The Quade Appeal on Decision vs CBA 4

4.  The words "Plus any exchange fluctuations" were in the hand writing of Mr
Plumb. CTB stands for Commonwealth Trading Bank. The use of expressions like
"... Australian corporates ... (mainly exporters with foreign currency income)
..." and the apparent gaps in the bank's knowledge of the appellants' personal
circumstances, including whether they had "offshore income in the borrowed
foreign currency" to enable them to cover currency fluctuations, are
significant.

5.  Further information was provided by the bank in its letter of offer of a
foreign currency loan dated 24 October 1984. Again the letter appears to
contain material created for customers other than the appellants, although
some of it is obviously personal to them. The principal part of this letter
(the Offer) was as follows:
    Dear Mr  Quade 
    APPLICATION FOR FOREIGN CURRENCY LOAN WITH BILLS
    DISCOUNT OPTION
    The Commonwealth Bank of Australia is pleased to
    offer you a foreign currency loan with a bills
    discount option for AUD600,000 to assist with the
    purchase of a 604ha farm property "Euronga".
    Approval of this accommodation is on the Bank's
    usual terms and conditions applicable to this type
    of facility and will afford you the option of
    raising funds locally by way of a bills discount
    facility or in a foreign currency by way of a
    foreign currency loan.
    The principal terms and conditions of the facilities
    are:
    ....
    FOREIGN CURRENCY LOAN
    The loan may be raised in any freely convertible and
    readily available major foreign currency (eg United
    States dollar, Japanese Yen, Swiss Francs, Sterling
    and Deutschmarks). Provision will exist for the
    loan currency to be switched at the end of each
    interest period.
    ....

6.  Provision was then made for various requirements such as 'fees',
'security', 'repayment arrangements', 'front end fee', 'stamp duties' and
'draw down'. The Offer went on:
    EXCHANGE RISK
    On the understanding that the exchange risks
    associated with borrowings in foreign currencies are
    fully recognised and that any adverse exchange rate
    movements are for the borrower's account, the Bank
    is prepared to allow the loan to proceed on an
    unhedged basis.
    However, in these circumstances, it is the Bank's
    normal practice to require the borrower to regularly
    meet any sizeable increases in the Australian dollar
    value of the loan resulting from exchange rate
    movements in order to maintain a satisfactory
    security/debt ratio. In this regard, the Bank will
    require you to meet any increase in excess of 5% in
    the Australian dollar value of the loan. These
    adjustments will take place at the end of each
    interest period or at the expiry of twelve months
    from drawdown at the Bank's option should the
    interest period arranged for you exceed twelve
    months.
    As you are aware exchange risks may be eliminated at
    any time during the life of the loan by entering
    into a hedge contract and the Bank would be happy to
    provide information in this regard on request.
    WITHHOLDING TAX
    Withholding tax must be met by you unless a Section
    128H Exemption Certificate is produced to the Bank
    before the first interest payment is made.
    Such a certificate must be obtained after each
    drawdown/renewal and it is your responsibility to
    produce this certificate to the Bank in order to be
    exempted from 10% withholding tax on the interest payment.
    However, we make the observation that in the light
    of recent tax law changes, it is now unlikely that
    an exemption will be available to you. We suggest
    you contact your Accountant, once drawdown has been
    effected, in order that he may put the application
    in train.
    We again point out the potential risk involved in
    borrowing in a foreign currency without covering
    your foreign currency exchange exposure and would
    like to remind you that any adverse exchange rate
    movements are for your account. As you are aware,
    your foreign currency exchange exposure may be
    eliminated at any time during the life of the loan
    and in this regard we suggest you make regular
    enquiries about foreign currency movements and the
    price for hedging the loan amount outstanding.
    Similarly, we stress the importance of your
    thoroughly investigating with your accountant (tax
    consultant) the ramifications of foreign currency
    borrowings particularly the tax treatment of any
    exchange rate profits/losses.

7.  Again the bank's apparent lack of knowledge of the appellants' capacity to
meet periodic currency losses and their ability and arrangements to cover
adverse exchange exposure, matters which it emphasised in the Offer, is
instructive and of concern. Moreover, the very first paragraph under the
heading "EXCHANGE RISK' reveals a significant flaw in the bank's approach to
the loan. How could the bank for its part have the "understanding" that the
appellants "fully recognised" the exchange risks if the bank did not know, as
was apparently the case, that the appellants had read and comprehended the
Advice and other documents shown to them and understood the discussions they
had held with the bank's officers, and what actions and decisions they had
taken on them?
The judgment at first instance

8.  Justice Morling accepted that the respondent assumed the responsibility of 
giving advice to the appellants in relation to foreign currency loans, and
agreed with a submission of the appellants that it "extended to fully and
properly explaining the risks involved" (p  35 of the judgment). However, his
Honour held that the appellants had a "real and sufficient appreciation of the
risk he was undertaking in borrowing in Swiss francs" (p  33), and concluded
that the respondent "sufficiently advised the applicants of the nature of the
proposed transaction and the risks involved" (p  35). The print of the
judgment below appears to have a typographical error of some relevant dates
relating to the loan.
Appellants' Case

9.  In the first place, the appellants sought a reversal of the trial result
by challenging various of the trial Judge's conclusions of fact. Standing
alone on the evidence at trial, this request must fail. It is not to the point
that an appellate court might have taken a different view to the trial Judge
on some of the evidence as it appears in the transcript.

10.  In my view an appellate court ought not to substitute alternative
conclusions or findings of fact made at first instance when, as here, it has
not seen or heard the witnesses, and the conclusions of the trial Judge were
open on the evidence and were based on assessments of credibility requiring at
least the weighing of oral and written evidence on important factual issues:
Warren v Coombes (1979) 142 CLR 531; S.S. Hontestroom v S.S. Sagaporack (1927)
AC 37 at 47 (Lord Sumner) approved in Abalos v Australian Postal Commission
High Court 15 November 1990 (McHugh J at page 14) as yet generally unreported
except for (1990) 21 Leg Rep 6 at 9.

11.  However, the result at trial was placed under more significant pressure
by the production by the respondent, on the appeal before this Court, of a
large number of documents which by oversight or negligence were not discovered
by the respondent at the time of the trial despite an order for discovery.
They were referred to as the `G' documents and largely consist of internal
memoranda of the respondent. The appellants moved the Court on notice in this
appeal to introduce these documents as further evidence under section 27 of
the Federal Court of Australia Act.

12.  The appellants submitted that the `G' documents portray the respondent as
vigorously promoting foreign currency loans at the time it was advising the
appellants, to the extent and with the result that they establish deception
within the meaning of section 52 of the Trade Practices Act, and a failure to
take adequate care in its advice to the appellants as its customers. The
appellants said that the documents emphasise only the selling of the concept,
not the erection of any safeguards. The respondent conceded, as is clearly the
case, that the `G' documents certainly evidence an enthusiasm at the relevant
time to expand the bank's commercial opportunities by promotion of this type
of loan.

13.  The appellants further argued that the `G' documents indicate the
respondent's knowledge, at the time it was advising the appellants about and
offering them the loan, that foreign currency loans required 'hedging', i.e.
insurance against undue falls in the value of the local as against the
borrowed currency, and constant monitoring by an expert. Furthermore, these
documents were said to show that the respondent knew the dangers of foreign
currency borrowing by people such as the appellants and that it should have
made itself much more aware of the appellants' financial circumstances and
have told the appellants considerably more than it did.

14.  As Morling J. was denied the opportunity of doing so, we have been asked
to assess the Advice and the Offer, and the rest of the evidence at trial, in
the light of these documents. On the basis of these and other suggested
features of the 'G' documents, the appellants submitted that Justice Morling
would have come to the opposite conclusion.

15.  The 'G' documents were not subjected to any testing before us, and of
course none of the existing witnesses and none of the documents' authors or
readers have been subjected to examination or cross-examination on them. The
documents have not been weighed against the evidence presented at trial.
Although the respondent did not use the opportunity given by Order 52 rule
36(7) of the Court's rules to address the conclusions to which the documents
ex facie appear to lead and did not suggest before us that any evidence was
available to refute these conclusions, it did suggest that in their context,
alternative interpretations were appropriate.

16.  Thus the appellants did not submit that this Court should order a verdict
in their favour, but said that on the basis of the 'G' documents, a new trial
should be ordered. They suggested that the relevant test to be employed in
determining whether the introduction of new evidence warrants the granting of
a new trial is whether the new evidence is likely to have produced a different
result. The appellants described the respondent's suggested test of a "high
degree of probability" of a different result as inappropriate in this case
because the absence of the documents at the time of the trial was due to the
fault of the respondent. They said that any test employed should be flexible
enough to permit the overriding criterion of doing justice. Neither party
seemed to suggest that the former onerous test of a virtual certainty of a
different result was applicable here: see for example Orr v Holmes (1948) 76
CLR 632 at 640-2; Wollongong Corporation v Cowan (1955) 93 CLR 435 at 444.
The 'G' documents

17.  The 'G' documents appear to establish that from the early 1980s, the
respondent decided to seek foreign currency loans to retain its competitive
position in Australian banking and because of the extra profits they generated
in comparison with onshore lending. There was considerable concern about the
bank's lack of liquidity at the time and this area of business was thought
likely to contribute urgently to alleviating that problem. The respondent
determined on a major marketing of this aspect of its services.

18.  The purpose of an unsigned memorandum of 16 March 1982 to the general
manager of the respondent was "to suggest action that will promote greater use
of the facility" of offshore lending. One of the reasons was stated to be:
"... we need to have as wide a range of the facilities as possible to match
the competition". In a further undated memorandum of the same year the
respondent prepares for a "promotional drive" to "expose as many people as
possible to this type of lending" (my underlining).

19.  While the documents discuss the issue of 'hedging' such loans, they point
out that fully hedged foreign currency loans cost about the same as onshore
loans. The obvious conclusion that this may well serve to dissuade several
borrowers from such loans and therefore deprive the bank of the profits it
hoped to make from them, did not lead the bank actually to advise against
hedging. At the same time, the risks in not hedging, especially in the case of
commercially unsophisticated borrowers, did not deflect the bank from its
aggressive marketing intentions for this type of loan with such persons
amongst others.

20.  It seems to me that this type of situation may well give rise, in an
appropriate case, to an analysis of whether the true legal relationship
between at least many banks and many customers involves some element of trust.
I shall return to this briefly later but to me the inescapable inference of
the 'G' documents is that the loans were to be marketed primarily for the
bank's benefit, not the client's advantage, at least wherever these two
interests were or may be in competition.

21.  It is true that the documents do emphasise the need for detailed
information and explanations to be given to the clients concerning the risks
of unhedged loans due to unpredictable and unexpected exchange rate
fluctuations. In fact they expressly and impliedly encouraged bank officers
and employees to give advice to clients about various aspects of such loans.
No doubt the Advice in this case and the discussions held by bank officers
with these appellants arose from such encouragement. However, the strong if
not overwhelming flavour of the documents was in firmly advantaging the bank
through charging fees, and in fully protecting it by ensuring that adequate
security, at whatever risk to the clients, was in place. The obvious clash of
interests between the bank and its clients was strongly skewed towards the
bank. There was no suggestion in any of the documents that this major conflict
should itself be declared and explained to clients as a most important reason
for the bank to decline to give any advice at all and to recommend and
encourage them to seek and obtain competent independent advice.

22.  Many of the relevant documents to these effects are set out in some
detail in the reasons for judgment of Justice Bruchett which I have found most
helpful in finalising my own conclusions. While with his customary
completeness and assiduity, his Honour points out that even his selection is
not exhaustive of the documents that are influential here, he has to my mind
chosen a very fair and representative selection of the material for present
purposes. There is therefore no point in my repeating them here.

23.  The 'G' documents show, as is well known, that in December 1983, the
Australian Government released the Australian dollar from exchange rate
controls and allowed it to "float" on international money markets. The
documents reveal that in the ensuing 12 months, the value of the Australian
dollar remained relatively steady against most foreign currencies. However, in
early 1985, the dollar's value dropped sharply against all major overseas
currencies. It subsequently continued, if a little more sporadically, to fall
even further. The documents show that one view in the bank near the end of
1985 was that while the Australian dollar would be devalued further against
the Swiss franc in the near future, some degree of recovery could be expected
in the medium to longer term. Although this written view post-dates the
appellants' loan, it accords with and may well corroborate evidence given at
the trial by or on behalf of the appellants that the respondent's officers had
often expressed confidence in 1984 that any losses due to currency movements
from time to time would soon be made up.

24.  The documents also seem clearly to demonstrate a realisation that not
only did many of its customers not appreciate the risks involved in unhedging
loans, but the bank's own officers were ill equipped to advise potential
borrowers about these risks. The content and context of the documents again
permit some which came into existence after the appellant's loan to have
relevance here, inter alia because they are speaking cumulatively of the
experience of several years of marketing the loans.

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