ACN 074 971 109 (as Trustee for the Argot Unit Trust) and Pegela Pty Ltd v The National Mutual Life Association of Australasia Ltd

[2011] VSC 519

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

LIST C

No. 2026 of 2002

ACN 074 971 109 (AS TRUSTEE FOR THE ARGOT UNIT TRUST)

PEGELA PTY LTD (ACN 002 256 751)

Firstnamed Plaintiff

Secondnamed Plaintiff

v

THE NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA LIMITED (ACN 004 020 437)

Defendant

No. 7779 of 2009

ACN 074 971 109 (AS TRUSTEE FOR THE ARGOT UNIT TRUST)	Plaintiff
v
THE NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA LIMITED (ACN 004 020 437)	Defendant

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JUDGE:	CROFT J
WHERE HELD:	Melbourne
DATE OF HEARING:	7-10, 15-18, 21-24 and 28 March;  31 May;  1, 2 and 8 June 2011
DATE OF JUDGMENT:	25 November 2011
CASE MAY BE CITED AS:	ACN 074 971 109 (as Trustee for the Argot Unit Trust) and Pegela Pty Ltd v The National Mutual Life Association of Australasia Ltd
MEDIUM NEUTRAL CITATION:	[2011] VSC 519

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CONTRACT – Investment linked life insurance policy - Construction of terms – Whether special terms negotiated on plaintiffs’ behalf created right to make arbitrage profits at the defendant’s expense through switching of investments between portfolios – Whether defendant breached terms of policy.

APPEAL – Extent of issues remitted for determination by Court of Appeal – Jurisdiction to deal with other matters, the subject of subsequent proceedings and otherwise – Extent to which res judicata, cause of action estoppel and Anshun estoppel arise – Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589.

UNCONSCIONABLE CONDUCT – Damages for unconscionable conduct or, in the alternative, for a breach of s 52 of the Trade Practices Act1974 – Loss of opportunity to make an alternative investment – Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr P. Crutchfield SC with Mr D. Gration	Lillas & Loel Lawyers
For the Defendant	Mr R. Brett QC with Mr P. Willis Mr A. Pound	TurksLegal

HIS HONOUR:

Background

1. These proceedings concern the operation of a prosperity bond investment scheme utilising prosperity bonds, which were policies of life insurance within the meaning of the Life Insurance Act1995 (Cth). The bonds were issued by the defendant as insurer. This matter comes before the Court in relation to proceedings commenced in 2002, in proceeding number 2026 of 2002 (“the 2002 proceedings”) and in proceedings commenced in 2009, in proceeding number 7779 of 2009 (“the 2009 proceedings”).

1. In 1998, large amounts of money were invested in these prosperity bond policies by a group of investors.  The policy premiums for these bonds, and their resulting earnings, were placed in a single identified fund.  This fund was divided into units of equal value, which were allocated to investors in the prosperity bond policies according to their entitlement.  The value of each of the units reflected the value of the underlying investments in the portfolios of assets with respect to which those units were issued.  There was a “cash” category portfolio and a “secure” category portfolio.  Investors in the bonds, as policyholders, were able to “switch” their units from one portfolio to another on notice to the defendant.  The “cash” category portfolio units maintained a relatively stable value, whereas the “secure” category portfolio units varied in unit price as their price was fixed with reference to movements in share indices.

1. Until mid-2000, the defendant adopted a practice of historical pricing with respect to units, reflecting the value of the “secure” category portfolio.  This enabled unit holders to assess likely movements in the value of the “secure” category portfolio units, by observing and assessing movements in share indices.  As the unit value changed in line with share indices, unit holders could make profits (and avoid losses) by strategically switching between the “cash” and “secure” category portfolios.  However, from mid-2000, forward pricing of units was applied by the defendant.  This restricted the ability of unit holders to make profits by switching between the “secure” and “cash” categories of units.  In order to continue to profit from switching under the forward pricing regime, unit holders sought to utilise sequential switch notices.  These were given to the defendant interspersed with notices of revocation of switch notices.  Each of these notices was given on the basis of the unit holders’ assessments of movements in share price indices, which would affect the price movements in the “secure” category portfolio units.  The use of, what might be termed, a sequence of switch and revocation notices, raised a variety of issues, including whether unit holders were permitted to “short sell” under the terms of the prosperity bond policies, and whether the defendant was entitled to give effect to a switching notice immediately or was obliged to wait for three working days before giving effect to a switching notice.

1. The dispute between the parties critically involved the interpretation of clause 1.8 of the prosperity bond policy, which is in the following terms:

“1.8 Large Withdrawals

We reserve the right to delay for up to 30 days any cash withdrawal or any transfer between the investment portfolios which would otherwise require the cashing within any 30 day period of Units valued at more that [sic] $100,000.  We will then use the Unit Price(s) applicable at the end of the period of delay.

AXA Australia will waive its right to delay withdrawals and switches for 30 days, providing the investor gives three working days notice of its intention to switch or withdraw.  The unit price will be the price on the day when the notice is given in writing.  AXA Australia also agrees that should the investor change their mind prior to the completion of the portfolio switch or withdrawal transaction and not proceed with the switch or withdrawal, no penalty will be involved.”

In addition to claims by the plaintiffs, as investors, that the defendant had breached these provisions, the investors claimed against the defendant on the basis of estoppel and contravention of s 52 of the Trade Practices Act1974 (Cth).

1. The plaintiffs’ claims were the subject of a long trial before Redlich J between October and December 2003, March and April 2004, and May, September and December 2006.[1]  The issues raised in that trial were complex, both factually and legally, and resulted in a judgment of 387 pages.  The proceeding at first instance was subject to an appeal the result of which, in general terms, was to vary the decision of Redlich J.[2]

   [1]See ACN 074 971 109 (as Trustee for the Argot Unit Trust), Pegela Pty Ltd, Thomas Oates and Paul Oates v National Mutual Life Association of Australasia Limited [2006] VSC 507.

   [2]ACN 074 971 109 (as Trustee for the Argot Unit Trust) & Anor v The National Mutual Life Association of Australasia Ltd (2008) 21 VR 351.

1. Following the appeal, the Court of Appeal made orders which, amongst other things, remitted certain questions to the Trial Division for determination, as follows:[3]

   [3]ACN 074 971 109 (as Trustee for the Argot Unit Trust) and Pegela Pty Ltd v National Mutual Life Association of Australasia Ltd (No 2) [2009] VSCA 24, [10] (paragraphs 2 (4) and (5)).

“4)  The following questions are remitted to the trial judge or, if he not be available to consider the matter further, to another judge of the Trial Division, for determination according to law:

a) Whether the defendant committed any and what breach or breaches of clause 1.8 of the plaintiffs’ Prosperity Bond policies.

b) In the case of any breach of clause 1.8, whether the plaintiff in question is entitled to damages for breach in contract in respect of the breach and, if so, the amount of those damages;

c) In the case of any breach of clause 1.8, whether the plaintiff in question is entitled to damages in lieu of specific performance in respect of the breach and, if so, the amount of those damages.

5)  It is directed that the judge to whom the above questions are so remitted for determination shall:

a) determine in light of the evidence already adduced whether it is just and appropriate for the parties to be permitted to adduce any further evidence or should be confined to that already adduced;

b) determine whether any question should be deferred to a special referee for decision or opinion and, if so, may refer the question accordingly.”

1. In broad terms, the 2009 proceedings arise out of the 2002 proceedings, though they are said by the plaintiffs to be separate proceedings which arise out of events subsequent to matters relevant to the 2002 proceedings.

1. By summons dated 9 March 2010, the plaintiffs sought to make amendments to their statement of claim in the 2002 proceedings.  The defendant opposed the application and, additionally, sought to strike out the statement of claim in the 2009 proceedings.

1. As indicated, the 2009 proceedings, like the 2002 proceedings, arise out of the prosperity bond policy investment arrangements established by the defendant.  The plaintiff in the 2009 proceedings submitted that these proceedings concerned breaches subsequent to the facts and circumstances pleaded in the 2002 proceedings and were concerned, principally, with events which occurred in 2009.  It is clear, however, from reading the amended statement of claim the subject of this application, that the facts and circumstances underpinning these events reach back to matters that occurred in the year 2000.

1. The defendant submitted at the hearing of these pleadings applications that many of the issues raised in the amended statement of claim in the 2009 proceeding were now precluded by reason of res judicata, or cause of action estoppel, because the cause of action is merged in the judgment already given in the 2002 proceeding, and no longer has any independent existence.[4]  Alternatively, the defendant submitted that many of these issues are precluded by what has become known as Anshun estoppel.[5]

   [4]See Blair v Curran (1939) 62 CLR 464 at 532 (Dixon J); Jackson v Goldsmith (1950) 81 CLR 446 at 466-468 (Fullagar J) “although dissenting his exposition can be treated as authority”: Effem Foods Pty Ltd v Trawl Industries of Australia Pty Ltd (1993) 43 FCR 510 at 513 (FC); Chamberlain v FCT (1988) 164 CLR 502 at 511.

   [5]See Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589; and see Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 36 FCR 406 at 422-423.

1. The defendant submitted that the relevant facts and circumstances relied upon in the 2009 proceedings have already been adjudicated upon in the 2002 proceedings, and are consequently now precluded from being raised and re-litigated on the basis of res judicata or action estoppel.  In the alternative, the defendant submitted that, to the extent that these claims can be regarded as new claims, they are claims that are now precluded because they could and should have been determined previously, and thus come within the principles articulated in Port of Melbourne Authority v Anshun Pty Ltd.[6]

   [6](1981) 147 CLR 589.

1. Having regard to the nature of the 2002 proceedings to which the 2009 proceedings clearly relate, I decided that it was not appropriate that the matters raised by the plaintiff and the defendant in their applications should be dealt with by way of a pleadings application, where there was not sufficient opportunity to consider the complex facts and law raised in these proceedings.  Consequently, I decided that it was appropriate to allow amendment of the statement of claim in the 2002 proceedings, on the application of the plaintiffs, and that it was not appropriate to accede to the strike out application, in whole or in part, made by the defendant in relation to the 2009 proceedings.  My reasons, with reference to authorities, are set out in a judgment dated 7 May 2010.[7]

   [7][2010] VSC 186.

Extent of remitted matters from Court of Appeal

1. The extent of matters the subject of the 2002 proceedings which were remitted by the Court of Appeal to the Trial Division is specified in the orders of the Court of Appeal;  the terms of which, naturally, require careful consideration.[8]  This is particularly important as the remit is narrow, in the sense that it is focused on particular questions.  It is not a general invitation to the Trial Division to revisit issues in, or with respect to, the 2002 proceedings.

   [8]See above, paragraph 6.

1. In relation to the 2002 proceedings, the critical question remitted is whether the defendant committed any breach or breaches of clause 1.8 of the plaintiffs’ prosperity bond policies and, if so, what were the breach or breaches.  The further questions remitted, with respect to damages or damages in lieu of specific performance, are dependent on a finding of a breach or breaches sounding in damages or a failure of performance with respect to the provisions of clause 1.8 which could provide a basis for an order for specific performance.  If no breach or breaches of clause 1.8 are found, there is no warrant to proceed further, with respect to damages or any other matters.

1. The orders of the Court of Appeal do, however, within the scope of the questions remitted, contemplate the Trial Division determining whether it is just and appropriate for the parties to be permitted to adduce any further evidence or whether they should be confined to that already adduced.  The orders also contemplate the possibility of a question being referred to a special referee for decision or opinion.  The position of the parties was that a reference to a special referee may be appropriate with respect to some complex issues in relation to the question of damages, in the event that they arise.

Extent of other matters for determination

1. As noted with respect to the pleadings issues the subject of my judgment in May 2010, the position of the defendant was that the matters sought to be raised by the plaintiffs in the 2009 proceedings did not have the effect of adding significantly to the issues remitted by the Court of Appeal with respect to the 2002 proceedings because, to the extent it was sought to do so in these proceedings, this was precluded by res judicata or cause of action estoppel or, alternatively, on the application of the principles in Anshun.[9]  For the reasons which follow, it has not proved necessary to embark on the process of determining the extent to which particular issues the subject of the 2009 proceedings are now precluded from consideration;  at least not in any detailed or comprehensive way.

   [9]Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589.

Court of Appeal decision

1. The decision of the Court of Appeal and the orders made are, naturally, defined in their ambit by the issues and relevant evidence before Redlich J and, in turn, by the matters raised and pursued on appeal.  It is common ground between the parties now that there have been further actions taken by the parties with respect to the prosperity bonds.  The extent to which these matters may be raised or relied upon now or the extent to which subsequent events have raised new issues going to the interpretation of clause 1.8 of the prosperity bond policies – hence with respect to the question of breach or breaches – which are either relevant now or which are able to be raised now, having regard to res judicata and the preclusionary principles to which reference has been made, is in dispute.

1. In any event, for the purpose of considering the critical question whether there have been any breach or breaches of clause 1.8, the Court of Appeal judgment must be taken to be the definitive, authoritative, determination of the proper construction of the provisions of this clause.  This does not mean, however, that there may not be some ambiguities or gaps in interpretation as a result of subsequent events or on the basis of issues with respect to the operation of clause 1.8 which are properly considered now.  Consequently, it is neither necessary nor open for the Court now to revisit the proper approach to the construction of clause 1.8.  Rather, the Court has the advantage of the consideration and determination of the commercial purpose of clause 1.8 and other provisions of the prosperity bond policies by the Court of Appeal and, in this context, the proper construction of its terms.

1. For present purposes it is, in my view, critical to examine the approach of the Court of Appeal with respect to the underlying proposition or assumption inherent in the plaintiffs’ case throughout the 2002 proceedings, both in the trial before Redlich J and in the appeal.  The pervading proposition or assumption was, and remains in the present stage of the 2002 proceedings and now in the 2009 proceedings, that the respondents were entitled, under the prosperity bond policies, to engage in profitable arbitrage.  The Court of Appeal rejected this proposition or assumption in the context of the varying issues raised on appeal.  At the outset, the Court of Appeal said:[10]

“In this appeal, the appellants contested the judge’s construction of the special terms and argued that in one way or another they were entitled to be fully compensated for their expectation losses based upon the continuation of their ability to engage in arbitraging.  …”

The critical provision, the, so-called, special terms of the policies is clause 1.8.

[10]ACN 074 971 109 (as Trustee for the Argot Unit Trust) & Anor v The National Mutual Life Association of Australasia Ltd (2008) 21 VR 351 at 356-7, [7].

1. In the course of considering the proper construction of clause 1.8, the Court of Appeal considered the argument by the plaintiffs (the appellants on appeal) that as the investor would, under the terms of clause 1.8, be entitled to revoke the notice before it expired, it followed that the defendant (the respondent on appeal) was not permitted to act on a notice until it had expired.  If the notice were not revoked before it expired, the defendant would be bound, on its expiration, to complete the transfer at the price applicable on the day the notice was given.  On this basis, the plaintiffs claimed that clause 1.8 enabled them to make arbitrage profits as they could decide whether to switch between portfolios, secure and cash, or withdraw units with the benefit of hindsight.  Continuing, the Court of Appeal said:[11]

   [11](2008) 21 VR 351 at 359, [19] and [20].

“[19] The judge placed some emphasis on the words ‘the unit price will be the price on the day when the notice is given in writing’.  His Honour reasoned that, if the price at which the transfer or withdrawal were to be effected was the price on the day that notice was given, the day of transfer or withdrawal should be that day.  But in our view the purpose of the second paragraph of cl 1.8 was to accommodate an investor who wished to effect a transfer or withdrawal at the price applicable at the date of giving notice and wished also to avoid the possibility of a delay of 30 days.  Its effect was that, in consideration of the investor giving the respondent three business days’ notice of intention to transfer or withdraw, and therefore the opportunity for the respondent to do what it thought necessary or desirable to accommodate the transfer or withdrawal, the investor was to be permitted to revoke the notice if, during the period of notice, the price so moved as to make transfer or withdrawal undesirable from the point of view of the investor.

[20] The judge read the words ‘prior to the completion of the portfolio switch or withdrawal transaction’ as intended to convey something other than the expiration of the three business days’ notice and thus as implying that completion could take place before the expiration of the notice.  His Honour said:

‘I reject the contention that the words “prior to the completion” can be disregarded as a matter of construction. They are not in conflict with any other words. The words mean that [the respondent] may “complete” within the 3 day period.’[12]

[12]Reasons at [372].

With respect, we disagree.  In our view, if an investor gives notice of an intention to make a transfer or withdrawal in three business days’ time, there is nothing in the policy apart from cl 1.8 which authorises the respondent to complete the transfer or withdrawal before the expiration of three business days.”

The Court of Appeal then considered specific issues arising in the context of the proper construction of clause 1.8 with respect to short selling, buy price/sell price, historical price, deduced term as to historical price, express term as to historical price and, of particular importance in the present context, in relation to any implied term as to historic pricing and said:[13]

“[90] In our view, that is not so.  We accept that his Honour erred in the construction of cl 1.8 of the policy.  As we see it, the proper construction of the clause was to allow the appellants to make switches on 3 days’ notice, and to cancel before expiration of that notice, as they contended.  But so to say does not necessitate the implication of daily publication and historic pricing terms.  The most that can be said is that the proper construction of cl 1.8 would not be inconsistent with the implication of such terms.  Having come to that point, it is then necessary to take into account the other relevant express provisions of the policy, about the construction of which we consider that the judge was correct; and in particular, cll 2.2(e), 3.2(e) and 4.20, which, upon their proper construction, are necessarily inconsistent with the existence of the alleged implied terms.

[91] Counsel for the appellants submitted that, having found that the effect of cl 1.8 was to afford the appellants the 3-day option for which they contended, it was necessary to imply daily pricing and historic price terms in order to afford the appellants the benefit of that for which they had contracted.

[92] We reject that submission too.  As observed earlier in these reasons, the special terms of the policies, and in particular cl 1.8, gave the appellants the right to make unlimited switches between portfolios on 3 days’ notice and to cancel a proposed switch without penalty before the expiration of the 3 days.  But those terms did not give the appellants the right to make switches at a profit.  It is one thing (which the law requires) to imply terms in order to yield to a party the benefits for which he or she has contracted.  It is quite another (which the law does not require) to legislate for benefits which that party may have hoped, even expected, to derive, but for which he or she has not contracted.  Especially is that so when, as here, there are express provisions of the contract (in this case, cll 2.2(e), 3.2(e) and 4.20) which enable the other party to act in a manner which frustrates such hopes and expectations.[14]’’

In summary, while the Court of Appeal was prepared to imply terms to ensure the delivery of a benefit for which the plaintiffs had contracted under the prosperity bond policies, it was not prepared to deliver some hoped for or expected benefit for which the plaintiffs had not contracted.  In the context of this particular case, the last sentence of paragraph 92 of the Court of Appeal judgment is, in my view, of very significant importance.

[13](2008) 21 VR 351 at 373-4, [90]-[92].

[14]Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607–8 ; 26 ALR 567 at 576 (Secured Income) (Mason J); Far Horizons Pty Ltd v Mc Donald’s Australia Ltd[2000] VSC 310 at [128] (Byrne J).

1. The Court of Appeal emphasised this approach with respect to various other issues raised on appeal.  In relation to terms as to daily unit pricing, the plaintiffs argued in support of an alleged requirement of daily publication of prices.  As to this, the Court of Appeal said:[15]

“[97] Counsel for the appellants made much of the fact that the special terms entitled the appellants to make unlimited free switches.  He submitted that, in order for that express right to be effective and for the appellants to get the benefit of it, the respondent had to declare and publish a unit price daily.  Otherwise, he said, an investor could not make a rational decision as to whether or not to switch.  On that basis he contended that the judge should have found that the implication of a term as to daily publication of unit prices was not only necessary to give business efficacy to the special terms, but also to be implied as part of the respondent’s duty to do all things necessary to give the appellants the benefit of the right to unlimited and free switches.

[98] We reject that contention too.  It proceeds upon the same misconception as was advanced in support of the implication of a term as to the continuation of historical pricing practice.  The appellants may have hoped, perhaps even expected, to derive profits from historical pricing arbitrage.  But they did not contract for an entitlement so to profit.  They contracted for the right to switch as and when they chose but subject expressly to the risk that the respondent could exercise the powers conferred on it by cll 2.2(e), 3.2(e) and 4.20) to frustrate the hope and expectation of profits.”

Again, the Court of Appeal emphasised that the plaintiffs’ entitlement under the prosperity bond policies did not include the right to profitable arbitrage, the right to make switches at a profit.  Rather, as the Court of Appeal emphasised in the last sentence of the passages set out above, the terms of the policies actually enabled the defendant to exercise powers under clauses 2.2(e), 3.2(e) and 4.20 “to frustrate the hope and expectation of profits” on the part of the plaintiffs.

[15](2008) 21 VR 351 at 375, [97] and [98].

1. The same approach is evident in the consideration of where any losses from “dilution” would lie under the terms of the policies.  As the Court of Appeal explained, “’Dilution’ is a natural consequence of historic pricing arbitrage between a stable Cash portfolio and a relatively volatile Secure portfolio.  It occurs because arbitrage between those portfolios consists in the arbitrager taking advantage of an increase in the value of assets in the Secure portfolio”.[16]  The Court of Appeal concluded the implied term argument with respect to dilution, emphasising, once again, that the special terms, clause 1.8, did not provide for profitable arbitrage or any protection for the policyholders as a result of the natural consequences of dilution:[17]

   [16](2008) 21 VR 351 at 376, [102].

   [17](2008) 21 VR 351 at 380, [112]-[116].

“[112] According to the appellants, the judge’s process of reasoning inverted the proper process of contractual construction by failing to consider first whether the policy or any special term of the policy enabled the respondent to dilute unit prices.  But in our view it is the appellants who invert reason and the proper process of contractual construction.  As has been explained, dilution was a natural consequence of Coneview investors arbitraging from the cash portfolio to the secure portfolio.  It occurred because the Coneview investors sought to take advantage of an increase in the value of assets underlying the non-Coneview investors’ units in the secure portfolio. Contrary to the appellants’ case, dilution was not something which the respondent did or for which it needed to identify a contractual authority.  It was something which occurred because the respondent did nothing to prevent it.  What the appellants are seeking to do is to impose an unexpressed contractual obligation on the respondent to do something to prevent it.

[113] Counsel for the appellants put an alternative argument that, assuming it were necessary to take into account the number of units on issue at the time of determination of the unit price, the respondent would be bound to procure the redemption of sufficient of its own units or alternatively to procure the funding and issue of sufficient further units to the appellants to ensure that the value of the appellant’s investment was not reduced by the effects of dilution.

[114] The judge rejected that argument too, and so do we.  There is no express term to that effect and we see no sufficient basis to imply it.  Such a term is not necessary in order to give the Coneview prosperity bonds business efficacy.  The special terms of the policies, in particular the second paragraph of cl 1.8, gave the appellants the right to make unlimited switches between portfolios.  But, as has already been observed, the special terms did not give the appellants the right to switch at a profit.  Where the policy was intended to provide for guaranteed results, as with protection, it provided for them expressly.  In other respects, the clear implication is that the policyholders were at risk.[18]

[115] Nor could a term of the kind contended for be regarded as reasonable. According to the appellants’ particulars of loss and damage, the respondent was required to put into the portfolio over the life of the policies sufficient of the respondent’s own money to enable the appellants to reap more than $1b in arbitrage profits (and apparently for no more reward than the relatively modest asset management fee charged to all policy holders plus the intangible advantages of having such a large amount of funds under management). As the judge said, that “would impose an extraordinary burden on [the respondent], not for the purpose of preserving the benefit of the contracts, but to give the [appellants] the return they hoped for”.

[116] For the same reason, it would be absurd to suggest that such a term was so obvious as to go without saying.^”[19]

Again, emphasising the point, the Court of Appeal said:[20]

“[124] The appellants called in aid actuarial standard 3.03, but in our view that takes the matter no further.  It may be assumed the standard imposed an obligation on the respondent to ensure that the reasonable expectations of the Coneview investors were met.  But, for the reasons already expressed, any expectation that the respondent would continue to fund the arbitrage profits of the Coneview investors for the duration of the policy would have been unreasonable.  …”

[18]Expressum facit cessare tacitum: Aspdin v Austin (1844) 5 QB 671 at 684 (Lord Denman CJ, Patterson, Coleridge and Wightman JJ); Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 73 ; 17 ALR 513 at 529 (Mason J).

[19]BP Refinery (Westernport) Pty Ltd v President Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 at 283 ; 16 ALR 363 at 379 (PC); Secured Incomeat CLR 605–6; ALR 575–6; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 441 ; 131 ALR 422 at 442–3 ; [1995] HCA 24 (McHugh and Gummow JJ)

[20](2008) 21 VR 351 at 393, [124].

1. Following on from the arguments in relation to dilution, the plaintiffs submitted that the terms of the prosperity bond policies did not permit the defendant to segregate the assets of the Coneview investors (which included the plaintiffs) from the investors in other prosperity bonds and thereby confine the effects of dilution as a result of Coneview investor arbitrage to those investors.  Alternatively, the plaintiffs argued that if the terms of the policies did not require the defendant to guard against the adverse effects of dilution, there was no clause in the policies which permitted the defendant to segregate assets to confine the effects of dilution to the Coneview investors.  Again, the Court of Appeal approached the segregation issue on the same basis as previous issues in that it emphasised that the plaintiffs were only entitled to the benefits for which they had contracted under the prosperity bond policies:[21]

“[134] Of course, it is true that, by removing the non-Coneview investors from the cash portfolio and the secure portfolio, the respondent effectively deprived Coneview investors of the ability to arbitrage at the expense of non-Coneview investors.  It is also true that, by depriving Coneview investors of that ability, the Coneview policies ceased to be as profitable as they otherwise would have been.  But there was nothing in any of the Coneview investors’ policies which expressly prohibited the respondent from removing non-Coneview policy holders from the cash and secure portfolios or which required the respondent otherwise to ensure that the Coneview policies remained as profitable as they had been before removal of non-Coneview policies.  We also reject the idea that any such obligations should be implied.  The Coneview policies are efficacious without the addition of a term of that kind and it is not necessary in order to afford the Coneview investors the benefits for which they contracted.  They have a prosperity bond policy with the ability to effect unlimited switches between the cash and secure portfolios.  So far as the evidence goes, it is profitable in the same way that non-Coneview policies are profitable.  It is capable of delivering all the benefits for which it provides.  This is not a case in which it is necessary to imply a term in order to yield to the appellants any benefits for which they contracted.[22]

…

[142] In any event, the segregation of Coneview investors and non-Coneview investors did not impermissibly affect the benefits of Coneview investors.  As has been explained, the opportunity to arbitrage at the expense of non-Coneview investors was not something for which Coneview investors contracted.”

The plaintiffs also argued that segregation was inconsistent with the provisions of s 32 of the Life Insurance Act 1995 (Cth) in that the process of segregation involved the defendant giving priority to its own interests over those of the owners of the policies. Again, the Court of Appeal rejected this submission on the same general basis as previously, namely that the meaning of “interests of owners and prospective owners of policies referrable to the fund” as used in s 32(1)(b) of that Act was referable only to the interests of those owners or prospective owners “as framed by their entitlements under the policies”.[23] The response of the Court of Appeal to the plaintiffs’ argument that segregation also involved a breach of s 46 of the Life Insurance Act was similarly based.[24]

[21](2008) 21 VR 351 at 385-6, [134] and [142].

[22]Compare Butt v McDonald (1896) 7 QLJ 68 at 70–1 (Griffith CJ, Cooper and Power JJ); Secured Incomeat CLR 607; ALR 576.

[23](2008) 21 VR 351 at 387, [146].

[24](2008) 21 VR 351 at 390, [152].

1. The last issue dealt with was an argument by the plaintiffs that the defendant was estopped from relying upon its contractual right to move to forward pricing and that the trial judge, Redlich J, had erred in holding that “the minimum equity required no more than that the respondent be compensated for their costs of borrowing and maintaining their property bond investments plus management fees incurred and the loss of investment opportunities foregone until the effluxion of such time as represented reasonable notice by the respondent”.[25]  The Court of Appeal agreed with the conclusion of Redlich J and, in particular, his Honour’s statement in concluding that the relief required was no more than was necessary to avoid detriment:[26]

“The expectation profits or loss of bargain which would flow from the fulfilment of the plaintiffs’ assumption of a right to make arbitrage profits for the life of the policies is not a detriment for which equity should provide relief.  …“

[25](2008) 21 VR 351 at 390, [153].

[26](2008) 21 VR 351 at 394, referring to judgment of Redlich J [952] (citations omitted).

1. In summary, the effect of the Court of Appeal judgment is to establish, and to emphasise, that the prosperity bond policies, clause 1.8 and the other provisions of those policies, did not confer upon the plaintiffs any right to arbitrage between the Cash and Secure portfolios at a profit.  Also of particular importance in relation to this stage of the 2002 proceedings and the 2009 proceedings, the judgment establishes and emphasises that the defendant was entitled to utilise any powers under the terms of the policies to prevent the plaintiffs conducting arbitrage at a profit, particularly in circumstances where the result required expenditure of moneys by the defendant in order to allow the plaintiffs to achieve this or where their profits from arbitrage would, in effect, be provided or subsidised by other, non-Coneview, policyholders.

Issues to be determined

1. Against the background of the judgment of the Court of Appeal in the 2002 proceedings and the issues arising in the 2009 proceedings, the plaintiffs identified the issues to be determined as being relatively narrow:[27]

“2.The plaintiffs opened their case stating that notwithstanding the volume and complexity of the evidence, submissions and judgments to date, the key remaining issues in the proceedings are straightforward:

(a)What did the Court of Appeal decide to be the proper construction of the special terms negotiated by the plaintiffs with the defendant and in particular clause 1.8 of the plaintiffs’ policies?

(b)Did the defendant breach clause 1.8 of the plaintiffs’ policies and by its conduct deprive the plaintiffs of an otherwise valuable opportunity to take advantage of the special terms?

(c)What was the value of that opportunity?”

[27]See Outline of the Plaintiffs’ Closing Submissions (19 May 2011), paragraph 2.

1. Addressing these broad issues in more detail, the plaintiffs’ submissions continued by way of a summary of their case:[28]

   [28]See Outline of the Plaintiffs’ Closing Submissions (19 May 2011), paragraphs 4 to 11.

“4.The defendant breached clause 1.8 of the plaintiffs’ policies from November 2000 to the date of the Court of Appeal’s decision on 5 December 2008, by adopting the practice of giving immediate effect to notices of intention to switch.[29]  In doing so the defendant deprived the plaintiffs of the opportunity to give effect to their strategy of maximising the benefits available to them from the special terms of the policies, terms which the defendant had expressly agreed with the plaintiffs.

[29]Statement of Michael Thornton, CB D16 paragraphs 23 and 24.

5.The defendant further breached clause 1.8 after the decision of the Court of Appeal by adopting the practice of immediately converting all the non-cash assets in the secure portfolio to cash on receipt of a notice of intention to switch.[30]  This was for all practical purposes equivalent to giving immediate effect to a switch from the secure portfolio to the cash portfolio,[31] which was precisely the conduct that the Court of Appeal had decided was not permitted by clause 1.8.

[30]Ibid paragraph 29(j).

[31]Statement of Richard Lyon, CB C15 paragraph 7.32.

6.The defendant further breached clause 1.8 by failing to put the plaintiffs in the position they would have been in had no notice of intention to switch been given if the plaintiffs revoked a notice of intention to switch.  Rather the defendant’s practice was to repurchase assets conforming to the secure portfolio mandate at the prices prevailing on the day of repurchase.  This meant that the secure unit price was different, and for practical purposes under the plaintiffs’ strategy less, than it would have been had the defendant not converted the non-cash assets to cash.[32]

[32]Exhibit DM-11 to the statement of Dale McMenamin, CB D12.

7.The cumulative effect of the defendant’s conduct was to repudiate the policy of the plaintiff in the 2009 proceeding … by showing an unequivocal intention not to be bound by clause 1.8.  Instead the defendant took, and intends to take, any action possible to deprive Argot of the benefit of clause 1.8.

8.The financial circumstances of Argot and Mr Tyne are in no way relevant to the question of whether the defendant’s conduct was repudiatory.

9.The plaintiffs’ damages should be assessed on the basis that the defendant deprived them of the opportunity to take advantage of clause 1.8 of their policies.  Many of the issues raised by the defendant go to calculation of damages and the steps legitimately available to minimise the defendant’s losses, rather than the question of whether or not the defendant breached the plaintiffs’ policies.

10.The calculation of damages should be undertaken by a special referee on the basis that the plaintiffs would have pursued their objective of maximising the benefits available to them from clause 1.8 and the defendant would have taken the steps legitimately open to it to minimise the cost to its shareholders of the plaintiffs doing so.

11.The special referee will need to be instructed as to:

(a)the proper construction of the policies, particularly with respect to determination of the day on which a notice is given under clause 1.8 and the expiry of the three day notice period under that clause;

(b)whether or not, and if so the extent to which, the defendant is permitted to undertake actions for the express purpose of depriving the plaintiffs of benefits that would otherwise be available to them under clause 1.8 including:

(i)conversion of the secure portfolio to cash on receipt of a notice of intention to switch;

(ii)changing the frequency of unit pricing;  and

(iii)changing the composition of the plaintiff’s portfolios;  and

…”

The plaintiffs’ summary continued, addressing repudiation and damages issues.[33]

[33]See Outline of the Plaintiffs’ Closing Submissions (19 May 2011), paragraphs 11(c) to 14.

1. The particular issues to be determined with respect to the construction and operation of the prosperity bond policies for the purpose of determining whether there was a breach of clause 1.8 of those policies are as follows:[34]

   [34]See Outline of the Plaintiffs’ Closing Submissions (19 May 2011), paragraphs 119 and 120.

(a)Early Conversion (or immediate liquidation):  Is the defendant entitled to convert the assets in the Secure portfolio immediately to cash on receipt of the switch notice?

(b)Portfolio Composition:  Is the defendant permitted to vary the composition of the Secure portfolio for the purpose of reducing the benefits that would otherwise be available to the plaintiffs through taking advantage of the special terms?

(c)Day Count:  The correct method of calculating the beginning and the end of the three working day period under clause 1.8 and the day’s unit price which should be used in respect of a switch which is not revoked?

(d)Multiple Notices:  The effect of issuing a switch notice when an earlier switch notice has not expired or has been revoked?

(e)Revocation of a Switch Notice:  If a switch notice is revoked, is the plaintiff entitled to be put in the same position it would have been if the notice had never been given?

(f)Unit Pricing:  Is the defendant permitted to calculate unit prices daily whether or not this has the effect of reducing the benefits that may otherwise be available to the plaintiffs through taking advantage of the special terms?

On the basis upon which the plaintiffs’ case was put and in the context of the extent of the matters remitted by the Court of Appeal, the determination of these particular issues with respect to the construction and operation of the prosperity bond policies resolves the outstanding issues in the 2002 proceedings and the issues raised in the 2009 proceedings, the latter to the extent that they are now open.[35]  There were also some good faith issues raised by the plaintiffs, which are considered separately.[36]  It should be noted, in this context, that the defendant did concede some “technical” breaches between 2 and 8 November 2000 in completing one switch earlier than it should have done.  This was a switch from the Secure portfolio to the Cash portfolio.  In the perspective of the nature and quantum of the claim of the plaintiffs in these proceedings any such conceded or similar breaches must be regarded as insignificant, and particularly absent any attempt to prove any loss and damage flowing from them (specifically).  This is unsurprising, given the focus of the plaintiffs’ case on the range of issues put by the plaintiffs (those set out above and the good faith and related issues) in relation to which they claimed the defendant was in breach over a long period of time, and significantly since the trial before Redlich J.  For these reasons and having regard to the views I have formed in relation to these issues, I regard any conceded and any similar “technical” breaches as insignificant and not matters to be considered for present purposes.

[35]See above, paragraphs 11 and 12 and, below, paragraph 139 .

[36]See below, paragraphs 131 to 138..

1. The parties provided a joint list of issues in dispute, at my request, after the conclusion of the hearing.  The joint list has been relied upon to the extent that the issues listed now arise having regard to my findings with respect to the issues in dispute on the basis of these reasons.

Early conversion (or Immediate liquidation)

1. Allegations that early conversion, or the immediate liquidation, of non-cash assets in the Secure portfolio on receipt of a switch notice, occurred were made only by the firstnamed plaintiff (“Argot”) and not by the secondnamed plaintiff (“Pegela”), and then only in the 2009 proceedings.  In broad terms, the allegation made by Argot in the 2009 proceedings was that immediate liquidation of non-cash assets in the Secure portfolio on receipt of a switch notice was a breach of the prosperity bond policy terms because the consequence of immediate conversion was to deny Argot the benefit of its entitlement under the policy terms to cancel a switch notice within the period specified.  It was said that the denial of benefit flowed from the fact that if the value of the assets in the Secure portfolio increased prior to the cancellation of the switch notice by Argot, the increased value would be lost to Argot because the immediate conversion to cash assets would mean that even though it may resume its unit holding in the Secure portfolio on cancellation of the switch notice, the value of its units would only reflect the cash value of the non-cash assets at the time of their conversion and prior to any increase in value.

1. Allegations in this respect are contained in paragraphs 59-62 of the 2009 Further Amended Statement of Claim.  These pleadings refer to a specific instance of the giving of a switch notice by Argot and the manner in which that notice was treated, directly and in terms of ancillary arrangements for conversion, by the defendant.  It is helpful to refer to some of the details of these pleadings in order to make clear the issue raised in this respect.  Paragraph 59 of the Further Amended Statement of Claim refers to a switch notice given by Argot after close of business on Wednesday 14 January 2009 (Switch Notice 3).  It is alleged in paragraph 60 that Switch Notice 3 was revoked by a notice given after close of business on Friday 16 January 2009.  This is followed by an allegation, in paragraph 61, that “In the premises of paragraphs 7 to 11 and 13 above”, the defendant was required not to act upon Switch Notice 3.  Paragraph 62 alleges that the defendant did act on Switch Notice 3 and consequently breached the terms of the Argot policy as follows:

“62.  In breach of the Argot policy … the defendant:

(a)     within the three working day period advised in Argot Switch Notice 3:

(i) sold or purported to sell the non-cash assets within the Secure Portfolio supposedly referrable to the Argot policy;  or

(ii) Switched the Secure Portfolio Account balance to the Cash Portfolio other than in accordance with the terms of any Switch Notice (or other authority or consent from Argot);  and

(b)     upon the revocation of Argot Switch Notice 3, re-acquired certain equity and fixed interest assets with the proceeds of the sale referred to in sub-paragraph (a) above.”

1. The facts pleaded by Argot in relation to this particular notice, Switch Notice 3, were not accepted in their entirety by the defendant.  In its defence, it pleads that the Argot policy had arrived in the Secure portfolio overnight between 14 and 15 January 2009.  Consequently, on the morning of 15 January, there was an amount of cash in the Secure portfolio.  At the commencement of that day, Argot Switch Notice 3, which was sent after business hours the evening before, was received.  The defendant says that, had a switch notice not been received, it would have acquired non-cash assets with the cash then sitting in the Secure portfolio, but because the Switch Notice 3 had been received, it did not do so.

1. The defendant asserted its right to early conversion of assets in the Secure portfolio on receipt of a Switch Notice in paragraph 11(c)(ii) of its defence in the 2009 proceedings in the following terms:

“[The defendant] is entitled, upon receipt of a notice of intention to switch, to prepare for the switch by realising non-cash investments in the departure portfolio and reinvesting the amount so realised in cash investments within the portfolio, or take other steps to preserve the Portfolio Net Value on the day when the notice was given in writing, so as to ensure that the value of the investments underlying the Policy at the time when the switch is to be effected equals or exceeds the transfer amount and thus that it had funds from that portfolio available to fund the transfer amount.”

The defendant further asserted in that defence, at paragraph 11(c)(iii), that:

“Taking the steps described in paragraph (ii) is not effecting a switch from the Secure to Cash Portfolios before the expiry of the notice of intention to switch or at all.”

The plaintiffs submitted that the practice of the defendant before the decision of the Court of Appeal was to give immediate effect to any switch notice for a movement from the Secure portfolio to the Cash portfolio and thereby cause the entire investment of the plaintiffs in the Secure portfolio to be held in cash from the close of business on the working day on which the switch notice was received.  It was submitted that the practice was reflected in the now deleted paragraphs 10A(b) and 10B of the defence in the 2002 proceedings in which the defendant asserted a right, but not an obligation, to delay giving effect to a switch notice for up to three working days.  This meant, the plaintiffs submitted, that the defendant asserted an entitlement to give immediate effect to a switch notice and therefore to “convert the plaintiffs immediately to 100% exposure to cash”.[37]  The plaintiffs submitted that the practice subsequently adopted by the defendant with respect to early conversion of assets in the Secure portfolio to cash was “precisely the conduct that the Court of Appeal found the defendant was not entitled to engage in.”[38]  The plaintiffs submitted that the practice in respect of a switch from the Secure portfolio to the Cash portfolio is outlined in the memorandum to the defendant’s Staff from Ms Vicki Carter of its Group Legal section dated 30 January 2009 which contained the following material:[39]

“between receipt of the notice (prior to 2.00 pm) and close of business, all non-cash assets supporting the units subject to the switch should be converted into cash assets in order to prepare for the switch, and ensure that there are sufficient assets supporting the units that are to be transferred at the price at which they are to be transferred.”

[37]See Outline of the Plaintiffs’ Closing Submissions (19 May 2011), paragraph 158.

[38]Outline of the Plaintiffs’ Closing Submissions (19 May 2011), paragraph 159; referring to [2008] VSCA 247, at [20] and also the orders of the Court of Appeal made on 26 February 2009 ([2008] VSCA 24).

[39]Exhibit DM-11 to the witness statement of Dale Austin McMenamin (20 December 2010).

1. The plaintiffs sought to contrast this material in Ms Carter’s memorandum with the following passages in the judgment of the Court of Appeal, with respect to the proper interpretation and operation of clause 1.8 of the prosperity bond policies:[40]

   [40](2008) 21 VR 351 at 359, [20].

“[19]… Its effect was that, in consideration of the investor giving the respondent three business days’ notice of intention to transfer or withdraw, and therefore the opportunity for the respondent to do what it thought necessary or desirable to accommodate the transfer or withdrawal, the investor was to be permitted to revoke the notice if, during the period of notice, the price so moved as to make transfer or withdrawal undesirable from the point of view of the investor.”

The Court of Appeal continued:[41]

“[20]… In our view, if an investor gives notice of an intention to make a transfer or withdrawal in three business days’ time, there is nothing in the policy apart from cl 1.8 which authorises the respondent to complete the transfer or withdrawal before the expiration of three business days.”

Nevertheless, these passages from the Court of Appeal judgment which have been relied upon by the plaintiffs in relation to this issue must be read in the context of the overall and underlying approach of the Court of Appeal, which was that the prosperity bond policies did not confer any right on the plaintiffs to engage in profitable arbitrage.[42]  Additionally, the Court does not, in these passages, canvas the nature of a switch, which is very important in this context, nor the effect of “revocation” of a switch notice.[43]  The plaintiffs’ position is only enhanced by these statements if one assumes that preliminary steps taken by the defendant preparatory to a switch are regarded as the switch or part of the process and, further, if it is assumed that the effect of “revocation” of a switch notice is to put the plaintiffs in the same position as though such notice had never been given.  For reasons discussed elsewhere in some detail, I do not accept either of these assumptions.[44]

[41](2008) 21 VR 351 at 359, [19].

[42]See above, paragraphs 17 to 25.

[43]The plaintiffs also sought to rely upon the language of the orders made by the Court of Appeal ([2008] VSCA 24, [10] (paragraph 1(2)(b)):

“The respondent was not permitted to effect the switch until the expiration of the notice” (emphasis added).

The plaintiffs sought to interpret the use of the word “effect” as indicating that no preliminary steps could be taken by the defendant with respect to underlying assets for the purpose of the switch.  These orders do not, in their terms, define what it is to “effect the switch”.  Rather, the meaning of this expression is to be found in the reasons contained in the Court of Appeal judgment. Consideration of the reasons of the Court of Appeal does not support the plaintiffs’ position, as indicated in these reasons.

[44]See below, paragraphs 38 to 47 (nature of a switch) and paragraphs 106 to 121 (effect of “revocation” of a switch notice).

1. The plaintiffs submitted that the defendant cannot now be permitted to circumvent the decision of the Court of Appeal through the artificial device of immediately converting the assets in the Secure portfolio to 100% cash following receipt of a switch notice and arguing that this somehow different to giving immediate effect to the switch from the Secure portfolio to the Cash portfolio.  It was submitted that this would be to do indirectly what is directly prohibited and, as such, would be unlawful.[45]  Further, it was submitted that the principles of res judicata preclude the defendant from now advancing a defence on this basis.  Alternatively, it was said that the principles in Anshun[46] preclude the defendant from now advancing a defence that would have been a complete answer to the plaintiffs’ case in the earlier proceedings.

   [45]See Outline of the Plaintiffs’ Closing Submissions (19 May 2011), paragraph 163, referring to Re Sentry Life Assurance Limited v Life Insurance Commissioner (1983) 49 ALR 292 at 308: “To appropriate the subsidy to part only of the statutory fund is a ‘back door’ approach and, in truth, is no more than an attempt to do indirectly what is forbidden to be done directly (see James v Eve (1873) LR 6 HL 335 at 344; Oxley County District Council v Macleay River County District Council (1964) 65 SR (NSW) 13 at 28). It lacks validity accordingly.”

   [46]Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589.

1. It was also submitted that the practice of early conversion denies the efficacy of the plaintiffs’ right to revoke a switch notice before it is given effect to.  It is not sufficient, it was said, for the defendant to repurchase the assets properly conforming to the Secure portfolio mandate if a switch notice is revoked.  The plaintiffs must, they submitted, be put in the position that they would have been in if the notice had not been given effect to or, indeed, had not been given at all.  As indicated previously, the plaintiffs’ prejudice, as they identified it, was that a switch from the Secure portfolio to the Cash portfolio where the value of the Secure portfolio assets increases during the three day period after the switch notice was given would leave them without the benefit of that increase in the value of these assets if they were to revoke the notice.  They would, in other words, lose all advantage of the rising market.

1. The defendant contended that, in substance, the plaintiffs’ allegations are as follows:[47]

   [47]Written Closing Submissions of the Defendant (2 May 2011), paragraph 118.

“(a)     First, that by liquidating the non-cash assets in the Secure portfolio immediately on receipt of a notice from the plaintiffs of their intention to switch from that portfolio to the Cash portfolio at the expiration of three days’ notice, NMLA is ‘effectively’ carrying out the switch immediately:  see pars 62(a)(ii) and 81, particular (ii)(C) [of the Further Amended Statement of Claim in the 2009 proceedings].  The term ‘effectively switched’ appears in the latter place.

(b)     Second, that as one of the effects of liquidating those assets is that the Secure unit price does not reflect movements in equity markets over the three-day notice period, and thus that if the notice of intention is cancelled or revoked during that period the unit price after revocation will not have risen in proportion to a general rise in equities markets during the period before revocation, the revocation does not put Argot in the same position as it would have been in if it had never issued the notice of intention.  This is said by Argot –

(i)to deny it the right to revoke a notice, as to ‘revoke’ a notice means to make things as if the notice had never been given, or, in effect, to avoid the notice ab initio;

(ii)to deny it the benefit of their right to cancel a notice.”

The defendant also made the point that the latter claim is not pleaded in these terms in that the contention that “revoke” as used in the terms of the policies means avoid ab initio is not pleaded by the plaintiffs anywhere in any form.  Further, the defendant submitted that the contention that early liquidation of the assets in the Secure portfolio has the effect of denying Argot the benefit of its right to cancel a notice is not pleaded in that form, though the particulars contained in paragraph (i) of paragraph 81 of the Further Amended Statement of Claim in the 2009 proceedings alleges that Argot has, by the defendant’s actions, been denied the benefit of the “Revised Capital Preservation Strategy”.

1. The right of the plaintiffs to switch investment portfolios derives from paragraph 3.3(a) of the prosperity bond policies, a provision which is in the following terms:

“3.3 Switching Portfolios by Transfers

a.      You may switch investment portfolios by transferring amounts between the Prosperity Bond investment portfolios at any time.  Minimum transfer amounts apply.”

It follows that, as contended by the defendant, the nature of the right to switch which is conferred by clause 3.3(a) is determined by the terms of the particular policy.  An immediately relevant term, which goes to the definition or description of a transfer or switch, is clause 3.3(b) of the policies, which provides:

“b.      Corresponding adjustments to the number of Units will be made using Unit Prices as at the date to which your request for transfer applies.”

1. The provisions of clause 2.2 of the prosperity bond policies are particularly relevant to the operation of clause 3.3 as they provide for the operation of the investment accounts provided for by the policies.  Clause 2.2(a) introduces the position, providing for a number of investment portfolios from which an investor may choose.  Clause 2.2(b) provides for the relationship between the policy and accounts maintained in the investment portfolios.  These provisions are as follows:

“2.2 Operation of Accounts

a.      Prosperity Bond has a number of investment portfolios;  your choice at the Commencement Date is show on your initial Statement of Benefits.  Any change to your investment portfolio choice will be shown on a subsequent Statement of Benefits.  Further details of investment portfolios are given in Section 3 below.

b.      Your policy contains Accounts in one or more of the various Prosperity Bond investment portfolios.  Each account is maintained in Units.”

1. Clauses 2.2(c), (d) and (e) of the prosperity bond policies are also relevant, as they provide for the relationship between accounts for the purpose of the process of adding or removing money from an account and its consequences in terms of the number of Units added or subtracted and the determination of the Unit Price.  These provisions are as follows:

“c.      Whenever an amount is put into an Account, a number of Units (determined by dividing that amount by the Unit Price) is added to the number of Units in that Account.

d.      Whenever an amount is taken from an Account, a number of Units (determined by dividing that amount by the Unit Price) is subtracted from the number of Units in that Account.

e.      We reserve the right to delay the application of money to or from an Account until midnight Australian Eastern Standard time on the date to which your request applies.  We will then use the Unit Price applicable at the end of the period of delay.”

1. In the context of these provisions of clause 2.2, it follows that clause 3.3(a) does, as the defendant contends, state exactly what a switch is:  it is the transfer of an amount between investment portfolios.  This position was recognised by the Court of Appeal in the context of considering the defendant’s right to delay a switch for 30 days under the first part of clause 1.8 of the prosperity bond policies, having regard to the second part of that clause upon which the plaintiffs relied.  The Court of Appeal said:[48]

“[33]  Next, cl 3.3 of the policy refers to switching ‘investment portfolios by transferring amounts between  Prosperity Bond investment portfolios at any time’.[49]  The natural and ordinary meaning of that clause is one of switching an amount which is an Account at the time of switching.  But, as has been seen, cl 1.8 provides for the respondent to delay a switch (that is to delay switching an amount from one Account to another Account) for a period of 30 days, if such would require encashment within any 30 day period of Units valued at more than $100,000.

[34]  As it appears to us, therefore, the purpose of cl 1.8 was to afford the respondent time in which to liquidate an investment, and thereby obtain the cash with which to purchase Units in the Account into which the investment was to be switched.  There would be no point in stipulating for a 30 day period in which to liquidate an investment if the investor could delay until the 30^th day the acquisition of the investment which was to be liquidated.  As the appellants’ expert witness, Mr Lyon, said in evidence, the respondent would not be able to make preparations to liquidate an investment unless and until it existed.”

[48](2008) 21 VR 351 at 361-2, [33]-[34].

[49]Emphasis added.

1. Expert evidence was given in relation to this issue by Mr Richard Lyon, a practising actuary.  In his report, dated 25 January 2011, Mr Lyon identified the elements of the switch as being, simply, the cancellation and creation of units in the departure and arrival portfolios, respectively.  In his view, the transfer, by journal entry, of the relevant amount of money from one portfolio to the other is part of the administration of the policy by the insurer, rather than part of the switch itself, though he did acknowledge in cross-examination that the policy defines the switch as including the transfer of money.  Importantly, in paragraph 7.26 of his report, he identified the switch itself as occurring “when it is reflected in the liabilities”, and stated that “none of the asset-related steps is required in order for the switch to take effect”.  This position was also confirmed in his oral evidence.[50]  Paragraph 7.26 of his report includes a discussion, which begins at paragraph 7.17, as to “[t]he steps (if any) that the defendant would be required to undertake in preparation for a switch from the Secure portfolio to the Cash portfolio and by when those steps would need to be undertaken in order to effect the switch at the expiry of a switch notice”.  Mr Thornton agreed with Mr Lyon’s distinction between a switch and assets dealings accompanying it, as did Dr Gribble.[51]

   [50]See transcript pp 287.5 – 289.5;  and 291.12 – 293.11.

   [51]See transcript pp 951.24 – 953.6 (Thornton);  transcript p 993.9 - .17 (Dr Gribble).

1. The expert evidence relied upon by the plaintiffs in relation to this and related issues was provided by Mr Richard Lyon, an independent actuary. The defendant relied upon expert evidence from Dr Julian Gribble, an independent actuary. The defendants also relied upon the evidence of Mr Michael Thornton who, at the time of the trial, had been employed by AXA Asia Pacific Holdings Ltd as its Group Chief Actuary. This position involved him having responsibility for some actuarial and risk management aspects of the defendant’s business. In relation to these issues the defendant submitted that while Mr Thornton was a lay witness, he was in substance an expert.

1. As submitted by the defendant, the prosperity bond policy terms, the Court of Appeal and the expert witnesses all said the same thing:  namely, that a switch is a transaction whereby units in one portfolio are cancelled and units in another portfolio created.  Further, a switch is to be contrasted with the administration of assets underlying the policy in question, which is not dealt with in the policy and is not, aside from recognising its existence as being the domain of the defendant outside the contract,[52] the subject of the judgment of the Court of Appeal (or the trial judge, as a matter of fact).

   [52]See Court of Appeal judgment, as to the purpose of clause 1.8 (2008) 21 VR 351 at 359, [19] and 362, [34]; cf effects of dilution: (2008) 21 VR 351 at 380, [112] and 384, [128].

1. Consequently, a switch between portfolios consists of the transactions with the units allocated to the policyholder in the relevant portfolios – involving the cancellation (subtraction from one portfolio) and the issue (addition to the other portfolio).  All other activity associated with the switch is administrative and solely in the control of the defendant.  The defendant’s activity in this respect was not considered by Redlich J at the original trial or by the Court of Appeal because no contention was made about it by the plaintiffs.  Nevertheless, I accept that it follows as a matter of necessary implication from the previous proposition.  Additionally, as the defendant submitted, the prosperity bond policy says nothing about how investments are to be made, or about how preparations are to be made for a switch or about the consequences that might follow from the switch being made.  Again, it follows from these apparently intentional omissions that these matters are therefore left, according to the terms agreed between the parties and contained in the policies, solely in the control of the defendant as the owner of the relevant assets.

1. It was also argued that the “practical effect” of early conversion, that is the immediate liquidation of the assets in the Secure portfolio on receipt of a switch notice, is the same as if the switch had actually been carried out.  As contended by the defendant, the allegation that immediate liquidation or early conversion is “effectively” carrying out the switch assumes that there is only one effect of a switch, namely the change of the types of assets underlying the plaintiffs’ policies.  This is, however, not the only effect.

1. The major effect of a switch from the Secure portfolio to the Cash portfolio is that the policyholder ceases to hold Secure units and holds Cash units instead.  The second effect of a switch is that it takes four business days to transition (switch back) to the other portfolio.  Immediate liquidation, or early conversion, does not bring about either result, in or in substance.  The plaintiffs continue to hold Secure units throughout the notice period.  If they change their minds and withdraw the notice of intention to switch, then no further unit cancellations or allocations need be made;  they simply continue to hold the same units they have held all through.  They do not need to give a further notice or request to be switched back to the Secure portfolio or wait four working days to return, as they have never left it.  The defendant conceded that it is true that after liquidation or early conversion of non-cash assets, movements in the Secure unit price during the balance of the notice period are similar to movements in the Cash unit price during the same period;  but it is said that this is not the same as holding Cash units.  It is simply a statement that the unit price performance is similar.  In my view, this is a correct analysis of the position on the basis of the provisions considered and the views expressed by the Court of Appeal.  Further, the assumption that the Secure portfolio always holds a mix of equities, fixed interest and cash assets is untrue in any event.  The Investment Instructions applicable to defensive asset portfolios allow for such portfolio to hold 100% cash.[53]  The defendant conceded that whilst it is true that this is not the normal asset allocation, it is nevertheless a permissible one, even in circumstances in which arbitrage is not occurring, for example where markets are experiencing unusual circumstances.  The same thing, it was said, happens in the form of the cash drag effect, which is a normal consequence of entry into the Secure portfolio.[54]  These factors, in my view, demonstrate a fallacy in the reasoning underlying the plaintiffs’ submissions, certainly to the extent of the assumption as to the composition of the Secure portfolio, as indicated above.

   [53]NMLA Investment Instructions 2003 (F06); Investment Instructions 2008 (F07);  McMenamin 2010 WS (D12), pars 15- 17;  see also CIB (N01), p 17 “Investment of the Portfolios”;  Thornton WS (D16), pars 76-78.

   [54]As to the “cash drag effect”, see Written Closing Submissions of the Defendant (2 May 2011), Appendix B, paragraph 7(b).

1. Moving on from the position that the administration of assets underlying the prosperity bond policy in question is to be distinguished from the switch itself, the defendants contended, and emphasised, that the matching of its assets with its future liability in respect of a notified switch is good asset management practice.  In summary, the defendant’s position was that once the policyholder gives a notice of intention to switch out of the Secure portfolio, it has a fixed unit price which it is to receive.  The policyholder then has no interest in the asset mix or performance of the Secure portfolio after that time until either it switches back into the Secure portfolio from the Cash portfolio or it cancels the notice of intention to switch, at which point the defendant would invest the policyholder’s funds in the prevailing Secure portfolio asset allocation.  A difficulty arises, at least from the defendant’s perspective, because of the possibility of cancellation of the notice of intention to switch.  When the switch notice has been given to it, the defendant can be confident that if the value of the underlying assets decreases, the switch will proceed, but it does not know whether that will occur or not.  This is its difficulty.  It does not know which way the value of particular classes of assets will move, save that it knows with virtual certainty that cash assets will not fall in value.  The defendant says that, supported by the unanimous view of all the expert witnesses, good life assurance company practice does not require the defendant to underwrite every possibility.  Rather, its obligation is to stand ready to transfer the Account Balance, at the unit price on the day that the notice to switch is taken to be given.  I turn now to the expert evidence relied upon by the defendant in this respect.

1. Mr Lyon first expressed a view on the matter in his supplementary Expert Report  in 2003.[55] He was commenting on the evidence of Mr Michael O’Brien, an actuary, who in 2003 was employed as the Chief Investment Officer of the defendant.[56] Mr O’Brien’s evidence was that on receipt of a notice of intention to switch from the Secure portfolio to the Cash portfolio, he would instruct relevant officers of the defendant immediately to liquidate all non-cash assets in the Secure portfolio.  He also said that if assets arrived in the Secure portfolio at a time when there was already a notice of intention to switch the relevant policies back to the Cash portfolio three days later (a situation which occurred in January 2009), it “would be contrary to all proper investment practice to acquire non-cash assets”.[57]  There was an assertion by Mr Tyne during the current hearing that Mr O’Brien had resiled from what he had said in this respect at the 2003 trial.[58]  Nevertheless, I accept that a reading of the relevant transcript shows that Mr O’Brien did not resile from this position and, rather, was not challenged in relation to it.[59] Mr Lyon in his 2003 Supplementary Statement said that Mr O’Brien’s:[60]

“rationale for immediate liquidation of non-cash assets in the Secure portfolio makes sense to me, provided that the switch to Cash is going to proceed.  It is not clear what he would intend to do if the switch were cancelled.”  (Emphasis in original.)

[55]See supplementary statement of Richard Hugh Stewart Lyon (15 December 2003), paragraphs 11.8 -11.9.

[56]See the witness statement of Michael Joseph O’Brien (18 November 2003).

[57]See the witness statement of Michael Joseph O’Brien (18 November 2003), paragraphs 29 – 33.

[58]See Tyne XXN (17 March 2011), transcript pp 672.8 – 16 – 684.12 – 19).

[59]See 2003 trial transcript pp 2452.29 – 2454.29.

[60]Supplementary statement of Richard Hugh Stewart Lyon (15 December 2003), at paragraph 11.9.

1. In the present proceedings, Mr Lyon described in his witness statement the nature of investment-linked businesses and stated that “The insurer aims to hold assets matched as closely as possible to the defined liabilities”.[61]  The defendant submitted that this is the fundamental reason why it took the course of immediately liquidating non-cash assets when a notice of intention to switch was received.  Also of significance is Mr Lyon’s discussion in his witness statement of the circumstances in which it would be reasonable for a portfolio with objectives such as those of the Secure portfolio to hold cash assets exclusively:[62]

“5.35   The one circumstance in which I would think it reasonable to invest 100% in cash would be when it is known for a fact that all of the units in the portfolio will be redeemed on a certain future date at a known price and that price can be protected by converting to cash.  This does not apply when the redemption price is unknown (and would be expected to reflect performance up to the redemption date).  It also does not apply when the redemption notice may be cancelled by the policyholder(s), since it is then not certain that the redemption will occur.

5.36   In case it is not clear, I do not consider that it would be acceptable practice for an insurer offering a product similar to the Prosperity Bond, with or without the Special Terms, to invest the Secure portfolio 100% in Cash, other than on receipt of an irrevocable notice of withdrawal of all of the funds in that portfolio.  I understand that a notice in accordance with the Special Terms is not irrevocable.”  (Emphasis in original.)

[61]See expert witness Statement of Richard Hugh Stewart Lyon (25 January 2011), part 2, particularly at paragraph 2.8.

[62]See expert witness statement of Richard Hugh Stewart Lyon (25 January 2011), part 5, particularly at paragraphs 5.35 to 5.36.

1. Evidence of Mr Lyon to which particular reference has been made was cross-examined.[63]  The basic proposition, as expressed in the quoted passages from his statements, was, as submitted by the defendant, that it was perfectly good practice for an insurer to liquidate immediately all non-cash assets, provided the notice of intention to switch was irrevocable.  It was noted by the defendant that Mr Lyon was criticised by the Court of Appeal for having expressed conclusions based on his interpretation of the terms of the policies which, as it happened, were found to be erroneous.[64]  Mr Lyon was questioned in cross-examination in the current hearing about the reason why, in the passage quoted from part 5 of his witness statement (particularly paragraph 5.36), he emphasised the need for the notice of intention to be irrevocable.  It was clear from his cross-examination that, although not stated in his report, the reason turned on his interpretation of the meaning of the word “revoke”.  This appears from the following exchange in cross-examination:[65]

“MR BRETT:  If it is the duty of NMLA, or a good practice of NMLA to manage its assets so that they match as nearly as possible its liabilities, why is it not good practice to move from - to put the investments purely into cash?---That comes down to what is meant by revoking the notice, and I believe that I’m not qualified to give that opinion.

All right?---But if what is meant, is that it should be as if they had stayed in secure and not issued the notice, then the cash return is not appropriate, and so the mismatch risk goes the other way.  The mismatch risk then is, that you’ve invested the assets in cash but you need to deliver the secure return, so now you need to make up the difference between the secure outcome and the cash outcome out of shareholders' funds, and you are going to have do that more often than the other.

So you are basically saying then, it’s only if revoked means ‘put back’ into the position that they would have been if the notice had never been given, that what you are saying applies?---It’s possible there’s another construction that would have the same effect but yes, but if revoked means:  Make it as if the notice had not existed;  then it’s clear that it should still have been secure, you wouldn’t have made that cash conversion because the notice didn’t exist, you should have been in that mandate, and that’s the price that should exist on Thursday.  It’s possible there’s another path that gets to the same answer, so I can’t say that’s the only circumstance in which that happens.”

The discussion concludes with paragraphs [97] and [98], which have been set out previously,[176] where the Court of Appeal emphasised that the plaintiffs’ entitlement under the prosperity bond policies did not include the right to profitable arbitrage and that the defendant was entitled to exercise powers under the policies “to frustrate the hope and expectation of profits” on the part of the plaintiffs.

[176]See above, paragraph 21.

1. In support of its position, the plaintiffs also sought to rely upon the Unit Pricing:  Guide to Good Practice issued by the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.[177]  In particular, reference was made to the statement that:[178]

“You should price as frequently as you make it possible to buy or sell units in the fund, and process applications at the price effective on the date of transaction”.

It was also submitted that monthly pricing would conflict with the defendant’s Unit Pricing Policy,[179] which specifies, in section 5.2 (Frequency of settling and calculating unit prices) that daily unit pricing is used in respect of both statutory funds and the underlying trusts.  It was also noted that the Unit Pricing Policy specifies, in section 12 (Backdating), how backdating is to be dealt with, noting that Appendix D states that:

“A simple definition of backdating is the situation where the effective date on an application/withdrawal for a product is earlier than the process date of an application/withdrawal”.

[177]Regulatory Guide 94 – August 2008.

[178]Unit Pricing:  Guide to Good Practice, p 59.

[179]Unit Pricing Policy – The National Mutual Life Association of Australasia Limited – National Mutual Funds Management Limited – October 2008.

As to this, the plaintiffs submitted that the “three day option” in clause 1.8 is, in effect, a contractually mandated form of backdating.  On this basis, reference was made to sub-paragraphs 12.2.2 and 12.2.3 of the Unit Pricing Policy, as follows:

“12.2 Backdating Costs/Benefits

NMFM Trusts

12.2.1  …

12.2.2  In instances where backdating does occur and there is a cost to the product, if the cost to the product is deemed to be less than $100, the cost will be borne by unit-holders in the product.  In circumstances where the cost to the trust is greater than $100, the cost will be borne by AXA.

Statutory Funds

12.2.3  In instances where backdating does occur, if the backdating period for an application/withdrawal is less than or equal to 5 Australian business days, the cost/benefit to the product will be borne by unit-holders in the product.  In circumstances where the backdating period for an application/withdrawal is greater than 5 Australian business days, the cost/benefit will be borne by AXA.”

Consequently, it was said that the effect of the defendant’s own policies is that unit pricing must be undertaken on a daily basis and to the extent that there are costs incurred by reason of backdating, those costs must be borne by the defendant.  In my view, this material does not assist the position of the plaintiffs.  The policy documents, both regulatory and those of the defendant, are significantly later in time to the date upon which the prosperity bond policies were entered into and, in any event, the terms of those policies must govern the position.  Further, I am of the opinion that the issue has been settled by the Court of Appeal in those parts of the judgment to which reference has been made.[180]  Additionally, I am of the view that the position is strengthened having regard to the specific reference by the Court of Appeal to this issue in the context of both the “express terms of the policy” and “custom”.[181]

[180]Particularly {2008} 21 VR 351 at 374-5, [95]-[98].

[181]See (2008) 21 VR 351 at 374, [95].

1. Finally, the plaintiffs made reference to the evidence of the defendant’s witnesses in support of the proposition that it was departing from settled practice or custom for the purpose of depriving the plaintiffs of the benefit of the special terms:[182]

“142.  The defendant’s witnesses each stated that the defendant’s practice was to calculate unit prices daily.[183]  The only rationale for departing from that practice was to deprive the plaintiffs of the benefit of the special terms.

143.  Mr Thornton even went further to suggest that the defendant could adopt a practice of examining the movements in underlying asset values and, if the asset prices had moved in favour of the defendant, set a new unit price but, if asset prices had moved in favour of the plaintiffs, refuse to adjust the unit price.[184] This practice would fly in the face of the requirements of clause 4.20 of the policy and sections 32 and 48 of the Life Insurance Act.  That the defendant could even propose such a practice serves only to demonstrate the determination of the defendant that under no circumstances will it permit the plaintiffs to benefit from the special terms granted by the defendant.

144.  Mr Thornton similarly demonstrates the defendant’s willingness to flaunt the terms of the policy in his proposal that that the defendant set the unit price on day a switch is given effect to, not the day the switch notice is given, as required by the express terms of clause 1.8 and the orders of the Court of Appeal.[185]”

[182]See Outline of the Plaintiffs’ Closing Submissions, paragraphs 142-144.

[183]Statement of Myra Hoare, Court Book D03 paragraph 8; statement of Dale McMenamin, Court Book D06 paragraphs 9 and 10; Vicki Bourke at page 6 in exhibit ATB-4 to the statement of Angela Bourke, Court Book D11 (also at exhibit DM-11 to the statement of Dale McMenamin Court Book D12); statement of Dale McMenamin Court Book D12 paragraph 38; statement of Michael Thornton, Court Book D16 paragraphs 47 and 69(b).

[184]Statement of Michael Thornton, CB D16 paragraphs 123-128.

[185]Statement of Michael Thornton, CB D16 paragraphs 117-122.

Even if one were to accept the plaintiffs’ characterisation of the evidence of the defendant’s witnesses, as set out above, I am of the view that this takes their position nowhere having regard to the express finding by the Court of Appeal that the defendant was entitled to exercise the powers conferred upon it by clauses 2.2(e), 3.2(e) and 4.20 of the Prosperity Bond policies “to frustrate the hope and expectation of profits”.[186]

[186]See [2008] VSCA 247, [98]; and see above, paragraph 21.

Good faith and related issues

1. Reference should also be made to the submissions by the plaintiffs that the defendant was under and obligation of good faith which, putting it in general terms, favoured the position of the plaintiffs.

1. It was common ground between the parties that the prosperity bond policies are “investment-linked contracts” for the purposes of s 14 of the Life Insurance Act 1995 (Cth) and that the defendant and its directors must comply with ss 32 and 48 of that Act in “the investment, administration and management of the assets of a statutory fund, … giving priority to the interests of owners and prospective owners of policies referable to the fund”. Reference was made to sub-s 48(3) of the Act which provides that:

“In order to avoid doubt, it is declared that, in the event of conflict between the interests of owners and prospective owners of policies referable to a statutory fund and the interests of shareholders of a life company, a director’s duty is to take reasonable care, and use due diligence, to see that the company gives priority to the interests of owners and prospective owners of those policies over the interests of shareholders.”

On this basis it was submitted that a life company, in exercising judgment or discretion in respect of the administration of life policies, must exercise that discretion in favour of the policyholders and not in a manner that advantages the shareholders of the life company at the expense of the policyholders.

1. Further, it was submitted by the plaintiffs that as contracts of life insurance the plaintiffs’ policies were also subject to s 13 of the Insurance Contracts Act 1984 (Cth) which provides that:

“A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.”[187]

The duty implied by s 13 is a statutory duty apart from any ordinary duty of good faith which might be owed by parties to a commercial contract.

[187]Notwithstanding the doubts expressed by Dr Gribble at T1040, lines 27-28, it is common ground between the parties and was accepted by Justice Redlich and the Court of Appeal that section 13 of the Insurance Contracts Act applies to the plaintiffs’ policies. Redlich J noted at [859] that “Each of the parties alleges that the conduct of the other and their construction of the special terms is contrary to the general notions of fairness under the LIA and the duty to act with utmost good faith under s 13 of ICA.”

1. The plaintiffs submitted that it was common ground between the parties and was accepted by Redlich J at the trial in the 2002 proceedings and by the Court of Appeal that s 13 of the Insurance Contracts Act applied to the policies.  Redlich J noted that:[188]

“Each of the parties alleges that the conduct of the other and their construction of the special terms is contrary to the general notions of fairness under the LIA [Life Insurance Act] and the duty to act with the utmost of good faith under s 13 of the ICA [Insurance Contracts Act].”

[188][2006] VSC 507, at [859].

1. Redlich J did, however, find it “unnecessary to further consider the plaintiffs’ allegation that the defendant was in breach of its implied duty to act with utmost good faith towards them”.[189]

   [189][2006] VSC 507, at [896].

1. In the context of and towards the conclusion of a discussion on “Dilution”, the Court of Appeal made reference to ss 13 and 14 of the Insurance Contracts Act and rejected the contention that the obligation of good faith involved the defendant, in effect, funding the plaintiffs’ profitable arbitrage.  The Court of Appeal said:[190]

“[125] Counsel for the appellants contended that, if the express or implied terms of the policy permitted dilution, the judge should have held that the respondent’s reliance on the provisions amounted to a failure by the respondent to act with the utmost good faith and, consequently, that the respondent was precluded by ss 13 and 14 of the Insurance Contracts Act 1984 (Cth) from relying on those provisions.

[126]  We also reject that contention.  At the risk of repetition, there was nothing in the terms of the policy which required the respondent to continue to fund the arbitrage profits of the Coneview investors for the life of the policies.  That being so, there was no lack of good faith involved in the respondent’s refusal to assume an obligation to continue to fund the arbitrage profits of the Coneview investors for the life of the policies.[191]”

[190](2008) 21 VR 351 at 383, [125] and [126].

[191]Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228, [23]-[24] (Buchanan JA).

1. The Court of Appeal approached arguments based on s 32 of the Life Insurance Act on the same basis:[192]

   [192](2008) 21 VR 351 at 387, [145]-[146].

“[145] The appellants contended that segregation was inconsistent with s 32 of the Life Insurance Act 1995 (Cth), which so far as relevant provides that:

(1) In the investment, administration and management of the assets of a statutory fund, a life company:

(a) must comply with this Part;  and

(b) must give priority to the interests of owners and prospective owners of policies referable to the fund.

…

(4) A reference in subsection (1) or (2) to the interests of owners of policies referable to a statutory fund is a reference to the interests of such persons viewed as a group.

[146] We do not agree. The plain and ordinary meaning of the ‘interests of owners and prospective owners of policies referable to the fund’ is their interests as framed by their entitlements under the policies. That interpretation was supported by evidence given by Lyon that life companies generally understand s 32 as requiring the treatment of all policyholders with reference to their entitlements under their policies. Section 32 does not require a life company to confer benefits for which policies do not provide and, as we have said, the Coneview policies did not provide that non-Coneview investors would remain invested in the Cash and Secure portfolios so as to ensure profitable Coneview investor arbitrage. The suggestion that segregation gave priority to the respondent’s own interests over the interests of Coneview investors is also misconceived. In effect, it simply repeats the fallacy that the respondent was required to put sufficient of its own funds into the Secure portfolio to eradicate the effects of dilution on arbitrage switching between the Cash and Secure portfolios.”

The same applies to s 48 of that Act.

1. The plaintiffs sought to limit the effect of this finding by the Court of Appeal on the basis that it did not excuse the defendant from meeting the costs of the obligations it had assumed or given the defendant carte blanche to take any action to deprive the plaintiffs of the benefit of the special terms of the policies which was not prohibited by the express terms of the policy.  It submitted further that if the defendant’s contrary position were correct, the obligation of utmost good faith would be empty and would confer on the parties no greater rights or obligations than they would have had under the ordinary law of contract.  I do not accept this submission.  It is clear from the passages from the Court of Appeal judgment set out above that the Court had turned its mind to statutory obligations of good faith and rejected the submissions of the plaintiffs in this respect, both in the reasons for judgment and its orders and declaration.[193]  In my view, this is also made abundantly clear by the emphasis given by the Court of Appeal in its judgment to the position that under the terms of the policies, the plaintiffs had no right to profitable arbitrage and, further, that the defendant was entitled to exercise its rights under the policy provision to frustrate their “hope and expectation of profits”.[194]  Additionally, in my view, the position of the plaintiffs in this context is not enhanced by reliance upon any common law obligation of good faith or duty to cooperate in effecting the contractual purpose[195] or the evidence of Dr Gribble and Mr Thornton in support of the proposition that the defendant cannot now be permitted to deprive the plaintiffs of the benefit of clause 1.8 simply because it regrets the bargain that it made.[196]  There can be no duty to cooperate to bring about something which the contract does not require, or to give effect to a claimed right the contract does not confer.  In my view, the approach taken by the Court of Appeal to the right to profitable arbitrage as claimed by the plaintiffs also disposes of these issues.

Effect of any res judicata, issue estoppel and Anshun matters

[193]As to the latter, see [2008] VSCA 24, [10] (paragraph 2(3)(a)).

[194]See above, paragraphs 17 to 25.

[195]See Outline of the Plaintiffs’ Closing Submissions (19 May 2011), paragraphs 105-107.

[196]See Outline of the Plaintiffs’ Closing Submissions (19 May 2011), paragraphs 108-118.

1. On the basis of the position reached with respect to the effect of breach or breaches, no res judicata, cause of action estoppel or Anshun estoppel matters or issues need be considered further, as both the remaining matters in the 2002 proceedings and the 2009 proceedings are resolved for the reasons already indicated.

Damages for unconscionable conduct and misleading or deceptive conduct

1. In relation to the 2002 proceedings, there remains for determination the assessment of damages payable by the defendant to each of the plaintiffs for unconscionable conduct or, in the alternative, misleading or deceptive conduct within the meaning of section 52 of the Trade Practices Act 1974 (Cth). The orders made by Redlich J in this respect were not set aside by the Court of Appeal. His Honour ordered:

“1. It is declared that the defendant engaged in unconscionable conduct in respect of the Prosperity Bonds issued by it to the plaintiffs by failing to disclose to the plaintiffs, prior to their entry into their respective Prosperity Bond policies, its intention to -

(a)cease calculating the prices of units issued in respect of the Cash and Secure portfolios on an historical basis; and

(b) reduce the plaintiffs’ expected profits from arbitrage through the defendant’s calculation of the prices of units issued in respect of the Cash and Secure portfolios on an historical basis by permitting changes in the numbers of units issued in respect of those portfolios to cause the prices of units in those portfolios to rise or fall, being changes brought about in consequence of switches of units between those portfolios requested by or on behalf of the plaintiffs.

2.        It is declared that:

(a) the defendant engaged in misleading and deceptive conduct within the meaning of section 52 of the Trade Practices Act 1974 (Cth) by failing to disclose to the plaintiffs, prior to their entry into their respective Prosperity Bond policies, its intention to -

(i)cease calculating the prices of units issued in respect of the Cash and Secure portfolios on an historical basis; and

(ii) reduce the plaintiffs’ expected profits from arbitrage through the defendant’s calculation of the prices of units issued in respect of the Cash and Secure portfolios on an historical basis by permitting changes in the numbers of units issued in respect of those portfolios to cause the prices of units in those portfolios to rise or fall, being changes brought about in consequence of switches of units between those portfolios requested by or on behalf of the plaintiffs.

(b)       the plaintiffs’ claims that the defendant engaged in   misleading and deceptive conduct otherwise fail.

3.        Order that the defendant pay damages to the plaintiffs:

(a) to be assessed in respect of the defendant’s conduct referred to in order 1, such damages -

(i)        to compensate the plaintiffs for:

(A) any borrowing expenses and other costs reasonably incurred in maintaining their investments in respect of their Prosperity Bond policies;

(B) any management fees paid in respect of the management of their Prosperity Bond policies; and

(C) any loss of opportunity to make alternative investments which the plaintiffs are able to establish;

(ii) to be calculated from the date on which the defendant ceased calculating the prices of units issued in respect of the Cash and Secure portfolios on an historical basis until the conclusion of a reasonable period after the date on which notice was given of the defendant’s intention to cease calculating the prices of units issued in respect of the Cash and Secure portfolios on an historical basis; and

(iii)not to include any expectation profits or damages for loss of bargain;

(b) in the alternative to (a) above, to be assessed in respect of the defendant’s conduct referred to in order 2.”

1. The parties in their joint list of issues in dispute summarised the outstanding issues in this respect as follows:

“Unconscionable conduct / Trade Practices Act damages

8.1 Reasonable period: For the purposes of calculating the plaintiffs’ loss and damage for contravention of section 52 of the Trade Practices Act or unconscionable conduct pursuant to the order of Redlich J, what is a “reasonable period” for the purposes of para 3(a)(ii) of the Orders of Redlich J made on 15 December 2006? The plaintiffs contend for 3 months (from 16 October 2000) for Pegela and 6 months for Argot; the defendant contends for one month.

8.2 Management fees and borrowing costs:  During the reasonable period applicable to each of Argot and Pegela, what management fees and borrowing costs were incurred by each of them?

8.3Alternative investment: During their reasonable period applicable to each of Argot and Pegela, has either or both of the plaintiffs established on the balance of probabilities that it lost a commercially valuable opportunity to make an alternative investment by reason of having invested in the policies in reliance upon the defendant’s contravention of section 52 of the Trade Practices Act or unconscionable conduct?

8.4Expectation damages. The plaintiffs confirm that they are not (or are no longer) claiming expectation damages in respect of the defendant’s unconscionable conduct and contravention of section 52 of the Trade Practices Act.

8.5Orders:  In accordance with the parties’ written submissions, the orders of the Court should be that the defendant pay the plaintiffs damages in respect of the defendant’s unconscionable conduct / contravention of section 52 of the Trade Practices Act in an amount agreed between the parties, having regard to any findings with respect to paragraphs [8].1 to [8].3 above or, failing agreement, in an amount determined by an Associate Justice.”

1. The date that the defendant ceased calculating the price of units on a historical basis was 16 October 2000. Therefore, the plaintiffs are each entitled to damages for:

(a)       any borrowing expenses and other costs reasonably incurred in maintaining their investments in respect of their Prosperity Bond policies;

(b)      any management fees paid in respect of the management of their Prosperity Bond policies;  and

(c)       any loss of opportunity to make alternative investments which the plaintiffs are able to establish;

to be calculated from 17 October 2000 to the conclusion of the reasonable period. The reasonable period referred is the amount of notice the defendant should have given the plaintiffs of the changes referred to in paragraph 1(a) and (b) of Redlich J’s orders.[197]

[197]See above, paragraph 140.

1. The plaintiffs submitted that the reasonable period for Pegela was three months. This was based on the evidence of Mr Hawkins that it would take three months to cash out of the Prosperity Bond policies and invest in an alternative investment.[198] The plaintiffs submitted that the reasonable period for Argot for making its alternative investment was six months. These submissions appeared to be based on the amount of time required to cash out of the Prosperity Bond policies, decide on another investment, obtain any required financing for the new investment and to enter into the new investment.

   [198]Transcript, 545 at [16]-[18].

1. In its closing submissions the defendant submitted that one month[199] was reasonable  notice as the entire investment could have been withdrawn immediately, or at least very quickly. I accept that this is the case and, consequently, as the defendant submitted, one month is more than sufficient for the purpose of withdrawing funds and making alternative investments. As a result, I find that one month is a reasonable period for the purpose of calculating the damages.

   [199]In its opening submissions the defendant submitted that the reasonable period was no more than three months; see Outline of Defendant’s opening submissions (4 March 2011), paragraph 27.

1. I now turn to consider the claims for loss of opportunity damages. Argot claims damages for the loss of the opportunity to make an alternative investment with an entity called LJM Partners. This claim was supported by the evidence of Mr Scott Tyne both in his witness statement and in cross examination.[200] Pegala claims damages for the loss of opportunity to make an alternative investment in Wesfarmers shares.  This claim was supported by the evidence of Mr Garrick Hawkins both in his affidavit and in cross examination.[201]

   [200]Witness statement of Scott Francis Tyne (8 November 2011), paragraphs 64-72.

   [201]Affidavit of Garrick Hawkins(9 June 2010), paragraphs 5-9.

1. The defendant submitted that:[202]

   [202]Outline of Defendant’s opening submissions (4 March 2011), paragraphs 15- 20.

“Damages for loss of opportunity

15. The principles by which some loss or damage for the loss of an opportunity to enter into an alternative investment are to be established and quantified are well established. 

16. The plaintiffs must establish:

(a) on the balance of probabilities, that their entry into the Prosperity Bond policies caused them to lose a commercial opportunity which had some, not merely negligible, value; and

(b) by reference to the degree of probabilities or possibilities, the value of the opportunity lost. 

17. In Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355, Mason CJ, Dawson, Toohey and Gaudron JJ described the manner in which this two stage enquiry is to be approached as follows:

“[T]he applicant must prove on the balance of probabilities that he or she has sustained some loss or damage.  However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities.  It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.”

18. In short, in a case such as this, a plaintiff must “establish that he could and would have entered into the different contract and that it would have yielded the benefit claimed”: Gates v The City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 13 per Mason, Wilson and Dawson JJ. If it cannot do so, it will have not have established any loss.

19. If a plaintiff can establish that he or she could and would have entered into some non-negligible alternative investment opportunity, the value of that opportunity will be assessed by reference to the degree of probability of the claimed value of the investment actually coming to fruition, even if it is less than 50%: Malec v J C Hutton Pty Ltd (1990) 169 CLR 638 at 642-643 per Deane, Gaudron and McHugh JJ; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355-356.

20. The defendant does not accept that the plaintiffs’ entry into the Policies  actually deprived them of any alternative investment opportunity that would otherwise have been open to them.  That is to say, while it may be the case that the plaintiffs would not have invested in the policies had it not been for the defendant’s unconscionable conduct, it is for the plaintiffs to establish, to the satisfaction of the Court, that the fact that they did invest in the policies prevented them from making some other form of investment.  If at the time there was no other investment opportunity that they found attractive, or if there was some attractive investment but they had the means to invest in it and decided not to for some reason, then the defendant’s conduct could not be said to have caused them to miss an alternative opportunity.  The relevant facts will be explored during the hearing. “

1. The defendant further submitted that:[203]

   [203]Written Closing Submissions of the Defendant (2 May 2011), paragraphs 262-264.

“262. The plaintiffs’ own evidence shows that there was no opportunity to make an alternative investment lost by reason of each plaintiff’s entry into its Prosperity Bond.  This is because of one or more of the following.

(a) There was no alternative investment then under consideration.  The Prosperity Bond was a unique investment opportunity, such that each plaintiff was able to make the investment outside of their usual pattern.

(b) The suggested alternative investment opportunities now put forward by each plaintiff lack credibility.

(c) If, contrary to the above, there was an alternative investment which either plaintiff was considering, each of them had the resources to undertake that investment in October 2000 and their resources were not affected adversely by their investment in the Prosperity Bond.

263. The plaintiffs were free at all times to withdraw from Prosperity Bond on 24 hours notice, with their capital entirely intact.  Accordingly, if there had been an alternative investment that could only have been funded by them if they were not invested in the prosperity bond, they could have withdrawn their funds immediately.

264. These conclusions are established by:

(a) the evidence of Messrs Tyne and Hawkins that there was no comparable product offering the same mix of return and risk;[204]

(b) the fact, established in documents sourced from ANZ Sydney under subpoena, that the bank was willing to lend on Prosperity Bonds because of the special security characteristics which the Prosperity Bond offered, with its guaranteed “Protection Option”;[205] 

(c)the fact, established by Argot’s[206] and Pegela’s[207] stated intentions in November 2000 to each invest a further $5 million in their respective policies, that their holding of the policies did not exhaust their ability to invest an equivalent sum at that time; 

(d) the fact that Pegela had the means to undertake any investment that it chose – the determinant on entry into other investments was the rate of return, length of time and risk, not constraints on the availability of finance.[208]”

[204]Tyne 2011 WS (C14), par 66(e)–(j); Hawkins  2003 Supp WS (C05), pars 10, 18.

[205]See ANZ Private Bank Diary Note (M Ferdinands) 16 May 2000, re Tyne Group [ANZ subpoenaed docs file 04 Misc, pp 38-51] at pp 40-41 of 234: “AXA Prosperity Bond Protection Option” and “Credit Rating of AXA”; ANZ Private Bank Diary Note (G Cracknell), 4 May 2000, re Hawkins Group, ” [ANZ subpoenaed docs file 04 Misc pp 64-69 of 234] at pp 3 -4 of 6: “AXA Prosperity Bond Protection Option” and “ Credit Rating of AXA”; ANZ Private Bank Diary Note (G Cracknell) 8 February 2000 re Tyne Group [ANZ subpoenaed docs file 04 Misc pp 62-63 of 234] – discussing application to invest in “AXA Guaranteed Bonds” and discussion of similar deals for other clients . Mr Tyne discovered in his fruitless application to Standard Chartered Bank in Hong Kong that that bank also fastened onto the Protection Option as essential to its security analysis.

[206]Letter, Argot to NMLA, 9 Nov 2000, OCB 1497 (G06: 2003 Trial CB vol 5, p 123 of 364): “It has been determined to invest a further $5 million into the above policy. … It is proposed to make this further investment at the end of the month.”.

[207]Letter, Pegela to NMLA, 9 Nov 2000, OCB 1509 (G06: 2003 Trial CB, vol 5, p 136 of 364): “I advise that Pegela has determined … to invest a further $5 million in Prosperity Bonds.  We propose to make this investment by the end of the month.  Please provide appropriate documentation to facilitate investment.”

[208]Hawkins XXN, 21/03/2011 T-810-811, 843.26 - 844.2 (“The means were there, yes, I agree with that.”), 844.21-25 (“It would have been challenging, but yes.”).

1. On the basis of the authorities, evidence and other matters referred to in the defendants submissions I accept that the plaintiffs have not established on the balance of probabilities that they each lost a commercial opportunity. While both plaintiffs may have been considering alternative investments prior to purchasing the Prosperity Bond policies, there is insufficient evidence to establish that the plaintiffs would have made the alternative investments as proposed in their evidence or that they did not have the funds to make those alternative investments regardless of whether they invested in the Prosperity Bond policies. As the plaintiffs could exit the Prosperity Bond policies at any time, there was nothing stopping the plaintiffs from withdrawing from the Prosperity Bond policies and making the alternative investments. For these reasons the plaintiffs claims for loss of opportunity damages must fail.

1. Consequently, the plaintiffs are entitled to damages for unconscionable conduct for borrowing expenses and other costs reasonably incurred in maintaining their investments, and management fees paid in respect of the period 17 October 2000 to 16 November 2000 in an amount agreed between the relevant plaintiff and the defendant, or, in default of agreement, as determined by an Associate Justice.

1. The plaintiffs are entitled to damages for unconscionable conduct, or, in the alternative, misleading or deceptive conduct. The plaintiffs did not press its claim for expectation damages for misleading or deceptive conduct and did not submit that they were entitled to more damages for misleading or deceptive conduct than for unconscionable conduct. Consequently, there is no need to go on to consider damages for misleading or deceptive conduct.

Conclusions

1. For the preceding reasons, it follows that in relation to the 2002 proceeding, the defendant has not committed any breach or breaches of clause 1.8 of the prosperity bond policies and that, consequently, this answers and disposes of the only questions remaining to be determined as stated in the orders of the Court of Appeal made on 26 February 2009.[209]  It also follows that none of the matters set out in the 2009 Further Amended Statement of Claim, individually or collectively, constitute a breach of the Prosperity Bond policies and, consequently, could not constitute a repudiation of the Argot policy or justify termination. Consequently, the repudiation claim set out in paragraph 82 of the 2009 Further Amended Statement of Claim and the alternative claims in paragraphs 84 to 87 of that pleading must be dismissed.

   [209]ACN 074 971 109 (as trustee for the Argot Unit Trust) and Pegela Pty Ltd v The National Mutual Life Association of Australasia Limited (No 2) [2008] VSCA 24, [10].

1. As has been noted,[210] another aspect of matters referred to the Trial Division by the Court of Appeal was whether the parties should be permitted to adduce further evidence or to be confined to that already adduced.  Subsequently to those orders of the Court of Appeal, the matter became more complex, and in a manner apparently not contemplated when those orders were made, as a result of the commencement of the 2009 proceedings.  Consequently, the giving effect to this order would involve the characterisation of any further evidence sought to be adduced as pertaining to the 2002 proceedings or the 2009 proceedings and then embarking on the exercise contemplated by those orders in relation to 2002 proceedings evidence – with introduction of 2009 proceedings evidence subject to res judicata, cause of action estoppel and Anshun estoppel matters or issues.  The parties did not pursue the conduct of such a process focusing, rather, on the extent that issues the subject of the 2009 proceedings were or were not capable of being pursued on the basis of res judicata, cause of action estoppel and Anshun estoppel arguments.  For reasons already indicated, it is not necessary to take the process further, even on this basis.[211]  It also follows from the preceding reasons that there remains no role for any special referee, a possibility also contemplated in the orders of the Court of Appeal.[212]

   [210]Above, paragraph 6.

   [211]See above, paragraph 139.

   [212]See above, paragraph 6.

1. In relation to the 2002 proceedings, other than with respect to the claim for damages for unconscionable conduct and misleading or deceptive conduct, I determine, for the preceding reasons, that the answer to the questions remaining to be determined in accordance with the orders of the Court of Appeal dated 26 February 2009[213] is that there is no breach and there are no breaches of clause 1.8 of the plaintiffs’ Prosperity Bond policies.

   [213][2008] VSCA 24, at [9].

1. In relation to the claim for damages for unconscionable conduct and misleading or deceptive conduct I direct that damages for unconscionable conduct be determined in accordance with the preceding reasons.

1. In relation to the 2009 proceedings, for the reasons indicated, these proceedings should be dismissed.

1. I will hear the parties further in relation to the form of final orders and in relation to the question of costs.