Pegela Pty Ltd v National Mutual Life Association of Australasia Ltd

deemedttttttttt

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 2026 of 2002

ACN 074 971 109 (AS TRUSTEE FOR THE ARGOT UNIT TRUST)	Plaintiffs
PEGELA PTY LTD
THOMAS OATES and
PAUL OATES
v
NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA LIMITED	Defendant

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JUDGE:	Redlich J
WHERE HELD:	Melbourne
DATES OF HEARING:	31 October, 6-7, 10, 17-21, 24-28 November, 1-5, 8-12, 15-17, 19 December 2003, 29 March – 1 April 2004, 8 May, 5, 22, 29 September, 15 December 2006
DATE OF JUDGMENT:	13 April 2006
DATE OF ORDERS:	15 December 2006
CASE MAY BE CITED AS:	Pegela Pty Ltd & Ors v National Mutual Life Association of Australasia Ltd
MEDIUM NEUTRAL CITATION:	[2006] VSC 507

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CONTRACT – Investment linked life insurance policy - Construction of terms – Whether special terms negotiated on plaintiffs’ behalf created right to make arbitrage profits at the defendant’s expense through switching of investments between portfolios - Relevance of opinion evidence – Relevance of parties’ reasonable expectations – Implied terms - Rectification

AGENCY – Whether parties who negotiated terms were defendant’s agents – Actual and ostensible authority – Deemed agency under Insurance Agents and Brokers Act 1984 (Cth) s.12

ESTOPPEL – Whether defendant estopped from denying that the plaintiffs could utilise the terms to engage in arbitrage – Whether defendant’s conduct induced assumption that it’s pricing methodology would remain consistent – Duty to inform plaintiffs of change in pricing policy – Estopped raised – Extent of equitable relief - Plaintiffs entitled to damages in lieu of reasonable notice as the minimum equity raised by the defendant’s conduct

TRADE PRACTICES – Misleading and deceptive conduct – Silence – Whether defendant aware of relevant assumptions made by plaintiffs - Defendant’s failure to inform plaintiffs of change in pricing policy constituted misleading and deceptive conduct - Trade Practices Act 1974 (Cth) s.52

INSURANCE LAW – Statutory duty to act in good faith - Insurance Contracts Act 1984 (Cth) s.13 – Whether plaintiffs had a duty to disclose their intention to engage in arbitrage - Whether defendant aware of this intention - Market linked investment portfolios - Defendant’s right to dilute the unit price of plaintiffs’ investments - Defendant’s right to segregate plaintiffs’ investments from those of other policyholders – Whether contrary to provisions of the Life Insurance Act1995 (Cth) or the Insurance Contracts Act 1984 (Cth)

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APPEARANCES:	Counsel	Solicitors
For the 1^st and 2^nd Plaintiffs	Mr P R Hayes QC with Mr I B Stewart	Eakin McCaffrey Cox
For the 3^rd and 4^th Plaintiffs	Mr P R Hayes QC with Mr I B Stewart	Madgwicks Lawyers
For the Defendant	Mr R A Brett QC with	Turks Legal
Mr J J Gleeson and Mr D W Bennett

TABLE OF CONTENTS

THE PROSPERITY BOND............................................................................................................... 2

Standard terms.............................................................................................................................. 2

Special terms.................................................................................................................................. 3

Alleged breach of special terms.................................................................................................. 5

FACTUAL SETTING....................................................................................................................... 10

THREE DAY OPTION.................................................................................................................... 68

Competing construction arguments......................................................................................... 68

Principles of construction.......................................................................................................... 70

Opinion evidence as to the ultimate issue............................................................................... 83

The nature of an investment linked contract within a policy of insurance........................ 84

The insured’s reasonable expectations.................................................................................... 92

Actuarial Standard 3.03.............................................................................................................. 94

The defendant’s understanding of Dr Keller’s purpose in negotiating the terms.......... 100

The proper construction of paragraph two of cl 1.8 of the policy..................................... 116

“Three working days’ notice”................................................................................................. 118

The insertion of the words “prior to completion”................................................................ 123

The notice to switch was to take effect on the day of the notice........................................ 126

Process of switching – time to complete................................................................................ 131

Short selling............................................................................................................................... 136

Buy and sell price...................................................................................................................... 140

One notice – in writing............................................................................................................. 142

Implied terms as to the three day option alleged by plaintiffs.......................................... 144

Implied terms as to the three day option alleged by defendant....................................... 149

Express contractual obligations regarding three day option.............................................. 153

Express terms that were partly written................................................................................. 153

Express terms that were partly oral....................................................................................... 159

The initial meeting between Tyne, Hawkins and Taylor (the first meeting)................... 160

Meeting between Keller, Taylor, Tyne and Hawkins (the second meeting).................... 162

Evidence of switching and cancelling.................................................................................... 169

Rectification of cl 1.8................................................................................................................. 170

Principles.................................................................................................................................... 171

Plaintiffs commenced proceeding on the contract in its unrectified form....................... 176

Rectification affecting third parties........................................................................................ 177

Antecedent agreement between Keller and defendant....................................................... 178

Intentions of Keller and Taylor – negotiations August to November 1999...................... 179

The defendant’s intention........................................................................................................ 183

The plaintiffs’ intention............................................................................................................ 185

AGENCY.......................................................................................................................................... 187

Actual Authority............................................................................................................. 190

Principles.................................................................................................................................... 191

Implied actual authority.......................................................................................................... 192

Ostensible agency............................................................................................................ 197

Keller marketing the product.................................................................................................. 197

Principles.................................................................................................................................... 198

The plaintiffs’ reliance upon any representation giving rise to ostensible authority..... 203

The agency was not acted/relied upon................................................................................. 209

Taylor’s position........................................................................................................................ 210

(iii) Statutory ‘deemed’ Agency.............................................................................................. 210

Deeming provision – whether repeal of substantive right. 210

......................................................................................................................................................

Conclusion.................................................................................................................................. 214

Ratification of terms if Keller or Coneview lacked authority............................................. 215

Estoppel, variation, election, misleading and deceptive conduct and negligent misstatement...................................................................................................................................................... 221

Variation – election - waiver.................................................................................................... 222

Estoppel...................................................................................................................................... 225

Principles.................................................................................................................................... 226

Estoppel – notice in writing..................................................................................................... 248

Conclusion as to Three Day Option....................................................................................... 250

HISTORICAL PRICING.............................................................................................................. 251

The evidence that the defendant had agreed to use historical pricing............................. 254

Conclusions................................................................................................................................ 268

Implied terms as to historical pricing.................................................................................... 269

Publication of daily price................................................................................................... 271
Implied Term identical to express oral term................................................................... 273

Estoppel ,Variation, Waiver or Abandonment, Reasonable Expectations, Misleading and Deceptive Conduct, or Negligent Misstatement.................................................................. 276

Defendant’s knowledge of arbitraging – effect of special terms and historical pricing. 284

Reliance by plaintiffs................................................................................................................ 289

Whether reliance was unreasonable....................................................................................... 292

Unconscionable conduct.......................................................................................................... 296

MISLEADING AND DECEPTIVE CONDUCT-NEGLIGENT MISSTATEMENT......... 298

Failure to speak......................................................................................................................... 300

Defendant’s knowledge of assumptions made by plaintiffs as to historical pricing...... 305

Conclusion.................................................................................................................................. 308

DILUTION...................................................................................................................................... 311

Implied terms as to dilution.................................................................................................... 313

Conclusion.................................................................................................................................. 313

Insurance Contracts Act Section 14 – Reliance on unusual term – Section 13 – duty to act in utmost good faith................................................................................................................................... 313

SEGREGATION............................................................................................................................. 313

Estoppels-to prevent dilution and segregation.................................................................... 313

Conclusion.................................................................................................................................. 313

ADDITIONAL INVESTMENTS................................................................................................ 313

DUTY TO ACT WITH UTMOST GOOD FAITH................................................................... 313

Lack of good faith by the plaintiffs......................................................................................... 313

Distinction between insurable risk and investment component................................. 313

Duty of disclosure..................................................................................................................... 313

Plaintiffs’ knowledge of the defendant’s lack of awareness............................................... 313

The defendant’s knowledge of the plaintiffs’ intentions in relation to the special terms 313

Lack of good faith by the defendant...................................................................................... 313

DAMAGES...................................................................................................................................... 313

Damages in lieu of specific performance............................................................................... 313

Breach of contract – acceptance of repudiation or affirmation of contract....................... 313

Election to affirm or terminate................................................................................................ 313

Acceptance of repudiation in pleadings................................................................................ 313

Whether genuine dispute or repudiation.............................................................................. 313

MINIMUM EQUITY..................................................................................................................... 313

Should equity provide relief?.................................................................................................. 313

Expectation relief –whether disproportionate-..................................................................... 313

Reasonable notice...................................................................................................................... 313

Conclusion.................................................................................................................................. 313

HIS HONOUR:

Between early 1998 and September 2000 the defendant, a corporation incorporated pursuant to the laws of the State of Victoria and wholly owned by AXA Asia Pacific Holdings Limited (‘AXA’), issued policies of life insurance known as the “Prosperity Bond”.

In about July 1998 a Dr Peter Keller and the defendant negotiated special terms (‘special terms’) to be incorporated into the Prosperity Bond policies issued to investors whose investment was to be managed by Keller. Keller was a New South Wales dentist who was also a principal of an investment company, Coneview Pty Ltd (‘Coneview’).

The plaintiffs allege that they were introduced to the defendant by Coneview and were informed by Keller, as agent of the defendant (or alternatively by Keller’s agent, one David Taylor), of the special terms of the Prosperity Bond which had been agreed between Keller and the defendant.

Each of the plaintiffs invested in a Prosperity Bond policy or policies. The first plaintiff entered into a policy on 30 June 2000 paying a premium of approximately $5,000,000, and paying a further premium of $500,000 in respect of the policy on 29 December 2000. The second plaintiff entered into a policy on 11 September 2000 paying a premium of $5,000,000. The third and fourth plaintiffs entered into three such policies between 18 April 2000 and 1 August 2000 paying premiums which in aggregate, after allowing for withdrawals, amount to approximately $600,000.

The plaintiffs allege the special terms gave them the right to make arbitrage profits for the life of the policy and that the defendant wrongfully denies that the special terms confer such benefits. Each of their contracts has been repudiated. The plaintiffs seek damages, which, on one calculation in the plaintiffs’ particulars, may exceed three hundred million dollars.

THE PROSPERITY BOND
Standard terms

Policies issued by the defendant in respect of prosperity bond investments were “life policies” within the meaning of s.9(1) of the Life Insurance Act 1995 (Cth).

The policy provided that all Prosperity Bond investment portfolios available at the commencing date were Prosperity Bond Market-Linked portfolios. The assets of those portfolios were held in the defendant’s No. 5 Statutory Fund (section 3.1). The Market-Linked portfolios were divided into parts of equal value called Units which were used to keep track of the policyholders’ entitlements under the policy. There were a number of portfolios including a “Cash” portfolio and a “Secure” portfolio. The latter contained Australian shares, a small percentage of international shares and fixed interest securities, the unit price being affected by the daily movement in the All Ordinaries Index. The policy expressly provided that changes in market value of the investments in the portfolios were to be reflected in the unit prices which rose or fell as a result. A policyholder was permitted to switch investment portfolios by transferring amounts between any of the Prosperity Bond investment portfolios at any time (section 3.3a). Adjustment to the number of units would be made using unit prices as at the date to which the request for transfer applied (section 3.3b), the unit price being a price which would be declared on a daily basis but which might be declared more or less frequently (section 3.2e).

The written terms of each of the plaintiffs’ policies provided that the policyholder had flexibility to make adjustments to the policy to pay an additional premium, subject to the defendant’s express agreement; and to switch investment portfolios or to withdraw cash by means of a full or partial surrender (section 1.1). Section 1.8 of the policy states:

“1.8 Large withdrawals
We reserve the right to delay up to 30 days any cash withdrawal or any transfer between the investment portfolios which would otherwise require the cashing within any 30 day period of units valued at more than $100,000. We will then use the unit price(s) applicable at the end of the period of delay.
AXA Australia will waive its right to delay withdrawals and switches for 30 days, providing the investor gives three working days’ notice of its intention to switch or withdraw. The unit price will be the price on the day when the notice is given in writing. AXA Australia also agrees that should the investor change their mind prior to the completion of the portfolio switch or withdrawal transaction and not proceed with the switch or withdrawal, no penalty will be involved.”

Special Terms
The plaintiffs’ case

All of the plaintiffs allege that they were promised and understood that they had the right to give notice of intention to complete an unlimited number of switches between the Cash and Secure portfolios in three working days’ time using the unit price on the day of the notice and the right to cancel such notices inside that period (“three day option”).[1] The plaintiffs also allege that they were promised and understood the defendant would be obliged to and would in the future, use historical pricing for Prosperity Bond unit prices (‘historical pricing’). The plaintiffs allege that either or both the three day option and the obligation of the defendant to use historical pricing gave the plaintiffs the ability to engage in arbitrage. They contend that by virtue of the three day option or historical pricing, the latter giving them the benefit of hindsight as to daily movements in market prices, they could make profits by switching between the Cash and Secure portfolios to take advantage of capital gains or to avoid losses. The plaintiffs say that the special terms or “intelligent strategy” allowed arbitrage profits to be made which by definition is risk free and a function of price variation and duration.
[1]Introduction to plaintiffs’ written submissions, para 1.

The plaintiffs allege that the special terms of the policies were partly in writing and partly oral. Insofar as they were in writing, they contend they are to be found partly in clause 1.8 of each plaintiff’s policy, in a letter forwarded to Keller by the defendant on 21 June 1999 (‘the June 1999 letter’), in a document entitled “Investors in Prosperity Bonds introduced by Coneview Pty Limited” which was annexed to each policy entered into by the plaintiffs (‘the no advice letter’) and in a document entitled “Investors in Prosperity Bonds introduced by Coneview Pty Limited - Special Agreements” annexed to each policy entered into by the plaintiffs (‘the undertakings letter’). Insofar as the terms were oral, they are said to have been communicated to the plaintiffs by Keller or Taylor as agents of the defendant. The plaintiffs also seek rectification of clause 1.8 of the policy.

The plaintiffs further allege that the defendant is estopped from pursuing its interpretation of the special terms and from denying the express and implied terms pleaded by the plaintiffs. The plaintiffs also plead that there were misrepresentations by the defendant contrary to s.52 of the Trade Practices Act 1974 (Cth) (‘TPA’) and negligent misstatement by the defendant relating to the three day option.

The defendant’s case

The defendant denies that the June 1999 letter, the undertakings letter or the no advice letter contained terms forming any part of the policy issued to the plaintiffs and submit that the terms of the policy are to be found entirely within each policy issued to the plaintiffs. The defendant disputes the existence of any oral terms or that the said Keller or Taylor were agents of the defendant.

The defendant submits that clause 1.8 must be read as part of a life policy within the meaning of the Life Insurance Act1995 (Cth) (‘LIA’) and says it is an “investment linked contract” within the meaning of the LIA. The defendant challenges the plaintiffs’ alleged entitlement to make substantial risk-free arbitrage profits for the remainder of their life pursuant to the special term because they were conferred neither a contractual right to take advantage of hindsight or foreknowledge in switching between portfolios (historical pricing claim), or a right to have unit prices move in the same manner as they would have moved if no switching had occurred, (three day option claim). The defendant pleaded that on the proper interpretation of the special term, switches may not be made for the purpose of obtaining returns to the investor which do not arise from changes in the value of underlying assets during the period whilst the investor holds the portfolio. Alternatively it submits that this is an implied term.[2] It denies that it made any representation that can support a claim of negligent misstatement or a breach of s.52 of the TPA.
[2]FAD para 10F, 10G – the plaintiffs say such implied terms are inconsistent with the right to arbitrage and their reasonable expectations.

Alleged breach of special terms

The plaintiffs allege that from 16 October 2000 the defendant completed switches between the Cash and Secure portfolios using the unit price on the day after the date on which the notice of intention to switch had been given rather than the price declared by the defendant at the time the notice of intention to switch was given. They allege that the defendant (since 30 October 2000) had completed switches and refused to process cancellations of instructions to switch given to it by the plaintiffs within three working days of the giving of notice of intention to switch. They claim that since 17 October 2000 the defendant had failed to make available current unit prices for the Cash and Secure portfolios, and had changed from an historic to a forward unit pricing system. They further allege that from that date the defendant had reduced the number of units on issue in the Cash and Secure portfolios without the consent of the plaintiffs so as to prevent the plaintiffs from utilising the special terms to make arbitrage profits. It is said the defendant failed to contribute to the Statutory Fund No. 5 or to the Cash and Secure portfolios so as to avoid a dilution in unit prices of units in those portfolios consequent upon a switch by the plaintiffs in accordance with their special terms. The plaintiffs also allege that the defendant had refused to accept additional premiums on existing policies after 30 September 2000.

The plaintiffs allege that by reason of the defendant’s breaches of the special terms of the prosperity bonds they have suffered loss or damage. Alternatively they allege that the defendant has evinced an intention not to be bound by the special terms of the prosperity bonds and has repudiated each of the plaintiff’s contracts with the defendant. The plaintiffs allege that they have accepted the defendant’s repudiation and claim damages as a result thereof.

The defendant says that from 16 October 2000 it followed the practice of calculating and determining the unit prices for the Cash and Secure portfolios applicable for each business day at the end of that business day. It alleges that prior to 1 November 2000 Keller never purported to give a notice of intention to switch between portfolios pursuant to clause 1.8 of the policy. It alleges that no request to switch required it to carry out the switch at some time in the future. As to the requests to switch made in October 2000 the defendant says that it processed the transfer of funds from one portfolio to the other as soon as practicable after the request was given. As to the requests made to cancel a switch during October 2000 it admits that it refused to cancel such switch as the switch had already been completed prior to the request to cancel being made. It had not elected to exercise its right to delay completion of the transfer for up to three working days. The defendant admitted that it had segregated the assets underlying the policies belonging to the plaintiffs from assets underlying the policies belonging to other prosperity bond holders and that from 16 February 2001 the only units on issue in the prosperity bond Cash portfolio were units allocated to Coneview investors, including the plaintiffs. Between 14 February 2001 and 24 October 2001 there were no units on issue in the prosperity bond Secure portfolio other than units allocated to Keller in respect of his policy and after 25 October those units were removed. The defendant says it was entitled to take those actions and was not required to seek the consent of the plaintiffs. It denies that it was under any obligation to contribute to the Statutory Fund No. 5 or to the Cash and Secure portfolios so as to avoid a dilution in unit prices of units in those portfolios. It denied that it was under any obligation to accept additional premiums proposed by the plaintiffs on their existing policies after 30 September 2000 or at all. It denied that it was in breach of the special terms or that it had repudiated each of the plaintiffs contracts. Further, the defendant alleges that the plaintiffs’ policies remained on foot and that the plaintiffs were not entitled to damages in respect of anticipated future losses.

The plaintiffs and the defendant by counterclaim each seek declarations as to the special terms of the prosperity bonds and their meaning. The plaintiffs, in the alternative, seek rectification of clause 1.8 of each of their policies by the removal of the words “prior to completion of the portfolio switch or withdrawal transaction”.

Trial history

At the commencement of the trial on 31 October 2003, the plaintiffs were granted leave to file a further amended Statement of Claim and consequential orders were made for the filing of a further amended defence and an amended reply. Proceedings were adjourned until 6 November 2003 to enable the parties to prepare the amendments to what were already very extensive and complex pleadings. Upon resumption, counsel for the plaintiffs requested and was granted further time in which to file an amended reply. The plaintiffs’ opening addresses commenced and continued until 10 November 2003. The plaintiffs foreshadowed that they would seek leave to make further changes to the Statement of Claim and orders were made for the filing of further amended pleadings. The hearing was further adjourned until 17 November 2003 to enable the parties to complete the further amendments to pleadings and to file objections to the contents of witness statements. Because of the number and apparent complexity of the issues, counsel for the defendant was permitted an opening address upon resumption of the hearing on 17 November 2003. The plaintiffs commenced to call evidence on 19 November 2003. It was by then apparent that the hearing would take far longer than the time normally allowed for a case in the Commercial List and that at the earliest, the hearing of the evidence would not be completed until the end of the legal year. Because of court commitments I was not available to continue the hearing in first term of the following year. Armed with this knowledge the parties concluded the calling of evidence on 17 December.

During the hearing of the evidence and closing submissions I utilised a “real time” transcript. This enabled me to extensively highlight and annotate the evidence as it was given and the arguments as they were advanced. Annotation of the transcript enabled me to link the evidence and the arguments to the various legal and factual issues in the trial. In particular, I was able to make contemporaneous annotations to the evidence which bore upon the credibility of witnesses in relation to questions of fact which were in dispute. Although I retained a clear impression of the small number of witnesses whose credit was really in issue, this process enabled me to record my assessment of their evidence as it was given.

On 19 December, the last sitting day of the calendar year, the plaintiff was given leave to file a third amended statement of claim and the defendant, leave to file a third further amended defence and counter-claim. The plaintiffs had also made substantial amendments to their already very extensive reply.[3] A timetable was fixed for the filing of written submissions. Although limits were placed on the length of the initial written submissions and replies, much to my subsequent regret, I made no order limiting the size or length of footnotes and did not preclude the filing of supplementary submissions or schedules. The extensive footnotes, supplementary submissions and the schedules of various errors alleged by the parties to be contained in the written or oral submissions of the other party, and the replies to those allegations, very substantially added to the material that I was required to consider for the purpose of preparing this judgment. The writing of the judgment was further complicated by the request of the parties, to which I had acceded, that they file their written submissions at the same time. This meant each parties’ written submissions were not responsive to the submissions of the other party. Closing addresses commenced on 28 March 2004. After permitting the parties five days of oral argument on which sitting hours were extended, the oral submissions were still not completed. On 2 April 2004 the hearing was adjourned because of other court commitments. During the following week both parties notified the Court that in preference to advancing further oral arguments, the parties would provide the Court with further written submissions and various schedules. These were filed in May 2004. Following numerous requests made during and after the trial, the parties, some months after the closing argument, finally provided an agreed chronology of facts that were not in dispute. Further written submissions were filed with the Court in June 2004. The trial had thus extended over a period of some eight months.
[3]The defence in its final form was 64 pages and the reply 34 pages.

Delay in delivering reasons

At the conclusion of oral submissions the parties were informed that there would be a substantial delay before I was able to deliver a judgment due to other court commitments. In addition to other judgments that were entitled to priority, I was involved in a trial that took almost the whole of 2005. As a consequence I was unable to give the present judgment the attention it required.

Because of the unfortunate delay in the delivery of these reasons I have felt obliged to set out the relevant evidence, the parties’ arguments and my process of reasoning which has led to the conclusions which I have reached, in a more comprehensive fashion than would have otherwise been necessary.[4] The task of meeting these obligations was made more challenging because of the multiplicity of issues in the trial which were all very extensively explored by the parties.[5] Counsel for each of the parties on more than one occasion emphasised the complexity of their submissions and the difficulties that would be posed for the Court in writing a judgment.[6] It has not been possible, nor was it necessary, to refer to or address every argument that has been raised. Fortunately, there were relatively few questions of credit which called for resolution despite the size and complexity of the case; but I considered it desirable to deal with those issues more extensively than would otherwise be the case.
[4]Hadid v Redpath [2001] NSWCA 416; Cobham v Frett [2001] 1 WLR 1775; R v Maxwell [1999] NSWSC 1085; Moylan v NutraSweet Co [2000] NSWCA 337.
[5]For example, some of the arguments as to the proper construction of parts of the standard terms.
[6]See for example T3135, 3446.

Submissions of the parties

The parties’ written submissions (including those that were not filed pursuant to any order), and large schedules alleging inaccuracies in the other party’s written and oral submissions, errors in the other party’s schedule of errors and replies to the errors in the other party’s schedule of errors, covered in excess of 500 pages. The submissions of the parties included extensive references to authorities, often in most detailed footnotes. When referring to a party’s submission I have generally recorded, in a footnote, the authority cited by that party which supports that party’s argument.

There was substantial repetition of arguments by each of the parties when dealing with each new issue. Often, the nature of the new issue made that unavoidable. In referring in my reasons to the parties’ arguments, I have endeavoured to minimise the degree of repetition without doing injustice to the submissions advanced

FACTUAL SETTING[7]

[7]The following facts are largely undisputed. Where the evidence was controversial I have referred to it as the evidence given by the witness.

From 1998 to October 2000, the defendant was using historical pricing for its Prosperity Bond product and was treating its use of historical pricing as confidential. The defendant also published daily unit prices in the morning. There was a direct correlation between the day’s unit price and the previous day’s closing market index. As at June 1988, and thereafter, standard Prosperity Bonds were a “slow selling” product line.

Gregory Andrews was employed by the National Mutual Life Association of Australasia Ltd (“NMLA”) between September 1987 and October 2000. He held various positions until July 1997, when he became a Product Specialist in the Investment Products Department at 447 Collins Street. In that position he reported to Mark Yesberg for work which included the maintenance of product features and the product development to maintain NMLA’s competitive market position.

Paul Mandalidis was a Dealership Manager with the defendant and was the defendant’s Financial Planning State Manager for NSW and the ACT. Although a principal witness in the Coneview Pty Limited proceedings heard in New South Wales, Mr Mandalidis did not give evidence in these proceedings.

On 12 June 1998 following a meeting with Peter Keller, Brian Beazley (an authorised insurance agent working on a commission basis with NMLA) and Brian Fitzpatrick, (who also worked for NMLA) sent a memorandum to Paul Mandalidis and Greg Andrews concerning “Mr Peter Keller’s ‘Investment Club’ Proposal.”[8] The memorandum stated as follows:
[8]CB 185-186 and 3577-3578.

“A group of high net worth individuals wish to invest substantial funds into an ‘Investment Club’ or some structure perhaps “unit trust” suitable to National Mutual’s requirements.
The number of people involved will be around 15 members and total funds invested in year one should be $15m-$20m. Additional funds of the same magnitude to be invested each year.
Basic Proposal
1.      Each ‘Member’ to borrow funds for negative gearing purposes. (Our understanding is that the lending facility is in place).
2.      Funds to be invested in an ‘Insurance’ or ‘Investment Bonds’ on a ‘No Advice Basis’.
3.      Investment Portfolio to be high growth, client would prefer ‘International Equity’ portfolio or secondly ‘Australian Share Portfolio’. (Maybe the Spread Managed Portfolio would be an option).
4.      Yearly profit from ‘Bond’ to be cleared out each 12 months and paid back to the Investment Club for distribution to members. The 39% tax rebate to apply to the distribution.
5.      For one year only, clients need a 100% ‘Protection Option’. They realise there is a cost to do this. Can this be done and at what cost?
6.      0.3% trail commission to be split 50% to Brian Beazley, 50% rebate to the Investment Club.
7.      Client wishes the 6% maximum asset charge quoted to the CIB to be removed for the purpose of this investment. Is this possible?
8.      Nil Entry/Exit Fee to apply.
Taxation
Clients will seek their own independent tax advice on all aspects of the investment.
Structure of the Investment Club
Clients are happy to comply with any ‘Structure’ suitable to National Mutual, possibly a Trust or Unit Trust. We are looking for guidance from National Mutual on this.
Bond Ownership
Peter Keller suggested each investor to be the owner of Individual Bonds, however, he wishes the yearly profits on each bond to be distributed back to the ‘Investment Club” structure. There may be a problem here unless the “Investment Club” is the owner of the policy. Any suggestions?
Conclusion
Clients are willing to fit in with National Mutual’s requirements on the structure of the ‘Investment Club’.
Investments to be on a ‘No Advice’ basis.

Ownership and the yearly distribution of profits are issues to be clarified between National Mutual and Mr Keller.
Clients are looking to invest into an Insurance Bond structure with international equities exposure and with a 100% guaranteed protection option for a minimum period of one year.”

On 12 June 1998 an e-mail was exchanged between Paul Mandalidis and Greg Andrews regarding answers to Dr Peter Keller’s questions.[9] On the same day a meeting occurred between Dr Keller, Brian Beazley and Brian Fitzpatrick. These early communications between Keller and representatives of the defendant assumed some importance in the trial as the disputed evidence of Beazley and Andrews was that the focus of discussions was upon withdrawals and that they were given no indication Dr Keller wished to make profits from frequent switching between portfolios.
[9]CB 211-212.

Dr Keller probably told Brian Beazley that investors were likely to be heavily geared towards policies. Mr Beazley understood that Coneview investors would need a higher return than was available from the standard bond in order to make the investment “attractive to investors”.[10] In a telephone call between Andrews, Beazley, Mandalidis and Keller in June or July 1998 “unlimited, free” switches were mentioned.[11] These persons then met on 3 July 1998.[12]
[10]T 1365.
[11]T 2201.
[12]CB 194.

In relation to that meeting, Mr Beazley states:
“My 1998 diary contains an entry relating to Dr Keller on the page for 3 July. On that basis, I believe that I met with him on that day. I cannot now recall the details of that meeting, nor whether anyone else from NMLA was present, but at page 194 of the C.B. is a copy of the first page of the 3 July 1998 document that I had prepared, on which I had made notes as follows:
·Free Switching
·30 Day Waiting Period – Is Interest Paid
·Asset Allocation
I believe that these are notes of issues raised with me by Dr Keller in response to the 3 July document, possibly at a meeting on 3 July 1998. As best I can recall, Dr Keller asked at that meeting for switches between portfolios to be free, and whether interest was paid if NMLA exercised its right to delay a withdrawal for up to 30 days.”[13]
[13]Witness statement of Brian Beazley; CB 194.
Similarly in relation to this same meeting, Mr Andrews states that:

“On or about 3 July 1998, I participated in a telephone hook-up with Mr Beazley, Mr Mandalidis and Dr Keller, who were all in Sydney. Although I do not recall the specific details of the entire conversation, I recall Dr Keller asking for unlimited free switches. I recall that I asked Dr Keller why it was that he wanted that. Dr Keller said something to the effect that the Investment Club wished to protect their assets. He did not, however, go into any further detail about how he proposed to use the unlimited free switches to protect his assets. I do not recall Dr Keller saying anything to the effect that he wished to enact switches at the unit price on the day he switched.“[14]

[14]Witness statement of Greg Andrews.

Dr Keller also told Andrews that he required free switches in order to “improve or maximize the returns.”[15] Although he did not recall having done so, in the normal course of his work practices, Andrews would have told Yesberg of this conversation, and he agreed that it was his best expectation that he did so.[16]
[15]T 2202-3.
[16]T 2208 and 2212.

In one of their conversations before 20 July 1998, Keller could have told Beazley that the defendant’s right to delay a withdrawal or switch for 30 days was unacceptable.[17]
[17]Exhibit LL at 636, T 1435-6.

On 3 July 1998 a Memorandum from Mandalidis, Beazley and Andrews was sent to Keller with respect to the subject of “Meeting re Investment Bond”.[18] Headed “Basic Proposal and Responses from Melbourne” the memorandum read as follows:
[18]CB 191-193.

“1. Question
Each ‘Member’ to borrow funds for negative gearing purposes. (Our understanding is that the lending facility is in place.)
Response
Fine, this doesn’t concern NM.

2. Question
Funds to be invested in an ‘Insurance’ or ‘Investment Bonds’ on a ‘No Advice Basis’.
Response

The ‘No Advice’ basis is for you to agree to as the adviser; it has no bearing on the set-up (apart from making commission difficult to pay).

3. Question
Investment Portfolio to be high growth, client would prefer ‘International Equity Portfolio’ or secondly ‘Australian Share Portfolio’. (Maybe the Spread Managed Portfolio’ would be an option.)
Response

Prosperity Bond has an Australian Equities portfolio, recently added at 1 Jan this year. We have no International Equities portfolio available, the Spread Managed (18.32% at 30 Apr) and Managed (15.4% at 30 Apr) portfolios being the most weighted to that asset class. Note, however, that the protection option facility is available on the Managed, but not the Spread portfolio. We will not make it available for this case.

4. Question
Yearly profit from ‘Bond’ to be cleared out each 12 months and paid back to the Investment Club for distribution of members. The 39% tax rebate to apply to the distribution.
Response

This would be done by the usual withdrawal of money as currently allowed. To make sure there is no misunderstanding, the 39% rebate is only on the amount withdrawn.

5. Question
For one year only, clients need a 100% ‘Protection Option’. They realise there is a cost to do this. Can this be done and at what cost?
Response

We won’t do it, full stop. Note also the protection option is only available for the managed, Matched, Property Biased and Secure portfolios. And no, we won’t consider applying it to the other portfolios.

6. Question
0.3% trail commission to be split 50% to Brian Beazley, 50% rebate to the Investment Club.
Response

To be checked with Systems for just how we go about this – it will have to be a manual process as the trail comes out in one piece regardless.

7. Question
Client wishes the 6% maximum asset charge quoted to the CIB to be removed for the purpose of this investment. Is it possible?
Response

Verbal response from Melbourne that they are happy at 2.5% limit, outside of any Legislative or taxation changes.

8. Question
Nil Entry/Exit Fee to apply.
Response
Verbal approval from Melbourne.

TAXATION
Clients will seek their own independent tax advice on all aspects of the investment.
STRUCTURE OF THE INVESTMENT CLUB AND BOND OWNERSHIP
Question
Clients are happy to comply with any ‘Structure’ suitable to National Mutual, possibly a Trust or Unit Trust. We are looking for guidance from national Mutual on this:
Response
I’ve received Legal’s opinion on the set up of this policy:

·     Having it under one policy is fine
·     There is no need for a formal trust to be set up as far as we are concerned
·     The investment club would be treated as an unincorporated association
·     Each member is a policy owner and a life insured (so we would have as many signatures/names as there are investors.)
·     They also raised an issue which the club must consider, that of death benefits. On the death of a life insured, that life insured’s benefits revert to the remaining life insured still in the Bond (see Benefits on page 1 of the CIB). Thus if there are 10 members of the club and one dies, their share in the investment won’t go to their families/beneficiaries with the rest of the estate. It remains in the Bond, effectively becoming part of the remaining life insurers’ (members of the club) policy/benefits.
·     It would then be up to the remaining 9 members to withdraw one-tenth of the policy and pass it to the estate of the deceased. NM can’t do this as part of a death benefit process. We strongly advise that this be communicated to the investment club, and they arrange an agreement amongst themselves on what will occur in such circumstances.”

On 20 July 1998 a facsimile attaching a draft letter that was to be sent to Keller was sent from Beazley to Andrews. The facsimile made the request that Andrews make any changes to the letter which he saw fit.[19] The draft letter read as follows:
[19]CB 200-202.

“Subsequent to our discussion on your “Investment Club” proposed investment into the National Prosperity Bond the following issues raised by you have been resolved and agreed to by National Mutual as follows:-
1.Entry Fees – All entry fees, including the .5% normally retained by National Mutual for establishment costs (such as share brokerage and stamp duty costs) will be waived. Hence “NIL” entry fees will apply.
2.Asset Charge (”National Mutual” may alter the asset charge to up to 6%)
National Mutual have agreed that excluding legislative and/or taxation changes made by the Government, National Mutual would not increase the asset charge to greater that 2.5% for the period of the customer Information Brochure (Expiry July 1999). This figure to be renegotiated each year.
3.Switching Fees
National Mutual will allow either of two options:-
(a)As many free switches as you see fit, up to a maximum of 1.5 times the amount invested (e.g. $18 M worth of switching on a $12M initial investment).

The aim of this offer is to allow you to ‘Drip-Feed” your funds from say the Secure Portfolio to your desired asset allocation over a 12 month period.
or
(b)Four free switches per year. (Prospectus sets a maximum of 2).

Option (a) in year one and thereafter Option (b) would be acceptable.
4.Withdrawals and Portfolio Switches
National Mutual will waive its right to delay withdrawals and switches for 30 days, providing the “Investment Club” gives three days notice of its intention to switch or withdraw.
National Mutual also agrees that should the ‘Investment Club” change its mind and not proceed with the switch or withdraw, no penalty will be involved.
5.Trail Commission
Trail commission payable would be split 50% to the ‘Investment Club” and 50 % to the delegated National Mutual servicing agent.
6.Structure of Investment
National Mutual is happy to have one policy for the ‘Investment Club”. The ‘Investment Club” would be treated as an unincorporated association, with each member being a policy owner and a life insured. (There could be as many owners as there are investors).
7.No advice Basis
The ‘No Advice” basis of lodgement is acceptable from National Mutual’s point of view. A signed letter from the ‘Investment Club” acknowledging such a basis would be required.

The above agreements are based on a minimum investment level of $10M.[20]

[20]Ibid.

On 30 July 1998, a facsimile was sent from Beazley to Andrews concerning the draft letter to be sent to Keller. The facsimile noted that point 3 of the 20 July draft letter to Keller, under the heading “Switching Fees”, was to be replaced with the following: “All switches from the Cash or Secure portfolios are unlimited and free and do not limit the four free switches from the other portfolios.”[21] On 31 July 1998 Beazley faxed to Andrews the revised draft letter to Keller incorporating this change. This revised draft letter read as follows:
[21]CB 204.

“Subsequent to our discussion on your “Investment Club” proposed investment into the National Prosperity Bond the following issues raised by you have been resolved and agreed to by National Mutual as follows:-
1. Entry Fees – All entry fees, including the .5% normally retained by national Mutual for establishment costs (such as share brokerage and stamp duty costs) will be waived. Hence ‘NIL’ entry fees will apply.

2.      Asset Charge (‘National Mutual’ may alter the asset charge to up to 6%)
National Mutual have agreed that excluding legislative and/or taxation changes made by the Government, National Mutual would not increase the asset charge to greater that 2.5% for the period of the customer Information Brochure (Expiry July 1999). This figure to be renegotiated each year.
3.      Switching Fees
All switches from the cash or Secure portfolios are unlimited and free and do not limit the four free switches from the other portfolios.
4.      Withdrawals and Portfolio Switches
National Mutual will waive its right to delay withdrawals and switches for 30 days, providing the ‘Investment Club’ gives three days notice of its intention to switch or withdraw.
National Mutual also agrees that should the ‘Investment Club” change its mind and not proceed with the switch or withdraw, no penalty will be involved.
5.      Trail Commission
Trail commission payable would be split 50% to the ‘Investment Club” and 50 % to the delegated National Mutual servicing agent.
6.      Structure of Investment
National Mutual is happy to have one policy for the ‘Investment Club’. The ‘Investment Club’ would be treated as an unincorporated association, with each member being a policy owner and a life insured. (There could be as many owners as there are investors).
7.      No advice Basis
The ‘No Advice’ basis of lodgement is acceptable from National Mutual’s point of view. A signed letter from the ‘Investment Club’ acknowledging such a basis would be required.
The above agreements are based on a minimum investment level of $10M.”[22]

[22]CB 208-210.

Nothing further occurred in the negotiations until June 1999 when Keller contacted Beazley seeking an updated letter. Around June 1999, after the defendant’s Product Department determined it wished to proceed in offering the Special Terms, it sought approval from the product actuary.[23] This is a matter of some importance because the plaintiffs contend that the actuary, upon analysis of the special terms, would have realized that they provided an opportunity to investors to arbitrage. On 21 June 1999 a meeting (by telephone) occurred between Keller, Beazley, Mandalidis and Andrews. A facsimile sent from Beazley to Andrews sought Andrews’ approval of an attached 21 June 1999 letter to Keller.[24] There were a number of drafts of that 21 June letter. In accordance with Andrews’ “usual practice” he would have referred the drafts to Yesberg and John Burton, the defendant’s actuary to whom Yesberg reported.[25] Mr Andrews read the drafts. Also on 21 June 1999 a facsimile was sent from Andrews to Beazley approving the 21 June letter to Keller.[26] A letter (the June 1999 letter) was then sent from Beazley to Keller noting that the attached 21 June 1999 letter had been approved.[27] This facsimile states, inter alia, that “ … the following issues raised by you have been resolved and agreed to by Greg Andrews as Product Manager for National Mutual as follows:
[23]CB 1634.
[24]CB 213-214.
[25]T 2243 and 2245-2249.
[26]CB 215.
[27]CB 216 and 3045-3046.

“1.Entry Fees – All entry fees, including the 0.5% normally retained by National Mutual for establishment costs (such as share brokerage and stamp duty costs) will be waived. Hence ‘Nil’ entry fees will apply.
2.Asset Charge (National Mutual may alter the asset charge to up to 6%) – National Mutual has agreed that excluding legislative and/or taxation changes made by the Government, National Mutual would not increase the asset charge to greater than 2.5% for the period of the Customer Information Brochure. Our standard Asset Charge/Investment Managers’ Fee will apply where they are under 2.5%.
3.Switching Fees – All switches from the Cash or Secure portfolios are unlimited and free and do not limit the four free switches from the other portfolios.

4.Withdrawals and Portfolio Switches - National Mutual will waive its right to delay withdrawals and switches for 30 days, providing the investor gives three working days notice of its intention to switch or withdraw, and the unit price will be the price on the day when the notice is given in writing.
National Mutual also agrees that should the investor change their mind and not proceed with the switch or withdrawal, no penalty will be involved.
5.Trail Commission – Trail commission payable would be split 50% to the Unit Trust Manager and 50% to the delegated National Mutual servicing agent …
6.…
7.No advice Basis – The ‘No Advice’ basis of lodgement is acceptable from National Mutual’s point of view. A signed letter from the investor acknowledging such a basis would be required.
The above agreements are based on a minimum investment level of $10M.”[28]

[28]CB 213-214.

Beazley knew that Keller would use the 21 June 1999 letter to promote the Prosperity Bonds with the Special Terms. The special terms would not become operative unless a minimum of $10 million dollars was invested.

On 29 June 1999, a facsimile from Beazley to Andrews attaches the proposed no advice letter which was to be signed by each investor. On the facsimile cover sheet it stated that “both Paul Mandalidis and Graham Roberts have agreed on it.” This document does not contain the words “prior to completion ...”.[29] Beazley drafted paragraph 4 of the no advice letter, and its wording was approved by the defendant.[30] On the same day a facsimile was sent from Beazley to Keller attaching a draft no advice letter.[31] The letter was headed ‘Investors in Prosperity Bonds introduced by Coneview Pty Limited” and it read as follows:
[29]CB 217-218.
[30]T 1489.
[31]CB 2993-2994 and 3048-3049.

“National Mutual Life Association of Australasia Limited (National Mutual) and AXA Mutual Financial Planning Ltd advise each person, investing in the AXA Australia Prosperity Bond by virtue of arrangements with Coneview Pty Limited (‘Manager’) that we have provided no advice on this investment to Manager and that your investment in the AXA Australia Prosperity Bond is done at your own choice.
We do advise that the following items relating to the Prosperity Bond have been agreed with the Manager.
1.Entry Fees – All Entry Fees have been waived
No Exit Fees apply.
2.Switching Costs – All switches from the Cash or Secure portfolios are unlimited and free and do not limit the four free switches from other portfolios.
3.Asset Charge (National Mutual may alter the asset charge to up to 6%) – National Mutual has agreed that excluding legislative and/or taxation changes made by the Government, National Mutual would not increase the asset charge to greater than 2.5% for the period of the Customer Information Brochure. Our standard Asset Charge/Investment Managers’ Fee will apply where they are under 2.5%.
4.Withdrawals and Portfolio Switches – National Mutual will waive its right to delay withdrawals and switches for 30 days, providing the investor gives three working days notice of its intention to switch or withdraw, and unit price will be the price on the day when the notice is given in writing. National Mutual also agrees that should the investor change their mind and not proceed with the switch or withdraw, no penalty will be involved.
5.Trail Commission – Trail commission payable (0.3%) would be split 50% to the Manager and 50% to the delegated National Mutual servicing adviser.
6.Structure of Investment – National Mutual will provide a separate policy for each investor.
7.No advice Basis – the ‘No Advice’ basis of lodgement is acknowledged and is acceptable to National Mutual.”

The letter was then to be signed by the “Life Insured and Policy Owner”.

On 7 July 1999 an e-mail was sent from Andrews to Amber Spanu (nee Bennett - Client Services Officer of National Mutual) and Sergio Folino (Technical Support Officer Investment Products) with respect to “New Prosperity Bond – Biofeedback”.[32] The e-mail noted:
[32]CB 219-220.

“There is an Investment Club in NSW that have been evaluating Prosperity Bond for the last year, intending to put in at least $10M. After a lot of serious questioning on their part, they have started the ball rolling as of last Friday, 2 July. They say the intention is to continue to put as much again each year into the product. Given the large amount, the high level of knowledge of the Investment Club members and the special rules made for this particular case, we have asked that a specific person be assigned to these policies for continuity. You and Serge were nominated by Don … The adviser is Brian Beazley …

The full $10M is expected by the end of August …
Given the amount and possible ongoing amounts in the future, we may make these policies a separate series with their own rules built in, making it easier for you. That will be decided once we’ve actually seen all this money arrive!
The things different about this policy …
1)      …
2)      All switches from the Cash or Secure portfolios to be free switches, regardless of number per year (the premiums will be put into these portfolios at first, and drip-fed out to other portfolios as they read the markets. These two portfolios are not going to cause any problems in doing this).
3)      Withdrawals and switches won’t be delayed for up to 30 days as long as they advise us 3 days prior to when they want the transaction done (that 30 day rule is rarely invoked and there to allow us to sell the necessary assets, some of which aren’t very liquid).
4)      Trail commission is to be split 50/50 between the adviser and Biofeedback. We don’t do anything here, the full trail will go to the adviser and he then forwards 50% to Biofeedback; it’s an arrangement between them …”[33]

[33]CB 219.

The First Investment Club Prosperity Bond policy was issued with the commencement date of 2 July 1999.[34]
[34]CB 3068-3087.

Amber Spanu was responsible for administering switches and withdrawals for the Coneview policies and Keller knew this. Essentially, Ms Spanu took instructions from Keller over the telephone for a period of nine months, until she handed over the job to Ms Sarah Wenzel.[35]
[35]T 173.

An e-mail was sent by David Taylor (a tax partner at Mallesons whose client was Coneview) to Garrick Hawkins on 9 July 1999 in relation to the subject of “Insurance Bonds – Investment Opportunity”.[36] In the second half of 1999, possibly on 12 July 1999, Scott Tyne and Hawkins met with Taylor[37] (‘the first meeting’). This is the first of two meetings during which the plaintiffs allege that representations were made about the special terms, by Taylor or Keller in their capacity as agent, of the defendant.
[36]See Exhibit H.
[37]T 557 and 595-596.

On 21 July 1999, Keller telephoned Spanu and made the first switch on an Investment Club policy. Between 21 July and 28 July 1999, Spanu created the first spreadsheet to record Investment Club policies.

On 23 July 1999 an e-mail was forwarded from Spanu to Andrews in relation to “Biofeedback – Prosperity Bond”. Spanu stated that:

“I just have a few concerns in reference to the free portfolio switches that are to occur on the above policy. As you can only do two free portfolio switches every anniversary year any after these are charged, presently we have no way of processing a switch free of charge through flexi-plan. Has systems been contacted to rectify this? Please advise asap as we have already used one free switch …”[38]

[38]CB 248.

On 26 July 1999, in his response Andrews advised Spanu as follows:
“There will be no system work done on this policy for some time, if at all – until we are sure it’s going to be worth it. For the extra switches (you can count on them happening) I’m unsure of the detail on how to do it, that’s an admin. function – see Serge – but we have to recredit the charge back to the policy as a separate amount …”[39]
[39]Ibid.
On 27 July 1999 an e-mail was forwarded from Spanu to Andrews concerning “Biofeedback”. In turn this e-mail was forwarded by Andrews to Yesberg. Ms Spanu’s message read as follows:

“Just in regards to the above investment, client has invested in the secure protected portfolio they have been charged a $1187.50 protection fee, then, made a switch to the Cash portfolio. I know that there was no agreement to waive the protection charge, but the client if he switches back to a protected portfolio will be charged protection again. I have spoken with Brian, I believe that we should reimburse this cost considering the nature of the policy …”[40]

[40]CB 249.

In the second half of 1999, some two weeks after that meeting with Taylor, possibly on 28 July 1999, Tyne and Hawkins met with Taylor and Keller.[41] This is the second meeting at which the plaintiffs allege that representations were made about the special terms (‘the second meeting’).
[41]Exhibit F at [10-11] and T 561 and 595-596. Exhibit O at [12, 14, 15, and 20] and T 803-805, 823, 833-834 and 893.

A letter dated 28 July 1999 from Keller was tendered. The letter was headed “Confidentiality Undertaking.” This letter read as follows:

“By executing this letter I
(a)recognise the Concept has been developed by Tyne and Hawkins;
(b)acknowledge that the Concept is commercially valuable;
(c)warrant that it will hold and keep the Concept as confidential, except:
(i)insofar as the Concept is or becomes information in the public domain;
(ii)where disclosure of the Concept is required by law; or
(iii)for the purposes of briefing professional advisers; and

(d)warrant that, until the Concept comes into the public domain otherwise than by way of a breach of this undertaking, it will not utilise or disclose to any person the Concept or the concepts embodied therein without the prior written consent of Tyne and Hawkins.

In this letter the term:
‘Concept’ means a refinement of the proposal discussed at a meeting between Tyne, Hawkins, David Taylor and me on 28 July 1999.
‘Proposal’ means the proposal put to me by Tyne and Hawkins the subject of a document entitled “Truemont Investment Trust No. 1 Information Memorandum”, varied to the extent of contemplating that investors will invest directly in NMLA Prosperity Bonds, rather than via the medium of a Trust.”[42]

[42]Exhibit I.

According to Tyne and Hawkins, they did not receive this document and knew nothing about the Truemont Trust[43] or about a proposal being put by, or on their behalf, to Keller or Taylor at a meeting on 28 July 1999.[44] The defendant relies upon this correspondence as reflecting adversely upon the credibility of one or all of Keller, Tyne and Hawkins.
[43]T 593, 597, 602, 693, 740, 748, 1432, 1485, 1486 and 3389.
[44]T 806-807; 593-594, 597, 599 and 740.

As of July 1999, Beazley understood that all Coneview investors would be switched as a block. That represented the defendant’s administrative preference and this was communicated to Keller.[45] In mid 1999, Mr Beazley requested Andrews to incorporate the terms of the “No Advice” letter into the policy document. Mr Yesberg and Mr Burton were also involved.
[45]T 1411 and 1495-1497.

On 30 August 1999, an e-mail from Mandalidis was sent to Andrews in relation to the subject of the “Insurance Bond – Investment Club”. It referred to the expected level of investment and the fact that all documentation was going to be reviewed. In part the e-mail stated:

“ … the money has started to flow …
… we are expecting another $20-$30M to be invested in the next few months. The bulk of this money is by way of a loan via ANZ.
We have met the legal adviser for the club, who is a investor in the club who is Tax partner with Mallesons Stephen Jaques in Sydney.
There are a couple of issues that we are continuing to monitor ie the Ralph report on CGT, the GST & the tax rate on Ins companies etc.
We are going to review the documentation drafted by both you & us to ensure the No advice document from the Defendant Fin Planning meets our legal requirements …”[46]

[46]CB 257.

By late 1999 or early 2000 Yesberg had seen the no advice letter. He had read it and had seen nothing wrong with the reference to clause 1.8 which contained the primary special term.[47] According to Yesberg the intention of the no advice letter was to confirm that the person entering into the agreement had undertaken their own due diligence.[48] The defendant relies upon the letter in answer to the plaintiffs’ allegations that Keller and Taylor in their capacity as agents for the defendant had made representations about the meaning of the special terms.
[47]T 1764-1765.
[48]T 1763-1764.

In relation to the “No Advice” term of the policy Beazley considered that this meant that each party to the contract was to ‘look after themselves’. He thought it was a matter between the defendant and the investors, and was nothing to do with himself.[49]
[49]T 1345-1346 and 1534-1535.

By the end of September 1999 at the request of Beazley, Andrews prepared an amended form of standard policy document incorporating special terms.[50]
[50]CB 292-311.

On 19 October 1999 a facsimile was sent from Beazley to Taylor attaching an early version of the Undertakings letter.[51] On the same day a facsimile from Beazley was sent to Andrews similarly attaching an early version of undertakings letter.[52]
[51]CB at 280-282.
[52]CB 3573-3575.

In late October 1999, discussions took place between Beazley and Taylor, regarding amendments to the policy document as well as other matters. [53] On 28 October 1999 a facsimile was sent from Beazley to Taylor attaching the draft letters and draft Prosperity Bond policy document.[54] On 29 October 1999 discussions again took place between Beazley and Taylor concerning the documents faxed the previous day. On 2 November 1999 a letter was sent from Taylor to Beazley in relation to the new policies and their drafting.[55] On 3 November 1999 a facsimile from Beazley was sent to Andrews seeking approval of the attached undertakings letter.[56] On the same day Taylor returned the undertakings letter to Beazley with Taylor’s handwritten amendments.[57] The defendant alleges the policy and undertakings letter in this form contained the special terms as finally settled.
[53]Witness statement of Brian Beazley.
[54]CB 289-310.
[55]CB 3195-3196.
[56]CB 320-321.
[57]CB 3194.

In an e-mail dated 9 November 1999, from Spanu to Andrews in relation to “New movement required urgently – for Investor Club”, Ms Bennett requests “Please advise progress of new movement to waive switching fees and protection charge as clients have already used up their 2 free switches in the new policies.”[58]
[58]CB 340.

On 10 November 1999 a letter from Taylor to Tyne re “Investment opportunity – managed insurance bonds”, enclosed the Information Memorandum prepared by Coneview (‘the CIM’). The letter,[59] but not the draft Information Memorandum attached to that letter, was tendered. A document entitled “Managed Investment Bonds - Information Memorandum” prepared by Coneview January 2000 was part of the Court Book.[60] I am unable to say whether the Information Memorandum supplied as part of the Court Book is substantially different to the draft attached to the letter. The CIM prepared by Coneview Pty Limited dated January 2000 stated in part as follows:

“Investors are offered the opportunity to invest in Prosperity Bonds issued by The National Mutual Life Association of Australasia Limited (“NMLA”), such investment to be managed by Coneview Pty Ltd …
The Manager’s investment objective for the Investor is to provide investment returns appropriate to meeting long term investment requirements …
Because of a number of special concessions which the Manager has been able to negotiate with NMLA, the Manager anticipates that the investment returns which the Investor will achieve will exceed those which would have been achieved if the investor had invested directly in an NMLA Prosperity Bond.”[61]

[59]Exhibit J.

[60]CB 452.

[61]CB 453.

With respect to investing in and withdrawing funds from NMLA Prosperity Bonds, the Memorandum stated as follows:

“An investor can invest in NMLA Prosperity Bonds managed by the Manager by signing the Investor Management Agreement, and by completing the application form, each in the form attached to this information memorandum and returning them to the Manger with his cheque. This will authorise the Manager to invest in NMLA Prosperity Bonds on the investor’s behalf.”[62]

[62]CB 454.

In relation to application and manager fees, expenses and commission associated with the defendant’s Prosperity Bond Portfolios, the Memorandum stated as follows:

“The Manager is entitled to receive two types of fee – an annual fee and a performance fee. The annual fee is payable in advance at the rate of 2% of the current aggregate value of the current aggregate value of the units held by the investor in the various NMLA Prosperity Bond Portfolios …
The performance fee is linked to the performance of the NMLA Prosperity Bonds, as managed by the Manager in respect of the 12 month period ending 31 May each year …
The performance fee is equal to 1/3 of the amount by which the Manager outperforms the return which the investor would have received had it remained as an investor (throughout the relevant period) in Security Portfolio (without any management by the Manager).
By special arrangement with NMLA’s servicing agent, the Manager will share equally the 0.3% “trail commission” payable by NMLA to its servicing agent, calculated by reference to the amount invested by the Investor in NMLA Prosperity Bonds.”[63]

[63]CB 455.

In respect of supervision, rights and obligations the Memorandum continued:
“Except as set out on page 3 of this information memorandum, the Manager does not guarantee the success of the investor’s investment in NMLA Prosperity Bonds, the repayment of capital, or any particular rate of capital or income return.”[64]
[64]CB 457.
In relation to the defendant’s Prosperity Bonds, the Information Memorandum states:
“ … The Manager believes that this strategy should be a successful one, and should provide a better investment return than would be available to an individual investor who invested directly in NMLA Prosperity Bonds (ie, without the Manager’s management). This is because the Manager has been able to negotiate a number of special concessions which will be available to investments made by the investor, in particular:
(a)no entry fees will be charged by NMLA at the time each investment is made, and hence the 0.5% normally retained by NMLA for establishment costs such as share brokerage and stamp duty costs have been waived;
(b)NMLA has agreed that, in the absence of legislative or the Taxation changes made by the Government it will not increase the asset charge to greater than 2.5% (compared to the normal 6%), although it reserves the right to renegotiate this figure each year;
(c)the Investor may have unlimited and free switches from the Cash or Secure Portfolios, and this will not limit the 2 free switches available each year from the other Portfolios;
(d)NMLA will waive its right to delay withdrawals and switches for 30 days, provided that the Manager (on behalf of the investor) gives 3 working days’ notice of its intention to switch or withdraw;
(e)the unit price which will apply if any notice of intention to switch or withdraw is given is the unit price on the day the relevant notice is given; and
(f)the Manager (on behalf of the Investor) may cancel, without penalty, any election previously made by it to switch or withdraw: this means that the Manager (on behalf of the Investor ) will have up to 3 working days to cancel a previous election ….
Information Memorandum
The manager is the issuer of this information memorandum and is responsible for all its contents …”[65]
[65]CB 458.
In an e-mail dated 23 November 1999 from Spanu and directed to Andrews, Spanu raised Keller’s third request to switch.

“Just wondering on the new movement spec, and how it was going already Peter Keller has called requesting his third switch, and I cannot waive the fees. Please advise as soon as possible how long, because I do not want to process until system in place. Also have you worked out the calc for the original biofeedback, our first statements to ANZ are due on the 29 November?”[66]

[66]Exhibit QQ(xiii).

According to Wenzel, around the end of November 1999, account balances in the case of policy withdrawals calculated by Spanu and herself were checked by the Actuarial Department or the Marketing Department. Mr. Yesberg worked in the Marketing Department.[67] On 30 November 1999 Beazley directed a facsimile to Taylor attaching extracts from AMP Technical and AXA Technical. One of those attachments was headed “AXA inside advantage – Assessable income of life assurance policies’. In that attachment under the heading of “Switching”, the following was set out:

“Unbundled policies may involve the purchase of units in specified investment classes. ‘Switching’ is a facility that allows a policyholder to vary the class of assets supporting the policy. For example, a policyholder may choose to switch between investments in shares, property, fixed interest or cash. In this way, the policyholder is able to select their preferred investment strategy.
After the switching option has been exercised, the rights or entitlements under the insurance policy are unchanged except that the future value of the policy will be calculated by reference to different assets.
Generally speaking, switching does not involve the payment of any new or additional premiums, change in the present value of the policy, a surrender of any part of the policy or a reapplication of money. As such, switching only varies the asset base of the existing policy, and therefore, the policyholder would not need to declare bonuses as assessable income nor would the policyholder be required to recommence the 10 year period …”[68]

[67]T 1656-1659.

[68]CB 350.

In December 1999, Tyne contacted Taylor requesting documentation relating to Taylor’s investment.

By the end of 1999 Andrews was aware of frequent switching by Keller on one of Keller’s policies.[69] He subsequently learned that switching was occurring in relation to all policies. Mr Andrews discussed this with Yesberg in the course of preparing a draft December Business Review Specification. [70] Mr Beazley knew that Keller was switching on behalf of all investors.[71]
[69]T 2270.
[70]Exhibit UU – Version 1, draft of Business Review Specification.
[71]T 2271.

On 22 December 1999, a telephone conference was held between Yesberg, Andrews, Mandalidis, Beazley, Taylor and Keller.[72] Item 1 on the agenda was “is there any objection to Brian Beazley paying trail commission direct to Coneview from my Commission payments?”[73] Mr Yesberg understood that Keller received part of the trail commission.[74]
[72]Exhibit TT.
[73]Ibid.
[74]T 1721.

In January 2000, Taylor provided Tyne with documentation. According to Tyne, he read the June 1999 letter, and the CIM carefully. He also read the 30 November 1999 facsimile. He skim read the Customer Information Brochure.[75]
[75]T 568.

Across the first quarter of 2000, Tyne and Tom Oates (a former solicitor at Mallesons, and now investment banker together with Tyne and Hawkins) had several conversations in relation to the Prosperity Bonds.[76] In late January 2000, Hawkins and Tyne spoke about due diligence. Hawkins and Tom Oates also spoke in relation to the investment. Tyne delivered documentation to Hawkins.[77]
[76]T 571-572; 575-578; 662-664 (Tyne) and 956-962 (Tom Oates).
[77]T 657-671 (Tyne) and 808-809 and 834-835 (Hawkins).

In February 2000 Andrews left the Investment Products Department of the defendant and moved to work on a GST team. In Andrews’ absence the matter was handled by Yesberg who was given Andrews’ folder which included the ANZ monthly summaries.[78] The Business Requirement Specification was circulated for the first time in February of 2000 to various persons including Yesberg. This document identified a lot of backlogged switches and was apparently drafted in December 1999.[79]
[78]T 2271.
[79]Exhibit UU; T 1775-1777.

Expectation relief – whether disproportionate

In oral submissions, counsel for the plaintiffs amplified their written submissions, explaining that the plaintiffs relied upon conventional estoppel, promissory estoppel and “expectation” estoppel as discussed in Giumelli v Giumelli.[1085]Counsel submitted that having regard to the defendant’s deliberate conduct, the minimum equity ought to be for the life of the policy and that the minimum equity required that they be given the benefit of the bargain which the defendant intended to enter into. It was said that the minimum equity was to give effect to the expectation, for the life of the contract, having regard to the defendant’s equitably fraudulent conduct. They also submitted that if the defendant is only required to make good their assumptions for a reasonable period, the evidence points to a period of 10 years as being the minimum period consistent with avoiding detriment to the plaintiffs. No explanation was provided for the selection of a 10 year period. I assume that it was chosen because of the evidence that the investment would be tax free if it was retained for a minimum of 10 years.[1086]
[1085]T3120.
[1086]Beazley T1366, T Oates 968, 1061; Hawkins T801; Tyne T565.

The defendant submits that an order requiring it to continue to make good the plaintiffs’ assumptions, thereby enabling them to continue making extraordinary profits, would be entirely disproportionate to any detriment suffered by them and inconsistent with the authorities. In support of its submission that the relief granted should be in accordance with the “minimum equity” principle the defendants refer to Verwayen;[1087] Birstar Pty Ltd v The Proprietors “Ocean Breeze” Building Units Plan No. 4745;[1088] SEA Foof International Pty Ltd v Lam;[1089] Mobil Oil Australia Ltd v Wellcome International Pty Ltd;[1090] AXA Trustees Ltd v Ergun;[1091] Southcap Pty Ltd v Lend Lease Financial Planning Ltd;[1092] and Murphy v Overton Investments Pty Ltd.[1093]
[1087]Supra at 413, 415-7 per Mason CJ 487 per Gaudron J, 429 to 430 per Brennan J, 441-2 per Deane J, 454 per Dawson J, 475 per Toohey J and 500-1 per McHugh J; Waltons Stores supra at 404-5 per Mason CJ and Wilson J, 419, 426-7 per Brennan J.
[1088][1997] 1 Qd R 117 at 128 per Macrossan CJ (with whom Thomas J agreed).
[1089](1998) 16 ACLC 552 per Cooper J.
[1090](1998) 81 FCR 475 at 516 per Lockhart, Lindgren and Tamberlin JJ.
[1091]{2000] NSW SC 872 at para 19 per Harrison M.
[1092](1997) Q Conv R 54-494 per Thomas J.
[1093]Supra at 203 per Bransen J.

The question that must be determined is whether the plaintiffs, as they contend, should have their expectation interest protected or whether, as the defendant contends, expectation relief would exceed what can be justified by the requirements of conscientious conduct[1094] and that the plaintiffs should receive the “minimum equity to do justice”.[1095] One must determine whether the defendant is required to make good the representation or whether the equity will be satisfied without its enforcement.[1096]
[1094]Giumelli supra at 121-5 per Gleeson CJ Mc Hugh, Gummow and Callinan JJ
[1095]Crabb v Arun District Council [1976] Ch 179 at 198; Verwayen supra.
[1096]See – Equity Doctrine and Remedies supra paras [17–050], [17-130]; Cheshire and Fifoot para [2.9].

The plaintiffs submit that the defendant should be precluded from departing from the assumed state of affairs and rely upon various passages from the judgments in Verwayen.[1097] They submit that the defendant’s unconscientious conduct warrants relief which will preclude it from departing from the assumption which it induced. In Verwayen, McHugh J spoke of whether the detriment could be paid for or whether it could be avoided by enforcing the promise.
[1097]At 412 per Mason CJ; at 443-4 per Deane J.

The differing judgments in Verwayen have been the subject of careful judicial analysis and commentary which I shall not revisit.[1098] In Commonwealth v Clark[1099] Ormiston JA, after an analysis of each of the judgments, concluded that each of the judgments stated:

“Explicitly or implicitly, the relevant principle as requiring proof of an act or omission to act in reliance of an induced assumption which ‘would’ (or ‘will’) cause detriment if the assumption were departed from.”[1100] (Emphasis mine)

His Honour considered the principle rested upon what Dixon J had said in Grundt v Great Boulder Pty Ltd[1101] was the “base purpose” of the doctrine of estoppel that “the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it … so that the action or inaction based upon that assumption becomes “a source of prejudice”.

[1098]Giumelli supra at [42]–[47]; Cheshire & Fifoot Law p 71; Equity Doctrines and Remedies, supra at [17-130].

[1099][1994] 2 VR 333 at 369 to 381.

[1100]Ibid at 376.

[1101](1937) 59 CLR 641 at 674-675.

Ormiston JA thus concluded:
“I would concede that a reason for insisting on proof of detriment is the need to ensure that detriment results from acts or inaction in reliance on the assumption and to exclude proof of detriment flowing merely from breach of the promise or departure from the assumption. Therefore the law requires proof of acts (or inaction) of the kind which would be likely to produce material detriment if departure from the representation of assumption were permitted, though confined to acts or inaction in reliance upon the assumption. So certain acts can easily be so characterised such as the payment of money or the incurring of costs or other liabilities. In many cases the expenditure or liability will almost certainly be incurred fruitlessly if the assumption is not maintained.”[1102] (Emphasis mine)
[1102][1994] 2 VR 333 at 377.
This conclusion accords with the view expressed by Brennan J in Verwayen that the relevant detriment does not consist in a “loss attributable merely to the non fulfilment of the promise”. Brennan J said:

“Nor is the loss of the plaintiff’s chance of success a detriment occasioned by any act done or omission made by the plaintiff in reliance on the defendant’s promise to admit or earlier admission of liability. Those ‘detriments’ flowed from the defendant’s failure to fulfil its promise, but not from any act done or omission made by the plaintiff in reliance on the making of the promise. They are not relevant detriments.”[1103]

[1103]Verwayen at 429 per Brennan J.

Counsel for the defendant sought to distinguish cases such as Giumelli and Verwayen as cases where the plaintiff would have suffered a substantial detriment if the assumption was not made good. It was submitted, correctly in my view, that estoppel was not to be used to secure future benefits for the same reason that damages for misleading and deceptive conduct do not encompass expectation profits. But the detriment need not consist of the expenditure of money or other quantifiable financial detriment.

Many circumstances in which the detriment suffered called for the assumption to be made good were considered in Giumelli. In Giumelli the High Court found that the reasoning in Verwayen did not foreclose the granting of a constructive trust and that equity could intervene to provide relief against the expectation induced by a non contractual promise. Where proprietary rights are involved a party may enforce their interest in the subject property by relief in equity.[1104] In Flinn v Flinn[1105] Brooking JA referred to Giumelli as establishing that in cases of proprietary estoppel it may be said that prima facie, departure from the assumed state of affairs is contrary to the requirements of conscientious conduct and whether departure is to be permitted will depend upon all the circumstances of the case.[1106]
[1104]Ramsden v Dyson (1866) LR 1 HL 129; Dillwyn v Llewelyn (1862) 45 ER 1285; Plimmer v Mayor of Wellington (1884) LR 9 App Cas 699; Olsson v Dyson (1969) 120 CLR 365 at 378-379 per Kitto J.
[1105]1999 3 VR 712.
[1106]At [119].

Young CJ in Henderson v Myles (No 2)[1107] extensively reviewed authority, particularly those concerned with proprietary estoppel, which bore upon when the minimum equity called for a party to fulfil the assumption or expectation. That analysis suggests that there is a clear distinction to be drawn between proprietary estoppel cases which frequently led to the fulfilment of the expectation[1108] and other cases where “the Australian preference is not to fulfil the plaintiff’s expectation but to analyse what is the detriment suffered by the plaintiff from doing acts and things which he or she might not otherwise have done because of the promise.”[1109]
[1107][2005] NSWSC 867
[1108]Supra at [89].
[1109]Supra at [72].

In Pearson v Williams[1110] Ashley J, drawing upon the language of Scarman LJ in Crabb v Arun District Council,[1111] observed that the Court “should approach the matter cautiously, in order to achieve the “minimum equity to do justice to the plaintiff” and further observing that “the court is not precluded from requiring the party estopped to make good the assumption.”[1112] In Anaconda Nickel Ltd v Edensor Nominees Pty Ltdand Gutnick[1113] the detriment suffered by the promisee, of the loss of an opportunity to rescue an ailing associated company, and the foregoing of any other remedy to meet that company’s deteriorating position on the basis of an assumption that the promisor had created that it would acquire the associated company, required as the minimum equity to do justice that the promisor be held to its promise.[1114] Similarly, in New Zealand Pelt Export Company Ltd v Trade Indemnity New Zealand Ltd[1115] the Court of Appeal found, on the basis of an assumption induced by the respondent, that the appellant had placed itself in a position which would be productive of significant disadvantage if the respondent were permitted to assert that the sales made by the appellant to a third party were not an ‘insured debt’ within the meaning of the appellant’s policy with the respondent. Nettle JA concluded that the minimum equity required that the respondent be held to the assumption and that such a result would not be disproportionate to the detriment which the appellant would otherwise suffer.[1116]
[1110][2001] VSC 509 at [72]–[75] per Ashley J.
[1111][1976] Ch 179 at 198.
[1112]Supra at [74]; Wright v Commonwealth of Australia [2005] VSC 200.
[1113](2004) 50 ACSR 679.
[1114]Ibid at [39]–[44] per Buchanan JA, with whom Eames JA and Coldrey AJA agreed.
[1115](2004) 13 ANZ Ins Cas 61-626.
[1116]Supra at 106.

In Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd[1117] it was said that the principles of equitable estoppel were intended “to relieve against the detriment suffered and not to make good an expectation.”[1118] In moulding a decree it was observed in Mobil that a court of conscience should go no further than was necessary to prevent unconscionable conduct and that a court of equity would only require the promise or expectation to be fulfilled if that was the only way in which the equity could be satisfied.[1119] The court approved the trial judge’s conclusions that to award the franchisees the benefit of the alleged promise would be disproportionate to the detriment in fact suffered by each franchisee.[1120] The principle as stated in Verwayen , Giumelli and Mobil Oil led Campbell J in Vella v Wah Lai Investment (Australia)[1121] to state

“if one party, who has encouraged another to act on the basis that a particular state of affairs exists, gives notice that that state of affairs should no longer be regarded as existing then, unless the other party has already irretrievably prejudiced himself by acting on the assumption that that state of affairs exists, the estoppel will cease to bind either immediately or after the other party has been given reasonable notice.”

[1117](1998) 81 FCR 475.

[1118]Ibid at 238.

[1119]Ibid at 239.

[1120]An application for special leave to appeal was refused by the High Court there being insufficient reason to doubt the correctness of the orders made by the Full Court.

[1121][2004] NSWSC 748 at [169].

TPA damages

The provisions of the TPA provide no express limitation on the kinds of loss or damage which may be recovered nor are they to be limited by some analogy with the law of contract, tort or equitable remedies.[1122] Loss or damage under the TPA is concerned with that which has been suffered or is likely to be suffered and does not include compensation for a mere loss of expectation.[1123]
[1122]Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at para [34], [38] per McHugh, Hayne and Callinan JJ.
[1123]Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 14-15 per Mason, Wilson and Dawson JJ; Marks v GIO Australia Holdings Ltd supra per Gaudron J at [12] and Gummow J at [110].

In assessing damages, a comparison must be undertaken between the position in which the plaintiffs have found themselves as a consequence of the misleading and deceptive conduct and the position they would have been in had they not invested in the prosperity bonds. In Marks, McHugh, Hayne and Callinan JJ observed:

“A party that is misled suffers no prejudice or disadvantage unless it is shown that that party could have acted in some other way (or refrained from acting in some way) which would have been of greater benefit or less detriment to it than the course in fact adopted.”[1124]

Similarly, in Henville v Walker[1125] McHugh J, with whom Gummow J agreed stated:
“The most appropriate approach is to identify what Mr Henville has suffered by way of prejudice or disadvantage in consequence of altering his position by reason of the breach of the Act . . . The measure of that loss is not determined by reference to what he would have received if Mr Walker’s representations had been true.”

Hayne J observed that to quantify any loss there must be:
“[a] comparison between the position in which the appellants found themselves after the project was finished, and the position in which they would have been in if, instead of relying on what they were told by the respondents, they had not undertaken the project. It does not invite attention to what would have been their position if an accurate estimate of selling price had been given by the respondents”.[1126]
[1124]Supra at [48].
[1125](2001) 206 CLR 459 at 502 at [132] (citations omitted).
[1126]Ibid, para [162].

Reasonable notice

If the court were minded to make an order requiring the defendant to make good the plaintiffs’ assumptions, the defendant submits that it should only be required to do so until the expiry of a reasonable period of notice and refers to Verwayen;[1127] Forbes v Australian Yachting Federation Inc;[1128] Central London Property Trust Ltd v High Trees House Ltd;[1129] Emmanuel Ayodeji Ajayi v R T Briscoe (Nigeria) Ltd;[1130] Novacal Australia Pty Ltd v Macquarie Generation;[1131] and Murphy v Overton Investments Pty Ltd.[1132]
[1127]Supra at 436, 442 per Deane J.
[1128](1996) 131 FLR 241 at 289 per Santow J.
[1129][1947] 1 KB 130 at 136 per Denning J.
[1130][1964] 3 All ER 556 (Privy Council).
[1131][1999] NSW SC 929 at [70]-[72] per Bergin J.
[1132]Supra at 203 per Bransen J, and at 208 per R D Nicholson J.

The defendant submits that the plaintiffs were given reasonable notice in October 2000 that any assumption which they had made in relation to the continuation of historic pricing was no longer valid. It relies upon the testimony of Yesberg and his file note of 18 October 2000 in which he discussed with Tyne, Hawkins and Tom Oates the change to unit pricing.[1133] The defendant argues that there is no evidence which suggests, and there was no reason to believe, that the plaintiffs would have been unable to redeem their policies and repay their loans upon notice from the defendant that it would no longer be administering their policies on an historic pricing basis. It submits that the evidence supported this conclusion and referred to the evidence of Tyne and Hawkins.[1134]
[1133]CB 1410-11.
[1134]Tyne T741, Hawkins T916, 929.

In July 2001 the defendant made an offer of settlement to the plaintiffs and other Coneview policyholders offering them their account balance as at 16 October 2000, which included all gains made up to that time plus a return of 15.9% on that amount from 17 October to 30 June 2001.[1135] Senior counsel for the defendant was to describe this offer as compensation equivalent to the defendant having given them reasonable notice of its intention to make changes.[1136]
[1135]CB 1683.
[1136]3263.

Conclusion

The plaintiffs’ conduct was not so unconscientious that equity should refuse its assistance. Their conduct, of which the defendant complains, did not have the necessary relationship to the equity sued for. By the time they invested, the purpose of the special terms was obviously apparent to all parties.

This is not a case in which it is appropriate to preclude the defendant from departing from the plaintiffs’ assumed state of affairs. To frame the relief on such a basis “would be inequitably harsh” and “would otherwise exceed what could be justified by the requirements of conscientious conduct.”[1137] The plaintiffs have the right and have always had the right to have their investment returned in full. They may be entitled to be compensated for such costs as they reasonably incurred in borrowing and maintaining their investment until such time as they were given reasonable notice of the defendant’s intention to discontinue its use of historical pricing. They may also make out a right to compensation for the payment of management fees to Coneview until the expiration of such time. They may also make out a claim that they would have made other investments or entered into other contracts had they not been induced to invest in the defendant’s prosperity bonds. If they are able to establish such a claim they may be awarded such damages as they can establish arising from such a loss of opportunity.[1138] That is the minimum equity needed to avoid the plaintiffs’ detriment.
[1137]Sarkis v Deputy Commissioner of Taxation (2005) 59 ATR 33 at [37] per Nettle JA.
[1138]Henville v Walker (2001) 206 CLR 457; Sellars v Adelaide Petroleum (1994) 179 CLR 332.

The expectation profits or loss of bargain which would flow from the fulfilment of the plaintiffs’ assumption of a right to make arbitrage profits for the life of the policies is not a detriment for which equity should provide relief. If, contrary to my view, the loss of bargain should be treated as a detriment, discretionary considerations militate against the granting of equitable relief for the loss of expected profits. The defendant has identified a number of factors which would make it inequitable and oppressive were such relief to be granted. The nature and the quantum of the plaintiffs’ claim and their conduct makes it wholly inappropriate that they should have the benefit of the assumption either for the life of the policy or the specified lesser period of ten years claimed. The defendant’s unconscionable conduct does not require it to be bound to give effect to the assumption after the giving of reasonable notice that it no longer intended to act as the plaintiffs assumed. The minimum equity to avoid the detriment does not call for the enforcement of the assumption.

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

Orders

On 13 April 2006 I delivered to the parties an unrevised version of these reasons. Some months later, Counsel for the plaintiffs and Counsel for the defendant, with reservation, foreshadowed that they would seek orders so that an appeal could be instituted prior to the completion of the trial as to damage. The parties were advised that until the plaintiffs provided proper particulars of damage so that an assessment could be made of the nature and likely duration of the damages trial, I would not contemplate making orders to facilitate an appeal on the question of liability.

A further substantial period of time elapsed before the parties returned to Court. The plaintiffs’ particulars of damage were still in a less than satisfactory state and the parties had been unable to agree as to the orders which should be made. The parties were given the opportunity to file written submissions. A number of further hearings were conducted and further oral submissions made which dealt with the orders which should be made. The plaintiffs’ particulars of damage were amended. Difficulties in finalising the matter were not assisted by the parties’ tendency to change their positions with respect the question of the appropriate orders. Finally, on 15 December 2006, the following orders were pronounced:

The judgment of the court on the plaintiffs’ claim is that

1.It is declared that the defendant engaged in unconscionable conduct in respect of the Prosperity Bonds issued by it to the plaintiffs by failing to disclose to the plaintiffs, prior to their entry into their respective Prosperity Bond policies, its intention to -
(a) cease calculating the prices of units issued in respect of the Cash and Secure portfolios on an historical basis; and
(b) reduce the plaintiffs’ expected profits from arbitrage through the defendant’s calculation of the prices of units issued in respect of the Cash and Secure portfolios on an historical basis by permitting changes in the numbers of units issued in respect of those portfolios to cause the prices of units in those portfolios to rise or fall, being changes brought about in consequence of switches of units between those portfolios requested by or on behalf of the plaintiffs.
2.It is declared that:
(a) the defendant engaged in misleading and deceptive conduct within the meaning of section 52 of the Trade Practices Act 1974 (Cth) by failing to disclose to the plaintiffs, prior to their entry into their respective Prosperity Bond policies, its intention to -
(i)cease calculating the prices of units issued in respect of the Cash and Secure portfolios on an historical basis; and
(ii) reduce the plaintiffs’ expected profits from arbitrage through the defendant’s calculation of the prices of units issued in respect of the Cash and Secure portfolios on an historical basis by permitting changes in the numbers of units issued in respect of those portfolios to cause the prices of units in those portfolios to rise or fall, being changes brought about in consequence of switches of units between those portfolios requested by or on behalf of the plaintiffs.

(b) the plaintiffs’ claims that the defendant engaged in misleading and deceptive conduct otherwise fail.
3.Order that the defendant pay damages to the plaintiffs:
(a) to be assessed in respect of the defendant’s conduct referred to in order 1, such damages -
(i) to compensate the plaintiffs for:
(A) any borrowing expenses and other costs reasonably incurred in maintaining their investments in respect of their Prosperity Bond policies;
(B) any management fees paid in respect of the management of their Prosperity Bond policies; and
(C) any loss of opportunity to make alternative investments which the plaintiffs are able to establish;
(ii)to be calculated from the date on which the defendant ceased calculating the prices of units issued in respect of the Cash and Secure portfolios on an historical basis until the conclusion of a reasonable period after the date on which notice was given of the defendant’s intention to cease calculating the prices of units issued in respect of the Cash and Secure portfolios on an historical basis; and
(iii) not to include any expectation profits or damages for loss of bargain;

(b)   in the alternative to (a) above, to be assessed in respect of the defendant’s conduct referred to in order 2.
4.Order that the plaintiffs’ claims be otherwise dismissed, including their claims:
(a)   for declarations as to the proper construction of the Prosperity Bond policies issued by the defendant to the plaintiffs;
(b)   for a declaration that the defendant breached the plaintiffs’ Prosperity Bond policies;
(c)   for a declaration that the defendant failed to act in the utmost good faith towards the plaintiffs;
(d)   for orders that the defendant specifically perform the Prosperity Bond policies in accordance with the terms alleged by the plaintiffs;
(e)   for orders that the defendant recalculate and maintain account balances of the plaintiffs’ policies by giving effect to notices of intention to switch and cancellations of those notices after 16 October 2000;
(f) for rectification of clause 1.8 of each plaintiff’s policy and the Undertakings/Special Agreements letter to reflect the 21 June 1999 and No Advice letters; and
(g)   for damages in lieu of specific performance and for repudiation.

The judgment of the court on the defendant’s counterclaim is that:

5.It is declared that the second paragraph of clause 1.8 of the Prosperity Bond policies entered into by the plaintiffs, on its proper construction, provides that:
(a)   upon being given written notice of the policy holder’s intention to transfer or switch their entitlements between portfolios (referred to hereinafter as a “switch”), or make a cash withdrawal, involving units valued at more than $100,000, the defendant waives its right to delay for up to 30 days any cash withdrawal or switch involving units valued at more than $100,000;
(b)   the notice referred to in paragraph (a) is a notice of the policyholder’s intention that the withdrawal or switch be effected on the day of the notice or as soon as possible thereafter;
(c)   where such notice is given, in lieu of its right to delay for up to 30 days, the defendant has a right to delay any such withdrawal or switch for up to three working days;
(d)   in the event that the defendant exercises its right to delay any such withdrawal or switch for up to three working days, the policy holder may cancel the withdrawal or switch at any time prior to the completion of the withdrawal or switch by the defendant; and
(e)   in the event that the policy holder does not cancel the withdrawal or switch prior to the completion thereof by the defendant, the defendant will complete the withdrawal or switch using the unit prices determined in accordance with order 6 of these orders.
6.It is declared that clause 1.8 of the Prosperity Bond policies entered into by the plaintiffs, on its proper construction, provides that:
(a) in the case of a withdrawal or switch where notice is given pursuant to clause 1.8, the reference to “unit price” in the second sentence of the second paragraph of clause 1.8 is a reference only to the “sell” price of the units in the portfolio from which funds are to be switched or from which funds are to be withdrawn (the “departure portfolio”);
(b) in the case of a switch where notice is given pursuant to clause 1.8, the defendant is entitled to calculate the “buy” price of the units in the portfolio into which funds are to be switched, on the day on which the switch is completed.
7.It is declared that the terms of the Prosperity Bond policies entered into by the plaintiffs, on their proper construction, do not require the defendant to calculate prices for units issued in respect of the portfolios maintained by the defendant in respect of Prosperity Bond policies on an historical basis.
8.It is declared that clause 3.3 of the Prosperity Bond policies entered into by the plaintiffs, on its proper construction, does not permit a notice of intention to switch units from one portfolio to another to be given unless the policy holder holds units in the departure portfolio at the time the notice of intention is given.
9.It is declared that the terms of the Prosperity Bond policies entered into by the plaintiffs, on their proper construction, do not require the defendant to contribute to Statutory Fund No 5 or the Secure and Cash portfolios or either of them so as to prevent changes in the numbers of units issued in respect of those portfolios to cause the prices of units in those portfolios to rise or fall, being changes brought about in consequence of switches of units between those portfolios requested by or on behalf of the plaintiffs.
10.It is declared that the terms of the Prosperity Bond policies entered into by the plaintiffs, on their proper construction, permit the defendant to reduce the number of units on issue in the Cash and Secure portfolios by cancelling units in those portfolios held by policyholders other than the plaintiffs and segregating the assets underlying the policies entered into by the plaintiffs from the assets underlying policies entered into by other investors in Prosperity Bonds.
11.It is declared that the terms of the Prosperity Bond policies entered into by the plaintiffs, on their proper construction, provide that the defendant has the right to decline to accept further investments.
12.Order that the defendant’s counterclaim be otherwise dismissed.

[2006] VSC 507

13 April 2006