Macquarie Bank Ltd v Graceland Industry Pte Ltd

CourtInternational Commercial Court (Singapore)
JudgeSir Henry Bernard Eder IJ
Judgment Date04 May 2018
Neutral Citation[2018] SGHC(I) 5
Citation[2018] SGHC(I) 5
Docket NumberSuit No 5 of 2017
Plaintiff CounselNish Kumar Shetty, Foo Chuan Min, Jerald and Tay Jia Wei, Kenneth (Cavenagh Law LLP)
Defendant CounselWong Hin Pkin Wendell, Priscylia Wu Baoyi and Wong Zi Qiang, Bryan (Drew & Napier LLC),and Abraham Vergis, Lim Mingguan and Kim Shi Yin (Providence Law Asia LLC)
Sir Henry Bernard Eder IJ: Introduction

These proceedings concern a claim by Macquarie Bank Limited (“Macquarie”) for US$1.2 million (alternatively damages to be assessed) in relation to what is said to be an “over-the-counter” (“OTC”) commodity swap agreement (the “Transaction”) in respect of 30,000 metric tonnes (“mts”) of nitrogen fertiliser (urea) at a fixed price of US$275 per mt between Macquarie and the Defendant, Graceland Industry Pte Ltd (“Graceland”), a subsidiary of Wengfu (Group) Co., Ltd (“Wengfu Group”) which is a Chinese state-owned enterprise involved in the manufacture and supply of phosphate-based chemical products.

In summary, it is Macquarie’s case that the Transaction was made in the course of certain emails in May 2014 and recorded in a Long Form Confirmation (“LFC”) dated 6 June 2014 incorporating the standard 2002 International Swaps and Derivatives Association Inc. Master Agreement (the “ISDA Form”); that Graceland wrongfully repudiated the Transaction thereby entitling Macquarie to terminate the Transaction as it did on 8 July 2014; and that the sum of US$1.2 million is recoverable by Macquarie as the “Close-out Amount” (as defined in the ISDA Form). As appears below, Graceland denies such claim and advances a counterclaim against Macquarie and also Mr Stephen Wolfe who was, at all material times, employed by Macquarie as a Senior Advisor.

By way of defence and counterclaim, Graceland raises a number of wide-ranging issues with regard to the proper analysis of the relationship between Macquarie/Mr Wolfe and Graceland, the nature and terms of the Transaction, the obligations of Macquarie/Mr Wolfe, alleged fraudulent misrepresentations/non-disclosures by Macquarie/Mr Wolfe and whether, as Graceland alleges, the Transaction was void ab initio and/or has been rescinded. In very broad terms, it was submitted on behalf of Graceland that it never thought that it was selling 30,000 mts of urea in a swap deal with Macquarie as a counterparty, but that Macquarie acted throughout as its agent, broker or fiduciary; that, in that capacity and against the background of more than 20 years of friendship and business relationship (guanxi) which Mr Wolfe enjoyed with Graceland’s director, Mr Liu Zhongjin, and the Wengfu Group, Mr Liu reposed confidence and goodwill in Mr Wolfe; that at every juncture, Mr Liu looked to Mr Wolfe for and relied entirely on Macquarie and Mr Wolfe for their advice and recommendations; that Mr Wolfe abused that relationship by misleading Graceland and enticing it to enter into a sector which it had no experience in, ie, commodity derivatives; and that, unknown to Graceland, this was a “recipe for commercial disaster”. As described somewhat dramatically by Mr Darrell Ingram (one of Graceland’s experts) in his supplementary report, the transaction was from both a transactional and financial point of view, simply “an off-course drone strike from the very start.” In addition, there is also an issue between the parties concerning the proper calculation of Macquarie’s claim for the Close-out Amount under the ISDA Form (if incorporated into the Transaction). As such, the present case involves issues which are potentially of considerable significance to the derivatives market.

It is important to note that, as originally pleaded in the defence, it was Graceland’s primary case that there was never any binding agreement between Macquarie and Graceland because there was no offer and acceptance. However, that issue was determined at a previous hearing before Woo Bih Li J in Registrar’s Appeal No 30 of 2017 before this case was transferred to the Singapore International Commercial Court (“SICC”). In particular, Woo J struck out the portion of Graceland’s defence pleading that “no contract was concluded between [Macquarie] and [Graceland] as [Macquarie’s] offer for a swap transaction had expired as time had lapsed before [Graceland’s] purported acceptance.” Graceland did not seek to appeal Woo J’s decision. Thus, the present position is that Graceland accepts (as it must) that there was a binding agreement, although (as referred to below) there are important “live” issues as to (a) the precise terms of such agreement; and (b) whether such agreement was void or voidable.

In summary, Graceland denies the claim on four main grounds: Unilateral mistake: The Transaction was void ab initio and/or has been rescinded on the basis of Graceland’s “unilateral mistake”. In particular, it is Graceland’s case that it did not intend to enter an OTC transaction and that it was under the mistaken belief that the Transaction was not such a transaction. Further, it is Graceland’s case that Macquarie and/or Mr Wolfe had actual and/or constructive knowledge of and/or unconscionably took advantage of such mistaken belief. Mutual mistake: The Transaction was void ab initio on the basis that the Transaction was entered into by a “mutual mistake” by Macquarie and Graceland, viz, Graceland had thought that Macquarie was at all material times acting as its agent or broker in the Transaction, whereas Macquarie thought Graceland wanted to transact with Macquarie as a counterparty (ie, principal to principal) to the Transaction. Breach of fiduciary duties: Macquarie and/or Mr Wolfe breached their fiduciary duties such that Graceland was entitled to and did validly elect to “reject” the Transaction. Fraudulent misrepresentation or non-disclosure: The Transaction has been validly rescinded by Graceland by virtue of fraudulent misrepresentations made by Macquarie and/or Mr Wolfe, alternatively, their material non-disclosure of certain matters. In the further alternative, Graceland relies upon s 2 of the Misrepresentation Act 1967 (c 7) (UK).

As stated above, Graceland also challenges the calculation of the amount claimed by Macquarie and advances a counterclaim for damages to be assessed against Macquarie and/or Mr Wolfe.

Save as set out below, it is common ground between the parties that all these issues are to be determined as a matter of English law.

The Parties

Macquarie is a company incorporated in Australia. It is a global provider of banking, advisory, trading, asset management and retail financial services. The second defendant in counterclaim, Mr Wolfe, was, at all material times, employed by Macquarie as a Senior Advisor.

Graceland is a company incorporated in Singapore. As stated above, it is a subsidiary of the Wengfu Group which is a Chinese state-owned enterprise involved in the manufacture and supply of phosphate-based chemical products. As a subsidiary of the Wengfu Group, Graceland facilitates the Wengfu Group’s manufacture and supply of these products including the trading of phosphate-based chemical products. It is a very substantial trading company with paid-up capital of US$50 million and revenues in 2013 of some US$2.3 billion. However, it is an important part of Graceland’s case that the vast majority of its business concerned the trading of physical products; that, so far as urea is concerned, its trading business was very limited, to perhaps about 150,000 mts of physical product per year; and that it had no prior experience of derivatives in fertilisers. Even so, Graceland cannot, in my judgment, be regarded as minnows. As Mr Liu accepted, it had its own in-house “legal guy” and had the fullest opportunity to take legal advice, if it wished. Indeed, it is noteworthy that, as appears below, Mr Wolfe recommended Graceland to take its own legal advice – which Graceland declined to do.

The Evidence

The vast bulk of the evidence consists of the contemporaneous email exchanges between the parties which speak for themselves. In addition, in support of its claims, Macquarie relied upon the evidence of Mr Wolfe. Graceland relied upon the evidence of two witnesses, viz, Ms Zhang Lin and Mr Liu Zhongjin. All three witnesses served affidavits of evidence-in-chief (“AEICs”) and were cross-examined in the course of the trial. Although Ms Zhang confirmed that she was able to and did speak English, that was not her first language and accordingly she gave evidence through an interpreter. Mr Liu understood and spoke English fluently. He gave his evidence in English although he occasionally had the assistance of the interpreter from time to time.

Mr Wolfe is currently the Executive Director in the Commodities and Global Markets Group of Macquarie. He first started work at Macquarie from 1984 to 1990 as a Senior Manager involved in the trade of derivatives and metals. After he left Macquarie, he worked at a number of other firms and was involved in the trade and finance of, among other things, base and precious metals, chemical fertilisers and their derivatives. In about December 2013, he re-joined Macquarie as a Senior Advisor in Macquarie’s Fixed Income, Currencies and Commodities group (the “FICC Group”), which is now named the Commodities and Global Markets group (the “CGM Group”). In particular, the FICC Group was involved in, among other things, the financing, trading and pricing of commodities globally. As set out in his Consultancy Agreement dated 3 December 2013, Mr Wolfe’s role as a Senior Advisor in the FICC Group included, among other things, the promotion and development of the FICC business in China. In particular, his role was to identify, promote and progress business opportunities in China with specific reference to physical commodities and their related derivative products as well as with existing and newly developed exchange-traded futures contracts. In his present role as an Executive Director in the CGM Group, he is now in charge of Macquarie’s commodities businesses in China. At the relevant time, Mr Wolfe worked mainly from Macquarie’s offices in Sydney, Australia but he would also travel on business to other places including China and Hong Kong. Further, as he explained in evidence, Macquarie’s trading desk operations were based in New...

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