin was "fine'', and I am satisfied that at all material times N.M.R.B. was aware that any variation in the total margin, or any variation in the risk associated with Kaloo, would have affected B.A.C.'s decision to enter into the transaction. It is always difficult to decide how a party may have reacted in changed circumstances - it is really speculation - but nevertheless I am of the view that one cannot ignore Jacob's evidence that if he had been aware of the increase he would not have wished B.A.C. to proceed with the transaction. When the contract documents were submitted to B.A.C. for execution it was known to N.M.R.B. that the applicable margin to which it was entitled under the facility it had implemented with Kaloo was 1. 35 per cent, yet the papers submitted expressly referred to an applicable margin of 1.25 per cent. N.M.R.B. at that time was aware that the documents submitted were false in that they did not truly reflect the position as it existed between N. M. R. B. and Kaloo. Further N. M. R. B. knew that the false representation was as to a matter which B.A.C. regarded as significant, if not essential, to its entering into the transaction. As I have already said I am satisfied that the true position was deliberately withheld from B.A.C. because N.M.R.B. did not wish to disclose its knowledge as to the increase in the risk associated with proceeding with the facilities to Kaloo. In all the circumstances I have come to the conclusion that N.M.R.B. was induced to enter into the Agreement in consequence of fraudulent misrepresentation by N.M.R.B. In so deciding I have had regard to what was said by Wilson J. in Gould v. Vaggelas (1985) 157 C.L.R. 215 at 238-9 and -- 70 of 86 -- 68 by Lockhardt J. in Henjo Investments at 96. This was a commercial decision taken by B.A.C. and the level of the margin available to it as compared with the margin charged to the borrower was a material consideration. In those circumstances the representations as to the applicable margin were clearly matters which induced B.A.C. to enter into the transaction. It is true that the Agreement defines the "Loan Agreement" as the offer dated 3rd September, 1986 from N.M.R.B. to Kaloo and accepted by the latter, and includes "the same amended, supplemented, restated or varied from time to time". It was argued by Mr. Hughes that properly construed the Agreement recognised that the "Loan Agreement" could be amended prior to the Agreement being executed. That may well be so, but in my view for such to be binding on B.A.C. that company would have to have had notice of the variation. It would be ludicrous, in my view, bearing in mind the provisions of clause 4(f)(i) of the Agreement, to say that the rate of interest could be varied without the knowledge of the risk participant prior to execution of the Agreement, but that could not be done thereafter. I have already on a number of occasions referred to the fact that the facilities were drawn down on 26th November, 1986, that is approximately one month before the Agreement was executed. The facilities as drawn down provided for an applicable margin of 1 .35 per cent, that being a different margin to that specified in the documents forming part of the Agreement. In the absence of knowledge at the time of execution, B.A.C. cannot by executing the documents become a risk participant with respect to a facility having material terms different to that specified in the -- 71 of 86 -- 69 Agreement. It is futile, in my view, N.M.R.B. submitting that B.A.C. would have signed the Agreement even if they had been aware of the material variation. That is pure speculation. The simple fact of the matter is that the loan facility evidenced by the draw downs on 26th November, 1986 on the terms relating thereto, was materially different from the "Loan Agreement" with respect to which B.A.C. agreed to become a risk participant by executing the Agreement on 24th December, 1986. I conclude that the transactions were materially different because there was a significant difference in the applicable margin. It follows that B.A.C. has made out a case for a declar~tion that it has no liability under the Agreement because the facilities entered into between N.M.R.B. and Kalod, as varied by the increase in the applicable margin, were not the facilities the subject of the Agreement. I am also of the view that the failure by N.M.R.B. to notify B.A.C. of the material change in the applicable margin rendered the representation that B.A.C. was receiving 0.6 per cent out of a total margin of 1.25 per cent untrue, and in the circumstances of the case that constituted "misleading or deceptive" conduct within s. 52 of the Trade Practices Act. There is no doubt that the letter of 10th October, 1986 represented to B.A.C. that the purpose of the AUD Credit Facility in the sum of AUD4.5 million was to enable Kaloo to pay for the modernisation of the Lutwyche Shopping Village. The evidence suggests that B.A.C. was not informed that prior to October 1986 work had in fact commenced on that project, but no point was made of that during the trial. Indeed one would think that when -- 72 of 86 -- 70 Harrison visited the site on 17th October there would have been some indication that such work was in progress. But the point taken by B.A.C. was restricted to the proposition that on draw down some $811,610.89 was utilised to defray foreign exchange trading losses due for payment on 26th November, 1986; therefore it was said there was a misrepresentation as to the proposed use of those funds. But as I have already pointed out, prior to 26th November 1986, progress payments totalling $3,256,297.81 had been made by having recourse, inter alia, to funds in the money market account. All of the draw down of $3,256,297.81 from the AUD Credit Facility on 26th November, 1986 was effectively utilised to satisfy payments due to that date for work carried out on the modernisation of the Lutwyche Shopping Village. The $811,610.89 reimbursed the money market account for withdrawals made to meet progress payments. Given that analysis it is not correct to say that part of the AUD Credit Facility was used by Kaloo in part payment of foreign exchange trading losses. The representation was that proceeds of draw down on that facility would be utilised to meet the cost of modernisation of Lutwyche Shopping Village, and that is in effect how the whole of the AUD4. 5 million was applied. The alleged misrepresentation is not made out. If I be wrong in arriving at that conclusion, I must say that I would be positively persuaded on the evidence that there was no fraud associated with the conduct of N.M.R.B. in that regard. The responsible officers of N.M.R.B. clearly believed that the amount of the draw down could be applied as it was -- 73 of 86 -- 71 without there being any departure from the purpose represented to B.A.C. Next, B.A.C. allege misrepresentation with respect to Kaloo's foreign exchange exposure. I have already indicated a finding that B.A.C. was aware, at least by 17th October when Harrison visited the Lutwyche Shopping Village site, that Kaloo was involved in hedging transactions but not speculative trading in foreign currency. But I am also satisfied that prior to entering into the Agreement B.A.C. was aware of other foreign exchange exposure, in particular the Westpac account. Ultimately I have come to the conclusion that the letter of 8th December, 1986 from B.A.C. to N.M.R.B. relating to Kaloo's foreign exchange exposure was directed to exposure under the Eurocurrency facility with respect to which B.A.C. was to become a risk participant. In other words, I am satisfied that B.A.C.'s expressed concern was to put a cap on its exposure under the Eurocurrency facility, and was not intended to have any wider implications. One of the obvious risks which B.A.C. accepted by entering into the Agreement was that Kaloo would at some future time during the currency of the Agreement accept further obligations with some other banker; it could not prevent foreign exchange trading in the future. All B.A.C. could do was limit its exposure under the facility in question, and that is what it did. To that extent I am not satisfied that there was any misrepresentation by N.M.R.B. with respect to Kaloo's foreign exchange trading exposure. But that does not meet the argument advanced by B. A. C. with respect to Kaloo' s foreign exchange trading account with N.M.R.B. as at the date the Agreement was -- 74 of 86 -- 72 signed. The issues raised by that submission can best be considered in conjunction with the allegations relating to the representation that Kaloo had a "good track record", and that the risk was a "minimal" one for B.A.C. I have already made findings of fact as to what was said by Heffernan with respect to the "good track record" and the risk being "minimal". In considering the impact of those statements it is, in my view, of critical importance to bear in mind the reason proffered by N.M.R.B. for seeking a risk participant. I readily accept the evidence that a prudent, reasonable banker would approach a proposal in a different light where it was put forward on the basis that risk participation was only being sought because Reserve Bank guidelines necessitated that there be a sell down of part of the risk. I accept Jacob's evidence when he said that the source of introduction of the business would always be an important factor, and was in fact so in this case. When Heffernan made the statement which he did about Kaloo' s "good track record" I accept that he believed what he said was true, and in fact at the time it was made that statement was arguably true. I have no hesitation in accepting that at the time when he made the statement about the risk being "minimal" he believed it to be true, and in fact statement was true at that time. There was therefore no fraud in making those statements early in October 1986. The problem arises because by the time the Agreement was executed those statements were no longer true. Indeed ih evidence Heffernan admitted that by December it could no longer -- 75 of 86 -- 73 be accurately said that Keefe had a "good track record". It is also correct, as contended by Mr. Hughes, that the expression "good track record" primarily relates to the past - it is an assessment of record to the date of making the statement. But some two months after the statements were made, and about a month before the Agreement was executed, Kaloo was called upon to settle foreign exchange trading losses amounting to AUD2,331,169.65 and could not do so. It will be recalled that N.M.R.B. agreed to a deferral of payment of AUD1,374,724.84 of those losses until 30th April, 1987 on certain conditions, including the deposit of $50,000.00 per month in a money market account and the giving of additional security. Notwithstanding the fact that by letter dated 5th November, 1986 Kaloo was asked to comply with those conditions, the additional securities had not been provided, and the $50,000.00 due on 15th December, 1986 had not been paid, prior to the execution of the Agreement by B.A.C. I have already held that the decision by N.M.R.B. not to disclose the increase in the applicable margin to B.A.C. was motivated by the desire to withhold knowledge of the foreign exchange trading position from B.A.C. But the question for my consideration here is whether or not N.M.R.B. was under a positive obligation to disclose to B.A.C. the position with respect to the foreign exchange trading losses. Ultimately, but not without some hesitation, I have come to the conclusion that it was. The proposal for risk participation was put forward on th~ basis that Kaloo was seen by N.M.R.B. to be a good risk and the -- 76 of 86 -- 74 only reason for seeking a risk participant was the fact that the proposed loan facility went beyond relevant guidelines. In that context the express statements made by Heffernan as to the "good track record" and "minimal" risk were made. Accepting, as I do, that there was an obligation on B.A.C. to make its own independent enquiries, and that statements in the letter of 10th October were made by N.M.R.B. with a disclaimer of liability, nevertheless the altered position of Kaloo with respect to foreign exchange trading losses was peculiarly within the knowledge of N.M.R.B. from mid-November 1986. Having put forward the proposal in the letter of 10th October, and having made the statements which it did as to Kaloo's then credit reputation, N.M.R.B. was, in my view, under an obligation to disclose any change of circumstances peculiarly within its own knowledge which occurred prior to the execution of the Agreement late in December 1986. In my view no reasonable man, nor even a reasonable banker, could contend that the inability to pay $2,331,169.65 was irrelevant to the risk participation agreement relating to the advance of additional millions of dollars. That is clearly so if I am right in holding, as I have done, that the inability to pay the $2,331,169.65 was a factor in producing the increase in the applicable margin from, 1.25 per cent to 1.35 per cent. It was contended on behalf of N.M.R.B. that it was under no common law duty, nor duty imposed by the Trade Practices Act, to make such disclosure. I do not find the argument convincing primarily because it ignores the particular circumstances of this case to which I have recently referred. The critical matters, in my opinion, are that representations were made which to the -- 77 of 86 -- 75 knowledge of the representor had become false, and further a situation had arisen which to the particular knowledge of N.M.R.B. had altered the basis on which it had put the proposal to B.A.C. In those circumstances it was, in my view, under an obligation to disclose the true position to B.A.C. There is no doubt that N.M.R.B. knew that B.A.C. was unaware of the true position with respect to the foreign exchange losses incurred by Kaloo, and there is equally no doubt that N.M.R.B. knew that if B. A. C. was aware of the true position its decision on the question whether or not to enter into the Agreement could well be different. In those circumstances, in my view, there ~as a misrepresentation by N.M.R.B. as to the true position with respect to a matter which was a relevant inducement to B.A.C. in deciding whether or not to enter into the Agreement. Further, I am positively persuaded that N.M.R.B. refrained from disclosing the true position because it was aware that if the true facts were known B.A.C. may well not enter into the Agreement. Separately and distinct from my finding with respect to fraudulent misrepresentation as regards the variation in the marginal rate from 1. 25 per cent to 1. 35 per cent, I am positively persuaded that N.M.R.B. f:.. audulently withheld information peculiarly within its knowledge as to the financial position of Kaloo so as to induce B.A.C. to proceed with its previously stated intention of entering into the risk participation agreement. My findings in relation to those matters would, of necessity, also result in a conclusion that in those particulars -- 78 of 86 -- 76 N.M.R.B. was guilty of "misleading or deceptive" conduct within s. 52 of the Trade Practices Act. The fourth basis as outlined above on which B.A.C. claims relief is that there has been a breach by N.M.R.B. of an essential condition being either a breach of clause 4(f) of the Agreement or a breach of clause 5 of the Agreement. There is now ample authority as to what constitutes an essential term of an agreement for these purposes; one only need refer to Tramways Advertising Pty. Ltd. v. Luna Park (N.S.W.) Ltd. (1938) 38 S.R. (N.S.W.) 632, Associated Newspapers Ltd. v. Bancks (1951) 83 C.L.R. 322 at 337, D.T.R. Nominees Pty. Ltd. v. Mona Homes Pty. Ltd. (1977) 138 C.L.R. 423, and Shevill v. Builders' Licensing Board (1982) 149 C.L.R. 620. In determining what is an essential term one must have regard to the nature of the contract in question and the terms thereof. Here the Agreement is a somewhat unusual one. The risk participant in terms of the Agreement has very few rights indeed, other than the right to receive the risk participation fee during the currency thereof. The only protection given to the risk participant is that which comes from clauses 4 and 5; the ground rules cannot be altered without the consent of the risk participant, and the risk participant must be kept fully informed of what is happening, particularly as to defaults on the part of the borrower. But the lead banker, here N.M.R.B., has the day to day control of the account, and even if the borrower is in default the risk participant can only take action with the consent of the lead banker. It is for those reasons that I am of the view thatj looked at from the point of view of B.A.C., clauses 4 and 5 were -- 79 of 86 -- 77 of essential importance. A participant would, in my opinion, only enter into the Agreement if there was an assurance, express or implied, that the lead banker would comply with the obligations imposed on it by clauses 4(f) and 5 in particular. That demonstrates, in my view, that clauses 4(f) and 5 were essential terms of this Agreement. B.A.C. alleges that those essential terms were breached by N.M.R.B. taking without consent mortgages and caveats over the Southport land, and also in releasing those mortgages. As already pointed out the demand from N.M.R.B. that Kaloo grant those securities was made prior to the Agreement being executed, and in those circumstances it is difficult to conclude that the mere taking of those securities, even if in consequence there was a reduction in the worth of the securities otherwise available to B.A.C. under the Agreement, constituted a breach of clause 4(f). The problems confronting B.A.C. in that regard are compounded when one examines the contention that there was also a breach of clause 4(f) by the release of those securities in the circumstances outlined above. I have already recorded in some detail what happened when the Southport land was sold. Certainly B. A. C. was informed on 4th November, 1988 of the proposed disposition of the sale proceeds and it does appear that, at least, B. A. C. acquiesced in the proposal which included the restoration of the security deposit account to a level slightly in excess of $1 million. Shortly afterwards, on 19th January, 1989, N.M.R.B. sought approval from B.A.C. to set off that amount against accrued interest and fees under the loan facilities. As already noted B.A.C. agreed to that. -- 80 of 86 -- 78 Mr. Hughes contended that by so agreeing to the use of the proceeds of sale of the mortgaged Southport property there had been an election by B. A. C. so that thereafter it could not contend that the granting of the mortgages over the Southport land and the use thereof to satisfy foreign exchange trading debts constituted a breach of an essential condition, namely clause 4(f) of the Agreement. He referred in that regard to Tropical Traders Ltd. v. Goonan (1964) 111 C.L.R. 41, Mehmet v. Benson (1965) 113 C.L.R. 295, Fuller's Theatres Ltd. v. Musgrove (1923) 31 C.L.R. 524, and Sargent v. A.S.L. Developments Ltd. (1974) 131 C.L.R. 634. It does seem to me that, at a point of time after B.A.C. was aware of the major foreign exchange trading losses which Kaloo had to meet, it acquiesced in N.M.R.B. having recourse to securities over the Southport land in order to satisfy not only those losses but also to reduce the liability under the facilities granted on 3rd September, 1986. I would conclude on the whole of the evidence that B.A.C. was precluded from contending in these proceedings that there had been a breach of an essential term with regard to the mortgages over the Southport land. B.A.C. also contended that the conduct of N.M.R.B. in charging Kaloo an applicable margin rate of 1 . 35 per cent without notice of the increase being given to B.A.C. constituted breach of clause 4(f) of the Agreement. That may well be so, but given the findings I have already made with respect to the increase in margin it is not necessary to take this contention further. -- 81 of 86 -- 79 So far as the allegations of breach of clause 5 of the Agreement are concerned I have arrived at the following conclusions. The failure by Kaloo to pay interest in the sum of $256,782.81 due on 22nd April, 1987 was technically a default; that amount was not paid until 27th April, 1987. But the circumstances surrounding that late payment were somewhat unusual. Money was due to Kaloo from a company of some substance and for reasons which I need not go into that amount was not paid on the due date. Kaloo informed N.M.R.B. of the circumstances, and the explanation was acceptable to the bank. In all the circumstances the payment of that interest some five days late was not a major default and clearly any reasonable banker would have waived default as in fact N.M.R.B. did. The only significance, in my view, of the evidence in relation to this allegation is that it demonstrates the attitude of N.M.R.B. towards B.A.C. Clearly, as a risk participant, and in accordance with the terms of the Agreement, B.A.C. was entitled to be kept informed of such matters. This evidence indicates, as is my conclusion on the whole of the evidence, that N.M.R.B. was not disposed to keep B.A.C. fully informed of relevant matters in accordance with the obligations imposed upon it by clause 5. When one has regard to the provisions of the Standard Terms and Conditions ( to which I have ref erred above) , Kaloo was clearly in default under the facilities evidenced by the letters of 3rd September, 1986 when it failed to meet its obligations to pay losses on its foreign exchange trading. Any default in meeting an obligation with respect to foreign exchange trading -- 82 of 86 -- 80 constituted a default pursuant to those Standards Terms and Conditions and therefore constituted a default under the facilities evidenced by the letters of 3rd September. The failure to pay the foreign exchange losses due on 26th November, 1986, and the failure to pay the $50,000.00 due on 15th December, 1986 occurred prior to the execution of the Agreement. Therefore such matters are relevant only to a consideration of whether or not there was fraud or other misleading conduct on the part of N.M.R.B. prior to the execution of the Agreement by B.A.C. But, for example, the failure to pay the foreign exchange losses deferred for payment until 30th April, 1987, which then amounted to AUD1,471,049.74, was in a different position. It must be remembered that by then Kaloo had not given the demanded security over the Southport land and there is no doubt, in my view, that as at that date Kaloo was in default to N.M.R.B. on a number of grounds. There is also no doubt that it was obvious to N.M.R.B. by that date that Kaloo was in a precarious financial position. In my view the failure by N.M.R.B. to give B.A.C. notice in April 1987 of those matters, as it was obliged to do in terms of clause 5, constituted a serious breach of the obligations it owed B.A.C. I have already made findings with respect to the failure of N.M.R.B. to require Kaloo to comply with the obligation to reduce progressively the exposure under the Eurocurrency option in other than AUD. Kaloo's failure to meet that requirement of the Loan Agreement was a matter which N .M.R.B. was obliged to notify B.A.C. under clause 5 of the Agreement but it failed to do so .. -- 83 of 86 -- 81 Given the various matters of which in my view notice should have been given by N.M.R.B. to B.A.C. pursuant to clause 5, I have come to the conclusion that there was a total disregard by N.M.R.B. of its obligations under that clause. Whereas it may well be that any particular one of the instances would not of itself constitute breach of an essential term, when one has regard to the overall situation there is no doubt, in my mind, on the evidence that N.M.R.B. totally disregarded its obligation to keep B.A.C. informed of defaults by Kaloo. As pointed out above it was only by giving such notice that B.A.C.'s position was protected. I would therefore conclude, if I was not prepared to grant relief on other grounds, that there had been breach of an essential term by N.M.R.B. which would entitle B.A.C. to accept that the Agreement had been repudiated. As I have already mentioned, B.A.C. can no longer rely on what happened with regard to the money market account as constituting a breach of an essential term because of its conduct in failing to rescind on that ground after notice of what had happened was received, and because it thereafter agreed to the disposition of those funds. Such conduct constituted an election not to rescind on that ground; given the authorities on election ref erred to above, counsel for B. A. C. was prudent in not pressing that contention. I have already pointed out that B.A.C. did not become aware of the increase in the applicable margin from 1.25 per cent to 1.35 per cent until late May 1989. It was shortly thereafter 1 namely on 3rd July, 1989, that it rescinded the Agreement; the -- 84 of 86 -- 82 writ was issued on 4th July. Until it became aware of the increase in the applicable margin it could not be said, in my view, that B.A.C. was aware of all material facts, so that its conduct in accepting risk participation fees up until March 1989 did not constitute either an election or waiver so that it lost the right to rescind on the grounds I have indicated. Clause 8, in the light of the authorities I have referred to above, does not afford a defence to the findings of fraudulent misrepresentation nor to the findings of "misleading or deceptive" conduct. Further, I am not satisfied that a defence based on the limitation provisions found in the Trade Practices Act has been made out. In the circumstances I am prepared to make a declaration that B.A.C. has duly rescinded the Risk Participation Agreement. Though it may not strictly be necessary in the circumstances I am also prepared to make a declaration that B.A.C. is not liable to make any payment to N.M.R.B. pursuant to the Risk Participation Agreement. I would also make an Order pursuant to s. 87 of the Trade Practices Act 1974 declaring that the Risk Participation Agreement is void. COUNTER-CLAIM BASED ON CLAUSE 8 OF AGREEMENT It will be remembered that clause 8 of the Agreement contained an acknowledgment by B.A.C. that it "has not relied upon information or advice or any appraisal of or investigation into the financial condition, credit worthiness, affairs, status or nature of the Borrower or any Surety provided or effected by the Bank". The allegation made in this counter-claim is that N .M.R.B. was induced to enter into the Agreement by that -- 85 of 86 -- 83 representation, and that N .M.R.B. has now suffered lu:s~~~-;;,"' damage because of the breach by B.A.C. thereof which amounted to "misleading or deceptive" conduct within s. 52 of the Trade Practices Act. Notwithstanding some evidence given by Hollamby, I am not satisfied that N.M.R.B. was induced to enter into the Agreement by such representation. As I have already pointed out there was reluctance on the part of other financial institutions to become involved in a sub-funding arrangement, and I am by no means satisfied that N.M.R.B. would have readily found another risk participant - particularly if the position with respect to Kaloo's foreign exchange trading losses was known. But in the circumstances it is sufficient for me to record a finding that N.M.R.B. did not rely on any representation derived from clause 8 in entering into this Agreement. ORDERS I order and declare that Bill Acceptance Corporation Limited has duly rescinded the Risk Participation Agreement. Further, I order and declare that Bill Acceptance Corporation Limited is not liable to make any payment to National Mutual Royal Bank pursuant to the Risk Participation Agreement. I further order and declare pursuant to s. 87 of the Trade Practices Act 1974 that the Risk Participation Agreement is void. I dismiss the counter-claim with costs. I order that the defendant pay the plaintiff's costs of and incidental to this action to be taxed. -- 86 of 86 --