ACN 074 971 109 Pty Ltd v The National Mutual Life Association of Australasia Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

No 2026 of 2002

ACN 074 971 109 (AS TRUSTEE FOR THE ARGOT UNIT TRUST)
ACN 074 971 109 (AS TRUSTEE FOR THE ARGOT UNIT TRUST)	First Appellant/First Cross-Respondent
PEGELA PTY LIMITED (ACN 002 256 751)	Second Appellant/Second Cross-Respondent
v
THE NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA LIMITED (ACN 004 020 437)
	Respondent/Cross-Appellant

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JUDGES:	BUCHANAN, NETTLE and DODDS-STREETON JJA
WHERE HELD:	MELBOURNE
DATES OF HEARING:	3, 4 and 5 March 2008
DATE OF JUDGMENT:	5 December 2008
MEDIUM NEUTRAL CITATION:	[2008] VSCA 247

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INSURANCE – Life assurance – Prosperity Bonds – Premiums and earnings invested in portfolios of assets divided into units – Policyholders entitled to switch between portfolios – Arbitrage profits gained by switching with the benefit of hindsight – Insurer prevented arbitraging by changing from historic to forward pricing of units – Contract – Interpretation – Plain and ordinary meaning – Clause of Prosperity Bonds entitling investor to switch investment between ‘Cash Portfolio’ and ‘Secure Portfolio’ on three days’ notice to life company – Upon its proper construction, clause did not entitle life company to complete switch before the expiration of notice – Short selling – Upon its proper construction, clause did not entitle investor to switch amount from one portfolio to another unless amount in hand at time of giving notice – Buy/sell price – Upon its proper construction, clause referred to both buying price and selling price of Units in portfolios – Historical pricing – Express terms of Prosperity Bond entitling life company to switch from historical pricing to forward pricing – Deduced terms – Implied terms – Alleged deduced terms and implied terms inconsistent with express terms of Prosperity Bonds – No deduced terms or implied terms of Prosperity Bond preventing change from historical pricing to forward pricing – Daily pricing – No express or implied term of Prosperity Bond requiring life company to publish unit prices daily – Agency – Whether third parties insurance intermediaries within meaning of Insurance (Agents and Brokers) Act 1984 (C’th) – Whether life company bound by representations of insurance intermediaries as to continuation of historical pricing – Any such representations inconsistent with express terms of Prosperity Bond and therefore not binding – Dilution – No implied term that life company would add sufficient funds to Portfolios to enable investors to continue to arbitrage between Portfolios at a profit – Segregation – No express or implied term of Prosperity Bonds prohibiting life company from segregating investors funds from the funds of other policy holders – No jus quaesitum tertio entitling investors to complain of breach of contract as between life company and other policy holders – Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 165 CLR 107 referred to – Estoppel – Equitable estoppel – Minimum equity – Minimum equity not exceeding any detriment suffered – Appeal allowed in part.

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APPEARANCES:	Counsel	Solicitors
For the Appellants/Cross-Respondents	Mr A C Archibald QC with Mr I B Stewart	Eakin McCaffery Cox (Victorian Agents Oakley Thompson & Co Solicitors)
For the Respondent/Cross-Appellant	Mr R A Brett QC with Mr D W Bennett	Turks Legal

BUCHANAN JA:
NETTLE JA:
DODDS-STREETON JA:

Between early 1998 and September 2000 the respondent issued policies of life insurance called ‘prosperity bonds’. Premiums and earnings were invested in portfolios of assets. The portfolios were divided into parts with equal value, called units, which represented the value of each policyholder’s entitlement. Changes in the market value of the investments in each portfolio were reflected in the prices of the units. Policyholders could switch units from one portfolio to another. Adjustments to the number of units held were made using unit prices as at the date on which the requested transfer was made. The portfolios included one called a ‘Cash’ portfolio, the value of which moved only incrementally, and one called a ‘Secure’ portfolio containing shares and fixed interest securities. The unit price of the Secure portfolio was affected by daily movements in share indices.

In mid-1998 a New South Wales dentist, Keller, entered into negotiations with the respondent to make available to persons introduced by Keller (‘the Coneview investors’) prosperity bonds on special terms. According to an internal memorandum of the respondent dated 12 June 1998, it was anticipated that the persons introduced by Keller would invest between $15 million and $20 million in the first year and like sums each year after that. The special terms included terms which entitled the appellants to switch between the Cash and Secure portfolios on three days’ notice of intending to switch, and at the price applicable on the date of giving notice, and to revoke the notice of intention without penalty at any time before completion of the switch.

The Coneview investors exploited the special terms by switching or declining to switch between the Cash and Secure portfolios with the benefit of hindsight and thus achieved risk-free arbitrage profits. Their modus operandi was described in the evidence of the respondent’s chief actuary. He said that the prices published by the respondent on one day reflected movements in asset values that had occurred on the previous day and that the price of the units in the Secure portfolio almost always reflected movements in the All Ordinaries Index. He continued:

Dr Keller had generally given his instructions to switch late in the day, when it had become apparent whether the All Ordinaries Index was going to finish higher or lower than the day before, and he therefore knew whether the price of units in the Secure portfolio would be higher or lower the following day. Dr Keller had therefore been able to time his instructions to switch from the Cash to the Secure portfolio and back again so that he moved into the Secure portfolio when its unit price was steady or rising and into the Cash portfolio (in which the unit price falls only in very exceptional circumstances) when the price of Secure units was falling.

In mid-2000 the respondent discovered the arbitraging conducted by the Coneview investors and took steps to prevent it, principally by changing from historic to forward pricing of units. Instructions given on a particular day to withdraw or switch funds were effected at prices which reflected the movement and value of the assets underlying the relevant portfolios that had taken place during that day. Once the respondent received a notice to withdraw or switch, it put the notice into effect as soon as practical after the close of business on the day on which the notice was given, and refused to accept any instruction to cancel the switch or withdrawal unless the instruction to cancel was received before the switch or withdrawal was actually processed. This action triggered the proceedings.

The proceedings below

The appellants’ principal claim below was that the effect of the special terms negotiated by Keller was to confer on them an option of three days’ duration in which to switch or to decline to switch at prices ruling at the first day of the option period; and so to confer on them the ability to switch or decline to switch with the benefit of hindsight. Alternatively, the appellants contended, the respondent was estopped for the duration of the prosperity bonds from denying that that was the effect of the special terms, and further or alternatively, the respondent had engaged in misleading and deceptive conduct which induced the appellants to invest in the prosperity bonds in the belief that the effect of the special terms was as they alleged.

The decision of the trial judge

The judge held that the special terms did not have the effect for which the appellants contended. His Honour ruled that, once a notice of intention to switch was given, it was open to the respondent to complete the switch at any time within the next three days and that, once a switch was so completed, an appellant was not entitled to revoke its notice of intention. The judge accepted that the respondent was estopped in part from departing from assumptions as to the prices at which units could be switched, on the basis of which he found that the appellants had entered into the prosperity bonds. But his Honour limited the relief to be accorded to the minimum equity, which his Honour determined to be the appellants’ costs of borrowing and maintaining their investments in the prosperity bonds, plus management fees incurred and loss of investment opportunities forgone until the effluxion of such time as represented reasonable notice by the respondent. His Honour also found that the respondent had engaged in misleading and deceptive conduct but held that the relief to be allowed was no more than was necessary to make good the minimum equity to which the estoppel gave rise.

The appeal

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. For its part the respondent sought to uphold the judge’s construction but contended that his Honour erred in holding that the respondent was estopped from denying that the special terms had the effect for which the appellants contended and in finding that the respondent engaged in misleading and deceptive conduct.

The terms of the prosperity bonds

Clause 1.1 of the prosperity bonds provided that policyholders could pay an additional premium, obtain investment protection in respect of certain portfolios, switch investment portfolios and withdraw cash by means of a full or partial surrender.

Clause 1.8 provided that:

1.8 Large Withdrawals
We reserve the right to delay for up to thirty days any cash withdrawal or any transfer between the investment portfolios which would otherwise require the cashing within any thirty day period of Units valued at more than $100,000. We will 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 thirty 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.

The second paragraph of the clause was a special term negotiated by Keller.

Clause 2.2 of the policy dealt with the operation of the investment accounts. Accounts in one or more of the various investment portfolios were maintained for policyholders. Each account was maintained in units. Whenever an amount was put into an account, the number of units, determined by dividing that amount by the unit price, was added to the number of units in the account. Similarly, whenever an amount was taken from an account, the number of units, determined in the same manner, was subtracted from the number of units in the account.

Clause 2.4 provided that policyholders could withdraw cash by surrendering units in investment portfolios.

The investment portfolios were described as ‘market-linked portfolios’. The assets of the portfolios were held in one of the statutory funds conducted by the respondent (cl 3.1).

Clause 3.2 provided, in part:

(a)Prosperity Bond Market-Linked Portfolios are divided into parts of equal value called Units which are used to keep track of your entitlements under this policy. Changes in market values the investments in each portfolio are reflected in the Unit Prices which rise and fall as a result.
(b)All investment income (including realised capital gains and losses) earn on the assets of a particular Prosperity Bond Market-Linked Portfolio, less any tax payable is credited to that portfolio.
…
(e)Unit Prices of Units in Prosperity Bond Market-Linked Portfolios are calculated as described in section 4 below. They are usually declared on a daily basis, but may be declared more or less frequently.

Clauses 3.3a and b provided:

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

The respondent could not charge for switching between the Cash and Secure Portfolios (cl 3.3d).

Clause 4.20 dealt with the calculation of unit prices. The clause provided:

4.20‘Unit Prices’ are the dollar value of each Unit. The Unit Price in a particular Prosperity Bond Market-Linked Portfolio is calculated as follows:
(i)As soon as practical after a day as at which the Portfolio Net Value is determined, we determine a Benchmark Unit Price as at that date, by dividing the Portfolio Net Value by the total number of Units then held in that portfolio;
(ii)The Unit Price is then calculated by adjusting as we deem appropriate the Benchmark Unit Price most recently determined to take account of any fluctuations in the market value of the investments of the Portfolio since the date on which the Portfolio Net Value is determined.

The meaning of clause 1.8

The principal question for the purposes of this appeal concerns the proper construction of the second paragraph of cl 1.8 of the policy. The appellants contended that its effect was that the respondent would waive its right to delay or withdraw or switch for 30 days, provided the relevant investor gave three days’ notice of intention to make the switch or withdrawal. So, according to the appellants, the investor would be entitled to revoke the notice before it expired and, correspondingly, the respondent was not permitted to act on a notice until it had expired. If, however, a notice were given and not revoked before it expired, the respondent would be bound upon expiration of the notice to complete the transfer at the price applicable on the day when the notice was given. Hence, in the appellants’ submission, the clause enabled the appellants to make profits by deciding whether to switch between portfolios or withdraw units with the benefit of hindsight.

The judge rejected the appellants’ construction. His Honour said that the purpose of the first paragraph of cl 1.8 was to give the respondent sufficient time to prepare for the switch or withdrawal of units – it permitted the respondent to delay carrying out the transaction when it thought it necessary – while the second paragraph did no more than reduce the period for which the respondent could delay to three days. It followed, his Honour held, that notice given by the investor was not a notice that the switch or withdrawal should occur at the end of the period but rather a notice of intention that the switch or withdrawal was to be effective from the date of the notice. As his Honour put it, the words ‘prior to completion’ meant that the respondent might ‘complete’ within the three day period.

[The respondent] is given the right to delay for up to three working days, with [the appellants] having the right to cancel their notice of intention at any time within those three working days provided [the respondent] has not in the meantime completed the withdrawal or switch.

With respect, we disagree. In our opinion, the judge’s construction of cl 1.8 distorts the plain meaning of the words ‘three working days’ notice of … intention to switch or withdraw.’ The natural and ordinary meaning[1] of three days’ notice of intention to switch or withdraw is that it is forward notice of an event to take place in three days’ time. If the switch or withdrawal were to take place on the day on which notice is given, the investor would have failed to give three days’ notice. To treat the second paragraph of cl 1.8 as entitling the recipient of the notice to perform the switch or withdrawal at any time within the three days would require a drastic recasting of the words in the paragraph. It would also make no sense in the context of the whole of the clause. If an investor gives notice requesting a transfer or withdrawal on the day of the notice, the respondent is entitled under the first paragraph of cl 1.8 to delay the transfer or withdrawal for up to 30 days. The second paragraph of cl 1.8 provides that the respondent is only bound to waive that right to delay for up to 30 days if the investor gives three business days’ notice of intention to transfer or withdraw.
[1]McCann v Switzerland Insurance Australia Ltd (2003) 203 CLR 579, 589 [22] (Gaudron J) and 600 [73]–[74] (Kirby J); Gardiner v Agricultural and Rural Finance Pty Ltd (2008) Aust Contract Reports ¶ 90–74 [7]–[13] (Spiegelman CJ).

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.

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 three day period.[2]

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.

[2]Reasons [372].

The respondent advanced a number of arguments in support of the judge’s construction. One was based on the form of cl 1.8 – in particular, that the first paragraph of the clause was in form solely for the benefit of the respondent - in that it conferred on the respondent the right to delay for 30 days what otherwise it would be bound to do by the end of the first day. Counsel for the respondent argued that, if the second paragraph had the effect for which the appellants contended, it would have turned a clause which was in form solely for the benefit of the respondent into one which in operation was solely for the benefit of investors. He submitted that, if the parties had intended to confer such an extraordinarily valuable right upon holders of policies,[3] they would surely not have gone about it by the partial relaxation of the power of delay conferred by the first paragraph of the clause.
[3]The respondent calculated that, if the appellants’ construction were adopted, it would result in a total liability of $2.8 billion to those policy holders.

That argument is not persuasive. In our view it is not surprising that a provision in favour of the appellants should have been drafted in the form of a partial relaxation of the first paragraph of cl 1.8. Even a slight relaxation of the respondent’s ability to delay completion for up to 30 days would be for the sole benefit of the appellants. It would not be inappropriate, however, to place it next to the provision which it was intended to relax. And the fact that the relaxation provided for in the second paragraph of cl 1.8 may have been particularly beneficial to the holders of policies with special terms does not alter the logic of placing it next to the provision it was intended to relax.

It was further submitted for the respondent that, if the second paragraph of cl 1.8 bore the interpretation for which the appellants contended, it would confer on the appellants a right to make gains from the policies which were of a fundamentally different nature to the gains for which the policy as a whole provides. More particularly, it was said that whereas the policy provides generally for investors to make long-term gains from increases in the value of the assets in their portfolios, the construction of cl 1.8 for which the appellants contended would allow the appellants to make short term gains at the expense of other policyholders.

In our view that submission is not persuasive either. The respondent may well not have agreed to the second paragraph of cl 1.8 if it had sufficiently thought through the possibilities for exploitation of the clause. Non constat that the clause is to be given a meaning for which it does not provide.[4]
[4]Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, 188 [11] (Gleeson CJ, Gummow and Hayne JJ).

Counsel for the respondent argued next that, if policyholders giving notice of an intention to switch had three days within which to determine whether to proceed, their intention to switch would be conditional upon movements in asset values and thus unit prices making the switch desirable, and because it was conditional would not be an informed intention of which notice could properly be given.

In our view that argument should be rejected. As counsel for the respondent conceded, even on his construction the clause would be capable of operating where an investor had every intention of completing a transfer or withdrawal but then revoked the notice of intention because prices moved so adversely against transfer or withdrawal as to make it ill advised. In point of principle that is no different from an intention to proceed unless circumstances change. In any event, we do not consider that the possible mental processes of those using the clause should determine its construction.

Finally, on this aspect of the matter, counsel for the respondent invoked an analogy with a landlord’s notice to quit. In his submission, a policyholder giving notice under cl 1.8 was in a similar position to the landlord and the respondent was in a similar position to the tenant who was required to act on the notice and so give effect to the transfer or withdrawal before the notice expired. That was further support, it was said, for the view that ‘three business days’ in cl 1.8 meant a request to transfer or withdraw on the date on which notice was given coupled with permission to delay completion for up to three days.

We think that the analogy is inapposite. A notice to quit must stipulate a date certain in order to bring a periodic tenancy to an end.[5] The only event of which notice is given is the end of the tenant’s right to occupy the premises. It is not notice of the event constituted by the tenant leaving the premises. A landlord may well be delighted if his or her tenant vacates the demised premises before a notice to quit expires. It does not follow that an investor who gives notice requesting a transfer or withdrawal to be made on a specified date will be delighted if the transfer or withdrawal is made before that date.
[5]Amad v Grant (1947) 74 CLR 327, 338 (Latham CJ).

Short selling

The appellants argued that the judge was wrong in holding that the policy did not permit an appellant to give notice to switch an investment from one Account to another unless the investment were in hand at the time of giving notice. Counsel for the appellants submitted that there was nothing in the terms of the policy which precluded an appellant from engaging in what he termed ‘short selling’, which is to say giving notice of intention to switch an investment before acquiring the investment, provided that the investment were acquired on or before the expiration of the notice.

We disagree. Although for different reasons, we are of the same view as his Honour as to the impermissibility of short selling. We consider that, upon its proper construction, the policy does not contemplate or tolerate switches of an investment from one Account to another unless, at the time of giving notice to switch, the investment is in hand in the Account from which it is to be switched.

The starting point is cl 2.2(a) which provides that the investor has a choice as to the portfolios into which his or her investment is to be placed, and cll 2.2(c) and (d), which provide that, when an amount is put into or taken out of an Account (scil. portfolio), the number of Units to be added or subtracted from the Account is to be determined by dividing the amount by the Unit Price at the time of transfer.

One goes then to cl 2.2(e), which provides for the respondent to delay ‘the application of money to or from an Account’ until midnight on the transfer date and then to use the Unit Price applicable at the end of the period of delay. The fact that the clause speaks in terms of delaying the application of money implies that the money is in place in the Account from which it is to be switched before the period of delay.

Next, cl 3.3 of the policy refers to switching ‘investment portfolios by transferring amounts between Prosperity Bond investment portfolios at any time’.[6] 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.
[6]Emphasis added.

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.

Finally, there is the second paragraph of cl 1.8 which, in consideration of the respondent waiving its right to delay for a period of 30 days, provides for the appellants to give three days’ notice of any switch and for the Unit price for the purposes of the switch to be the price as at the day of giving notice. It would make little sense for the Unit price to be fixed at the date of giving notice unless the investment existed at that date.

Approaching the matter in the context of those provisions, and applying the test of what honest and reasonable business persons would have supposed cl 1.8 to mean,[7] we construe it as requiring that an investment exist before it may be made the subject of a notice to switch, and thus as implicitly prohibiting the practice of short selling.
[7]Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288, 300 (Isaacs J); Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, 188 [11] (Gleeson CJ, Gummow and Hayne JJ).

Buy price/sell price

The appellants further contended that the judge erred in holding that the ‘unit price’ mentioned in the second paragraph of cl 1.8 referred only to the selling price, and thus in concluding that the buying price would be the price at the time of the switch.

We agree that the judge erred in that fashion. His Honour reasoned that cl 1.8 was concerned with the conversion of units into cash and not the conversion of cash into units. In our view that is not so. The first paragraph expressly refers to ‘any transfer between the investment portfolios’ as denoting one of the transactions with which the provision is directly concerned. We see no reason to doubt that the second paragraph of the clause was intended to be co-extensive. That implies that the expression ‘unit price’ in the second paragraph is commensurate with the expression ‘Unit Price(s)’ in the first.

The respondent argued that it was significant that the second paragraph of the clause applied to both withdrawals and switches and that, in the case of a withdrawal, there is only ever a selling price. Counsel for the respondent submitted that the logical implication was that ‘unit price’ referred only to the selling price. He also emphasised that the clause is headed ‘Large Withdrawals’ and submitted that there was no support for the idea that the clause was directed primarily to switches. He referred too to the difference between the expression ‘Unit Price(s)’ in the first paragraph of the clause and ‘unit price’ in the second paragraph and submitted that it bespoke the meaning for which he contended.

Those submissions are not persuasive. The first paragraph of cl 1.8, refers to ‘Unit Price(s)’ in a fashion which is directed to both selling price and buying price. The sentence in which the expression ‘unit price’ appears in the second paragraph of the clause is in the form of a qualification to the penultimate sentence of the first paragraph. Logically, the qualification presents as the quid pro quo for the investor’s acceptance of the three day notice requirement. As such, its apparent purpose is to enable the investor to lock in the transfer or switch price as at the date of giving notice, despite the three day delay. If, however, the ‘unit price’ referred only to the buying price or only to the selling price it would leave the investor at risk of movements in prices either way. That seems unlikely.

Admittedly, in some other contexts, the difference between the expressions ‘Units Price(s)’ and ‘unit price’ might be taken as an indication that they are intended to have different meanings.[8] But the drafting of this policy is not sufficiently fine or precise to permit that sort of analysis. Other examples of its imprecision include that the expression ‘Unit Price’ in cl 2.2(e) stands in contradistinction to the expression ‘Unit Price(s)’ in the first paragraph of cl 1.8, but in context both expressions appear to mean the same thing. Equally, in the definition provision in cl 4.20 of the policy, the expression ‘Unit Prices’ is the appellation ascribed to the defined term, when logically it should be ‘Unit Price’. In these and other respects, the instrument has the appearance of a collection of provisions drafted by different people at different times without a great deal of thought for what had gone before.
[8]Expressio unius est exclusio alterius: Blackburn v Flavelle (1881) 6 App Cas 628, 634 (Sir Peacock, Sir Montague, Sir Couch and Sir Mellor).

In any event, upon the proper construction of cl 1.8, we consider that ‘unit price’ in the second paragraph of the clause refers distributively to both the buying price and the selling price and thus that, subject to cl 2.2(e), 3.2(e) and 4.20, as previously explained, in the case of a switch the buying price and the selling price are to be those which apply at the date of giving notice.

Historical pricing

Historical pricing[9] affords the benefit of hindsight as to daily movements in market prices. Thus, any system which involves historical pricing will present the opportunity to arbitrage. It depends on the fact that an investor has the ability to decide to switch or not, by reference to the previous day’s prices. The investor alert to the overnight international markets would ascertain market trends, yet, where historical pricing is used, the unit price on the day of giving notice would be that of the day before. It would not take into account the overnight activity or trends. The investor would thus gain the predictive benefit of factors which render a transaction ‘locked in’ on day one.
[9] Clarion Ltd v National Provident Institution [2000] 2 All ER 265.

In this case historical pricing permitted arbitrage because the practice of setting the unit price one day in advance permitted an investor to move between the Cash and Secure portfolios, avoiding capital loss and achieving capital gains. As explained by Mr Tyne in his memorandum to Mr Hawkins dated 25 February 2000:

Switches take effect on the day of the notice at the ‘current price’. However, the current price for Tuesday is in fact Monday’s close price. In effect the switch is retroactive by 1 day. We can make unlimited switches and cancel a switch if we advise in writing not later than 3 days from the switch date. You will appreciate that those terms effectively allow one to arbitrage between the cash and equity markets with the benefit of hindsight.

The Coneview investors’ arbitraging prior to October 2000 was based on the exploitation of historical pricing. From 16 October 2000, however, the respondent abandoned historical pricing. From that date, it completed switches between the Cash and Secure portfolios on the basis of the unit price published on the day after the date on which the notice of intention to switch had been given. Those prices were calculated at the end of the day on which the investor requested the switch. Whereas previously the price for day X was set on day X-1 (reflecting the state of the market at the close of day X-1), under the regime of forward pricing applicable since October 2000, the price for day X is that calculated at the end of day X and published on day X+1. That method of pricing may be described as ‘forward pricing’.

Under forward pricing, the investor, at the time of requesting the switch, does not know the price which will apply to it. Generally speaking, it will reflect more up-to-date movements in the underlying asset value of the portfolio than under historical pricing. The move to forward pricing thus eliminates the investor’s opportunity to exploit market movements on day X by acquiring or disposing of units at a price considerably higher or lower than one which reflects the market value of the underlying assets at that precise moment.

Appellants’ submissions below

The appellants contended below that there were express or alternatively implied terms of the policy that the respondent:

would on a daily basis calculate and publish unit prices for the cash and secure portfolios in sufficient time to make an informed decision whether to enable each plaintiff investor to give three days’ notice of his or its intention to switch or withdraw,[10]

and that:
unit prices would be calculated on an historical basis, meaning that the price published for units in the cash and secure portfolios on any given day reflected the previous day’s movements in the market values of the investments in those portfolios.[11]

[10]FASOC [11(a)]. This term was pleaded only as an implied term.

[11]This term was pleaded in FASOC [10(aa)] as an oral term and [11(aa)] as an implied term.

The judge rejected those contentions. Based upon an exhaustive analysis of the evidence, his Honour concluded that:

1) The contractual documents upon which the appellants relied and the customer information memorandum were silent as to historic pricing.

2) He was not satisfied of the truth of allegations that Keller or Taylor had represented that the respondent agreed to calculate unit prices on a historical basis. He found to be unconvincing testimony which suggested that Keller or Taylor made a promissory representation as to historical pricing to Tyne, Hawkins and Tom Oates. As the judge put it, whatever was said by Keller or Taylor as to historical pricing or the respondent’s understanding of Keller’s need for a unit price at the time of switching, it was not promissory and had no contractual force.

3) He was not satisfied by the evidence called on the appellants’ behalf that the any of the appellants viewed Keller or Taylor as the respondent’s representatives, or as authorised to make any representation on its behalf, or as making a promise as to historical pricing which would bind the respondent.

4) He was not satisfied that the appellants had relied upon Keller or Taylor as acting as the respondent’s agents and the respondent could not be imputed with the knowledge of Keller and Taylor, even if they were acting as the respondent’s agents, because they were consciously acting against the interests of the respondent. In any event, the appellants had not established that they relied upon any oral representation made by Keller or Taylor as to historic pricing or that any such reliance was reasonable.

5) There was no conduct of the respondent which established that the respondent admitted that historical pricing was a special term or that it impliedly promised that it was so and, assuming that any of its subsequent conduct could be examined to assist in the determination or interpretation of the alleged oral term, such conduct was not unequivocally consistent with the alleged oral term.

6) The alleged terms could not be implied because, in the case of the alleged implied term as to daily publication of prices, it was inconsistent with express terms of the policy; and, in the case of both the alleged implied term as to daily publication of prices and the alleged term as to historic pricing, they were not necessary to give business efficacy to the policy.

Deduced term as to historical pricing

In this appeal, the appellants contended that the judge erred in reaching those conclusions. Counsel for the appellants argued that, although the policy document did not expressly refer to either an historical cost pricing term or a daily publication of prices term, the judge should have deduced[12] the existence of the historical pricing term from cl 2.2(e).[13] In counsel’s submission, that clause had work to do in an historic pricing regime (namely, to guard against sudden large falls in market and thus unit prices) but would be otiose and unnecessary in a forward pricing system (because in such a system the price may be set for a given day at the end of that day).
[12]Hawkins v Clayton (1988) 164 CLR 539, 570 (Deane, J); Breen v Williams (1996) 186 CLR 71, 91 (Dawson and Toohey JJ).
[13]‘We reserve to right to delay the application of money to or from an Account until midnight … on the date to which your request applies. We will then use the Unit Price applicable at the end of the period of delay’.

By and large, we agree with the judge. Clause 2.2(e) permits the respondent, after receiving funds from an investor, or after an investor requests a monetary withdrawal or a portfolio switch, to delay the application of the relevant sum until the end of the relevant day (that is, until after close of business on that day). It also expressly provides that the respondent will use the unit price then applicable. The unambiguous statement of the respondent’s entitlement to use that practice is inconsistent with a contractual obligation to adhere to historical pricing.

So far from operating as an assurance that the practice would always be continued, the clause was evidently calculated to enable the respondent to move to an alternative form of pricing, and thereby prevent historic pricing arbitrage. As the appellants’ expert witness, Lyon, said, the primary purpose of such a clause is to protect a life company and other policy holders against arbitrage by some policy holders based on the life company’s use of historic pricing.

Counsel for the appellant argued in the alternative that cl 2.2(e) (as a sub-clause of 2.2 (headed ‘operation of accounts’)) was properly limited to the deposit and withdrawal of cash. In his submission, it did not apply to switching, which was effected by book entries.

We reject that submission. There is no indication that the subject-matter of cl 2.2 is limited to fresh inflows and outflows of cash, thus excluding book entries. Clause 2.2(a), for example, specifically refers to making a choice between portfolios. Its confinement to inflows and outflows of cash depends on an unduly narrow construction of the concept of the application of moneys to or from an account, which is unwarranted in the context of a commercial document like the policy.

In the further alternative, counsel for the appellants contended that cl 3.2(a) effectively embedded historical pricing in the policy. Clause 3.2(a) relevantly provides that:

Prosperity Bond Market – Linked Portfolios are divided into … units … changes in market value of the investments in each portfolio are reflected in the Unit Prices which rise and fall as a result …

We reject that contention too. While cl 3.2(a) indicates that unit prices will be determined on the basis of market changes which have already occurred, that basis is common to both historical pricing in the sense asserted by the appellants and the system of forward pricing (which may more accurately be described as ‘deferred historical pricing’) applied by the respondent since October 2000.

Clause 3.2(a) does not expressly or impliedly require the unit price thus calculated to apply to a switching transaction on the following day, or at any particular date or time after the calculation. It is equally consistent with historical pricing and forward (or deferred historical) pricing.

Furthermore, cl 3.2(e) expressly provides for more than one unit price within the same day. Consequently, even if the respondent declared a unit price at the commencement of the day of a switch (based on the previous day’s asset values), cl 3.2(e) would allow a new unit price to be set, after close of business on the day of the switch, based on that day’s asset values; and cl 2.2(e) would permit the respondent to delay the application of funds until after that new unit price has been set and to apply that price to the switch. In so providing, the policy in effect contemplates the very possibility that a policyholder who requests a switch may not know the unit price(s) until after the switch is effected, and thereby contemplates the very possibility of action by the respondent calculated to defeat the ability of the policy holder to exploit historic pricing. The historic pricing term for which the appellants contended would fly in the face of those arrangements.

Counsel for the appellants argued that, despite the express terms of cl 3.2(e), the publication of a price on a daily basis was mandatory. He submitted that some clauses of the policy, such as cl 3.4(b) and cl 1.8 (in stating that ‘the unit price will be the price on the day when the notice is given in writing’) implicitly contemplated a single daily price. Alternatively, he contended, publication of multiple prices was not permitted because, by the combined effect of cl 3.3(a) (which provides ‘you may switch investment portfolios by transferring amounts between the Prosperity Bond to investment portfolios at any time’) and cl 3.3(b) (which provides ‘corresponding adjustments to the number of units will be made using unit prices as at the date to which your request for transfer applies’), it was necessary that the unit price be known at the time of the switch and that requirement, given the failure expressly to reserve a right to move to forward pricing, fortified the conclusion that historical pricing applied.

We reject those submissions too. The clear terms of cl 3(2)(e) prevail over any inconsistent, indirect indications in other clauses that a daily price is either requisite or restricted to a single price. Similarly, sub-cl 3.3(a) and (b), which are cast in general terms, neither expressly nor impliedly require the unit price to be known at the time of the request to switch. Adjustments can be made using the price as at the date to which the request for transfer applies, consistently with the use of forward pricing.

Counsel for the appellants argued that the evidence conclusively confirmed that the parties’ agreement entailed the incorporation of an historical pricing term. In his submission the fact that the special terms were negotiated at a time when the respondent employed an historical pricing system, and knew that it enabled investors to arbitrage by switching between portfolios with virtual certainty as to whether the switch would be in their interests or not, put the matter beyond doubt.

In our view that takes the matter no further. For the reasons already expressed, it is apparent that the incorporation of cl 2.2(e) is to be seen against the background of the respondent’s use of an historical pricing system and as calculated to empower the respondent to adopt some other sort of pricing system when and if it chose. Questions of estoppel aside, the fact that the Coneview investors did not anticipate that the respondent might invoke that power is neither here nor there.

Express term as to historical pricing

Counsel for the appellant argued that the judge’s finding as to there being no express oral term to maintain historic pricing was contrary to evidence that Keller and Taylor, in their capacity as agents for the respondent, orally promised the appellants that historical unit pricing was a term of their contracts. Counsel relied in particular on evidence of the following four conversations in order to establish the alleged oral term:

(a) a conversation in mid-1999 between Taylor, Tyne and Hawkins;
(b)a further conversation a couple of weeks later between Keller, Taylor, Tyne and Hawkins;

(c) a conversation between Tyne and Taylor in January 2000; and
(d) a conversation between Oates and Taylor in about March 2000.

In counsel’s submission the judge had erred in rejecting that evidence of Hawkins and Tyne as lacking in independence.[14] According to counsel, there were no relevant similarities in their accounts and further or alternatively any similarities were adequately explained.[15] Counsel argued that the judge had also erred in attributing weight to such similarities as there may have been, because, in counsel’s submission, they related solely to extraneous matters. There was further error, it was said, in the failure of the judge to refer to the evidence of Mr Mandalidis and Mr Beazley of the respondent which, it was suggested, corroborated the appellants’ evidence.
[14]Reasons [632].
[15]Reasons [633].

In our view those criticisms are unfounded. Taylor and Keller did not give evidence. Tyne, Hawkins and Oates prepared witness statements, some paragraphs of which were admitted into evidence. They also gave viva voce evidence of the conversations.

There were inconsistencies in the evidence of the appellants’ witnesses on what was said about historical pricing at the meetings. Tyne and Hawkins gave oral testimony to the effect that Keller and Taylor told them that the respondent was obliged to use historical pricing under the policies, but their witness statements did not include that assertion. Their evidence in chief differed in relation to what Taylor said at the first meeting.

Tyne’s examination-in-chief also differed from that given in his witness statement in relation to the second meeting. In his oral evidence in chief, Tyne testified that Keller said that, by an arrangement with the respondent, he would know the price at which a switch would be effected, because the respondent published the price on a daily basis by reference to the market movements the previous day.[16] Contrastingly, Tyne’s witness statement did not say that Keller had asserted that he had any arrangement with the respondent, but simply that Keller stated that the respondent published each day’s unit price in the morning and that he had informed the respondent of his need to know the unit price before switching.
[16]Reasons [637].

Tyne’s witness statement stated that, in a subsequent conversation, Taylor told him that Keller could generally access the unit price by 10 am and that the price was, in effect, yesterday’s calculation. According to the witness statement, Tyne asked Taylor if the respondent were committed to that pricing system (although his evidence in chief was that he had already been told that there was an arrangement to that effect) and was informed that the respondent did it as a matter of practice. According to the witness statement, Taylor also told him that Keller had made clear that the investors needed to know the price, so it seemed to Taylor that the respondent was obliged to maintain the historical pricing system. Tyne then enquired whether the policy mentioned historical pricing and Taylor replied that it did not do so in exact words, but that prices were declared daily in the usual course of things and Keller had told the respondent that he needed to know the prices prior to switching, so Taylor thought that the respondent was committed to historical pricing and, from a practical point of view, that was how the arrangements were being conducted.

The judge concluded that Tyne’s account established that Taylor conveyed to him Keller’s wishes as expressed to the respondent, rather than an agreement with the respondent, and that Taylor’s statements to Tyne were not promises or representations. We see no error in that.

Hawkins, in his examination-in-chief, testified that Keller told the investors at the first meeting that, pursuant to a special term, the unit price was set in the morning and reflected the closing price of the market on the previous day. Contrastingly, Hawkins’ witness statement did not mention that Keller made a representation as to historical pricing.

His Honour found Hawkins’ explanation that he had overlooked Taylor’s reference to historical pricing at the first meeting, and his witness statement, to be unconvincing, because the reference was also omitted from the further amended statement of claim. We take the same view.

In his witness statement, Oates stated that Taylor told him that Tyne had said that the respondent used historical pricing, which was a valuable and important procedure or practice which Keller had ensured was in place, but that it was not spelt out in the documentation because it was confidential. According to Oates’ witness statement, Taylor also told him that it would take a considerable overhaul to move to ‘real time’ or current day pricing, which was not anticipated in the near future.

In his examination-in-chief, however, Oates stated that he raised with Taylor Tyne’s assertion that the capacity to arbitrage on the basis of the respondent’s historical pricing was not documented, which Taylor confirmed, saying that it was confidential. Taylor responded that historical pricing had been requested by Keller and was the respondent’s practice, which it had confirmed on inquiry by Keller. Oates further asserted that he had told Tyne that the respondent used historical pricing and that Taylor had confirmed that it was an administrative matter which the respondent was unlikely to change. Tyne responded that he understood that the respondent had confirmed to Keller that it would administer the policies on an historical price basis and Tyne thought that the respondent was unlikely to change due to the difficulties involved, and that it had undertaken to keep administering the policies on that basis to satisfy Keller’s requirements.

Contrastingly, in cross-examination, Oates stated that he thought that Taylor spoke in terms of confirmation, rather than a commitment by the respondent. He said that he called the respondent’s service centre to check whether today’s unit prices were available and were on an historical basis. He did not tell Tyne that he understood from Taylor that Keller had agreed to historical pricing with the respondent.

Oates also made a handwritten note of his conversation with Taylor. The note did not refer to the alleged representation. It recorded Taylor’s view that the respondent was unlikely to change to forward pricing because of administrative difficulties.

After the respondent changed to forward pricing, Oates wrote a memorandum. It stated, inter alia, that the respondent could legitimately administer the bonds in that way.

The judge concluded that Oates’ evidence was inconclusive and fell short of asserting the alleged representation or promise. His Honour considered that Oates’ memorandum accurately reflected his view that historical pricing was not a contractual term. His Honour concluded that: ‘The [appellants] have not established that Keller or Taylor represented that [the respondent] had agreed it would calculate unit prices on a historical basis’ and that ‘whatever was said in these conversations by Keller or Taylor as to historical pricing or [the respondent’s] understanding of Keller’s need for a unit price at the time of switching, it was not promissory and had no contractual force’. With respect, we agree.

It remains to deal with the appellants’ allegations of specific error in the judge’s analysis of the evidence. The first is the contention that the judge erred in rejecting the appellants’ evidence as lacking in independence, and the submission that ‘there were no relevant similarities in their accounts and any similarities were adequately explained.’

In our opinion, there is nothing in that point. The appellants’ characterisation of the basis on which the judge rejected the testimony of Tyne and Hawkins does not accurately reflect his Honour’s comprehensive reasoning on that question. His Honour found that elements of Oates’ witness statement displayed ‘the same features’, which Oates conceded must have resulted from his having access to another party’s account. In the relevant context, that implied that the accounts of Tyne and Hawkins were the result of ‘common reconstruction arrived at with a view to advancing [the appellants’] case’.[17] In another context, his Honour found that although Tyne testified that Taylor told him in the first meeting that Keller and others had cancelled switches retrospectively and obtained 20 per cent yields in accordance with the special terms, it was plain that they could not have done so, because at the time of the first meeting in July 1999, there was only one policy (that of Keller), who had made only one switch. His Honour also found that Hawkins testified that Taylor confirmed to him at the first meeting that the investment had been working under the terms, but at the time, only a single switch had been made. His Honour found too that, in relation to the second meeting, which also occurred in July 1999, Hawkins testified that Keller told them that he had been cancelling switches on the basis of the terms, but at the time, no cancellations had occurred. The first cancellation did not occur until February 2000.
[17]Reasons [632].

It followed, as the judge found, that the witness statements of Tyne and Hawkins contained accounts of the relevant conversations and related matters which revealed some common authorship and could not have come into existence independently. If one witness had used the other’s witness statement as a basis for his own, it was not acknowledged, as neither conceded that his account was not independent.

The judge concluded that:

I do not regard their evidence as deliberately false but it was the result of their obvious reconstruction of the events in the most favourable light. Their reconstruction of the conversations of the first and second meeting was for this and other reasons unconvincing and in part, unreliable.

The appellants submitted that the common content of the accounts of the relevant conversations was not material, and thus that an innocent explanation was probable. But, as his Honour recognised, the relevant paragraphs were ‘contentious’. Oates conceded the likelihood of his access to other material but Tyne and Hawkins denied any want of independence and did not purport to explain the apparent common authorship.

The appellants also contended that his Honour should have accepted, as a sufficient explanation, Tyne’s evidence that the appellants’ former solicitor asked him to prepare a narrative of his conversations. But such evidence, if accepted, would neither negate a want of independence nor compel a conclusion that it was satisfactorily explained. Elements of common authorship were thus either conceded or not convincingly explained.

The suggestion that the judge erred in failing to refer to the evidence of Mandalidis and Keller is in our view equally unwarranted. Mandalidis did not give evidence at the trial, but some of the transcript of the evidence in a related proceeding was admitted into evidence. The effect of that evidence was that during their negotiations in 1999, Keller told Mandalidis that investors wanted to be able to switch at the unit price at the time of giving notice and not at the end of the period of delay. The appellants, in a related context, described the evidence of Beazley as ‘confused’ and ‘irrational’ and ‘unsatisfactory’. At best it went no further than that Keller ‘could well have said’ that he needed to know the unit price at which a switch or withdrawal of funds was to occur at the time of making the request because otherwise he would be working in the dark. Furthermore, the evidence of Beazley and Mandalidis was not of conversations between Keller, Taylor, Tyne, Hawkins and Oates, but rather of negotiations between Keller and Mandalidis and Beazley. Thus, even if the evidence were accepted in full, it would in no way corroborate that Keller and Taylor, in their capacity as agents for the respondent, orally promised the appellants that historical unit pricing was a term of their contracts. At best it was supportive of the appellants’ case in estoppel, which the judge accepted.

Mr Taylor was a partner at Mallesons Stephen Jaques. Tyne and Oates were lawyers who had previously worked for that firm. At relevant times, the four plaintiffs worked together and communicated with each other about their investments. In effect, Tyne’s evidence was that Taylor expressed a view as to whether the respondent would be bound to continue with historic pricing.[18] Consistently with that state of affairs, when the appellants spoke to Yesberg on 18 October 2000, they said nothing of any promise as to the continued use of historic pricing. Oates’ evidence did not establish that that the respondent made any promise to continue with historic pricing[19] and it is apparent that he did not believe it had. In a memorandum prepared in late 2001, he wrote that the respondent had ‘legitimately begun administering the property bonds such that unit prices are not known or declared until at least the next day.’[20] In effect, that was an admission that he had not understood the respondent to be contractually bound to persist with historic pricing.[21] The lack of any response or action on the part of the other plaintiffs implies that they were of a similar point of view.
[18]Reasons [641].
[19]Reasons [644]–[645].
[20]Reasons [649].
[21]FAI Traders Insurance Company Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, 351 (Brooking J); Grey v Australian Motorists & Insurance Co Pty Ltd [1976] 1 NSWLR 669, 684 (Samuels JA).

The appellants contended that the judge’s conclusion was inconsistent with his Honour’s finding that the appellants invested on the faith of the assumption, induced by the respondent, that the respondent would continue to use historic pricing.[22] But in our view there is no such inconsistency. It was one thing for the respondent to have induced the assumption that it would continue its practice of historic pricing. We agree with the judge’s finding that the respondent did that, and we note that that finding is not contested. It would be quite another thing for the respondent to have covenanted that it would continue to use historic pricing for the life of the bonds. And in our view, the evidence did not go that far.
[22]Reasons [758]–[762].

It remains to add that the judge also had the advantage of seeing Tyne, Hawkins and Oates give evidence and that his Honour concluded that, ‘The manner in which Tyne, Hawkins and Oates testified and the substance of their evidence in this regard affected my assessment of their credibility and the weight that I should attach to their evidence.’[23] Although in Fox v Percy[24] and CSR v Della Maddalena,[25] the High Court warned against according undue deference to a trial judge’s advantage in observing a witness, it did so in the context of reaffirming the legitimacy of that advantage in the ordinary course. In this case we consider that his Honour’s direct assessment of the witnesses’ demeanour in giving their evidence was a significant advantage. There is no indication that the advantage was misused. This is not a case where, as in Fox v Percy, the trial judge’s findings on credit were inconsistent with incontrovertible facts or evidence, glaringly improbable or contrary to compelling inferences. To the contrary, the patent inconsistencies, inadequately explained similarities, absence of confirmation in contemporary documentation and other features of the evidence identified by his Honour vindicate his conclusion that the witnesses’ evidence was unsatisfactory in various respects and involved significant reconstruction. In our opinion, his Honour was right to reject the witnesses’ account of the oral promise of an historical pricing term.
[23]Reasons [635].
[24](2003) 214 CLR 118.
[25](2006) 224 ALR 1, 7 [15]–[24] (Kirby J).

Implied term as to historic pricing

The appellants argued in the alternative that, if the existence of an historic pricing term were not to be deduced from cl 2.2(e), it was to be implied from a combination of cll 2.2(e), 3.2(e) and 4.20; the absence of any express provision for forward pricing; the fact that the respondent was practising historic pricing at the time of contracting with Keller and during the prior course of dealing at the time the appellants invested; from what the appellants alleged to be a finding[26] that the respondent represented to the appellants that they had a right to historic unit pricing; and from the fact that the respondent’s post contractual conduct was consistent with the existence of the term.
[26]Reasons [758]–[762].

In our view, that analysis breaks down at several levels:

1) For the reasons already given, cll 2.2(e) and 3.2(e) are opposed to the implication of the term contended. As previously explained, cl 3.2(e) allowed a new unit price to be set after close of business on the day of a switch, based on that day’s asset values, and cl 2.2(e) permitted the respondent to delay the application of funds until after that new unit price has been set and apply that price to the switch.

2) Clause 4.20 is also opposed to the implication of such a term. As has been observed, it provided that the respondent could calculate unit prices by adjusting the benchmark unit price ‘as we deem appropriate to take account of any fluctuations in the market value of the investments in the portfolio’.

3) In other circumstances, the fact that the respondent was in the habit of using historic pricing may have been something from which to infer an implied term that it would continue to use that system. The possibility of such an implication, however, was in this case necessarily excluded by the express terms of cll 2.2(e), 3.2 and 4.20. In effect, in combination, they reserved to the respondent an express right to change the basis of pricing.

4) Contrary to the appellants’ contention, the judge did not find that that the respondent represented to the appellants that they had a right to historic unit pricing. Rather his Honour found that the respondent was aware that the appellants were proceeding upon the assumption that the respondent would continue to use historic pricing and refrained from informing the appellants that it did not intend to continue to do so.[27]

5) Whatever post-contractual conduct the respondent may have engaged in, it is doubtful that it could be invoked in aid of interpretation of the express terms of the policy.[28] It might be admissible in support of the existence of an implied term.[29] But in this case, the possibility of such an implied term is excluded by the express inconsistent provisions of cll 2.2(e), 3.2(e) and 4.20.

[27]Reasons [758]–[762].

[28]FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, 347–349 (Brooking J); Ryan v Textile Clothing & Footwear Union of Australia [1996] 2 VR 325; Dovuro Pty Ltd v Wilkins (2000) 215 CLR 317, 341 [71]; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289, 318 [109] (Gummow J).

[29]Council of the City of Sydney v Goldspar Australia Pty Ltd (2006) 230 ALR 437 [164] (Gyles J).

The appellants contended that the judge’s approach to the implication of terms was erroneous because it rested on his Honour’s construction of the express terms.[30]
[30]Reasons [375]. As his Honour stated ‘As I have concluded that the defendant’s construction of cl 1.8 is correct, the plaintiffs’ argument as to implied terms must fail. Such terms would be inconsistent with the express terms and are unnecessary to give business efficacy to the contract.’

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 three 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.

Counsel for the appellants submitted that, having found that the effect of cl 1.8 was to afford the appellants the three 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.

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 three days’ notice and to cancel a proposed switch without penalty before the expiration of the three 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.[31]
[31]Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, 607-608 (Mason J); Far Horizons Pty Ltd v Mc Donald’s Australia Ltd [2000] VSC 310 [128] (Byrne J).

Last on this aspect of the matter, counsel for the appellants contended that judge had erred in failing to have proper regard to s 53 of the InsuranceContracts Act 1984 (Cth). It provides that:

Variations of contracts of insurance
Where a provision included in a contract of insurance … authorizes or permits the insurer to vary, to the prejudice of a person other than the insurer, the contract, the provision is void.

Counsel argued, that if upon its proper construction cl 2.2(e) permitted, or the policy otherwise contained a provision which entitled, the respondent to change to forward pricing, it necessarily prejudiced the appellants by removing the ability to engage in historical pricing arbitrage and to that extent was void.

As neither Keller nor Taylor made or conveyed a promise to use historical pricing, it is unnecessary to consider the question whether they acted as the respondent’s agents or whether the move to forward pricing amounted to a variation of the appellants’ contracts within terms of s 53 of the Insurance Contracts Act. In our view, however, the argument appears to be misplaced. Section 53 does not apply to contracts of life insurance.[32]
[32]See Insurance Contracts Regulations, 1985, No 162 of 1985, (Cth) reg 31(c).

Term as to daily unit pricing

Counsel for the appellants argued in support of the alleged daily publication of prices term that the judge had erred in concluding that such would be inconsistent with express terms of the policy and not supported by custom. In counsel’s submission, inasmuch as cl 3.2(e) of the policy provided that unit prices ‘are usually declared on a daily basis, but may be declared more or less frequently’ it was a breach of the express provisions of cl 3.2(e) for the respondent to adopt a practice of failing to declare prices daily.

We disagree. There could be no breach of the kind alleged unless upon its proper construction cl 3.2(e) amounted to a warranty that the respondent would usually declare unit prices on a daily basis. In our view, it appears from other clauses of the policy, and in particular from cll 2.2(e) and 4.20, that it did not have that effect but rather was in the nature of a warning that the pricing system could be changed.

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.

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.

Agency

Counsel for the appellant argued that the judge erred in concluding that neither Keller nor Taylor had actual or implied or ostensible authority to agree terms with or make representations to the appellants which were binding on the respondent. He submitted that, contrary to the judge’s findings, those men were deemed by s 12 of the Insurance (Agents and Brokers) Act1984 (Cth)[33] to be the respondent’s agents and also satisfied the general law requirements for the relationship of principal and agent with the respondent. Consequently, he said, the ‘promises’ made by Keller, Coneview and Taylor to the appellants, including those in relation to their right to historical unit pricing, and their right to cancel switches within three days, were binding on the respondent.
[33] At relevant times, s 12 of the Insurance (Agents and Brokers) Act 1984 (Cth), provided that:
‘insurance intermediary’ shall be deemed, in relation to any matter relating to insurance and as between an insured or intending insured and an insurer, to be the agent of the insurer and not of the insured or intending insured’.

The problem with all that, however, is that, even allowing that Keller or Taylor or at least Coneview may have been an ‘insurance intermediary’, in that he or it arranged for the issue of the prosperity bonds as the appellants’ agent[34] (and thus that as to matters relating to the insurance as between the appellants and the respondent he or it was to be the agent of the respondent),[35] the judge was not persuaded that any of Keller, Taylor or Coneview promised the appellants that the policies contained or would contain an historic pricing term as opposed to telling them that the respondent’s practice was to use historic pricing which could be exploited by historic pricing arbitrage in order to generate substantial returns, and further or alternatively, that in his or its opinion, the respondent was unlikely to change its historical pricing practice.
[34]Insurance (Agents and Brokers) Act 1984 (Cth), s 9.
[35]Ibid s 12(1).

Counsel for the appellants contended that the evidence was overwhelming that Keller or Taylor had promised that it was a term of the policy that the respondent was bound to continue with historical pricing and that Tyne and Hawkins and Oates relied upon it. In our view that is not so. Rather, it tended to suggest, if not establish on the balance of probabilities, that the appellants well knew that the policy did not include an historical pricing term but were persuaded by Keller and Taylor’s assurances that the respondent was unlikely to depart from historical pricing practice. As has already been observed, the judge analysed that evidence extensively and, in our view, his Honour’s conclusion on this aspect of the matter was correct. The statements made by Keller and Taylor were not in a promissory form. They purported to be descriptive or explanatory of one of the formal terms of the policy into which the appellants proposed to enter. It is impossible to say that either of the parties actually intended that the statements should constitute a term of the policy or that an objective inference can be drawn that they did so intend. In form the representations were not promissory and, even if they had been promissory, they would have been inconsistent with the express provisions of the policies; and so, as already explained, could not have stood as terms of the policy or as a collateral contract consistently with the policy. In the words of Gibbs, CJ in Gates v City Mutual Life Assurance Society Ltd:

Even if a different view had been taken on the question of intention, the alleged contractual agreement constituted by the statements could not stand consistently with the main written agreement and for that reason, according to established authority in Australia (including Hoyt's Pty Ltd v Spencer[36] and Maybury v Atlantic Union Oil Co Ltd[37]), could not be enforced. The learned author of an article[38] criticizes those decisions but I find no need to reconsider them here, since the present is not a case in which one party made a promise to modify or to refrain from enforcing a term of the principal agreement. The absence of an actual contractual intention, and of any circumstances which could give rise to estoppel, is enough to defeat the appellant's claim in contract.[39]
[36](1919) 27 CLR 133.
[37](1953) 89 CLR 507.
[38]N C Seddon, A Plea for the Reform of the Rule in Hoyts Pty Ltd v Spencer (1978) 52 ALJ 372.
[39](1986) 160 CLR 1, 5.

Dilution

‘Dilution’ is a natural consequence of historic price 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. The way in which the process plays out is illustrated in the following example.

Assume that at the end of day 0 there are 10 units in the Cash portfolio and the total value of cash in the Cash portfolio is $10.00. The day 1 unit price of units in the Cash portfolio is thus $1.00 per unit. At the same time, assume that at the end of day 0 there are 10 units on issue in the Secure portfolio and that the total value of securities in the Secure portfolio is $10.00. The day 1 unit price of units in the Secure portfolio is thus $1.00 per unit. Now assume that during day 1 the value of the securities in the Secure portfolio rises to $15.00 such that, but for any other developments, the unit price for day 2 would be $1.50. Assume then, however, that shortly before the close of trade on day 1 all the unit holders in the Cash portfolio switch out of that portfolio and into the Secure portfolio, by purchasing 10 units in that portfolio at the day 1 unit price of $1.00 per unit. There would then be $15.00 of securities in the Secure portfolio plus the $10.00 of cash switched into that portfolio, producing total assets in the Secure portfolio of $25.00, with 20 units on issue. It would follow that when the day 2 unit price came to be calculated at the end of day 1 – by dividing total assets in the Secure portfolio (that is $25.00) by the total number of units on issue in the portfolio (that is 20) – it would be only $1.25 and thus the amount of so called dilution would be $0.25 per unit.[40]
[40]The phenomenon of dilution is illustrated in greater detail and with greater sophistication in [275] and [276] of the judge’s reasons.

As can be seen in that example, the arbitragers would profit from the switch, because they would increase the value of their holdings from $10.00 to $12.50 (in effect at the expense of the other unit holders in the Secure portfolio). But the arbitragers would not profit as much as they could do if the unit price for day 2 were the same as the cost price for day 1.

The evidence before the judge was that, before the appellants’ policies were issued, the effect of switches between portfolios inevitably produced dilution but that the volume of transactions was so small that the effects of the dilution were more than matched or outweighed by increases in asset values over time. It was not until the appellants’ policies issued and the appellants began to engage in a far greater number of switches, that the effects of dilution became significant. The natural increase in the value of assets over time was no longer enough to cover the effects of the dilution and so the value of assets represented by non-Coneview investors’ units began to decline. Due, however, to the way in which the respondent’s records were kept, the change was not detected until the value of assets represented by non-Coneview investors’ units was seriously reduced. As was recorded in the AXA Group CEO report of Mr Yesberg of 30 October 2000 as follows:

The [Coneview investors are] a group of policyholders acting in concert who have all purchased a Prosperity Bond policy since October 1999, under special terms and conditions, including the waiver of switching charges and limited redemption periods. These special terms were negotiated by Distribution Management in mid 1999.
The policies have been introduced on a ‘no advice basis’ by an aligned adviser in NSW, acting as a facilitator for a Dr Peter Keller, who has coordinated policyholder action.
The [Coneview investors] have invested in the Cash and Secure portfolios of the product and have actively switched between the portfolios on a regular basis. There are currently 212 policies with investments totalling $166m.
The method used for setting unit prices for this product (and many other AXA products written under the statutory funds) is to set a unit price one day in advance, to allow same day processing when cash or switch instructions are received. This practice is, I understand, not unusual for unit linked insurance bonds in the Australian market although has long since been changed in the UK.

The plaintiffs are entitled to an award of damages as the minimum equity arising from the defendant’s unconscionable conduct or for its misleading and deceptive conduct under the TPA.[75]

[75]Reasons [952], citations omitted.

With respect, we agree. By standing by and allowing the appellants to act on the assumption that the contracts would continue to be administered in the same manner as the other Coneview investors’ policies, the respondent in effect represented that it would not enforce its contractual rights under the policy. The appellants’ reliance upon that state of affairs gave rise to an equity in favour of the appellants. But in accordance with Brennan J’s exposition of principle in Waltons Stores, the equity was subject to the qualification that the respondent could resile from its ‘promise’ (which is to say the assumed basis of dealing), on giving reasonable notice, unless the appellants could not resume their position. In this case the appellants could resume their position. As his Honour observed, they could have redeemed their policies and repaid their loans an any time; and they still can. The orders which his Honour made will restore them to their original positions with, in effect, the benefits, for a reasonable period following the respondent’s departure from that assumed basis of dealing, of the terms which the appellants’ assumed would apply.

The appellants alleged that his Honour’s discretion to refuse expectation profits miscarried on several bases. (His Honour did not exercise the discretion, but observed that if, contrary to his view, expectation profits were appropriate, he would exercise it to refuse them.)

The appellants argued, first, that his Honour’s reference in that context to the nature and quantum’ of the appellants’ claim, unjustifiably stigmatised arbitrage profits as unworthy of equitable relief. Counsel submitted that it reflected unjustified assumptions about the quantum of the claim, which were not based on evidence, and implied that equity would readily repair only minor detriment.

Secondly, the appellants complained that his Honour’s readiness to take their conduct into account in exercising the discretion was unjustified, because he had found that it was not so unconscientious as to justify a denial of equitable relief, and they had breached no legal or equitable principle. The finding that the appellants were aware that Keller and Coneview misled the respondent was, the appellants argued, manifestly erroneous.

Thirdly, the appellants argued that his Honour ignored the respondent’s unconscionable conduct in determining the minimum equity.

In our opinion, those criticisms are unfounded. Had his Honour exercised his discretion in the manner he proposed by reference to the specified matters, his determination (like the equally discretionary primary determination of the minimum equity) would probably have been unassailable, on the basis of the principles of House v R.[76]
[76](1936) 55 CLR 499; see also Norbis v Norbis (1986) 161 CLR 513, 518 (Mason and Deane JJ); AMP General Insurance Ltd v WorkCover Authority & Ors (2006) 15 VR 175, 181 (Maxwell P and Neave JA); cf Flinn v Flinn [1999] 3 VR 712, 750 [19] (Brooking JA).

On a fair reading of his observations, his Honour did not hold or suggest that arbitrage profits were, by their nature tainted or undeserving of equitable relief. His statement related to the general nature of the appellants’ claim. He was entitled to take into account that they were sophisticated, well-resourced, professionally advised investors on a substantial scale, who knowingly sought to achieve an unusually high level of profit pursuant to concessional special terms.

His Honour was also entitled to take into account that, whatever its precise quantum, the appellants’ claim was very large. The appellants’ claim for loss was particularised at $37 million, with expectation based damages of $1.44 billion.[77] The absence of evidence of specific amounts did not preclude a broad assessment of the magnitude of the claim.
[77]October 2006, particulars of loss.

Nor did his Honour, as the appellants submitted, ignore the conduct of the respondent. His analysis of that conduct underpinned his determination of unconscionability, and it was unnecessary to repeat it in assessing discretionary considerations relevant to the minimum equity, which is directed at compensation for the claimant’s detriment, rather than punishment of the party estopped.

We agree with his Honour’s analysis. In our view the appellants’ conduct and the nature and the quantum of their claim would make it inappropriate that they should have the benefit of the assumption either for the life of the prosperity bonds or the specified lesser period of ten years claimed. This is not a case in which the effects of unconscionable conduct are to be measured in the imponderables of human feelings. There is nothing personal or heartfelt or otherwise special about the appellants’ disappointment at the respondent’s departure from the assumed state of dealing. The case is simply about money and more precisely about how much of it each side sought to make out of the other. As is apparent from the appellants’ particulars of October 2006, there is a massive disproportion between their claim for reliance/detriment based relief, which is quantified in the sum of $37 million,[78] and the supposed expectation based relief which is claimed in the sum of $1.44 billion. In the circumstances of this case, such an exorbitant amount of money could not be justified by the requirements of conscientious conduct.
[78]A sum which is yet to be proved.

Finally on this aspect of the matter, it is not without significance that the appellants did not frame their claim for relief at trial as one for the recovery of expectation losses. As the respondent’s counsel pointed out in argument, the appellants’ claim below was put in terms of the detriment which they had suffered by having borrowed moneys to invest in the bonds, paying management fees and giving up other investment opportunities. That is exactly what the judge’s orders give them.

The Cross Appeal

The respondent, by a notice of cross-appeal dated 24 January 2007, appeals from the trial judge’s holding that it engaged in unconscionable conduct and misleading and deceptive conduct in relation to the appellants’ policies, for which it was liable in damages.

The judge’s determination of unconscionability and misleading and deceptive conduct depended, essentially, on the same factual findings. Broadly, his Honour found that:

(a)the respondent created or encouraged the appellants’ assumption (on which they reasonably relied in investing in their policies) that the respondent would administer their policies in the same way as it had administered those of other Coneview investors, using, inter alia, historical pricing, which would permit arbitrage returns comparable to those already obtained by Taylor, Keller and the other Coneview investors;
(b)while the respondent both knew and, in the circumstances, ought to have known, that the appellants were investing on the basis of that assumption, by that stage it had realised that the existing Coneview investors were using historical pricing to make arbitrage profits and had determined to take steps, including the discontinuance of historical pricing, in order to prevent the practice;
(c)despite its actual and constructive knowledge that the appellants were investing in the policies in reliance on the assumption, the respondent did not inform or warn them of its intention to cease using historical pricing and to terminate arbitrage profits – rather, it remained silent and accepted additional funds of approximately $120 million as investment in new policies, including those of the appellants; and
(d)the respondent issued the new policies despite its discovery of the Coneview investors’ arbitraging on the basis of historical pricing (and its awareness that the further investment was being made in reliance on its continuance) in order to obtain the benefit of the substantial further investment, while at the same time intending to terminate the historical pricing and the arbitraging, as its officer, Yesberg, believed it was legally entitled to do.

Although the appellants had neither expressly required the inclusion of an historical pricing term nor advised the respondent of their assumption, his Honour concluded that in the above circumstances:

[The respondent’s] conduct was unconscionable. Independently of any duty that it owed at law or any equity which may be raised in favour of [the appellants], it had an obligation under s 52 to disclose its intention to the appellants and in failing to do so its conduct was false and misleading. [The respondent] knew and ought to have known that the appellants were acting upon the assumption that the respondent would administer their contracts in the same manner as it had administered the other Coneview investors’ policies, it knew that they were investing upon the basis that it would continue to use historic pricing and that if it were not intending to do so it would inform them of its intentions. It had a duty in conscience to correct the false assumption upon which [the appellants] were intending to invest and which give rise to an estoppel. [The appellants’] claim under s 52 of the TPA is also made out as [the respondent’s] conduct was false and misleading.[79]

[79]Reasons [762], citations omitted.

Although the judge held that the respondent was entitled to permit dilution, for the same reasons given in relation to historical pricing, his Honour also held that the respondent’s failure to speak was unconscionable and gave rise to an estoppel in circumstances where it had played such a part in encouraging the appellants’ assumption that it would continue to administer the Coneview investments as before, without enforcing its rights to dilute, that it would be unjust and oppressive to permit departure from the assumption.

His Honour found that prior to the appellants’ investment, the increase in unit price calculated on an historical basis reflected the ‘full grid’, rather than the diluted effect of increase in the underlying assets. Further, the respondent knew, or ought to have known, that Keller and Coneview would represent that as one of the benefits of the special terms, and that potential investors who followed the movement of the units, would so assume.

His Honour concluded that:

The [respondent] had a duty to speak if it intended by dilution and segregation of the appellants’ investments to reduce [the appellants’] expected profits from arbitrage through the use of historical pricing. [The respondent] did not spell out that it reserved the right to take away the benefit of successful arbitraging by diluting the entitlement through the dilution of a finite fund with the increased number of units so that the entitlement was inexorably diluted. The failure to reserve the right to dilute was a breach of [the respondent’s] duty to speak. It was required in conscience to correct the false assumption upon which [the appellants] were intending to invest which gives rise to an estoppel.[80]

[80]Reasons [845], citations omitted.

The respondent contends that the judge erred in holding that it engaged in unconscionable conduct in failing to disclose, prior to the appellants’ investment in their policies, its intention to cease calculating unit prices on an historical basis and to reduce their expected arbitrage profits through historical pricing by permitting dilution. In particular, it was said that the trial judge erred in holding that:

(i)the respondent’s conduct induced or encouraged the appellants’ assumption that it would continue to use historical pricing and would not permit dilution;

(ii)      the appellants acted in reliance on the respondent’s conduct;
(iii)     the appellants’ reliance was reasonable;
(iv)     the respondent was aware of the appellants’ reliance; and
(v)      the respondent’s conduct was unconscionable.

The respondent also contends that, for the same reasons, his Honour erred in holding that the respondent engaged in misleading and deceptive conduct in breach of s 52 of the Trade Practices Act 1974 (Cth) by its failure to disclose its intention to cease the use of historical pricing and to permit dilution.

The respondent advanced five principal submissions in support of those contentions. The first was that its conduct in applying historic pricing to other Coneview investors’ policies was not such as to create the appellant’s expectation or assumption of its continuance in relation to their policies. The previous use of historical pricing did not, the respondent argued, amount to a clear and unequivocal representation that it would not move from that method in future, as it neither said nor did anything to ‘exclude the possibility of a future change of mind’ or to represent that it would not, in future, move to forward pricing in accordance with its contractual rights. Thus, in reliance on Hooker Corporation Ltd v Commonwealth[81] (‘Hooker’), the respondent argued that its past conduct in relation to other investors’ policies could not, as a matter of principle, constitute a representation which could estop it in relation to the pricing method applied to the appellants’ policies.
[81](1986) FLR 55, 62 (Kelly J).

We reject that submission. First, Hooker did not, in our view, establish that conduct in relation to previous transactions, whether with the claimant or others, can never, for the purposes of estoppel, constitute a representation to prospective transacting parties that like conditions or treatment will apply to their dealings.

In Hooker, the plaintiff, which had leased land from the Commonwealth government, built on the land without first obtaining a valid approval. The plaintiff, by its statement of claim, alleged that for many years since the introduction of a specified building ordinance, the Commonwealth had, to the plaintiff’s knowledge, always granted building approval to Crown lessees (including the plaintiff) pursuant to a particular ‘administrative usage, custom, procedure and practice’, which the plaintiff had again followed in relation to the subject leased land. The Commonwealth had never before, the plaintiff alleged, required any further steps of Crown lessees who sought building approval. The plaintiff pleaded that the Commonwealth’s ‘conduct, administrative usage, custom, procedure and practice’ constituted a representation, in reliance upon which it did not seek further or other approvals, and thus acted to its detriment constituted by the risk of breach of its obligations as lessee.

Kelly J held that the plaintiff’s statement of claim did not disclose a cause of action because the facts as pleaded could not amount to ‘such a representation as is required to found an estoppel’.[82]
[82]Ibid 64.

He observed that the statement of claim implicitly alleged that the plaintiff observed or came to know of the relevant administrative usage and concluded that it extended to the consent required under its particular lease, that the form of approval it in fact obtained was therefore sufficient, and that because of what had occurred in relation to previous leases, it had no need to seek further consent.

Kelly J considered that, on such facts and inferences, the Commonwealth had not ‘by any relevant representation induced the plaintiff to alter its position to its detriment’. [83]
[83]Ibid 62.

He relied, in that context, on a number of nineteenth century and early twentieth century authorities on estoppel by deed, which held that third parties could not rely upon recitals in instruments. He considered that such reasoning applied to all estoppels by convention, whether by deed or not.

Kelly J thus, at one point in his judgment, appeared to require the relevant representations to be made in the context of the subject transaction itself.

He proceeded, however, to state that:

Anyone though not capable of raising an estoppel against himself in favour of the public or a class, in its entirety can address a representation to that public or class in a particular transaction which is of such a nature that the representation is intended or expected or ought to be expected to be acted upon by a member or more than one member of such body of undesignated and unidentified persons so that the representation it acted upon to this prejudice by any such member of that body may operate as an estoppel against the representor in favour of those member …[84]

[84]Ibid 64.

If, as Kelly J recognised, a representation capable of founding an estoppel can be acted upon by members of ‘a body of undesignated and unidentified persons’ he cannot have intended to limit such representations to those made in the very transaction with the claimant from which the complaint arose.

On a fair reading of Hooker, Kelly J assumed that representations capable of founding an estoppel are not confined to those made in a given transaction with the claimant. Rather, he recognised that a representation may be made to the public or to a class of the public and would found an estoppel in favour of any member of ‘such body of undesignated and unidentified persons’, provided that the transaction were of such a nature that the representation was intended, expected or ought to have been expected, to be acted upon by such persons.

Kelly J’s reference to a particular transaction, when taken in context, was directed to a transaction of the requisite nature, rather than a specific transaction with the party asserting an estoppel.

That construction is fortified by Kelly J’s statement that the probable mischief of a contrary approach would be that a person could claim estoppel because he entered a contract with a defendant identical to contracts the defendant had with third parties and, having observed the defendant’s conduct towards those third parties, could act to his detriment ‘on no basis other than his observations in relation to the earlier contracts.’[85]
[85]Ibid 62.

Hooker thus indicates that if a representation is made in the course of a transaction which is of such a nature that as yet unidentified members of the public, or a class thereof, may be expected to act on the representation, the representation may be treated as addressed to those parties and is capable of founding an estoppel in their favour.

In the present case, the respondent’s prior transactions with Keller, Taylor and other Coneview investors were of such a nature that the representations made therein were, or should have been, expected to be acted on by prospective Coneview investors, such as the appellants.

Further, the respondent’s conduct in relation to previous Coneview investments was not the sole basis of his Honour’s finding that the respondent encouraged or induced the appellants’ assumption that the respondent would continue to use historical pricing and they would make arbitrage profits comparable to those of Taylor, Keller and earlier Coneview investors. His Honour stated that the assumption was:

induced by what Keller and Taylor told them as to [the respondent’s] use of historical pricing, the knowledge that [the respondent ]was aware that Keller would need to know the unit price at the time of a switch, the respondent’s conduct in permitting the investment to be administered in that way, in permitting Keller to market the special terms knowing that it would be suggested that arbitrage profits could continue to be made in this way, and [the respondent’s] deliberate concealment from investors between June and September of its proposed actions.[86]

[86]Reasons [753].

The respondent’s conduct in ‘permitting the involvement to be administered in that way’ was not the only basis for his Honour’s finding. It was but one element in a number of interrelated circumstances which, collectively, his Honour found, contributed to or encouraged the appellants’ assumption.

His Honour’s finding that the respondent’s conduct created or encouraged the appellant’s assumption reflects the broad terms of an enquiry authorised by the reasoning in Waltons Stores,[87] which overtook and extended earlier articulations, based on estoppel by deed that principally informed some aspects of the approach of Kelly J in Hooker. While Hooker did not, in our view, hold that that conduct in another transaction or with other parties could never amount to a relevant representation, such a narrow and inflexible approach to the circumstances capable of constituting contributing conduct in the context of estoppel would not, in any event, accord with the reasoning in Waltons Stores.
[87](1988) 164 CLR 387.

Secondly, the respondent contended that his Honour erred in finding that the appellants relied on the assumption, or, if they did not, that the reliance was reasonable.

The respondent argued that the factual finding of reliance was unsafe, because it was inconsistent with other findings made by the trial judge including, in particular, his statement in relation to the three day option estoppel that:

The plaintiffs were aware that the defendant would take whatever steps it could to protect itself against arbitraging. They were aware of the potential detriment of the terms to the defendant. Absent an established contractual right to risk free arbitrage profits for the life time of the policyholder, the plaintiffs were not entitled to hold a reasonable expectation that they could exercise the three day option to cause very substantial financial loss to the defendant upon the basis of a representation, if it had been made in such circumstances.[88]

and his statement that:

The plaintiffs appear to have proceeded on the basis the defendant would do everything in its power to alter the effect of the special terms once it came to realise how the plaintiffs and Keller were utilising the term.[89]

[88]Reasons [602].

[89]Reasons [252].

In the respondent’s submission, those findings established, either that, far from relying on the continuance of historical pricing, the appellants believed that unless contractually bound to it, the respondent would probably move to forward pricing; or alternatively, that in the circumstances (including Tyne’s belief that historical pricing was not a term of the written contract) any reliance on the assumption was unreasonable.

We reject that submission.

The respondent pointed to a number of documents and statements in evidence, including a memorandum of Tyne written in February 2000 (which predated both his initial investment of $500,000 and the further $5 million in June 2000). The respondent said that the memorandum showed that Tyne expected the respondent to do something about the special terms, including historical pricing, if it could, once it came to fully appreciate their economic consequences.

The memorandum also, however, expressed Tyne’s view that the respondent was bound to use historical pricing in relation to the current investors and that it was therefore important for others to invest soon, in case the respondent decided to ‘rule off the books’. The memorandum, taken as a whole, does not exclude reliance on the use of historical pricing under the then available contractual terms.

The respondent also contended that Tyne’s admission that he knew that historical pricing did not form part of the written contract made the reliance unreasonable. Tyne gave evidence that he and Oates discussed the possibility of a change to forward pricing during the life of the policies, that a contractual commitment to historical pricing was important to him, and that he would have preferred the inclusion of a written term requiring it.

While, as his Honour recognised, there were inconsistencies in Tyne’s evidence, he was entitled to conclude that when viewed in context, the above matters did not exclude reliance. Tyne also maintained that he relied on Taylor’s advice as to what Keller had arranged with the respondent and Taylor’s opinion of the meaning of the special terms. Tyne stated:

I relied on what was written, I relied on what David Taylor and Peter Keller told me. I relied on my own observations of the movements of these secure unit prices published by AXA in the period prior to my investing in the Tyne policy…

Although the allegedly confidential historical pricing term was not distilled in writing, it was not disputed that Keller and Taylor made ‘statements to Tyne, Hawkins and Oates about the respondent’s use of historical pricing and Keller’s expressed need to know the unit price at the time of the switch’.[90]
[90]Reasons [714].

His Honour stated:

it is also [the appellants’] case that Keller and Taylor told Tyne and Hawkins, more than once, that Keller had made clear to [the respondent] that he needed to know the unit price on the day that the notice to switch was given. I accept that Keller and Taylor made statements to that effect in their meetings with Tyne and Hawkins. I think it is likely that [the respondent] was so informed. This constituted part of [the respondent’s] and [the appellants’] knowledge at the time that [the appellants] invested. No attempt was made to challenge the factual foundation for such an inference.[91]

[91]Reasons [745].

In all the circumstances, his Honour was entitled to conclude that the appellants’ reliance was reasonable. Various appellants at different stages discussed the possibility of a change to forward pricing, were aware that certain United States insurers had made that change, verified the respondent’s current practices by their own observations, believed that arbitrage did not depend on historical pricing alone, but could be also made by three day option, considered it preferable that the special terms be reduced to writing, believed, at various times, that the respondent was likely to take such steps as were legally open to it to prevent arbitrage, and (in Oates’ case) opined in November 2001 that forward pricing was legitimate under the policies. None of those matters undermines or renders untenable his Honour’s factual finding of the appellants’ reasonable reliance at the time of the appellants’ investment.

Thirdly, the respondent contended that his Honour erred in finding that the appellants believed, by the time of their investment, that the respondent understood the consequences of the special terms. Such a finding was, the respondent submitted contrary to the evidence that, as at February 2000, the appellants believed, as expressed in Tyne’s February memorandum, that the respondent did not understand the full implications. There was nothing, the respondent argued, to suggest that their state of mind subsequently changed.

We reject that submission. His Honour was alive to the fact that the parties’ submissions and evidence on the appellants’ belief about the respondent’s understanding of the consequences of the special terms were principally directed at February 2000, rather than later, when the appellants invested.

As his Honour observed, however, there were developments after February 2000 which indicated that the respondent was aware of the consequences of the special terms and the returns being made by the Coneview investors. During the first half of 2000, Tyne received investor reports on his policy showing yields of 19 per cent to 21 per cent per annum from switching and a report of William Mercer dated 17 June 2000 which stated that the respondent had verified Tyne’s portfolio balance. Hawkins relied on Tyne and on investment reports of the Argot Unit Trust in concluding that the respondent was administering the investment to produce arbitrage profits, as Keller had represented. Oates received the reports of Tyne and Mercer showing a 24 per cent return on his April investment, and consequently, his Honour found:

believed that the [respondent] had now been administering Coneview investments for 15 months with returns of at least 20%. He believed the [respondent] was aware of how the investment was operating.[92]

His Honour was, in our view, entitled to find that the appellants, whatever their initial beliefs, believed (correctly) by the time of making their investments that the respondent was aware of arbitraging under the special terms.

[92]Reasons [727], citations omitted.

Fourthly, the respondent contend that the appellants’ reliance on the assumption was belied by the fact that after being alerted to the changes in the administration of the policies, they each attempted to invest a further $5 million. We reject that submission. His Honour’s finding of estoppel related to the appellants’ investments made in June and September 2000, prior to notification of the changes in administration of the bonds. Moreover, the respondent’s letter of 11 September 2000 did not, in terms, advise that the respondent would move to forward pricing and the evidence does not establish that the appellants were aware of that prior to their attempts to make further investments in November 2000. As the respondent conceded, the appellants may have intended to take advantage of cll 1-8, irrespective of other changes.

Fifthly, the respondent argued that his Honour erred in failing to hold that, given the appellants’ own unconscionable behaviour, the respondent’s conduct was not unconscionable.

It submitted that equity should not intervene to assist either party in circumstances where one contracting party conceals its intention to profit by the use of contractual terms combined with administrative arrangements of the other party, and the other party, discovering that intention, itself conceals it intention to change the administrative arrangements to deny the intended profit.

Both at trial and on appeal, the respondent submitted, in essence, that any unconscionability entailed by the respondent’s silence about its intention to eliminate arbitrage was effectively nullified by the appellants’ concealment of their intention to use historical pricing to make arbitrage profits, believing (as Tyne’s February 2000 memorandum revealed) that the respondent was unaware of the implications of the special terms coupled with historical pricing and the possible economic detriment. His Honour rejected that contention, correctly in our opinion.

His Honour found that the appellants initially believed that the respondent did not understand the implications for arbitraging by Coneview investors pursuant to the special terms and historical pricing, but, contrary to the respondent’s submissions, he was satisfied that the appellants believed that the respondent was aware of it by the time they invested.

His Honour found that ‘Keller and Taylor did not reveal their purpose during the negotiations…’[93] with the respondent and that Keller and Coneview were ‘less than frank’.[94] He found that the appellants knew that Keller had concealed the purpose of the special terms, which posed the potential for significant economic detriment to the respondent. Further, Tyne was aware that Keller was not acting in the respondent’s best interests, but rather, thought that Keller was rowing ‘with the appellants in the same canoe’ against the respondent.
[93]Reasons [312], citations omitted.
[94]Reasons [477], citations omitted.

His Honour stated:

I was left in no doubt that each of the plaintiffs understood that Keller and Taylor had managed to negotiate and settle the special terms without revealing their true purpose to the defendant in seeking these terms.[95]

[95]Reasons [598], citations omitted.

His Honour nevertheless acquitted the appellants of dishonesty. He concluded that:

By mid 2000 it was inevitable that the plaintiffs thought, as was the fact, that the defendant understood Keller’s purpose in seeking the concessions which he obtained. At the time they invested they believed that the defendant understood that the special term created an opportunity to arbitrage. Their belief that the defendant was prepared to be bound by such terms, knowing the ultimate objective was to make arbitrage profits by the movement of the investment between portfolios, removes any element of dishonesty from their conduct.[96]

[96]Reasons [886].

As stated above, his Honour was entitled to make that finding. The respondent contended that it was inconsistent with his Honour’s statement that ‘[t]he plaintiffs were aware that the defendant would take whatever steps it could to protect itself against arbitraging’.[97] That statement was made specifically in relation to the three day option and the conversations between Tyne, Hawkins, Taylor and Keller in July 1999.[98]
[97]Reasons [602].
[98]Reasons [603], citations omitted.

While his Honour implicitly characterised the appellants’ conduct as unmeritorious or immoral (in the nature of an intention to overreach or deceive the respondent, although falling short of dishonesty), he applied the principle that such conduct would not preclude equitable relief unless it had ‘an immediate and necessary relation to the equity sued for’.[99]
[99]Reasons [731], citations omitted.

He found that the appellants did not at any stage disclose their requirement or request of the respondent that historical pricing be a term of the policies. He accepted that thus, there was some connection between the appellants' own conduct and their assumption that the respondent would continue to use historical pricing, or not use its right to discontinue it.

Despite the sharp and exploitative elements of the appellants‘ conduct, by the time they invested, ‘the purpose of the special terms was obviously apparent to all parties’[100] and, as his Honour found, the appellants were aware that the respondent now understood the position. His Honour therefore found no direct connection between their unmeritorious conduct and the assumption encouraged by the respondent, so that equitable relief was not precluded.
[100]Reasons [951].

His Honour observed that, as the respondent insurer conceded, its own conduct in permitting the appellants’ investment in reliance on the assumptions that the respondent would use historical pricing when it did not intend to do so ‘was a very bad thing’.[101]
[101]Reasons [931], citations omitted.

In circumstances where, as his Honour found, the respondent knew that the appellants were investing under a mistaken belief to which it had contributed to or encouraged, but it failed to speak and correct the assumption, taking the benefit of the funds while intending to eliminate the advantages it knew the appellants expected, the respondent’s conduct was unconscionable and founded an estoppel on the basis of the principles recognised in Waltons Stores.

The same reasoning, based on the identical facts, justifies his Honour’s conclusion that the respondent’s conduct was misleading and deceptive, in contravention of s 52 of the Trade Practices Act 1974 (Cth).

Other issues

The appellants did not press their appeal from any findings that expectation damages were not available pursuant to s 82 of the Trade Practices Act or that such damages would run only to the point of expiry of a reasonable period of notice, as the parties ultimately proceeded on the basis that no such findings were made and the assessment of damages under the Trade Practices Act was deferred.

The parties briefly addressed the judge’s failure to vary the appellants’ contracts pursuant to s 87 of the Trade Practices Act in order to reflect the terms alleged by the appellants. It was, however, unclear whether the parties intended that issue to be deferred to the assessment of damages under the Trade Practices Act. Orders under s 87 can be made ‘only in so far as those orders will compensate (or will prevent or reduce) the loss or damage that is identified’.[102]
[102]Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494, 513 ( McHugh, Hayne and Callinan JJ).

The appellants provided no proof of any loss or damage caused by a contravention of s 52 of the Trade Practices Act, and, in our view, the trial judge did not err in failing to order the variation.[103] Such an order would, in any event, be tantamount to granting expectation relief, and would have imposed a commercially unreasonable result on the respondent.
[103]Ibid.

Finally, although the appellants did not abandon, they did not elaborate on, their associated ground of appeal based on his Honour’s failure to make a finding of negligent misstatement. In effect, it ceased to be an issue.

Conclusion and orders

Given that we have come to a different view to the judge as to the meaning of the second paragraph of cl 1.8, the appeal will be allowed in part and we shall make a declaration that upon its proper construction that paragraph had the effect that a Coneview investor was entitled to give three days’ notice of intention to switch at the buying and selling prices applicable on the date on which the notice was given; that the respondent was not permitted to effect the switch until expiration of the notice; that the Coneview investor was entitled to revoke the notice at any time before its expiration; and that if not so revoked, upon expiration of the notice the respondent was bound to give effect to the switch.

In all other respects, however, the appeal has failed and therefore will be dismissed.

The cross-appeal has also failed and therefore will be dismissed.

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[2008] VSCA 247

5 December 2008