Calliden Group Limited v Australian Unity Limited - [2010] NSWSC 263

No judgment structure available for this case.

CITATION: Calliden Group Limited v Australian Unity Limited [2010] NSWSC 263

HEARING DATE(S): 22/03/2001 - 26/03/2001, 29/03/2001, 31/03/2001

JUDGMENT DATE :
13 April 2010

JURISDICTION: Equity Division
Commercial List

JUDGMENT OF: Einstein J

DECISION: Plaintiffs have established entitlement to declaratory relief. Parties to bring in short minutes of order which will inter alia return the matter to Ernst & Young for further consideration .

CATCHWORDS: Contracts - Proper construction - Deed whereunder plaintive purchases capital in insurance companies - Dispute concerning amount of adjustment to be made to the purchase price following completion and way in which amount of adjustment was to be determined - Consideration of sundry different actuarial methods - Consideration of methods of estimating reinsurance recoveries

LEGISLATION CITED: Evidence Act 1995 (NSW)

CATEGORY: Principal judgment

CASES CITED: Australian Broadcasting Commission v. Australasian Performing Right Association Ltd (1973) 129 CLR 99
Briginshaw v Briginshaw (1938) 60 CLR 336
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288
Downer Engineering Power Pty Ltd v P & H Minepro Australasia Pty Ltd [2007] NSWCA 318
Jones v Dunkel (1959) 101 CLR 298
Legal & General Life of Australia Limited v A Hudson Pty Limited (1985) 1 NSWLR 314
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170
Pedler v Richardson (unreported, Supreme Court of NSW, 16 October 1997, Young J)
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989
The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
Watson v Foxman (1995) 49 NSWLR 315

PARTIES: Calliden Group Limited (Plaintiff)
Australian Unity Limited (Defendant)

FILE NUMBER(S): SC 2008/290365

COUNSEL: Mr J T Gleeson SC, Mr N J Owens (Plaintiff)
Mr P Braham (Defendant)

SOLICITORS: Yeldham, Price, O'Brien & Lusk (Plaintiff)
Atanoskovic Hartnell (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

EINSTEIN J

Tuesday 13 April 2010

2008/00290365 Calliden Group Limited v Australian Unity Limited

JUDGMENT

The proceedings

1 These proceedings concern the respective contractual entitlements of the plaintiff [Calliden Group Ltd] [Calliden] and the defendants [Australian Unity General Insurance Ltd and Mansions of Australia Ltd] [together called AU] arising pursuant to a Share Deed dated 6 July 2007.

2 Pursuant to that Deed Calliden purchased the entire issued capital in the two defendant insurance companies.

3 The dispute concerns the amount of an adjustment that the Deed provided was to be made to the purchase price following completion, and the way in which the amount of that adjustment was to be determined.

4 More precisely, the parties negotiated the purchase price on the basis that the net tangible assets (“NTA”) of the acquired companies would, on completion, be $38,749,500. That estimate of NTA, including the various line items comprising it, was set out in Schedule 7 of the Deed (CB1/100).

5 Under the Deed, following completion of the purchase, there was then required to be a calculation of the acquired companies’ NTA as at the date of completion. The difference between the estimated NTA and the completion NTA was then required to be paid by one party to the other.

6 If the completion NTA was higher than the estimated NTA, then Calliden would pay the difference to AU. If the completion NTA was lower than the estimated NTA, then AU would pay the difference to Calliden.

7 A critical component of their NTA was the value of their insurance liabilities. If the value of those liabilities went down, then (assuming all other things remained equal) the companies’ NTA would go up, and vice versa.

8 It is in relation to the calculation of one component of one of the acquired companies’ (“AUGIL”) insurance liabilities (namely, AUGIL’s commercial liability portfolio) that the parties have fallen into dispute.

The critical issues

9 Without being exhausted the critical issues include the following:

unchanged

[This issue is arguably the most significant construction issue between the parties

It involves the meaning of clause 5 (a) of schedule 6 and specifically whether "unchanged" in the clause means :

Unchanged from similar valuations in prior periods (which is the plaintiff's contention) or

1. On the defendant’s construction of the clause it requires consistency of method and approach only as between the two valuations referred to in the schedule – i.e. the valuation as at 30 June 2007, and that at completion.

a. a consideration of the text of the Deed, and of the schedule in context; and

ii. Whether the June 2006 Valuation and the June 2007 Valuation were prepared using unchanged approaches to the selection of assumptions.

iii. Whether the Completion Valuation was a “final actuarial valuation of outstanding claims” of AUGIL within the meaning of clause 3(g) of Schedule 6 of the Deed.

iv. Whether Calliden was required to incorporate the Completion Valuation into its Draft Completion Statement without alteration.

v. Whether the Draft Completion Statement produced by Calliden was a Draft Completion Statement for the purposes of the Deed.

vi. Whether Australian Unity was entitled to refuse to procure Ernst & Young to perform the “agreed upon procedures” in relation to the Draft Completion Statement.

vii. The nature of the relief, if any, to which Calliden is entitled.

10 In short:

[The valuation was performed by Ms Gillian Harrex, who was the person agreed by the parties for that purpose. The plaintiff claims not to be bound by that valuation.]

a) A question of contractual construction: viz the proper construction of the Share Sale Deed (Deed) (CB 1.1), and in particular schedule 6, clause 5(a) (CB 1.98).

Legal & General Life of Australia Limited v A Hudson Pty Limited

11 Calliden contends that the valuation of insurance liabilities for the purposes of determining the completion NTA was required to be performed in the same way as the valuation that had been used to determine the estimated NTA, so as to enable a meaningful comparison to be made between the two.

12 As the reasons which follow make plain, in fact, there was a very substantial change in the way that the valuation for the purposes of determining the completion NTA was performed. That change resulted in a significant decrease in the value of AUGIL’s insurance liabilities.

The material provisions of the Deed

13 There are many provisions in the relevant Deed which have been referred to during argument and during the taking of evidence. Without being exhaustive a précis of the material provisions that list includes the following:

i. Pursuant to the Deed, Calliden agreed to purchase, and AU agreed to sell, the entire issued share capital of AUGIL and Mansions (clause 3.1) (CB1/21).

ii. The Deed provided (in clause 4.1 (CB1/21)) that the “Initial Cash Purchase Price” (which was defined in clause 1.1 to mean cash and shares in Calliden with a total value of $62,500,000 (CB1/12)) was to be paid in two instalments. A deposit of $3,000,000 was paid on the date of the execution of the Deed (6 July 2007), with the balance paid on the date of completion (31 July 2007) (see also clause 7.6 (CB1/31).

iii. The final step in the payment of the purchase price was to give effect to any adjustment under clause 9.7 (CB1/34). That provided that to the extent that there was a difference between the estimated NTA (in Schedule 7 (CB1/100)) and the completion NTA (prepared in accordance with the Deed), there was to be a corresponding adjustment to the purchase price. As described above, if the completion NTA was higher than the estimate NTA then the difference would be paid by Calliden to AU, and vice versa.

Clause 9.1 provided that (CB1/31):

“[Calliden] must as soon as reasonably possible after the Completion Date (and, in any event, within 20 Business Days after that date) prepare, and deliver to [AU] and the Accountant, a pro forma statement of net tangible assets for the Companies as at Completion (Draft Completion Statement of Net Tangible Assets) prepared in accordance with the Accounting Principles.”

vi. Schedule 6 (CB1/97) provided that the Draft Completion Statement must be prepared, inter alia, “on the basis of the accounting principles, rules and procedures set out in Schedule 5” and “in the format” of the estimated NTA (clauses 1(a) and (b) of Schedule 6).

“(a) Final Actuarial Valuation of outstanding claims and premium liabilities as at 30 June commentary 2007 by Finity (draft to [Australian Unity] only on 23 July) – 25 July;

^th

“The Approved Actuary will be instructed to prepare the actuarial valuations as at 30 June 2007 and as at the Completion Date according to the following principles:

(a) unchanged methods and approaches to the selection of assumptions, unless clearly justified, in which case the justification should be fully explained;
(b) …

ix. Schedule 5 of the Deed (CB1/91) (which, it will be recalled, was incorporated into the “Accounting Principles” by Schedule 6) stated that the estimated NTA (set out in Schedule 7 of the Deed) “was prepared in accordance with the accounting policies, rules and procedures set out in this schedule” (clause 1(a)).

14 Once Calliden had completed the Draft Completion Statement, the Deed required (in clause 9.1) that it was to be provided to AU and Ernst & Young. Clause 9.2(a) then provided that (CB1/32):

“[Calliden] and [AU] must procure that [Ernst & Young]:

i. Performs the Agreed Upon Procedures … in preparing or checking the Draft Completion Statement of Net Tangible Assets applying the Accounting Principles; and

ii. Produces the Certified Completion Statement of Net Tangible Assets and delivers the Completion Report … stating the results of the factual findings, including a summary of differences between the Draft Completion Statement of Net Tangible Assets and the Certified Completion Statement of Net Tangible Assets and that in the course of conducting the Agreed Upon Procedures the Accountant did not identify any matter which would indicate that the Certified Completion Statement of Net Tangible Assets has not been prepared in accordance with the Accounting Principles.”

“an audit to check the Draft Completion Statement of Net Tangible Assets applying accounting principles as referred to in clause 9.2(a)(i) of the Deed.”

iv. Once Ernst & Young had produced a Certified Completion Statement of Net Tangible Assets (the “Certified Completion Statement”) and accompanying report, clause 9.5 (CB1/33) provided that if neither Calliden nor Australian Unity disputed the Certified Completion Statement within a certain period, it would be taken to be the Final Completion Statement of Net Tangible Assets (the “Final Completion Statement”). If, on the other hand, Calliden or Australian Unity did dispute the statement, the dispute was to be resolved in accordance with clause 9.6 (CB1/33).

General Factual Background

15 The general factual background established by the evidence may be shortly described as follows:

[A “roll-forward” is an actuarial term for moving an estimated liability from the date at which an original (more detailed) review has been undertaken to a subsequent date. In a “roll-forward”, full re-modelling of liabilities does not occur; rather, the models are updated to allow for payments between the date of original and “roll-forward” valuation, and any additional liabilities incurred in the period between the valuations]. In the case of the December 2006 Valuation, there was also a slight modification to the “initial loss ratios” selected for more recent years for the purposes of the Bornheutter-Ferguson (“BF”) method.

a) “initial loss ratios” of between 50% and 60% were selected for the purposes of the BF method of estimating insurance liabilities (see Table 3.17, CB1/316); and

iii. When the terms of the purchase were being negotiated between Calliden and AU, Ms Harrex met with Calliden’s actuary to answer questions about the insurance portfolios being acquired. On 1 June 2007, Ms Harrex told Mr Atkins that recent experience for AUGIL’s commercial liability portfolio had been “running much better than expected”, and said that “at December $1 million was released and indications for further releases ($1 million) at June 07 if experience continues” (CB3/1241).

a) an initial loss ratio of 43% for the purposes of the BF method (see Table 3.20, CB1/433); and

v. Ms Harrex admitted that she had adopted a different approach to the selection of assumptions when she prepared the June 2007 Valuation (Trans. 126/26-28; 140/14-16).

vi. Ms Harrex was provided with Schedules 5 and 6 of the Deed only four hours before she delivered the June 2007 Valuation (CB4/1755.205). AU did not, however, instruct Ms Harrex to comply with them (Trans. 73/37-44), and she did not give herself an instruction to do so (Trans. 80/50-81/3).

vii. Completion of the Deed took place on 31 July 2007.

viii. The valuation of AUGIL’s insurance liabilities as at the date of completion of the Deed (i.e., 31 July 2007) (the “Completion Valuation”) (CB1/574) was a roll-forward of the June 2007 Valuation, and used the same assumptions.

a) a lower initial loss ratio was selected (43% as opposed to between 50% and 60%); and

x. The evidence establishes that Calliden was surprised by the extent of the reduction in the value of AUGIL’s insurance liabilities. On 10 September 2007, Calliden wrote to Ms. Harrex (CB5/2079). In that letter, Calliden set out certain passages from Schedules 5 and 6 of the Deed, and asked whether Ms. Harrex had been instructed to prepare her valuations in accordance with those passages.

xi. Ms. Harrex replied to that letter on 14 September 2007 (CB5/2221). Ms. Harrex stated that she had not been instructed to prepare her valuations in accordance with Schedules 5 and 6 of the Deed. She stated, however, that it was her “understanding that both the [June 2007 Valuation] and [Completion Valuation] are consistent with the requirements of Schedules 5 and 6.”

xii. On 7 February 2008, Calliden’s own approved actuary, Mr. Geoff Atkins, provided Calliden with a report stating that he considered Ms. Harrex’s report was not prepared in accordance with Schedules 5 and 6 of the Deed (CB5/2388). Mr. Atkins stated that if Ms. Harrex had prepared her valuation in accordance with the Deed, her valuation of AUGIL’s insurance liabilities would have been $3 million higher (CB5/2392).

xiii. Calliden then prepared a Draft Completion Statement which reflected Mr. Atkin’s view that there should be an increase of $3 million made to the insurance liabilities over the figure recommended by Ms. Harrex. That Draft Completion Statement was provided by Calliden to AU and Ernst & Young on 20 March 2008 (CB5/2422).

xiv. On 27 March 2008, the solicitors for AU wrote to Calliden and Ernst & Young (CB5/2427), stating that Calliden had not provided a Draft Completion Statement within the meaning of the Deed, because the statement provided was not based on Ms. Harrex’s valuation of AUGIL’s insurance liabilities. On that basis, AU instructed Ernst & Young not to proceed (CB5/2427; 2436).

xv. On 8 April 2008, Calliden instructed Ernst & Young to proceed with its engagement, notwithstanding AU’s position (CB5/2430).

The respective cases

16 Calliden has advanced a case which has 4 limbs:

(a) First , it is alleged that AU breached clause 9.2 of the Deed by refusing to procure Ernst & Young (inter alia) to determine whether the Draft Completion Statement complied with the Accounting Principles.

(b) Secondly , it is alleged that AU breached Schedule 6, Clause 5(a) of the Deed by failing to give Ms Harrex an instruction to prepare the June 2007 Valuation and the Completion Valuation in accordance with the provisions of that clause.

Thirdly

i) used a different approach to the selection of assumptions than that which had been adopted for the purposes of the June and December 2006 Valuations; and

(d) Fourthly

17 AU contended that it was unnecessary due to decide Calliden's Cases 1 and 2. Its propositions were as follows:

i. the starting position is the question of construction concerning the meaning of 'unchanged'. If Calliden succeeded in its construction argument then the question for decision would become whether the changes to the approach to selection of assumptions, which Ms Harrex acknowledged making, were clearly justified. If they were clearly justified, then Calliden's case fails.

ii. Properly analysed Calliden's Case 1 does not create any additional source of rights to those existing under its cases 3 and 4. To put it another way, if the plaintiff succeeds on Case 3, it may be entitled to succeed on Case 1, but if it does not succeed on Case 3 (whether because it fails on the construction argument, or because it succeeds on construction, but fails on “clearly justified”), it cannot succeed on Case 1.

(a) If the plaintiff fails on the construction issue, then the required instruction had content insofar as clause 5(a) is concerned only in the requirement to ensure that the completion valuation was a roll forward of the June 2007 valuation. This it undoubtedly was. There is no question that the actuary required an explicit instruction as to the matters in 5(b) and (c).

18 AU utilised a so-called 'decision tree' to explain how the matters for decision appropriately presented:

Returning to parameters of significance

19 Before travelling through the detail in terms of the factual position it is convenient to address a number of parameters of significance in understanding and ultimately adjudicating upon the principle disputed questions of construction namely:

i. First , there is a dispute as to point of reference against which Schedule 6, clause 5(a)’s requirement that there be “unchanged methods and approaches to the selection of assumptions” is to be measured; and

Secondly

The “Unchanged” Requirement

20 Schedule 6, clause 5(a) relevantly provides that:

21 The dispute between the parties can be summarised as follows:

both

22 AU contends that the requirement in 5(a) (although not the requirements in 5(b) and (c)) applied only to the preparation of the Completion Valuation. That is to say, there was complete freedom under Schedule 6 to select the methods and approaches to the selection of assumptions for the June 2007 Valuation, with the “unchanged” requirement applying only to the preparation of the Completion Valuation. AU thus contends that the sole purpose of 5(a) was to stipulate that the Completion Valuation was to be a “roll-forward” of the June 2007 Valuation.

23 To put the matter more precisely, the defendant’s relevant construction arguments at least include the following propositions:

i. Clause 5(a) of schedule 6, it requires consistency of method and approach only as between the two valuations referred to in the schedule – i.e. the valuation as at 30 June 2007, and that at completion.

a. The plaintiff’s question leaves unanswered the question “Unchanged from what?” If the plaintiff’s construction is correct there existed a significant and surprising lacuna in the Deed, which was left attended with considerable uncertainty

b. The plaintiff’s construction is also said to create a startling tension with the requirement of consistency contained in schedule 5 clause 3.13, which plainly and directly operates to impose a requirement of consistency between the 2007 reports, and those in prior periods. It is said to be surprising if the parties, having turned their mind to a requirement of consistency with prior periods, and having expressed that requirement explicitly in schedule 5, had then decided to adopt a different and inconsistent requirement in schedule 6. The plaintiff seeks to meet this consideration by pointing to the fact that schedule 5 continues to operate as an historical description of how the estimated net tangible assets had been derived. But that in itself emphasises the problem with the plaintiff’s construction. The contention is that this would be an absurd construction that saw the valuation reflected in the estimated NTA being the subject of a looser requirement of consistency with a prior period than the later performed June 2007 valuation.

c. The defendant’s construction is said to address an inherently necessary condition of the proper performance of the obligations contained in clause 3 of schedule 6, and in particular clause 3(g). That clause required the actuary to produce a final actuarial valuation “with limited commentary”. The defendant contends that if the report was to have limited commentary, and yet have significant effect in the structure of the Deed and underlying commercial transaction, it could only be because it was intended to be a “roll forward” from 30 June 2007 without significant change in basis, and so not requiring extensive commentary (unless changes were made, in which case they needed to be fully explained – requiring a departure from the limited commentary anticipated by clause 3(g)). Hence the need for clause 5(a). Contrary to the plaintiff’s submission, the “roll forward” aspect of the completion valuation is not implicit in clause 3(g). Theoretically a valuation including many changes in assumptions could be presented with “limited commentary”. And so it was important to the parties to ensure that the “limited commentary” report also included limited changes. The requirement to “fully explain” any changes that were “clearly justified” is also said to look back to the “limited commentary” otherwise required for the completion valuation.

iii. The 30 June 2007 valuation which was to be prepared by the Approved Actuary has no purpose under the SSD except to provide a benchmark for the completion valuation. It is the completion valuation which then must be taken into account in creating the completion balance sheet and then giving rise to any adjustment to the purchase price as a consequence. So why would the parties agree to constrain the actuary in arriving at the June 2007 valuation? The 30 June 2007 valuation does not itself need to be “unchanged” - it needs to be “correct” as complying with the relevant statutory and regulatory requirements for a valuation. In effect what the defendant submits is the operation of clause 5(a) and indeed all of clause 5 of Schedule 6 is that the rigour that applies with respect to an actuarial valuation for regulatory purposes, which will be subject to review and oversight by the Australian Prudential Regulatory Authority, is brought to apply to the completion valuation which would otherwise not be subject to that standard of rigour.

Finding

24 As is often the case where complex construction issues are before the Court for determination, the respective arguments concerning the 'unchanged' requirement have required extremely careful study.

25 The following matters put forward by Calliden are accepted in favouring its construction:

i. First , the plain language of the provision supports the view that the requirement applies to both the June 2007 Valuation and the Completion Valuation as against the earlier valuations.

ii. The opening words to clause 5 clearly require that both the June 2007 Valuation and the Completion Valuation are to be prepared according to all of (a), (b) and (c). In other words, when the actuary came to prepare the June 2007 Valuation, she was required to do so in accordance with (a) as much as (b) and (c).

iii. Only Calliden’s construction gives (a) any work to do in relation to the June 2007 Valuation. On AU’s construction, the constraint in (a) applies only to the Completion Valuation. In effect, AU seeks to re-write the opening words to clause 5 so that the June Valuation must be prepared in accordance with (b) and (c), and the Completion Valuation must be prepared in accordance with (a), (b) and (c). This does violence to the clear language of the clause as a whole.

iv. Moreover, AU’s construction requires the insertion of language into the Deed when there is no need to do so. As AU’s letter to Calliden on 28 February 2008 (CB5/2395) demonstrates, AU seeks to insert the words “as between these two final Actuarial Valuations” after the word “unchanged” in clause 5(a).

v. There is no warrant for the inclusion of such extraneous words. The natural meaning of the word “unchanged” directs attention to the status quo (in this case, the December 2006 Valuation) and commands that it be maintained. The insertion of those additional words thus contradicts the plain meaning of the clause.

vi. Secondly , in addition to this, the overall structure and purpose of the Deed makes clear that the “unchanged” requirement does apply to the June 2007 Valuation and the Completion Valuation, and requires consistency between those valuations and the December 2006 Valuation (and thus the June 2006 Valuation).

vii. Fundamental to the structure of this deal was the idea that the purchase price would be fixed by reference to an estimation of the acquired companies’ NTA, with an adjustment following completion to reflect the extent to which the estimate was incorrect.

viii. Clause 9.7 requires there to be a comparison between the estimated NTA set out in Schedule 7, and the completion NTA determined in accordance with the provisions of Clause 9. The fact that the Deed required such a comparison to be made suggests in the strongest of possible terms that the comparison was one that was intended to be meaningful. A comparison of two NTA calculations can only be meaningful if they are prepared in the same way. Otherwise, the comparison will not be one of “apples with apples”. This factor thus indicates strongly that the parties intended that the Completion Valuation be one that was meaningfully comparable with the December 2006 Valuation.

ix. The clear purpose and object of the “adjustment amount” mechanism set out in clause 9.7 of the Deed was thus to ensure that any discrepancy between the estimated NTA upon which the initial purchase price was based and the completion NTA was reflected in the final purchase price. In other words, the parties agreed upon the purchase price on the basis that the estimated NTA (Schedule 7), prepared on an identified basis (Schedule 5), provided an appropriate valuation for the assets and liabilities being taken over. What was then needed was simply to roll-forward that statement to reflect changes in position between 31 March 2007 and the date of completion, and in turn to make a corresponding adjustment to the purchase price.

x. In those circumstances, there is a clear commercial rationale supporting Calliden’s construction. Put simply, the sole purpose of the Completion Valuation was to enable a comparison to be made with the December 2006 Valuation which was utilised in the estimated NTA (Schedule 7). Unless those valuations were prepared using the same methods and approaches to the selection of assumptions, no meaningful comparison was possible.

a) schedule 5, clause 1(a) makes clear that the first purpose of Schedule 5 as a whole is to describe how the estimated NTA calculation (Schedule 7) was performed. In other words, it is an account of the principles etc in accordance with which the first comparator was prepared.

b) schedule 6, clause 1(a) then makes plain that the second comparator, the completion NTA calculation is to be performed in accordance with the principles etc set out in Schedule 5. In other words, the completion NTA calculation is expressly stated to be required to be prepared in the same way as the estimated NTA calculation. In this way, the two comparators will be prepared in the same way, making a meaningful comparison possible.

xii. Calliden’s construction is consistent with this general intention (i.e., not only would all other aspects of the accounting exercise be performed in the same way as had been done to produce the estimate, but so too would the actuarial valuation of insurance liabilities). AU, on the other hand, advances a construction that places the valuation of insurance liabilities in a separate category, with no requirement of any consistency of approach between the valuation used to prepare the estimate, and the valuation used for completion purposes.

xiii. AU says that clause 5(a) provided “comfort” to Calliden that the actuary would not adopt one valuation basis for the June 2007 Valuation, and another for the Completion Valuation. That concern was already addressed by the requirement that the Completion Valuation be “in the same format” as the June 2007 Valuation but contain only “limited commentary” (Schedule 6, clause 3(g)). In any event, the June 2007 Valuation had no relevance to any matter under the Deed. The Deed required there to be a comparison between the companies’ NTA as at completion, and the estimate in Schedule 7. If, for some reason, the June 2007 Valuation had been prepared on a different basis to the Completion Valuation, that would not in itself pose any problems or difficulties for Calliden. The “comfort” that Calliden required was that the Completion Valuation would be performed on a consistent basis with the valuation upon which it had negotiated the purchase price.

A short reference to authorities

26 It is a principle of the construction of contracts that, where a contract has been entered in a business context, it should not be read in a way that is commercially unlikely to be what the parties intended: Australian Broadcasting Commission v. Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; Cohen & Co v. Ockerby & Co Ltd (1917) 24 CLR 288 at 300; The Council of the Upper Hunter County District v. Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437.

The pervasive plausible commercial intention

27 The only plausible commercial intention that the parties to the Deed could have had would have been that the December 2006 Valuation and the Completion Valuation be prepared using unchanged methods and approaches to the selection of assumptions. As Calliden has submitted that is so, because only in that way could there be a meaningful comparison of the net tangible assets used to calculate the initial purchase price, and the net tangible assets as at completion.

28 Further and again as Calliden has submitted, the circumstances surrounding the entry into the Deed strongly support its construction.

Returning to the authorities

29 In this regard it is clear that evidence of the factual matrix in which a contract came to be concluded is relevant to the construction of a contract where the terms are susceptible of more than one meaning: see Reardon Smith Line Ltd v. Yngvar Hansen-Tangen [1976] 1 WLR 989 at 997; Codelfa Construction Pty Ltd v. State Rail Authority of NSW (1982) 149 CLR 337. As the High Court said in Toll (FGCT) Pty Ltd v. Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]:

The surrounding circumstances of the transaction

30 The following were the surrounding circumstances of the transaction for present purposes:

“We have assumed net tangible assets at completion of the transaction will not be less than the amount of $38.7 million estimated at 31 March 2007.”

“Current approach uses an ICD and Average claim size method. There is a move to separate the small and large claims in the commercial liability valuation.”

c) Schedule 6, clause 5 was drafted by Mr Atkins (CB6/2709). Given the disclosure of the “move” to adopt a new valuation basis, it is clear that clause 5(a) was inserted to ensure that there was no change in method or approach to the selection of assumptions before completion (subject to the proviso). The factual matrix in which this provision came to be inserted into the Deed is thus one in which the person drafting the relevant amendment has been put on notice that there could be a change in method. A provision requiring that there be “unchanged” methods is thus readily understood as a response to that specific possibility.

d) All of this clearly indicates that the concern of the parties was to ensure that there was a meaningful comparison able to be made between the estimated NTA and the completion NTA, and that one particular concern in that regard was to ensure that the way in which insurance liabilities were valued did not change (and, in particular, that the foreshadowed move to a new method did not occur).

31 AU contends that the sole purpose of clause 5(a) is to provide that the Completion Valuation is to be a mere roll-forward from the June 2007 Valuation. That is rejected for the following reasons:

i. If that is what the parties had meant, then they could have said so in clear words. As Calliden has contended , the parties should not be taken to have intended to express their intention in such a vague and indirect way. The construction advanced by Calliden is consistent with the actual words used and does not require the Court to say that, by those words, the parties “really” meant something else.

ii. Clause 5 of Schedule 6 deals with how the valuations are to be prepared. It does not deal with what is to be prepared. That topic is dealt with in clause 3 of Schedule 6. If the parties had intended to stipulate the nature of the document to be created (i.e., a “roll-forward” as opposed to a “full valuation”) one would expect to find that in the identification of what was to be produced, and not in the statement of how a particular document (already identified) was to be produced.

did

32 AU next says that its construction is supported by the “fundamental lacuna” in the Deed; namely, that clause 5(a) does not, itself, state from what the methods and approaches to the selection of assumptions in the June 2007 Valuation is to be “unchanged”. As Calliden has contended, AU's contention is unpersuasive:

i. The word “unchanged” contains its own point of reference (namely, the status quo). When clause 5(a) requires that both the June 2007 Valuation and the Completion Valuation are to be prepared using “unchanged” methods etc, it directs attention to the pre-existing valuations (namely, the December 2006 and June 2006 Valuations), and requires no change to the methods etc. used to prepare them. It is thus not the case that there is any such “fundamental lacuna”.

ii. In any event, for the reasons given above, the overall scheme of the Deed, as well as its clear commercial purpose, and the circumstances in which it was made, indicate in the plainest of terms that there is to be no change from the valuation used (consistently with Schedule 5) for the purposes of preparing Schedule 7 (i.e., the December 2006 Valuation, which was a roll-forward of the June 2006 Valuation).

33 AU then says that Calliden’s construction of clause 5(a) renders clause 3.13 of Schedule 5 “entirely otiose”. Again and as Calliden has contended, there is no substance in this AU submission:

i. Schedule 5’s first role is a statement of how Schedule 7 was prepared (see clause 1(a)). The statement in clause 3.13 that the insurance valuations used to arrive at Schedule 7 were prepared “on a basis broadly consistent with prior periods and in accordance with professional standards” is thus, in the first instance, a statement of history.

ii. Schedule 6 Clause 1(a) then gives Schedule 5 a second operation: it must be applied in preparation of the completion NTA. Clause 5(a) of Schedule 6 is clearly intended to have further work to do – it adds some more stringent requirements to Schedule 6 Clause 1(a), incorporating Schedule 5.

iii. Clause 3.13 of Schedule 5 and Clause 5 of Schedule 6 undoubtedly overlap (both, for example, deal with the requirement of the application of professional standards). The two provisions are, though, in no way inconsistent. More importantly, however, whichever construction of 5(a) is adopted there will, on AU’s argument, be an element of redundancy about clause 3.13. That is to say, on AU’s construction, clause 3.13 is “entirely otiose” insofar as the Completion Valuation is concerned, and “entirely otiose” insofar as the prevalence of professional standards is concerned.

34 Finally, AU suggests that Calliden’s interpretation may bring about a conflict between the requirement that the June 2007 Valuation be prepared using particular methods, and the APRA imposed obligation that an end of year insurance liabilities valuation arrive at a genuine central estimate. Again, this complaint is of no substance. This concern is plainly addressed by the proviso within Clause 5(a) of Schedule 6 and further by Clause 5(c).

35 For all of these reasons, Calliden’s construction of clause 5(a) is accepted as correct.

The “Broad Consistency” requirement

36 The second principal construction question in this case is the meaning to be given to the term “broadly consistent” in Schedule 5, clause 3.13. That states:

37 The following matters also put by Calliden are pervasive:

i. The words “broadly consistent” are plainly not actuarial terms of art (Trans. 272/4-5).

ii. The evidence in this case was that when actuaries use the word “basis” they mean method and assumptions (Trans. 204/38-40).

iii. To say, therefore, that a valuation is to be prepared on a “basis” that is “broadly consistent” with that adopted in prior periods, is plainly to require that broadly consistent methods and assumptions are used.

38 AU, however, appears to submit that an insurance valuation will be prepared on a “broadly consistent” basis if it (see joint report, Question 1):

i. is prepared using actuarial models to estimate outstanding claims and premium liabilities;

ii. estimates outstanding claims and premium liabilities on a net of reinsurance basis;

iii. estimates outstanding claims and premium liabilities on an inflated and discounted basis;

39 The first of those points says nothing more than that a valuation should use “actuarial models”. Ordinarily an actuary will prepare a valuation of insurance liabilities using a “model”. But there could be many different models. The clause would become almost uninformative if simply meant “use some model – whatever you like”. Thus it cannot seriously be suggested that an actuary using two completely different models is preparing valuations on a “broadly consistent” basis.

40 As Mr Fry said, for two methods to be “broadly consistent” they would have to “look at things in a similar sort of way” (Trans. 240/6). Mr Fry went on (Trans. 240/6-12):

41 I accept that the requirement of “broad consistency” requires the use of methods and approaches to the selection of assumptions that look at the portfolio in a similar sort of way. They do not, of course, have to be identical. But the general approach must be consistent. The sorts of matters that will be relevant to that analysis are thus:

i. whether the methods look at the portfolio in the aggregate, or separate out different sorts of claims in some way;

ii. whether the same method is applied to the whole portfolio, or whether different methods are applied to different parts of the portfolio;

42 A further a telling indicator of a broad inconsistency of approach is if the individual components of a net liability (i.e., gross outstanding claims liability and reinsurance recoveries) do not have individual integrity. The requirement of individual integrity was a requirement of the Deed (see Schedule 5, clauses 3.7 and 3.13; see also Trans. 317/12-19). If a method is selected, and manipulated, so that it does not produce individual components that have integrity, that that method has not been applied in a manner broadly consistent with a proper application of the method.

43 I further accept that the following matters would also be relevant to demonstrating a lack of a broadly consistent approach:

i. A change from a cautious and conservative approach, to a significantly less cautious and conservative approach.

ii. A change from an approach to the selection of assumptions unconstrained by any attempt to achieve a result derived from another method.

iii. Acceptance of a direction to release as much in reserves as the actuary was comfortable with, when no such direction had ever been given or accepted before.

iv. Taking into account an irrelevant consideration (namely the proposed sale of the insurer) when no such consideration would ever have previously been regarded as relevant.

44 If considerations such as those outlined above were made out, it would be established that there was no “broad consistency” within the meaning of Schedule 5, clause 3.13.

The different actuarial methods

45 There are various different actuarial methods that have been mentioned in these proceedings. It is convenient to presently address the terms the features of each one.

The ICD method

46 The ICD, or “incurred claim development”, method is a method for estimating the ultimate gross (i.e., before taking into account reinsurance recoveries) liabilities of an insurance portfolio.

47 The ICD method examines the change, or “development”, of incurred claim costs (payments actually made, plus estimates on open claims) for a particular half-year period in each subsequent half-year period. The development in the amount of incurred claim costs each half-year allows the actuary to identify historical ratios from period to period, and these ratios are called “ICD factors”. The actuary then uses these historical ratios, or ICD factors, to project the future development of claims.

48 For example, if an actuary were looking at claims for the half year ending June 2002, he or she would look at the total amount of incurred claims costs for that period at June 2002, December 2002, June 2003, December 2003, June 2004, and so on.

49 At the end of June 2002 the total amount paid out in claims, plus claims managers’ estimates on open claims, might be $100,000. When the actuary returned to look at the incurred claims costs for that period in December 2002, the amount might have risen to $150,000. When the actuary looked at it again in June 2003, the total might have risen to $225,000.

50 The actuary would examine the change in incurred claims costs for the June 2002 half year in each subsequent period, and use that information to predict the ultimate amount of the incurred claims costs for the period.

51 The ultimate incurred claims costs can be expressed as a dollar amount, and as a percentage of the premium charged for the relevant period. The latter produces a number known as the “loss ratio”. If a portfolio for a particular half-year has an ultimate loss ratio of 50%, it thus means that half of all premiums collected for the period would ultimately be paid out in claims costs.

52 Hence the ICD method, for any given period, looks at the portfolio as a whole in order to derive the projected ultimate loss ratio. It is then necessary to estimate the amount that will be recovered by reinsurance.

53 Before 2007, Ms Harrex used the ICD method to value older periods (pre-June 2002).

The BF method

54 The BF method is also a method for estimating the ultimate gross (i.e., before taking into account reinsurance recoveries) liabilities of an insurance portfolio.

55 The BF method blends the actual experience of a portfolio for a particular period with the projected experience for that same period, to produce an estimate of the ultimate gross liabilities. It does so in the following way:

i. First, regard is had to the actual experience of the portfolio in the relevant period. So, if the actuary was looking at the June 2002 half year, he or she would identify the amounts actually paid out in claims so far, and the amounts reserved for those claims (but not yet paid).

ii. Secondly, the actuary would estimate what percentage of the total liability for that period is constituted by the amounts already paid, and for which a reserve has been made. In other words, if the amount an insurer has paid out, or reserved, for known claims in a period is $500,000, the actuary may determine that that represents 25% of the claims that will ultimately be reported. This is known as the IBNR factor. The actuary relies on an ICD analysis to select this assumption (i.e., he or she looks at historical claims development to estimate, at a particular point in time, what percentage of ultimate claim cost will have been identified).

iii. Thirdly, the actuary selects an “initial” or “a priori” loss ratio. This is the ratio that the actuary assumes will constitute the ultimate loss ratio for the claims that have not yet been notified. This ratio is selected having regard to various factors including (a) the development, or experience, of the portfolio, (b) the ultimate loss ratios being suggested by an ICD analysis, and (c) any relevant lessons that can be drawn from other actuarial methods.

56 Hence the BF method looks at the portfolio as a whole for a given period, and blends emerging experience with projections as to future experience, to give an estimated ultimate position.

57 As with the ICD method, this is a means of determining the gross claims cost only, and it is necessary to estimate the amount that will be recovered from reinsurers. .

58 Before 2007, Ms Harrex used the BF method to value new periods (post-June 2002).

59 Of particular relevance are the following observations concerning the BF method:

i. It is a method that treats a portfolio in the aggregate, that is to say, it treats all claims within the portfolio in the same way, and deals with them as a whole. It does not separate claims into different categories, and analyse them differently, nor does it have regard to individual claims for the purposes of the analysis.

ii. The assumptions as to initial loss ratios are selected from experience in relation to the portfolio as a whole, and such inferences as can usefully be drawn from the results of other methods.

iii. In this portfolio, while the experience of older years may be more stable, the financial impact of them is limited. The financial results of the method are all driven by the recent years. This means that significant care was required with respect to the setting of assumptions for recent years (Trans. 231/11-22).

iv. Because it is an approximate method (it is used in cases where there is not a lot of information), the general practice is to adopt “round” numbers for assumptions. Adoption of more “specific” numbers as assumptions would seem to give them an appearance of greater accuracy than they deserve (Trans. 223/24-29).

v. The matters to which an actuary may look for the purposes of selecting BF assumptions may point in different directions. This emphasises the dangers in relying solely on one indicator, or limited trends (Trans. 232/23-48; 235/41-236/3).

vi. Assumptions for the purposes of the BF method are not, however, selected with a view to having the BF result replicate the results of another method. Any interaction between methods is required to be a “conversation” – that is to say, the results of each method should inform the other (Trans. 256/18-35; 257/14-18; 258/3-15; 287/22-28). It is as important to revisit and query the assumptions driving the result in the other method as it is to adjust the BF assumptions (Trans. 258/3-15; 319/19-22).

vii. Nor is it any part of a BF analysis to try generally to achieve a particular result, such as releasing as much as an actuary is comfortable with, or to release as much as possible without defying credibility. The assumptions should be selected in a fair manner, so as to see what result the model suggests, rather than attempting to reverse-engineer a particular outcome (Trans. 270/22-33).

PPCI plus large

60 The “PPCI plus large” method is actually two different methods, applied to different categories of claims within the one portfolio. It is thus immediately apparent that it is fundamentally different to the ICD/BF analysis that Ms Harrex had previously used. Those methods approached the estimation of the gross claims cost of the portfolio as an aggregate question. That is to say, they looked at the portfolio as a whole, and applied uniform assumptions to the portfolio as a whole.

61 The first step in the PPCI plus large analysis is to segregate the portfolio into “large” and “small” claims. Ms Harrex defined the boundary between the two categories at $200,000.

62 In relation to the “small” claims, a “PPCI” method was used. PPCI stands for “payments per claim incurred”. It is not necessary for the purposes of these proceedings to understand in detail what a PPCI approach entails. In short, however, it involves the projection of expected claim numbers and the average cost of each claim.

63 In relation to the “large” claims, a “numbers times size” methodology was adopted. This method worked as follows:

i. Assumptions are made as to the number of large claims that will, on average, be made in each period. In this case, Ms Harrex estimated that 4-5 large claims per year would be made.

ii. Assumptions are made as to the average size of the large claims. In this case, Ms Harrex estimated that the average claim size would be $450,000.

64 The actuary then combines the results of the PPCI and the “numbers times size” approach to obtain a total gross ultimate cost for the portfolio.

65 The advantage of this methodology is said to be that small claims and large claims behave differently, with the result that there is an advantage to applying a different, better suited, method to each category. Whether this is right or wrong, it is immediately apparent that the approach (both as to each individual method, and the general approach of applying different methodologies to different categories of claims) differs significantly from the aggregate approach of the ICD and BF methods.

66 Once again, it is necessary then to make an estimate of likely reinsurance recoveries to obtain a net figure.

Methods of estimating reinsurance recoveries

67 For the purposes of these proceedings, there are two different ways that it is possible to approach the question of likely reinsurance recoveries.

68 The first is that which Ms Harrex used in conjunction with the ICD and BF methods. In this method:

a) A “net to gross” factor of 80% implies that 80% of an insurer’s gross liabilities will be retained by them, and 20% will be recovered from reinsurers.

reinsurer

In 2005 and 2006, Ms Harrex considered that an ultimate loss ratio of under 50% was reasonable for a reinsurer (Trans. 89/18-22). In 2007, however, she decided (for no rational reason explained to my satisfaction in the evidence) that a reasonable implied ultimate loss ratio would be greater than 50%.

In determining what would be a reasonable implied loss ratio for a reinsurer, it is important for there to be evidence available – such as experience with the loss ratios of reinsurers with similar attachment points and portfolios of business – in order for reasonable conclusions to be drawn (Trans. 312/34-39).

iii. It is important to note that in applying this method (at least before June 2007) Ms Harrex had never regarded it as relevant to make assumptions about future large claims experience (the number of those claims and their size), calculate how much would be recovered from reinsurers on those assumptions, and then work out what percentage of the gross claims cost that would be. This forward looking, assumption dependent, analysis of a portion of the portfolio (as opposed to taking an aggregate approach) is not consistent with an overall method which looks to determine an aggregate “net to gross” factor.

69 The second method is the one that Ms Harrex considered was preferable to be used in conjunction with her “preferred” (PPCI plus large) analysis. In this approach:

i. Reinsurance recoveries are assessed differently for small and large claims.

ii. Because small claims are defined as being under $200,000, and because AUGIL’s reinsurance cover only commenced at $200,000 per claim, it was assumed that there would be no reinsurance recoveries in respect of small claims. The net figure for these claims is thus the same as the gross.

iii. For large claims, the approach to reinsurance recoveries was to look at how the company’s reinsurance would actually work on the assumption that the number and size of large claims was as the actuary had predicted. So

iv. If each claim had an average size of $450,000, then on average $250,000 would be recovered from reinsurers per claim.

v. So, if there were 4-5 such claims per year, then $1-1.25 million would be recovered in reinsurance each year.

vi. The amount of expected reinsurance recoveries is then deducted from the projected gross cost of large claims, to produce the insurer’s net liability.

70 In this approach the portfolio is not treated in the aggregate, but, rather, the same separate approach is taken. Also, the question of reinsurance recoveries is solely answered by reference to assumptions that are made about future claim numbers and their size.

71 In the June 2007 Valuation, Ms Harrex adopted a hybrid model. That model can best be described as follows:

i. She performed a PPCI plus large analysis, and observed the gross claims liability that it produced.

ii. She performed an analysis of likely reinsurance recoveries in accordance with the second method described above. That is, she referred to her assumptions about the number and average size of large claims (4-5 claims per year, at an average size of $450,000), and determined what the total dollar recovery from reinsurers was likely to be.

iii. She then manipulated both her BF initial loss ratio assumption, and her reinsurance net to gross factor, to get as close as she could to the result of the PPCI plus large analysis, but using a BF method and a net to gross factor to estimate total reinsurance recoveries (Trans. 125/16-19; 126/18-20; 129/41-44 131/1-3; 133/5-17; 137/47-49).

“The main reason for constructing this basis was to show AUGIL that it would be possible to derive a valuation result using the BF basis that was not dissimilar to the result on the [PPCI plus large] basis.”

b) Having reduced them to 40% for the early years and 43% for the later years in the first cut, she then made them 43% for all years (CB3/1413).

c) The result was to produce a gross liability value that was lower than was obtained by the PPCI plus large approach (CB3/1414).

In relation to the reinsurance net to gross factor:

d) She did not have regard to the portfolio’s large claims experience, which is what she had done previously, and which indicated a low number of claims, with an average claim size of $350,000 (CB6/2565).

e) Rather, she made the assumptions that she made for the purposes of her PPCI plus large analysis (i.e., 5 large claims a year, with an average size of $450,000), and worked out likely reinsurance recoveries on that basis (CB3/1413).

f) She then applied that number to her gross liability calculated in accordance with the constructed BF method, and came up with 20% (CB3/1413).

72 As the plaintiff has contended the translation from the PPCI plus large approach to calculating reinsurance recoveries to the determination of a net to gross factor for the purposes of a BF analysis is particularly problematic.

73 In a genuine PPCI plus large analysis, the assumption made regarding the number of large claims per year is the one that is critical to the net position. That is because each additional claim adds $200,000 to the total net result.

74 The assumption made regarding the average size of large claims is not, however, critical to the net position. That is because it is assumed that all amounts per claim over $200,000 are recovered from reinsurers. As such, whether the average claim size is $250,000 or $600,000, the net position for the insurer is unchanged. All that changes is the amount recovered from reinsurers.

75 As Calliden has submitted, assumptions about the average size of large claims do become relevant, however, when the analysis is blindly applied to a different method (namely, a BF analysis). In that case it is the proportion of reinsurance recoveries compared to gross liabilities that is important. In that context, assumptions regarding average claim size do matter (because they inflate the gross position) (Trans. 314/24-36).

76 That fact reveals the true significance of Ms Harrex’s assumption of an average claim size of $450,000 (as opposed to the experience, which was $350,000). By inflating her estimate in that way, Ms Harrex increased the proportion of reinsurance recoveries, which enabled her to justify a significantly higher net to gross factor.

77 It can thus be seen that Ms Harrex’s construct was a most unusual method. The result was substantially derived from a faithful application of the PPCI plus large approach, but rather than implement that approach, or allow that approach to engage in a meaningful two way conversation with another approach (such as the BF method), she reverse-engineered BF and reinsurance assumptions to achieve as close an approximation as she could to the result of the PPCI plus large approach.

78 In the result, the method she adopted was neither PPCI plus large, nor proper BF. It was a genuine hybrid, or construct, with none of the integrity of either method, faithfully applied.

79 It was a method that Ms Harrex had not performed before (Trans. 131/33-35) and Mr Heath had never seen it done before (Trans. 285/13-29).

Calliden’s case

80 Each of the following submissions advanced by Calliden is of substance and adopted in these reasons.

Case one: breach by failing to procure Ernst & Young to work

81 It cannot seriously be suggested that AU did not refuse to procure Ernst & Young to perform is work under its retainer. The facts are as follows:

a. Calliden provided Ernst & Young with the Draft Completion Statement on 20 March 2008 (CB5/2422).

“AU will not agree to procure Ernst & Young to perform, nor will AU bear the cost of, any work that goes beyond the description of work outlined in the Deed. In particular, AU will not procure or pay for work by Ernst & Young in connection with:

(i) the [Draft Completion Statement provided by Calliden on 20 March 2008], which has not been prepared in accordance with the Deed; or

looking behind the [Completion Valuation].

c. On 8 April 2008 Calliden’s solicitors replied that AU had no basis to “prevent or interfere with the certification process” and stated that Calliden had “instructed Ernst & Young to proceed on the basis of the Draft Completion Statement” (CB5/2430).

d. On 8 April 2008 Calliden wrote to Ernst & Young to “confirm our instructions requiring you to undertake the certification required by clause 9.2” (CB5/2432).

e. On 10 April 2008 a lawyer at AU (Dave van Sanden) spoke to the partner at Ernst & Young and said that AU’s “immediate issue is to ensure E&Y understand they don’t have joint instructions” (CB5/2436).

f. On 11 April 2008 the solicitors for AU wrote to Ernst & Young repeating the comment in their letter of 27 March 2008 quoted above at (b) (CB5/2437).

82 Hence:

a. Calliden was instructing Ernst & Young to perform the work under clause 9;

83 This was clearly a breach of clause 9.2 of the Deed.

84 The following matters that AU has raised in argument against that conclusion have no substance:

a. AU says that Calliden did not itself commit to requiring that Ernst & Young performed the necessary work. The evidence is otherwise. The sequence of correspondence outlined above, in particular the letter of 8 April 2008 (CB5/2432) makes clear that Calliden expressly directed Ernst & Young to perform its work under clause 9.

“The valuation as at 30 June 2007 was peer reviewed by Ernst & Young, which did not report any relevant inconsistency with prior years, or any deviation from professional standards. Ernst & Young had also reviewed the valuation as at 30 June 2006 and were, therefore, in an ideal position to report any relevant deviation or inconsistency of approach with prior periods.”

i) The notion that it is only if a perfectly complying Draft Completion Statement is provided to Ernst & Young that AU has any obligation to procure Ernst & Young to do the work under clause 9 is misconceived. The whole purpose of retaining Ernst & Young is to enable Ernst & Young to determine if the Draft Completion Statement was properly prepared. On AU’s construction, there would be no purpose whatsoever served by Ernst & Young’s retainer.

Calliden’s primary obligation came from Clause 9.1 of the Deed, in having to prepare a pro forma statement of net tangible assets as at completion. That requirement is satisfied by a document which purports to be a Draft Completion Statement, and which contains the necessary structural elements for such a statement.

The Deed specifically left the question of the compliance of Calliden’s Draft Completion Statement to Ernst & Young (in the first instance) and the expert appointed under clause 9.6 (in the second instance).

That is to say, cl. 9.1 required Calliden to prepare a Draft Completion Statement, and to provide that statement to both Australian Unity and Ernst & Young. One of the functions that Ernst & Young was then required to perform was to audit the statement by applying the Accounting Principles. In other words, Ernst & Young was required to determine whether the statement produced by Calliden complied with the requirements of the Deed.

Given that Ernst & Young had that function, it cannot be the case that Australian Unity was entitled to refuse to “procure” (see cl. 9.2) Ernst & Young to perform its functions on the basis that AU considered that Calliden had not produced a compliant statement. By doing so, AU arrogated to itself the very function that the Deed gave to Ernst & Young.

If Ernst & Young were to conclude that the statement provided by Calliden was compliant, and proceeded to issue a Certified Completion Statement on that basis, AU would be entitled to object under clause 9.5. By making such an objection, Australian Unity would be invoking the dispute resolution procedure outlined in clause 9.6. The question whether Calliden’s statement complied with the Deed would then be determined by the expert appointed pursuant to clause 9.6.

I accept that mechanism established by the Deed is similar to the agreement considered by the NSW Court of Appeal in Downer Engineering Power Pty Ltd v. P & H Minepro Australasia Pty Ltd [2007] NSWCA 318. In that case, it had been argued that a document that purported to be a “Completion Statement”, and which contained all of the “structural elements” of such a statement had been prepared (see at [72]). The other party considered, however, that the statement that had been prepared did not conform to the requirements of the parties’ agreement. It was thus contended that the process set out in that agreement for the review by an independent third party of the completion statement did not operate, because there had been a prior breach of the obligation to prepare a valid statement (see at [73])

c. selected assumptions for the purposes of the BF method in June 2007 that gave her a result as close as possible to the PPCI plus large method (Trans. 125/16-19);

d. allowed the PPCI plus large result to drive the selection of her BF assumptions (Trans. 126/18-20; 131/1-3);

e. she had not done this in June 2005, June 2006 or December 2006 (Trans. 126/22-24);

f. in selecting her reinsurance recoveries assumption for the purposes of the BF method, she had manipulated the assumption to get as close as she could to the big re-insurance recoveries indicated by the PPCI plus large approach (Trans. 129/41-44);

g. she had no material available to her that would justify the significant increase in the loss ratio for reinsurers implied by the actuary’s assumption as to reinsurance recoveries (Trans. 133/10-17);

h. the sole matter justifying her selection of that assumption was her attempt to reverse-engineer the result of the PPCI plus large approach (Trans. 133/5-9);

i. she considered that with the assumptions she had selected she had pushed the BF method to the limits of credibility (Trans. 137/44-45);

j. she considered that she had manipulated the assumptions of the BF model to try and achieve the results of the PPCI plus large method (Trans. 137/47-49);

k. it would have been cautious and conservative to release $1.5 m (Trans. 104/40-42); and

112 Although the respective submissions differed in relation to what the Court could glean from the evidence of the other actuaries, it seems to me that the experts are ultimately seen to agree that Ms Harrex changed her approach to the selection of assumptions.

113 Mr Fry was always of that opinion (see first report at 3.2.1.4, 3.2.1.5, 3.2.1.9, second report pages 1-5; and joint report Question 3). Mr Heath did not originally hold that opinion, but, on the basis of the assumptions that were put to him, he changed his mind (Trans. 281/4-8). Moreover, Mr Heath said that his observation of Ms Harrex’s evidence meant that he was satisfied that it was appropriate for him to assume that “the whole of her work seems to have been directed to what changes she could make to BF assumptions to get a result as close as she could to the result indicated by the PPCI plus large method” (Trans. 305/36-45).

114 The finding is that Ms Harrex changed her approach to the selection of assumptions in the June 2007 and Completion Valuations.

There was a change in method

115 As the plaintiffs have contended a finding that there was a change in Ms Harrex's approach to the selection of assumptions, renders it strictly unnecessary for the Court to determine whether there was also a change in method. Nevertheless, it is appropriate that a decision be made on this aspect of the case.

116 The evidence establishes that Ms Harrex adopted a new method for the purposes of the June 2007 and Completion Valuations:

a. The method was clearly a hybrid. It was not a faithful application of the BF method, in that the choice of assumptions was driven by matters completely irrelevant to an ordinary use of that method. Nor was it a faithful application of the PPCI plus large approach, in that the result that was ultimately produced only bore an approximate resemblance to the net result of the PPCI plus large approach. The gross result was too low, and the estimated reinsurance recoveries were too high. There was thus no integrity in the individual components revealed by the method. This is a real problem (see Trans. 317/12-19). It cannot, therefore, be said that it was an example of the PPCI plus large method.

b. There was no evidence that anyone had ever performed such an analysis before (Trans. 131/33-35; 285/13-29).

117 Ultimately I accept that the method adopted by Ms Harrex can best be described as a method that purports to present a result achieved by one method (PPCI plus large) as a result in fact achieved by another method (BF). In the course of presenting the result, however, manipulations and distortions are required to be made, so as to allow the result to as nearly as possible approximate the result obtained by the first method.

118 Mr Fry considered that there had been a change in method. He described his view as follows (Trans. 201/47-202/6):

119 Mr Fry then confirmed that he did not consider that a BF method had in fact been used in 2007 (Trans. 202/8-11).

120 Mr Fry was not shaken in his views on this question.

121 I accept that this is a very different method to the standard ICD/BF method used by Ms Harrex in the 2006 Valuations. As the plaintiffs have contended this provides an independent basis upon which to find that the June 2007 and Completion Valuations did not comply with Schedule 6, clause 5(a).

Were the changes clearly justified and fully explained?

122 In my view this question requires to be answered in the negative.

123 As Calliden has contended, in relation to the “fully explained” requirement, it is sufficient to note that, given that Ms Harrex did not, until cross-examination, accept that she had changed any aspect of her approach, it is unsurprising that she did not fully explain in her report why she felt those changes were clearly justified

124 In any event, as the finding is that none of the changes were clearly justified, it would never have been possible to satisfactorily explain them:

a. Once Ms Harrex accepted the wrong instruction given to her by AU (i.e., to release as much as she was comfortable with), she could never have turned her mind to the question of whether complying with that instruction was clearly justified in the context of Schedule 6, clause 5(a). Ms Harrex was thus incapable of forming a view on the “clearly justified” question, and plainly did not do so.

b. Mr Fry said that the changes were not clearly justified (see, e.g., joint report, Question 5).

c. Ms Harrex herself accepted that she did not need to move to the new basis, or release a larger amount, in order to discharge her professional duties (Trans. 108/25-30).

125 Importantly the Court accepts that it is not enough to demonstrate that a change was “clearly justified” to show that it was “reasonably open”. Here, on no view could such a change be justified. As Calliden has contended, window dressing, manipulation and reverse engineering are not sanctioned by actuarial standards (or the law generally). Further Ms Harrex allowed herself to be pushed to the very edge of her “comfort” zone. She recognised she could, properly, have come to a much higher reserve and she in fact did this, on the standard of Schedule 6 Clause 5(a) although her work in that regard had been destroyed.

126 How, one might ask, could there ever be a clear justification for adopting a method, or an approach to the selection of assumptions that was, at best, non-genuine?

Conclusion

127 In the result June 2007 and Completion Valuations did not comply with Schedule 6, clause 5. It thus follows that those valuations were not complying valuations under the Deed in the A Hudson sense.

Case four: The June 2007 and Completion Valuations did not comply with schedule 5, clause 3.13.

128 For many of the same reasons as have been set out above the further finding is that that the June 2007 and the Completion Valuations were not prepared on a basis that was “broadly consistent” with prior periods, nor “in accordance with professional standards”.

Broadly Consistent

129 Mr Heath’s opinion appears to be that as long as an “actuarial model” is used to prepare different valuations, then they will be prepared on a “broadly consistent” basis. For the reasons given above, the clause must have more meaning than that.

130 Even accepting that interpretation, however, it is clear that the “method” used by Ms Harrex (dressing up the results of one method as having been derived by another method) is not an “actuarial model”. It is a sham, or a construct. No actuary giving evidence had ever seen such a model before (Trans. 131/33-35; 285/13-29).

131 The preferred construction to be given to “broadly consistent” is that it requires that the methods that are used be “similar”. Mr Fry’s evidence was that these methods were not “similar”, and he gave cogent reasons in support of that view, namely:

a. The PPCI plus large approach looks at small and large claims separately, whereas the ICD/BF method looks at a portfolio as a whole;

b. The PPCI plus large approach conducts a different analysis on the different segments of the portfolio, whereas the ICD/BF approach is applied to the portfolio as a whole;

132 In this case, the method adopted by Ms Harrex did not produce a gross result, or an estimate of reinsurance recoveries, that were individually sound. Rather, her method only produced a net result that approximated the net result of the PPCI plus large method (see the memorandum of 5 July 2007, CB3/1412). The fact that the method did not produce individual components with integrity shows that it is not a broadly similar method or approach to those previously adopted.

133 Furthermore, the following factors indicate that Ms Harrex’s new approach was not broadly consistent with her previous approach:

a. She changed from a cautious and conservative approach, to a significantly less cautious and conservative approach (Trans. 117/9-10).

b. She changed from an approach to the selection of assumptions unconstrained by any attempt to achieve a result derived from another method (Trans. 125/16-19).

c. She accepted a direction to release as much in reserves as she was comfortable with (CB3/1373), when no such direction had ever been given or accepted before.

d. She took into account an irrelevant consideration (namely the proposed sale of the insurer) when no such consideration would ever have previously been regarded as relevant (Trans. 121/48-50).

134 The finding is that the June 2007 and Completion Valuations were not prepared on a basis broadly consistent with the 2006 Valuations.

Inconsistent with Professional Standards

135 The relevant professional standard cross-examined upon was Professional Standard 300, which is Exhibit P2 in the proceedings.

136 Mr Heath said that there was nothing in the standard that sanctioned the approach taken by Ms Harrex (Trans. 284/22-26), even if he was not prepared to accept that she had contravened it.

137 Mr Fry said that it was a “very difficult” question, and that the report was “getting close to the edge of being unprofessional” (Trans. 203/25-35). He observed that the report “is less than forthcoming about how influential the PPCI plus large approach was to the selection of the final answer” (Trans. 203/36-38).

138 Despite the hesitation of the experts to in relation to this “difficult question”, the finding is that that Ms Harrex’s June 2007 Valuation does not comply with that standard in the following respects:

a. Clause 15 sets out the steps in accordance with which a valuation is to be prepared. Steps (iv), (v), and (vi) indicate that the valuation model is to be selected first, then the assumptions, and then the calculation is performed. In this case, Ms Harrex selected one model (PPCI plus large), used it to obtain a result, then reverse engineered a BF analysis. This is contrary to the structure and overall intention of clause 15.

b. Clause 29 stipulates that it is the responsibility of the actuary to select the most appropriate valuation model. In this case, Ms Harrex allowed herself to be dictated to be her client in relation to the model used to present the results. That is to say, she determined that she wanted to use the result from the PPCI plus large analysis, but given that her client instructed her “not to change method”, she reverse engineered a BF analysis.

c. Clause 30 requires the actuary to select assumption having regard to the valuation model and the analysis of the experience. In this case, Ms Harrex selected her BF assumptions in order to replicate a result achieved under a different method.

d. Clause 53 provides that the actuary’s report must state the purpose of the report and the terms of reference given. The finding is that the instruction given to Ms Harrex to release as much as possible, but not to change method, required disclosure under this clause. Additionally this clause required Ms Harrex to identify the extent to which her report did not comply with Professional Standard 300, and the reasons why.

e. Clause 54 provides that the report should deal with the valuation model and key assumptions, and any changes in the method and key assumptions since the last report. This report did not reveal the change in method, nor the different approach taken to the selection of assumptions. Those matters were required to be disclosed under the rule.

139 On the evidence Ms Harrex’s June 2007 Valuation does not comply with, at least, these provisions of the professional standard.

Parameters of the approach taken by the defendants

140 Mr Braham endeavoured to establish that Ms Harrex in fact struck a reasonable central estimate in June 2007. His approach followed two central routes:

a. The first seeking to sustain the proposition that her central estimate clearly reflected her genuinely held view of the correct central estimate [as is made plain in the reasons on the evidence this proposition is rejected].

141 However as the reasons establish, Ms Harrex herself accepted that she did not need to move to the new basis, or to release a larger amount in order to discharge her professional duties.

142 The reasons treat with the evidence given by the other actuaries and in particular with what was said to be a very difficult question in respect of which the experts were clearly hesitant. This being the question of whether or not [as in the opinion of Mr Heath] although there was nothing in the standard that sanctioned the approach taken by Ms Harrex, he was prepared to accept that she had contravened it. He was not prepared to so accept.

143 For his part Mr Fry said that it was a “very difficult” question, and that the report was “getting close to the edge of being unprofessional” (Trans. 203/25-35). He observed that the report “is less than forthcoming about how influential the PPCI plus large approach was to the selection of the final answer” (Trans. 203/36-38).

144 It is important to recall that in essence the experts called do not purport to arrive at their own valuations of the insurance liabilities of AUGIL as at 30 June 2007. Rather they were commenting on Ms Harrex's compliance with the Deed (assuming Calliden's construction of the Deed to be a correct one].

145 And certainly as the reasons given make clear Mr Fry and nor Mr Atkins nor the Ernst & Young peer review was able to undo the damage to her credit.

146 Ultimately it is left to the Court to determine on the evidence whether Ms Harrex's opinion that the central estimate she arrived at was a reasonable central estimate in the somewhat extraordinary unusual circumstances.

147 As the reasons make clear that question is determined in the negative.

Witnesses

148 It is convenient to make some comments in relation to the various witnesses who gave (or did not give) evidence in this case.

Ms Gillian Harrex

149 The demeanour Ms Harrex in the witness box was unimpressive. On a number of occasions there were lengthy pauses when a difficult question was put to her. She was clearly troubled by many of the questions put to her. In my view she was not particularly forthcoming throughout her period in the witness box and on a number of occasions only made admissions when no other alternative was open to her.

150 Calliden first raised its concern that the June 2007 was not prepared in accordance with the Deed on 15 August 2007 (CB4/1921). Ms Harrex was made aware of these concerns on 16 August 2007 (CB4/1926). She immediately wrote to Colin Brigstock to arrange to discuss the matter with him “to make sure we ‘have our ducks in a row’ so to speak” (CB4/1939).

151 Calliden then wrote directly to Ms Harrex on 10 September 2007 seeking to understand the extent to which her 2007 Valuations complied with the Deed (CB5/2079). Again, her first reaction was to write to Colin Brigstock, saying that she “needed to discuss” the letter (CB5/2081).

152 She drafted a reply, and showed it to Mr Bruce Watson, the senior actuary at Finity. Mr Watson had not had any involvement in the matter, but nevertheless suggested that Ms Harrex change the letter to say that at the time she had told Mr Atkins that she expected a release of approximately $1 million she had “not received any data since 31 December” (CB5/2160). That statement was false, Ms Harrex knew it to be false, but she included it in any event (Trans. 182/8-18).

153 The final version of her response to Calliden, dated 14 September 2007 (CB5/2221), also contained the following false account (CB5/2222):

test

investigated

comfort

154 That statement presented a false account of the way in which Ms Harrex prepared the 2007 Valuations. It is false in at least the following respects:

a. It was not an ICD/BF method that was used. At the very least, it was not the same ICD/BF method that had been used in previous valuations. Rather, it was a PPCI plus large approach that was used to derive an ultimate result, with an ICD/BF method then being manipulated to replicate that ultimate net result as nearly as possible.

155 Ms Harrex then persisted in her false account during these proceedings. She swore two affidavits, and in neither of them did she acknowledge the process she had actually undertaken, nor the fact that that process did not conform to the requirements of the Deed. In her affidavit of 17 July 2009, for example, she again stated that, for the June 2007 Valuation, she used the PPCI plus large approach only to “assess the reasonableness” of her BF assumptions (at [54(b)]). She claimed that she selected her BF assumptions by looking at the loss ratio implied by the ICD method, and “checked it against the PPCI and numbers times size of claims analysis” (at [57]). She claimed that her approach to the estimation of likely reinsurance recoveries was the same as in her previous reports (at [60]). All of these statements she has now admitted to be false.

156 I accept that Ms Harrex was only driven (reluctantly) to acknowledge the truth in a searching cross-examination.

157 Ultimately, Ms Harrex was forced to admit that much of her story was false. To the extent that she would not admit an ultimate proposition that she had acted improperly, her evidence is rejected.

Mr Colin Brigstock

158 Mr Brigstock was the internal peer reviewer of Ms Harrex’s June 2007 Valuation (Trans. 75/28-30).

159 Despite his heavy involvement in the preparation of the 2007 Valuations, Mr Brigstock has not given evidence in these proceedings.

160 It is clear from the evidence that Mr Brigstock:

a. knew in January 2007 that Ms Harrex had performed an alternative analysis on the Commercial Liability portfolio which suggested that much larger releases could be made than were being suggested by the ICD/BF analysis. He knew that she had, however, adopted a “cautious” approach, and had not allowed that alternative analysis to affect her 2006 Valuations (CB3/907).

b. received by email a draft copy of the powerpoint presentation that Ms Harrex intended to present to AU on 28 June 2007 (CB3/1335). In that email Ms Harrex told Mr Brigstock that she thought that the size of the release suggested by the alternative PPCI plus large approach ($4 million) “could be very tricky” for AU.

c. knew of AU’s instruction to Ms Harrex that she “release as much as [she is] comfortable with but given the circumstances it might be good to try and achieve that without changing method” (CB3/1373).

d. knew, having received Ms Harrex’s memorandum of 5 July 2007 (CB3/1412), that Ms Harrex was attempting to “move” her BF basis “towards” the result of her alternative analysis. That memorandum also stated, and so Mr Brigstock must have known, that the BF basis could only be made to produce a result approximating the PPCI plus large approach by producing a gross liability result that was too low, and using assumed reinsurance recoveries that were too high. He knew that the ultimate result was only achieved by selecting assumptions that were starting to “test the grounds of credibility”.

e. received a draft of the June 2007 Valuation for his review and comment (CB4/1664). As discussed above, many of his comments had the effect of disguising the role of the alternative PPCI plus large analysis, making it seem as if the large release was simply due to favourable experience being reflected in the BF model, and concealing the fact that the previous cautious and conservative approach had been abandoned.

f. knew of the contents of Schedules 5 and 6 of the Deed, having discussed them with Ms Harrex (Trans. 76/19-34).

g. was involved in preparing Ms Harrex’s “story” after Calliden had raised its concern. Ms Harrex spoke to Mr Brigstock to make sure that they had their “ducks in a row” (CB4/1939), and when she received Calliden’s letter of 10 September 2007 (CB5/1950) she wrote to Mr Brigstock saying “we need to discuss these!” (CB5/2081).

161 It can thus be seen that Mr Brigstock was intimately involved in the preparation of the 2007 Valuations, knew of the limitations under which they were required to be prepared, and sought actively to portray those valuations as complying with the Deed when he must have known that they did not.

162 It is appropriate to infer that Mr Brigstock’s evidence would not assist AU’s case (Jones v Dunkel).

Mr Martin Fry

163 Mr Fry was an impressive expert witness.

164 He readily made concessions where appropriate, and always gave the impression that he was open to new assumptions or points of view. He demonstrated significant independence.

165 Mr Fry also demonstrated a much greater familiarity with relevant underlying documents. For example, in his cross-examination he was able to refer to Ms Harrex’s memorandum of 5 July 2007 as relevant to his opinion on a particular topic (see Trans. 221/43-222/10).

166 This familiarity with the factual complexities of the case means that he was able to provide ready, informed, opinions in relation to the case.

167 At his opinions are accepted as based on a careful consideration of all relevant material.

Mr David Heath

168 Mr Heath candidly acknowledged that various of the opinions he had expressed in his reports were altered, or needed to be reconsidered, in light of Ms Harrex’s evidence.

169 Mr Heath did not display the familiarity of Mr Fry with the detailed documentary evidence in this case. As Calliden has contended, that's meant that he was unable to offer opinions when new matters were put to him as easily as Mr Fry, and it appeared as a result that he was less willing to make concessions.

170 It was apparent that Mr Heath was reluctant to depart too readily from his original assessment of Ms Harrex’s work, but ultimately did so in significant respects (i.e. there was a change in approach to selection of assumptions and he was no longer able to say he had formed a view of clear justification). To the extent that he adhered to his original position (which in the end is limited to whether there was a change in Method and the – largely construction question – of what “broad consistency requires”), Mr Fry is accepted as having been to have been the more impressive witness on the strictly expert aspect of the questions.

The so-called reserved issue

171 During the hearing Calliden pursued a contention that three officers of the defendant were involved in the breach of contract:

i. The first being Mr Greg Bellairs, Finance Manager of AU;

ii. The second being Mr Jim Pappas, Manager Technical Services AU;

172 The plaintiff's contention announced in its opening was that it would seek to prove that there was a reason why they did not give Ms Harrex the relevant instructions. The alleged reason as to why they did not give her the instructions was these persons feared that:

i. if they did so she would produce a report which did not sanction a $4 million release,

ii. they further feared that they would not be able to increase the purchase price by $3 million,

173 The proposition was put in the following terms:

The evidence given by Mr Bellairs

174 Mr Bellairs was responsible for providing to Ms Harrex Schedules 5 and 6 of the Deed (which contained the instructions according to which Ms Harrex was to prepare her valuations). Mr Bellairs did not do so until such time as Ms Harrex had all but completed the June 2007 Valuation:

i. Mr Bellairs received a copy of Schedules 5 and 6 of the Deed immediately before the Deed was executed on 6 July 2007 (Trans. 388/41-43).

ii. For the purposes of performing his job in relation to the completion of the transaction, Mr Bellairs needed to understand and read the Schedules (Trans. 389/15-17; 389/42-46; 391/10-12).

iii. Mr Bellairs accepted that it was “critically important” that Schedules 5 and 6 be provided to Ms Harrex very shortly after the execution of the Deed (Trans. 392/24-27).

iv. Soon after he received the Schedules, Mr Bellairs forwarded them on to Mr Lockett (Trans. 388/49-389/1).

v. On 18 July 2007 Mr Bellairs sent a copy of the Schedules to Messrs McNeill, McCoy and Grummitt (an AU employee, external consultant to AU, and Ernst & Young accountant respectively) (Trans. 395/12-20).

vii. On 23 July 2007 Mr Bellairs sent a copy of the Schedules to Mr Dring, the partner at Ernst & Young who was to perform the audit of the completion statement of NTA under clause 9 of the Deed (Trans. 395/29-32).

viii. Mr Bellairs only provided the Schedules to Ms Harrex, however, on 27 July 2007 (CB1755.205; Trans. 392/33-35).

175 The evidence of Mr Bellairs confirms that AU failed to give to Ms Harrex the instructions required by the Deed.

176 I accept that the evidence given by Mr Bellairs went the following distance:

i. Mr Bellairs understood that the purchase price for the transaction had been struck by reference to AUGIL’s NTA (Trans. 372/1-3).

ii. Mr Bellairs understood by 6 July 2007 that, following completion, there was to be a process of reconciliation whereby the purchase price would move up or down depending on whether AUGIL’s NTA as at completion was higher or lower than the estimate by reference to which the initial purchase price had been struck (Trans. 373/22-25).

iii. Mr Bellairs was present on a telephone call between Mr Atkins and Ms Harrex on 1 June 2007 (Trans. 379/27-36). During that call Ms Harrex told Mr Atkins that the commercial liability portfolio was “running much better than expected” and that “indications for further releases ($1 million) at June 07 if experience continues” were expected (CB3/1241).

iv. It was likely that Mr Bellairs was aware that, as at 1 June 2007, Ms Harrex was considering a further release of about $1 million (Trans. 381/31-33).

a. understood from that presentation that if Ms Harrex continued to use the same method and did not change basis a release of about $1.4 million was expected (Trans. 384/8-33);

b. understood that although Ms Harrex had chosen not to release an additional $1.5 million in her December 2006 Valuation that she could have released, she was now considering releasing that amount (Trans. 384/35-39);

c. did not recall, but did not deny, that he learned from the powerpoint presentation that there was a new valuation method that was being proposed that would release in excess of $4 million (Trans. 385/5-44);

vi. At the 28 June 2007 meeting, Ms Harrex was told to release “as much as she was comfortable with”, but that, “given the circumstances” it might be better to “try and achieve that without changing method” (CB3/1373; Trans. 115/26-30).

vii. Mr Bellairs recognised that a release of $4 million instead of $1 million was a material change in terms of the size of this transaction (Trans. 386/27-30).

177 So much may be accepted as generally having either been established in the course of Mr Bellairs examination or as constituting appropriate inferences flowing from that evidence.

178 However I do not accept that Calliden has proved its further contentions seeking to suggest some impropriety in relation to such interests as Mr Bellairs had in terms of bonuses should the transaction proceed.

179 There is a plethora of authority in support of the proposition that the Court is bound to see that a case pursuing allegations of this type are clearly proved: cf Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170. The gravity of such allegations has been said to be such that whereas section 140(1) of the Evidence Act 1995 (NSW) stipulates a single standard of proof for all civil cases, namely the balance of probabilities, Section 140(2) preserves the doctrine in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362; Pedler v Richardson (unreported, Supreme Court of NSW, 16 October 1997, Young J) at 10-11. See also McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315, 319.

180 Allegations such as those here sought to be made fell far short of what is required bearing in mind the gravity of the matters alleged.

The evidence of Mr Pappas

181 Insofar as Mr Pappas was concerned, his evidence supported that of Ms Harrex (CB1373; Trans. 115/26-30) that she was given an instruction at the 28 June 2007 meeting to release as much as she was comfortable with, and to do so without changing method (Trans. 463/5-10).

182 During the course of his evidence it became clear that Mr Pappas was not aware that any movement in AUGIL’s NTA would affect the purchase price, and did not have anything more than a very general understanding of the contents of Schedules 5 and 6 (Trans. 463/12-466/49).

183 No allegations were pursued against Mr Pappas in the circumstances.

Mr Walliser

184 In the same way Calliden withdrew its allegations against Mr Walliser.

Returning to the broader picture

185 Overall, AU has not given satisfactory, explanation in these proceedings for why it gave Ms Harrex an instruction to release as much as she was comfortable with, and not to change method, and why it did not provide Ms Harrex with copies of the Schedules (or otherwise instruct her in accordance with the Deed). That represents a significant lacuna in AU’s case.

Relief

186 Effectively Calliden has established an entitlement to declaratory relief in respect of which it has nominated 6 declarations in paragraph 47 of its further amended summons. The last of those declarations is inappropriate as in my view the fact that Ms Harrex's valuations did not comply with the provisions of the Deed, leaves the Court with no competing valuation which could substitute for the valuation required by the Deed. It is important to keep in mind that the Court has relevantly been engaged in an exercise of construction and enforcement of a contract, and is concerned neither with determining actuarial valuations itself, nor with exercising a judicial discretion as to how the entitlements of the parties ought to be established.

187 In the circumstances the Court will grant an opportunity to Calliden to indicate which of the declaratory claims sought in paragraph 47 [1 – 5] in its claims to relief are pressed.

188 I accept that the appropriate further order is to remit the matter to Ernst & Young for further consideration. The parties will be given an opportunity to address as to whether or not that further consideration should be by Ms Harrex, and if so as to the reasons for that course, and if not, as to what the alternatives may be.

189 The parties will be given an opportunity to address on costs and to attempt to consult with one another in relation to final relief.

Rulings on objections

190 During the hearing the parties sensibly prepared schedules identifying which objections were pressed and which objections were not pressed.

191 Shortly after the conclusion of the hearing, the defendant’s objections to the tender bundle were forwarded to the Court as an updated document reflecting the defendant’s objections.

192 It is unnecessary to refer to the materials which had been removed from the court book by consent, in which respect of course, no ruling was needed.

193 Treating with page numbers being the third column in the defendants objections note:

As to volume 3:

i. The objection to pages 1259-1260 was not pressed.

ii. The objection to pages 1393-1399 was the subject of an agreement that the document be admitted into evidence subject to a limiting order: the document is an e-mail chain and is only relevant to the extent that it shows a communication to Tony Connon (the final e-mail in the chain) and the internal Calliden communications are to be disregarded.

As to volume 4:

i. The document 1653 -1920 is admitted into evidence subject to the 136 limiting order noted at transcript 249;

ii. The document page at 1660 is allowed;

iii. Each of the documents objected to in relation to pages 1714, 1865-1871, 1872-1874, 1875-1882, 1885-1891 are allowed;

iv. Each of the documents at page 1907 of volume 4 of the Court book, and running up to and including page 1920 are admitted subject to a limiting order under section 136 of the Evidence Act, limiting the evidence to exclude the proposition that the documents evidence;

*******

Actions

Download as PDF Download as Word Document

Citations

Calliden Group Limited v Australian Unity Limited [2010] NSWSC 263

Most Recent Citation

Specialist Diagnostic Services Pty Ltd v Healthscope Ltd [2010] VSC 443

Cases Citing This Decision

1

Specialist Diagnostic Services Pty Ltd v Healthscope Ltd [2010] VSC 443

Cases Cited

14

Statutory Material Cited

1

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36

Cohen & Co v Ockerby & Co Ltd [1917] HCA 58

Westfield Management Limited v Perpetual Trustee Company Limited [2007] HCATrans 367

CITATION:	Calliden Group Limited v Australian Unity Limited [2010] NSWSC 263
HEARING DATE(S):	22/03/2001 - 26/03/2001, 29/03/2001, 31/03/2001
JUDGMENT DATE :	13 April 2010
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Einstein J
DECISION:	Plaintiffs have established entitlement to declaratory relief. Parties to bring in short minutes of order which will inter alia return the matter to Ernst & Young for further consideration .
CATCHWORDS:	Contracts - Proper construction - Deed whereunder plaintive purchases capital in insurance companies - Dispute concerning amount of adjustment to be made to the purchase price following completion and way in which amount of adjustment was to be determined - Consideration of sundry different actuarial methods - Consideration of methods of estimating reinsurance recoveries
LEGISLATION CITED:	Evidence Act 1995 (NSW)
CATEGORY:	Principal judgment
CASES CITED:	Australian Broadcasting Commission v. Australasian Performing Right Association Ltd (1973) 129 CLR 99 Briginshaw v Briginshaw (1938) 60 CLR 336 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 Downer Engineering Power Pty Ltd v P & H Minepro Australasia Pty Ltd [2007] NSWCA 318 Jones v Dunkel (1959) 101 CLR 298 Legal & General Life of Australia Limited v A Hudson Pty Limited (1985) 1 NSWLR 314 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 Pedler v Richardson (unreported, Supreme Court of NSW, 16 October 1997, Young J) Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 Watson v Foxman (1995) 49 NSWLR 315
PARTIES:	Calliden Group Limited (Plaintiff) Australian Unity Limited (Defendant)
FILE NUMBER(S):	SC 2008/290365
COUNSEL:	Mr J T Gleeson SC, Mr N J Owens (Plaintiff) Mr P Braham (Defendant)
SOLICITORS:	Yeldham, Price, O'Brien & Lusk (Plaintiff) Atanoskovic Hartnell (Defendant)