JUDGMENT

Lord Lloyd Of Berwick J:

[1] This case arises out of a Currency Management Agreement dated 8th July 1985 between the appellant, Citibank NA, and the respondent, Stafford Mall Limited, a company incorporated in New Zealand who were the plaintiffs in the action. The case came on for hearing before Henry J in the High Court of New Zealand on 12th March 1991. After a trial lasting 18 days, the judge found in favour of the plaintiffs. He awarded $546,367 as damages for breach of contract, plus interest. An appeal to the Court of Appeal was dismissed on 10th June 1992. There is now an appeal by leave to Her Majesty in Council.

[2] The plaintiff company was formed for the purpose of promoting and developing a shopping mall at Timaru, in the South Island. The company is or was owned and controlled by Mr Edginton, a successful local businessman. At the time of the proposed development, interest rates in New Zealand were over 20%. If the project was to be viable, it was essential that the company should be able to borrow at a lower rate of interest. Accordingly, the company entered into what is known as a multicurrency loan agreement, whereby the bank agreed to lend the company the equivalent of NZ$2,570,000 in US dollars, or in one or more other currencies freely convertible into US dollars. The agreement is dated 21st May 1985. The initial loan, known as the development loan, was to be replaced by a term loan expiring on 30th August 1990. Interest on the term loan was at 2% above a Singapore bank rate known as SIBOR. This was less than half the current New Zealand rate of interest. Interest was payable at three monthly intervals. The loan was "rolled over" at the end of each interest period.

[3] The loan was drawn down in four tranches. The first draw down was on 20th May 1985 at a spot rate of 45, ie 45 US cents to the New Zealand dollar. The second draw down was on 20th June at 47 The third draw down was on 23rd July at 51 The final draw down was on 2nd August at 53 So the New Zealand dollar was strengthening against the US dollar throughout the draw down period. The total sum drawn down was US$1,228,614. The average draw down rate was 478.

[4] Another important feature of the New Zealand economy at the time was that the exchange rate was extremely volatile. Until 1985 New Zealand had a managed currency. The exchange rate was strictly controlled. When exchange control restrictions were lifted in March 1985, and the New Zealand dollar was allowed to float, the rate was about 44. It was generally assumed that the rate would fall below that level, due to a net outflow of capital. In the event this did not happen.

[5] In order to protect itself against the expected fall in the value of the New Zealand dollar (thus making it more expensive for the company to repay the loan) the company entered into a second agreement with the bank known as the Currency Management Agreement. It was dated 8th July 1985. The purpose of the Agreement, as its title would suggest, was to provide the company with advice on the management of the currency aspect of the loan. Since the outcome of the appeal turns on the true construction of the Currency Management Agreement, it is appropriate to set out the relevant terms verbatim, as did the judgments in the courts below:-

"WHEREAS

A. The Bank has provided the Borrower with a multicurrency credit facility (hereinafter called 'the facility') amounting to NZ$2,570,000 (hereinafter called 'the amount of the facility') upon the terms contained in a facility agreement made between the parties and dated the 21st day of May, 1985 (hereinafter called 'the agreement') and at the request of the Borrower has agreed to offer the Borrower currency management advice in respect of the facility and may at its sole discretion offer to the Borrower certain currency information (as hereinafter defined) from time to time.

B. The Borrower may request the Bank to provide the Borrower with spot or forward exchange contracts (hereinafte