CATCHWORDS

 

CONTRACT - Breach of Contract - breach of written "bonus" agreement - whether express term of employment - whether bonus scheme was a flexible arrangement - whether revenue based incentive scheme could be unilaterally varied from time to time - whether bank entitled to allocate profit way from profit centre - whether failure to dispute or protest variation meant applicant not entitled - whether entitled to believe difference in incentive payments would be paid - application of cancellation clause.

 

BANKING - foreign exchange - swap transactions - bank's practice - dealers' commission

 

TRADE PRACTICES - breach of s 52 of Trade Practices Act.

 

Trade Practices Act 1974 (Cth) s 52

 

Prenn v Simmonds [1974] 1 WLR 1381

 

Utica City National Bank v Gunn (1918) 118 NE 607

 

Reardon Smith Line ltd v Hansen-Tangen [1976] 1 WLR 989

 

Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337

 

 

ALISON ETHELL v

SOCIETE GENERALE AUSTRALIA LTD

 

No G99 of 1994

 

 

Tamberlin J

Sydney

13 November 1995

IN THE FEDERAL COURT OF AUSTRALIA)

NEW SOUTH WALES DISTRICT REGISTRY)    No. G99 of 1994

GENERAL DIVISION                  )

 

 

 

 

              BETWEEN:           ALISON ETHELL

                                  Applicant

 

 

 

              AND:               SOCIETE GENERALE

                                  AUSTRALIA LTD

                                  ACN 002 093 021

                                  Respondent

 

 

 

CORAM:        TAMBERLIN J

PLACE:        SYDNEY

DATED:        13 NOVEMBER 1995

 

                             

                    REASONS FOR JUDGMENT

 

Introduction

 

In her Amended Application, Alison Ethell ("the applicant") claims from Societe Generale Australia Limited ("SGAL"), the sum of $786,685 for debt, or alternatively by way of damages, for breach of section 52 of the Trade Practices Act 1974 (Cth), ("the Act"). There is a further alternative claim for breach of contract. Interests and costs are also claimed.

 

The applicant's case is that in August 1991 SGAL agreed to employ her in the capacity of Corporate Foreign Exchange dealer. She was employed in that capacity up to mid-January 1993 when she left to take up employment with Indosuez Australia Limited.

 

She commenced working for SGAL in late September 1991 having taken a short vacation on leaving Citibank Limited ("Citibank"), her previous employer.

 

The applicant contends that in January 1992 she agreed with SGAL that her remuneration, effective from 1 January through  December 1992, would include a monthly bonus of 2.5% of so much of the gross revenue earned by the Sydney Corporate Foreign Exchange Desk of SGAL, as exceeded the sum of $140,000.  In addition, she was also to receive a base salary of $40,000. This proceeding is concerned with the applicant's claim for unpaid bonus entitlements.  

 

The applicant claims that it was an express term of her employment with SGAL that all revenue earned by her from foreign exchange dealings with, or on behalf of Bank Negara Malaysia ("Negara") would be attributed to SGAL's Corporate Foreign Exchange Desk, Sydney ("Corporate Desk").

 

During the period 1 January 1992 to 29 June 1992, the applicant says that the gross revenue of the Corporate Desk totalled $5,955,989; that her bonus entitlement was therefore $148,899  but that she was only paid the sum of $94,402.96 leaving a shortfall of about $54,496.

 

In the period 30 June 1992 to 31 August 1992, the applicant claims that the gross revenue of the Corporate Desk, was in total $12,852,854; that her bonus entitlement was therefore $321,321 but that she was only paid $88,826 leaving a shortfall over that period of $232,494. 

 

During the period 1 September 1992 to 31 December 1992, the applicant claims that the gross revenue of SGAL's Corporate Desk, from foreign exchange dealings with or on behalf of Negara totalled $23,382,747; her bonus entitlement was therefore $584,568; and she received $84,875 leaving a shortfall of $499,693. 

 

The Amended Application also contains an alternative claim under s 52 of the Act on the basis that SGAL's Treasurer, Mr Francois Naude, made certain representations to the effect that he would attribute a portion of the revenue of Corporate Desk to other desks and departments, but that SGAL would make up to the applicant the equivalent of the reduction of her bonus resulting from such attribution of revenue.

 

Although, the representations alleged were referred to in final submissions, as bearing on the contract or debt claim, the separate claim for damages under s 52 of the Act, on the basis of representations was not pressed by the applicant.

 

The applicant's case is primarily founded on the bonus agreement effective from 1 January 1992 which she said remained in force through to December 1992. 

 

On and from 30 June 1992 SGAL, on the applicant's case, purported wrongly to allocate and record 75% of all revenue on forward currency deals and currency swaps involving Negara, to desks and departments of SGAL other then the Corporate Desk, (subject to minor accounts), when the revenue should have been allocated to that desk for the purpose of calculating her bonus entitlements.

 

Further, from 1 September 1992 to 31 December 1992, the applicant says SGAL wrongly purported to allocate and record 100% of the revenue on forward currency deals and swap transactions involving Negara to desks or departments other than Corporate Desk.

 

These purported allocations are alleged to constitute breaches of the bonus agreement between the SGAL and the applicant who had an entitlement as a member of Corporate Desk. As a consequence, the applicant's bonus entitlements are said to have been wrongly calculated on the revised understated figures, which led to a discrepancy in payments of bonus entitlements in the sum of $786,685.

 

It is common ground that SGAL agreed to employ the applicant as a Corporate Foreign Exchange dealer from 22 August 1991 and that it was a term and condition of the applicant's employment with SGAL, that she would be entitled to participate in a revenue-based incentive scheme.

 

SGAL contends that there were different versions of the bonus scheme involving the applicant, operative during 1992.  SGAL says that the terms of the scheme which were effective from 1 January 1992 to 28 June 1992 were set out in a document dated 9 January 1992 entitled "Corporate Foreign Exchange Desk Bonus Scheme".

 

SGAL says that the terms of the scheme which were in force from 29 June 1992 to 1 September 1992 were communicated by SGAL to the applicant in a document dated 26 June 1992, called "Memorandum".

 

Further, SGAL says that the terms of the scheme which were to take effect on and from 1 September 1992 to 31 December 1992 were communicated by SGAL to the applicant in a document dated 25 August 1992 entitled "Memorandum Bank Negara/STC Alcatel Transactions".

 

However, SGAL denies that there was ever any term, express or otherwise, of the applicant's employment, that all revenue earned by SGAL from foreign exchange dealings with or on behalf of Negara would be attributed to the Corporate Desk, Sydney.

 

SGAL denies, or does not admit, the balance of the applicant's allegations and says that SGAL owes no money to the applicant.

 

In substance, SGAL says that under the different bonus arrangements with the applicant, during 1992, it was entitled to attribute and or allocate revenue from foreign exchange dealings with Negara to other desks, departments or sections of SGAL, from time to time as it saw fit. SGAL's contention is that it had an absolute discretion to determine the profit centre to which revenue arising out of Negara transactions were to be attributed for bonus calculation purposes and that the applicant was not entitled to require all revenue from Negara transactions to be attributed to the Corporate Desk for bonus purposes.

 

Principal Participants

Alison Ethell - The applicant

 

David "Francois" Naude - Treasurer of SGAL since October 1991. Prior to that, from early 1991 to October 1991, he was Deputy Treasurer of SGAL. He had been head of foreign exchange at Citibank Limited during the period 1987 to early 1991 and the applicant had worked with him at that bank in the foreign exchange area from 1987 to early 1991.

 

Bernard Denis - ("Denis"), Managing Director of SGAL from July 1985 to January 1993, now a consultant in Paris.

 

Societe Generale Australia Limited - ("SGAL"), the respondent.

 

Societe Generale Paris  - ("SG Paris"), the Head Office of the Respondent.

 

Bank Negara Malaysia - ("Negara") - the Central Bank of Malaysia on behalf of which the relevant large currency transactions were carried out by SGAL during December 1991 through December 1992.

 

Nor Mohammed Jakcop ("Nor"), adviser to the Governor of Negara with whom Naude enjoyed a close business relationship.

 

Thia Tiong Chin - ("TC"), also known as "Top Cat" was chief dealer of Negara, who placed orders with the applicant and with whom the applicant enjoyed a close and trusted business relationship.

 

Credit

 

As there are substantial conflicts in the evidence, I will briefly express my views as to the reliability of the evidence of some of the principle witnesses.

 

Applicant

I regard the applicant's evidence as generally reliable. The applicant's version appeared inherently likely and corresponded with the events which transpired in relation to the January Bonus Scheme; on which this action is founded. Although the applicant admitted lying in relation to sick leave on one occasion, I do not think that her general credit was significantly shaken. In the light of the applicant's working relationship with Naude, I find the continuing assurances which she claims were given to her by him, were likely to have been given.   The "special treatment"  which Naude, on her version indicated she would be given, was consistent with the experience, performance and ability which she brought to the Negara transactions as compared with input to those transactions from the other members of Corporate Desk. I generally prefer her view of discussions to that of Naude where they conflict.

 

I accept that she trusted Naude and to some extent regarded him as her mentor.  However, it is true that she has a large financial stake in the outcome of this proceeding and her evidence should for this reason be approached with caution.

 

Naude

While I do not consider that Naude knowingly gave false evidence, I do consider that his recollection and version of events was substantially reconstructed and tailored to accommodate the bank's position as advanced in this proceeding. At the time of the hearing he was still in the employ of the Bank in a senior position. The attempts, on behalf of the Bank, to portray the applicant as performing basically clerical duties and only seeking "recognition" as opposed to seeking a large financial reward smack of unreality given her prior experiences at Citibank.  Having observed the applicant giving evidence, I do not in any way accept that her primary interest was simply to secure recognition although that they may have been one of her motives in protesting against the changes to the scheme. She was at all times vitally concerned with securing her full pecuniary entitlement under the bonus scheme as she understood it.

 

Denis

Denis is now retired from the Bank. He was not closely involved in dealings with the applicant or involved to the same extent as Naude. I accept Denis as attempting to recall to the best of his ability the course of events. However, for the most part I prefer to rely on the documents and the objective surrounding circumstances when evaluating the evidence of both Denis and Naude.

 

Jacobs

In the relevant period Paul Jacobs was in charge of the Forward Desk at SGAL. He asserted that the applicant and Agnes Vas were engaged primarily in formal clerical roles. This is directly contrary to the objective evidence.

 

He does not appear to have been privy to the part played by the applicant in determining the dealing price to be negotiated with Negara and he attributes this determination to Naude.  His evidence as to his non-recollection of a promise to pay the applicant an amount of $31,500, in view of the written memorandum to that effect, must cast substantial doubt on such of his evidence as is not otherwise corroborated or inherently probable.

 

Terminology

 

Reference is made in evidence several different types of transactions and to a specialised terminology.  It is therefore useful to briefly set them out as follows:

 

Spot Transaction - is a foreign exchange transaction where settlement is to take place within two days of the transaction.

 

Forward Transaction - is where the transaction will settle at some time in the future being more than two days from the date of the transaction.

 

Swap Transaction  - is a forward transaction where on the transaction date one party agrees to exchange one currency for another on two or more "value dates" at a specific exchange rate. The currency is either repurchased or resold on some date in the future at the spot rate plus or minus swap points.

Swap points - are a premium or discount reflecting the interest rate differential between the interest rate applicable in the two countries represented by the two forms of currency.

 

Reserve Swap - is basically the same as an ordinary swap. The word "reserve" is used to identify a swap transaction as one carried on by a country's Reserve Bank and the amounts involved are generally large.

 

Pre-delivery - is where a customer seeks to settle on a transaction prior to the original settlement date. (This  occurred in the two large Negara transactions on 3 and 7 January 1992 which will be referred to later).

 

Roll - is a transaction where the settlement date for a spot or forward transaction is changed to a date after the original settlement date.

 

MTM -  is an abbreviation for "marked to market". The MTM position of a party dealing with SGAL, for example, is the position of net loss or net gain which that party would be in as regards SGAL over all of the outstanding foreign exchange contracts between the two parties, if they were "closed out" or liquidated as at the date on which the MTM position is being assessed. This exercise was regularly carried out by SGAL to monitor its net position.

 

Point - is one unit in the last decimal place to which a particular currency rate is usually quoted. For example, DLR/DEM (US dollars against Deutschmarks) may be quoted as "1.4890-97".   The US dollar is usually quoted to four decimal places.  In this illustration there is "a spread" of seven points between the price at which SGAL is willing to offer to buy US dollars 1.4890 and the price which it is willing to sell US dollars 1.4897.

 

Split - is the distribution or allocation of the points of profit taken by SGAL on a particular transaction where dealers on more than one desk have played a part in the transactions.

 

Spread - is a margin measured in points.

 

TMU - stands for Treasury Marketing Unit and is another name used within SGAL for Corporate Foreign Exchange Desk.

 

FPU - stands for Financial Product's Unit and is another term for Forward Desk.

 

Background

 

The applicant was employed from January 1987 to August 1991 with Citibank. Initially, as a Foreign Exchange Front/Back Office Supervisor. Then she was employed as a junior on the Foreign Exchange Desk. In early 1990 she became a Corporate Foreign Exchange Dealer. During 1990 Naude was the head of the Foreign Exchange at Citibank. He had developed a relationship with Negara. Naude introduced the applicant to Negara at Citibank and she assisted the conduct of foreign exchange dealings with Citibank. After Naude left Citibank in early 1991, to take up his position as head of Foreign Exchange and later Treasurer with SGAL, the applicant continued to work with Citibank. Negara remained its customer and she had the conduct of foreign exchange dealings with it. Negara remained with Citibank until about August 1991. The first large foreign exchange currency swap transaction between SGAL and Negara in relation to foreign exchange dealings was in December 1991.

 

In late July, early August 1991 Naude contacted the applicant to see if she was interested in leaving Citibank and joining the Foreign Exchange Dealings Section of SGAL. She expressed interest in working with Naude at SGAL. After some further discussions with Naude, Michael Sutherland (the newly appointed head of Corporate Desk at SGAL) and the then Treasurer, Mr Bernard Wall, she agreed to take up employment with SGAL as a Corporate Foreign Exchange Dealer within the Treasury department.

 

A letter of offer of employment dated 21 August 1991, signed by the applicant on 23 August 1991, records that her appointment was for an initial period of three months and that, subject to satisfactory performance, she would be offered permanent employment. She later took up "permanent" employment. Her total remuneration was to be $40,000 per annum, but in addition, she would participate in a revenue based incentive scheme. There is reference to the superannuation fund and review of salaries. The commencement date was confirmed as 22 August 1991. The employment was terminable on one month's notice by either party.

The terms of the "revenue-based incentive scheme" were not spelt out in the letter of 21 August 1991. The applicant says that after she commenced employment with SGAL, Naude informed her that the other dealers did not want her to be included on the then current Corporate Desk bonus scheme and that for the time being he would give her a separate bonus arrangement, namely 10% of any gross revenue which she made from customers assigned to her over $70,000. The applicant says she agreed to this. It appears that prior to early December 1991 when Negara first began dealing with SGAL she expressed some regret to Naude at having let him down because she did not think she was going to make the $70,000 budget.

 

The applicant says that Naude informed her that he would give her a discretionary bonus. She says that she did not recollect ever having a conversation with Michael Sutherland of Corporate Desk relating to the receipt by her of 1% of the gross corporate foreign exchange trading income exceeding the budgeted amounts and that she never had a conversation with Naude in that regard.

 

A memorandum from Naude to Denis dated 13 November 1991, in relation to the applicant, records that shortly after she commenced employment, Naude proposed a temporary bonus/incentive scheme for the remainder of 1991. The Memorandum states that, "unfortunately, it subsequently transpired that Mike Sutherland did not explain the financial details of the scheme to Alison", (the applicant) and it states that according to her, she was informed that she would receive 1% of the excess gross Corporate Foreign Exchange Trading Income exceeding certain budgeted amounts.

 

The Memorandum points out that she worked long hours and was "continually in contact with off-shore relationships". He recommended in the memorandum that she be paid 1% of Corporate Foreign Exchange income in excess of amounts between $130-$150,000 for the months of October-December. The result was that for example, in October, her proposed bonus was to be $2,647. This was approved on the basis that it was a temporary decision and she received this amount less tax on 15 November 1991. She says that she was not made aware of the terms of this 1% arrangement.

 

I accept that for the months of October, November and December 1991, the incentive scheme was administered on the terms set out in the Memorandum.

 

There was some dispute on the question, but I accept that the applicant played a significant role in bringing Negara across from citibank to SGAL in the latter half of 1991. I reach this conclusion having regard to the evidence that for at least eight months Agnes Vas and Naude had been endeavouring to persuade Negara to deal with SGAL.  These efforts had met with no success. However, on 20 August 1991 the applicant had spoken to the chief dealer at Negara (TC) expressing her concern that she no longer had control of the way the Citibank account with Negara was being handled and that she was going to another bank.  TC then indicated that he trusted her and would follow her to the new bank. The next day, namely 21 August 1991, SGAL wrote the letter offering employment to the applicant referred to above. The day before, that is on 20 August 1991, the then Treasurer, Mr B Wall, sent a facsimile to SG Paris, stating inter alia:

 

          "SGAL have for some time been marketing the bank Negara to gain a share of their Spot FX business. The Bank has today approached us to become one of their main counterparties in this time zone on the basis of placing "at-best" or "specified level", business with us.

 

          They have indicated that to be of assistance to them we would need to have a daily delivery limit of up USD 500 mio for Spot transactions ... we seek your approval to enter into Spot FX business to a maximum outstanding amount of USD 500 mio.  We shall investigate the possibility of netting exposures at a subsequent date if initial approval is granted to this request.

 

          As Negara has a choice of counterparties here, all anxious to gain this low risk business, we seek your response by return message to enable us to advise the bank immediately of our ability to service them."  (Emphasis added)

 

 

This fax related to Spot rather than Swap transactions. They were much less profitable but provided a "foot in the door" with Negara.

 

A fax from SGAL to SG Paris dated 21 August 1991 records that:

          "Bank Negara has recently had a fall-out with its usual counterparty in the region for its significant "at best" spot foreign exchange transactions on the USD and the AUD (Citibank).

 

          Besides, it would appear our sizeable spot lines in SG Jakarta and SG Hong Kong are little used or not used at all. Our dealers, who are well known to Negara, would like to provide quotations as from today."

 

 

On 22 August 1991 SG Paris replied and advised that the request for a daily delivery limit of USD 500 mio had been approved in relation to Negara.

 

Naude seeks to explain the correspondence in timing with the employment of the applicant as no more than co-incidental.  This explanation is not convincing and I prefer the version given by the applicant, namely that she played a part an important role in attracting Negara's business to SGAL.

 

In evaluating her relationship with Negara it is important to note that after the applicant left SGAL to work with Banque Indosuez Australia in 1993, Negara continued to deal with her at that bank. This assists my conclusions as to the extent and importance of her relationship with Negara.

 

Some evidence was led on behalf of the bank directed to support a submission that the applicant was simply engaged in "clerical work" in relation to Negara transactions.  However,
this was clearly not the case on the evidence and no submission to this effect was pressed in final address.

 

Dealing Room Layout

 

Naude was given responsibility for the dealing room at SGAL as from October 1991.

 

A sketch plan shown to me indicated that the layout of the dealing room at SGAL in the relevant period was as follows.

 

Across from what appears to be a corridor from the Treasurer's office occupied by Naude, there was a long desk with a "Spot Desk" section and positions for six dealers. Further along on the same long desk adjacent to the Spot Desk was a section referred to as Corporate Desk where the applicant, Mr Chris Skinner, Agnes Vas and Michael Delany worked. Each of these persons had Reuter's video screens on which current foreign exchange rates were continuously displayed and updated. Further along, the next section of the desk adjacent to the Corporate Desk, furthest away from the office of Mr Naude, was the Forward Desk, which was operated by Craig Bannister, Paul Jacobs and Craig Jones and another person. Near the entrance to the room at the rear of the above desk there is designated an Options Desk and a Money Market Desk. The Spot Desk, Swap Desk and the Corporate Desk were concerned with foreign or currency dealing.

 

The Corporate Desk had direct and immediate proximity and access to both the Spot Desk and the Forward Desk and Naude was only a short distance away from the three operating sections of the long desk involved in currency operations.

 

Nature of the Transactions

 

On 9 December 1991, Negara requested SGAL to sell USD 2 bio and to buy Deutschmarks. Due to the size of the transaction it was carried out over four days, namely 11, 12, 13 and 16 December 1991. This Swap deal also the agreement of Negara to buy back US dollars on 11, 12, 13 and 16 March 1992 at agreed exchange rates.

 

This transaction yielded a profit to SGAL on the Negara transaction of 4.675 points or AUD 838,249. Of this total profit a split was made whereby Corporate Desk was allocated 91% or AUD 762,966 and Forward Desk which "laid off" the transaction with counterparties was allocated 9% or AUD 75,283. This transaction is set out below in summary form.

 

            "1. DEAL DONE 10 DECEMBER 1991

 

            NEGARA SELLS/BUYS USD 2 BIO AG DEM

            VALUE 11.12.91 AG 11.3.92 AT 1.5670 AG 1.5854 USD 500

            VALUE 12.12.91 AG 12.3.92 AT 1.5670 AG 1.5855 USD 500

            VALUE 13.12.91 AG 13.3.92 AT 1.5670 AG 1.58569 USD 500

            VALUE 16.12.91 AG 16.3.92 AT 1.5670 AG 1.58627 USD 500

 

            TOTAL POINTS PROFIT: 4.675

 

            TOTAL PROFIT: DEM 1,024,487   AUD 838,249-

 

            SPLIT

            Corporate:  DEM 932,477-            AUD 762,966       91.00%

            ForwardS:   DEM 92,010-       AUD  75,283-            09.00%

 

            REVAL RATESDLR.DEM           1.5770

                        AUD.USD           0.7750"

As shown in the above table there was a split or allocation of a fraction of a profit point between Corporate Desk and Forward Desk amounting to .42 of a point with respect to the December transaction.  Naude said that this allocation was determined by him and that he was the person entitled to make any allocations. The contention of SGAL is that at this time the applicant was on a 1% bonus scheme (although she says this was not her understanding) and that the power to allocate profits as between different profit centres or desks lay with Naude and that this was the prevailing arrangement during the employment of the applicant with SGAL in 1992.

 

The applicant on the other hand says that the allocation of a small percentage of profit as between Corporate Desk and other profit centres (principally, Forward Desk) was at the discretion of Corporate Desk in relation to foreign exchange currency Swap transactions and in particular those with Negara. This small allocation was designed to promote a good working relationship with Forward Desk. The applicant says that she did not contest the allocation of 9% or .42 of a profit point because it was a reasonable amount to allocate for the assistance provided by Forward Desk. In any event, there was no dispute with Naude with respect to that allocation. However, the applicant registered strong protests to the other re-allocations of profit away from Corporate Desk in 1992.

 

The question as to who had the right to determine the allocation of profits during 1992 is important in this case because the applicant's contention is that neither Naude nor anyone else at SGAL had any right to allocate profit away from Corporate Desk to other desks, units or departments, in relation to the bonus scheme, unless Corporate Desk agreed to such allocation.

 

In view of the agreement between the applicant and Naude as to the allocation of .42 of a point being a fair and reasonable allocation, I do not think that the fact the applicant did not protest in relation to the power to make such an allocation assists the case of SGAL to any extent because that allocation was minor in comparison with the later major diversions.  SGAL seeks to rely on this split as one of a number of allocations which indicated that the true arrangement was that Naude had the power to determine allocations as between desks, profit centres and himself as he saw fit.

 

Usually requests for major currency swap transactions came from Negara late in the afternoon. The Forward Desk in the dealing room, would then effect a series of transactions. Where the transaction was USD 2 bio there would generally be a number of transactions, in USD 50 mio lots, involving counterparties around the world carried out by Forward Desk. The transactions involved the exchange of the currency one way on a specified date and a swap back again on a forward date. The role of the applicant was to estimate and build in points of difference between the buying and selling rates and these points of difference would represent the profit. The process carried on from Corporate Desk was that Negara would propose specified transactions and SGAL would then enter into counterparty transactions at the same time with other banks, at agreed prices and would take a profit, as set out above, in the price it quoted to Negara.  Delicate questions of judgment arose in these transactions as to how many points of difference should be quoted. If the price was excessive and generated too large a profit then the customer would be dissatisfied on the basis that an exceptional profit was being made and that they were being exploited. Negara would know from its own monitoring, the current range of margins prevailing on the world market from time to time.

 

The applicant agreed that if there was a dispute between herself and Naude as to the number of points to be taken by Corporate Desk, on a particular transaction, he could ultimately have over-ruled her.  However, her case was that this power only related to the small allocations and that there was a relationship of confidence and trust between them with the result that Naude generally agreed with her decision as to what was an appropriate split.

 

January 1992 Swap Transactions

 

On 3 January and 7 January 1992 two large swap deals were made with Negara. They were each of USD 1 bio.  They involved in effect the swapping back of the deals done on December 9 by way of pre-delivery. The transaction carried out on 3 January 1992 led to a total points profit of 23.6 or AUD2,086,808. This was an exceptionally large profit. This profit was split between Corporate Desk as to 82.585% or AUD1,723,395 and Forward Desk, (Craig Jones), as to AUD363,413 or 17.415%. Although there was a difference of evidence as between Naude and the applicant as to who was responsible for negotiating the high points figure on this transaction, I am satisfied that Naude was inclined to take a substantially lesser figure but that the judgment of the applicant prevailed and she was able to secure for Corporate Desk the very high profit points figure of 23.6. Naude eventually agreed to the higher number of points being  put to Negara.

 

Again in the transaction carried out on 7 January 1992 there was a swap back of the 9 December 1991 transactions as to the remaining one billion dollars by way of pre-delivery.  Again, the total points profit was high, being 23.02 points. This was split in three ways. The total profit was AUD1,896,759.  The split to Corporate Desk was 54.75% of AUD1,038,611; to the Treasurer, Naude 31.63% namely AUD600,000 and as to Forward Desk AUD258,148 being 13.62%.

 

There was a difference of opinion, as between Naude and the applicant, as to the percentages which should be paid to the Forward Desk on the 3 January transaction. Naude suggested 4 points or about 17%. The applicant protested that the "giveaways", meaning splits should be at her discretion. She said to Naude that she wanted to get all her entitlements from this Negara transaction. The applicant alleges that he assured her and said, "Don't worry. Everyone knows that you made the money and you will be looked after." I accept that Naude said to her words to this effect.

 

In relation to the 7 January transaction the applicant says that she protested to Naude on learning of the allocation. Again, she said that Naude reassured her that she should not worry and that the bank would make it up to her.

 

In relation to the transaction of 3 January there is no dispute that the applicant protested in relation to the allocation to the Forward Desk. Again, in relation to the transaction of 7 January it is common ground that she protested about this split and particularly in relation to the share allocated to Naude's name in the sum of AUD600,000. Naude contends that he claimed it was only fair because the deals came about through his relationship with Nor, the credit rating of the Bank and its standing and ability to transact such very large amounts. He also says that he referred to the bank having gone way over its limits. Naude claims that her concern was simply to secure "recognition" for her part in the transaction thereby inferring that the bonus payment was not critical to her. Naude denies that he said any words to the effect that the Bank would make it up to her in such a way
that she would ultimately receive full compensation for what she would lose by re-allocations of revenue.

 

The 1992 Bonus Agreement

 

The applicant's probationary period ended in November 1991 and she thereafter became a permanent employee.

 

On 9 January 1992 Denis and Naude signed a document entitled "Corporate Foreign Exchange Sydney Desk Bonus Scheme". It was effective from 1 January 1992 to 31 December 1992 and so far as is material reads as follows:

 

 

     "SGAL SYDNEY                      9 January 1992

     ILJA0830 

 

              SOCIETE GENERALE AUSTRALIA LIMITED

                   ACN 002 093 021

 

 

              STRICTLY PRIVATE AND CONFIDENTIAL

 

     CORPORATE FOREIGN EXCHANGE SYDNEY DESK BONUS SCHEME

                        1/1/92 - 31/12/92

     ----------------------------------------------------

 

     TERMS AND CONDITIONS

 

     (1)  The bonus will apply and be calculated on the following basis.

 

              Gross Revenue                     $4,200,000

 

          Less: Maintenance Amount                        $1,680,000

                                           -----------

    

              1992 Corporate FX Sydney

              Desk Net Result Budget for        $2,520,000

              Bonus purposes               -----------

                                           -----------

     (2)  Total Treasury (Foreign Exchange

          and Money Market) Net Revenue

          Budget                                $23,500,00

                                           -----------

 

 

     (3)  Corporate Foreign Exchange, Sydney Desk Bonus Scheme Calculations will be as follows;

 

 

          Condition 1

 

 

 

          Condition 2

 

 

 

          ......

 

 

     (5)  The Corporate Foreign Exchange Sydney Desk's Gross Revenue amount will be subject to Audit by Societe Generale Australia Ltd's appointed external auditors Arthur Andersen.

     (6)  It is to be noted that Societe Generale Australia Limited is currently in the process of implementing a Net Present Value (NPV) calculation for determining the Profit/Loss on all transactions with a maturity in excess of the spot date. With the introduction of the NPV formula, all commissions payable to the Corporate Foreign Exchange dealers will be based on the Profit and Loss generated by forward, swaps, deposits transactions, etc, on the NPV basis.

 

          The implementation of this system will be notified in due course.

 

          Please note point 1-6 are applicable only to the Corporate Foreign Exchange Sydney Desk.

 

          .....

 

          The Managing Director reserves the right to offset against this bonus entitlement any costs incurred in maintaining the dealing room to standards appropriate to Societe Generale Australia Limited.

 

          The Managing Director reserves the right, at all times, to vary/cancel this incentive scheme, with effect from the close of business on the day of written notification by the Managing Director to the Treasurer, due to non-compliance with Bank Policy, unforseen circumstances beyond the control of the Bank or any significant ongoing investigations by staff appointed by the Managing Director, other than Treasury Division staff which relate to material discrepancies between SGAL's official accounting results compared to the Treasurer's reported results.

 

          This specially designed scheme had been devised to assist the Treasurer to maintain the motivation of the Corporate Foreign Exchange Sydney Department, by providing incentives commensurate with Dealing Performance and is in line with general market practice.

 

          Mutual agreement/approval of this scheme is to be indicated below by signing in the space indicated.

 

 

          B L DENIS                    F NAUDE

          MANAGING DIRECTOR            TREASURER

 

          Date:...... 9.01.92     Date:......9-01-92"

 

 

The terms of the Corporate Foreign Exchange Sydney Desk Bonus Scheme as set out above were agreed to by the applicant.

 

In early January the applicant says that Naude told her that she would participate in the Sydney Corporate Desk Remuneration Scheme.

 

Naude said her salary would continue at $40,000 but in addition she would receive 2.5% of all Sydney Corporate Desk gross revenue, less the marketing maintenance amount, paid monthly.  This latter amount was $140,000. Gross revenue budget would be $1 million.

 

On 7 January 1991 Naude sent a memorandum to the applicant in the following terms:

          "Ali,

 

          Negara Swap done on 7/1/91

 

          - 10 Points of Profit has to go to Fwd. Unit. I will arrange with Paul to have profit transferred to Myself.

 

          - You (Corp. Unit) will get at least 25% of any profits made by myself on any Negara deal when they deal through myself.

 

          - I have no interest in run of mill deals Negara do with yourself.

 

          - However, when deals are done in excess of limits or for exceptionally large swaps (over $500.000.000 and over I want 25% of profits.

 

          - I have no interest or intention to deprive Corp. FX of any earnings. This is a fair arrangement and I regard matter as closed.

 

          - Should any Corp. Dealer speak out on the desk against this decision, he or she may as well resign.

 

                   Francois

 

          Please keep this on file."

 

 

This peremptory and threatening memorandum, handwritten by Naude, preceded by two days the bonus scheme quoted above. It is inconsistent with the bonus scheme. It does not appear to have been subsequently referred to and must be taken to have been overtaken by the bonus scheme.

 

18 June 1992 - Negara Transaction

 

The next large transaction implemented with Negara in which the applicant was concerned was on 18 June 1992, when Negara
sold GBP 275 mio against US dollars. The total points profit on this transaction was 7.3 points or AUD266,954 which was split to the Treasurer (Naude) as to 47.95% or AUD127,992 and as to Corporate Desk AUD138,962 or 52.05%. The applicant gave evidence that she protested about the split and insisted that any "giveaways" (to other desks, units or persons) be at her discretion. She says that Naude informed her that if she wanted to get her money she had better play it his way, that she should trust him, and that he would never do the wrong thing by her.  The applicant also emphasised to him how important it was to her that her name should have recorded against it exactly how much she had made for SGAL. Naude, acknowledged the good work she had been doing and assured her that it would be recognised. He stated  that he went on to say that if she "kept doing a good job then the Bank would look after her." He said the split in question was not negotiable and she should go out and get Negara spot business.

 

Naude Memorandum of 26 June 1992

 

On 26 June 1992, Naude wrote a Memorandum to the Foreign Exchange dealers including the applicant concerning Negara. A copy was sent to the Managing Director, Mr Denis who agreed with its contents. The relevant parts of that Memorandum reads as follows:

      "After further consultation with our Managing Director, the following procedures and profit distribution ratios have been decided upon and will become effective from Monday, 29 June 1992.

 

      SPOT FOREIGN EXCHANGE AND RESULTING FORWARD TRANSACTIONS

 

      1.    Alison Ethell is the account manager and has an excellent relationship with all the Negara dealers, especially with their Chief Dealer.

 

            As such, all incoming calls from Negara dealers must be handled by her or another Treasury Marketing Unit (TMU) dealer.

 

            All spread income on such Spot deals and all margin income on resulting outright Forward transactions are for the account of TMU.

 

            Profits on all extensions (rollovers) or pre-deliveries of such Forward deals are able to be retained by this Unit.

 

      2.    Should Mr. Sam Saw or I initiate a Spot transaction (normally on an "at best" basis) with Mr. Nor Mohammed or any other Negara dealer, the total profit will be retained by the individuals concerned.

 

            Similarly, should Mr. Nor Mohammed or any Negara dealer specifically ask for either Mr. Sam Saw or myself, the same profit rule applies.

            .......

 

      SWAPS TRANSACTIONS

 

      Negara's reserve and cashflow management is handled directly by Mr. Nor Mohammed and/or his deputy Madam Essah. They decide which banks will be used for swaps and the dealers in the trading room only transact such transactions on instructions from senior management.

 

      The profit distribution on all swaps transactions after allowing for the applicable funding cost/benefit must be distributed on the following basis:

 

      Treasurer                           70%

      Treasury Marketing Unit             25%

      Financial Products Unit (FPU)       5%

 

      Reasons

 

      1.    I have the only personal relationship with Negara's senior management. I am convinced that the main reason for SGAL securing such deals is because of my initiation, relationship and continuing contact.

 

      2.    The credit rating of a bank is an important prerequisite in Negara concluding "reserve" swaps.

 

      3.    SGAL currently has small authorised limits for Negara. The ultimate risk responsibility rests with our Managing Director.

 

      4.    These swaps tie up substantial counterparty and country limits.

 

 

      5.    Recognition of Alison Ethell's vital role in coordinating and managing all facets of the Negara relationship and for her close relationship with all their dealers.

 

      GENERAL

 

      1.    Alison Ethell is responsible for the administration of this account. All transactions must be done through her and she is responsible for all file notes and detailing of transactions.

 

      2.    FPU dealers are not permitted to take any spread on Negara transactions. The average cover rate or market rate has to be provided to Alison Ethell or other designated TMU dealer. TMU may allocate any "spread" to FPU in cases where they do not qualify for the 5% swap allocation.

 

      3.    FPU, in particular Craig Jones, is responsible for calculating and verifying cashflow point adjustments/funding costs on swaps and historic rate rollovers.

 

      4.    TMU must obtain FPU's sign off on all transactions involving cashflow/funding cost calculations.

 

      5.    Cooperation between Units and "common sense" should prevail at all times.

 

            .............

 

      WARNING

 

      *     Negara is our most important relationship and exceptional service in both speed and quality of pricing must be provided at all times.

 

      *     Be sensible with "spreading" - this is a long term relationship and the short term profit should never become the overriding concern. We will not get a second chance should we get "caught". Alison Ethell, please take note and care.

 

 

      *     Confidentiality should be maintained at all times. Refer to my May Call Report to fully appreciate the importance of this requirement. Inform all staff to cooperate. In fact, should it come to the attention of Senior Management that a staff member discussed our Negara dealings with an outside party, the services of such a person will be terminated.

 

      Mr  Denis and I believe the outlined profit distribution and procedures are fully justified and allow all contributors to benefit fairly from this prime relationship.

 

 

 

      F. NAUDE

      GROUP TREASURER"

 

 

About 26 June 1992, the applicant says she had a conversation with Naude wherein she suggested that 100% of all gross revenue attributed to her customers be ascribed to her name and to the Corporate Desk.  Naude suggested a 60/40 split and she protested, whereupon Naude assured her that the Bank would look after her in the long run. The applicant's case is that she relied on the assurances given to her by Naude and so did not press for payment of differences in her incentive entitlement.

 

She continued to conduct foreign exchange dealings with SGAL on behalf of Negara for SGAL from 30 June 1992 through to 31 December 1992.

 

Denis Memorandum of 25 August 1992

 

On 25 August 1992 Denis wrote a memorandum to Naude in the following terms:

 

 

 

                        "STRICTLY PRIVATE AND CONFIDENTIAL

 

                                    MEMORANDUM

 

            TO          MR F NAUDE

 

            FROM        MR B L DENIS

 

            DATE        25 August 1992

 

            SUBJECT     BANK NEGARA/STC ALCATEL TRANSACTIONS

           

 

 

            I refer to your memorandum dated 26 June 1992 detailing the profit allocations for swaps transactions with Bank Negara.

            PROFIT AND LOSS ALLOCATION 1992

 

            Following an analysis of the implications of your revised allocation policy, please be advised that effective 1st September 1992, all profitability arising from such swap transactions with Bank Negara, must be attributed directly to Treasury Management (yourself) for the remainder of this year.

 

            However for all spot FX transaction and resulting forward transactions the policy will remain as previously stated for 1992.

 

            All deals with Negara must, of course, still be reflected in the Corporate FX Profitability Report for inter alia volume determination purposes.

 

            At year end I require to be furnished with a detailed breakdown of SGAL's dealings with Negara during 1992 reflecting:

 

                  •     Total profitability

                  •     Total revenue credited to Group Treasurer

                  •     Number of deals transacted

                  •     Total volume

 

            BUDGET 1993

 

            For our 1993 budgetary processes, all income arising from ALL transactions (Spot, Forward, Swaps, etc) with Bank Negara and STC Alcatel must be excluded from the Corporate Foreign Exchange Unit Gross Income Budget (for accounting and bonus purposes) and allocated directly to a newly created profit centre within the Daily Dealing Room Trading Performance Report.

 

            BONUS SCHEME 1993

 

            In recognition of the withdrawal of these clients from the profitability arrangement of the Corporate Foreign Exchange, I advise that for 1993 an annual bonus will be considered by the Managing Director for services performed by relationship managers in retaining these valued clients.  Such recognition will be via the discretionary allocation by the Managing Director of the bonus available from the bonus scheme pool.

 

 

            For the record I wish to thank Ms A Vas and Ms A Ethel (sic) for their contributions in maintaining and consolidating our customer relationship with Bank Negara. Mr Delany's ongoing excellent service to STC Alcatel is recognised.

 

            I am sure you will find the details of this memorandum quite reasonable. Please convey this decision to the relevant Unit Heads.

 

            Thank you,

 

 

            B L DENIS"

 

 

After 31 August 1992, upon her return from leave, the applicant protested to Naude in relation to the revised allocation policy relating to swap transactions with Negara. She said that on this occasion she was again assured by Naude that the rest of the corporate dealers were, in his view, still being paid too much and that the Bank would look after her. There is no doubt on the evidence, that the applicant was the only member of the Corporate Desk who had an enduring and trusted relationship with Negara. Accordingly, it is not surprising that Naude should consider it unfair that other members of the Corporate Desk should be so well rewarded under the bonus scheme.

 

During the period from 1 September to 31 December 1992, the applicant conducted a number of foreign exchange dealings on behalf of Negara, from which the gross revenue derived by SGAL amounted to AUD23,382,747.

 

In September 1992 one of the members of Corporate Desk left SGAL and a new employee was appointed. As a result, Naude changed the distribution under the scheme from 2.5% each to 3% each for the remaining employees on that desk, namely Agnes Vas, the applicant and Chris Skinner. This new arrangement operated in relation to Corporate Desk for the fourth quarter of 1992. However, for bonus purposes all the revenue from the Negara transactions was diverted from Corporate Desk in this period.

 

Following the end of the calendar year 1992, the applicant received a discretionary bonus of $70,000 which Naude states was the "second highest" discretionary bonus paid to the Corporate Desk dealers and more than four times the next highest bonus paid to members of Corporate Desk in Sydney. This allocation of the discretionary bonus provides some support for the view that the applicant's efforts were of substantially greater value to the Bank than that of other members of the Sydney Corporate Desk during 1992.

 

On 21 January 1993 the applicant was advised that her employment with SGAL was terminated. She received a cheque including her payment in lieu of notice in the sum of $2,530.59.  

 

The applicant says that her expectation was that, at the end of the year, when bonuses were paid, she would receive the difference between her incentive entitlements calculated on the basis that the whole of the gross revenue to SGAL for foreign exchange dealings relating to Negara had been attributed to Sydney Corporate Desk and that this did not occur.

 

Outline of Applicant's Case

 

The applicant's case is that the contractual arrangements under which the applicant was employed during 1992 included the bonus arrangements described in the "Corporate Foreign Exchange Sydney Desk Bonus Scheme" signed by Denis and Naude on 9 January 1992. Effectively, she was to receive 2.5% of all gross revenue of the corporate Foreign Exchange Sydney desk in excess of $140,000 per month. "The Gross Revenue of the Corporate Desk" was generated when Corporate Desk dealers added a marginal spread of points to the prices at which the Spot and Forward Desk dealers were able to effect the relevant transactions in foreign exchange markets. The total price, with the marginal spread of points added on by Corporate Desk dealers, was the price quoted to and agreed with SGAL's customers, in particular with Negara.  It was an express oral term of the applicant's employment, that all revenue from SGAL transactions with Negara would be recorded as revenue of Corporate Desk for budget and incentive purposes in accordance with the bonus scheme. The structure and relationship of SGAL's Foreign Exchange Desks and the manner in which SGAL derived income from its foreign exchange transactions meant that revenue from Negara transactions would be treated as earned by the Corporate Desk. This was subject to a qualification that the dealer responsible for each transaction had a limited discretion whether to allot part of the revenue which otherwise would have been earned by Corporate Desk, namely a percentage of the spread of points, to another desk which had been involved in the transaction. Where that discretion was exercised that part of the total revenue earned would be recorded as profit of that other desk. In that sense, and only in that sense, there was a split or allocation of the total points profit consistent with the bonus scheme.

The directions given by Naude to the applicant in January and June 1992, that some points from transactions of 3 and 7 January and 18 June should be attributed to himself, did not have the effect of varying the applicant's contract of employment. They were contrary to it. The directions did not in terms purport to change the operation terms of the bonus scheme and were not apt to do so. They could not and did not, on the applicant's submission, change the character of the revenue from the Negara transactions as being revenue of Corporate Desk, nor could they vary the identity of the profit centre within the Bank at which revenue was earned.

 

On their face, the directions purported to reallocate Corporate Foreign Exchange Desk revenue, so that the terms of employment in relation to the bonus scheme would not apply to that revenue.  It is submitted that these unilateral directions were incapable of altering the facts as to the profit centre at which the revenue was earned are were not permissible under the bonus scheme.

 

It is conceded, on behalf of the applicant, that on the evidence some percentage of the profit earned by the Corporate Desk would have been voluntarily allocated by the applicant to the Forward Desk. This, it is said,  was a matter within the discretion of the applicant, and in calculating quantum in this proceeding allowance must be made for it.  In a supplementary final submission the applicant refers to the "giveaway" points in fact allowed by Corporate Desk and submits that a reasonable basis on which to assess this adjustment should the applicant be otherwise successful is as follows. For transactions where the Bank's "spread" was more than ten points the points "given away" should be 1.25. It is submitted for the applicant that where transactions involve profit points of ten or less, then the amount which it is reasonable to allow for "giveaways" would have been only a fraction of a point sufficient to round up "the points to cover" to the next full point or the next half point. It is said that this was in fact done in the instances where there is evidence that the Bank's total spread was relatively low. On this basis making the necessary allowances, the applicant's resulting claim would be reduced to $732,273.71. No submissions as to calculation of interest are made by the applicant at this stage, and this, it is said, is a matter which should be considered when Short Minutes of Orders are filed in Court.

 

Outline of Respondent's Case

 

The submission for SGAL is that the only relevant contractual obligation was to permit the applicant to participate in a bonus scheme, not in any fixed or immutable scheme. In order to operate fairly and realistically in a commercial sense it needed to be regarded as flexible. It is said that the bonus scheme made available to the applicant during 1991 and 1992 went through a series of changes. The applicant's actual
bonuses amounted to about $338,000 on a base salary of $40,000.

 

SGAL submits that it is not appropriate to simply look at the 9 January 1992 bonus scheme in isolation but that it is necessary to consider it in the light of the relevant surrounding circumstances and the factual matrix.

 

Previously at Citibank, as well as at SGAL, and under all relevant schemes, "revenue" of a particular person or desk for bonus purposes was calculated from points obtained in particular transactions.  The way in which these points were allocated to Corporate Desk for the purpose of the scheme then current was a process outside that scheme and was based on a discretion lying with the Treasurer. It is said that points had been allocated to other profit centres within the Bank, without the consent of the applicant, in December, January 3 and January 7 before the agreement on the 1992 bonus scheme. Reliance was placed on the applicant's lack of protest in December. However, it is conceded that she did protest at later stages but it is said that her protests were on the basis that the allocation was "unfair" rather than on the ground that Naude was not entitled ultimately to make different allocations at his discretion. It is said that the applicant's real concern was to obtain "recognition" on the records of SGAL for her work as opposed to being primarily concerned with the amount of compensation she was to receive.

 

It is submitted, that under the bonus scheme, that allocations of revenue which would normally be attributed to the Corporate Desk could be, and were, varied from time to time to reflect corporate policy and the true and fair contributions of different employees to the earing of profits.

 

It is said that the large Negara swap deals which generated the disputed allocation profits were abnormal transactions; arose primarily from Naude's connection with Nor; involved activities on the part of the applicant which were essentially clerical, as well as being a point of contact; involved delicate decision making by Naude; involved substantial work by employees on Forward Desk; involved substantial risk to SGAL; involved an exceeding of limits by the Managing Director and caused a tying up of credit limits which in turn inhibited the ability of Forward Desk to carry on its normal profit making  activities.  It is therefore said that the diversions of revenue away from Corporate Desk were not unfair.

 

In the alternative, it is submitted by SGAL that the schemes were actually changed from time to time with the consent of the applicant and that these changes were contractually permissible under the bonus scheme. I do not accept either of these submissions.

 

SGAL denies that there was any agreement that all Negara revenue would be credited to Corporate Desk. It is said that it does not follow from the words alleged by the applicant in her affidavit evidence that such credits would be made exclusively to that desk, and it was said to be inconsistent with the systems in force from time to time and with the earlier and ongoing practices of SGAL. It was also said that reference to "all gross revenue"  was too uncertain to be contractually binding in the sense that no fixed percentage was specified and that to rely on oral statements amounted to an assertion of a verbal collateral contract. Such a contract would be inconsistent with the written contract if it were to allege that all Negara revenue would be credited to Corporate Desk.

 

Approach to Construction of Bonus Scheme

 

The following principles and interpretation are relevant in the present proceeding:

 

1.   Agreements should not be isolated from the matrix of facts in which they are set and interpreted purely on internal linguistic considerations.  The task of the Court is to enquire beyond the language and see what the circumstances were with reference to the words used and the object appearing from the circumstances which the person using them had in view. Prenn v Simmonds [1971] 1 WLR 1381 at 1383-1384, per Lord Wilberforce. As Cardozo J said in Utica City National Bank v Gunn (1918) 118 N.E. 607 at 608, surrounding circumstances may:

          "... stamp upon, a contract a popular or looser meaning than the strict legal meaning, certainly when to follow the latter would make the transaction futile."

 

 

     In a commercial contract a court should know the commercial purpose of the contract which involves knowledge of the genesis of the transaction, the background, the context, and the market in which the parties are operating. See also Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995-997; Lewison Interpretation of Contracts, (1989) at 44 ff.

 

2.   Evidence of surrounding circumstances is admissible to assist in the interpretation of a contract if the language is ambiguous or susceptible to more than one meaning.  However, it is not admissible to contradict the language of the contract when it has a plain meaning.

 

3.   Generally, facts existing when the contract was made will not be received as part of the surrounding circumstances as an aid to construction unless they were known to both parties, although if the facts are notorious, knowledge of them will be presumed.

 

4.   When the issue is which of two or more possible meanings is to be given to a contractual provision the Court looks not to the actual intentions, aspirations, or expectations of the parties before or at the time of the contract, except insofar as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and the parties' presumed intention in this setting. The Court does not take into account the actual intentions of the parties and because an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to those factors at the expense of the actual language of the written contract. See Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 348 - 352 per Mason J.

 

The Role of Forward Desk

 

Large transactions with Negara were not ones which SGAL could undertake on its own. On the relevant transactions it was necessary to obtain counterparty deals to offset the deals with Negara. 

 

Until June 1992 most of each deal was offset by counterparty deals.  Some amounts may have been kept on Forward Desk books. From June increasing amounts were kept as part of the Forward Desk books and particularly from September 1992.  Due to the size of the Negara swap deals it was impossible to obtain appropriate counterparty deals within SGAL's own time zones.  The size of the Negara deals also generally necessitated obtaining more than one other counterparty deal. Craig Jones, on Forward Desk, obtained counterparties in deals between 50 million to 100 million dollar lots, until he had the required amount of cover.

 

In seeking counterparty deals Craig Jones contacted European banks on Reuter's Direct Dealer screens from late afternoon to  early evening.  Earlier he dealt primarily with SG France but later he began to use a variety of European banks. Each time he completed a transaction with one of the European banks a completed foreign exchange transaction was generated to which the Bank was then committed.  Craig Jones did this even though, at this time, there was no committed deal with Negara but simply an understanding that the bank would return with an average price after the full amount had been cleared in the market and they would then deal. It often took several hours to place all of the deals and frequently six or seven hours. This was the basic pattern of initial Negara deals, but for later deals SGAL committed a rate to Negara before they covered the deal on the market.

 

In some cases, the average price at which the deal was later covered was better than the initial rate quoted to Corporate Desk. The improvement in price was later delivered to Corporate Desk. This was effectively a transfer of Forward Desk profit to the Corporate Desk which in turn could choose to pass it on to the customer or improve its own margin.  On one other occasion where a firm price was quoted before cover was taken the market in fact moved against SGAL. The margin charged by the Corporate Desk was reduced to effect a transfer point to the Forward Desk to offset the loss.

 

After all transactions necessary for counterparty deals for the proposed Negara deal were completed, Jones calculated the average price for the counterparty deals and gave it to the applicant. The applicant using a computer program then calculated the historical rate roll-over price required by Negara. Jones calculated it manually to ensure the rate obtained in the computer was correct. The applicant then had discussions with Naude about the price which would be offered to Negara and the price would then be set. The applicant would contact Negara via Reuters and advise the Negara dealer of the proposed rate. The Negara dealer would confirm acceptance of the rate and the deal was then completed subject to entering it in the computer and doing confirmatory follow up paper work.

 

Setting a price for Negara involved establishing the level of utilisation of Negara's credit limit; the value of the previous forward contracts held by SGAL with Negara; the duration of the yield differential between the currencies involved in the forward contract and sharing of points where appropriate.

 

There was no fixed agreement as to how much of the profit or how many points should be shared. This was left to the discretion of the individual Corporate Desk dealer who was giving away the points.  Points shared by dealers were only ever small in number.

 

There was little market risk in the Negara deals where there were direct counterparty deals. As long as the Negara deal was completed and delivered, which always occurred, they used up the Forward Desk dealing line.  Other banks with whom SGAL had dealt were aware that SGAL had a particular transaction with delivery dates outstanding. The result was that if Forward Desk wished to undertake a new deal it might either be refused or the price quoted would be unacceptably high.  The Negara counterparty transactions being in place inhibited Forward Desk's ability to deal and make profits on other transactions. Thus it is said that in business there needed to be some power to SGAL to allocate profit away from Corporate Desk in the interest of properly compensating Forward Desk dealers.

 

For a period of three months Negara deals were very large amounts.  During 1992 as more Negara deals were held as open positions on the books of the Forward Desk dealers, (that is, were not covered by counterparty deals), the market risk to SGAL increased.

Risk to SGAL from Negara Swaps

 

The risk to SGAL on a forward transaction depended on the volume and duration of the deal. The highest risk deal was one which had large volume over long duration.

 

A primary contention for SGAL was that it was not appropriate to treat the bonus scheme of the Bank as a fixed unchangeable formula. The allocation was something which needed to be varied form time to time to take into account the differing contributions on an ongoing basis of different employees of the company and to reflect differing policies of the company from time to time.

 

The magnitude of the risks incurred by the Bank were illustrated by reference to the "Marked To Market" position of SGAL in relation to Negara's swap transactions as at 30 July 1992. A memorandum from Denis to Naude entitled "Outstandings with Negara" showed that the net position of SGAL over its foreign transactions with Negara, if closed out on that date, would result in a net loss of USD $95,806,528 at a time when the MTM limit was USD $50 million. The Memorandum also showed that the total face value of outstanding contracts with Negara was USD $5,850 million.

 

In large currency transactions it was the practice of SGAL in 1992 to monitor its position as to profit or loss at regular intervals.

It was the intention of Denis in the light of this information that the Negara Swap transaction should be "taken out of the Corporate Desk profitability".

 

The impact of the Negara Swaps on Forward Desk is summarised by Craig Jones, who worked on that desk at SGAL in 1991-1992 in the following terms:

 

 

          "While there was little market risk in the Negara deals where there were direct counterparty deals, as long as the Negara deal was completed and delivered which always occurred, they did use up the forward desk's dealing lines. What this meant was that other banks with whom we had dealt were aware that we had particular transactions with delivery dates outstanding. The result was that if we wished to undertake a new deal it would either be refused or the price quoted would be unacceptably high.  Therefore, the Negara counterparty transactions being in place inhibited the forward desks' (sic) ability to deal and make profits on other transactions."

 

 

Whilst Naude agreed that SGAL could not trade any better than when it was fully using its credit lines, the submission on behalf of SGAL was that the Forward Desk had a legitimate claim to be allocated a greater amount of profit as a result of the Negara transactions, bearing in mind the restrictions the Negara Swap deals placed on its ability to deal because of the tying up of its credit limits. Due to the need to adjust, from time to time, the compensation to different profit centres for the work done by them in relation to Negara Swap deals, it was submitted that the better interpretation of the
bonus scheme was that it should be flexibly administered so as to allow the Bank to fairly reallocate profits and adjust compensation.

 

While this consideration could warrant the drawing up of a new and different bonus scheme for Corporate Desk as compared with other desks, personnel or departments, it does not affect the interpretation or application of the January Scheme drawn up in respect of that desk which was designed to apply during calender year 1992.

 

Present Case

 

The starting point for an examination of the applicant's bonus entitlement for 1992 is the written scheme set out in the document executed on 9 January 1992 by the Managing Director (Denis) and the Treasurer, (Naude).

 

There is a conflict, as between the applicant and Naude, as to whether Naude informed the applicant in early January of the terms of the scheme of 1992. I prefer the evidence of the applicant on this point. It is likely that given her close working relationship with Naude and her concern about the level of earnings and remuneration, that she would want to know and that he would have told of the new scheme prior to its execution on 9 January.

 

The purpose of the scheme is to encourage participants to increase gross review earnings at the Corporate Desk. The scheme was effective on and from 1 January 1992 for the calendar year 1992.

 

By 9 January 1992 there had been three major transactions with Negara involving USD 2 bio and these had generated very large profits for SGAL.  Accordingly, Naude and Denis must have appreciated as at January that the bonus scheme they signed could generate large payments to the employees. The scale of the transactions and profits could not be said to have gone unanticipated.  The large currency transactions with Negara were precisely what SGAL had aimed to secure during late 1990 and 1991 through the efforts and contacts of Naude, the efforts of Agnes Vas and the employment of the applicant. To accommodate large transactions with Negara the application of 20-22 August 1991 was made to Head Office in order to increase the limits applying to SGAL and it was granted.

 

Clause 3 of the Terms and Conditions of the Sydney desk Bonus Scheme refers to "All gross revenue". There is therefore nothing to exclude the Negara Swap and Spot transactions. The terms were over all gross revenue.

 

The reference to "all gross revenue" being "available for a monthly payment to the Corporate Foreign Exchange Sydney Desk of 10% of the excess ... at the rate of ...  2.5%" to the applicant is important. The reference to "gross revenue" was considered by SGAL witnesses to convey a definite meaning. In cross-examination Naude agreed that it was correct to say that the " profit that was made on the Corporate Desk was a distinct identifiable category of the earnings of the bank". In his memorandum to Denis of 6 January 1992, Naude refers to Alison Ethell's "individual corporate FX 1991 results".

 

Naude refers in oral evidence to the Corporate Desk being a profit centre and to debits being made to the Corporate Desk and to losses of the Corporate Desk. There are also references to creating a new profit centre other than the Corporate Desk. The Corporate Desk is treated as an identifiable and specific centre for the attribution of earnings, profits and loss. Although it is was not in any sense a legal entity, its activities and revenues could be specified as an operational unit for the purpose of splitting profits between it and other desks and employees such as the Treasurer, Night Desk and Forward Desk.  Denis identified the ordinary practice of SGAL, as being that profits calculated and identified at the conclusion of the deal by the Corporate Desk dealer were allocated as profits of that desk on the Profit and Loss Account subject only to some points being given away to other desks.

Variation - Cancellation Clause

 

Some reliance was placed by SGAL on the variation/cancellation clause on the third page of the Bonus Incentive Scheme executed on 9 January.

 

The provisions of that clause are set out earlier in these reasons.

 

On my interpretation of this clause it cannot be said that the Managing Director was entitled to or had varied or cancelled the bonus scheme in writing the Incentive Scheme due to non-compliance by the applicant with the Bank's policy. Although, "bank policy" can be treated as to some extent fluid, and variable according to commercial exigencies from time to time, the cancellation clause is directed to the conduct of the participants.  There is no suggestion in the present case that the variations or changes were made on the basis of non-compliance with bank policy by the applicant. Nor does the variation provision which refers to "significant ongoing investigations" apply.

 

It is submitted, however, that the variations to the bonus scheme and the allocation of profits within that scheme came within the provision for variations due to "unforeseen circumstances beyond the control of the Bank". The size and impact of the Negara transactions were said to have amounted to "unforeseen circumstances beyond the control of the Bank." Reference is made in submissions to certain features and consequences of the Negara transactions during 1992. It is submitted for SGAL that the large Negara Swap deals which generated the profits:

 

     "i   were abnormal transactions;

 

     ii   arose primarily from  Mr Naude's connection with Mr Nor;

 

     iii  involved activities on the part of the applicant which were essentially clerical;

 

     iv   involved delicate decision-making by Mr Naude;

 

     v    involved substantial work by employees on Forward Desk;

 

     vi   involved substantial risk to the respondent;

 

     vii  involved an exceeding of limits by the managing director; and

 

     viiicaused a tying up of credit limits which in turn inhibited the ability of forward desk to carry on its normal profitability activities."

 

 

The evidence is that the size of the transactions were out of the ordinary but by 9 January there had been three of these large Swap deals amounting in total to USD 4 Bio and no doubt it was contemplated and intended by SGAL that there would be further large transactions which would provide substantial profits for SGAL in the ensuing twelve month period. The size of the transactions alone does not constitute, in my view, an unforeseen circumstance.  Moreover, since it was open to SGAL to accept or decline the transactions, it cannot be said to have been a circumstance "beyond the control of the bank."

 

While it could be said that the Negara swap deals arose largely from the association of Naude with Nor of Negara, the records of SGAL clearly demonstrate that the work and association of the applicant with TC was an important catalyst to the relationship between the banks and was a significant factor in the continuance of that association.

 

It is to be noted that Naude expressed the view, at one stage, that he was "too old to be on the boards".  On the evidence it cannot be said that, as some of the witnesses in their evidence on behalf of the Bank suggested, her work was essentially clerical. The Bank records refute this. Indeed, the January pre-delivery deals in particular demonstrate that her judgment as to the extent of the profit which could be made by SGAL on the Negara transactions was more perceptive and accurate than that of Naude.  He initially was of the view that a substantially lower spread of profits should be taken than that which was eventually achieved as a result of the insistence of the applicant.

 

Again, when the applicant was on vacation and Agnes Vas was filling in for her on the Corporate Desk, the actions of Vas led to some hostility and endangered the relationship with TC, the chief dealer at Negara. This was a serious matter and needed some considerable smoothing over by Naude. Naude stated that "he could not wait for Alison to return ...".   Whilst there was no doubt some "delicate" decision-making by Naude, the evidence showed that he had great faith in the judgment of the applicant in relation to the large transaction where millions of dollars of profit could turn on the variations as to number of points taken. He appears to have basically accepted her assessments as to the extent of profit to be taken and to have endorsed them.   She certainly took a more aggressive approach to the number of points which could be taken on certain transactions and there was no evidence of any significant dissatisfaction on the part of Negara. Indeed, the evidence during 1992 is to the contrary.

 

The Negara swaps, of course involved substantial work by the Forward Desk; significant risk to SGAL; tying up of credit limits; an exceeding of limits by Denis, but there were large profits made by SGAL. The rewards to SGAL, the forward dealer, and Naude were very high.  The above considerations raised by SGAL cannot displace the entitlement of the applicant to have the resulting revenues from the Negara deals allocated to Corporate Desk, subject to discretionary "giveaways" to Forward Desk for its efforts.

 

In my view, none of these considerations, raised on behalf of SGAL, taken individually or even cumulatively, provided a contractual basis on which to vary the allocations of revenue on Negara transactions away from Corporate Desk.

 

A further submission was made that the only relevant contractual obligation was to allow the applicant to participate in a bonus scheme, as in force from time to time, as opposed to a fixed scheme. Reference was made to the contention that the bonus scheme provided to the applicant went through six stages during 1991-1992. It is said there were two variations in 1991 and 4 versions or variations in 1992. The applicant does not accept this and contends that the only incentive scheme relevant for present purposes was that executed on 9 January 1992  that it was not varied or cancelled and that it was in force during the entire calendar year.

 

I do not accept the submission of SGAL on this point. For the calendar year, 1991, there was only one bonus scheme so far as Corporate Desk was concerned. This was embodied in the written scheme. It was not open to SGAL to unilaterally vary or cancel that scheme on the pretext of a change in policy otherwise than as provided for in that scheme. The specific power to vary the bonus scheme, in specified circumstances, is inconsistent with the suggestion that there was a further reserved power or right in SGAL to unilaterally vary the January scheme.

 

Another matter raised by SGAL, in aid of its interpretation of the agreement, was that because the employment agreement of 21 August 1991 was terminable by either party on one month's notice, it is appropriate to construe the bonus scheme as leaving it open to the bank to terminate the entitlement of the applicant on one month's notice, and thereby avoid the obligation to pay her future large bonuses from Negara transactions. Further, it is said the applicant could have availed herself of this clause to the detriment of the bank by simply walking out on the bank on one month's notice.  It was put that the limited duration of the employment assisted the inference that the bonus scheme was never intended to provide profits from large Negara Swap deals to Corporate Desk which could not be re-allocated by the bank. In my opinion, notwithstanding this provision as to termination on one month's notice, the parties at all relevant times envisaged that the employment of the applicant would be for an indefinite and ongoing period.  I do not think any real assistance can be gleaned from the employment termination provision when considering the express written bonus scheme.

 

The recasting of the incentive calculation by the Memorandum of 26 June 1992 from Naude to Denis was calculated to and did divert away from Corporate Desk future profits of a nature which had previously been recorded to Corporate Desk so that Naude was attributed 70%, and Forward Desk 5%. It was clearly seen by Denis and Naude as "a change" to the Scheme. This "change" was unilateral and in my view in breach of the Scheme in force during the whole of 1992. Indeed, Naude said to the applicant on about 18 June 1992, words to the effect:

 

          "I should never have allowed Negara to be part of the corporate scheme. It should have been the same as at Citibank, the way (sic) it has turned out, others are being compensated who are not involved....

          I know the good work which you have been doing and I can assure you that this will be recognised. If you keep doing a good job then the Bank will look after you. Now this split is not negotiable. You should get out there and get Negara spot business. I've said to you before that any revenue that you can get on your own will always be credited to you. (Emphasis added)"

 

 

This conversation is significant. First, it shows that Naude considered that the effect of the Scheme in the light of the Negara transactions was to give a much larger profit to Corporate Desk than originally anticipated and he regretted this inclusion. Negara was clearly considered to be "part of the Corporate Scheme".  Second, that Naude's Memorandum of 26 June 1992 was intended "to change" this situation. Third, that his concern was that "others" on the Corporate Desk, apart from the applicant, were being over-compensated when they were not involved in the Negara deals. The implication is that Naude considered the applicant was closely involved ("the good work") and was rightly compensated.  Fourth, that SGAL would "look after her". Fifth, that in the light of the Bank's assurance, the 70-25-5% split was not open to negotiation and she would have to abide by it despite her protest. The applicant did this and she said she did it on the basis of the assurance and other assurances continuously given to her by Naude. I accept her evidence on this point to the effect that she was given assurances in the terms indicated in her evidence.

 

In relation to the August variation, effective 1 September, Naude's evidence was that during August he had conversations with Denis in relation to "changes to the Corporate Desk Bonus Scheme". He spoke with the applicant about a further change to "revenue allocation" saying that Corporate Desk had been over compensated for "their contribution" and stated that if she continued to work well she could be compensated "discretionary wise".  He went on to say that the prevailing "greed" could not continue and that there was an air of total reliance on Negara which he also said could not continue.

 

The effect of the 25 August Memorandum was that all profits arising from the Negara swap transactions were attributed directly to Naude for the rest of the year as from 1 October 1992. All foreign exchange swap transactions and resulting forwards transactions were not affected by the new policy. These did not generate large profits.

 

Although, as a result of this Memorandum, it was said that deals with Negara were to continue to be reflected in Corporate Desk's Profitability Report this was only for volume and other purposes.

 

This Memorandum signed by Denis but edited in its draft form by Naude, stemmed from an analysis of the implications of Naude's revised allocation policy. This analysis is set out in a Memorandum from Naude written to Denis and dated 18 August 1992. This analysis and the suggestions in it was approved by
Naude presumably before the "variations" of the allocation as set out in the Memorandum of 25 August.

 

In this Memorandum of 18 August Naude points out that the proposed re-allocation would produce a net saving for SGAL of AUD 715,474. Referring to this arrangement, Naude says:

 

          "This scheme will also result in considerable savings to the bank via the allocation of all Negara profits to this Management pool away from the corporate FX division." (Emphasis added)

 

 

 

It is significant that he was recommending in terms a substitute scheme which effectively diverted the bonus consequences of the Negara profits away from Corporate Desk although they were technically retained there for some purposes, such as recording volumes.

 

This change was not just a cosmetic or collateral variation to the scheme but it went to the heart of the scheme, namely the gross revenue of Corporate Desk, and constituted a new scheme by removing the profits from Corporate Desk contrary to what was, in my view, envisaged by the January scheme.

 

There is no suggestion in the Memoranda of 26 June and 25 August that Denis was basing the change on any of the specific matters, by reference to which variations or cancellations were provided for in the January Memorandum. The August Memorandum is also an acknowledgment that the profits from the Negara transactions had previously been treated as attributable to the Corporate Desk and would continue to be so attributed but only for limited purposes.

 

The cross-examination of Naude records:

 

          "Q.  The savings you were talking about were savings in the bank's obligations in terms of bonus to its dealers?

 

          A.   Yes.

 

          Q.   The savings would increase because you would allocate Negara, particularly Negara, profits, not to corporate FX where the bank would pay 10 per cent, but into FX management net revenue category, where only 3 per cent of it would be available for discretionary distribution?

 

          A.   It's actually 17 per cent isnt't it, not 10 per cent, because by diverting it away from the corporate desk so it's ....

 

          Q.   Already you were going to save the bank 17 per cent because the first - or 14 per cent, because the first 10 would be the corporate desks specific bonus entitlement and the next 7 would be discretionary bonus entitlement, which they got under their scheme if they passed budget by a certain amount?

 

          A.   The saving - the use of the word saving, yes, was to demonstrate that, but the decision about, in June already, in the June memorandum, it was already decided by management that 75 per cent of that split would be with management in any event."  (Emphasis added)

 

It is clear from the above, that Naude saw the exercise as diverting Negara profits away from the Corporate Desk where they would normally be attributed. He goes on to point out that an alteration had already been made in June but similar observations may be made in relation to that previous diversion of profits away from the Corporate Desk in favour "of management."

 

Another material consideration is, that in justifying the re-allocations, Naude does not refer to any agreement or understanding with the applicant or any other member of the Corporate Desk to the effect that allocation of revenue from Negara deals or other deals to Corporate Desk was discretionary and could be varied unilaterally at the unfettered discretion of SGAL. This might reasonably have been expected to be raised had there been any such specific agreement prior to the June or August memoranda.

 

Conclusion

 

I have reached the conclusion that the applicant is entitled to succeed in her claim for additional bonus compensation on the basis that the January 1992 Bonus Incentive scheme was in force throughout calendar year 1992. I do not consider that SGAL was entitled to vary this Scheme by diverting revenue from Corporate Desk in such a way as to diminish or eliminate the applicant's share of that revenue without the applicant's consent.  SGAL is therefore indebted to her. There is no agreement as to the precise quantum which ought to be awarded having regard to the concession on behalf of the applicant that there would have been some allowances made by her in relation to the giving away of points or fractions of points to other desks or sections. I therefore direct that Short Minutes be prepared by the applicant and served on the respondent.  The matter is to be set down on a date to be arranged for the making of formal orders. I will also hear the parties on interest and costs at that time.

 

 

 

 

 

 

 

 

 

 

I certify that this and

the preceding sixty-three (63)

pages are a true copy of the

Reasons for Judgment herein of

his Honour Justice Tamberlin.

 

Associate:

 

Date:                                     13 November 1995                                                             

 

Counsel for Applicant:                    Mr D J Fagan                                   

 

Solicitor for Applicant:                        Mr M N Johnson

                                          Holman Webb

 

Counsel for Respondent:                   Mr D M J Bennett QC                                  

                                          Mr M R Ellicott

 

Solicitor for Respondent:                 Mr Tony Woods

                                          Henry Davis York

 

Date of Hearing:                          31 July and

                                          1, 2, 3, 4, August 1995                        

 

Date Judgment Delivered:                        13 November 1995