ABN AMRO Bank NV v Bathurst Regional Council

2. APPEAL GROUNDS 955 ABN Amro and S&P raised three matters on appeal against LGFS: 1. To establish causation on each of its claims, LGFS had to prove on the balance of probabilities that, absent the impugned conduct, it would have taken some other more beneficial course (the Alternative Universe Contention): ABN Amro Appeal Grounds Matrix Rows 85A-85D and S&P Appeal Grounds Matrix Rows 50A-50B; 2. LGFS' claim on the LGFS Retained Notes infringed the "rule" in Potts v Miller (1940) 64 CLR 282: ABN Amro Appeal Grounds Matrix Rows 89A-89B and S&P Appeal Grounds Matrix Rows 47A, 48A, and 51A; and 3. LGFS was contributorily negligent in connection with its loss on the LGFS Retained Notes. 956 The Alternative Universe Contention was addressed at [786]-[790] and [934]-[935] above. It is rejected for those reasons. 957 We turn then to the remaining Appeal Grounds.

3.1 Introduction 958 At trial and on appeal, ABN Amro and S&P submitted that LGFS failed to prove its loss because it had adopted an alternative approach to the "rule" in Potts v Miller. In particular, each submitted that LGFS had impermissibly claimed its loss was the difference between the price it paid for the Rembrandt 2006-3 notes less the amount it received when it sold them to LGSS on 20 March 2008 (see [955] above) without establishing that this would not result in it being overcompensated. The primary judge concluded that LGFS had not failed to prove its loss: J[3452]-J[3463]. 959 ABN Amro and S&P contended that there were two findings which underpinned the primary judge's reasoning. First, that the extreme spread widening which accompanied the GFC and led to the Rembrandt 2006-3 notes cashing out was not a supervening or extraneous event (J[3454]-J[3458]) and, second, that as a consequence of the impugned conduct of ABN Amro and S&P, LGFS was effectively "locked in" to the purchase of the notes until it cashed out by sale to LGSS: J[3459]-J[3462]. ABN Amro and S&P challenged these findings on appeal.

3.2 Analysis 960 The Appeal Grounds fail. ABN Amro and S&P's contentions are inconsistent with both applicable legal principles and the facts. It is important to understand that neither ABN Amro nor S&P contended that different principles were to be applied in determining whether LGFS had proved loss or damage in tort or under the statutory provisions and neither contended that a different result would or should have followed if the proper principles were applied. Rather, in the circumstances of the current appeal, it is sufficient to observe that the "true measure" of LGFS' loss is the amount which represents the prejudice or disadvantage suffered by LGFS as a result of it altering its position in reliance on the misleading representations of each of ABN Amro and S&P: HTW Valuers (Central Qld) Pty Limited v Astonland Pty Limited (2004) 217 CLR 640 at 656-659 [35]-[40] and Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1 at 12. 961 We have stated the "true measure" of LGFS' loss in those terms because it reflects, accurately, the position LGFS found itself in as a result of the impugned conduct of ABN Amro and, separately, the impugned conduct of S&P. It is important to understand why that proposition was stated in those terms and where it sits with the so-called "rule" in Potts v Miller. 962 The position was explained by the High Court in HTW Valuers. In that case, the argument on appeal was that the correct measure of damages, apart from consequential losses, was to deduct the value of the asset acquired at the date of acquisition from the purchase price and in assessing that value to bear in mind post-acquisition events. The Court's response to that argument (at 656-659 [35]-[40]) was and remains important: 35. [(1)] The approach of subtracting value from price is commonly employed where the acquisition of land, chattels, businesses or shares is induced by deceit. It has also been commonly employed under s 82 of the [TPA]. It is sometimes described as the rule in Potts v Miller. [(2)] Even in the areas in which that approach is often applied, and even apart from cases in which consequential losses have been recovered, the "rule" is not universal or inflexible or rigid. This perception is not novel. It has existed at least since the judgment of Dixon J in Potts v Miller and has been quite plain since that of Gibbs CJ in Gould v Vaggelas. Even Jordan CJ, who called the rule "well settled", acknowledged that it was only a "rule of practice". The flexibility of the rule can be seen by reference to a number of its characteristics. 36. One key qualification of the rule which prevents it from being inflexible is that the test depends not on the difference between price and "market value", but price and "real value" or "fair value" or "fair or real value" or "intrinsic" value or "true value" or "actual value" or what the asset was "truly worth" or "really worth" or "what would have been a fair price to be paid ... in the circumstances ... at the time of the purchase". This distinction is sometimes difficult to draw, but it is old and fundamental. 37. A second qualification flows from the first. The distinction between a value which answers one of the tests just stated and market values means that market values - the prices actually obtainable in market sales - may be disregarded if they are "delusive or fictitious" because they are the result of "a fraudulent prospectus, manipulation of the market or some other improper practice on the part of the defendant". There are other reasons why the law does not limit recovery by reference to market value - the amount for which the plaintiff might have sold the assets acquired. One is that, subject to mitigation issues, the plaintiff is "not bound to sell them". Another is that there may not be a market. Another is that the market is mistaken on some basis other than manipulation. It is common to speak of shares being undervalued (or overvalued) by the market. … 39. In the same way, in Kizbeau Pty Ltd v W G & B Pty Ltd this Court pointed out that, in many fields of law, assessments of compensation or value at one date are commonly made taking account of all matters known by the later date when the court's assessment is being carried out. … The limpid words of Lord Macnaghten about the duty of an arbitrator in determining compensation are far too well known to escape repetition: Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark? The significance of Kizbeau Pty Ltd v W G & B Pty Ltd is that it endorsed that approach in relation to s 82 of the [TPA] when the court is assessing damages by comparing the price and the real value of the asset at the date of the acquisition. 40. Finally, although the court is entitled to take into account events after the date of acquisition, it must distinguish among possible causes of the decline in value of what has been bought. "If the cause is inherent in the thing itself, then its existence should be taken into account in arriving at the real value of the shares or other things at the time of the purchase. If the cause be 'independent', 'extrinsic', 'supervening' or 'accidental', then the additional loss is not the consequence of the inducement". (Material in brackets and emphasis added. Footnotes omitted). 963 A number of matters are worth stating. First, LGFS had the burden of proving its loss or damage. Second, subject to the loss being proved, the approach to assessment must be flexible and "best adapted to give the injured claimant an amount which will most fairly compensate for the wrong suffered" provided that it works no injustice: Ingot Capital Investments at 684 [171]; Henville v Walker (2001) 206 CLR 459 at 502 [131] and HTW Valuers at 667 [65]. Third, causation and damages are closely linked: Ingot Capital Investments at 684 [172]. Fourth, and no less importantly, where property has been acquired in reliance on misrepresentations, there will be many cases where the losses are not represented by the difference between the price and the value of the asset at the time of purchase: see HTW Valuers at 656-659 [35]-[40]; Ingot Capital Investments at 685-686 [176]-[180] and 688 [190] and Smith New Court Securities Ltd v Citibank NA [1997] AC 254 at 266. The circumstances in which that last group of cases might arise are not closed. 964 It is against that background that it is necessary to address the submissions of ABN Amro and S&P. First, they described the "rule" in Potts v Miller as being that where a plaintiff has been induced by deceit to purchase an asset, the proper measure of the plaintiff's loss is the difference between the price the plaintiff paid for the asset and its true value at the time of purchase (HTW Valuers at 656-657 [34]-[35]) and then submitted that the rule is appropriate for the assessment of damages under s 82 of the TPA (and its analogues) where misleading conduct has induced a person to purchase an asset: HTW Valuers at 656-657 [35]. Second, although commonly employed, the "rule" in Potts v Miller is not "universal or inflexible or rigid": HTW Valuers at 656-657 [35]. Third, under provisions such as s 82 of the TPA, other approaches to the assessment of damages are permissible, provided they will not result in the plaintiff being overcompensated: HTW Valuers at 666-667 [63] and 667-668 [65]. 965 Fourth, a primary reason for the common adoption of the so-called "rule" in Potts v Miller was to separate out losses resulting from extraneous factors in the later history of the asset: HTW Valuers at 667-668 [65]. In support of that contention, they referred to Gleeson CJ's statement in Henville at 471-472 [24]-[25] that: [24] Although there has been some discontent with its apparent rigidity, a primary reason for the general principle that damages in deceit, where there has been a fraudulent inducement to acquire shares in a company, are measured by the difference in the value of the shares at the time of acquisition and the price paid for them, is the need to separate out losses resulting from extraneous factors in the later conduct of the company's business. Peek v Derry [(1887) 37 Ch D 541] was a case concerning shares in a tramway company that were taken up on the faith of a false prospectus. Cotton LJ said [at 592]: Neither can the Plaintiff get the benefit of any loss or depreciation in the shares which was occasioned by subsequent acts. If the company at the time was a good company and the shares had an intrinsic value, then no fact which subsequently occurred, as for instance, some Act of Parliament being passed to prevent such tramways from using steam-power, or anything else, ought to add to the damages to be paid by the Defendants ... [25] Later, his Lordship referred to "events injurious to the company, which occurred not from intrinsic defects in it, but from events which happened after the purchase", which "cannot be taken into account" [at 593]. (Some footnotes omitted.) 966 The contention was that losses resulting from extraneous events were to be separated out because they were not the reasonable consequence of the impugned conduct and so the defendant should not be held liable for them. So much may be accepted. As Dixon J said in Potts v Miller at 298: The reason given for the rule is that, if, after the date of purchase, the thing which the plaintiff was induced to buy loses in value owing to accidental or extrinsic causes, that loss is not the reasonable consequence of the inducement. "It is not enough to say that but for the misrepresentation or fraud the purchaser would never have bought, and therefore would not have lost the thing bought. To recover back the whole price, if the thing had any value when bought, he must be in a condition to rescind the bargain and replace it, which here the plaintiff is not, as it is not in his power to make the company take back the shares, or in the power of the company to resume them. If a man is induced by misrepresentation to buy an article and while it is still in his possession it becomes destroyed or damaged, he can only recover the difference between the value as represented and the real value at the time he bought. He cannot add to it any further deterioration which has arisen from some other supervening course" (per Cockburn CJ in Twycross v Grant [(1877) 2 CPD at 544]). 967 Fifth, ABN Amro and S&P asserted that another reason for adopting the "rule" in Potts v Miller was that its application required a difficult distinction to be drawn between causes of loss or diminution in the value of the relevant asset which are extraneous, and those causes which are inherent in the asset itself. And, that in drawing that distinction, assistance is to be gained by bearing in mind that what underlies it is the notion that diminution in the value of an asset from inherent causes can properly be taken into account in assessing the asset's true value as at the date of its acquisition, whereas diminution in value from extraneous causes cannot: Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 at 291. 968 Finally, ABN Amro and S&P asserted that, as a separate exercise, it was and remained necessary to separate out losses or diminution in the true value of the asset resulting from extraneous events, even where the purchaser retained the asset as a result of the impugned conduct (e.g., because there was no market for it). 969 Each of these propositions repays careful analysis. The premise which underpins each appears to be that the "rule" in Potts v Miller is the default position or starting point. If that is the premise, we reject it. Labelling it a "rule" is unhelpful and dangerous. It is unhelpful and dangerous because inevitably the wrong question is asked: namely is the "rule" in Potts v Miller satisfied rather than asking the more fundamental questions - what are the facts, do those facts establish a compensable loss and if so, what was its true measure? Put at its highest, Potts v Miller points to considerations which may, not must, bear upon the assessment of that "true measure". In the present appeal, the onus was and remained on LGFS to prove its loss: Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co Ltd [1997] AC 191 at 218D-F (Lord Hoffmann). In the circumstances of this case, the "true measure" of LGFS' loss was the amount which represented the prejudice or disadvantage suffered by LGFS as a result of it altering its position in reliance on the misleading representations of each of ABN Amro and S&P, namely the amount paid by LGFS for the notes less the amount received when it sold the LGFS Retained Notes to LGSS. 970 Next, the distinction that ABN Amro and S&P would have the Court draw between the "true value" or "real value" of the asset, as distinct from its "market value", as at the time of purchase (see [964] above) is inapposite. At the heart of this contention was the submission that focus on the "true value" or "real value" of the asset preserved the flexibility of the "rule" in Potts v Miller, and meant that it remained an appropriate measure of loss even in circumstances where the market value of the asset is "delusive or fictitious" (as such market values may be disregarded) or there is no market for the asset at all: HTW Valuers at 657-658 [36]-[37]. That submission does not assist. The focus on "true" or "real" value at the time of purchase is interesting but irrelevant in answering the more fundamental questions in assessing LGFS' loss or damage. 971 The true comparator was between the price paid and the "real value" of the notes. The real value of the notes was what was paid on cash out (or sale to LGSS) because no-one knowing the true creditworthiness of the notes would have paid any more than that amount. And the fact that the loss is measured at that time (the time when the notes cashed out or sold and not at the time of purchase) is necessary because the decline in value was attributable to the notes themselves, not to an extrinsic event. That analysis demonstrates two further reasons why the so-called "rule" in Potts v Miller is inapposite in assessing the true measure of LGFS' loss. It would assess the measurable loss at the wrong date and would direct attention to an extrinsic event which did not exist thereby ignoring a loss inherent in the thing bought. As to the date, the correct point of comparison of the "true value" was when the representations ceased to have operative effect - here, the sale of the notes to LGSS. Next, the cause of the loss. Any assessment of the true measure of loss or damage requires identification, precise identification, of the losses or diminution in the true value of the asset and the events from which those identified losses or diminution in value were said to have resulted. Here, the questions posed by Potts v Miller are inapposite because, as we have explained when assessing the "scope of liability" or normative assessment of causation, the loss was caused by the inability of the notes, inconsistent with a AAA rating, to survive relatively rapid credit spread widening without mean-reverting in the short to medium term. That loss was attributable to the characteristics of the notes themselves (and the characteristic of the notes to which the negligent and misleading statement made by each of ABN Amro and S&P was directed), not an extraneous event: J[3417], J[3427] and J[3455]-[3456]. The primary judge was correct to conclude that in those circumstances, the true measure of LGFS' loss is the amount paid by LGFS for the notes less the amount it received on the notes being sold to LGSS: J[3462]. 972 What then of these so-called "extraneous factors" referred to by ABN Amro and S&P? The submission was that where a plaintiff has been induced by misrepresentation to purchase an asset, an alternative to the so-called "rule" in Potts v Miller is to measure the plaintiff's loss as the difference between the price it paid for the asset and the benefit left in the plaintiff's hands at trial but that that alternative was not likely to be an appropriate approach (because it will result in the plaintiff being overcompensated) where the value of the asset has been diminished by extraneous factors and/or where the plaintiff has not been locked into the asset by the continuing effect of the misrepresentation or the asset not being saleable: HTW Valuers at 667-668 [65]-[66]. As we have just said, in the circumstances of this appeal, that analysis is inapposite. LGFS' loss was attributable to the characteristics of the notes themselves (and the characteristic of the notes to which the negligent and misleading statements made by each of ABN Amro and S&P was directed), not an extraneous factor. 973 However, it is necessary to address the so-called "extraneous factors", relied on by ABN Amro and S&P and providing the basis for their Appeal Grounds.

3.3 Extreme spread widening accompanying the GFC 974 The primary judge concluded at J[3454] that "it cannot be accepted that the GFC, which from the point of view of the performance of the notes was simply an example of sustained spread widening being a risk central to the assessment of the creditworthiness of the notes, may be ... characterised [as a supervening or extraneous event]": see also J[3417] and J[3427]. 975 ABN Amro and S&P submitted that the finding was incorrect for four reasons: 1. The basal reason for the finding - that the extreme spread widening which accompanied the GFC and led to the Rembrandt 2006-3 notes cashing out was simply an example of sustained spread widening which was central to S&P's assessment of the creditworthiness of the notes - was factually incorrect. 2. The primary judge was in error to conclude (at J[3455]), in relation to the spread widening which accompanied the GFC, that "[t]his is an example of the principles discussed in HTW Valuers at [658-659] [38]-[40] that the real value of an asset may be assessed having regard to subsequent events if those subsequent events do no more than expose what was inherent in the asset in the first place". 3. The primary judge was also in error to conclude (at J[3456]-J[3458]) that the losses sustained by LGFS on the downgrade and cash out of the Rembrandt 2006-3 notes were causally related "to S&P's and [ABN Amro's] negligent misrepresentations" in a way which went beyond the mere fact that, absent those misrepresentations, LGFS would not have purchased the notes. 4. The primary judge was incorrectly influenced (at J[3452], J[3453] and J[3458]) by a belief that the duties of care of ABN Amro and S&P were in some way analogous to that of the valuer in Kenny & Good Pty Limited v MGICA (1992) Limited (1999) 199 CLR 413. 976 In the context of the LGFS Retained Notes, none of these matter because LGFS' loss was occasioned by the intrinsic defects in the notes, defects which both ABN Amro and S&P represented to be otherwise. LGFS suffered the loss that it did because the notes were not as represented. The event which brought home the inaccuracies of those representations is properly not described as an independent extraneous event causing LGFS' loss. It was, as the primary judge said, "an example of the principles discussed in HTW Valuers at [38]-[40] that the real value of an asset may be assessed having regard to subsequent events if those subsequent events do no more than expose what was inherent in the asset in the first place". That event was not the GFC. That event was the inability of the notes, inconsistent with a AAA rating, to survive relatively rapid credit spread widening without mean-reverting in the short to medium term. That loss was attributable to the characteristics of the notes themselves, not an extraneous event. 977 Further, in any event, LGFS sold the LGFS Retained Notes on 20 March 2008 to LGSS: see [958] above. Although what was the start of the GFC is the subject of much debate, when LGFS sold the LGFS Retained Notes, the collapse of Lehman Brothers on 15 September 2008 was still six months away.

3.4 LGFS effectively "locked in"? 978 That leads to the second alleged "error" relied upon by ABN Amro and S&P, namely that the primary judge erred in finding that, as a consequence of the impugned conduct of ABN Amro and S&P, LGFS was effectively "locked in" to the purchase of the notes until they cashed out by sale to LGSS: J[3459]-J[3462]. 979 The primary judge held that LGFS was "locked in" to its purchase of the Rembrandt 2006-3 notes for two reasons - first, because ABN Amro's (and S&P's) impugned conduct as to the creditworthiness of the notes continued to operate until shortly before LGFS sold them to LGSS (see J[3419], J[3422]-J[3424] and J[3459]) and, second, because even if that conduct was negatived at an earlier point in time, the notes were not a readily marketable asset: see J[[3426], J[3428] and J[3460]-J[3461]. On appeal, ABN Amro and S&P challenged each reason: ABN Amro Appeal Grounds Matrix Rows 89A-89B and S&P Appeal Grounds Matrix Row 53A.

3.5 Impugned conduct did not continue to operate 980 ABN Amro and S&P contended that their impugned conduct did not continue to operate on LGFS until shortly before it sold the Rembrandt 2006-3 notes to LGSS. First, they contended that the impugned conduct never had any effect on LGFS. That contention has been addressed earlier at [774]-[800] and [916]-[935] and is without foundation. 981 Next, they contended that, even if this was not so, any continuing effect of ABN Amro's impugned conduct on LGFS had come to an end by late February or early March 2007 when ABN Amro informed Mr Hilder that S&P was reviewing how it rated CPDOs, and that, accordingly, ABN Amro would not issue any further Rembrandt 2006-3 notes to LGFS. ABN Amro contends that it ought to have been plain to Mr Hilder, from the fact that ABN Amro was declining to issue any further Rembrandt 2006-3 notes, that S&P's review at least called into question the reliability of its earlier AAA rating of the notes. The primary judge refused to accept this on the basis that Mr Hilder was not told, in terms, that S&P's original rating had been negligent or misleading: J[3424]. 982 ABN Amro and S&P contended that in framing the issue that way, the primary judge misdirected herself. Instead, ABN Amro and S&P stated that what mattered was whether LGFS continued to rely on S&P's rating (since, if it did not, LGFS could not have been relying on ABN Amro's impugned conduct). In support of that contention, ABN Amro submitted that: Mr Hilder did not need to be told that the rating was negligent or misleading in order to stop relying on it. He was an experienced participant in financial markets, who knew that credit ratings addressed creditworthiness at a particular point in time and could change. To stop relying on S&P's rating, therefore, all Mr Hilder needed to know was that the rating had changed or was likely to change. The fact that [ABN Amro] was refusing to issue any more of the notes because of S&P's rating review was sufficient to convey this to him. The "irresistible inference" they contend the primary judge should have drawn was that Mr Hilder (and by extension LGFS) did not rely on S&P's AAA rating (and, therefore, could not have relied on ABN Amro's impugned conduct) after late February or March 2007. 983 As we have explained at [971] above, Potts v Miller has no application where the misrepresentations have and continue to have operative effect. ABN Amro's and S&P's submission fails because LGFS not only relied on both the ABN Representations and the S&P Representations but both sets of representations had a continuing effect on LGFS: see [980] above. That leaves the facts set out at [981] above. There are two fundamental problems with the submission based on those facts. The submission misapplies Potts v Miller and it is factually inaccurate and incomplete. 984 ABN Amro told LGFS, in early 2007, that S&P was reviewing how it rated CPDOs: see [981] above. That is not in dispute. However, that statement must be considered in context, not in isolation. What then was the context? It included that (a) the rating of the Rembrandt notes had not been downgraded and remained AAA at the time of ABN Amro's statement and thereafter (see [142] above) (b) ABN Amro did not disclose what it knew about the rating (see [981] above) (c) ABN Amro did not suggest the rating was unreliable (see [981] above) and (d) ABN Amro did not challenge on appeal the primary judge's finding at J[3420] that the events before the downgrade did not affect LGFS' ongoing belief that the rating was reliable. 985 Put simply, Potts v Miller had no application because LGFS did not know the representations were misleading. 986 S&P adopted a different position about the so-called end point in relation to the continuing representations: S&P Appeal Grounds Matrix Rows 55A-56A. It contended that the primary judge erred in failing to find that the AAA rating operated as a continuing representation only until the Rembrandt 2006-3 notes were (a) placed on "CreditWatch Negative" or (b) downgraded to BBB+. Two matters should be noted. The substance of S&P's complaint is the same as ABN Amro's. S&P simply adopted two alternative end points. Second, in support of these alternative end points, it relied upon ABN Amro's submissions. It is dismissed for the same reasons: see [980]-[985] above.

3.6 LGFS able to sell to ABN Amro 987 The other matter relied upon by ABN Amro and S&P was that LGFS was able to sell the Rembrandt 2006-3 notes to ABN Amro. It was common ground that, pursuant to the Rembrandt 2006-3 term sheet, ABN Amro was obliged to repurchase the notes from LGFS, if it so required, at a price which reflected supply and demand: see [84] above. There is a short answer to this contention. ABN Amro's promise to buy back was at market value: see [84] above. There is no reason to think that in an informed market the notes had any greater value than the price at which LGFS sold them (immediately following the downgrade). 988 Accordingly, for those reasons, ABN Amro and S&P's Appeal Grounds that the primary judge should have concluded that LGFS: (a) had not proved any loss in accordance with the "rule" in Potts v Miller and (b) had not established that it would not be overcompensated if its alternative approach were applied, fail.

4. CREDIT FOR INTEREST OR COUPON PAYMENTS? 989 That leaves the last contention that in assessing LGFS' "true measure" of loss, LGFS should give credit for the interest payments or coupon payments it received: ABN Amro Appeal Grounds Matrix Row 89C and S&P Appeal Grounds Matrix Row 49A. That contention is rejected. Contrary to S&P's contentions, labelling LGFS' claim as a "no transaction case" again obscures the more fundamental questions: see [969]-[971] above. LGFS suffered loss when it sold the notes. That was a loss of principal invested. There was no requirement to give credit for interest or coupon payments received before that date because those payments reflect a cost of money which LGFS would have earned, to some degree, in any event (e.g, if paid into a term deposit LGFS would have earned interest).

5. NOTICES OF CONTENTION - LGFS AND COUNCILS 990 By Notices of Contention, both LGFS and the PA Councils submitted that: 1. The Court should find that the principles for assessing and quantifying damages in Potts v Miller do not apply to LGFS' and the PA Councils' claim for damages against ABN Amro, S&P and LGFS (in the case of the PA Councils) because LGFS and the PA Councils would never have acquired an investment in the Rembrandt notes had the notes not been assigned a AAA rating by S&P: LGFS Appeal Grounds Matrix Row 127 and PA Councils Appeal Grounds Matrix Row 134; and] 2. In the alternative, if the Court finds that the principles in Potts v Miller apply, the Court should find that as at the date of acquisition, the Rembrandt notes had no value or a nominal value and damages should be calculated as the difference between zero and the purchase price paid by LGFS and the Councils, plus interest: LGFS Appeal Grounds Matrix Row 128 and PA Councils Appeal Grounds Matrix Row 135. 991 For the reasons at [954]ff, we reject the submissions.

6. LGFS CONTRIBUTORILY NEGLIGENT? 992 This is addressed in Part 13 below.

PART 7: LGFS' CLAIMS AGAINST ABN AMRO AND S&P IN RELATION TO SETTLEMENT WITH STATECOVER

1. INTRODUCTION 993 LGFS sued both ABN Amro and S&P on account of its payment to StateCover to discharge StateCover's claims against LGFS, ABN Amro and S&P arising from the Rembrandt 2006-2 notes, which were purchased by LGFS on StateCover's behalf: [SAF1]. The relevant facts are summarised at [76]-[78] above. 994 At trial, the primary judge found that: 1. S&P and ABN Amro had breached a duty of care owed to LGFS in relation to the Rembrandt 2006-2 notes: J[2993], J[2741]-J[2825], J[2925]-J[2956] and J[3179]-[3200]; 2. S&P and ABN Amro had engaged in misleading conduct against LGFS in relation to the Rembrandt 2006-2 notes in contravention of ss 1041E and 1041H of the Corporations Act and s 12DA of the ASIC Act: J[2993] and J[3088]-J[3104]; 3. LGFS suffered loss and damage as a result of S&P's and ABN Amro's breach of duty and contravention of ss 1041E and 1041H of the Corporations Act and s 12DA of the ASIC Act: J[2837]-J[2882], J[2959]-J[2975], J[2984], J[2920]-J[2922], J[2993] and J[3167]-J[3178]; and 4. S&P and ABN Amro were liable to make equitable contribution to LGFS for LGFS' settlement of the StateCover proceedings: J[2991]-J[2992], J[2994] and J[3722]. 995 S&P and ABN Amro appealed against these findings. 996 It is necessary to note certain aspects of the Rembrandt 2006-2 transaction. The term sheet for the Rembrandt 2006-2 transaction indicated that the characteristics of, and disclaimers applicable to, the Rembrandt 2006-2 notes were the same as for the Rembrandt 2006-3 notes with minor exception. Further, the primary judge found that the Mandate Letter did not apply to the Rembrandt 2006-2 notes: J[3234]. That finding was not challenged on appeal.

2.1 Tort Claims: ABN Amro Appeal Grounds Matrix Rows 59A, 77B and 78B 997 The primary judge found that ABN Amro owed LGFS a duty to exercise reasonable care and skill in providing to LGFS information and advice about the Rembrandt 2006-2 notes: J[3179]-J[3200]. That duty was the same duty which ABN Amro owed to LGFS in relation to the Rembrandt 2006-3 notes. The primary judge found that ABN Amro breached its duty of care: J[3201]-J[3214]. 998 ABN Amro challenged the primary judge's finding of the existence of a duty on the same bases as it did with respect to the Rembrandt 2006-3 notes: see [805]-[806] above. The nature of the differences between the Rembrandt 2006-2 transaction and the Rembrandt 2006-3 transaction meant that there were some subtle differences between ABN Amro's submissions in respect of the two but those differences do not materially alter the analysis. We therefore reject that challenge for the reasons at [807]-[838] and [852]-[860] above. 999 Similarly, and subject to one exception, ABN Amro's challenge to the primary judge's finding that it breached its duties also mirrored the arguments it made in relation to the Rembrandt 2006-3 notes: see [878] above. That exception was its submissions that there was no breach because "it cannot be doubted that the [Rembrandt 2006-2] notes, which had the new rebalancing method, would have rated AAA using either [15% or 25%] volatility" and that the Rembrandt 2006-2 notes "could have rated AAA at a starting spread as low as 28 bps (well below the level of around 32 bps which prevailed when the notes were issued". We have dealt with these submissions at [374]-[424] above. We reject ABN Amro's challenge to the primary judge's finding that it breached the duties it owed to LGFS in relation to the Rembrandt 2006-2 notes for the reasons at [879]-[906] above.

2.2 Statutory Claims: ABN Amro Appeal Grounds Matrix Row 60A 1000 The primary judge found that ABN Amro had engaged in misleading conduct in contravention of ss 1041E and 1041H of the Corporations Act and s 12DA of the ASIC Act for the same reasons as she had found it had done so in relation to the Rembrandt 2006-3 notes: see [913]-[915] above. ABN Amro challenged that finding for the same reasons it deployed in its challenge to the finding in relation to the Rembrandt 2006-3 notes: see [913]-[915] above. We reject that challenge for the reasons at [913]-[915] above.

2.3 Causation: ABN Amro Appeal Grounds Matrix Rows 64B, 79B and 81C 1001 The primary judge's findings on causation in relation to the claims brought by LGFS against ABN Amro applied to both the Rembrandt 2006-2 and the Rembrandt 2006-3 notes: see Part 5, Section 3 above. ABN Amro challenged those findings on the same bases as it did with respect to the Rembrandt 2006-3 notes: see [916] above. In particular, ABN Amro submitted that: 1. LGFS failed to prove that, if it had not caused StateCover to purchase the Rembrandt 2006-2 notes, it would have caused StateCover to purchase an alternative product which would not have exposed LGFS to the same liability; and 2. LGFS' unlawful conduct was the real and essential cause of its liability to StateCover. 1002 We reject ABN Amro's challenge for the reasons at [916]-[935] and Part 4, Section 1.1.4.4 above.

3.1 Tort Claims: S&P Appeal Grounds Matrix Rows 1A, 10B, 12E, 12G and 12I 1003 The primary judge found that S&P owed LGFS a duty to exercise reasonable care in forming, and to have reasonable grounds for, the opinion expressed by the rating: see J[2993] and [566] above. That duty was the same duty which S&P owed to LGFS in relation to the Rembrandt 2006-3 notes. The primary judge found that S&P breached that duty: J[2993]. 1004 Subject to one exception, S&P challenged the primary judge's finding of the existence of a duty on the same bases as it did with respect to the Rembrandt 2006-3 notes: see [567] above. The exception was S&P's submission that the finding of a duty was "unsupported by the facts about the Rembrandt 2006-2 notes (as opposed to the Rembrandt 2006-3 notes)". S&P did not elaborate on this submission beyond directing the Court to its submissions with respect to LGFS and the PA Councils and stating that its submission was effectively that "it has not been proven on the balance of probabilities that the relevant indicia for imposition of a duty of care in relation to Rembrandt 2006-2 exist". We disagree and reject S&P's challenge to the primary judge's finding of the existence of a duty for the reasons at Part 4, Section 1.1 above. 1005 Consistently with its position in relation to the Rembrandt 2006-3 notes, S&P did not appeal against the primary judge's finding that the rating was incorrect and, as a result, it had breached its duty.

3.2 Statutory Claims: S&P Appeal Grounds Matrix Rows 12B, 14B, 15B, 17B, 22B-22E, 23B, 26B, 27B and 30B 1006 The primary judge found that S&P had engaged in misleading conduct in contravention of ss 1041E and 1041H of the Corporations Act and s 12DA of the ASIC Act for the same reasons as she had found it had done so in relation to the PA Councils: see [1304] below. S&P challenged that finding for the same reasons it deployed in its challenge to the finding in relation to the PA Councils: see [1304]-[1308] below. We reject that challenge for the reasons at [1304]-[1308] below.

3.3 Causation: S&P Appeal Grounds Matrix Rows 31B, 32B and 38B 1007 The primary judge's findings on causation in relation to the claim brought by the PA Councils against S&P applied equally to LGFS in the StateCover proceedings: see J[2837]-J[2882], J[2959] and [1309] below. S&P challenged those findings for the same reasons as it did with respect to the PA Councils: see [1309] below. We reject that challenge for the reasons at [1309] below.

3.4 Loss and Damage: S&P Appeal Grounds Matrix Row 47B 1008 On appeal S&P raised the same issues and pressed the same arguments in relation to loss and damage as it did with respect to the PA Councils: see [1311]-[1312] below. We reject S&P's arguments for the reasons at [1311]-[1312] below.

4. EQUITABLE CONTRIBUTION 1009 The primary judge found that ABN Amro and S&P were each liable to make equitable contribution to LGFS for LGFS' settlement of the StateCover proceedings: J[2991]-J[2992]. Her Honour accepted that the principles which governed the question whether LGFS was entitled to equitable contribution were those expressed by the High Court in HIH Claims Support Limited v Insurance Australia Limited (2011) 244 CLR 72 at 87-90 [36]-[48]: [36] In [Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342], Kitto J said the basic concept of contribution was longstanding and was "accepted by both law and equity as one of natural justice", expressed by ensuring equality between persons obliged in respect of a common obligation; although his Honour recognised that "the doctrine of equality operated more effectually in a court of equity". He described the basic principle thus: "persons who are under co-ordinate liabilities to make good the one loss … must share the burden pro rata". [37] The rationale for equitable contribution was explained by Eyre LCB in Dering v Earl of Winchelsea. Obligors (such as co-sureties) severally bound by different instruments in respect of the same liability, who may not even know of each other, have "a common interest, and a common burthen". It is because the charging of one surety in respect of the common obligation discharges the other that "each therefore ought to contribute to the onus". The equity of contribution does not apply between obligors where one of them is, in fact, a surety for a surety rather than a co-surety. The nature or quality of the obligations is critical although the quantum of liability between co-obligors may vary. [38] Co-ordinate liabilities are not limited to circumstances involving co-sureties, or to double insurance where two insurers each have a secondary liability in respect of the same risk; in the latter case "the two policies of insurance are treated as one insurance". [39] Given that natural justice, exemplified by equality, underpins the duty to contribute in respect of co-ordinate liabilities, the search for a common obligation "should not be defeated by too technical an approach". It is possible to have a common obligation where the obligation of each of two obligors has a different source, such as statute and contract, as occurred in BP Petroleum Development Ltd v Esso Petroleum Co Ltd, provided the obligations can be characterised as "of the same nature and to the same extent". [40] By way of contrast, the obligation of an indemnifier under a contract of services, and the obligation of an insurer which may cover the same event, have been held not to be obligations "of the same nature and to the same extent" because, as explained in Caledonia, liabilities incurred in tort, deceit or contract are generally primary whereas the liability of an indemnity insurer to an injured party is generally secondary. [41] In the Inner House decision upheld by the House of Lords in Caledonia, Lord Sutherland explained the rationale: "Contribution …. is a two way exercise. You cannot have contribution from one without contribution from the other." [42] As the requirement of co-ordinate liabilities is essential for the operation of the doctrine of equitable contribution between obligors, the duty to contribute is not based on "some general principle of justice, that a man ought not to get an advantage unless he pays for it". [43] In Burke v LFOT Pty Ltd, a purchaser of retail premises suffered loss arising out of misrepresentations made by the vendor which were actionable under the Trade Practices Act 1974 (Cth), and also loss arising from the negligence of one of the directors of the purchaser who acted as the solicitor in relation to the purchase. The vendor and one of its directors failed to obtain contribution from the solicitor because the liabilities were not, as in BP Petroleum, "of the same nature and to the same extent". Accordingly, they were not co-ordinate liabilities in respect of a common obligation. The repayment to the purchaser by the vendor and its director of the difference between the price received and the true value of the premises did not command equity's intervention. [44] The equitable doctrine that a duty to contribute applies where obligors are under a common burden or common obligation was restated by this Court in the plurality judgment in Friend v Brooker: "With a claim to contribution, as is the position generally with the intervention of equity to apply its doctrines or to afford its remedies, the plaintiff must show the presence of 'an equity' founding the case for that intervention. The 'natural justice' in the provision of a remedy for contribution is the concern that the common exposure of the obligors (or 'debtors') to the obligee (or 'creditor') and the equality of burden should not be disturbed or be defeated by the accident or chance that the creditor has selected or may select one or some rather than all for recovery … The equity to seek contribution arises because the exercise of the rights of the obligee or creditor ought not to disadvantage some of those bearing a common burden; the equity does not arise merely because all the obligors derive a benefit from a payment by one or more of them. As explained in United States authority, contribution is an attempt by equity to distribute equally, among those having a common obligation, the burden of performing it, so that without that common obligation there can be no claim for contribution." (Footnotes omitted.) [45] The plurality went on to prefer the wider term "co-ordinate liabilities" said to subsume the expression "common obligation", and confirmed that "the doctrine is not enlivened merely because the claimant's payment operates to the financial benefit or relief of the other party". [46] In that case, the first respondent, a director of a company, had claimed equitable contribution from a co-director in respect of loans he had made to the company, on the basis that the directors were parties to a common design to achieve a common end. The appellant successfully resisted the claim on the basis that the doctrine of equitable contribution should not be extended to "a common design" which would have the effect of "outflank[ing] the consequences of the selection by the parties of the corporate structure" for their business, which "brought with it the attendant legal doctrines of corporate personality and limited personal liability". The result confirms that equity will not intervene in the absence of a common legal burden or co-ordinate liabilities. [47] The authorities show that no court has departed from the requirement that the equity to contribute depends on obligors bearing a common burden, the basis for co-ordinate liabilities in respect of the one loss. A proposition upon which the appellant wishes to rely - namely, that equity looks to substance rather than form - has never been invoked successfully to achieve a departure from, or modification of, that requirement. [48] In terms of the abovementioned authorities, it was argued for the appellant that the facts of this case justified a "controlled departure" from Lord Sutherland's conception that contribution "is a two way exercise", since the plurality in Friend v Brooker concentrated upon equity addressing the "disadvantage" an obligee might cause to an obligor. However, as the passages quoted above show, the reference to "disadvantage" in Friend v Brooker is predicated on obligors bearing a common burden. (Footnotes omitted.) 1010 The primary judge identified that the basal question in a claim for equitable contribution was whether the parties' liabilities were "of the same amount and to the same extent". That question was directed to identification of "the existence of a common obligation" and should not "depend on an overly technical approach": J[2992]. The primary judge found that the liabilities of LGFS, ABN Amro and S&P to StateCover were "co-ordinate" in the sense that StateCover "suffered but one loss": J[2992]. While the parties' liability was differently sourced, it was "for the same amount, the same extent and of the same nature": J[2992]. LGFS settled the claim and "in so doing the liability of S&P and ABN Amro was discharged": J[2992]. 1011 ABN Amro and S&P appealed against that finding: ABN Amro Appeal Grounds Matrix Rows 94R and 94S and S&P Appeal Grounds Matrix Rows 58C and 58D. 1012 ABN Amro challenged the primary judge's finding that the parties' liabilities were "co-ordinate" or that they shared a "common obligation" to "make good the one loss": Burke v LFOT Pty Ltd (2002) 209 CLR 282 at 292-293 [15]-[16] and HIH Claims at 87-90 [36]-[48]. ABN Amro submitted that there was "no suggestion that StateCover was directly mislead by or relied on [ABN Amro's] impugned conduct". It further submitted that LGFS' case at its highest was that "[ABN Amro] mislead LGFS, and that this led LGFS to breach its contractual and other obligations to StateCover". LGFS' liabilities to StateCover were not, therefore, "of the same nature and to the same extent" as ABN Amro's liabilities. 1013 S&P submitted that the primary judge erred because she treated LGFS' liability as arising in contract from the settlement agreement it entered into with StateCover whereas S&P's liability was "founded in various contraventions of the statutory prohibitions of misleading or deceptive conduct or negligence". ABN Amro made a like submission in the course of oral argument. Those two sources of liability were said to be "fundamentally different in the obligations that they impose and cannot properly be described as being of the same nature or to the same extent": Burke at 298-299 [38]. S&P further argued that a co-ordinate liability does not arise "merely because two obligations are owed to the same party or connected in time or circumstance or merely because one party's payment has benefitted or relieved the other party financially": Burke at 301 [43]-[44]. What is required is "a common design between the purported contributors to a common end": Burke at 303 [48]. 1014 We reject these submissions. They misstate the nature of the primary judge's findings. The primary judge found that the parties' liabilities were co-ordinate in the sense that StateCover suffered "but one loss". That aspect of her Honour's reasoning was not challenged. We reject ABN Amro's submission that its liability to StateCover was different from LGFS' liability to StateCover. ABN Amro and LGFS shared a common liability. Both parties had (or would have been found to have had) a liability to exercise care in the provision of information to StateCover about the Rembrandt notes: cf J[2991]. Further, we reject S&P's argument that the fact that its liability to StateCover had a different source to LGFS' liability to StateCover (if that were to be accepted) pointed against a common obligation. As the Court stated in HIH Claims (at 88 [39]), a difference in the source of liability does not preclude the finding of a common obligation. S&P's submissions adopt precisely the overly technical approach to the identification of a common obligation that the Court warned against in HIH Claims. No error has been identified in the primary judge's findings and, in our view, none could be identified. 1015 LGFS, ABN Amro and S&P were common obligors to StateCover. LGFS' settlement with StateCover was expressly stated to cover S&P's and ABN Amro's liability with respect to StateCover's investment losses: J[2992]. LGFS' settlement of the StateCover proceedings discharged that common obligation. Equity requires ABN Amro and S&P to make equitable contribution to LGFS. Indeed, "a community of obligation" will make it inequitable for the party against whom the contribution is sought to keep the benefit which arises from the claimant discharging its obligations: QBE Insurance (Australia) Ltd v NSW Self Insurance Corporation [2013] NSWSC 1841 at [28] (Hammerschlag J).

5. LGFS CONTRIBUTORILY NEGLIGENT? 1016 This is addressed in Part 13 below.

PART 8: PA COUNCILS' PURCHASE OF 2006-3 NOTES: LGFS

1. INTRODUCTION 1017 The PA Councils' claims against LGFS were in tort, for breach of contract and misleading and deceptive claims under statute. The Appeal Grounds relevant to those claims will be dealt with in that order.

2.1 Introduction 1018 The PA Councils maintained three separate claims. A claim in negligence, a claim for negligent misstatement and a claim for breach of fiduciary duty. Each claim succeeded. LGFS has appealed. This section of the judgment will address the factual findings and then consider the Appeal Grounds - the appeal against the finding that LGFS breached its fiduciary obligations to the PA Councils and then turn to consider the negligence and negligent misstatement claims together.

2.2 Factual Analysis 1019 For this section of the judgment, a number of matters should be noted. First, some of the relevant factual matters have already been addressed in Part 2, Sections 1, 2 and 7 above. Next, the primary judge made numerous factual findings about the relationship, and dealings, between LGFS and the PA Councils which were not appealed by LGFS. To the extent necessary, it will be sufficient to identify some of those in summary terms, cross referenced to the trial judgment. During the course of argument, LGFS identified seven challenges it made to the primary judge's factual findings. After addressing the summary of factual findings, each of the seven specific challenges made by LGFS will be dealt with in turn. 1020 The primary judge's analysis of the relationship, and dealings, between LGFS and the PA Councils was extensive and, to the extent necessary, included the findings that follow at [1021]-[1035]. For the sake of convenience, they are addressed under the following headings: 1. Nature of the relationship; 2. Representations made by LGFS to the PA Councils; 3. The context in which the representations were made; 4. Distinction between RB Councils and NRB Councils.

2.2.1 Nature of the relationship 1021 LGFS had a lengthy history of interactions with councils in New South Wales and wanted the councils to "feel a strong relationship" with it, acting as a sounding board by providing advice on an ongoing but informal (unpaid) basis: see [29] above and J[1259(1)]. 1022 LGFS' corporate strategy, explained by its staff, was to develop a relationship of trust and confidence with councils in New South Wales so as to become their trusted adviser and "confidant": see [29] above and J[1259(1) and (2)]. 1023 The primary judge found that LGFS was in an advisor relationship with the PA Councils: J[2324], J[2262], J[1406] and J[1378]-J[1379]. LGFS was not a mere salesman: J[2262]. In particular, the primary judge found that: 1. An analysis of the historical relationship between LGFS and the PA Councils generally, and by reference to each of the PA Councils, demonstrated LGFS was acting as an adviser to each PA Council: J[1259]-J[1289], J[1306]-J[1372] and J[1476]-J[2116]; 2. The fact that some PA Councils had invested in CDOs prior to their acquisition of the Rembrandt notes did not establish that those PA Councils were not conservative investors or understood complex structured products such that they were not reliant on LGFS' advice with respect to the Rembrandt notes: J[1477] and J[1402]; 3. The fact that some PA Councils had made investments with other financial advisers or sought investment advice from third parties concerning other investments did not preclude the existence of an informal advisory relationship with LGFS, either generally or more specifically with respect to the sale of the Rembrandt notes: J[1480]. As the primary judge said, "[a] council may have more than one trusted adviser": J[1660]. 1024 LGFS knew that all councils were bound by the relevant Ministerial Order (see [29] above) and the Investment Guidelines (see [21]-[24] above) including the prudent person approach: J[1642]. LGFS knew also that all councils, when investing, were dealing with public money that would ultimately be required for public purposes: J[1642]. As a result, LGFS knew that councils in New South Wales were all conservative investors and had to give priority to preserving capital over rates of return when the two were in material conflict: J[1642], J[1937] and J[1996]. Whilst in some cases LGFS expected a council to consider whether it had the funds available to invest, LGFS expected, or it was objectively reasonable for it to expect, that the council would treat the advice from LGFS as a recommendation that they in fact invest in the product subject only to the availability of surplus funds: J[2149]. LGFS' recommendation was not merely a recommendation to "take another look" or the like: J[2150], see also J[2148]. In the context of the relationship between LGFS and the PA Councils, both historically and by reference to the evidence of officers from each PA Council, the effect of LGFS offering the Rembrandt notes to the PA Councils was a recommendation that they buy it: J[1381], J[1384] and J[2161]-J[2165].

2.2.2 Representations made by LGFS to PA Councils 1025 The primary judge reviewed the evidence of Mr Hilder and Mr Tischler (at J[1135]-J[1243]) and drew conclusions as to what was said by Mr Tischler and Mr Michell to the PA Council officers in marketing the Rembrandt notes: J[1325]-J[1333]. Her Honour accepted the evidence of the PA Council officers to the extent there was any conflict with the evidence of Mr Hilder and Mr Tischler: J[1264], J[1325], J[1671], J[1759], J[1794] and J[1891]-J[1892]. 1026 The primary judge found (at J[2147]) that LGFS represented to the PA Councils that, for example, Rembrandt 2006-3 was: 1. One of the best products that had come across LGFS' desk for a long time: Eurobodalla and Deniliquin (J[2147(1)]). 2. Designed/tailored specifically for local Councils or with Councils in mind: Corowa, Orange, Moree, Oberon, Deniliquin, Murray, Cooma, Narromine and Ryde (J[2147(10)]). 3. Fully supported by LGFS/LGFS fully supports the product/LGFS will buy back at market value/guaranteed 24 hour liquidity/LGFS guarantee liquidity/money back whenever the Council needs it: Eurobodalla, Parkes, Corowa, Orange, Oberon, Deniliquin, Narrandera, Murray, Cooma, Moree and Ryde (J[2147(16)]). 4. A very robust product: Eurobodalla, Corowa and Moree (J[2147(2)]). 5. A good/suitable product for the Council: Parkes, Oberon, Murray and Ryde (J[2147(3)]). 6. A great/fantastic/terrific/perfect product or opportunity for the Council: Corowa, Moree and Deniliquin (J[2147(4)]). 7. Secure, safe and liquid: Oberon and Deniliquin (J[2147(5)]). 8. A safe product and a sound investment: Bathurst and Ryde (sound investment) (J[2147(6)]). 9. Extremely risk averse: Cooma (J[2147(7)]). 10. Suitable for a conservative Council: Oberon and Ryde (J[2147(8)]). 11. Higher returns than term deposits but low risk: Ryde (J[2147(9)]). 12. Put together by LGFS and so will sit well with the councillors: Bathurst (J[2147(11)]). 13. Designed/built to cash in and become a risk free investment in six or seven years: Eurobodalla, Orange and Moree (J[2147(12]). 14. Likely to cash in in six or seven years and then become risk free: Eurobodalla, Parkes (seven years) and Narrandera (J[2147(13)]). 15. Conservative in structure/defensive structure and takes as little risk as possible: Parkes, Corowa (takes the minimum risk possible to achieve the stated coupon), Moree and Ryde (J[2147(14)]). 16. As to cash out the likelihood was very remote/very low/very unlikely: Eurobodalla, Moree and Narrandera (J[2147(15)]).

2.2.3 The context in which the representations were made 1027 The context in which those representations were made is important. 1028 Mr Tischler marketed the Rembrandt notes by providing the PA Councils with some or all of the LGFS Community Income Notes Brochure (see [131] above), the Pre-Sale and/or the Post-Sale Report (see [131] above) and the ABN Amro term sheet (see [131] above) and "left them to it": J[1212], J[1338] and J[1389]-J[1391]). This method was not how Mr Hilder directed his staff to market the Rembrandt notes although he conceded that he had left it to them to determine what the Councils "wanted to know": J[1218]-J[1221], J[1224] and J[1335]-J[1337]. 1029 The primary judge found that: 1. Given the nature of the Pre-Sale and Post-Sale Reports and the ABN Amro term sheet, LGFS' knowledge of the fact that Council officers did not understand CDOs and the lack of any questions based on the Pre-Sale Report or Post-Sale Report or term sheet, LGFS could not have believed that the PA Councils read either document before deciding to invest, nor that Council officers actually understood the product or its risks from those documents: J[1348]. 2. Reading the LGFS Community Income Notes Brochure, the Pre-Sale and/or Post-Sale Report and ABN Amro term sheet would not have assisted the PA Councils to identify the risks as (J[1637]): 2.1 The LGFS Community Income Notes Brochure did not disclose the risks - "it was a wholly one sided description of the potential benefits of investing in a product said to have been arranged by LGFS without any accompanying disclosure of the potential risks which LGFS itself knew about"; 2.2 The Pre-Sale or Post-Sale Report also did not disclose all of the risks of which LGFS was aware and did not purport to be a summary of the product suitable to be given to the PA Councils for the purpose of explaining the nature of and risks associated with the product; and 2.3 The ABN Amro term sheet did not identify the risks of the Rembrandt notes. 3. Eurobodalla was in the same position as the other PA Councils despite receiving the Surf Presentation: J[2198]. 4. LGFS knew that the Council officers would not have understood the material they had been provided: J[1343], J[1348], J[1395], J[1451], J[1566(2)] and J[1682]. 5. LGFS was fully aware (or ought to have been aware) of the lack of financial sophistication of the PA Councils and that they would not understand the complex nature of the product: see J[1282]. 6. It was apparent from the PA Councils' witnesses' evidence that "they did not know what they did not know" and thus could never have asked the right questions to obtain the relevant information from Mr Tischler: J[1620] and J[1639]. 7. Had LGFS turned its mind to its disclosure obligations, it would have appreciated from its knowledge of local councils that their officers were not capable of formulating meaningful questions about the Rembrandt notes: J[1639]. 8. LGFS was leveraging off the rapport it had established with councils over the years as a platform for the sale to them of the Rembrandt notes: J[996], J[1157], J[1178], J[1290], J[1514], J[1645], J[1671], J[1682], J[1684], J[1743], J[1823], J[1910], J[2018], J[2144], J[2167], J[2843], J[2845] and J[3319]. 9. LGFS did not want the PA Councils to get advice from anyone else about the product as that would be contrary to its business plan and purpose in marketing the Rembrandt notes exactly as it did: J[1371]. 1030 The position was best summarised by the primary judge at J[2265]: Given the unique history of LGFS, its unique status under the Ministerial [O]rder, its marketing of itself… and the beliefs [which] all of these factors engendered in the [C]ouncils about LGFS the [C]ouncils were peculiarly vulnerable to LGFS … Their degree of reliance on LGFS was high. Moreover, LGFS knew that to be the case both because of what LGFS knew about the limited capacities of [C]ouncils to understand structured financial products but also because of what LGFS knew about the high degree of trust the [C]ouncils placed in LGFS. … The category of relationship between LGFS and the [C]ouncils in respect of the product was investment adviser and client. … 1031 LGFS challenged three of these findings (1029(1), (4) and (5)) in the context of the statutory claims. These challenges are addressed and dismissed in Part 9, Section 3 below. 1032 The primary judge concluded that it was apparent from the overall circumstances, and course of dealings, between each Council and LGFS over many years, that LGFS expected and intended that, in making a decision to invest, the Councils would rely on LGFS' advice that the Rembrandt notes were suitable for Councils, were safe, secure, robust and sound: J[2150].

2.2.4 Distinction between RB and NRB Councils? 1033 There were two categories of Council. The first category comprised the RB Councils - Corowa and Cooma (see [116] above) - who had a contractual relationship (in the form of the Right Balance Agreement (see [112]-[115] above) with LGFS. That contractual relationship required LGFS to give advice when required on the portfolio of those Councils, and the recommendations LGFS made to the RB Councils for the purchase of the Rembrandt 2006-3 notes was made in the course of such a portfolio report. The other category comprised those Councils who had not entered into a Right Balance Agreement with LGFS - the NRB Councils. 1034 The relevant findings by the primary judge included that: 1. The relevant officers of Deniliquin, Moree, Parkes and Ryde did not recall LGFS offering to them the Right Balance Service and accordingly, there cannot have been any change in the reliance which those Councils placed on LGFS for investment advice: J[1289]. 2. The other Councils which were aware of the Right Balance Service did not subscribe for the service because they perceived they had been receiving that service from LGFS for many years and for free: J[1289], see also, for example, the primary judge's finding in relation to Narrandera at J[1847]; 3. Nothing in LGFS' marketing materials regarding the Right Balance Service or subsequent dealings with the NRB Councils suggested that the fact that they had not taken up the Right Balance Service impacted in any way upon their continuing relationship with LGFS: J[1289].

2.2.5 LGFS' challenges to factual findings 1035 Against that background, we turn to consider LGFS' seven challenges to the factual findings made by the primary judge. A number of matters of general application should be noted at the outset. 1036 Each of LGFS' challenges is rejected. The passages referred to by LGFS are incomplete and taken out of context. As the preceding section of this Part demonstrates, the primary judge made numerous factual findings which have not been challenged. That is unsurprising. As the primary judge said (at J[1247]): I accept that in cases involving disputed facts from years ago contemporaneous or near contemporaneous documents, where available, are invaluable and often more revealing of the true position than flawed attempts at recollection by those with an interest in the outcome of the litigation. I do not accept, however, that I should simply put to one side the affidavits of the [C]ouncil officers because they were demonstrated to be incorrect in some respects. It is true that the affidavits of the [C]ouncil officers contained formulaic evidence, errors and omissions. It is not true that "few if any of them had any real recollection of their dealings with LGFS concerning Rembrandt or the Councils' internal deliberations leading to the purchase", as LGFS submitted. It is also not true that "the Council officers who dealt with LGFS were not the decision makers". Although this was the case with respect to some [C]ouncil officers, the generalisation is too broad and fails to take account of the fact that all relevant officers involved in the decision-making processes gave evidence describing their involvement. These observations and findings cannot, and should not, be ignored.

2.2.5.1 Challenge 1: Whether the witnesses were the decision makers and the availability of other potential advisers 1037 The primary judge made a finding that the Council officers, being those persons with whom LGFS dealt, did not have a high level of financial expertise (a fact that was known to LGFS) and instead had a general understanding of the investment products that they were authorised to invest in and relied upon LGFS' advice to assist them in making their investment decisions: J[1259(3)]. 1038 LGFS challenged this finding. Its challenge was specific. LGFS submitted that the people that it was dealing with were not always the decision makers and that LGFS was not the only available source of advice for the Councils. LGFS summarised its argument as follows: LGFS was also dealing with the Councils as institutions. LGFS was not privy to the Council's internal deliberations concerning [the Rembrandt notes]. LGFS did not necessarily know what experience the decision maker(s) had. And even when LGFS might have suspected that all the relevant Council officers lacked knowledge or experience of structured products, LGFS had no way of knowing whether outside assistance had been brought to bear in making the decision. 1039 The challenge fails generally and specifically. First, the passages of the trial judgment referred to by LGFS in support of its challenge are incomplete and taken out of context. LGFS does not challenge the finding (at J[1247]) that "all relevant officers involved in the decision-making processes gave evidence describing their involvement". In fact, LGFS accepted the truth of that statement but went on to contend that not all of the decision maker witnesses in fact dealt with LGFS. Again, that statement conceals more than it reveals. 1040 The first witness identified was Mr Brian Matthews, who, until his retirement in 2008, was the Director of Corporate Services at Parkes. Mr Matthews did not discuss the Rembrandt notes with LGFS. However, Mr Robert Bokeyar from Parkes did discuss the Rembrandt notes with Mr Tischler of LGFS. The evidence disclosed that Mr Bokeyar had contact with Mr Tischler through at least two separate discussions (J[1541], J[1542] and J[1546]) and through the provision of the Pre-Sale Report by Mr Tischler to Mr Bokeyar: J[1545]. The evidence disclosed that, on at least two occasions after his discussions and communications with Mr Tischler, Mr Bokeyar would discuss the Rembrandt notes with Mr Matthews, his superior: J[1543], J[1544], J[1548] and J[1549]. None of those facts were challenged by LGFS. 1041 Similar complaints were made by LGFS in relation to Mr Tony Burgoyne at Bathurst and Ms Jane Redden at Narromine. In relation to Bathurst, Mr Michell of LGFS visited Bathurst and discussed the Rembrandt notes with a Mr Campion. He gave Mr Campion the LGFS Community Income Notes Brochure and, in response to a concern expressed by Mr Campion, stated that Rembrandt 2006-3 was not a CDO and not like a CDO. On the same day, Mr Tischler sent Mr Campion an email attaching the Pre-Sale Report and the ABN Amro term sheet. Mr Campion forwarded the email and gave the LGFS Community Income Notes Brochure to his superior, Mr Burgoyne (J[1814]), who then discussed the proposed investment with his own superior, Mr Roach (J[1824]). The position at Narromine was not dissimilar. Mr Michell dealt with Ms Corderoy and she discussed the Rembrandt notes with her superior, Ms Redden (J[2046]). None of these facts were challenged by LGFS. 1042 The next PA Council identified was Oberon. LGFS submitted that two of its decision makers - Mr John Chapman and Mr Bruce Fitzpatrick - did not discuss the Rembrandt notes with LGFS and that the primary judge did not make any specific findings in relation to Oberon's relationship with LGFS. Again, LGFS omitted to refer to the fact that Mr Michell of LGFS discussed the Rembrandt notes with Ms Amanda McGrath, the Finance Manager at Oberon. At J[1694], the primary judge addressed this contention directly and stated: "Mr Chapman did not have discussions directly with LGFS. He relied on what Ms McGrath told him LGFS had said in that regard". It must be recalled that her Honour made further unchallenged factual findings (at J[1690]) that Ms McGrath reported to Mr Chapman and that, according to Mr Chapman, Ms McGrath was in 2006 primarily responsible for analysing investment options for the Council and providing him with relevant information. LGFS did not challenge any of these findings. The primary judge did not leave the position there. Her Honour also made an unchallenged finding (at J[1697]) that: The fact that Mr Chapman relied on LGFS (in this case) having determined that the product was a suitable one for [C]ouncils, and thus Oberon, to invest in does not mean that Mr Chapman exercised no judgment at all about investments and he did not give evidence to that effect. The [C]ouncil still had to consider its own position including whether it had the funds available to invest and whether such a long-term investment was appropriate at the time given its funding obligations. The [C]ouncil did not rely on LGFS to make those decisions for it (although, as it turns out, in the case of Oberon it was LGFS which identified that the [C]ouncil had two investments with LGFS which were about to mature and funds from which could be reinvested in [the Rembrandt notes]). But it did rely on LGFS having determined that the product was a suitable one for any [C]ouncil, including Oberon, to invest in. This analysis demonstrates that LGFS' contention that the primary judge made no findings specific to Oberon's relationship with LGFS is wrong. 1043 LGFS then referred to Ryde where two members of its investment committee - Mr Michael Whittaker and Mr Roy Newsome - did not deal with LGFS. Again, that statement conceals more than it reveals. Mr Michell dealt with Mr Richard Nankivell, the third member of the committee (J[2070]) and also with Mr Barry Gibb (Mr Nankivell's assistant). Mr Tischler also dealt with Mr Nankivell in relation to the Rembrandt notes: J[2083]-J[2085]. Mr Nankivell was primarily responsible for assessing proposed investments: J[2075]. Mr Gibb was also a member of the investment committee: J[2073]. In addition, Mr Nankivell received the [CPDO] letter from Mr Hilder of LGFS attaching the LGFS Community Income Notes Brochure: J[2088]-J[2089]. Mr Nankivell reported to Mr Newsome and the investment committee and did so in relation to the Rembrandt 2006-3 notes: J[2092]-J[2093]. In addition, Mr Gibb provided assistance to Mr Nankivell and prepared a memorandum about the Rembrandt notes for the investment committee: J[2090] and J[2094]. None of these facts were challenged by LGFS. 1044 Finally, LGFS referred to Eurobodalla and Moree in support of its contention that LGFS was not the only available source of advice for the Councils. Mr Tischler had had involved discussions with a representative from Eurobodalla and had informed Eurobodalla that it was unlikely that it would lose capital because of the Rembrandt notes' "cash in" and "self cleansing" features: J[1481]. The primary judge made findings that although both Eurobodalla (J[1480]) and Moree (J[1660]) referred to and relied upon another body for advice, that fact alone did not establish that each Council could not have relied upon LGFS when it came to investing in Rembrandt 2006-3 notes. As the primary judge said (at J[1674]), a Council may have more than one trusted adviser. LGFS' contention on appeal was that the existence of more than one advisor did not mean that the relevant Council did not rely on what LGFS told it but did show that the Council was not reliant on LGFS. For our purposes, that is a distinction without a difference. Each Council was found to rely on what LGFS told it: Eurobodalla at J[1482] and Moree at J[1664]. LGFS does not challenge those findings or the facts upon which those findings were made.

2.2.5.2 Challenge 2: Relevance of Right Balance Agreements 1045 The primary judge considered the relevance of the Right Balance Agreement at J[1271] as follows: Contrary to LGFS's submission I do not find it at all unconvincing that all but two of the [C]ouncils which were aware of the Right Balance [S]ervice refused it on the basis that they believed that LGFS was already offering the same service free of charge. It is true that the [C]ouncils must have known that they were not receiving the reporting services offered as part of the Right Balance [S]ervice. But the point is this - by LGFS's own prior invitation the [C]ouncils had access to LGFS's expertise free of charge as and when they required it to act as the [C]ouncils' sounding board and financial markets confidant because LGFS enjoyed a unique and long-standing association with local government which ensured that it would act in the best interests of the [C]ouncils. The Right Balance [S]ervice seems to have failed precisely because LGFS had always offered the same service - albeit without the formal reporting - free of charge. … 1046 LGFS' challenged what it described as "the primary judge's finding that the Right Balance Service offered by LGFS was the same or substantially the same as the ad hoc advice LGFS provided to the Councils". There are a number of answers to that contention. First, the Right Balance Agreement provided a different legal basis for LGFS' relationship with the RB Councils as distinct from the NRB Councils. In considering the position of the NRB Councils, that fact alone did not provide an answer, let alone a complete answer, to the nature of the relationship between LGFS and the NRB Councils. The nature of the relationship between LGFS and the NRB Councils had to be addressed by reference to the unchallenged factual findings at [1021]-[1024] above. Those findings were independent of the Right Balance Agreement. LGFS' contention proceeds on a false premise - that the existence of the Right Balance Agreement somehow altered the nature of the relationship between LGFS and the NRB Councils. It did not and that was the finding of the primary judge: J[1287]-J[1289]. Indeed, at least four NRB Councils (Deniliquin, Moree, Parkes and Ryde) could not recall being offered the Right Balance Service: J[1289]. Other Councils decided not to take up the Right Balance Service because they considered they had been receiving the same service from LGFS for many years without the fees imposed by the Right Balance Agreement: J[1289] and J[1269]. 1047 There were other factual findings that should not be overlooked in this context. Those findings include that the distinction between the RB Councils and the NRB Councils did not seem to have existed in anyone's mind at LGFS at the time or, if it did exist, it had no effect on the information which LGFS provided to the Councils: J[1349]. So, for example, the RB Councils received no more information from LGFS than any of the NRB Councils: J[1349].

2.2.5.3 Challenge 3: Whether the Councils would have understood that LGFS would prefer its own interests over those of the Councils 1048 LGFS challenged the following italicised sentence of the primary judge's findings at J[1272]: The fact is that LGFS's own marketing material and documents are sufficient to found the inference that LGFS deliberately and over many years fostered a belief in the [C]ouncils that LGFS not only had the necessary skill, experience, qualifications and expertise to be able to provide financial information and advice tailored to the particular needs and requirements of [C]ouncils but also that as a trustworthy and reliable source of such information and advice, the interests of which were closely aligned with those of [C]ouncils, LGFS would ensure its information and advice was provided with a view to the best interests of the [C]ouncils. In other words, the whole of LGFS's relationship with [C]ouncils in New South Wales was to the effect that LGFS would not prefer its own interests to those of the [C]ouncils. This was LGFS's crucial point of distinction with other providers of financial advice and services to [C]ouncils in New South Wales. (Emphasis added.) 1049 The passage in italics is just one sentence. As the sentence makes clear ("in other words"), it was the primary judge's restatement of the factual findings which preceded the sentence. None of those factual findings were challenged by LGFS. The sentence must be read in the context in which it sits. It is only by divorcing the sentence from its context that LGFS could assert, as it did, that the primary judge put the relationship between the parties too highly. The argument must be rejected. The unchallenged findings by the primary judge stated the nature and relevant consequences of LGFS' relationship with the PA Councils accurately: see also, by way of example, J[1141], J[1147], J[1148] and J[1157], and [1021]-[1024] above.

2.2.5.4 Challenge 4: Whether the Councils were reliant on LGFS 1050 LGFS challenged the primary judge's finding that the PA Councils were reliant on LGFS when it came to understanding whether the Rembrandt 2006-3 notes were a suitable investment for them: J[1259(4)]. Her Honour stated that there was "ample evidence" to support that general finding. We agree: see, for example, J[1475], J[1684], J[2324] and J[2151] and the factual findings set out at [1021]-[1024] and [1029]-[1030] above. During the course of argument, LGFS referred to passages of the trial judgment it relied upon in relation to Challenges 1, 3 and 5. The problems with that material apply equally to Challenge 4. 1051 LGFS' argument must be rejected. The PA Councils were reliant upon LGFS when it came to understanding whether the Rembrandt 2006-3 notes were a suitable investment for them: see [1021]-[1024] and [1029]-[1030] above.

2.2.5.5 Challenge 5: Findings concerning LGFS' beliefs in J[1371] 1052 Paragraph J[1371] of the trial judgment was entitled "If LGFS not giving investment advice" and it read: … [A]gain, as the [C]ouncils submitted in their alternative case, LGFS did not inform any of the [C]ouncils that: - (i) LGFS had not considered whether an investment by them in the Rembrandt notes was suitable or appropriate for them; (ii) LGFS was not recommending they invest in the Rembrandt notes, or (iii) they should obtain financial advice about whether to invest in the product. I consider that LGFS did not inform the [C]ouncils to this effect for one obvious reason - because LGFS knew the [C]ouncils believed that: - (i) LGFS had considered whether an investment by them in the Rembrandt notes was suitable or appropriate for them; (ii) LGFS was recommending they invest in the Rembrandt notes, and (iii) they need not obtain financial advice about whether to invest in the product because LGFS was advising them to do just that. Moreover, LGFS intended that the [C]ouncil officers should believe these things. LGFS did not want the [C]ouncil officers to get advice from anyone else about the product. That would have been contrary to LGFS's business plan and purpose in marketing the product to the [C]ouncils in the way it did. LGFS cannot complain now that the [C]ouncils acted precisely as LGFS in fact intended at the time by relying on LGFS. (Emphasis added.) 1053 LGFS' argument was that the findings in italics were unsupported by evidence and were directly contradicted by emails sent to Narromine and Ryde. 1054 Again, this argument conceals more than it reveals. First, these findings were addressing the PA Councils' alternative case run at trial (i.e, if LGFS was found not to be giving investment advice). The primary judge found that LGFS was giving investment advice: see [1021]-[1024] and [1029]-[1030] above. 1055 Second, the findings in italics were supported by evidence: see [1021]-[1024] and [1029]-[1030] above. Third, LGFS' argument that the emails to Narromine and Ryde contradicted those findings is rejected. The emails stated that LGFS was "happy to provide any further information to you or your adviser". These two emails do not contradict the finding. Selectively quoting part of one sentence from two emails to support a contention that a finding was incorrect is impermissible. The contents of emails (here, part of a sentence), absent other evidence, do not and cannot conclusively establish LGFS' state of mind. LGFS' argument is rejected.

2.2.5.6 Challenge 6: Relevance of the speed of the Councils' decision to acquire the Rembrandt notes 1056 As we have seen (see [1029] above), the primary judge made a finding that given the nature of the Pre-Sale Report, the Post-Sale Report and the ABN Amro term sheet, LGFS' knowledge of the fact that Council officers did not understand CDOs and the lack of any questions based on either the Pre-Sale or Post-Sale Report or the term sheet, LGFS could not have believed that the PA Councils read either document before deciding to invest, nor that Council officers actually understood the product or its risks from those documents: J[1348]. That factual finding was not challenged. 1057 There was, however, another related aspect to this finding at J[1348]. That was a finding that, except for Cooma, it was difficult to accept that LGFS did not notice how quickly many of the PA Councils made their decisions after first being contacted about the product and having been sent the documents by LGFS to which reference has just been made. These findings were and remain interrelated. 1058 Moreover, the finding was not made in a vacuum. It was preceded by other significant and unchallenged factual findings. For example, the primary judge made the following factual findings (at J[1347(c)]): Mr Tischler [of LGFS] knew he had taken two months of immersion to understand the product but LGFS never appears to have been surprised by the swiftness of the decisions some of the [C]ouncils communicated to LGFS measured against receipt of the [Pre-Sale Report] (including possible weekends - about four days for Eurobodalla, zero days for Parkes, three days for Corowa, maybe a week or two for Orange or less but not more, a week for Moree, for Oberon the report was received a week after the decision was communicated to LGFS, 10 days for Deniliquin, eight days for Bathurst, nearly four weeks for Narrandera, seven days for Murray, three weeks for Narromine and four days for Ryde). The only Council that had the [Pre-Sale Report] for any lengthy period before investing was Cooma - but Cooma invested in response to a specific LGFS recommendation six months after the [Pre-Sale Report] was emailed. 1059 These findings were not challenged by LGFS. Instead, it contended that there was no "[C]ouncil-specific case" or "[C]ouncil-specific" cross examination of Mr Tischler about these matters. There are a number of problems with that contention. This was a conclusion about reliance, not understanding, in all the circumstances. Selective criticism of just one circumstance identified by the primary judge is neither permissible nor appropriate. In any event, the inference was open to the primary judge. LGFS' challenge must be rejected.

2.2.5.7 Challenge 7: Price volatility and whether the Rembrandt notes were suitable for any Council at any time 1060 The primary judge found that LGFS should have known that an investment that might be highly volatile was not a suitable investment for any Council to make at any time: J[2164]. LGFS challenged two propositions - (1) that a potentially volatile investment was unsuitable for any Council at any time and (2) if that was so, LGFS knew Rembrandt 2006-3 to be sufficiently "highly volatile" to be unsuitable. 1061 This challenge is rejected for the reasons set out in Part 8, Section 2.4.4.2 under the heading "Suitability of Rembrandt for local councils": see [1136]-[1152] below.

2.2.6 Conclusion 1062 It is against that factual background that we turn to consider LGFS' Appeal Grounds.

2.3 Fiduciary duty claim: LGFS Appeal Grounds Matrix Rows 101-108

2.3.1 Introduction 1063 The primary judge found that LGFS was in a fiduciary relationship with each PA Council. In relation to the RB Councils, LGFS accepted on appeal that it had a contractual relationship (in the form of the Right Balance Agreement) (see [112]-[115] above) with each of the RB Councils which required it to give advice when required on the portfolio of those Councils and that the recommendations it made for the purchase of the Rembrandt 2006-3 notes was made in the course of such a portfolio report. LGFS accepted that in those circumstances it owed fiduciary obligations to each of the RB Councils: LGFS Appeal Grounds Matrix Row 102. 1064 On appeal, LGFS challenged the primary judge's finding that LGFS was in a fiduciary relationship with the NRB Councils and further contended that, if such a relationship did exist, it did not breach any fiduciary obligations it owed to the NRB Councils: LGFS Appeal Grounds Matrix Rows 101, 103 and 104. 1065 This section of the judgment will consider whether LGFS' relationship with each of the NRB Councils was a fiduciary relationship and then turn to consider whether LGFS breached the fiduciary obligations it owed the NRB Councils.

2.3.2 Applicable legal principles - fiduciary relationship 1066 For the purposes of this appeal, the applicable principles may be summarised as follows: 1. The "critical feature is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person": Hospital Products Pty Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96-97; Pilmer v Duke Group Ltd (2001) 207 CLR 165 at 196-197 [70]-[71] and Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 at 76 [270]-[275] and 77 [283]. 2. It is the element of undertaking (from the point of view of the fiduciary) or obligation (for and on behalf of the beneficiary) that has the consequence that equity insists that the principal must act in the "interests of" or "for the benefit of" the beneficiary rather than in the principal's own interests: Breen v Williams (1996) 186 CLR 71 at 113, approved in Pilmer at 196-198 [70] and [74]. 3. Whether a fiduciary relationship exists in a particular case, and if so, the scope of that fiduciary relationship, are matters which depend critically upon the particular circumstances of the case: In Re Coomber [1911] 1 Ch 723 at 728-729, approved in Hospital Products at 102; see also Pilmer at 198-199 [77]-[78] and Citigroup at 76 [285], 78 [287]-[288]. 4. The characteristics which define a fiduciary relationship cannot be exhaustively defined. It is inappropriate to treat the existence of a fiduciary obligation as being dependent upon whether the principal and beneficiary fall into a particular status relationship: James Edelman, 'The Role of Status in the Law of Obligations: Common Callings, Implied Terms and Lessons for Fiduciary Duties' (Paper presented at the University of Alberta, 18 July 2013, and DePaul University conference, Chicago, 19-20 July 2013). 5. Similarly, whether a fiduciary relationship has come into existence does not depend upon the motivation or desire of one party to establish a relationship of trust or confidence. What matters is whether there is a relationship involving the requisite undertaking, determined as a matter of objective characterisation, rather than by having regard to the subjective expectations of the parties: Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at 45 [188] and 46 [194]; P D Finn, Fiduciary Obligations (Law Book Company, 2nd ed, 1977), par 14ff; James Edelman 'The Importance of the Fiduciary Undertaking' (2013) 7 Journal of Equity 128 (see also, James Edelman 'When Do Fiduciary Duties Arise' (2010) 126 Law Quarterly Review 302) and, in the context of a contractual relationship, Citigroup at 77 [281].

2.3.3 LGFS' submission on appeal 1067 Against that background, it is necessary to address the relationship between LGFS and each of the NRB Councils. LGFS submitted that: The relationships between LGFS and the NRB Councils were different. … [I]t was not correct to describe any of those relationships as one of "investment adviser'", whether "informal" or not. There is a clear distinction between LGFS's dealings with those Councils and Patrick Partners' dealings with Dr Daly which were the subject of Daly v Sydney Stock Exchange. Dr Daly had a particular sum of money to invest and entrusted the task of advising on how to invest that sum to Patricks. It was in that context that Patricks recommended that the money be deposited with it. The relationship was one where, of its nature, the giving of investment advice and the making of investment recommendations was a matter exclusively for Patricks. There was no equivalent relationship between LGFS and the NRB Councils. None of those Councils entrusted their portfolios, or any particular part of their portfolios, for LGFS to advise upon. At most, those Councils which used LGFS as a "sounding board" sought its "advice" (in the form of information and opinions about particular products) as and when it suited them, and made their decisions on the basis of that and other information without further reference to LGFS. Nor was this relationship in any way exclusive to LGFS. The Councils dealt with a number of different financial institutions depending on the nature of the proposed investment. When LGFS set out to market Rembrandt [2006-3] to the NRB Councils, it did not do so under cover of complying with any pre-existing obligation or request for advice. Rather, LGFS made a "cold call". LGFS would have been entitled to assume that the Councils would have treated this approach in the same way in which they had treated approaches from vendors of other products: that is, by asking any questions they had of LGFS, considering the material which LGFS provided for them (and, in the case of Eurobodalla, which it already had), and quite possibly by seeking information and opinions from competitors and other third parties, as in fact two of them did. There was nothing in any of this which amounted to an undertaking by LGFS to act in the Council's interests rather than its own. These contentions fail. That statement requires further explanation.

2.3.4 Did a fiduciary relationship exist between LGFS and the NRB Councils? 1068 The primary judge found (at J[2322]-J[2324]) that LGFS was in a fiduciary relationship with each of the NRB Councils for the following reasons: 1. LGFS held itself out as an entity on which the Councils could and should rely to satisfy themselves that LGFS had brought its expertise to bear and evaluated the product as a suitable investment for each Council. In so doing LGFS moved beyond the role of a mere salesman and acted as an investment advisor and thereby attracted to itself fiduciary duties to avoid conflicts of interest or duties to disclose and obtain consent to such conflicts": J[2324] and J[2300]-J[2323]; 2. In introducing the Rembrandt 2006-3 notes to the Councils, LGFS did not act as a mere salesman. LGFS knew the Councils perceived LGFS as acting in their interests and not LGFS' sole interests and LGFS did not disabuse the Councils of that belief: J[2324]; and 3. LGFS traded on that belief (that the Councils perceived LGFS as acting in their interests and not LGFS' sole interests), a product of the relationship that LGFS' fostered and cultivated over many years with the Councils, to achieve its own commercial objectives: J[2323]-J[2324]. 1069 Her Honour described LGFS as an "informal investment adviser" to each Council: J[2322]-J[2324]; see also Part 2, Sections 1, 2 and 7 above and [1021]-[1030] above. That description was, and is, not inaccurate. 1070 LGFS' contention (at trial and on appeal) that it did not owe fiduciary obligations to each NRB Council is untenable. First, LGFS would have the Court ask the wrong question. As the summary of applicable legal principles illustrates, the question is not whether LGFS "fits" into the facts of a decided case and, in particular, Daly v Sydney Stock Exchange (1986) 160 CLR 371. The question was and remains whether the facts disclose the existence of a fiduciary relationship. It is that question which identifies LGFS' second error - its analysis and assessment of the facts was incomplete and inaccurate. 1071 The characteristics which define a fiduciary relationship cannot be exhaustively defined. Contrary to LGFS' contention on appeal, the facts were sufficient to constitute a fiduciary relationship in which LGFS undertook to act in the NRB Councils' interests rather than its own: see [1021]-[1030] above. The existence of such a duty followed analysis of the history of the relationship between LGFS and each of the NRB Councils, including how LGFS marketed itself to the PA Councils: see Part 2, Section 7 above and [1028]-[1030] above.

2.3.5 Conflict of interest and therefore disclosures required by LGFS? 1072 A party owing fiduciary obligations to another is bound "to avoid being in a position of conflict between its interests and duties, and between its duties to other persons" and "not to obtain any unauthorised benefit from its position": Breen v Williams at 113. The identification of the relevant conflict informs the required disclosures by the fiduciary and the analysis of whether the fiduciary has breached those requirements. 1073 The primary judge found that LGFS breached its fiduciary duty to avoid conflicts of interest, or to disclose and obtain fully informed consent to such conflicts: J[1373]-J[1374] and J[2311]-J[2324]. The issue was addressed by her Honour in two separate passages of the judgment.

2.3.5.1 Failure to disclose potential risks and ramifications faced by LGFS in holding $40 million of notes 1074 In the first passage (at J[1373]-J[1374]), her Honour dealt with LGFS' alleged conflict of interest in the following terms: After its purchase of all of the Rembrandt notes issued under the Rembrandt 2006-3 transaction, LGFS held $40,000,000 of the notes (to which $5,000,000 was added in January 2007). LGFS recognised that this fact had consequences for it identified as potential risks and ramifications. As disclosed in its board papers for October 2006, LGFS was aware that LGFS could end up holding inventory with no available purchaser (the asset would be suitable for LGFS's balance sheet operations but would prevent new issues as there would be no room for holding long-term assets). LGFS's consciousness of these risks and ramifications, as well as its own commercial [imperative] to address the impact of CDO's on its balance sheet, placed it in a position of conflict of interest … 1075 These findings were unsurprising. They are consistent with, and reflect, the position that LGFS found itself in: see [90] above. At best, one Council (Orange) knew that LGFS had purchased notes valued at $40 million: J[2301]. No Council was told of the potential risks and ramifications faced by LGFS in holding that amount of notes, including LGFS' commercial imperative of addressing the impact of those notes on its balance sheet. As it was described elsewhere in the trial judgment, LGFS acquired the entire tranche of the Rembrandt notes from ABN Amro in the amount of $40 million and had an interest in liquidating a portion or a substantial portion of its own holdings because: 1. To the extent LGFS was not able to sell the Rembrandt notes, it was exposed to the risks of losses on those notes it continued to hold; and 2. Those risks included certain risks associated with the Rembrandt notes (see Part 3 above) which were not disclosed at the time LGFS marketed the notes to the PA Councils. 1076 LGFS' duty was not to be in a position of conflict of duty and interest. It breached that duty. LGFS was in a position of conflict between its interests and duties, and between its duties to the PA Councils. LGFS did not disclose to the PA Councils the potential risks and ramifications faced by LGFS in holding the amount of Rembrandt notes it held, including LGFS' commercial imperative of addressing the impact of those notes on its balance sheet. 1077 Indeed, LGFS accepted that if it was in a fiduciary relationship as "investment advisor" with the PA Councils (and it was) then a "potential conflict of interest" arose from the fact that LGFS would profit from the sale of the Rembrandt notes to the PA Councils. However, LGFS submitted that the Councils knew that fact: J[2319]. So much may be accepted. However, LGFS' argument that the PA Councils were aware that LGFS was the vendor of the Rembrandt notes or otherwise stood to gain financially from their purchase of the notes goes to issues of informed consent, not questions of conflict and disclosure. 1078 The PA Councils did not know, and were not told by LGFS, of the commercial pressures LGFS faced and which made its sale of the notes commercially imperative. Its motivation for selling the notes was itself a conflict, a substantial conflict, which was required to be disclosed and was not: cf Pilmer at 199-201 [79]-[83]. LGFS accepted that it was, and remains, the fiduciary's obligation to disclose the conflict and to permit the beneficiary to make a free and fully informed decision on whether to proceed. That did not occur. And, contrary to LGFS' submissions, the fact that LGFS was obliged to disclose the commercial pressures it faced was not and is not unworkable. 1079 That leads to the form of the disclosure. LGFS raised two complaints: LGFS Appeal Grounds Matrix Row 105. First, LGFS contended that the primary judge overstated the significance of the Rembrandt notes to the viability of LGFS' business. LGFS submitted that this meant that even if LGFS had a duty to disclose its commercial imperatives, the duty would have been satisfied by a less stark disclosure than the primary judge considered necessary. The second complaint was that the primary judge's formulation of what LGFS had to disclose was different from that pleaded by the PA Councils. LGFS submitted that as the PA Councils did not mount an evidentiary case as to what they would have done if they had known of the "conflict", it did not have an opportunity to meet the relevant disclosure. These contentions fail. 1080 The PA Councils did not know, and were not told by LGFS, of the commercial pressures LGFS faced and which made its sale of the notes commercially imperative. The significance of the Rembrandt notes to the viability of LGFS' business was not and cannot be overstated: see [90], [98]-[108], [116]-[119] and [124] above. Even if we are wrong to reject that contention, LGFS was obliged to disclose the significance of the Rembrandt notes to the viability of LGFS' business and it did not. That failure placed it in an immediate position of conflict. Its duty was not to be in a position of conflict of duty and interest. It breached that fiduciary duty. 1081 The next limb in LGFS' argument - that the PA Councils did not mount an evidentiary case as to what they would have done if they had known of the "conflict" - is addressed below in section 2.3.6 of this Part of the judgment.

2.3.5.2 LGFS information 1082 The second passage of the judgment addressed the conflict of interest issue in wider terms by reference to what was defined in the trial judgment as the "LGFS information". It was defined to mean: 1. LGFS was entitled to earn a substantial fee or commission on the sale of Rembrandt to the [C]ouncil; 2. LGFS was under a mandate with ABN [Amro] to assist in the promotion of the product; 3. LGFS had arranged the structuring and creation of Rembrandt by ABN [Amro] for LGFS to sell to local [C]ouncils as it was concerned that it was losing market share of [C]ouncils' invested funds by not offering higher yielding financial products similar to those offered by LGFS' competitors such as collateralised debt obligations (CDOs) to local [C]ouncils. 4. LGFS had acquired the entire tranche of Rembrandt from ABN [Amro] in the amount of $40,000,000 and had an interest in liquidating a portion or a substantial portion of its own holdings because; (a) to the extent LGFS was not able to sell Rembrandt, it was exposed to the risks of losses on those [n]otes it continued to hold; (b) those risks included certain risks associated with Rembrandt that have been identified in these proceedings, but which were not disclosed at the time LGFS marketed Rembrandt to the [C]ouncil; 5. LGFS had received a report prepared by Grove Research and Advisory which identified substantial risks associated with Rembrandt which were not disclosed to the [C]ouncil officers by LGFS; 6. LGFS held the view that Rembrandt was a grotesquely complicated product; 7. LGFS was aware that in the period prior to LGFS's marketing of the product to the [C]ouncils there had been negative movements in the credit spreads in the two indices which was likely to have an adverse effect on the future performance of Rembrandt; LGFS may have had a conflict of interest in Rembrandt by reason of the matters referred to in 1 to 7 above. 1083 The primary judge addressed the conflict of interest issue in the context of the LGFS information at J[2311]-J[2312]: … [T]he LGFS information created a conflict between LGFS's interests and those of the [C]ouncils. In the context of the fiduciary relationship between LGFS and the [RB Councils] the attempts by LGFS to isolate and diminish the significance of each piece of the LGFS information should be resisted. As a whole the circumstances described disclose the existence of a conflict of interest. The [C]ouncils' interest was to invest only in products that were suitable for [C]ouncil investment in the sense described. In respect of the Rembrandt CPDO LGFS's interest was to establish itself as a player in the financial products market in order to overcome the substantially deleterious effect that the sale of CDOs had on LGFS's profitability. The conflict is not removed by LGFS's belief that the product was not a "dog" (as LGFS put it, a belief which LGFS did hold), could be held on LGFS's balance sheet if not sold entirely to [C]ouncils albeit with some risk, and was suitable for [C]ouncils given its AAA rating and good return. In fact, LGFS's apparent beliefs support the existence of the conflict of interest which it submitted either did not exist or was too remote or insubstantial to have any effect on the discharge of any fiduciary obligations. The point can be explained this way. The essence of the LGFS information, evaluated in the context set by the evidence, is that LGFS's business was under serious threat from CDOs, it wanted a product to compete, it entered into a deal with ABN Amro about the CPDO which enabled it to compete, it bought as much of the product as it could intending to sell it to [C]ouncils to increase (probably, more to the point, establish) its position as a structured product provider to [C]ouncils, it knew things about the product that in fact made it unsuitable for [C]ouncils, but implemented strategy by selling as much of the product as it could to [C]ouncils and proceeded to do so without telling the [C]ouncils any of this information. It is not an answer to this case to say that LGFS believed the product to be suitable for [C]ouncils. 1084 For our part, we are not persuaded that each limb of the "LGFS information" placed LGFS in a position of conflict that necessitated the disclosure of each limb to each of the PA Councils. At the very least, the PA Councils did not know, and were not told by LGFS, of the commercial pressures it faced and which made its sale of the notes commercially imperative. That failure placed LGFS in an immediate position of conflict. Its duty was not to be in a position of conflict of duty and interest. That was sufficient to constitute a breach of LGFS' fiduciary duty: see Part 8, Section 2.3.4 above.

2.3.6 Factual causation 1085 This section of the judgment will consider factual causation in relation to the claims for equitable compensation for breach of fiduciary duty. 1086 Having dismissed LGFS' Appeal Grounds in relation to the fiduciary duty findings (see [1067]-[1084] above), LGFS' next contention was that the primary judge erred in holding that, but for LGFS' breaches of duty, the PA Councils would not have invested in the Rembrandt notes: LGFS Appeal Grounds Matrix Row 117. 1087 LGFS' argument at trial and on appeal was that: The direct and immediate cause of the Councils' losses was the cash-out of their [n]otes. This in turn was the result of deficiencies in Rembrandt's structure which led to its robustness being over-estimated and over-represented by ABN [Amro] and S&P. In a real and practical sense, these were the causes of the Councils' losses. … [N]one of the misrepresentations and non-disclosures alleged against [LGFS], individually or collectively, was a cause of those losses in the relevant sense. That argument was rightly rejected at trial. 1088 LGFS had further complaints. It submitted that on causation, the primary judge said that it was "sufficient to say that I do not accept that [the RB Councils] would not have acted any differently if LGFS had disclosed its conflict of interest and sought [their] consent to its conflicted position" (J[2321]) but did not give any further reasons, or identify any specific factual findings on which she relied for this conclusion. LGFS further contended that the primary judge did not expressly address the question of causation as it applied to the NRB Councils. In addition, LGFS contended that the Councils did not mount an evidentiary case as to what they would have done if they had known of the "conflict". 1089 It is necessary to keep a number of points at the forefront of consideration. First, LGFS made a gain from its dealings in the Rembrandt notes where its duty to the Councils and its personal interests conflicted. Second, the Councils' informed consent to that dealing was not obtained. Third, because the Councils invested in the notes, they lost a substantial part of their investment. 1090 Fourth, the principles of causation in relation to a claim for equitable compensation for breach of fiduciary duty are distinct. The court must identify "criteria which supply an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty": Maguire v Makaronis (1997) 188 CLR 449 at 473 and O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 276-277. What constitutes an adequate or sufficient connection is not predetermined or formulaic. Each case requires a precise focus on both the nature of the obligations and the nature of the breach: Beach Petroleum at 90 [431] and Maguire at 472-473. Any question of "direct" or "immediate cause" is a red herring. The required focus is the nature of the obligations and the nature of the breach because different obligations and breaches may raise different criteria that supply the necessary connection. So, for example, "several matters appropriately will be taken into account when there falls for consideration, in an action against the fiduciary arising other than out of breach of trust, the criteria which supply an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty" which may not be relevant in breach of trust cases (emphasis added): Maguire at 473. 1091 Indeed, as Spigelman CJ stated in O'Halloran, "[i]n the case of a trustee dealing with trust property, the law has proceeded beyond the invocation of the formulaic "common sense" approach to causation, by adopting a stringent test to the selection of those events preceding loss which are to be taken as causing the loss": at 276-277. Spigelman CJ's reference to the "common sense" approach to causation was to the oft-stated proposition that a court will only make good losses that on a common sense view of causation were caused by the breach of fiduciary duty: Beach Petroleum at 90 [432]; Watson v Ebsworth & Ebsworth (a firm) (2010) 31 VR 123 at 173 [160]; O'Halloran at 272-273; Ganson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 at 163 and Target Holdings Ltd v Redferns [1996] 1 AC 421 at 439. So much may be accepted. 1092 Finally, the compensation payable for "breaches of fiduciary duty is assessed based on loss at the time of the trial with the full benefit of hindsight": Wingecarribee Shire Council at 260-261 [995]; Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 at 555 applied in Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at 499 [35]; see also Parker, In the matter of Purcom No 34 Pty Limited (In Liq) (No 2) [2010] FCA 624 at [23]. 1093 In this appeal, the criteria which supply the adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty is not reliance upon a misrepresentation. Here, the connection was established by LGFS' non-disclosure of material facts which the Councils were entitled to know in connection with their purchase of the notes and, in breach of which, LGFS sold the notes to the Councils: see [1080] above and Maguire at 472-473. 1094 A question which then arises is whether, in light of that breach, LGFS was entitled to maintain the contention that "the disclosure would not have altered the [Councils'] decision to proceed with the transaction ...": Maguire at 471 and Brickenden v London Loan & Savings Co [1934] 3 DLR 465 at 469; see also Hydrocool v Hepburn (No 4) (2011) 279 ALR 646 at 711-714 [443]-[466] and the authorities there cited. LGFS submitted that the Court needed to be satisfied that the purchase of the Rembrandt notes was caused by an actionable non-disclosure on the part of LGFS, that the Councils would not have purchased the notes if the relevant disclosure had taken place and that the onus of proving this lay on the Councils: Beach Petroleum at 90-91 [432]-[433] and 94 [449]-[450] and Watson v Ebsworth & Ebsworth at 173 [160]-[162]. 1095 A starting point for consideration of this contention is the observations of Lord Thankerton in Brickenden at 469, that: When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant. These observations were cited with approval in Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 394-395; Wan v McDonald (1992) 33 FCR 491 at 511 and 520-521; Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239 at 243 and 252-253 and Australian Securities and Investments Commission v Adler (No 3) (2002) 20 ACLC 576 at 707. This passage has also been the subject of criticism: see, for example, Maguire at 489-492. 1096 In this appeal, LGFS' contention fails. First, given the nature of the obligations and the nature of the breach, enquiries into whether the Councils' would have given informed consent were fruitless and irrelevant: see, by way of example, Brickenden at 469 and Hydrocool at 711-714. That conclusion is not surprising. Unlike breach of trust cases, "[t]he consequences of such a conflict (the non-disclosure of material facts) are not discoverable. Both justice and policy are against their investigation": Furs Ltd v Tomkies (1936) 54 CLR 583 at 592; cf Youyang at 500-502 [38]-[44]. 1097 Second, contrary to LGFS' contention, Beach Petroleum at 90-91 [432]-[433] and 94 [449]-[450] and Watson v Ebsworth & Ebsworth at 173 [160]-[162] are not authority for the proposition that the onus lay on each Council to establish that it would not have purchased the Rembrandt notes if the relevant disclosure had taken place. On the contrary, as the Court of Appeal stated in Watson v Ebsworth & Ebsworth at 173 [161]-[162], "[t]he [C]ourt was entitled, with the full benefit of hindsight, not to speculate against the interests of the [Councils]", in respect of whom there was a breach of fiduciary duty. Here, LGFS was the defaulter. Its default was non-disclosure of material facts which the Councils were entitled to know in connection with their purchase of the notes and, in breach of which, LGFS sold the notes to the Councils. The Councils were obliged to establish "adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty". The Councils discharged that duty: see [1067]-[1084] above. If LGFS wished to contend otherwise, as a matter of fact, it should have adduced evidence or cross examined the Councils' witnesses. It did not. 1098 In this context, it must be recalled that the primary judge was satisfied that the Councils would not have purchased the notes if LGFS had disclosed its conflict: J[2321]. Given the views we have formed, that finding was unnecessary but nevertheless open on the evidence: see [1085]-[1097] above.

2.3.7. Contributory negligence / indemnity / apportionment in relation to fiduciary duty claim 1099 This is addressed in Part 13 below.

2.4.1 Introduction 1100 Given our rejection of LGFS' Appeal Grounds in relation to fiduciary duty, this section of the judgment is arguably unnecessary. However, given the positions adopted by the various parties, it is appropriate to address these Appeal Grounds. 1101 The primary judge found that LGFS owed to the NRB Councils a duty which included a duty to exercise reasonable care and skill in: (a) analysing investments being considered on behalf of the NRB Councils and identifying the risks associated with the investment; (b) only recommending investments that were suitable for the NRB Councils and (c) properly providing the NRB Councils with all material information about the investment that might reasonably be considered as bearing upon the investment decision: J[2263]-J[2265]. 1102 LGFS appealed. It again drew a distinction between the RB Councils and the NRB Councils. It did not dispute that it owed the duties identified in [1101] above to the RB Councils. In relation to the NRB Councils, LGFS did not dispute that: 1. In marketing the Rembrandt notes to the Councils, it owed a duty of care in relation to what it said to the Councils about the notes: Tepko at 16-17 [46]-[47]; 2. It owed a duty to exercise reasonable care that any statements of fact were correct to the best of its knowledge: South Australia Asset Management Corp v York Montague Ltd [2007] AC 191 at 214; and 3. It also owed a duty to take reasonable care that any statements of fact or opinion derived from the application of its experience or other expertise reflected opinions that were honestly held and which were based on reasonable grounds: Tipperary Developments Pty Ltd v State of Western Australia (2009) 38 WAR 488 at 525 [162]. 1103 However, LGFS did contend on appeal that the primary judge erred in finding that it owed the duties identified in [1101] above to the NRB Councils and in holding that LGFS breached those duties of care: LGFS Appeal Grounds Matrix Rows 112-114. Those Appeal Grounds are rejected. In advising and recommending to the NRB Councils that they invest in the Rembrandt notes, LGFS undertook, or at the very least, in the circumstances objectively undertook, the obligations identified in [1101] above to each of the NRB Councils.

2.4.2 Factual analysis 1104 The finding at trial that LGFS owed the duties identified in [1101] to the NRB Councils followed analysis of the history of the relationship between LGFS and each of the Councils, including how LGFS marketed itself to the PA Councils. That analysis has been addressed in Part 8, Section 2.2 and Part 2, Section 7 above.

2.4.3 Duty of care 1105 Were the duties identified in [1101] above owed to the NRB Councils? The answer is yes. First, the factual findings. LGFS was in an advisory relationship with the NRB Councils. It was not a mere salesman: see Part 8, Section 2.2 above. 1106 Second, the legal analysis. The primary judge's identification of the duties owed by LGFS to each of the NRB Councils was consistent with established principles relating to duties of care in circumstances where the parties are in a relationship of investment advisor and client. As the primary judge accepted (at J[2251]): 1. The core obligation of a financial advisor is to warn the investor of the "material risks" of a potential investment: NMFM Property Pty Ltd v Citibank Ltd (No 10) (2000) 107 FCR 270 at 366 [427]-[428]. A "material risk" is a risk to which the investor would attach significance: NMFM Property at 366 [427]-[428] citing Rogers v Whittaker (1992) 175 CLR 479 at 490. 2. An investor is entitled to be warned of the fact that projected rates of return and growth might not be achieved and that there is an element of commercial risk-taking involved for which the investor must be prepared to take responsibility: NMFM Property at 365-366 [425]; see also, Paige v FPI Limited [2001] NSWSC 627 at [193]. 3. Where an investor has suffered a loss because the investment was "unsuitable" for them, such that no financial advisor would have made an unqualified recommendation in the circumstances, the advisor will be liable to put the investor back in the position they would have been in had they not invested: NMFM Property at 375 [468]. LGFS did not identify any error in these factual findings or the legal analysis. 1107 Instead, on appeal, LGFS identified two "errors" in support of its contention that the primary judge erred in finding that LGFS owed the duties identified in [1101] to the NRB Councils. First, LGFS submitted that the primary judge's finding that LGFS owed those duties based upon LGFS' status as a financial advisor would "cut across the statutory regime applicable to such parties" under the Corporations Act. Second, LGFS submitted that such a duty could only be found to exist if LGFS undertook, or was taken in the circumstances to have objectively undertaken, to perform those obligations to each of the NRB Councils (which LGFS submits it did not undertake to do). Both these so called errors are rejected.

2.4.3.1 Conflict with LGFS' statutory duties as investment advisor? 1108 On appeal, LGFS submitted that the fact that LGFS sought to sell, and succeeded in selling, the Rembrandt 2006-3 notes to the NRB Councils could not justify the imposition of the duties identified in [1101] above. As we have said, the basis for this submission was that the primary judge's finding that LGFS owed those duties based upon LGFS' status as a financial advisor would "cut across the statutory regime applicable to such parties" under the Corporations Act. 1109 These contentions fail for a number of reasons. First, at trial, LGFS did not contend that the content of these duties of a financial advisor was inconsistent with the statutory regime in the Corporations Act regulating the conduct of financial advisors. The alleged inconsistency was only relied on by LGFS if LGFS was found to be a mere salesman. The primary judge correctly rejected the contention that LGFS was a mere salesman: see [1023]-[1024] above and J[2262]. 1110 Second, the factual and legal bases for LGFS' contention that the duties would "cut across the statutory regime applicable to such parties" under the Corporations Act is wrong. At a factual level, LGFS was not a salesman, it was a financial adviser: see [1023]-[1024] above. 1111 Legally, there is no disconformity between the statutory provisions identified by LGFS and the content of the duties identified in [1101] above: Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) (2007) 63 ACSR 1 at 140 [540(7)] and 148 cf [588]. That last statement requires further explanation. 1112 It is first necessary to understand the reason for the "disconformity principle". The fundamental issue is the coherence of the law. The law recognises that "[t]here are cases ... where to find a duty of care would so cut across other legal principles as to impair their proper application and thus lead to the conclusion that there is no duty of care of the kind asserted: Sullivan v Moody (2001) 207 CLR 562 at 580 [53]. So, for example, a common law duty of care "should not be found if that duty would not be compatible with other [statutory] duties which the respondents owed": Sullivan at 581 [55]. Therefore, a "common law duty of care cannot be imposed on a statutory duty if the observance of such common law duty of care would be inconsistent with, or have a tendency to discourage, the due performance by the local authority of its statutory duties": X (Minors) v Bedfordshire County Council [1995] 2 AC 633 at 739 and Sullivan at 574 [30]. Here, the duties imposed by the primary judge in no way impair the application of the existing statutory regime, are not inconsistent with the other duties LGFS owed under the Corporations Act and do not discourage the performance of those obligations. 1113 Second, and in any event, Ingot (No 6) at 140 [540(7)] and 148 [588] does not support LGFS' submission. Ingot (No 6) at 140 [540(7)] is authority for the uncontroversial principle that the relevant statutory and common law context is relevant to the determination whether a duty of care should be imposed in a particular case. The finding at 148 [588] that "[w]here the legislature has seen fit to prescribe rights and liabilities ... , the courts should be slow to engraft their own scheme of protection, ... [t]hey should be slow to find gaps where the legislature has created a self-contained and detailed scheme of protection" is not applicable in the current circumstances. 1114 LGFS referred to two specific aspects of the Corporations Act which it submitted conflicted with the duties identified in [1101] above: (1) the fact that there are no statutorily implied terms governing the sale of financial products comparable to those for the sale of goods and (2) to the extent that any duty might be thought to arise out of LGFS' status as a "financial advisor", LGFS referred to s 912A and what it termed the "limited" disclosure obligations in ss 941A, 944A and 949A. 1115 The fact that there are no statutorily implied terms governing the sale of financial products comparable to those for the sale of goods is interesting but irrelevant. LGFS was not a salesman, it was a financial adviser: see [1023]-[1024] above. 1116 The other provisions do not assist LGFS. The statutory obligations of the holder of an AFSL are identified in s 912A. The fact s 912A does not contain a duty in the terms or of the character identified in [1101] above is again interesting but irrelevant. The section, headed "General Obligations", requires a holder of an AFSL, among other things, to "do all things necessary to ensure that the financial services covered by the [AFSL] are provided efficiently, honestly and fairly". The imposition of a duty in the terms or of the character identified in [1101] above is neither inconsistent with, nor cuts across, these general obligations. 1117 The next set of provisions referred to by LGFS was the statutory disclosure obligations imposed on LGFS by ss 941A, 944A and 949A of the Corporations Act. LGFS accepted that none of these statutory disclosure obligations were engaged. And the fact that the provisions existed and, further, were not engaged is again interesting but irrelevant. They are interesting but irrelevant because the disclosure obligations in relation to advice provided to wholesale investors is not prescribed by statute. 1118 LGFS' contention (as we best understood it) that, in the absence of statutory provisions regulating such conduct, the legislature intended that no duty of care would arise in relation to wholesale investors is without foundation. As a matter of legal and commercial sense, it is unsurprising that the Corporations Act does not impose blanket disclosure obligations in relation to wholesale investors, but that common law obligations may be owed to particular wholesale investors in circumstances where the salient features giving rise to a duty of care are present.

2.4.3.2 LGFS undertook, or was to be taken to have undertaken, to perform those obligations to each of the NRB Councils? 1119 LGFS submitted that finding was not open to the primary judge. We disagree. The primary judge found that the salient features giving rise to a duty of care were present (see [1068]-[1069] above and J[2265]) and, in the circumstances, found it appropriate to impose a duty of disclosure: see [1074]-[1075] above and J[2262]. 1120 LGFS undertook, or is to be taken in the circumstances of the case to have undertaken, the particular obligations in question in relation to each NRB Council. In this context, it is necessary to recall that whilst in some cases LGFS expected a NRB Council to consider whether it had the funds available to invest, LGFS expected, or it was objectively reasonable for it to expect, that the NRB Councils would treat the advice from LGFS as a recommendation that they in fact invest in the product subject only to the availability of surplus funds: see [1024] and J[2149]-J[2150].

2.4.4 Breach of duty: J[2157]-J[2169] 1121 LGFS challenged the primary judge's finding that LGFS breached each of the duties (see [1101] above) that it was held to owe to each of the PA Councils: LGFS Appeal Grounds Matrix Row 114. 1122 On appeal LGFS identified three "errors": 1. The primary judge's findings as to LGFS' commercial objectives in selling the Rembrandt notes overstated the importance of the Rembrandt transaction to LGFS' business, such that the primary judge erred in finding that LGFS was blinded to any deficiencies in the product by its need to sell the notes; 2. There was no "obvious justification" for the primary judge's finding that investment in the Rembrandt notes was not suitable for any local council at any time. According to LGFS, there were some investors including some local councils for whom the Rembrandt notes were an appropriate investment and whether the notes were suitable for the PA Councils required a council-by-council analysis; and 3. With respect to the RB Councils, LGFS' duty to those councils would not have been breached unless LGFS could not reasonably have held the view that the Rembrandt notes were appropriate to those councils' circumstances and the evidence did not justify such a conclusion. It is important to understand that, except for these three "errors", LGFS made no other complaints about the approach adopted by the primary judge. 1123 It is therefore necessary to understand what the primary judge in fact did. Her Honour made critical findings that by "offering the [PA Councils] this unsuitable product [the Rembrandt notes] and/or failing to properly identify the risks associated with a repurchase by ABN Amro from LGFS (and thus LGFS from the [PA Councils]) .... and not properly providing the [PA Councils] with information material to their investment decisions, LGFS breached its duty of care to the [PA Councils]": J[2272]. 1124 Those findings were not made in a vacuum. The primary judge supported each finding by detailed reasons, reasons which were clearly open on the evidence: see Part 2, Section 7 and Part 8, Section 2.2 above. 1125 First, LGFS believed that the Rembrandt notes were a "grotesquely complicated" financial instrument but failed to disclose this to the PA Councils: see [90] above. As a result, the PA Councils did not appreciate "that they were investing in something unlike anything they had ever invested in before": J[2268]. And the fact that the product was extremely complicated was a factor that the PA Councils would have taken into account in assessing their willingness to invest in the Rembrandt notes: see, for example, [103]-[104] above and J[2268]. 1126 Second, LGFS failed to disclose to the PA Councils that the Rembrandt notes could be highly volatile: see [128]-[130] above. The primary judge observed that "[g]iven the nature of local government it should have been obvious to LGFS, as experts in local government financial markets, that although councils might intend to hold an investment for the term it was possible, even likely, that they would be subject to contingencies which might require an investment to be liquidated": J[2269]. The duty LGFS owed to the PA Councils required LGFS to disclose to the PA Councils that there was a high likelihood that the Rembrandt notes could trade significantly below par and that if the PA Councils wanted to sell the notes prior to maturity they may be forced to sell the notes substantially below their par value. As the primary judge noted, "[i]n circumstances where LGFS was offering to repurchase at market value on 24 hours' notice, the [PA Councils] needed to know that the product could be highly volatile": see [128]-[130] above and J[2269]. 1127 Next, LGFS failed to disclose to the PA Councils the "performance and modelling risk" of the Rembrandt notes. LGFS knew that the performance of the Rembrandt notes was highly path dependent (see [129] above) and therefore "LGFS understood not only that the product could be highly volatile but why it could be highly volatile": see [129] above and J[2270]. LGFS also understood that "S&P's rating was based on modelling of the performance of the product assuming multiple different spread paths and that ... there was a risk that past performance may not be representative of future performance, current modelling assumptions are unlikely to be consistent with actual performance of the CPDO, and key modelling assumptions were as set out in S&P's base case assumptions": see [62] above and J[2270]. Again, by reason of the duty LGFS owed to the PA Councils, the primary judge found that the PA Councils were reasonably entitled to rely on LGFS disclosing the performance and modelling risk associated with the Rembrandt notes, but LGFS failed to disclose this risk: see, for example, [128]-[130] above and J[2270]. No other conclusion was open. 1128 Finally, the primary judge identified a number of material matters relevant to the PA Councils' investment decision which the PA Councils needed to know about and reasonably relied on LGFS to ensure that they did in fact know about but which LGFS failed to disclose or adequately disclose to the PA Councils. Those matters were listed at J[2271] as follows: (a) the product was not designed, developed or tailored for councils but was created for wholesale investors who, as ABN Amro put it, wished to diversify their current structured credit portfolio (a description which, by definition, excluded Bathurst, Narrandera and Murray): [see [62] and [65] above]; (b) LGFS was promising only to repurchase the notes at market value on 24 hours' notice by a back-to-back arrangement with ABN Amro so that the amount LGFS would pay any council as so-called market value would be the same as the amount ABN Amro paid to LGFS in circumstances where that amount would not necessarily be the same as and may be lower than the net asset value of the note at the time having regard to ABN Amro's assessment of supply and demand: [see [84] and [130] above]; (c) the performance of the product, including its volatility, depended on the evolution of credit spreads on the two indices over the term: [see [62] above]; (d) the tightening of credit spreads which was occurring immediately before the issue of Rembrandt 2006-3 could be adverse to the performance of the product given its dependence on the evolution of credit spreads: [see [62] above]; and (e) for those councils which invested after 22 March 2007, S&P had issued its CPDO Evaluator which disclosed that S&P would use a different approach to rating instruments such as the product in the future so that, if the product had been issued later, it would not have obtained a rating of AAA from S&P: [see [366] and [368] above]. The references in brackets identify the evidentiary bases for these findings. 1129 It is therefore unsurprising, that, having regard to these matters (taken separately or cumulatively), the primary judge was satisfied that LGFS' dealings with the PA Councils involved breaches of its duty of care to them to: (a) properly analyse any investment being considered on behalf of a client and identify the risks associated with the investment; (b) only recommend investments that are suitable for the client and (c) to properly provide the client with all material information about the investment that might reasonably be considered as bearing upon the investment decision. 1130 As the primary judge said (at J[2272]): In offering the [PA Councils] this unsuitable product and/or failing to properly identify the risks associated with a repurchase by ABN Amro from LGFS (and thus LGFS from the councils) - namely that ABN Amro would determine the price having regard to supply and demand and not necessarily the net asset value of the notes at the time - and not properly providing the council with information material to their investment decisions LGFS breached its duty of care to the [PA Councils]. 1131 It is against that background that the three "errors" identified in [1122] above must be considered.

2.4.4.1 LGFS' commercial objectives 1132 LGFS' contention on appeal was that the primary judge's findings as to the importance of the Rembrandt transaction to LGFS' business were not supported by the evidence. This contention is rejected. The evidence did support the findings. Moreover, given the nature and significance of the other findings of non-disclosure, the contention goes nowhere. 1133 First, the evidence. We reject the contention that the primary judge's findings as to the importance of the Rembrandt transaction to LGFS' business were not supported by the evidence: see Part 2, Sections 6 and 7 at [90], [98]-[108] and [118]-[124] above and at Part 8, Section 2.2, especially at [1021]-[1024] and [1029]-[1030] above. 1134 Next, the futility of the contention. It must be recalled that LGFS' "commercial objectives" were addressed in the context of the PA Councils' claims for breach of fiduciary duty. The PA Councils did not know, and were not told by LGFS, of the commercial pressures LGFS faced and which made its sale of the notes commercially imperative. That failure placed it in an immediate position of conflict: see Part 8, Sections 2.1-2.3 above. 1135 The essential elements of LGFS' breach of fiduciary duty were the non-disclosures identified in Part 8, Section 2.3 above, especially at [1074]-[1078]. However, the legal significance of the non-disclosures did not stop with the fiduciary duty claims. The non-disclosures to the PA Councils necessarily had an effect on LGFS' performance of its other legal obligations. The findings (see [1128]) above identified deficiencies in LGFS' marketing material. It was the consequences of those deficiencies that were assessed in deciding whether the duty found to be owed was breached. The so-called "importance" of the Rembrandt transaction to LGFS' business is a red herring. Regardless of the level of its "importance", LGFS was obliged at least to disclose the matters identified at [1074] above. It did not. Those non-disclosure findings existed independently of any assessment of the significance of the Rembrandt notes to the viability of LGFS' business. As we have said, those non-disclosure findings identified deficiencies in its marketing of Rembrandt to the PA Councils.

2.4.4.2 Suitability of Rembrandt for local councils 1136 LGFS submitted that the primary judge's finding (at J[2164]) that the Rembrandt notes were not suitable for any council at any time was wrong. LGFS submitted that: The fact that an investment in the CPDO would expose a council to the additional risk, beyond the risk of default, of suffering a capital loss should it be required to sell in adverse circumstances was a factor to be taken into account but did not of itself mean that the CPDO should be off limits. Whether or not the CPDO was unsuitable for a particular council would depend on various factors, including the size and structure of the Council's investment portfolio, its perceived cash flow and liquidity requirements, etc. 1137 LGFS' contention goes nowhere. LGFS' selection of one sentence from a lengthy and detailed judgment, out of context, is inappropriate. LGFS' contention ignores critical findings. Those critical findings extend to the following matters. First, the representations made by LGFS to the PA Councils: see Part 8, Section 2.2.2 above, especially at [1026], and J[2147]. These were LGFS' oral recommendations to the PA Councils. Those recommendations were made in a particular context: Part 8, Section 2.2.3 above. 1138 It is therefore unsurprising that the primary judge found (at J[2148]) that each of those matters constituted an opinion intended to induce the council officers to invest in the product and that, considered in context, many of them constituted a recommendation to invest in the product. As we have said (at [1120]) above, it was apparent from the overall circumstances and course of dealings between each of the PA Councils and LGFS over many years that LGFS expected and intended that the PA Councils would rely on its advice that the Rembrandt notes were suitable for the PA Councils and were safe, secure, robust and sound in making a decision to invest: J[2150]. 1139 That leads us to the second basis for rejecting LGFS' contention. As the primary judge said (at J[2164]), "[i]f it is assumed that LGFS in fact held the opinion that the investment was suitable for a council (that is, any council which had the available funds) to make then, nevertheless, … the opinion was not based on reasonable grounds and was not the product of the exercise of due care and skill. LGFS should have known that an investment that might be highly volatile was not a suitable investment for any council to make at any time". 1140 The primary judge's finding that LGFS' opinion that investment in the Rembrandt notes was suitable for a council was not based on reasonable grounds and was not the product of the exercise of due care and skill was correct. Two important aspects of the Rembrandt notes demonstrate why this finding was open and correct. 1141 First, the liquidity of the Rembrandt notes. Liquidity of an investment was an important factor to the PA Councils (apart from Ryde) who may have needed the funds invested for public purposes: see [130] above. That fact was known to LGFS: see [130] above. Indeed, LGFS emphasised the "next day liquidity" of the Rembrandt notes in its marketing material: see [130] above. However, the council officers were not told that there was no secondary market for the Rembrandt notes or that the market value of the notes may not be the face value and substantially below par if they chose (or were forced) to sell them before maturity: see [90] and [130] above. This was a major risk of investing in the Rembrandt notes which affected the suitability of the product as an appropriate investment for the PA Councils. 1142 Second, the volatility of the Rembrandt notes. LGFS knew that the Rembrandt notes were not just volatile but "highly volatile" (see [129] above) and that this was a factor which was highly material to its suitability as an investment for the PA Councils: see [129] above. This aspect had nothing to do with the rating: see [130] above. LGFS knew that the PA Councils needed to be able to liquidate investments as it knew the 10 year term of the Rembrandt notes would be an "eyebrow raiser": see [130] above. LGFS' statement about volatility was in the fine print of the LGFS Community Income Notes Brochure (see [128] above), which was drafted to emphasise LGFS' 24-hour liquidity promise instead: see [128]-[130] above. In short, LGFS knew that the high volatility of the notes was an important factor and LGFS chose to emphasise its liquidity promise without any corresponding emphasis about the potential for high volatility: see [128]-[130] above. 1143 LGFS submitted that the primary judge's finding that the Rembrandt notes were not suitable for any council at any time was "contrary to the view of market participants in 2006". LGFS did not pursue a defence at trial that the recommendation of the Rembrandt notes to the PA Councils was reasonable by reference to standard industry practice. The PA Councils did not adduce evidence in relation to this issue. LGFS should not be permitted to raise this contention on appeal: Coulton at 7-8. In any event, the contention is not substantiated by the evidence: see, for example, [135] and [139] above. LGFS' submission referred to a fragment of advice from Grange Securities Ltd to Moree: see [139] above. That fragment must be read in context. That statement was not an endorsement of the product. In fact, the statement was given in limited terms in the context of the prior disclosure that the investment was likely to be suitable for investors "[a]ble to cope with a high level of potential volatility in NAV" and "[a]ble to invest for a 10-year period - while intended liquidity arrangements through making a market appear reasonable, there is no guarantee of liquidity in all market conditions": see [135] above. No, less significantly, as the primary judge noted, the fact that Grove Research and Advisory sold the Rembrandt notes to three unidentified "clients" did not establish that it held the view that the investment was suitable for councils: J[1113]. 1144 The final aspect of LGFS' complaint under this heading was that the primary judge was required to undertake a council-by-council analysis to assess the suitability of the product and that her Honour failed to do so. LGFS submitted that "[t]he proper conclusion was that Rembrandt was not for everyone but there were some investors (including some local councils) for whom it was an appropriate investment to include in their portfolio" (emphasis added). LGFS addressed the RB Councils and the NRB Councils separately. 1145 In relation to the RB Councils, LGFS accepted that, in recommending Rembrandt 2006-3, it owed a duty to take reasonable care to ensure that it was a suitable product for each of them. However, LGFS submitted that its obligation to the RB Councils was only to take reasonable care, such that it will only have breached its duty if it could not reasonably have held the view that the Rembrandt notes were suitable for the RB Councils. There are three answers to that contention. First, LGFS could not reasonably have held the view that the Rembrandt notes were appropriate to those Councils' circumstances. They were not: see [1141]-[1142] above. 1146 Second, whether LGFS breached its obligation to the RB Councils to take reasonable care to ensure that the Rembrandt notes were a suitable product is not answered by simply enquiring whether LGFS could reasonably have held the view that the Rembrandt notes were suitable for the RB Councils. It ignores the more extensive duties LGFS owed to the RB Councils: see [1101] above. LGFS breached those duties: see [1121]-[1131] above. 1147 Third, even if in assessing whether LGFS breached its obligation to the RB Councils to take reasonable care to ensure that the Rembrandt notes were a suitable product, it was sufficient to simply enquire whether LGFS could reasonably have held the view that the notes were suitable for the RB Councils (a view we do not accept), the material referred to on appeal by LGFS did not support such a finding. So, for example, LGFS submitted that it discharged that duty because: Corowa was a long-term and enthusiastic investor in structured products, including CDOs. It had clearly adopted the practice of holding a significant proportion of its portfolio in such products. Although Cooma's track record was shorter, it too had a portion of its portfolio in long-term and structured products. On the face of it, both Councils met Grove's criteria for investors for whom Rembrandt would be suitable. 1148 The "Grove criteria" which LGFS referred to as indicative of the suitability of the Rembrandt notes to Cooma and Corowa were merely "Indicative Investor Profiles" (see [135] above) which indicated the types of investors to whom the product might be suitable to offer. That statement was unsurprising. As the Grove Report itself stated, "[y]our Grove advisor can recommend whether these notes fit into your portfolio strategy": see [135] above. We therefore reject LGFS' contention that it was reasonable for it to recommend the Rembrandt notes to the RB Councils because it now considers that they fit "on their face" into Grove Research and Advisory's indicative criteria for investors who could consider the investment. 1149 LGFS owed the RB Councils a duty to investigate and only recommend investments which it concluded were suitable to those Councils in the circumstances. Whether or not Cooma and Corowa fit "on their face" into Grove Research and Advisory's indicative criteria for investors, unsurprisingly, was not an issue at trial. And it was not an issue at trial because even if they did fit the criteria, the criteria are no more than indicative. In other words, even if the RB Councils did fit the criteria (about which there was no evidence and no findings), that fact alone would not establish that it was reasonable for LGFS to recommend the Rembrandt notes as a suitable investment. 1150 Of course, even if LGFS had reasonable grounds to believe the Rembrandt notes were suitable to Cooma and Corowa (a view we do not hold), that would not discharge LGFS' common law and contractual duty to disclose all material facts relevant to the decision to invest, which, for the reasons outlined at [1132]-[1135] above, LGFS did not do. 1151 LGFS complained that the RB Councils did not attempt to demonstrate that some other product was more suitable for them and that LGFS could have and should have recommended that product. That contention is, at best, misguided. There was no obligation on the RB Councils to establish what LGFS should have done so as not to be negligent or in breach of its contractual obligations. The RB Councils were obliged to establish that by recommending the Rembrandt notes to the RB Councils, LGFS was in breach of the duties of care it owed to them. The primary judge correctly found that LGFS breached those duties: see [1121]-[1131] above. 1152 That leaves the NRB Councils. Their position is addressed at [1024] above. LGFS did not have reasonable grounds to believe the Rembrandt notes were suitable for those Councils.

2.4.5 Other representations and non-disclosures 1153 LGFS accepted that it owed duties of care in what it said when marketing Rembrandt notes to the PA Councils. The issue of breach of duty will be addressed in the context of the statutory claims for misleading or deceptive conduct in Part 8, Section 3 below.

3.1 Introduction 1154 LGFS was found to have contravened ss 1041H(1) and 1041E(1) of the Corporations Act and s 12DA of the ASIC Act. In particular, LGFS was found to have engaged in misleading and deceptive conduct, and, in one respect, the publication of information or a statement false in material particulars, and otherwise found to have made negligent misrepresentations to the PA Councils about the Rembrandt 2006-3 notes. It was also found to have breached its AFSL in advising the PA Councils about, and selling to them, the Rembrandt notes because the notes were not a debenture and thus not a security but a derivative under the Corporations Act in which LGFS was not licensed to deal. LGFS appealed: LGFS Appeal Grounds Matrix Rows 118 and 119.

3.2 Section 1041H of the Corporations Act 1155 Under s 1041H of the Corporations Act, "[a] person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive" (emphasis added): see [724] above. 1156 The statutory question was whether LGFS engaged in conduct in relation to a financial product (the Rembrandt notes) or a financial service which was misleading or deceptive. The primary judge concluded that it had. The primary judge's conclusions that the PA Councils' acquisition of the Rembrandt notes from LGFS involved the acquisition of a financial product and LGFS' conduct in selling the Rembrandt notes to the PA Councils was dealing in a financial product and providing a service, including giving financial product advice, were not challenged by LGFS: J[2119]-J[2132]. Significantly, none of the findings depended on LGFS being in an advisor relationship with the PA Councils. That question does not arise on the proper construction and application of s 1041H of the Corporations Act. 1157 What then was the misleading or deceptive conduct? There were two separate groups of findings. The first was that LGFS represented to each of the PA Councils that the Rembrandt notes were a suitable investment. These representations were conveyed by LGFS orally and in its various promotional statements: see, by way of example, [125] above. The primary judge found that the representations were misleading or deceptive because Rembrandt 2006-3 was not a suitable investment for the PA Councils and LGFS should have known this to be so: J[2160]-J[2164]. The factual bases for these findings are the same as those addressed in Part 8, Section 2.4 above, especially at Part 8, Section 2.4.4. LGFS' appeal against those findings is dismissed for the same reasons. 1158 The second group of findings related to discrete misrepresentations or non-disclosures by LGFS. The findings may be summarised as follows: 1. Representing (to Bathurst) that Rembrandt 2006-3 was "not a CDO or like a CDO" and otherwise failing to properly disclose the nature of the product as a "highly complex structured credit derivative": J[2174], J[2182]-J[2185] and J[2271(a)] and [1041] above; 2. Representing that Rembrandt 2006-3 had been designed or tailored by LGFS for local councils when it had not: J[2172] and J[2271(a)] and [131] above; 3. Representing that Rembrandt 2006-3 was a good or sound investment, without properly disclosing the notes' potential NAV volatility, and in particular its dependence on the evolution of credit spreads, and implications of the then current low spread environment: J[2171], J[2186]-J[2187], J[2189]-J[2190], J[2198], J[2269]-J[2270], J[2271(c)] and J[2271(d)]), and [125]-[130] above; 4. Representing that LGFS would buy the product back, without properly disclosing that LGFS' undertaking to repurchase the product at "market value" did not mean NAV: J[2188] and J[2271(b)], and [90] and [130] above; 5. Failing to disclose the disclaimer in the Surf Presentation concerning "modelling risk": J[2199]-J[2200] and J[2270] and [125]-[130] above (with the exception of Eurobodalla, the Rembrandt 2006-3 notes were not marketed on the basis of the Surf Presentation); 6. Failing to disclose to the Councils considering the purchase of Rembrandt 2006-3 notes after March 2007 that S&P had developed a new CPDO Evaluator for rating future CPDO issues: J[2207(a)], J[2209] and J[2271(e)], and [142] above; 7. Representing that a cash out was very unlikely and Rembrandt 2006-3 was very robust: J[2175] and [1044] above; and 8. Representing that Rembrandt had been designed, or was likely, to cash in early: J[2175]. 1159 LGFS did not appeal against the first finding. It appealed against each of the other findings on the grounds that: (1) some of the findings of misrepresentation and non-disclosure should not have been made on the facts; (2) some findings as to what LGFS knew or should have known acting reasonably went too far and (3) the PA Councils did not demonstrate that any misconceptions about Rembrandt 2006-3 which they may have had, or the misjudgements they may have made in investing "were the responsibility of LGFS". 1160 None of these submissions have merit. The primary judge found that LGFS contravened s 1041H(1) of the Corporations Act and s 12DA of the ASIC Act in marketing and selling the Rembrandt 2006-3 notes to the PA Councils. The primary judge said (at J[2232]): LGFS engaged in misleading and deceptive conduct in relation to a financial product and in providing a financial service in the manner proscribed by each provision. The councils were misled by and as a result of LGFS's conduct about many material aspects of the investment as identified. They invested in reliance on their erroneous beliefs induced by LGFS's conduct. I am also satisfied that LGFS's contravening conduct, at least on a prima facie basis, materially contributed to the loss and damage the councils suffered when the investment cashed out even though the councils also relied on the mere fact of the AAA rating on interest and principal by S&P which LGFS was, as it is said, passing on to the councils as S&P's representation rather than its own. 1161 That conclusion was preceded by a detailed analysis of the pleaded case and the evidence, both generally and in respect of each of the Councils. LGFS' challenge to that analysis was largely undirected. It fell under five headings - (1) the "conservatism" of the Councils; (2) LGFS' perception of the Councils' understanding of structured products; (3) oral presentations to the Councils; (4) the nature of the product and (5) challenges to specific representations. It is necessary to address each.

3.2.1 'Conservatism' of Councils 1162 The significance of the matters under this heading to a challenge to the primary judge's finding that LGFS had engaged in conduct in contravention of s 1041H of the Corporations Act was not readily apparent. The primary judge made a finding that each Council was "conservative": J[1642], J[1937] ("[i]n common with all of the councils Murray was a conservative and risk averse investor") and J[1996]. (As to the Councils individually: J[1500]-J[1501], J[1504], J[1533] and J[1573] (Parkes); J[1629]-J[1630] and J[1641]-J[1642] (Orange); J[1662] and J[1665]-J[1666] (Moree); J[1698], J[1709] and J[1714(3)] (Oberon); J[1754] and J[1777] (Deniliquin); J[1849], J[1854]-J[1855], J[1857], J[1861] and J[1867] (Narrandera); J[1936]-J[1938], J[1944], J[1949], J[1963]-J[1964] and J[1973] (Murray); J[1996] (Cooma); J[2038], J[2041]-J[2042] and J[2056] (Narromine) and J[2083], J[2087] and J[2104] (Ryde)). 1163 LGFS challenged the primary judge's description of Eurobodalla as a "conservative" investor: J[1477]. In support of that finding, the primary judge identified that Eurobodalla operated well inside the Ministerial Order and Investment Guidelines and saw the security of its funds as very important. LGFS submitted that findings that it was aware of Eurobodalla's "conservative" requirements (see, for example, J[1482(a)] and J[1477]) had to be understood in context. LGFS' complaint was that even if Eurobodalla was relatively conservative compared with other investors, it needed to be recognised that the label ("conservative" investor) was being applied to a local council which was investing a significant proportion of its assets in structured products (including CDOs) which were not principal protected, could fluctuate in value and for which there was no ready market if they needed to be sold to raise cash. LGFS submitted that a similar analysis applied to other Councils. 1164 As LGFS put it: Not all of [the Councils] invested in complex structured products to the same extent as Eurobodalla (although Corowa, Parkes, Ryde and Moree did). But none of the Councils which did invest in CDOs apparently regarded such investments as detracting from their status as risk-averse investors concerned above all with the protection of capital. Even the Councils which had not previously invested in structured products invested in higher-yielding and lower rated FRNs without considering that they were being anything other than "conservative". 1165 The relevance of these matters was not and is not apparent. Moreover, LGFS' submission was wrong. It inaccurately summarised the PA Councils' investment portfolios and ignored the primary judge's findings concerning LGFS' knowledge of local government investment requirements (see [1024] above) and the PA Councils' individual investment strategies. For present purposes, it is sufficient to take Eurobodalla by way of example: see J[1476]-J[1495]. As the PA Councils submitted, Eurobodalla had a historical preference for term deposits. Eurobodalla's 2002 and 2005 investment policies specified that "[t]he order of priorities are first, the preservation of capital, second the maintenance of liquidity and third, maximum return on investment". Its investments in CDOs increased substantially after November 2005 when it entered into an Individually Managed Portfolio (or IMP) Agreement with Grange Securities Ltd under which Grange traded CDOs "by default" on Eurobodalla's behalf: J[1480]. Eurobodalla's draft investment policy, sent to LGFS sometime in 2003, stated that "[t]here is an emphasis on capital protection and risk reduction rather than an aggressive approach to high earnings/growth". Eurobodalla was bound by, and complied with, the Ministerial Order. None of these facts support a finding that it was reasonable for LGFS to conclude that Eurobodalla was anything other than a conservative investor. A similar analysis may be applied to the other PA Councils. 1166 There are, however, more basic flaws in LGFS' argument. The fact that a Council increased its investment in CDOs (or an equivalent product) does not support a finding that that Council was not conservative. It merely suggests that the composition of that Council's portfolio changed over time. Change was inevitable as the application of the relevant ministerial orders changed from time to time, including the reference to permitted investments in products with S&P credit ratings of A or above: see [19] above. Finally, and no less significantly, LGFS' submission ignores the evidence of council officers, including evidence that they believed the investments were "conservative": see, for example, J[1714], J[1777], J[1949], J[1963] and J[2083].

3.2.2 LGFS' perception of the Councils' understanding of structured products 1167 LGFS challenged aspects of the primary judge's findings (see [1029(1), (4) and (5) above), namely: 1. Given the nature of the S&P Reports and the ABN Amro term sheet, LGFS' knowledge of the fact that council officers did not understand CDOs and the lack of any questions based on the S&P Reports or ABN Amro term sheet, LGFS could not have believed that the PA Councils read either document before deciding to invest, nor that council officers actually understood the product or its risks from those documents: J[1348]; 2. LGFS knew that the council officers would not have understood the material they had been provided: J[1343], J[1348], J[1395], J[1451], J[1566(2)] and J[1682]; and 3. LGFS was fully aware (or ought to have been aware) of the lack of financial sophistication of the PA Councils and that they would not understand the complex nature of the product: J[1282]. 1168 LGFS sought to support these challenges by reference to four matters: 1. The PA Councils' previous investment in structured products; 2. LGFS was dealing with the PA Councils as institutions and it was not privy to the PA Councils' internal deliberations concerning the Rembrandt notes; 3. The contents of the documents it provided to the PA Councils and their response to those documents; and 4. The particular circumstances attaching to Eurobodalla. Each will be addressed in turn.

3.2.2.1 Previous investment in structured products and therefore necessary knowledge 1169 LGFS submitted: … Her Honour quoted internal LGFS board papers from 2005 and 2006 which stated that local councils generally lacked understanding of, or the ability to analyse, CDOs and other structured products then on the market [J[1004]-[1005] and J[1036]]. Later at various points in the judgment, she relied on this material in support of findings that the Councils did not understand Rembrandt and that LGFS knew or ought to have appreciated that this was so: see for example [J[1282], J[1317], J[1395] and J[1402]]. She also suggested that LGFS should have realised that (on her findings) the Council officers were not reading or were not understanding the documents provided to them by LGFS: [J[1348]]. The views found in LGFS's board papers were generalisations across local councils as a whole. They did not necessarily apply to all the Councils which were offered Rembrandt by LGFS. Most of the Councils had previously purchased CDOs and some had purchased other more exotic structured products. In the course of this, the Council officers were exposed to numerous presentation documents, research reports and the like. Promoters of CDOs, such as Grange, also conducted seminars on structured products. It could not be assumed that none of this would have had any effect. Certainly LGFS might reasonably assume that previous dealings with CDOs had given the Councils sufficient appreciation of the issues involved to know the types of risk involved and to be able to ask about the risks or features which concerned the councils. Mr Michell's marketing report of November 2006 referred to the positive response to Rembrandt "both by Councils who have a good understanding of CDO & CPPI and others who are having a structured product explained to them for the first time": [J[1094]]. The Councils who were the subject of the report and who had previously invested in structured products included Oberon, Moree and Narromine. 1170 LGFS contended that it was reasonable for LGFS to assume that previous dealings with CDOs had given the PA Councils sufficient appreciation of the issues involved to be aware of, and understand, the types of risks involved and to be able to ask about the risks which concerned the PA Councils. LGFS' challenges to these findings are untenable. Aspects of these submissions have already been addressed in Part 8, Section 2.2.5.1 under the heading "Challenge 1: Whether the witnesses were the decision makers and the availability of other potential advisers". The same criticisms apply here. LGFS was selective in the evidence it referred to in support of its challenges. 1171 LGFS first referred to some aspects of LGFS' internal board papers which stated that councils generally lacked understanding of, or the ability to analyse, CDOs and other structured products on the market: J[1004]-J[1005] and J[1036]. The evidence was not confined to LGFS' board papers. In particular, it extended to include: 1. Mr Michell's tour of New South Wales in September 2005 to meet various local council representatives and his contemporaneous record of those meetings: see [104] above; 2. Mr Hilder's September 2005 Activity Report to the LGFS Board in October 2005: see [106] above; 3. Mr Hilder's 30 November 2005 email attaching board papers including an "Activity Report December 2005 Quarter": see [117] above; 4. The fact that LGFS held a copy of the paper published by Mr Cordeiro of ABN Amro on 6 March 2006 (see [120] above) and that, on the same day, Mr Tischler had a meeting with ABN Amro (including Mr Cordeiro) for which Mr Tischler's contemporaneous notes recorded that "[s]ome CDOs held by councils may not be suitable for inclusion because of excessive risk or unusual structural elements": see [121] above and J[1011]-J[1012]; 5. The fact that, on 5 April 2006, Mr Cordeiro emailed Mr Hilder regarding developing "Further Options for NSW Councils" and, among other things, stated that he was "conscious of the limited level of knowledge of complex financial products such as CDO's and similar products" and that there was "no independent specialist reviewing the transactions making it difficult for the council to truly understand the level of risk associated with the investment": see [122] above. 1172 None of this evidence was referred to by LGFS. None of this evidence supports LGFS' contention that it was entitled to assume that previous dealings with CDOs had given the PA Councils sufficient appreciation of the issues involved to be aware of, and understand, the types of risks involved and to be able to ask about the risks which concerned them. Indeed, the evidence was to the contrary. 1173 LGFS' placed considerable reliance on Mr Michell's marketing report of November 2006 to the effect that the Rembrandt notes had received a positive response from "councils who have a good understanding of CDO & CPPI" (see [137] above) and the fact that the report included Oberon, Moree and Narromine who had previously invested in structured products: see [136] above. The report does not assist LGFS. The two page report also related to visits to six other councils who were not parties to these proceedings. No statements about Oberon, Moree or Narromine's understanding of CDOs were made in that report. Mr Michell was not called to give evidence as to the PA Councils to which those comments in his report related.

3.2.2.2 Councils as institutions 1174 LGFS submitted that it was dealing with the PA Councils as institutions and was not privy to their internal deliberations concerning the Rembrandt notes. Therefore, according to LGFS, LGFS did not know what experience decision makers within the PA Councils had, with the implication that it could not reasonably have known that the PA Councils did not understand structured products. That submission does not assist LGFS. Aspects of this submission have already been addressed in Part 8, Section 2.2.5.1 under the heading "Challenge 1: Whether the witnesses were the decision makers and the availability of other potential advisers": see [1037]-[1044] above. Moreover, the submission that LGFS did not know what experience decision makers within the PA Councils had, with the implication that it could not reasonably have known that the PA Councils did not understand structured products, was inconsistent with its submission that although Mr Hilder thought the Surf Presentation was too complicated, he was supposedly comforted by the fact that "as Mr Tischler knew, Mr [John] Murphy and Mr [Miles] Craighead [from Eurobodalla] had considerable experience of structured products".

3.2.2.3 Contents of documents provided by LGFS to PA Councils and their response 1175 LGFS then sought to garner support for its contention from the contents of documents provided by LGFS to the PA Councils. LGFS submitted that it provided these documents for the PA Councils to read, but did not know whether they had done so, or how thoroughly, and that, in the absence of a request for an explanation or assistance from the relevant PA Council (and LGFS never received any such request) it was difficult to see what else LGFS should have done. LGFS further submitted that the documents were capable of being understood by the relevant officers at each of the PA Councils, arguing that the LGFS Community Income Notes Brochure "was written in accessible terms" and that the S&P Reports were "not so arcane that [they] could not be read and understood". 1176 Those contentions proceed upon a false premise - that the documents were accurate. They were not. For example, as the primary judge found, reading the LGFS Community Income Notes Brochure, the S&P Reports and ABN Amro term sheet would not have assisted the PA Councils to identify the risks involved with the Rembrandt notes (J[1637]) as: 1. The LGFS Community Income Notes Brochure did not disclose the risks - "[i]t was a wholly one sided description of the potential benefits of investing in a product said to have been arranged by LGFS without any accompanying disclosure of the potential risks which LGFS itself knew about"; 2. The S&P Reports did not disclose all of the risks of which LGFS was aware and did not purport to be a summary of the product suitable to be given to the PA Councils for the purpose of explaining the nature of and risks associated with the product; and 3. The ABN Amro term sheet did not identify the risks of the Rembrandt notes. 1177 The inaccuracies in the documents, together with LGFS' non-disclosures (see Part 8, Section 2.3 above), are a complete answer to LGFS' contention that it was entitled to rely upon the fact that it received little or no questioning from the PA Councils to justify its conclusion that the PA Councils understood the product. As the primary judge said (at J[1620] and [1639]), the PA Council witnesses "did not know what they did not know" and could never have asked the right questions to obtain the relevant information. The contention is rejected.

3.2.2.4 Eurobodalla 1178 LGFS sought to distinguish Eurobodalla on the grounds that, in addition to the Pre-Sale Report, Eurobodalla had previously been provided with the Surf Presentation. LGFS submitted that its marketing to Eurobodalla had to be evaluated in the context that Eurobodalla could reasonably be expected to have read the Surf Presentation. LGFS' submission was that the primary judge therefore erred in finding (at J[2198]) that Eurobodalla was in the same position as the other PA Councils despite receiving the Surf Presentation. That submission is unfounded. It ignored evidence given by officers from Eurobodalla. Mr Craighead said he "tried to read it" but that there would have been terms in the document that he was unable to understand in detail and which he was not sure were totally traversed. Another officer, Mr Murphy, also gave evidence that he did not understand aspects of the Surf Presentation, including how the product used leverage. 1179 There are other flaws in LGFS' submission. The Surf Presentation was not "perfectly comprehensible". Indeed, LGFS' own witness Mr Hilder gave evidence that he did not understand aspects of the Surf Presentation, including that the price of the CPDO was not directly impacted by movements in correlation, and that the mechanics "were a bugger". LGFS' submissions also failed to address the fact that Eurobodalla had previously rejected the notion of investing in the CPDO when it was approached by ABN Amro: J[1481]. It had chosen to invest in the Rembrandt 2006-3 notes because they were recommended by a trusted adviser (LGFS) and Mr Tischler had told Eurobodalla that it was one of the best products he had seen across his desk in a long time: see J[1481] and [1044] above. This contention fails.

3.2.2.5 Oral Presentations to PA Councils 1180 LGFS submitted that there was very little contemporaneous documentary evidence before the primary judge as to what Mr Tischler and Mr Michell said in their oral presentations to the PA Councils concerning the Rembrandt notes. It must be recalled that Mr Michell did not give evidence and Mr Tischler did not remember the individual conversations but gave evidence of what he said his general practice had been. The primary judge expressed a preference for the evidence of council officers over Mr Tischler's evidence where they were in conflict. 1181 LGFS' position was that where the PA Council witnesses were uncontradicted or effectively uncontradicted because of the primary judge's general rejection of Mr Tischler's evidence of his general practice, it did not mean that the PA Council witnesses were necessarily reliable. LGFS submitted that many of the same factors which militated against accepting Mr Tischler's evidence were equally applicable to the PA Council witnesses and, indeed, in some cases, the primary judge rejected specific aspects of the PA Council witnesses' evidence despite the lack of contradiction. 1182 LGFS then submitted that: There are therefore limitations to her Honour's findings on what was said in the Council officers' conversations with LGFS and internally. Her Honour did [address] all of the issues which were raised as to what was specifically said. And even where she did so, and accepted the thrust of the Council witnesses' evidence, they were only claiming to remember the "substance" or "context" of what had been said and the precise wording which appeared in their affidavits and oral testimony remained subject to the factors which necessarily affected its reliability. 1183 LGFS does not identify any specific errors which the primary judge made in accepting the evidence of the PA Councils' witnesses. There was nothing inconsistent or erroneous in the approach of the primary judge. LGFS does not identify any error or point to what her Honour should have done differently. 1184 The submission that "there are limitations" to the primary judge's findings on what was said between the PA Councils and LGFS was not articulated with any, or any sufficient, particularity. For that reason alone, it is rejected. However, three points must be made: 1. Unlike many of the PA Council officers, Mr Tischler was found to have no specific recollection of his discussions with the PA Councils about the Rembrandt notes: J[1326]; 2. Mr Michell was not called to give evidence; and 3. All of the PA Council officers impressed the primary judge as witnesses who were doing their best to accurately recall what they had been told: J[1325]. 1185 The primary judge preferred the PA Council officers' evidence of the oral representations made by LGFS. There was no error in the primary judge's findings of fact as to those representations. There was and is no basis to overturn those findings: Fox v Percy at 125-127; Rosenberg v Percival (2001) 205 CLR 434 at 448 [41]-[42] and Devries v Australian National Railways Commission (1993) 177 CLR 472 at 482-483.

3.2.2.6 Nature of product 1186 The primary judge found that it was misleading for LGFS not to disclose its opinion that Rembrandt 2006-3 was "grotesquely complicated" because the complicated nature of the product prevented the PA Councils from appreciating that it was different in material respects from products with which they had previously dealt: see, for example, [90] above. In particular, the primary judge said investors in CDOs would be misled into thinking that the product was like a CDO, and investors in floating rate notes (FRNs) would be misled into thinking it was like an FRN: J[2184]. LGFS submitted that the primary judge erred in finding that LGFS engaged in misleading and deceptive conduct by failing to disclose to the PA Councils that it considered the product to be "grotesquely, extremely, highly or extraordinarily complicated": J[2184]. In short, LGFS' principal complaint was that the fact that the complexity of the Rembrandt notes was obvious to the PA Councils. 1187 These complaints are rejected. It may be accepted as a general proposition that the PA Councils perceived the Rembrandt notes as a complex structured product. But that was just part of the equation. An, if not the key, aspect of the primary judge's finding was LGFS' failures to disclose its opinion as to the degree of complexity of the Rembrandt notes, not the fact that the notes were complicated. 1188 It was LGFS' failure to tell the PA Councils that it regarded the Rembrandt notes as grotesquely complicated which was misleading because it led the PA Councils to believe that whilst the notes were complex, their level of complexity was consistent with other structured products which they had been offered or invested in in the past, such as CDOs and FRNs. As noted earlier, the PA Councils "did not know what they did not know because LGFS had never taken any steps to ensure the contrary": J[1620], J[1639] and J[1177] above.

3.2.3 Specific representations 1189 LGFS then identified specific representations or non-disclosures which it submitted the primary judge erred in finding were misleading or deceptive. Those representations or non-disclosures were: 1. The role of LGFS; 2. The failure to disclose that the Rembrandt notes were highly volatile; 3. The meaning of "market value" for purpose of sale back to LGFS; 4. The modelling disclaimer; 5. The March 2007 rating review by S&P; and 6. The cash out and cash in features of the Rembrandt notes. Each will be addressed in turn.

3.2.3.1 Role of LGFS 1190 The primary judge found that representations were made to nine of the PA Councils (Corowa, Orange, Oberon, Deniliquin, Moree, Murray, Cooma, Ryde and Narromine) to the effect that Rembrandt 2006-3 had been designed or tailored for local government. In particular, the primary judge found that the relevant representations were made orally to Corowa and Orange by Mr Tischler and to Oberon, Deniliquin, Moree, Murray and Cooma by Mr Michell. 1191 LGFS did not submit that these findings that representations were made to nine of the PA Councils to the effect that Rembrandt 2006-3 had been tailored or designed for local government were wrong. LGFS rather submits that LGFS' conduct as a whole must be assessed to determine whether the representations were misleading and that, in context, they were not misleading because the LGFS Community Income Notes Brochure stated the correct position and there was no finding that the PA Councils were misled by, or relied upon, that finding in making the decision to invest in Rembrandt 2006-3. These submissions are rejected. 1192 LGFS' conduct as a whole must be assessed to determine whether it was misleading (see [770] above) and that was the approach adopted by the primary judge. The problem for LGFS was that the matters of context it identified did not assist it. First, the LGFS Community Income Notes Brochure. Its content, with its emphasis on LGFS' role, confirmed the oral representations that the Rembrandt notes had been tailored for local government: see [125] above, in particular the emphasis on the fact that the notes were "[a]rranged by [LGFS]", diversification and liquidity. Indeed, that was the finding of the primary judge at J[1671] in relation to Moree. 1193 Next, contrary to LGFS submission, the PA Councils' did rely on the representation that the Rembrandt notes were specifically designed for local government. There were findings that the PA Councils were misled by, or relied upon, that finding in making the decision to invest in Rembrandt 2006-3. The primary judge found: 1. In relation to Moree, that that representation "was calculated to induce trust in the product and reliance on LGFS' involvement and had that effect. Mr Johnson [of Moree] did not need to say he relied on that statement in isolation or over and above the other statements Mr Michell made to establish reliance on it": J[1671]; and 2. In relation to the other PA Councils, who were relevantly in the same position as Moree, that this representation would be a "powerful inducement for councils to believe the product was particularly well suited to their investment requirements having regard to the Ministerial Order, the [I]nvestment [G]uidelines and the prudent person standard to which councils were subject and the fact that councils deal with public money ultimately required for public purposes": J[1712]. 1194 Third, and no less importantly, the remaining context in which these representations were made cannot be ignored. The context has been outlined earlier: see [1027]-[1030] above. In particular, the context included the fact that LGFS had "white badged" or rebranded the product as "Community Income Notes" "arranged by LGFS" in order to (as LGFS put it) give the product a local government "feel": see [74] above. As the primary judge found, that assisted LGFS in "leveraging off its rapport with councils": see [74] above and J[1278]. 1195 Finally, the primary judge made specific findings in relation to some of the PA Councils. For example, in relation to Narromine, the primary judge found that if Ms Redden had known that LGFS had not tailored the Rembrandt notes to local government she would not have trusted LGFS and would not have invested: J[2058]. In relation to Ryde, the primary judge accepted that if Mr Newsome had known that statements in the CPDO letter (see [131] above) from LGFS, including the statement that the Rembrandt notes were tailored to local government, were false, it would have affected his perception of LGFS and he would have reconsidered investing Ryde's funds with LGFS: J[2105]. That finding must be understood in the broader context of the unchallenged findings made by the primary judge about Ryde: see [1043] above. 1196 For those reasons, LGFS' submission fails. LGFS' representation that the Rembrandt notes were tailored/designed for local government, was a material inducement to each of the PA Councils to invest in the notes.

3.2.3.2 The highly volatile nature of the Rembrandt notes 1197 The primary judge found that LGFS made representations to ten of the PA Councils (all except Orange, Narrandera and Narromine) as to the quality of the Rembrandt notes which were misleading because they did not include an explanation that the NAV might be volatile, and in particular of the effect of the widening of credit spreads. LGFS submitted that the primary judge erred in finding that LGFS engaged in misleading and deceptive conduct in failing to disclose that the Rembrandt notes were highly volatile because: (a) at least seven of the PA Councils were aware that the NAV was linked to the performance of the underlying indices and therefore it could (and would) go up and down and, in any event, this was an inherent feature of any structured product and was implicit in the diagrams in the LGFS Community Income Brochure and in the Pre-Sale Report and (b) the evidence did not support the conclusion that LGFS knew or had reason to believe this was anything more than "an unquantified (but unlikely) possibility". 1198 These contentions are misplaced. First, LGFS challenged the primary judge's finding (at J[2158]) that LGFS knew that the value of the Rembrandt notes might be "highly volatile" and that it might perform within anticipated parameters yet nevertheless lose up to 30% of its value: see also Part 8, Section 2.2.5.7 under the heading "Challenge 7: Price volatility" at [1060] above. That challenge is rejected. The challenge was inconsistent with, and impermissibly ignored the evidence from, Mr Hilder for LGFS. During cross examination, Mr Hilder accepted that: 1. The strategy values in NAV graphs provided to LGFS by ABN Amro on 9 October 2005 showed it was possible for significant losses of market value to occur in the early years of those structures; 2. The 22% loss of value which the Rembrandt notes experienced in 2007 was consistent with the scenarios provided by ABN Amro and that there was a possibility of this occurring; and 3. The possibility that the Rembrandt notes could suffer a 28-30% loss in value based on the ABN Amro scenarios was highly material to LGFS' assessment of whether it was willing to buy the product and that he was "happy to take that risk on LGFS' behalf". 1199 Whether or not Mr Hilder perceived the high volatility of the Rembrandt notes as a "problem", he acknowledged that he understood that it was a "risk" which was highly material to LGFS' assessment of whether it should invest in the notes. Mr Hilder also accepted that he expected that Mr Tischler and Mr Michell would discuss the risk with the PA Councils. Despite that knowledge and understanding, LGFS did not mention that the product might be highly volatile to a single PA Council: J[2158]. Instead, LGFS placed its only warning regarding volatility in the fine print on the LGFS Community Income Notes Brochure in the middle of a long paragraph consisting mainly of boilerplate text: see [125] above and J[2158]. That was wrong. 1200 There are other reasons for rejecting LGFS' submission. First, LGFS' submission that it should have been inferred that the PA Councils were on notice of this fact based on the Surf Presentation (see [62] above) and/or what LGFS described as the "implicit" representations in the descriptions of the product in the diagrams in the LGFS Community Income Notes Brochure (see [125]-[127] above) is not supported by the identified documents. For example, the fact that the Surf Presentation disclosed that the performance of the Rembrandt notes was linked to the evolution of credit spreads (see [62] above) is different to the proposition that the Rembrandt notes were highly volatile. Second, LGFS cross-examined the PA Councils' witnesses about "market value". The primary judge found (at J[2158]) that that cross-examination did not in substance "go beyond the truism that market value might go up or might go down" and the fact that the council officers knew that could not be equated with knowledge that the Rembrandt notes were highly volatile. None of the other documents relied upon by LGFS support LGFS' submission. So, for example, the Grove Report (see [135] above) stated: Credit spreads widening, with large discontinuities, could reduce NAV substantially, and place coupons at risk. In particular, unlike conventional CDOs, CPDOs directly participate in market value risks. (Emphasis in original.) 1201 LGFS also submitted that the launch of Rembrandt 2006-3 took place during a long period of benign credit market conditions and that therefore credit spreads could be expected to widen again "sooner or later". That statement does not accurately state the evidence. The primary judge accepted that credit spreads "were expected by knowledgeable investors to rise at some time in the not so distant future" (emphasis added): J[1353]. The problem for LGFS was twofold. First, the finding that the PA Councils were not knowledgeable investors: J[1354]. Second, the fact that the PA Councils did not ask questions in relation to the volatility of the NAV does not indicate that it was reasonable for LGFS not to disclose that it was highly volatile. As has been said earlier, it was apparent from the PA Councils' witnesses' evidence that "they did not know what they did not know" and in those circumstances could not have asked the right questions: J[1620], J[1639] and [1177] above. 1202 LGFS knew that it was a real possibility (reflected in the scenarios provided to LGFS by ABN Amro (and accepted by Mr Hilder)) that the Rembrandt notes may lose up to 30% of their value, which was highly material to LGFS' decision to invest and was a material fact which it was incumbent on LGFS to disclose to the PA Councils. It did not do so.

3.2.3.3 The meaning of "market value" for purpose of sale back to LGFS 1203 The primary judge found that LGFS' explanation of its promise to buy back the Rembrandt notes from the PA Councils at "market value" was misleading and inaccurate and LGFS thereby engaged in misleading and deceptive conduct. On appeal, LGFS challenged that finding on the grounds that the primary judge's conclusion was "contestable" (at least so far as it implied that the variation of the value of the notes from NAV could be substantial). That challenge is rejected. 1204 LGFS promised the PA Councils that it would provide liquidity by repurchasing the Rembrandt notes at market value. The market value of the Rembrandt notes was to be determined by ABN Amro having regard to the supply of and demand for the notes: see [84] and [130] above. Accordingly, the market value of the Rembrandt notes could be substantially below the par or NAV of the notes: J[1363]. That fact was disclosed in the Surf Presentation, which stated that "[t]he traded price may be different from the NAV of the notes due to supply and demand issues". The primary judge found that Mr Hilder understood this: J[1357]. The problem for LGFS is that it did not inform the PA Councils that the market value at which LGFS promised to repurchase the Rembrandt notes from them could be substantially below the par or NAV of the notes (as it would be whatever price ABN Amro determined having regard to supply and demand at the time): J[1363]. 1205 The relevant question was not the construction of the promise between ABN Amro and LGFS. The relevant question was whether LGFS' conduct was misleading and deceptive in failing to disclose to the PA Councils that the "market value" of the Rembrandt notes for the purpose of its buy-back promise was not the face value of the notes. The PA Councils entered into the investment in reliance on LGFS' promise to buy-back the notes: see, for example, J[2147(16)] and J[1552] (Parkes); J[1641] (Orange); J[1914] (Narrandera); J[1954] (Murray) and J[2089] (Ryde). Mr Hilder believed that the 24-hour liquidity promise "would be a great comfort for [the PA] Councils" and that the liquidity of the Rembrandt notes "was an essential feature for [c]ouncils because they could direct LGFS to deconstruct the [n]otes with 24 hours' notice at any stage throughout the life of the product": see also [130] above. Likewise, Mr Tischler believed that the liquidity feature would be attractive to the PA Councils and that liquidity was "very important to the [PA Councils'] cash flow and their potential desire for access to funds". Mr Tischler understood that because liquidity was important for the PA Councils, it was very important for them to get back all, or nearly all, of the funds they had invested if they wanted to redeem the Rembrandt notes. Mr Tischler agreed during cross-examination that he never told councils that the market value of the notes may not be their face value or that if they chose to sell the notes before maturity, it could be substantially below par. He also agreed that it was one of the major sources of risk, that it was not disclosed by the S&P Reports and that he "never gave the council representatives the benefit of [his] knowledge about that as a major risk". 1206 In those circumstances, it was misleading and deceptive for LGFS to fail to tell the PA Councils that LGFS' promise to buy back the Rembrandt notes at market value might be at a price below (or substantially below) par.

3.2.4. The modelling disclaimer 1207 The Surf Presentation contained a disclaimer concerning the modelling which supported the rating: see [853] above. The disclaimer, in the "Key Risk Factors" section of the presentation, stated that "Current modelling assumptions are unlikely to be consistent with the actual performance of CPDO": see [62] above. The primary judge found that this disclaimer should have told LGFS that "notwithstanding the rating of AAA, there was an element of risk in the performance of the product because the rating of it involved modelling based on assumptions which were unlikely to reflect actual conditions as they evolved in the future": J[2200]. As the primary judge said, this indicated "the existence of risk which the rating could never eliminate given the way in which the rating was derived": J[2200]. 1208 Accordingly, the primary judge found that it was misleading and deceptive of LGFS not to communicate the rating to the PA Councils without also communicating that there was an element of risk in the performance of the product not accounted for by the rating - the rating involved modelling based on assumptions unlikely to reflect actual conditions in the future: J[2200]. 1209 LGFS challenged this finding on the grounds that the primary judge overstated the significance of the disclaimer. That challenge is misplaced. The primary judge's finding was not that the disclaimer meant the rating was unreliable. The primary judge's finding was not inconsistent with her Honour's other findings at J[3100]. Instead, the primary judge found that the disclaimer was a factor which was not accounted for by the rating and that therefore it was misleading and deceptive for LGFS to pass on the rating without also disclosing the existence of a risk which the rating could not and did not eliminate given the manner in which the rating was derived: see Part 3, Section 1 above. 1210 LGFS again placed considerable emphasis on the fact that Eurobodalla had the Surf Presentation. LGFS submitted that Eurobodalla could not sensibly claim that LGFS should have made the further disclosure described in the previous paragraph when LGFS knew that Eurobodalla already had the presentation. That contention fails for the reasons set out at [1178] above. 1211 In this context, LGFS again resorted to the contention that the PA Councils did not ask about the rating, including the modelling assumptions, and that therefore LGFS could reasonably assume that the PA Councils understood that S&P's modelling was based only on past events. That contention is untenable for a number of reasons. LGFS represented to the PA Councils that the product was a suitable investment (and had been tailored) for local government: J[2148]. LGFS failed to disclose that the product was grotesquely complicated: J[2268]. The PA Councils did not have the resources or expertise to second-guess the rating of a structured financial product: J[2816]. The PA Councils "did not know what they did not know" and could never have asked the right questions to obtain the relevant information: J[1620], [1369] and see [1177] above. In those circumstances, LGFS could not reasonably assume that the PA Councils would independently come to the conclusion that the product carried with it an additional risk not accounted for by the rating and not disclosed by LGFS.

3.2.5 The March 2007 rating review by S&P 1212 The primary judge found that LGFS engaged in misleading and deceptive conduct by failing to disclose that, in March 2007, S&P was reviewing its ratings approach for CPDOs. LGFS appealed against that finding on the basis that as S&P's review of its ratings approach did not apply to the Rembrandt notes, LGFS was under no duty to disclose the fact of that review to the PA Councils. Its challenge is rejected. 1213 First, the background. S&P started reconsidering its rating approach in November 2006. At that time, S&P went to considerable trouble (at ABN Amro's behest) to avoid making any public comment which would question the rating of the products already issued. When a rumour of the reconsideration surfaced (and was referred to in the Grove Report (see [135] above), LGFS raised the issue with ABN Amro and was told that the new ratings matrix had no impact on the rating for the Rembrandt notes: J[1191(6)] and J[1368]-J[1369]. The primary judge made no adverse finding against LGFS. The primary judge accepted that LGFS could legitimately rely upon what it had been told by ABN Amro. 1214 S&P then adopted a revised rating matrix in the form of the CPDO Evaluator in March 2007: see [364] and [366] above. LGFS (through Mr Hilder) was aware that S&P had announced that it was revising the way it rated products such as the CPDO, and was aware that it had potential ramifications for how the Rembrandt notes would be perceived: see [142] above and J[1369]. Indeed, LGFS' February 2007 Status Report annexed to its 21 March 2007 board papers recorded that: More recently Standard Poor's (sic) announced that it was revising the way in which it rates such products. Whilst this does not impact our product directly there may be some ramifications in how the product is perceived. As a consequence ABN [Amro] declined our request to issue more of the notes ... The primary strategy will remain to sell the notes directly to councils. Mr Hilder agreed that those facts were never disclosed to any of the PA Councils. 1215 Mr Tischler's position was different. He first heard about the new CPDO Evaluator from Grove Research and Advisory by email on 10 November 2006. That email was to the effect that, if issued now, the Rembrandt notes would be rated A+ and not AAA: J[1368]. Mr Tischler agreed that no council would have bought the Rembrandt notes if they had been told of those facts. And the PA Councils were not told. Yet despite this knowledge, the February 2007 Status Report stated that the primary strategy would remain to sell the Rembrandt notes directly to councils: see [1214] above. LGFS was aware that the perception of the Rembrandt notes would be affected by these facts and the inclusion of these facts in its February 2007 Status Report, indicates that LGFS knew that they would be material to potential investors in the notes. 1216 The primary judge was correct to find that LGFS engaged in misleading and deceptive conduct by failing to disclose to the PA Councils in March 2007 that S&P was reviewing its ratings approach for CPDOs with the effect that, if issued now, the Rembrandt notes would be rated A+ and not AAA. The fact that new CPDO Evaluator was expressed not to apply to the Rembrandt notes was not determinative.

3.2.6 The cash out and cash in features of the Rembrandt notes 1217 LGFS was found to make cash out representations to three PA Councils and cash in representations to five PA Councils: J[2147(12), (13) and (15)]. The representations were that: 1. Rembrandt 2006-3 was designed/built to cash in and become a risk free investment in six or seven years (made to Eurobodalla, Orange and Moree): J[2147(12)]; 2. Rembrandt 2006-3 was likely to cash in in six or seven years and then become risk free (made to Eurobodalla, Parkes and Narrandera): J[2147(13)]; and 3. the likelihood of cash out was very remote/very low/very unlikely (made to Eurobodalla, Moree and Narrandera): J[2147(15)]. 1218 The primary judge found that these representations were unjustified. The primary judge stated (at J[2175]): To the extent that LGFS made representations about the likelihood of the product cashing in and the unlikelihood of it cashing out, I am satisfied that LGFS unwittingly and innocently engaged in misleading and deceptive conduct. LGFS had been given information by both ABN Amro and S&P which provided LGFS with reasonable grounds to believe that the product was unlikely or very or extremely unlikely to cash out, but (as discussed) that information was itself misleading and deceptive and LGFS did not merely pass the information on for what it was worth. LGFS adopted and adapted the information for its own marketing purposes. Even if, as S&P would have it, the meaning of the AAA rating on interest and principal is limited to an extremely strong capacity for the instrument to meet its financial obligations LGFS believed, based on the AAA rating, that the instrument was unlikely or very or extremely unlikely to cash out (which would require a loss of value of 90%). From the information provided by ABN Amro LGFS also believed that the product was designed to cash in and was likely to cash in in six or seven years. Hence, LGFS's conduct was innocent but nevertheless misleading and deceptive. … As LGFS knew, S&P's rating did not address the volatility of the product, only its capacity to meet its financial obligations (that is, whether or not the product would pay interest and principal as promised or would cash out). As LGFS also knew, the information it was provided by ABN Amro dealt with not only the likelihood of cash-in and its timing but also the high volatility the product might experience before cashing in (or cashing out). In these circumstances while LGFS had a reasonable basis to believe that the AAA rating and the information provided by ABN Amro supported its representations about the likelihood and timing of cash-in and the likelihood of cash-out of the investment, this basis did not exist in respect of any representation LGFS made (as it did - see above) as to the safety, security, soundness or risks of the product as a whole which included its potentially high volatility. (Emphasis added.) 1219 LGFS had two complaints. First, that the primary judge impermissibly treated these representations as a statement of fact, rather than a statement of opinion and, second, that the primary judge failed to find that LGFS had reasonable grounds for that opinion. Those contentions are misplaced. The primary judge treated the representations as statements of opinion which carried with them a representation that the opinion was based on reasonable grounds: see the italicised section extracted above. The difficulty for LGFS was that the primary judge found that LGFS had no reasonable grounds for that opinion. The primary judge's reasons for reaching that view are set out in the second paragraph above. LGFS' subjective view was and remains irrelevant. That was the reason why the primary judge stated that LGFS "unwittingly and innocently engaged in misleading and deceptive conduct". 1220 LGFS again sought to distinguish the position of Eurobodalla by reason of the fact that it had received the Surf Presentation and that presentation expressly referred to the rating and ascribed a probability of default based on the rating of 0.728% and early cash in. That contention fails for the reasons set out at [1178] above. Moreover, in response to a query from Mr Craighead about the security of Eurobodalla's capital, Mr Tischler explained to Mr Craighead that it was unlikely Eurobodalla would lose capital because of Rembrandt's "cash in" and "self-cleansing" features and that for a "cash out" to occur a significant number of defaults of major international companies would have to occur within a six-month period: J[1481] and [1044] above. There was no basis for suggesting that Eurobodalla would have assumed such a statement to be LGFS merely passing on information from ABN Amro. 1221 Finally, in this context it is important to recall that LGFS did not challenge the findings that LGFS engaged in misleading or deceptive conduct by not disclosing to the PA Councils that the performance of the Rembrandt notes depended on spread evolution, and in not disclosing that in the period prior to marketing the Rembrandt notes, there had been negative movements in the credit spreads on the CDX and iTraxx indices which were likely to have an adverse effect on the future performance of the notes.

3.3 Section 1041E of the Corporations Act 1222 LGFS did not challenge the finding that it made representations that the Rembrandt notes were tailored or designed for local government and that these representations were false for the purposes of s 1041E of the Corporations Act: J[2237]-J[2238]. However, LGFS submitted that those misrepresentations were not causative of the PA Councils' losses. That issue is addressed in Section 5 below.

3.4 Section 12DA of the ASIC Act 1223 It was common ground that no additional issues arise in relation to s 12DA of the ASIC Act and that LGFS' liability under that section falls to be determined with its liability under s 1041H of the Corporations Act.

CONTRACT CLAIMS IN RELATION TO COOMA AND COROWA 1224 LGFS accepted that these Appeal Grounds (LGFS Appeal Grounds Matrix Rows 109 and 115-117) should stand or fall with its Appeal Grounds in relation to the tort claims and the statutory claims. Accordingly, these Appeal Grounds are rejected.

CAUSATION 1225 LGFS challenged the primary judge's finding at J[2275] that LGFS' negligence and misleading conduct was causative of the PA Councils' losses. The applicable principles have been addressed earlier: see [775]-[781] above. Causation requires a two-step analysis: (a) whether the PA Councils would have proceeded with the purchase of the Rembrandt 2006-3 notes "but for" the non-disclosures and misrepresentations of LGFS (the 'But For' Test) and (b) whether it was appropriate that LGFS be held liable for the actual losses suffered under s 5D(1)(a) of the Civil Liability Act (the Scope of Liability Test).

5.1 The 'But For' Test - the first step 1226 The first step in the inquiry - whether each loss was in fact caused by LGFS' negligent or misleading conduct - was a step considered by the primary judge. Her Honour found that but for LGFS' breaches of its duty of care, none of the PA Councils would have invested in the Rembrandt 2006-3 notes and that LGFS' negligence was a necessary condition of the harm the PA Councils suffered when the notes cashed out in October 2008: J[2275]. 1227 LGFS sought to challenge these findings by reference to the following headings: 1. Role of LGFS; 2. NAV volatility and evolution of credit spreads; 3. Calculation of market value; 4. Modelling disclaimer; 5. March 2007 S&P CPDO Evaluator; 6. Unlikelihood of cash out; and 7. Prospects of cash in. Each will be addressed.

5.1.1 Role of LGFS 1228 LGFS submitted that the PA Councils would still have invested in the Rembrandt notes had it not represented that the notes were tailored for local government because what "was important for them was [LGFS'] involvement through 'white badging' the product". That is rejected. As explained at [1190]-[1196] above, in relation to Moree, the primary judge found that the representation "was calculated to induce trust in the product and reliance on LGFS' involvement and had that effect". The primary judge was correct to hold that Mr Johnson of Moree did not need to say he relied on that statement in isolation or over and above the other statements Mr Michell made to establish reliance on this representation: J[1671]. 1229 The primary judge found that the other PA Councils were in relevantly the same position as Moree. As the primary judge said, the representation would be a "powerful inducement for councils to believe the product was particularly well suited to their investment requirements having regard to the Ministerial [O]rder, the [I]nvestment [G]uidelines and the prudent person standard to which councils were subject and the fact that councils deal with public money ultimately required for public purposes": J[1370]. 1230 LGFS sought to distinguish Narromine's position. LGFS submitted that Narromine did not rely on the representation that the Rembrandt notes were tailored to local government. That submission is rejected. It was not supported by any evidence and was inconsistent with the primary judge's finding at J[2058] that if Ms Redden of Narromine "had known that LGFS had not in fact tailored the CPDO to local government as represented in the CPDO letter she would not have trusted LGFS and would not have invested": see [1195] above.

5.1.2 NAV volatility and evolution of credit spreads 1231 LGFS presented this argument in two parts. First it dealt with Eurobodalla and then it addressed the position of the PA Councils' generally. 1232 In relation to Eurobodalla, LGFS submitted that Eurobodalla was on notice that the NAV could fluctuate and that the Rembrandt notes' performance was based on the evolution of credit spreads and that, despite being on notice of these matters, Eurobodalla was not dissuaded from investing in the notes. That submission is incorrect. Mr Murphy of Eurobodalla gave evidence that he appreciated that the value of the notes could go up and down but that he was not aware that money invested in the notes would then be used to invest in credit indices. That evidence does not support the contention that Eurobodalla was aware of NAV volatility and the evolution of credit spreads and that this did not affect its decision to invest. Indeed, the primary judge found that the PA Councils' knowledge that the value of the Rembrandt notes could go up and down did not amount to knowledge that the notes were highly volatile: see [1200] above. As we have explained at [1199] above, this was a factor which was highly material to LGFS' decision to invest, which LGFS knew was important to councils and which Mr Hilder expected would be discussed with the councils but it was not: J[1314]. 1233 Further, if the PA Councils had been told that the Rembrandt notes were highly volatile, and that there was a real possibility they could lose up to 30% of their value, the PA Councils would not have invested in the Rembrandt notes: see [1198]-[1202] above. The Grove Report does not support LGFS' contention that high NAV volatility would not have been an important factor which would have deterred the PA Councils from investing: see [1148] above. The further contention that the PA Councils "would have seen themselves as meeting Grove's criteria" is unsubstantiated by any evidence. 1234 Finally, LGFS submitted that the PA Councils saw the Rembrandt notes as buy and hold investments. That submission goes nowhere. It does not indicate that the PA Councils would have proceeded to purchase the Rembrandt notes if told that the notes were highly volatile such that they could lose up to 30% of their market value. Liquidity was an important concern for all of the PA Councils and LGFS knew that the funds being invested would be required for public purposes and that the cash flow requirements of a council may change over a term as long as 10 years: see [130] above. The primary judge was correct to conclude that the PA Councils would not have invested in the Rembrandt notes had they been informed of the volatility risk.

5.1.3 Calculation of market value 1235 In relation to LGFS' failure to disclose that market value could be significantly below par, LGFS submitted that the calculation of market value only arose if the PA Councils were forced sellers. This contention is rejected for the reasons at [1203]-[1206] above. The PA Councils invested in the Rembrandt notes relying on LGFS' promise to buy back the notes. LGFS knew that the liquidity of the Rembrandt notes "was an essential feature for [c]ouncils because they could direct LGFS to deconstruct the [n]otes with 24 hours' notice at any stage throughout the life of the product".

5.1.4 Modelling disclaimer 1236 The modelling disclaimer was not adequately disclosed and there was no basis for suggesting that Eurobodalla, or any other PA Council, would have proceeded to invest notwithstanding that issue: see [1209]-[1210] above.

5.1.5 March 2007 S&P CPDO Evaluator 1237 LGFS submitted that while the primary judge made a finding that the perception of an effect on the Rembrandt notes from the issuing of the CPDO Evaluator in March 2007 would have dissuaded Ryde from investing (J[2114]) and probably Narrandera (J[1908]), no such finding was made for Cooma or Narromine. The implication of LGFS' submission was that absent a positive finding that the issuing of the CPDO Evaluator would have dissuaded a council from purchasing the notes, causation could not be established. The submission fails: see [1212]-[1216] above. It must be recalled that Mr Tischler agreed that no council would have bought the Rembrandt notes if they had been told those facts: see [1215] above.

5.1.6 Likelihood of cash out 1238 LGFS submitted that its failure to disclose that market value could be significantly below par on cash out only arose if the PA Councils were forced sellers. That submission is rejected for the reasons at [1217]ff above. The PA Councils invested in the Rembrandt notes in reliance on LGFS' promise to buy back the notes. LGFS knew that the liquidity of the Rembrandt notes "was an essential feature for [c]ouncils because they could direct LGFS to deconstruct the [n]otes with 24 hours' notice at any stage throughout the life of the product".

5.1.7 Prospects of cash in 1239 LGFS submitted that the time to cash in was not of itself important to the PA Councils because none of the PA Councils made any plans to schedule capital expenditure in reliance on these statements. That statement is incorrect. The evidence before the primary judge established that a number of the PA Councils relied on this promise, including, for example, Eurobodalla; Orange; Moree (see J[1683]), Parkes and Narrandera.

5.2 The Scope of Liability - the second step 1240 LGFS submitted that the direct and immediate cause of the PA Councils' losses was the cash out of the Rembrandt notes. That submission is rejected. 1241 First, LGFS ignores the primary judge's finding that "LGFS' misrepresentations had a direct and immediate connection with the loss the PA Councils suffered": J[3521]. LGFS did not identify any error in that finding or that it was appropriate that LGFS be liable for the loss suffered. 1242 Second, LGFS misunderstands the second step. It is not necessary that each and every risk which LGFS failed to warn of came to pass in order for the scope of LGFS' liability to extend to the PA Councils' losses. The relevant question is whether the loss flowed directly from the inducement to enter into the investment: Kenny & Good at 330. Put another way, a defendant will be liable for loss that is "the reasonable consequence of the inducement", not for losses which have extraneous causes: NMFM Property at 373-374 [463]-[464]. Here, the loss on the Rembrandt notes, being sustained spread widening causing cash out of the notes, was a reasonable consequence of LGFS' inducement to the PA Councils to purchase the notes. That was the "central risk" of an investment in the Rembrandt notes: J[3454]. Accordingly, LGFS' submission that LGFS' conduct was not the real and practical cause of the loss because it only put the PA Councils in the position that certain risks (e.g., cash out risk) "might come to pass" must be rejected. It asks the wrong question.

5.3 Contributory negligence of the Councils? 1243 This is addressed in Part 13 below.

LOSS AND DAMAGE 1244 LGFS had one Appeal Ground in relation to loss and damage. LGFS' reliance on that Appeal Ground was contingent on this Court finding that the PA Councils did not suffer loss and damage in circumstances where: (a) the PA Councils continued to hold the Rembrandt notes after late February 2007; or (b) have not proved the alternative investments they would have made had they not purchased the notes: LGFS Appeal Grounds Matrix Row 120. We have not made those findings: see [1311]-[1312] and [1383]-[1385] below.

SECTION 1041E CLAIMS APPORTIONABLE? 1245 The primary judge concluded that the various claims pursuant to s 1041E of the Corporations Act were not apportionable but that they were apportionable under s 1041L of the Corporations Act because they arose out of the same facts as the claim under s 1041H. For the reasons set out at Part 13, Section 3 below, the primary judge was in error. The primary judge should have found that LGFS was liable to the PA Councils for the whole of the loss and damage caused by LGFS' misleading or deceptive conduct in contravention of s 1041E of the Corporations Act.

UNLICENSED TO DEAL CLAIM 1246 LGFS filed a Notice of Contention that the primary judge should have held each of the notes a debenture and that it was therefore authorised pursuant to the AFSLs to advise in relation to and deal with the notes: LGFS Appeal Grounds Matrix Row 123. That submission was considered in Part 4, Section 1.1.4.4 above and is rejected for those reasons.

RESCISSION CLAIM BY COUNCILS 1247 These Appeal Grounds were abandoned by the PA Councils: PA Councils Appeal Grounds Matrix Rows 129-131. It remained an Appeal Ground for Bathurst and will be addressed in Part 11, Section 4 below.

1. INTRODUCTION 1248 The PA Councils' claims against S&P were in tort and for misleading or deceptive conduct. The primary judge held that S&P's rating of AAA of the Rembrandt notes was misleading and deceptive and involved the publication of information or statements false in material particulars and otherwise involved negligent misrepresentations to the class of potential investors in Australia, which included LGFS and the PA Councils, because the S&P Representations (see [723] above) were not true and S&P also knew them not to be true at the time they were made. 1249 The findings made against S&P in relation to the PA Councils were inextricably linked with the findings made against it in relation to LGFS. To a large extent, the findings have been addressed in Part 4 above.

2.1 Negligence 1250 The duty owed by S&P to the PA Councils was a duty to exercise reasonable care in forming, and to have reasonable grounds for, the opinion expressed by the rating: see, by way of example, J[2453], J[2455] and J[2457]. This was the same duty S&P owed LGFS: see [566] above. 1251 S&P appealed against that finding. As with the claim made by LGFS (see [567] above), S&P contended (at trial and again on appeal) that it owed no duty of care to the PA Councils because: 1. It was not reasonably foreseeable that S&P's conduct would cause loss and damage to the PA Councils and the risk of harm was insignificant: S&P Appeal Grounds Matrix Rows 1 and 13; 2. The salient features of a duty of care were not present, or not sufficiently present: S&P Appeal Grounds Matrix Rows 2-6; 3. The special prerequisites for the imposition of a duty of care for negligent misstatement were not satisfied: S&P Appeal Grounds Matrix Rows 7-9; and 4. It would be incongruous for a duty to exist when the PA Councils were in breach of s 625 of the Local Government Act and the Ministerial Order in purchasing the Rembrandt notes: S&P Appeal Grounds Matrix Rows 11 and 12. 1252 This section of the judgment will consider the relevant findings of fact, the applicable legal principles and then turn to consider S&P's Appeal Grounds in relation to the PA Councils' claims against S&P. A careful reader will notice that these Appeal Grounds substantially repeat S&P's Appeal Grounds in relation to LGFS' claim.

2.2 Facts 1253 The relevant facts have been addressed at [569]-[572] above.

2.3 Applicable legal principles 1254 The applicable legal principles have been addressed at [573]-[578] above.

2.4 Application of principles to facts 1255 The analysis at [579]-[582] was, and remains, equally applicable to the PA Councils' claim against S&P. One S&P Appeal Ground (S&P Appeal Grounds Matrix Row 7, referring to Appeal Ground 2(f)) was that the requirements for establishing negligent misstatement set out in Tepko were not satisfied. That Appeal Ground is dismissed for the reasons set out at [569]-[582] above.

2.5 S&P's Appeal Grounds 1256 Against that background, it is necessary to turn to consider S&P's other Appeal Grounds. Each of the matters listed in [1251] above will be addressed.

2.5.1 No reasonable foreseeability / risk of harm insignificant? 1257 S&P contended at trial and on appeal that the risk of harm was not reasonably foreseeable and / or was insignificant with the consequence that S&P owed no duty of care to the PA Councils: see [1251] above. These grounds of appeal are rejected. 1258 A number of matters were relied upon by S&P. First, S&P's liability was indeterminate and, in particular, S&P did not know the identity of LGFS as a purchaser of the notes and did not know (and could not have known) of the identity of the PA Councils as secondary purchasers: S&P Appeal Grounds Matrix Rows 1-3. Next, the PA Councils were not vulnerable and, even if they were, S&P was not aware of their vulnerability: S&P Appeal Grounds Matrix Rows 1 and 4-6. Third, S&P did not control the PA Councils or have any direct dealings with them: S&P Appeal Grounds Matrix Rows 1 and 8-10. Fourth, LGFS acted in contravention of the Corporations Act in purchasing and on-selling the notes to the PA Councils, and, finally, the PA Councils were in breach of s 625 of the Local Government Act and the Ministerial Order in purchasing the Rembrandt notes: S&P Appeal Grounds Matrix Rows 11 and 12. Each will be considered.

2.5.2 S&P's liability indeterminate and S&P did not know identity of the PA Councils 1259 When S&P published its ratings of the Rembrandt notes, S&P did not know the identity of LGFS as a purchaser of the notes or the identity of the PA Councils. S&P submitted that those facts meant that the primary judge made an error in finding that S&P owed the PA Councils the duty earlier described. The first limb of the argument (that S&P did not know the identity of LGFS as a purchaser of the notes) has been addressed and rejected at [587]-[595]. 1260 Further, the fact that S&P did not know the identity of the PA Councils falls to be determined by reference to the same legal principles as LGFS and is rejected for the same reasons as LGFS: see [587]-[595] above. The class was not indeterminate. It was both known and identified. It was possible to identify the class to whom the duty was owed as investors in the Rembrandt notes. That was and remains sufficient. Liability was not indeterminate because S&P did not know the precise identity of the members of the class, the exact number of members in the class or the exact loss. S&P knew what it needed to know. It knew the characteristics of the class. S&P knew that a characteristic of the class (some might say a critical characteristic of the class) was that each was an investor in the Rembrandt notes and S&P also knew the foreseeable type of loss. It is the nature of the loss, not the precise amount which is relevant: Perre v Apand at 221-222 [107]-[108]. Here, the nature of the foreseeable loss was not in doubt. As we have said, S&P knew that if S&P's opinion as to the creditworthiness of the Rembrandt notes was careless, investors were likely to lose the money they had invested in the notes. And, in that context, S&P knew the size of the notes issued ([580] above), the level of minimum subscription ([580] above), that investors would rely on S&P's ratings ([57] and [580] above) and the 10 year period to the maturity of the notes (see [50] above): see also J[290] and J[2950]. As with LGFS, the class and the foreseeable loss were determined by the function S&P undertook. That function was delineated by the purpose of the rating (the first limb of Tepko addressed at [574] above) and the known reasonable reliance (the second limb of Tepko addressed at [575] above). 1261 That leads to a further aspect in the context of the PA Councils. S&P submitted that the primary judge should have found that its potential liability was for an unascertainable amount or to an unascertainable class because the notes could have been sold on a secondary market and that an informal secondary market did develop when LGFS on-sold the notes to the PA Councils. We reject those contentions. 1262 There was no indeterminacy. As we have said, S&P's ratings applied only to an identified tranche of a nominated amount of Rembrandt 2006-3 notes: J[2747] and J[2451]. The size of the notes issued ([580] above), the level of minimum subscription ([580] above) and the 10 year period to the maturity of the notes (see [50] above) never altered. The quantum of S&P's liability was not indeterminate. Further, even if LGFS' sale to the PA Councils, or offer to buy back the notes from the PA Councils, was able to be described as a secondary market, the class was ascertainable (each was an investor in the Rembrandt notes) subject to the same prescribed parameters. That conclusion is reinforced by the fact that indeterminacy is assessed at the time of the impugned conduct, not at some later point in time: Perre v Apand at 221-222 [112]. The impugned conduct was S&P's failure to exercise reasonable care in forming, and to have reasonable grounds for, the opinion expressed by the rating. None of the parameters just addressed altered at the time of the impugned conduct. Two final points should be noted in this context. First, it was common ground that when the rating was issued, there was no secondary market in existence and, second, at all relevant times, S&P was in a position to withdraw or change the rating. It did not.

2.5.3 PA Councils not vulnerable 1263 S&P contended at trial and on appeal that the PA Councils were not vulnerable because they were capable of protecting themselves from the loss suffered. The primary judge found that the PA Councils were vulnerable: J[2767]-J[2778]. S&P submitted that finding was in error. Again it is necessary to address the legal and factual foundation for S&P's submission. 1264 The applicable legal principles have been addressed at [597]-[598] above. As we said at [598] above, in the field of negligent misstatement, vulnerability is the consequence of, not an additional criterion of, knowledge (actual or which a reasonable person would have) of reasonable reliance by an ascertainable class of persons. There is no superadded requirement of vulnerability in addition to the Tepko criteria. 1265 That leaves the application of those principles to the PA Councils. As we have said (at [599] above), S&P knew that an ascertainable class of persons (investors in the notes of which each of the PA Councils was a member) would be reliant on S&P's conduct. However, the conduct of S&P was not at large. Its function was to rate the notes and, in particular, a certain aspect of the notes - their creditworthiness: see [40]-[58] above. S&P knew that its function was specialised and that the members of that ascertainable class were likely to rely on S&P carrying out its function. Indeed, the only available information as to the creditworthiness of the notes was S&P's rating: see [581] above. None of the PA Councils could not replicate or "second-guess" S&P's rating or undertake its own analysis of the credit risk of the Rembrandt notes: see [39] and [580] above. 1266 It was that function - to rate the notes and, in particular, the creditworthiness of the notes - that informed the duty of care owed by S&P to the PA Councils. S&P's duty was not to protect against any loss suffered by the PA Councils. Its duty was to exercise reasonable care in forming and expressing the relevant opinion about the credit risk of the Rembrandt notes. It was in that respect, and that respect alone, that S&P owed a duty of care to the PA Councils because S&P knew of an ascertainable class of persons "who is or are reliant, and therefore vulnerable". That ascertainable class included the PA Councils. 1267 Contrary to S&P's submissions, none of the PA Councils was capable of protecting itself from the loss it suffered and the PA Councils were induced by S&P's conduct not to take steps to protect itself: Perre v Apand at 225 [118]. None of the PA Councils could replicate or "second-guess" S&P's rating: see [39] and [580] above. 1268 The other factual matters relied upon by S&P do not support S&P's contention that the PA Councils were not vulnerable. S&P submitted that the PA Councils were not vulnerable because they could have read the Pre-Sale Report and sought clarification from LGFS about aspects that they did not understand. The contention has been addressed at [602]-[604] and [1175]-[1177] above and is dismissed for those reasons. Put simply, the contention proceeds upon a false premise - that the documents were accurate. They were not. For, example, as the primary judge found, the Pre-Sale Report would not have assisted the PA Councils to identify the risks (J[1637]) as "the [Pre-Sale Report] did not disclose all of the risks of which LGFS was aware and did not purport to be a summary of the product suitable to be given to the [PA Councils] for the purpose of explaining the nature of and risks associated with the product". There was no step which the PA Councils could have taken to protect themselves from the faulty rating assigned by S&P. The inaccuracies in the Pre-Sale Report, together with S&P's faulty rating, are a complete answer to S&P's contention that the PA Councils could have protected themselves because they could have read the Pre-Sale Report and sought clarification from LGFS about aspects that they did not understand. As the primary judge said (at J[1639]), the PA Council witnesses "did not know what they did not know" and could never have asked the right questions to obtain the relevant information. The contention is rejected. 1269 S&P further submitted that even if the PA Councils were vulnerable (and they were), the primary judge erred in imposing a duty of care because as it did not know the identity of the PA Councils, it could not know they were vulnerable. That contention has been addressed in the context of indeterminacy and is rejected: see [1259]-[1262] above.

2.5.4 S&P did not control the PA Councils or have any direct dealings with them 1270 S&P had no contractual relationship with any of the PA Councils. S&P had a contractual relationship with ABN Amro. The significance of that contractual relationship has been addressed at [614]-[616] above. 1271 Next, it is necessary to address S&P's submission that the absence of a direct dealing between S&P and each PA Council precludes a duty being owed by S&P to a non-party such as the PA Councils. That submission is rejected. It is inconsistent with: 1. The principles of determinacy that a duty can be owed to a class: see [591]-[595] and [1259]-[1262] above. The PA Councils were within the class of "interested parties" referred to in the Ratings Letters; 2. The authorities which have held a duty to be owed even where there has been no direct relationship between the person who owed the duty and the person to whom the duty was owed: The Dredge "Willemstad" at 573-574; Hedley Byrne; Henderson; Aiken v Stewart Wrightson; Kestrel Holdings; Dartberg and BT Australia; and 3. What the primary judge described as the "real nature" of the transaction between S&P and ABN Amro: J[2780]. ABN Amro engaged S&P to provide the rating and paid S&P for it. But that statement is incomplete. It does not address the purpose of the rating, why S&P authorised the distribution of the rating or why S&P published the Pre-Sale Report and the Post-Sale Report: see [40]-[57] above. S&P knew that ABN Amro obtained and paid for the ratings for the sole purpose of communicating the rating to "interested parties" so that those parties could consider the rating in deciding whether to invest in the notes: see also J[2759] and J[2775].

2.5.5 Councils acted unlawfully: s 625 of the Local Government Act 1272 The fourth limb of S&P's arguments on appeal was that the duty should not be imposed on it because LGFS acted in contravention of the Corporations Act in purchasing and on-selling the notes to the PA Councils, and, finally, that the PA Councils were in breach of s 625 of the Local Government Act and the Ministerial Order in purchasing the Rembrandt notes: S&P Appeal Grounds Matrix Rows 11 and 12. 1273 The first limb, that LGFS acted in contravention of the Corporations Act in purchasing and on-selling the notes to the PA Councils, has been addressed in Part 4, Section 1.1.4.4 above. The second limb raises the question whether the Rembrandt 2006-3 notes were "securities" under s 625(1) of the Local Government Act: J[2212]-J[2229]. 1274 The PA Councils were entitled to "invest money that [was] not, for the time being, required by the council for any other purpose": s 625(1) of the Local Government Act and [SAF8] However, "[m]oney [could] be invested only in a form of investment notified by order of the Minister published in the Gazette": s 625(2) of the Local Government Act and [SAF8]. 1275 The Ministerial Order permitted investment in certain investments. The relevant extracts of the Ministerial Order are at [20] above. 1276 At trial and on appeal, S&P contended that investment in Rembrandt 2006-3 was not permitted under s 625 of the Local Government Act as they were not "securities" as required by paras (k) and/or (l) of the Ministerial Order and were not otherwise authorised for investment by councils within the meaning of the Ministerial Order. S&P contended that the PA Councils' purchase of Rembrandt 2006-3 in contravention of s 625 was unlawful and had a number of consequences: (1) it precluded the imposition of a duty of care because loss and damage could not be reasonably foreseeable; (2) no duty of care could arise on the basis of the principles set out in Miller, it being "incongruous for the law to proscribe the plaintiff's conduct and yet allow recovery in negligence for damage suffered in the course, or as a result, of that unlawful conduct": see Miller at 454 and (3) that the PA Councils could not establish causation because the "real, essential, substantial, direct or effective cause of the loss or damage" was not S&P's negligence but the PA Councils' unlawful conduct. ABN Amro adopted S&P's submissions. 1277 By contrast, the PA Councils contended that the Rembrandt 2006-3 notes were "securities" for the purposes of the Ministerial Order. In the alternative, they contended that Miller did not lay down an inflexible rule precluding the recovery of damages. Rather, they contended that Miller required identification of the purpose of the law to determine whether a purpose of the law was to deprive the relevant offender of his or her civil remedies. They submitted that no such purpose could be divined from the Local Government Act. 1278 At trial, Bathurst conceded that the Rembrandt 2006-3 notes were not "securities" and therefore investment in them was unlawful. The primary judge found that Bathurst was not bound by its concession: J[2230]. S&P challenges that finding on appeal and we deal with its challenge at [1298]-[1301] below. Bathurst also submitted that Miller did not lay down a rigid test but that the consequences of statutory prohibitions would depend on the true construction and operation of the statute, referring to Nelson v Nelson (1995) 184 CLR 538 at 551 (Deane and Gummow JJ) and 611-613 (McHugh J); Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215 at 2-7 (McHugh and Gummow JJ); Yango Pastoral Co Pty Ltd v First Chicago Australia Limited (1978) 139 CLR 410 and Tonkin v Cooma-Monaro Shire Council (2006) 145 LGERA 48 at 59-60 [67]-[72]. 1279 The primary judge held the Rembrandt 2006-3 notes were "securities" within the meaning of the Ministerial Order and that investment in the notes was authorised under s 625 of the Local Government Act: J[2215] and J[2225]. There was no error in her Honour's approach. 1280 "Securities" is not defined in the Local Government Act or the Ministerial Order. Its meaning and effect must be determined by reference to ordinary principles of construction: J[2216]. The primary judge correctly accepted that the relevant principles of construction are those identified in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-382 [69]-[71] and CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408: J[2222]. Those principles do not need restating. 1281 The term "securities" in the Ministerial Order should therefore take its ordinary meaning: J[2216]. There is no reason to ascribe an artificially narrow meaning to the word "securities" in s 625 of the Local Government Act. As the primary judge held, "securities" is not limited to a debt which is secured but extends to a claim which is in some way secured and an "instrument which creates or acknowledges an obligation to pay a sum of money, even though it is the original source of the obligation and the obligation is executory": Handevel at 217 and Singer v Williams [1921] 1 AC 41 at 49. That conclusion is reinforced by the express language of paras (k) and (l) of the Ministerial Order which use ratings as the control on the scope of investment in "securities": J[2227]. In other words, on its face, the concept of securities in the Ministerial Order includes structured financial products like the Rembrandt 2006-3 notes. 1282 What then were the matters relied upon by S&P to contend that a different meaning of the word "securities" should be adopted? 1283 At trial and on appeal, S&P contended that the definition of "security" in the Trustee Act 1925 (NSW) (Trustee Act) ought to be applied for the purposes of construing paras (k) and (l) of the Ministerial Order, with any necessary modifications to ensure that the definition reflects the purpose and policy of s 625 of the Local Government Act and the Ministerial Order. At all relevant times, the Trustee Act defined "security" in s 5 as "includes stock, funds, shares". 1284 S&P's argument proceeded on the basis that, prior to the Ministerial Order being introduced, the Local Government Act permitted Councils to invest in "any security authorised under the Trustee Act 1925". S&P submitted that construing "securities" in paras (k) and (l) of the Ministerial Order as meaning, exhaustively, "stock, funds, shares" (and thereby excluding "debentures") was supported by a review of the legislative history of s 625 of the Local Government Act and the Ministerial Order and the purpose, and policy, of its predecessor provisions: J[2216]-J[2220]. S&P contended that if "securities" was construed as including "debentures", it would render the phrase "debentures or" in paras (b), (c), (d), (e) and (m) of the Ministerial Order otiose. 1285 The primary judge considered and rejected those submissions: J[2225]. Her Honour correctly found that the reference to "securities" in the Local Government Act was not so limited. 1286 First, the definition in s 5 of "stocks, funds or shares" in the Trustee Act was inclusive, not exhaustive: J[2223]. In support of the contention that the word "includes" in s 5 should be interpreted as identifying an exhaustive list of securities, S&P referred to YZ Finance Co Pty Ltd v Cummings (1964) 109 CLR 395 at 398-399. That authority does not assist S&P. In YZ Finance at 398, McTiernan J stated: The word "include" is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares they shall include. But the word "include" is susceptible of another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined. (Emphasis added.) 1287 There is nothing in the context of the Trustee Act or the Local Government Act that supports the contention that the latter construction should be adopted. Indeed, the contrary is the position. The Trustee Act specified authorised securities which were beyond the s 5 definition and also authorised investments in prescribed securities with a particular rating which excluded the investments expressly named in s 5. For those reasons, the definition in s 5 cannot have been intended to be exhaustive: J[2225]-J[2226]. 1288 Second, the legislative history of the Local Government Act and the Trustee Act do not support S&P's contention. As the primary judge explained (at J[2223]): In s 201 of the 1919 [Local Government] Act, for example, a council was authorised to invest in "any security authorised by the Trustee Act 1925". In s 14(2) of the latter Act authorised securities were identified as including nominated debentures. The definition of "securities", … was expressed to be inclusive of stocks, funds and shares. Insofar as it might be permissible to impugn any objective intention to the legislature it is apparent that under s 201 "any security authorised by the Trustee Act 1925" included the nominated debentures. This position remained at the enactment of the Local Government Act 1993 which … also identified permissible investments as "any security authorised by the Trustee Act 1925". The authorised investments under the latter Act, then in s 14A(2), also nominated as authorised securities various investments including investments in debentures. Authorised securities at this time included under s 14A(2)(m) "any debentures, promissory notes or other prescribed securities which" satisfied particular ratings requirements. 1289 As the primary judge found, immediately before the current regime, councils were permitted to invest in "any security" in s 14A(2) of the Trustee Act which included "any debentures, promissory notes or other prescribed securities [which satisfied particular ratings requirements]" but which excluded stocks or shares. 1290 When the relevant provision of the Trustee Act was repealed so that the Local Government Act no longer defined authorised investments by reference to the Trustee Act, the words "any debentures, promissory notes or other prescribed securities" in the former s 14A(2)(m) of the Trustee Act were condensed into the words "any securities" in the Ministerial Order and in a context where "securities" had long been used to refer to all nominated classes of permissible investments including debentures. 1291 As is apparent, S&P's submission that "securities" in the Ministerial Order should be interpreted as meaning only "stock, funds and shares" is not supported by the legislative history. Indeed, as the primary judge stated, S&P's construction of "security" in the Trustee Act would lead to the surprising result that two types of investments previously excluded under the old regime (stocks and shares) became two of only three permitted types of securities under the Ministerial Order: see [20] above. That is unlikely to have been the intention of the legislature. 1292 The third matter referred to by S&P was that "the Rembrandt notes are complex, relatively new, derivatives which could not in any stretch of the imagination be described as being 'conservative'" such that they cannot have been intended to be permissible investments for councils. That matter does not support S&P's "narrow" construction of "security" in s 625 of the Local Government Act. First, it ignores the role of credit ratings in controlling authorised investments. The Investment Guidelines indicated that credit ratings were the best independent information available as to the creditworthiness of an investment. Indeed, the Ministerial Order used credit ratings as a control over the scope of investments in securities by prescribing that investments must have a minimum credit rating of A from S&P (or its equivalent), which indicated that the investment had a "strong" capacity to meet its financial obligations. Second, S&P assigned the notes a AAA rating. As the PA Councils submitted, the construction of "securities" adopted by the primary judge was consistent with the mischief which the restriction on permissible investments imposed by the Ministerial Order was intended to remedy and consistent with the policy and purpose of the Ministerial Order. That was consistent with the objective of the Local Government Act and the Ministerial Order to promote the investment of public funds in safe and secure investments, determined by reference to the credit ratings assigned to those products by ratings agencies including S&P. Contrary to the submission of S&P, there was no requirement that investments authorised by the Ministerial Order be capital guaranteed. 1293 In the alternative, S&P argued at trial and on appeal that the common law definition of "securities" ought to be applied, tempered, if necessary, by reference to the purpose and policy of the provisions. S&P submitted that care must be taken to modify the common law meaning to recognise the purpose and policy of s 625 of the Local Government Act and the Ministerial Order and the mischief they were intended to cure, citing R v Scott (1990) 20 NSWLR 72 at 76-77: see J[2216]. The primary judge comprehensively considered and rejected these arguments: see J[2216]-J[2229]. 1294 S&P contended on appeal that while the primary judge found that the term "securities" should take its "ordinary meaning", her Honour incorrectly characterised and applied that meaning, or in the alternative incorrectly failed to modify that ordinary meaning, to reflect the purpose and object of the provisions. Specifically, S&P submitted, the applicable common law definition of securities includes an obligation to repay and no such obligation existed in the Rembrandt notes, thereby precluding them from being "securities" for the purposes of the Ministerial Order. That argument is rejected. As the primary judge stated (at J[2228]): Whether or not the Rembrandt CPDO created a debt ... it is apparent that it created a claim in some way secured or involved an instrument which creates or acknowledges an obligation to pay a sum of money. The mere fact that the obligation was not to repay the principal as invested does not change the legal character of the instrument so that it is not one which creates or acknowledges an obligation to pay a sum of money. The terms of the transaction created obligations in the trustee to pay the interest and principal as specified and to pay the balance of the cash deposit in the event of cash-out. S&P did not identify any error in that finding. There is no inconsistency between this conclusion and the conclusion we reached at [665]ff that the Rembrandt notes were not a debenture. It was sufficient for the purposes of the Ministerial Order that the instrument acknowledged an obligation by Perpetual to pay a sum of money even though the issuer of the security did not undertake to repay the loan as a debt. 1295 Finally, the position adopted by S&P in relation to this issue is inconsistent. In relying on the disclaimer in the S&P Reports, S&P characterised the Rembrandt notes as a security. If the Rembrandt notes are not a security, that disclaimer has no application. S&P cannot and should not approbate and reprobate on this issue. 1296 For those reasons, the primary judge was correct to conclude that the Rembrandt notes were "securities" within the meaning of paras (k) and/or (l) of the Ministerial Order and were therefore authorised for investment by the Councils within the meaning of the Ministerial Order and s 625 of the Local Government Act. 1297 S&P's arguments in relation to statutory illegality and causation do not need to be considered further.

2.5.6 Bathurst's concession 1298 It is however necessary for us to deal with the further Appeal Ground of S&P relating to Bathurst's concession at trial that the Rembrandt notes were not "securities" for the purposes of s 625 of the Local Government Act and therefore investment in them was unlawful. The primary judge found that Bathurst was not bound by its concession because it involved an admission that was nothing but a conclusion of law: J[2230]. On appeal, Bathurst did not depart from its position that the notes were not securities but submitted that the primary judge was correct to hold that they were not bound by their concession. 1299 S&P contended that Bathurst was bound by its concession and that the primary judge erred. It argued that it was open for parties to make admissions of fact and law through pleadings or otherwise: Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317 at 340 [69] (Gummow J) (McHugh J at 331 [40] and Heydon J at 372 [177] agreeing), 327 [25] (Gleeson CJ), and 348-349 [94] (Kirby J); Lym International Pty Ltd v Marcolongo [2011] NSWCA 303 at [130] (Campbell JA, Basten JA and Sackar J agreeing) and Commissioner of Taxation v Star City Pty Ltd (2009) 175 FCR 39 at 62-63 [89]-[95]. 1300 That much may be accepted. But as the primary judge noted, both Dovuro and Marcolongo draw a distinction between an admission as to a point of law and an admission as to a conclusion which depends upon the application of a legal standard: J[2230]. Different questions arise in relation to the latter type of admission, which has been described as "valueless" owing to the maker's general "unfamiliarity with the [legal] standard" governing such an admission: Dovuro at 340-342 [70]-[71] (Gummow J); Grey v Australian Motorists and General Insurance Co Pty Ltd [1976] 1 NSWLR 669 at 676 (Glass JA) and Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 at 68 (Lockhart and Gummow JJ). 1301 Her Honour found that Bathurst's concession involved "nothing but a conclusion of law" which she had found to be wrong: J[2230]. By that we take her Honour to have meant that it involved a conclusion which depended on the application of a legal standard. S&P identified no error with her Honour's characterisation of the admission flowing from Bathurst's concession and it was entirely open for her Honour to hold, as she did, that Bathurst was not bound by that concession. We reject this Appeal Ground.

2.5.7 Conclusion 1302 The primary judge correctly found that it was foreseeable that potential investors in the Rembrandt notes, including the PA Councils, would suffer loss if the rating was not based on reasonable grounds or the product of the exercise of reasonable care. We reject S&P's contention that it was not foreseeable that potential investors would suffer loss and that the risk of loss was not significant (S&P Appeal Grounds Matrix Row 13) for the reasons at [588]-[595], [602]-[616] and [1272]-[1301] above.

2.6 Breach of duty 1303 S&P did not appeal against the primary judge's findings that S&P breached the duty it owed to the PA Councils, namely the duty to exercise reasonable care in forming, and to have reasonable grounds for, the opinion expressed by the rating: S&P Appeal Grounds Matrix Row 14.

3.1 Introduction 1304 The PA Councils made a series of claims that S&P had engaged in misleading or deceptive conduct in contraventions of ss 1041E and 1041H of the Corporations Act and s 12DA of the ASIC Act. The primary judge held that S&P's rating of AAA of the Rembrandt notes was misleading and deceptive and involved the publication of information or statements false in material particulars to the class of potential investors in Australia, which included LGFS and the PA Councils, because by the AAA rating there was conveyed a representation that in S&P's opinion the capacity of the notes to meet all financial obligations was "extremely strong" and a representation that S&P had reached this opinion based on reasonable grounds and as the result of an exercise of reasonable care and skill when neither representation was true and S&P also knew them not to be true at the time they were made.

3.2 Section 1041H of the Corporations Act: S&P Appeal Grounds Matrix Rows 15 and 16 1305 S&P again challenged the primary judge's finding of liability under s 1041H of the Corporations Act on the grounds that the impugned conduct of S&P was not conduct "in this jurisdiction" within the meaning of that section. These Appeal Grounds were addressed at [729]-[745] in the context of LGFS' claim against S&P. These Appeal Grounds are substantively the same and are rejected for those reasons.

3.3 Section 1041E of the Corporations Act: S&P Appeal Grounds Matrix Rows 23, 24, 25 and 26 1306 S&P again challenged the primary judge's finding of liability under s 1041E of the Corporations Act that S&P made a statement or disseminated information that was false in a material particular and was materially misleading. These Appeal Grounds were addressed at [746]-[753] in the context of LGFS' claim against S&P. These Appeal Grounds are substantively the same and are rejected for those reasons.

3.4 Section 12DA of the ASIC Act: S&P Appeal Grounds Matrix Rows 17, 19, 20, 21 and 22 1307 S&P challenged the primary judge's finding that its conduct was misleading or deceptive in contravention of s 12DA of the ASIC Act. These Appeal Grounds were addressed at [754]-[764] in the context of LGFS' claim against S&P. These Appeal Grounds are substantively the same and are rejected for those reasons.

3.5 Conduct of S&P misleading or deceptive: S&P Appeal Grounds Matrix Rows 27, 28, 29 and 30 1308 S&P challenged the primary judge's finding that its conduct was misleading or deceptive. These Appeal Grounds were addressed at [765]-[773] in the context of LGFS' claim against S&P. These Appeal Grounds are substantively the same and are rejected for those reasons.

3.6 Causation: S&P Appeal Grounds Matrix Rows 31, 32, 33, 34, 35, 36, 37 and 38 1309 The causation Appeal Grounds (and the arguments S&P raised in relation to them) were addressed at [774]-[794] and [797]-[800] in the context of LGFS' claim against S&P, and at [1272]-[1301] above. These Appeal Grounds are substantively the same and are rejected for those reasons.

4. CONTRIBUTORY NEGLIGENCE 1310 This is addressed in Part 13 below.

5. LOSS AND DAMAGE 1311 S&P raised three matters on appeal against the PA Councils: 1. To establish causation on each of its claims, the PA Councils had to prove on the balance of probabilities that, absent the impugned conduct, they would have taken some other more beneficial course (the Alternative Universe Contention): S&P Appeal Grounds Matrix Rows 47 and 50; 2. The PA Councils' claim infringed the "rule" in Potts v Miller: S&P Appeal Grounds Matrix Rows 47-48 and 51-56; and 3. The primary judge failed to deduct the amount of the coupon (or interest) payments made to the PA Councils (the Coupon Contention): S&P Appeal Grounds Matrix Row 49. 1312 The Alternative Universe Contention was addressed at [786]-[790] and [934]-[935] above. These Appeal Grounds are rejected for the same reasons. The Appeal Grounds founded on Potts v Miller were addressed at [958]-[988] above and are rejected for those reasons. The Coupon Contention was addressed at [989] above. This Appeal Ground is rejected for the same reasons.

PART 10: PA COUNCILS' PURCHASE OF 2006-3 NOTES: ABN AMRO

1. INTRODUCTION 1313 The PA Councils' claim against ABN Amro was for misleading and deceptive conduct, knowing involvement in S&P's misleading and deceptive conduct and negligence. ABN Amro was found to be knowingly concerned in S&P's contraventions of the various statutory provisions proscribing such misleading and deceptive conduct, and also itself having engaged in conduct that was misleading and deceptive by publishing information or statements false in material particulars and otherwise involved in negligent misrepresentations to the class of potential investors with which ABN Amro knew LGFS intended to deal, being the PA Councils, by reason of ABN Amro's deployment of the AAA rating and its own representations as to the meaning and reliability of the AAA rating which also were not true and which ABN Amro knew not to be true at the time they were made. 1314 ABN Amro appealed those findings. This section of the judgment will deal with the tort claims and then the statutory claims.

2. FACTUAL FINDINGS 1315 The facts relevant to ABN Amro's involvement have been addressed in [813] above. It is unnecessary to repeat that detailed analysis. 1316 Put simply, ABN Amro created the Rembrandt notes for LGFS to enable LGFS to sell a structured financial product to councils. ABN Amro's task was directed to that end. ABN Amro was aware that LGFS would on-sell any financial product it purchased to councils: see [60] above. ABN Amro knew that LGFS would reasonably rely on the AAA rating and the representations ABN Amro made about it. ABN Amro intended that LGFS would rely on the rating: see [813] above. The insurmountable hurdle for ABN Amro was that it knew that the rating was unreliable and lacked reasonable grounds: see Part 3 above. 1317 It will be necessary to return to consider these factual findings below.

3. TORT CLAIMS: ABN Amro Appeal Grounds Matrix Rows 69-79

3.1 Introduction 1318 The findings against ABN Amro were significant. ABN Amro was found to have known that S&P's rating lacked reasonable grounds and was not the product of the exercise of reasonable care and skill on the part of S&P: J[3212]. 1319 ABN Amro was found liable in negligence to the PA Councils (and to LGFS) for promoting the AAA rating when it knew it lacked reasonable grounds. ABN Amro was also found to owe to the PA Councils, as members of the class of known intended purchasers of notes from LGFS, a duty to exercise reasonable care and skill in the provision of information and advice to LGFS about the Rembrandt 2006-3 notes: J[3279]. ABN Amro was found to have breached that duty when it failed to disclose to LGFS (and therefore the PA Councils) that the rating could not be relied upon: J[3280] and J[3201]-J[3204]. 1320 On appeal, ABN Amro challenged the imposition of the duty and that it breached that duty: ABN Amro Appeal Grounds Matrix Rows 69-77.

3.2.1 Introduction 1321 In relation to the imposition of the identified duty, ABN Amro identified eight reasons why it contended that the duty should not have been imposed: 1. ABN Amro did not know that LGFS intended to market the Rembrandt 2006-3 notes to the PA Councils or any specific matter which might have enabled it to assess the type of information which should be provided to the PA Councils: ABN Amro Appeal Grounds Matrix Row 70; 2. ABN Amro had no control over what (if any) information LGFS provided to the PA Councils: ABN Amro Appeal Grounds Matrix Row 71; 3. ABN Amro did not assume responsibility for the provision of information to the PA Councils: ABN Amro Appeal Grounds Matrix Row 72; 4. ABN Amro did not assume responsibility to LGFS "for modelling and structuring" the Rembrandt 2006-3 notes: ABN Amro Appeal Grounds Matrix Row 73; 5. The PA Councils were not vulnerable to a breach of the alleged duty by ABN Amro: ABN Amro Appeal Grounds Matrix Row 74; 6. The alleged duty was incompatible with the contractual relationship between ABN Amro and LGFS: ABN Amro Appeal Grounds Matrix Row 75; 7. The alleged duty would leave ABN Amro exposed to liability in an indeterminate amount to an indeterminate class: ABN Amro Appeal Grounds Matrix Row 76; 8. The alleged duty would require ABN Amro to review and assess the adequacy of S&P's rating of the Rembrandt 2006-3 notes in circumstances where (ABN Amro Appeal Grounds Matrix Row 77): (1) S&P was an expert ratings agency and ABN Amro was not; (2) ABN Amro had no power to require S&P to disclose to it the basis on which it rated the Rembrandt 2006-3 notes or any other CPDO; (3) S&P's rating of the Rembrandt 2006-3 notes and other CPDOs necessarily involved matters of judgment which ABN Amro could not assess adequately or at all; (4) Potential purchasers of the Rembrandt 2006-3 notes were interested to know S&P's opinion as to their creditworthiness, not ABN Amro's; and (5) This would cause ABN Amro to incur significant costs without being likely to produce any commensurate benefit. 1322 None of these reasons is valid.

3.2.2 Applicable principles 1323 In identifying the applicable legal principles, ABN Amro referred to and relied upon the submissions it made in relation to LGFS' claim against ABN Amro. Those submissions and the analysis of the relevant applicable principles are set out at [808]-[812] above and, by reference, at [573]-[578] and [589]-[595] above. 1324 A recipient of information or advice is owed a duty by the speaker if (a) that recipient is part of a class to whom the statement or advice is directed and (b) reliance on the statement or advice by a member of the class is consistent with the substance of the purpose for which the statement is made or advice given: see [573] and [578] above. It is those principles which must be kept at the forefront of any consideration of the duty found to be owed by ABN Amro to the PA Councils.

3.3.3 Findings 1325 The facts surrounding the Councils' purchase of the Rembrandt 2006-3 notes are addressed in Part 2, Section 4 (ABN Amro), Section 6 (Sale of Notes to LGFS), Section 7 (Sale of Notes to the Councils) and in Part 5, Section 1.2.3 in relation to LGFS' claim against ABN Amro and at [1019]-[1062] above. It is unnecessary to repeat or amplify those facts except in respect of a particular Appeal Ground addressed later in these reasons.

3.2.4 Appeal Grounds 1326 It is against that background that we address ABN Amro's Appeal Grounds which it contended demonstrated that the identified criteria for the imposition of a duty to exercise reasonable care in making a statement or giving advice (see [573] above) were absent. 1327 ABN Amro contended that "there was simply no relationship between ABN [Amro] and the PA Councils sufficient to support the imposition of such a duty". It further contended that "[t]aken together, the following uncontroversial factual matters precluded a finding that there was any relationship". Those contentions are rejected.

3.2.4.1 ABN Amro did not know that LGFS intended to market the Rembrandt 2006-3 notes to the PA Councils or any specific matter which might have enabled it to assess the type of information which should be provided to the PA Councils 1328 Three questions were raised by ABN Amro's submission. First, did ABN Amro know that LGFS intended to market the Rembrandt 2006-3 notes to the Councils? The answer is yes. Contrary to ABN Amro's submission, there was evidence that the PA Councils would trust in ABN Amro's especial competence to give information or advice about the Rembrandt 2006-3 notes. The relevant facts have been identified earlier: see [813] above. Those facts support the factual findings summarised at [1316] above. 1329 The second question was whether it was necessary for ABN Amro to know the identity of the specific councils to whom the notes were to be marketed. ABN Amro relied on particular aspects of its cross-examination of Mr Hilder at trial to establish that it did not know the level of sophistication of each PA Council, their risk appetite and investment portfolio and, therefore, no duty could arise in relation to the PA Councils with respect to the provision of information by ABN Amro to LGFS. That cross-examination was as follows: At no time up to the middle of '07 did you disclose to anyone at ABN the investment strategy or policy of any particular council?---No. Nor the investment portfolio of any council?---No. I wouldn't do that, no. And at no time up to the middle of '07 did you disclose to ABN your understanding of the level of financial sophistication of any council?---No. And didn't disclose the name of any council you were seeking to sell the Rembrandt product to?---No - well, I don't think so. 1330 This submission goes nowhere. It was not necessary for ABN Amro to know the identity of specific councils: see [589]-[595] above. The fact that it did not know the PA Councils specifically does not militate against the imposition of the second duty: see [587]-[595] above. In any event, it knew a sufficient amount about local councils in New South Wales generally to justify the imposition of a duty: see [813] above and, in particular, [83]-[84] and [121]-[122] above. 1331 The third question concerned the information LGFS would provide to the PA Councils to enable them to assess the Rembrandt 2006-3 notes and ABN Amro's knowledge of that information. ABN Amro provided information about the notes to LGFS. ABN Amro submitted that it did so in response to LGFS' requests for information for LGFS' own purposes and not for the provision to the PA Councils. In support of this contention, ABN Amro referred to cl 3.4 of the Mandate Letter: see [83] above. ABN Amro submitted that cl 3.4 prevented the disclosure of information by LGFS to the PA Councils. This contention does not address the duty found to be owed by ABN Amro. The duty found was a duty to exercise reasonable care in the provision of information and advice to LGFS about the product. That did not mean that ABN Amro was required to provide LGFS with anything, but if it chose to, it had to exercise reasonable care in doing so. By choosing to provide information about the notes to LGFS, ABN Amro had to exercise reasonable care with the result that it had to tell LGFS that it knew or ought to have known information it was providing was not reliable. That basic obligation did not require ABN Amro to know anything about the characteristics of the individual councils. That basic obligation arose because ABN Amro was seeking to arm LGFS with the means to sell the notes to the PA Councils: see [813] above. The problem for ABN Amro was that it armed LGFS with information and advice which was wrong - the rating. ABN Amro knew that S&P's rating lacked reasonable ground and was not the product of the exercise of reasonable care and skill on the part of S&P: see Part 3 above.

3.2.4.2 ABN Amro had no control over what (if any) information LGFS provided to the PA Councils 1332 ABN Amro contended that it could not ensure that LGFS provided to the PA Councils the information and advice ABN Amro provided to LGFS. This factor was said to be a reason why there was "minimal utility" in imposing on ABN Amro a duty to the PA Councils in relation to information and advice provided to LGFS when ABN Amro could not ensure that information was provided by LGFS to the PA Councils. 1333 This contention does not address, and in fact ignores, the facts. ABN Amro was negligent in promoting the AAA rating to LGFS: see [805]-[860] above. If ABN Amro had not been negligent, ABN Amro would not have promoted the rating to LGFS. Moreover, ABN Amro knew that LGFS would rely on S&P's rating and the ABN Representations, ABN Amro intended that LGFS would rely on the rating and that LGFS would market the Rembrandt 2006-3 notes to the PA Councils on the basis of the AAA rating and on the basis of the ABN Representations and that the rating was unreliable. If ABN Amro had provided LGFS with accurate information (and it did not) and then LGFS failed to pass it on to the PA Councils, then LGFS would be liable and ABN Amro would not be liable. That was not what occurred. This Appeal Ground is dismissed.

3.2.4.3 ABN Amro did not assume responsibility for the provision of information to the PA Councils 1334 ABN Amro submitted that it was not appropriate to impose on ABN Amro a duty to the PA Councils in relation to information or advice about the Rembrandt 2006-3 notes provided to LGFS when it had assumed no responsibility for the information or advice which LGFS itself provided to the PA Councils. ABN Amro conceded on appeal that "it may be that it was, or ought to have been, reasonably foreseeable to ABN [Amro] that LGFS would market the Rembrandt 2006-3 notes to local councils generally on the basis of S&P's AAA rating, and that councils might suffer loss if the rating was incorrect": see also J[3272]-J[3274]. However, it contended that this was not sufficient to make ABN Amro "responsible" for the provision of the rating to the PA Councils: cf J[3274]. 1335 This Appeal Ground is dismissed for the same reasons as the previous Appeal Ground. It fails on the facts. ABN Amro knew that LGFS would rely on S&P's rating and the ABN Representations, ABN Amro intended that LGFS would rely on the rating and that LGFS would market the Rembrandt 2006-3 notes to the PA Councils on the basis of the AAA rating and on the basis of the ABN Representations and that the AAA rating was unreliable. 1336 These findings do not "bypass" the requirement for a relationship of the relevant kind between ABN Amro and the PA Councils before the imposition of the duty. In fact, these findings establish that the requirements for a relationship of the relevant kind between ABN Amro and the PA Councils were satisfied: see [573]-[574].

3.2.4.4 ABN Amro did not assume responsibility to LGFS "for modelling and structuring" the Rembrandt 2006-3 notes 1337 This Appeal Ground was not separately addressed by ABN Amro. It fails for the reasons set out in Part 5, Section 1.3 above. ABN Amro did assume responsibility to LGFS "for modelling and structuring" the Rembrandt 2006-3 notes.

3.2.4.5 The PA Councils were not vulnerable to a breach of the alleged duty by ABN Amro 1338 This Appeal Ground concerned the PA Councils' vulnerability. ABN Amro submitted that the primary judge was incorrect to conclude that the PA Councils, who had, in LGFS, a "sophisticated, licensed financial services provider protecting their interests", were unable to protect themselves against a want of care in the provision of information by ABN Amro to that provider. 1339 ABN Amro submitted that the PA Councils were able to protect themselves by the terms on which they contracted with LGFS including, for example, by obtaining a warranty as to the accuracy and completeness of the information which LGFS provided to them: Perre v Apand at 226 [120]. ABN Amro submitted that the fact that LGFS had no capacity to replicate S&P's ratings modelling was not an answer because it impermissibly focussed on S&P's rating rather than the general nature of the duty of care imposed on ABN Amro. Finally, ABN Amro submitted that another factor which supported its contention that the PA Councils were not vulnerable was that they were wholesale clients under s 761(7)(a) of the Corporations Act and trustees of substantial amounts of public funds with obligations to understand, and with sufficient resources to engage qualified staff and advisors to control, their investments. 1340 There is a complete answer. The PA Councils were vulnerable: see [1263]-[1269] above. The PA Councils' financial adviser, LGFS, was vulnerable: see [817]-[833] above. ABN Amro knew that S&P's rating lacked reasonable grounds and was not the product of the exercise of reasonable care and skill on the part of S&P: see Part 3 above. ABN Amro alone had the capacity, and did, replicate S&P's rating: J[3275]. Neither LGFS nor the PA Councils could or did replicate S&P's rating: see [599]-[600] and [1265] above. Moreover, as we have said earlier (see [1037] above), their vulnerability was not limited to the rating and ABN Amro knew that from the outset: see [39] above. ABN Amro obtained the rating because many potential investors would not have the resources or expertise to assess the creditworthiness of the CPDO or to second-guess the rating of a structured financial product: J[2759] and J[2816]. ABN Amro had no basis to believe that LGFS or any council in New South Wales had the resources or the capacity to check the rating: J[3275]. The PA Council witnesses' "did not know what they did not know" and thus could never have asked the right questions to obtain the relevant information: J[1620], J[1639] and [1177] above.

3.2.4.6 The alleged duty was incompatible with the contractual relationship between ABN Amro and LGFS 1341 ABN Amro contended that the alleged duty was incompatible with the contractual relationship between ABN Amro and LGFS. That relationship was the Mandate Letter: see [83] above. That contention has been addressed at [1332]-[1333] above and is rejected for the same reasons.

3.2.4.7 The alleged duty would leave ABN Amro exposed to liability in an indeterminate amount to an indeterminate class 1342 ABN Amro's submissions in relation to indeterminate liability raise the same substantive issues as S&P's contentions. They are rejected for the same reasons: see [1259]-[1262] above and for the further reasons set out in Part 10, Section 3.2.4.1 above.

3.2.4.8 The alleged duty would require ABN Amro to review and assess the adequacy of S&P's rating of the Rembrandt 2006-3 notes in circumstances where it was inappropriate or impossible 1343 ABN Amro submitted that the imposition of duty required ABN Amro to assess the competency with which S&P rated the Rembrandt 2006-3 notes and therefore the duty was inefficient, inutile and inappropriate. In support of that contention, ABN Amro referred to the following facts and matters: 1. ABN Amro (like other arrangers) was not expert in conducting credit ratings, whereas S&P (as an expert credit rating agency) was; 2. Not having designed the CPDO, S&P was independent of the Rembrandt 2006-3 notes, whereas ABN Amro, as the arranger of the product, was not; 3. S&P was not obliged to disclose to ABN Amro its rating methodology or reasoning; and 4. Potential purchasers of the Rembrandt 2006-3 notes were interested in the opinion of S&P as to the creditworthiness of the notes, rather than the opinion of ABN Amro. According to ABN Amro, viewed overall, the imposition of the duty required ABN Amro to incur significant costs without being likely to produce any commensurate benefit or, indeed, any benefit at all. 1344 This contention fails on the facts. The submission that S&P was the expert credit ratings agency and not ABN Amro does not address ABN Amro's role in procuring the rating and its knowledge of S&P's ratings process: see Part 3 above and J[3155]. ABN Amro designed the product: see [158] above. ABN Amro was capable of assessing the creditworthiness of the CPDO. Indeed, it was more capable than S&P and identified shortcomings in the rating before S&P: see, for example, [220]-[226] above. ABN Amro knew that S&P was using ABN Amro's model, was aware of the process applied by S&P to rate the Rembrandt notes and of all material inputs S&P used in its modelling: see Part 3 above and J[3208]. ABN Amro's involvement was so great that the rating was not independent: see, by way of example, [434] above. 1345 Having regard to ABN Amro's intimate knowledge of the product and the rating, it was not unreasonably burdensome for ABN Amro to exercise reasonable care and skill in providing information to LGFS about the Rembrandt notes. Of course, it must be recalled that ABN Amro had no difficulty in disclosing to LGFS what it identified and described as the "key risks" associated with the CPDO: see [62] above and J[3271]-[3277] and J[3207]. As the primary judge said at J[3207], ABN Amro was intimately involved in the closest possible scrutiny of S&P's work to ensure a AAA rating and the duty arises because of the actual relationship between ABN Amro, S&P and LGFS. 1346 ABN Amro's reference to incurring significant costs without being likely to produce any commensurate benefit or, indeed, any benefit at all is fanciful. ABN Amro incurred costs in conducting modelling that was designed to assess the creditworthiness of the Rembrandt notes, the results of which it used to try to persuade S&P to assign a AAA rating: see Part 3 above. As the primary judge stated "ABN Amro did comprehensively review S&P's rating for the purposes of ensuring that ABN Amro got what it wanted, the rating of AAA": J[3211]. Potential purchasers would have been interested in knowing facts that made or ought to have made ABN Amro aware that S&P's opinion was unreasonable and unreliable.

3.3 ABN Amro breached the duty? 1347 ABN Amro was found to have known that S&P's rating lacked reasonable grounds and was not the product of the exercise of reasonable care and skill on the part of S&P: J[3212]. ABN Amro was found liable in negligence to the PA Councils (and to LGFS) for promoting the AAA rating when it knew it lacked reasonable grounds. ABN Amro was also found to owe to the PA Councils, as members of the class of known intended purchasers of notes from LGFS, a duty to exercise reasonable care and skill in the provision of information and advice to LGFS about the Rembrandt 2006-3 notes: J[3279]. ABN Amro was found to have breached that duty when it failed to disclose to LGFS (and therefore the PA Councils) that the rating could not be relied upon: J[3280] and J[3201]-J[3204]. ABN Amro appealed against the findings that it breached those duties on, amongst other things, the basis that the rating could achieve a AAA rating at 25% volatility (the volatility issue, in particular taking into account the rebalancing referred to at [148] above): ABN Amro Appeal Grounds Matrix Row 78. 1348 For the reasons set out in Part 3, this Appeal Ground fails . ABN Amro is not entitled to raise the rebalancing issue on appeal (see [387]-[418] above) and we have rejected ABN Amro's submissions on the volatility issue: see [431]ff above. ABN Amro knew (or at the very least, ought to have known) that S&P's rating lacked reasonable grounds and was not the product of the exercise of reasonable care and skill on the part of S&P and it failed to disclose to LGFS (and therefore the PA Councils) that the rating could not be relied upon.

4.1 Introduction 1349 The primary judge found that ABN Amro contravened ss 1041H and 1041E of the Corporations Act and s 12DA of the ASIC Act by causing or permitting the publication or communication of the fact that S&P had assigned a AAA rating to the Rembrandt 2006-3 notes to a class of potential purchasers of the notes (including the PA Councils) in circumstances where ABN Amro was aware, or ought reasonably to have been aware, that the rating was misleading because the rating conveyed the S&P Representations (see [723] above) on which the PA Councils relied, which were themselves misleading: J[3238] and J[3243]. ABN Amro challenged those findings on appeal: ABN Amro Appeal Grounds Matrix Rows 59-68. Sections 1041H of the Corporations Act and s 12DA of the ASIC Act will be dealt with together.

4.2 Section 1041H of the Corporations Act and s 12DA of the ASIC Act 1350 The relevant legislative provisions and applicable legal principles have been addressed earlier: see [724]ff above. It is against that background, that we consider the various Appeal Grounds that ABN Amro pursued on appeal. 1351 First, the findings of the primary judge. The primary judge held: 1. That "it is sufficient if the conduct is misleading whether or not the corporation knew or ought to have known it was misleading": J[3244]; 2. ABN Amro promoted and disseminated the rating, which carried with it the S&P Representations which were false and misleading: J[3250]; 3. ABN Amro made an implied representation that the rating could be safely relied upon: J[2997(5)], J[2995(6)], J[3088] and J[3097]; 4. ABN Amro "went far beyond acting as a mere conduit for S&P's rating. It used the AAA rating as a springboard for its marketing and in so doing both adopted it as its own ... and represented that S&P's opinion could be safely relied on": J[3097]; 5. ABN Amro represented to LGFS that the capacity of the Rembrandt notes to pay interest and principal was extremely strong and that the rating could be relied upon (J[3098]-[3099]) and those representations were false (to ABN Amro's knowledge): J[3098]; 6. ABN Amro had actual knowledge of the falsity of the AAA rating and the representations ABN Amro made about it: J[3245]; 7. Even if the evidence fell short of actual knowledge on ABN Amro's part, it readily supports the inference that ABN Amro ought to have known of the misleading nature of the AAA rating: J[3246]; 8. Given what ABN Amro knew it is difficult to see how ABN Amro could have deployed the AAA rating at all without engaging in misleading conduct: J[3174]. 1352 ABN Amro's challenges to these findings and the imposition of the contraventions of the statutory provisions are addressed under two headings - (1) ABN Amro's conduct and (2) whether that conduct was misleading.

4.2.1 ABN Amro's conduct 1353 ABN Amro contended that it did not cause or permit the publication or communication to the PA Councils of the fact that S&P had assigned a AAA rating to the Rembrandt 2006-3 notes. 1354 At trial and again on appeal ABN Amro referred to three matters in support of that contention. First, that ABN Amro had no direct dealings with the PA Councils which could be considered material. Second, that publishing or communicating S&P's rating to the PA Councils was a step LGFS took of its own volition and not in response to any requirement imposed, or even suggested, by ABN Amro and, third, that no permission from ABN Amro was given or required for LGFS to publish or communicate the fact of S&P's rating to the PA Councils (the rating in fact being publicly accessible to any interested person). 1355 None of these matters assist ABN Amro. They do not assist because each is contrary to, or at the very least ignores, the findings in relation to ABN Amro's conduct that have been addressed at Part 3 above. That conduct necessarily includes the circumstances in which LGFS dealt with ABN Amro: see Part 2, Section 6 and [813] above. As a result of that relationship, and those dealings between ABN Amro and LGFS, ABN Amro knew, or ought to have known, that LGFS would supply the rating to the PA Councils and that the PA Councils would rely upon it: see Part 2, Section 6 and [813] above. Those facts establish that ABN Amro caused or permitted the publication or communication to the PA Councils of the fact that S&P had assigned a AAA rating to the Rembrandt 2006-3 notes. No other conclusion is open. 1356 As the primary judge said (at J[3243]): It may be accepted that ABN Amro had no direct dealings with the councils which can be considered material. The case of the councils against ABN Amro, however, is not confined to the fact that ABN Amro merely engaged S&P to assign the rating. As ABN Amro knew, LGFS intended to market and sell the Rembrandt 2006-3 notes to councils in New South Wales, a defined (needed, narrow) market. ABN Amro knew that LGFS had made the AAA rating a condition precedent of the purchase of the notes. Whatever else its relevance the communication from Mr Cordeiro of ABN Amro to LGFS of 5 April 2006 disclosed that ABN Amro understood that LGFS's goal was to be able to market to councils a product with a high degree of security and a stable rating. So much must again have been obvious to ABN Amro in respect of the specific Rembrandt 2006-3 product given LGFS's insistence on the assignment of the AAA rating it required before it purchased the notes. It equally must have been obvious to ABN Amro that LGFS needed to be able to communicate to its clients, the councils, the AAA rating. Unless LGFS could do so its arrangement with ABN Amro as reflected in the mandate letter made no sense. ABN Amro thus knew that the AAA rating would be communicated by LGFS to potential council investors. It follows that ABN Amro knew or ought to have known that LGFS would convey to the councils also that the AAA rating meant that the product had a degree of security or default risk commensurate with the AAA rating, at least in the most general sense of the meaning of the rating as the product having an extremely strong capacity to pay interest and principal. Yet, as I have found, ABN Amro in fact knew that the AAA rating was unreasonable and unjustified. 1357 Contrary to ABN Amro's contention, the factual findings establish that ABN Amro caused or permitted the publication or communication of the fact that S&P had assigned a AAA rating to the Rembrandt 2006-3 notes to a class of potential purchasers of the notes (the PA Councils). Indeed, as the PA Councils pointed out, if ABN Amro had told LGFS of the rating but sought to preclude LGFS from telling the PA Councils about it, LGFS would not have bought the product. Why? Because LGFS would not have been able to market it to councils using the rating and the entire purpose of the transaction recorded in the Mandate Letter would have been defeated. 1358 In this context, ABN Amro identified three further matters. First, a pleading point. It submitted that the PA Councils never alleged that ABN Amro misled LGFS or alleged that ABN Amro made any misrepresentation. That submission is rejected. At trial, the PA Councils alleged that ABN Amro knew or ought to have known that LGFS and the PA Councils would rely on statements made, and information provided, by ABN Amro about the notes, that it communicated the fact of the rating to LGFS and the PA Councils with the intention that they would rely on it and failed to disclose to LGFS and the PA Councils that the rating was deficient and could not be relied upon. That pleading formed a sufficient basis for the primary judge's findings. 1359 ABN Amro's contention that the PA Councils did not allege the making of any misrepresentations by ABN Amro misstates the PA Councils' case for another reason. To establish that ABN Amro engaged in misleading and deceptive conduct, the PA Councils were required to prove that ABN Amro promoted and disseminated the rating, which carried with it the S&P Representations (see [723] above) which were false and misleading: see [765]-[773] above. The PA Councils proved those elements and the primary judge made that finding: J[3250]. It was no answer for ABN Amro to say that it told the truth when it conveyed that the Rembrandt notes had been assigned a AAA rating. ABN Amro did not merely pass on the rating "for what it was worth" or disclaim any belief in its truth or falsity (Yorke at 666, approved in Butcher at 605 [38]-[39] and 629-630 [123]): see [886] above. As the primary judge found, ABN Amro "went far beyond acting as a mere conduit for S&P's rating, it used the AAA rating as a springboard for its marketing and in doing so both adopted it as its own … and represented that S&P's opinion could be safely relied on": see [881]-[905] above and J[3097]. The rating carried with it the S&P Representations: see [723] above. 1360 ABN Amro further submitted that it did not engage in misleading conduct in relation to LGFS and that LGFS did not rely on any misleading conduct of ABN Amro. Those contentions are wrong. They were addressed and rejected at [906] above.

4.2.2 Was ABN Amro's conduct misleading? 1361 Even if ABN Amro engaged in the impugned conduct (as we have found), ABN Amro submitted that the primary judge erred in finding that that conduct was misleading. ABN Amro submitted the "conduct against ABN [Amro] was of a very narrow and specific kind; namely, that it caused or permitted the publication or communication to the PA Councils of the fact that S&P had assigned a AAA rating to the Rembrandt 2006-3 notes where ABN [Amro] knew the rating was misleading". 1362 That contention fails at the first hurdle for the reasons set out at [1349] above - ABN Amro's conduct carried with it the S&P Representations, which were themselves misleading. Next, as the primary judge said, "[g]iven what ABN Amro knew, it is difficult to see how ABN Amro could have deployed the AAA rating without engaging in misleading and deceptive conduct": J[3174]. ABN Amro knew the S&P Representations and ABN Representations to be false: see Part 3 and [906] above. It knew, or at the very least, ought to have known that S&P's AAA rating of the Rembrandt notes was unreasonable and unjustified and therefore misleading: see Part 3 above. ABN Amro knew, or ought to have known, that S&P's rating of the Rembrandt notes was negligent and, further, ABN Amro did not have reasonable grounds for the opinions it expressed through the ABN Representations: see Part 3 above. ABN Amro lacked a reasonable basis for its representations as to the creditworthiness of the notes: see Part 3 and in particular [563] above. ABN Amro lacked a reasonable basis for its representations as to the reliability of S&P's rating: see Part 3 and in particular [563] above. The primary judge was correct to find that ABN Amro in fact knew that S&P's rating was not reliable: see Part 3 and in particular [563] above. 1363 It was in this context, that ABN Amro sought to contend that S&P's rating was reasonable and justified: ABN Amro Appeal Grounds Matrix Row 62A. ABN Amro is not permitted to raise the rebalancing issue on appeal (see [387]-[418] above) and, in any event, its Appeal on the volatility issue is dismissed for the reasons set out at Part 3 above. 1364 That analysis also provides a complete answer to a further ABN Amro Appeal Ground: ABN Amro Appeal Grounds Matrix Row 63. Contrary to ABN Amro's contentions, the primary judge was correct to find that ABN Amro did not care whether S&P's rating of the Rembrandt notes and the S&P Representations were true or false: see Part 3 above. 1365 These Appeal Grounds are dismissed. ABN Amro engaged in misleading conduct in contravention of ss 1041H of the Corporations Act and s 12DA of the ASIC Act.

4.3 Section 1041E of the Corporations Act 1366 The PA Councils' case against ABN Amro under s 1041E of the Corporations Act was substantially the same as their case under s 1041H of the Corporations Act save that the claim under s 1041E required proof of the necessary mental element. On appeal, ABN Amro sought to advance the same so-called errors as those it advanced in relation to s 1041H of the Corporations Act. These Appeal Grounds are rejected for the same reasons as [1350]-[1365] above. 1367 ABN Amro knew, or at the very least, ought to have known that S&P's rating of the Rembrandt notes was unreasonable and unjustified and therefore misleading: see Part 3 above. ABN Amro had actual, or at the very least constructive knowledge, that the rating was misleading and did not care whether the AAA rating itself, and what was conveyed by that AAA rating, was true or false: see Part 3 above.

4.4 Accessorial liability claims 1368 The primary judge found that ABN Amro was knowingly concerned in, or party to, or aided, abetted, counselled or procured, S&P's contraventions of ss 1041E and 1041H of the Corporations Act (within the meaning of ss 79 and 1041I of the Corporations Act): J[3254]-J[3266]. On appeal, ABN Amro challenged that finding: ABN Amro Appeal Grounds Matrix Rows 66-68. 1369 ABN Amro submitted that it could not be found to have been "involved" in S&P's contraventions unless it had actual knowledge of the essential matters going to them at the time they occurred. As we have seen, that element was established: see Part 3 above. ABN Amro knew that S&P's rating of the Rembrandt notes was misleading: see Part 3 above and J[3264].

5.1 Introduction 1370 ABN Amro raised three causation issues on appeal. 1371 First, ABN Amro challenged the primary judge's finding that the PA Councils relied on ABN Amro's misleading conduct, in circumstances where ABN Amro contended that the mere reliance on that conduct by LGFS, rather than the PA Councils, would not be capable of establishing causation for the PA Councils (the Indirect Causation Contention): ABN Amro Appeal Grounds Matrix Rows 64, 65, 79, 80 and 81. 1372 Second, and in any event, ABN Amro contended that the PA Councils' failed to prove causation because they did not establish that, absent the impugned conduct, they would have adopted some course of action, other than purchasing the Rembrandt 2006-3 notes, as a result of which they would have been better off than they in fact were (the Alternative Universe Contention): ABN Amro Appeal Grounds Matrix Rows 82-85. 1373 Third, that the unlawfulness of the conduct of LGFS and the PA Councils in dealing with the Rembrandt 2006-3 notes was the real and effective cause of the PA Councils' losses (the Unlawfulness Contention).

5.2 Indirect Causation Contention 1374 The primary judge found that the PA Councils had demonstrated reliance on ABN Amro's conduct: J[3250]-J[3251]. ABN Amro submitted that there were four errors in the primary judge's conclusion that the PA Councils had demonstrated that reliance: 1. The facts did not permit the conclusion; 2. There was no proper basis for concluding that the PA Councils relied on ABN Amro's impugned conduct; 3. The finding was inconsistent with the PA Councils' decisions to invest in the Rembrandt 2006-3 notes, especially the trust and confidence the PA Councils placed in LGFS, not ABN Amro; and 4. In concluding that the PA Councils relied on ABN Amro's impugned conduct, the primary judge was influenced by an irrelevant consideration - that ABN Amro knew or that it was reasonably foreseeable that LGFS would market the Rembrandt notes to the PA Councils on the basis of the representations made by ABN to LGFS. ABN Amro submitted that this misstated the question, which was to be determined by a consideration of the PA Councils' "states of mind", not ABN Amro's. ABN Amro's case on appeal was fundamentally that the most that could be said was that ABN Amro's conduct contributed to the PA Councils' opportunity to buy the Rembrandt 2006-3 notes, or, in other words, all the PA Councils can rely on is indirect causation. That is, ABN Amro submitted that its representations induced LGFS to buy the notes and, if LGFS had not done so, the PA Councils would never have invested in the notes. Put another way, ABN Amro, like S&P, submitted that its conduct did not cause loss and damage because the impugned conduct was not any statement made to or conduct directed at the PA Councils and it is insufficient that a third party, such as the PA Councils, rely on allegedly misleading conduct which results in loss and damage: see [797] above and Ingot Capital Investments at 731-732 [612]-[619]. 1375 ABN Amro misstates the applicable legal principles and, in any event, the contentions fail on the facts. First, the legal principles. There is no bright-line principle that it is insufficient for a plaintiff to prove that some other person relied on the alleged misleading conduct and that that person's reliance led to the plaintiff suffering loss. Ingot Capital Investments does not stand for that proposition. Ingot Capital Investments is authority for the proposition that where misleading and deceptive conduct provides the opportunity for an investor to enter into a transaction, that investor will not be entitled to recover where the investor knows the truth of the underlying misrepresentation or was indifferent to its truth and proceeded nonetheless: Ingot Capital Investments at 661-662 [19]-[22] and 731-732 [612]-[619]; see also, Digi-Tech (Australia) Pty Ltd v Brand (2004) 62 IPR 184 at 212 [159]. 1376 Next, the entitlement to recover loss or damage in a case of misleading and deceptive conduct is not confined to persons who relied on the conduct: Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526. Indeed, a plaintiff need not establish that the plaintiff directly received and relied upon the misrepresentation made by a defendant: see, by way of example, Hampic Pty Ltd v Adams (2000) ATPR 41-737. The causation inquiry required to be undertaken for the purposes of s 82(1) of the TPA (and for s 5D of the Civil Liability Act) entails a determination of whether the loss or damage is the "real or direct or effective cause of the applicant's loss"; "it must have been 'brought about by virtue of' the conduct which is in contravention of s 52": Janssen-Cilag at 530. The inquiry is whether the plaintiff suffered loss or damage by reason of, or as a result of, the contravention: Janssen-Cilag at 531. 1377 The PA Councils are entitled to rely upon ABN Amro's conduct in disseminating and promoting the rating to LGFS as a step in the chain of causation that led to their losses. Part of that chain of causation was the PA Councils' reliance upon the AAA rating, which they would never have received had it not been provided by ABN Amro to LGFS, which would not have happened if LGFS had not relied upon the ABN Representations: see [923]ff above. Here, unlike the position in Ingot Capital Investments, there was no suggestion that the PA Councils actually knew that the AAA rating was not based on reasonable grounds and was not the product of the exercise of reasonable care and skill or that they were indifferent to the rating. 1378 That brings us to the facts. They have been addressed at Part 2, Sections 6 and 7, and [813] above. 1379 In this context, it must be recalled that ABN Amro represented to LGFS that the rating could be relied upon and that the rating meant that the CPDO had an extremely strong capacity to meet its obligations (see [881]-[905] above) and that LGFS relied on those representations: see [923]ff above and J[3098]. The ABN Representations were "decisive considerations" in LGFS' decision to purchase the Rembrandt notes from ABN Amro and to sell them to the PA Councils on the basis of the AAA rating: see [919]-[933] above and J[3171]-J[3174]. The rating carried with it the S&P Representations: see [723] above. That was a decisive consideration for the PA Councils in acquiring the Rembrandt notes: see Part 2, Sections 1 and 7 and Part 8, Section 2.2 above. 1380 The primary judge did not find that the PA Councils knew that ABN Amro made the ABN Representations. Instead, it was LGFS' reliance on those representations which, in turn, caused the PA Councils to rely on the rating. Therefore, the ABN Representations to LGFS, and LGFS' reliance upon them, were a material cause of the PA Councils' decision to invest in the Rembrandt notes: Ingot Capital Investments at 659-660 [12]. Consistent with the earlier principles, there did not need to be a direct inducement by ABN Amro, it was sufficient that ABN Amro's representation was material to the decision of the PA Councils to invest, in the sense that "the representation was a link in the causal chain": Ingot Capital Investments at 660 [13]. It was: see Part 2, Sections 1 and 7 and Part 8, Section 2.2 above.

5.3 Alternative Universe Contention 1381 ABN Amro's contentions are rejected for the same reasons that we rejected this contention when it was advanced by S&P: see [1308] above.

5.4 Unlawfulness Contention 1382 ABN Amro adopted S&P's contentions. They fail for the reasons at Part 9, Section 2.5.5 above.

6. LOSS AND DAMAGE: ABN APPEAL GROUNDS MATRIX ROWS 86-88 1383 ABN Amro submitted that the PA Councils had failed to prove their loss because they had adopted an alternative approach to the "rule" in Potts v Miller. This approach was also contended for by S&P. On appeal, ABN Amro identified two findings in her Honour's reasons for concluding that the Potts v Miller approach did not apply which it contended were in error: 1. That spread-widening, which contributed to the cash out of the Rembrandt notes, was not a supervening or extraneous event: J[3454]-J[3458]; and 2. That as a consequence of ABN Amro's impugned conduct, the PA Councils were effectively locked in to their purchases of the notes until cash out: J[3459]-J[3462]. 1384 These contentions have been addressed at [958]-[988] above and are rejected for those reasons. The considerations that were relevant, and applied, to LGFS are equally applicable to the PA Councils. By way of summary: 1. Spread-widening, which contributed to the cash out of the Rembrandt notes, was not a supervening or extraneous event because sustained spread widening was "a central" or "major" risk and "vulnerability" of the Rembrandt notes, which S&P and ABN Amro always knew about: see [974]-[977] above and J[3454]; 2. Sustained spread widening, even to an exceptional but plausible extent, ought reasonably to have been at the forefront of S&P's mind when assessing the credit risk of the notes: see [976] above and J[3417] and J[3454]; 3. The whole of the loss which the PA Councils suffered was the consequence of the rating being wrong, not only because the PA Councils would not have acquired the Rembrandt notes but for the AAA rating, but also because the loss was caused by sustained spread widening "which was one of the principal risks encompassed by the wrong information as to the creditworthiness of the CPDO": see [976] above and J[3457]; 4. As a consequence of ABN Amro's impugned conduct, the PA Councils were effectively locked in to their purchases of the notes until cash out: see [978]-[988] above and J[3459]-J[3462]; 5. The principles in Potts v Miller do not apply to the damages case because the PA Councils were locked in to their investment in the notes: see [978]-[988] above and J[3458]-J[3462]; and 6. The PA Councils did not suffer loss until the notes cashed out: see [971] and [978] above and J[3407]. 1385 At trial and on appeal, ABN Amro submitted that LGFS' non-disclosure to the PA Councils that S&P was reviewing how it rated CPDOs and that ABN Amro would not issue more CPDOs meant that ABN Amro's conduct had no continuing effect on the PA Councils after March 2007. That submission was rejected by the primary judge (at J[3422]) and on appeal: see [980]-[988] above. Neither the PA Councils nor LGFS had any reason to suspect they were the victims of a negligent and misleading rating. As the primary judge said, "it could hardly have been clearer to LGFS that ABN Amro's position was that S&P's new ratings approach did not bear upon the rating of the existing CPDO notes at all": see [142] above and J[3422].

7. COUNCILS' FAILURE TO TAKE REASONABLE CARE AND CONTRIBUTORY NEGLIGENCE 1386 This is addressed in Part 13 below.

8. NO DEDUCTION FOR COUPONS: ABN APPEAL GROUNDS MATRIX ROW 89 1387 This issue has been considered in the context of LGFS at [989] above. It is rejected for the same reasons.

1.1 Tort claims: ABN Amro Appeal Grounds Matrix Rows 59, 59B, 77A and 77D 1388 The primary judge found that ABN Amro owed two duties to Bathurst. The first duty was the same duty it owed to the PA Councils: see [1319] above. ABN Amro challenged the primary judge's findings on the first duty on the same bases as it did with respect to the PA Councils: see [1321] above. We reject that Appeal Ground for the reasons set out at [1326]-[1346] above. The second duty ABN Amro owed to Bathurst was identical to the Second Duty it owed to LGFS: see [803] above. ABN Amro challenged the primary judge's findings on the second duty on the same bases as it did with respect to LGFS: see [862] above. We reject that Appeal Ground for the reasons set out at [864]-[875] above. 1389 ABN Amro raised three further matters which it submitted pointed against the imposition of the Second Duty with respect to Bathurst: 1. ABN Amro had no relevant dealings or relationship of any kind with Bathurst; 2. ABN Amro did not know that LGFS intended to market and sell the Rembrandt 2006-3 notes to Bathurst specifically, and was unable to make any assessment of the sort of investment which would be appropriate for it; and 3. Bathurst was not vulnerable to any want of care on ABN Amro's part because it could have protected itself by the terms on which it contracted to buy the notes from LGFS. 1390 We reject ABN Amro's submissions that the matters raised in (1) and (3) above should negate the imposition of the second duty for the reasons set out at [614]-[616] and [829]-[830] above. In relation to (2), the facts establish that ABN Amro was aware that LGFS would on-sell any financial product it purchased to councils and it used this knowledge in its marketing of the notes to LGFS: see [60] and [1316] above. The fact that it did not know Bathurst specifically does not militate against the imposition of the second duty: see [587]-[595] above. 1391 As with the PA Councils and LGFS, the primary judge found that ABN Amro breached the two duties it owed to Bathurst. On appeal, ABN Amro challenged those findings on the same bases as it challenged the primary judge's findings in relation to the PA Councils and LGFS: see [1347] above in relation to the First Duty and [908] above in relation to the Second Duty: ABN Amro Appeal Grounds Matrix Rows 78A and 78D. For the reasons set out at [1348] and [908]-[910], we reject ABN Amro's challenge to the primary judge's finding that it breached the two duties it owed to Bathurst.

1.2 Statutory claims: ABN Amro Appeal Grounds Matrix Row 60B 1392 At trial, Bathurst's case against ABN Amro under ss 1041E and 1041H of the Corporations Act and s 12DA of the ASIC Act reflected LGFS' case against ABN Amro under those sections. ABN Amro challenged the primary judge's finding that it had breached those sections in relation to Bathurst for the same reasons as it did in its case against LGFS: see [911]-[915] above. We reject that challenge for the reasons [911]-[915] above. 1393 ABN Amro also contended that the primary judge erred in finding that its conduct, or negligence, in making the ABN Representations caused Bathurst loss or damage in circumstances where Bathurst had neither pleaded nor proved that it relied on the ABN Representations or was otherwise induced by them to purchase the Rembrandt 2006-3 notes. ABN Amro again deployed the same arguments in support of that contention as it did in its case against the PA Councils: see [1370]-[1373] above. We reject ABN Amro's contention for the reasons at [1374]-[1382] above. 1394 Finally, ABN Amro contended that the primary judge erred in finding that it was appropriate under s 5D of the Civil Liability Act that the scope of its liability for its negligence in making the ABN Representations, and in causing the Rembrandt 2006-3 notes to be issued, extend to any loss suffered by Bathurst in purchasing those notes. It relied on essentially the same argument as it did with respect to the PA Councils: see [1370]-[1373] above. We also reject this contention for the reasons at [1374]-[1382] above.

1.3 Loss and damage: ABN Amro Appeal Grounds Matrix Rows 82A, 84A, 86A, 87A and 88A 1395 ABN Amro challenged the primary judge's findings on loss and damage in relation to Bathurst on the same bases as it did in relation to the PA Councils: see [1383] above. We reject that challenge for the reasons at [1384]-[1385] above.

1.4 Contributory negligence: ABN Amro Appeal Grounds Matrix Rows 94A-94E and 95A 1396 This is addressed in Part 13 below.

2.1 Tort claims: S&P Appeal Grounds Matrix Rows 1-14 1397 The primary judge found that S&P owed the same duty to Bathurst as it owed to the PA Councils: see [1250] above. S&P challenged that finding on the same bases as it did in relation to the PA Councils: see [1251] above. We reject that challenge for the reasons at [1252]-[1303] above.

2.2 Statutory claims: S&P Appeal Grounds Matrix Rows 15-30 1398 The primary judge found that S&P contravened ss 1041E and 1041H of the Corporations Act and s 12DA of the ASIC Act in relation to Bathurst for the same reasons it had contravened those statutory provisions in relation to the PA Councils: see [1304] above. S&P challenged that finding on the same bases as it did in relation to the PA Councils: see [1305]-[1308] above. We reject that challenge for the reasons at [1305]-[1308] above.

2.3 Causation: S&P Appeal Grounds Matrix Rows 31-38 1399 The primary judge's findings on the issue of causation in the PA Councils' case against S&P applied equally to Bathurst's case against S&P: see [1309] above. S&P challenged those findings on the same bases as it did in relation to the PA Councils: see [1309] above. We reject that challenge for the reasons at [1309] above.

2.4 Loss and damage: S&P Appeal Grounds Matrix Rows 47-56 1400 S&P challenged the primary judge's findings on loss and damage in relation to Bathurst on the same bases as it did in relation to the PA Councils: see [1311] above. We reject that challenge for the reasons at [1311]-[1312] above.

2.5 Contributory negligence: S&P Appeal Grounds Matrix Rows 39-46 1401 This is addressed in Part 13 below.

3. LGFS' CLAIMS AGAINST BATHURST 1402 The analysis and findings made in Part 8 with respect to the PA Councils apply equally to Bathurst.

4. RESCISSION CLAIMS - SECTION 925A OF THE CORPORATIONS ACT 1403 Bathurst contends that the primary judge erred in dismissing its claim that, pursuant to ss 925A and 925B of the Corporations Act, it was entitled to a declaration that it had rescinded, by notice dated 6 May 2009 (the Rescission Notice), its agreement made on or about 20 December 2006 to purchase a Rembrandt 2006-3 note from LGFS (the Bathurst Agreement): J[3288]-[3307]. The PA Councils did not press their Appeal Grounds concerning the same issue as it related to the Rembrandt 2006-3 notes purchased by them. 1404 The reasons of the primary judge concerning this question generally refer to the Councils. Where appropriate we have done likewise. However, we have generally adopted her Honour's reasons as referable only to Bathurst, it being the only council which maintains its cross-appeal on this issue. 1405 The primary judge correctly found that the requirements of s 924A of the Corporations Act were satisfied and that ss 925A and 925B were engaged: J[3289]. No issue as to this arises in the cross-appeal. 1406 Section 925A(2) provides that the "client" (Bathurst) "may only give a notice under this section within a reasonable period after becoming aware of the facts entitling the client to give the notice". 1407 Following a ratings downgrade of the Rembrandt notes, a meeting took place on 9 April 2008 (the 9 April meeting) attended by representatives of a number of the Councils, including Bathurst, and LGFS. Thereafter, it was determined that legal advice should be obtained about potential claims by the Councils against LGFS. Bathurst first retained lawyers in April 2008. More than one year later, on 6 May 2009, on its behalf, they sent a letter to LGFS, part of which contained the Rescission Notice. 1408 The case at trial was that the Councils, including Bathurst, gave notice of rescission within 3-4 months or less of learning of the right to rescind and that such a period, for the purposes of s 925A(2), was reasonable: J[3295]-[3296].

4.1 The trial judgment 1409 Bathurst's case, as with the other Councils, depended on the drawing of inferences about its state of awareness based on the need for legal advice for them to have become aware of the right to rescind. However, the primary judge held that awareness of the right to rescind was not the statutory question but that, upon its proper construction, s 925A(2) requires only awareness of the facts entitling the giving of the notice to rescind: J[3299] and J[3301]. Accordingly, the primary judge proceeded upon a different construction in the application of s 925A(2). 1410 The primary judge found that the facts, the awareness of which entitled Bathurst to give a written notice stating that it wished to rescind the Bathurst Agreement pursuant to s 925A(1) were as follows (at J[3299]): 1. That LGFS did not hold an AFSL covering the provision of financial services in relation to the Rembrandt 2006-3 notes; 2. That LGFS was not exempt from the requirement to hold an AFSL covering the provision of the financial service in relation to the Rembrandt 2006-3 notes; 3. The terms of LGFS' AFSL (which did not permit it to deal in derivatives); and 4. The legal character of the Rembrandt 2006-3 notes (that the notes were not a debenture and were a derivative in which LGFS had no licence to deal). 1411 It is important to understand that these "facts", because of the construction applied by the primary judge, did not include any facts as to when Bathurst became aware of its right to give the Rescission Notice. The 9 April meeting is of some significance as there is an issue in the cross-appeal as to whether the primary judge found that it was likely that Bathurst was aware of the facts set out in the preceding paragraph by the time of that meeting and, if so, whether that finding was erroneous. 1412 Her Honour may, in her reasons, particularly at J[3305], have concluded, relevantly, that Bathurst knew the relevant facts, for the purposes of s 925A, by the time of the 9 April meeting. However, her reasons on this question might be thought to be equivocal. We do not think they are when seen in context. 1413 The apparently equivocal nature of her Honour's reasons is principally due to the different legislative constructs in play: that contended for by Bathurst and that as found by the primary judge. This difference, as we have explained, informs the relevant "facts" for the purposes of s 925A. 1414 It is necessary to understand that the primary judge was weighing up inferences that might be drawn, under the construction adopted by her Honour, in competition with those contended for by Bathurst and the other Councils under their postulated different construction. Her conclusion at J[3304] was that there were other equally, if not more, persuasive inferences available on the whole of the evidence including the evidence of the 9 April meeting. She then posited that it was equally, if not more, likely that Bathurst, relevantly, knew of the facts, on her construction, entitling it to give the Rescission Notice, even if it did not know of the entitlement to give the Rescission Notice itself, by the time of the 9 April meeting: J[3304]-J[3305]. 1415 Her Honour continued in this provisional manner at J[3306], that "[i]f the [C]ouncils became aware of the facts entitling them to give the notice by 9 April 2008 (as may well be the case) then the giving of notice a total of 11 months later (at best) … is not a reasonable period". This observation proceeded from her Honour's consideration of what inferences were capable of being drawn because there was no relevant direct evidence. 1416 At trial, Bathurst did not lead any direct evidence, on its case and under its construction, as to when and how it became aware of the facts entitling it to give the Rescission Notice. In particular, it led no direct evidence as to what, if anything, it had learned from its own research, or had been advised by experts or lawyers, bearing on this issue. Bathurst put on an affidavit which identified the dates on which solicitors, and then counsel and an expert, had been retained, but nothing which went directly to the awareness requirement found in s 925A. This evidence, such as it was, was all directed to the construction formulated by Bathurst. 1417 Bathurst asked the Court to infer that it had only received advice to seek rescission shortly before the Rescission Notice was sent. 1418 Importantly, her Honour found at J[3306] that she was not satisfied as to the date on which, relevantly, Bathurst became aware of the facts entitling it to give the Rescission Notice under s 925A under the construction adopted by her. It followed necessarily from this finding that, as the primary judge stated at J[3306], it was not possible to be satisfied that, relevantly, Bathurst had given the Rescission Notice within a reasonable period after becoming so aware.

4.2 The appeal 1419 Significantly for this appeal, as we have mentioned, the primary judge found that Bathurst had not discharged its onus to prove when it became aware of the relevant facts (J[3304]-[3306]) and accordingly that it was not possible to be satisfied that the Rescission Notice was given within a reasonable period after Bathurst became so aware, which is the statutory requirement under s 925A(2) for the giving of a notice. Bathurst accepts, on appeal, that it did carry such an onus at trial. Three questions arise on appeal. The first concerns the proper construction of s 925A(2). 1420 This, in part, will inform the answer to the second question. The second, which is in two parts, is whether the primary judge erred in finding that Bathurst failed to discharge its onus as to when it became relevantly aware and, if so, when was it that her Honour should have found it was so aware? The third, assuming such error and that the evidence was capable of establishing when Bathurst became relevantly aware, is whether the Rescission Notice was sent within a reasonable period after that time. 1421 If the construction of the primary judge is correct and her Honour was also correct in finding that Bathurst had not discharged its onus, as described, then that will be sufficient to dismiss Bathurst's cross-appeal.

4.3 Consideration 1422 In our opinion, the construction given to s 925A(2) by the primary judge was correct. The conditioning facts before a notice may be given pursuant to the provision are twofold. First, when did the client become aware of the facts entitling it to give a notice. This says nothing about awareness of any right to rescind, that is an awareness of the meaning and effect ss 924A and 925A of the Corporations Act as applicable to the relevant facts. It is merely the client's awareness of "the facts" giving rise to such an entitlement which is required. The facts are those, proof of which, in combination, are capable of establishing the matters set out in s 924A(1). The second condition is that the notice be given within a "reasonable period" after the client became relevantly aware. 1423 The "facts", in this case, are those identified by the primary judge at J[3299] which we have set out at [1410] above and indeed which, as we will explain, were, in substance, identified also by Bathurst in its Rescission Notice. 1424 This construction reflects the plain and ordinary meaning of the language in s 925A(2). The provision does not contemplate, expressly or by necessary implication, that the client should be aware of its entitlement to give the notice. Such, had the legislature intended, could have been stated, in which case the words "the facts" would have been unnecessary. All that would have been required were words, for example, as to the client becoming aware of the client's entitlement to give the notice. 1425 Cases such as Ellison v Lutre Pty Ltd (1999) 88 FCR 116 concerning the loss of a contractual right to rescind by conduct including delay giving rise to an inferred election to affirm a contract are of no assistance to the statutory requirements in the present case. Section 925A it seems, although it is unnecessary to decide, is a codification of the right to rescission of such agreements. For example, s 925A(3) provides for a statutory bar to rescission in this context, in the event of relevant affirmation. The statutory right to rescission is unequivocal: it requires the client "becoming aware of the facts entitling the client to give the notice". Of course, all of the relevant circumstances will need to be considered in each particular case. 1426 Bathurst submitted that the relevant "facts" for the purposes of s 925A are complex constructs of the legal system that reference complex constructs developed in the world of commerce and investment. That this was so was illustrated at length in Bathurst's written submissions. Such facts, it contends, are far removed from the sort of "facts" about which the referenced clients could be ordinarily expected to make reliable judgments without considerable and highly technical expert assistance and analysis. We do not accept this submission as apt. Matters of complexity in relation to a particular agreement are no doubt a factor in the length of time it might take for a client to become relevantly aware. However, that is not the statutory inquiry under s 925A which is directed implicitly, as a starting point, to when it was that the client first became aware of all the relevant facts which, as we have explained, are those, proof of which is necessary to establish the matters set out under s 924A. The length of the journey, and the reasons contributing to that length, before the client reaches the relevant state of awareness do not touch on the initial question which focusses on the journey's end. It is a simple question of fact capable, ordinarily, of direct proof: when did the client become aware of the relevant facts? The question then is whether the notice was given within a reasonable period from that time. 1427 Bathurst also challenges the findings of the primary judge at J[3303] that at the 9 April meeting, the issues discussed included whether the Rembrandt notes, of which the Rembrandt 2006-3 note was one, were a "credit derivative", as well as LGFS' lack of capacity to deal in derivatives. 1428 We have concluded that the evidence, on the balance of probabilities, fell short of establishing these facts and, to that extent, the primary judge was in error. It is unnecessary to descend into the detail of why that is so because the error is immaterial to the disposition of the cross-appeal. 1429 The crucial findings by the primary judge at J[3306], which proceeded from her Honour's construction of s 925A(2), are that her Honour was not satisfied as to when it was that, relevantly, Bathurst became aware of the facts entitling it to give notice under s 925A(1) and therefore that it was not possible for her Honour to be satisfied that Bathurst gave notice within a reasonable period after becoming so aware. Consideration of the second requirement necessarily demands proof of the former. 1430 Bathurst submits that the only sensible inference open to be drawn on the uncontroversial evidence adduced by it is that it did not become relevantly aware until after counsel was briefed and an expert was retained "to assist the lawyers in understanding various technical aspects of the documents and the nature of the referenced financial products on which the performance of the notes apparently depended". Bathurst submits that this proceeds from the unchallenged evidence from its employee Mr Robert Roach, Bathurst's Director of Corporate Services and Finance, as to what occurred between December 2008 and March 2009. 1431 It must, however, be understood that this submission, as at the trial, proceeds upon an incorrect construction of s 925A(2) and is directed to a different set of relevant facts, in part, to those identified correctly by the primary judge. Nonetheless, we will consider the evidence relied upon by Bathurst which it contended, by inferential reasoning, was capable of establishing that it became aware of its right to give the Rescission Notice only after it received legal advice and that this occurred shortly before it gave the Rescission Notice. 1432 Mr Roach deposed that Mr Campion, Bathurst's representative at the 9 April meeting, told him that "the meeting had no outcomes". Mr Roach said that, in his view, there was a need for Bathurst to obtain legal advice in relation to the investments made and that he did so on its behalf within 7 days of the 9 April meeting. He then deposed to what occurred thereafter, including correspondence between Bathurst's solicitors and ASIC, the retention of counsel, his attendance at conferences with the solicitors and counsel and the retention of an expert to assist the lawyers in understanding various technical aspects of the documents and the nature of the referenced financial products. He concluded by stating that he reviewed and authorised service of the Rescission Notice to LGFS shortly after 29 April 2009. 1433 The Rescission Notice was not a stand-alone document. It forms part of a letter from Bathurst's solicitors to LGFS dated 6 May 2009. The main part of the letter sets out allegations as against LGFS that Bathurst had been the subject of a series of misrepresentations concerning the Rembrandt 2006-3 note. These, in part, referred to misrepresentations by S&P. 1434 However, these allegations, which are found on the first 9 pages of the letter, did not directly go to the grounds under s 924A(1) upon which a notice may be given under s 925A(1). Those were dealt with on pages 9-11 of the letter under the heading "Statutory Rescission - Corporations Act Section 925A". This part of the letter constituted the Rescission Notice. 1435 The Rescission Notice confined itself, appropriately, to the following assertions: 1. Such authorisation as LGFS had could only depend upon cl (b)(i) of Australian Financial Services Licence No 245642 effective 5 November 2004. 2. The Rembrandt 2006-3 note could not be characterised as a "debenture" as defined in s 9 of the Corporations Act. 3. The Rembrandt 2006-3 note was, if relevant, not a "security" within the meaning of the Corporations Act and in particular s 761A. 4. The Rembrandt 2006-3 note was a "derivative" for the purposes of Chapter 7 of the Corporations Act: s 761D. 5. In these premises, LGFS was not authorised under its licence to deal in the Rembrandt 2006-3 note. 1436 The assertions relied upon did not depend on the alleged misrepresentations, to which we have referred, although it may be accepted that there is, to an extent, some factual overlap. They broadly coincide with the facts identified by the primary judge to which we have already referred as being those, the awareness of which entitled Bathurst to give a notice of rescission: J[3299]. The Rescission Notice then asserted that, taking the above matters together, the requirements of s 924A were met and were a warrant for the notice of rescission. 1437 Just when it was that Bathurst knew these confined facts, relevant to s 924A(1), giving it warrant to give a notice under s 925A(1), is not capable of being established on the evidence. It may have been shortly after Bathurst engaged its lawyers in April 2008. It may not have been then. However, it should not have been left to inference, nor could it have been, when there were other, at least equally competing inferences which would not assist Bathurst. As her Honour correctly stated at J[3300], it was, relevantly, for Bathurst to adduce sufficient evidence to enable a finding to be made by way of properly drawn inference about the date upon which it became aware of the relevant facts and that LGFS could not know or advance relevant evidence about Bathurst's state of awareness. Neither Mr Roach nor any witness, on behalf of Bathurst, gave evidence of when Bathurst became aware of the facts entitling it to give the Rescission Notice, even on Bathurst's construct of s 925A(2). That no such direct evidence was called to demonstrate the actual position no doubt gave the primary judge comfort in concluding, as she did, that the evidentiary burden on Bathurst had not been discharged. Such a consideration is evident from her Honour's observations at J[3303] as to her concern about the chain of inference sought to be invoked by the Councils when it was always in their power to have adduced direct evidence of their awareness. 1438 This result follows even if the construction of s 925A contended for by Bathurst was adopted. There was no direct evidence as to when it was that Bathurst became aware of its entitlement to give the Rescission Notice. As the primary judge observed at J[3302], proof of the relevant state of awareness, on Bathurst's case, depended on a series of inferences that it would have reached this state of awareness only on receipt of legal advice and not otherwise. 1439 As the primary judge correctly observed at J[3302], there was no reason not to expect the adducing of direct evidence from a relevant officer or officers about when Bathurst first became aware of the facts entitling it to give the Rescission Notice or, for that matter, the facts it relied upon under its construction of s 925A(2). It was entirely reasonable for her Honour to conclude that the inferences sought by Bathurst, on its construction, collapsed into mere suspicion: J[3302]. Other at least equally compelling inferences were available. Bathurst, it might be open to infer, had the relevant awareness early on after first taking legal advice but, for any number of reasons, did not act on it by giving a notice. For example, it may have deferred giving the Rescission Notice, despite having relevant awareness of the facts until after it had advice on the raft of other issues which form the major part of the letter of 6 May 2009. Such matters, which are directed to the express statutory question should not, where direct evidence is available, as usually it will be in such cases, be left to inference. No error by her Honour in this respect has been established. The cross-appellant had an onus which it failed to discharge. 1440 The primary judge, as we have mentioned, did not base her conclusion on the construction under s 925A(2) proposed by Bathurst. However, given her Honour's conclusions to which we have referred in the previous paragraph, even if she had adopted this construction, it is apparent that she would not have drawn the inferences contended for by Bathurst, and which would have been necessary to make out its case. 1441 There is one remaining matter to consider. At trial, the issue around s 925A, framed by Bathurst, and as the primary judge observed, concerned when it was that it became aware of its legal right to rescind under s 925A. Bathurst submitted that at trial its representative at the 9 April meeting was not cross-examined as to any awareness of the "section 925A facts" as a result of his attending that meeting. Nor, it was said, was any similarly focussed cross-examination conducted in relation to Mr Roach. It says that at no time during the case did LGFS suggest that Bathurst had become aware of facts entitling the client to give notice at any time prior to solicitors being retained. 1442 These submissions are misconceived, proceeding as they do on a wrong construction of s 925A(2) and further on the assumption that it was for LGFS to both raise and prove the facts as to Bathurst's relevant awareness, even on Bathurst's case. It carried no such burden as Bathurst concedes. It is no error on the part of the primary judge that she determined the issue upon a proper construction of s 925A where that was at odds with the incorrect construction framed by Bathurst in the prosecution of its claim. 1443 The primary judge correctly identified that awareness of the right to rescind is not the statutory question but rather s 925A requires only awareness of the facts entitling the giving of the notice to rescind: J[3299]. 1444 It is unnecessary, in light of our conclusions to consider what remedial orders might have been made under s 925D(1) had the cross-appeal been successful. 1445 The cross-appeal is dismissed.

ABN AMRO CLAIM AGAINST S&P 1446 At trial, ABN Amro cross claimed against S&P in the Corowa and Bathurst Proceedings alleging that any liability ABN Amro was found to have to the PA Councils, Bathurst and/or LGFS was caused by its reliance on S&P's misleading conduct and/or negligence in assigning a rating of AAA to the Rembrandt notes. 1447 The primary judge dismissed ABN Amro's cross-claims against S&P: J[3471]-J[3482]. The reason for dismissing ABN Amro's cross-claims was that ABN Amro knew or ought to have known that S&P's rating was misleading, and so did not rely on it "in any way capable of founding liability on S&P's part to [ABN Amro]": J[3481]. Moreover, notwithstanding this knowledge, ABN Amro chose to deploy the rating. As the primary judge stated, ABN Amro's cross claims failed "for lack of reliance and thus lack of any causal connection between S&P's conduct and any loss of ABN Amro by reason of [the] proceedings": J[3481]. ABN Amro appealed against the dismissal of its cross-claims: ABN Amro Appeal Grounds Matrix Rows 99-103. 1448 ABN Amro submitted that there were two flaws in the reasoning of the primary judge. First, that ABN Amro did not know, nor ought it to have known, that S&P's rating of the notes was misleading. That contention is wrong: see Part 3 above. ABN Amro knew, or ought to have known, that S&P's rating was misleading. As the primary judge stated, ABN Amro "knew all S&P did and more": J[3523]. 1449 Second, ABN Amro submitted that if it did not know, but ought to have known, that S&P's rating was misleading, that would only have warranted a reduction in S&P's liability to ABN Amro for ABN Amro's contributory negligence, not S&P's liability. In other words, ABN Amro submitted that if ABN Amro did not have actual knowledge, it was still capable of relying on S&P's conduct. 1450 That contention is rejected. ABN Amro did have actual knowledge that S&P's rating was misleading and, further, having regard to ABN Amro's knowledge, the primary judge correctly concluded that it could not have relied on the rating: see Part 3 above. Put simply, S&P's conduct did not cause any loss or damage suffered by ABN Amro. 1451 It was common ground that ABN Amro's claims against S&P were premised on indirect causation. S&P submitted that its conduct did not cause loss and damage because the impugned conduct was not any statement made to or conduct directed at ABN Amro and it is insufficient that a third party, such as ABN Amro, rely on allegedly misleading conduct which results in loss and damage: Ingot Capital Investments at 731-732 [612]-[619]; see also J[2877]-J[2881] and J[2920]. 1452 ABN Amro accepted that it must demonstrate reliance on S&P's conduct. The question was whether ABN Amro relied on S&P's conduct. The fact that it knew that the rating was misleading necessarily means that it did not (and could not) rely on S&P. ABN Amro knew the truth and was not misled. These Appeal Grounds are dismissed.

S&P CLAIM AGAINST ABN AMRO 1453 At trial, S&P cross-claimed against ABN Amro in the Corowa and Bathurst Proceedings for contribution, alleging that ABN Amro had engaged in misleading or deceptive conduct against it by representing to LGFS, the PA Councils and Bathurst that the Rembrandt notes were: 1. The product of the exercise of due care and skill; 2. Suitable for investment by LGFS and councils in New South Wales; and 3. Fit for the purpose for which they were supplied, that is, to be purchased by LGFS and on-sold to councils in New South Wales. S&P also said that in publishing S&P's rating of the Rembrandt notes, ABN Amro represented to LGFS that the rating could be relied on as investment, financial or other advice and that that representation was misleading or deceptive by reason of the various disclaimers and qualifications employed by S&P. 1454 The primary judge dismissed S&P's cross-claims against ABN Amro: J[3471]-J[3475], J[3480] and J[3482]. The reason for dismissing S&P's cross-claims was that S&P knew or ought to have known of the misleading and deceptive nature of S&P's representations about the AAA rating (i.e., the S&P Representations). Despite its knowledge, it authorised ABN Amro to deploy the misleading and deceptive rating in its dealing with investors. S&P knew ABN Amro was intending to make representations about the meaning of the rating in the Surf Presentation (that presentation having been provided to S&P). S&P's knowledge about the misleading and deceptive nature of its rating meant that it knew that the Surf Presentation was itself misleading in respect of all matters in connection with the rating. The primary judge found that, in these circumstances, S&P could "hardly complain about ABN Amro's deployment of the AAA rating and information based on that rating (such as the 0.728% rating quantile or default probability)": J[3482]. 1455 S&P submitted that the primary judge erred given the nature of her findings in relation to ABN Amro's conduct: S&P Appeal Grounds Matrix Row 58E. It also relied on the same matters as it did at trial. Further, it submitted that ABN Amro owed a duty of care to exercise care and skill in relation to the notes, which included a duty to supply potential purchasers with information that was accurate and sufficient to allow them to determine whether or not to purchase the Rembrandt notes. 1456 These contentions are rejected. The primary judge's findings about the nature of ABN Amro's misleading and deceptive conduct in relation to LGFS, the PA Councils and Bathurst support, rather than undermine, her finding that S&P knew or ought to have known that ABN Amro was going to engage in that conduct. S&P's reliance on the arguments it advanced at trial is also of little assistance as they do not demonstrate any error in her Honour's findings. Finally, whatever may be said about whether ABN Amro had a "duty to supply potential purchasers with information that was accurate and sufficient to allow them to determine whether or not to purchase the Rembrandt notes", S&P's reliance on that duty to support its cross-claims is untenable in circumstances where it allowed ABN Amro to deploy the rating without limitation and without requiring ABN Amro to provide particular information to investors.

PART 13: CONTRIBUTORY NEGLIGENCE, APPORTIONMENT, PREJUDGMENT INTEREST AND COSTS

1.1 Introduction 1457 There were two allegations of contributory negligence - against LGFS and against the Councils. S&P and ABN Amro contended at trial that LGFS failed to take reasonable care of its own interests or was guilty of contributory negligence. The primary judge rejected that contention: J[3354]-J[3360], especially at J[3356]. In relation to the Councils, S&P, ABN Amro and LGFS contended that the Councils failed to take reasonable care of their own interests or were guilty of contributory negligence. The primary judge rejected that contention: J[3344]-J[3350]. These findings were challenged on appeal. It will be necessary to deal with each set of claims in turn.

1.2 Rembrandt 2006-3 - LGFS contributorily negligent?: ABN Amro Appeal Grounds Matrix Rows 94M-Q and S&P Appeal Grounds Matrix Rows 40A-40B and 46C-46D 1458 This section will address the statutory framework and then the relevant Appeal Grounds.

1.2.1 Statutory framework 1459 ABN Amro and S&P's contributory negligence defences are statutory: s 9 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW) (the 1965 Act) read with s 5R of the Civil Liability Act, s 1041I(1B) of the Corporations Act and s 12GF(1B) of the ASIC Act. That statement requires further explanation. 1460 First, the relevant provisions of the Civil Liability Act. By s 5A(1) of the Civil Liability Act, Part 1A of that Act "applies to any claim for damages for harm resulting from negligence, regardless of whether the claim is brought in tort, in contract, under statute or otherwise". 1461 Section 5R deals with contributory negligence: (1) The principles that are applicable in determining whether a person has been negligent also apply in determining whether the person who suffered harm has been contributorily negligent in failing to take precautions against the risk of that harm. (2) For that purpose: (a) the standard of care required of the person who suffered harm is that of a reasonable person in the position of that person, and (b) the matter is to be determined on the basis of what that person knew or ought to have known at the time. 1462 Section 5S provides that "[i]n determining the extent of a reduction in damages by reason of contributory negligence, a court may determine a reduction of 100% if the court thinks it just and equitable to do so, with the result that the claim for damages is defeated". 1463 Part 4 of the Civil Liability Act concerns proportionate liability. Part 4 includes s 34, which provides as follows: (1) This Part applies to the following claims (apportionable claims): (a) a claim for economic loss or damage to property in an action for damages (whether in contract, tort or otherwise) arising from a failure to take reasonable care, but not including any claim arising out of personal injury, (b) a claim for economic loss or damage to property in an action for damages under the Fair Trading Act 1987 for a contravention of section 42 of that Act (as in force before its repeal by the Fair Trading Amendment (Australian Consumer Law) Act 2010) or under the Australian Consumer Law (NSW) for a contravention of section 18 of that Law. (1A) For the purposes of this Part, there is a single apportionable claim in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind). (2) In this Part, a concurrent wrongdoer, in relation to a claim, is a person who is one of two or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim. … 1464 Section 35 provides: (1) In any proceedings involving an apportionable claim: (a) the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damage or loss, and (b) the court may give judgment against the defendant for not more than that amount. (2) If the proceedings involve both an apportionable claim and a claim that is not an apportionable claim: (a) liability for the apportionable claim is to be determined in accordance with the provisions of this Part, and (b) liability for the other claim is to be determined in accordance with the legal rules, if any, that (apart from this Part) are relevant. (3) In apportioning responsibility between defendants in the proceedings: (a) the court is to exclude that proportion of the damage or loss in relation to which the plaintiff is contributorily negligent under any relevant law, and (b) the court may have regard to the comparative responsibility of any concurrent wrongdoer who is not a party to the proceedings. (4) This section applies in proceedings involving an apportionable claim whether or not all concurrent wrongdoers are parties to the proceedings. (5) A reference in this Part to a defendant in proceedings includes any person joined as a defendant or other party in the proceedings (except as a plaintiff) whether joined under this Part, under rules of court or otherwise. 1465 Section 9 of the 1965 Act provides: (1) If a person (the claimant) suffers damage as the result partly of the claimant's failure to take reasonable care (contributory negligence) and partly of the wrong of any other person: (a) a claim in respect of the damage is not defeated by reason of the contributory negligence of the claimant, and (b) the damages recoverable in respect of the wrong are to be reduced to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage. (2) Subsection (1) does not operate to defeat any defence arising under a contract. (3) If any contract or enactment providing for the limitation of liability is applicable to the claim, the amount of damages recoverable by the claimant by virtue of subsection (1) is not to exceed the maximum limit so applicable. Section 9 of the 1965 Act applies to claims in tort and in contract insofar as the contractual duty was concurrent and co-extensive with the tortious duty: s 8 of the 1965 Act. 1466 The statutory test has been described as "whether a reasonable person in the position of [LGFS], i.e., having the knowledge which [LGFS] had or ought to have had, was negligent": Origin Energy LPG Ltd v Bestcare Foods Ltd [2012] NSWCA 407 at [217].

1.2.2 Appeal Grounds 1467 ABN Amro and S&P contended that the primary judge's finding that LGFS was not contributorily negligent was erroneous because the primary judge adopted an overly narrow focus by limiting her analysis to the question whether LGFS was contributorily negligent in its purchase of the Rembrandt notes (as opposed to its sale of those notes to the Councils. In particular, ABN Amro and S&P contended that the primary judge failed to have any, or any reasonable, regard to the following facts: 1. LGFS purchased the notes for the purposes of on-selling them to the Councils; and 2. LGFS ought to have known that the notes were not suitable for that purpose particularly because they were derivatives, the on-selling of which was in breach of its AFSLs (and thus the Corporations Act) and because of the notes' complexity and volatility. 1468 The matters identified in (2) above reflect, more broadly, ABN Amro's and S&P's complaint that LGFS should have been found to have been contributorily negligent because, in marketing and selling the notes, LGFS had contravened its AFSL and the Corporations Act, breached its fiduciary duties to the Councils, engaged in misleading conduct and failed to disclose risks to the Councils which had been disclosed to LGFS. They will be dealt with under the broader argument as to the suitability of the notes. Each of the facts listed above and identified by ABN Amro and S&P will be addressed in turn.

1.2.2.1 Purchased notes for on-sale to councils 1469 ABN Amro and S&P referred to, and placed considerable reliance upon, the primary judge's finding that LGFS purchased the notes for on-sale to local councils: J[1290], J[1292], J[2166], J[2315], J[2486] and J[3243]. Although acknowledging that LGFS was prepared to hold the notes it was unable to on-sell, they contended that that was not the purpose for which the notes were acquired. Instead, LGFS' objective was to on-sell all of the notes to councils and to be left holding as few as possible. 1470 The error in ABN Amro's and S&P's submissions stems from their failure to refer to all of the relevant findings on this issue. The findings relied upon by ABN Amro and S&P (and summarised in [1469] above) were incomplete. For example, LGFS knew that it may not sell all the notes and in relation to those that it did not sell, the evidence was that it intended to keep them: J[1182], J[2486] and J[3359]. Next, LGFS' carelessness in selling the notes did not increase the number of LGFS Retained Notes. The negligence in selling was not causally significant to the losses suffered on the LGFS Retained Notes. The statutory bases for reducing LGFS' entitlement to damages are limited to an "amount reflecting that proportion of the damage or loss claimed" and to an "extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage". The "damage" here was the damage caused by S&P and ABN Amro to LGFS in LGFS' purchase of the Rembrandt notes. LGFS was not careless in making the decision to buy the Rembrandt notes. Other findings were important. They included that: (1) LGFS undertook a due diligence of the notes, a finding not challenged: J[3357] and [72]-[82] above; (2) LGFS was under no obligation to, and had no ability to, effectively "double guess" the rating: J[3356]; and (3) LGFS did not exhibit any lack of care in buying the notes, only in selling the notes: J[3358]. The primary judge correctly identified the inquiry she was required to undertake.

1.2.2.2 The notes were not suitable for on-selling 1471 The premises which underpin these contentions have been addressed earlier: see Part 2, Sections 6 and 7 (which set out the facts pertinent to the sale of the notes to LGFS and to the Councils) and Parts 4-6 (LGFS' claims against S&P and ABN Amro). 1472 Each of the matters identified by S&P and ABN Amro was not causative of LGFS' loss (or the Councils' loss). Each of the matters is addressed as follows: 1. The notes were derivatives: see Part 4, Section 1.1.4.4 above; 2. The on-selling of the notes was in breach of LGFS' AFSLs (and thus the Corporations Act): see Part 4, Section 1.1.4.4 above; 3. The notes' complexity and volatility: see Part 3 above. None of these matters was causally significant to the losses suffered on the Rembrandt notes.

1.2.3 Conclusion 1473 The primary judge was correct to find that LGFS was not guilty of contributory negligence in connection with its losses. These Appeal Grounds are dismissed.

1.3 Rembrandt 2006-2 - LGFS contributorily negligent?: ABN Amro Appeal Grounds Matrix Rows 94F-94K and S&P Appeal Grounds Matrix Rows 40B and 46B

1.3.1 Appeal Grounds 1474 ABN Amro and S&P submitted on appeal that the primary judge erred in failing to find that in purchasing the Rembrandt 2006-2 notes on behalf of StateCover (see Part 7 above), LGFS had not taken reasonable care of its own interests or had been contributorily negligent in circumstances where: 1. LGFS purchased the notes on behalf of StateCover in contravention of the terms of its AFSL and the Corporations Act; 2. StateCover was not permitted to invest in the notes under its investment policy with which LGFS was intimately familiar; and 3. Purchase of the notes on behalf of StateCover was brought about by LGFS' misrepresentations, by LGFS' failure to disclose to StateCover risks in relation to the notes which had been disclosed to LGFS and by LGFS' breaches of its duty to provide investment management services to StateCover with due care and skill.

1.3.2 Analysis 1475 These contentions fail. The submissions assume that LGFS was liable to StateCover for all of the reasons alleged by StateCover in its pleading. Although the primary judge considered that LGFS would have difficulty in defending the StateCover claim, liability was not established by the evidence, or by the settlement. 1476 Next, LGFS accepts that the Rembrandt 2006-2 notes were not suitable for StateCover. That lack of suitability arose for a number of reasons. One (but not the only) important reason (and as with the Councils the reason directly connected to loss) was that the risk of loss was much greater than that of a genuine AAA rated instrument. That is, each of ABN Amro, S&P and LGFS were responsible for the loss, and ABN Amro's and S&P's wrong was directly causally connected to the loss. Finally, as with the Councils' claims, the rating directly influenced Mr Hilder's beliefs and conduct which resulted in LGFS' negligent act in causing StateCover to purchase the notes: see Part 2, Section 6 above. 1477 ABN Amro contends that it is much less at fault than S&P. As Part 3 above has demonstrated, that contention fails on the facts. Each has a considerable degree of responsibility for LGFS' loss and those responsibilities are interrelated. LGFS was not contributorily negligent and there is no basis for adjusting the apportionment imposed by the primary judge.

1.4 Councils contributorily negligent?: ABN Amro Appeal Grounds Matrix Rows 90, 91, 92, 93, 94, 94A-94E; LGFS Appeal Grounds Matrix Rows 110-111 and S&P Appeal Grounds Matrix Rows 39-40 and 41-46

1.1.1 Introduction 1478 At trial, each of ABN Amro, S&P and LGFS submitted that the Councils had been guilty of contributory negligence in purchasing the Rembrandt 2006-3 notes. The primary judge rejected those submissions: J[3344]-J[3350] and J[1407]-J[1474]. 1479 The primary judge found that the Councils had not failed to take reasonable care of their own interests in deciding to invest in the Rembrandt 2006-3 notes and that the relevant statutory provisions for reducing the Councils' entitlement to damages were not engaged because there was no failure to take reasonable care or contributory negligence by the Councils: see J[3345] and J[3350]. 1480 The primary judge's findings included that: 1. "A prudent person will ordinarily have available the defence that 'they had selected a reasonably careful person and acted upon the skilled advice that they had received upon such a question': Learoyd v Whiteley (1887) 12 AC 727 at 730-1)": see also NMFM Property at 380-381 [494] and J[3347]-[3348]. 2. The S&P Reports did not identify the key risks of the product or explain its structure, other than explaining cash in and cash out in an obscure way: see [49]-[50] and [1176]-[1177] above and J[1320], J[1340]-J[1345], J[1377(5)], J[1387] and J[3345(8)]. 3. The LGFS Community Income Notes Brochure "was a wholly one sided description of the potential benefits of investing in a product said to have been arranged by LGFS without any accompanying disclosure of the potential risks which LGFS itself knew about": J[1637]. 4. The Councils were entitled to accept "LGFS's words and deeds at face value" and in those circumstances the Councils could never have formulated the relevant questions to ask LGFS in order to obtain relevant information: J[1639]. 1481 Each of ABN Amro, S&P and LGFS has appealed. It is necessary to address each "error" relied upon by one or more of ABN Amro, S&P and LGFS in support of the contention that the Councils failed to take reasonable care and did not act prudently in deciding to invest in the Rembrandt 2006-3 notes. There are seven.

1.1.2 Standard by which Councils' conduct to be assessed: S&P Appeal Grounds Matrix Rows 39 and 41 1482 S&P submitted that the primary judge erred in finding that the standard by which the Councils' conduct should be judged was that of an ordinary reasonable investor, rather than that of the prudent, wise cautious and judicious investor (S&P Appeal Ground Matrix Row 39): J[1409]-J[1474], J[2483]-J[2484] and J[3344]-J[3350]. S&P further submitted that the primary judge erred in finding that the Councils' concession that they were required to read the documents provided to them was not relevant and argued that this issue raised "fundamental policy concerns in relation to the extent to which guardians of public money are required to take appropriate steps when investing that money on behalf of public authorities": S&P Appeal Grounds Matrix Row 41. 1483 These Appeal Grounds fail. They misstate the primary judge's finding and at least one of the bases on which the trial was conducted. The primary judge concluded that the standard of care applicable was that of an ordinary reasonable investor. Her Honour, however, went further. The primary judge also found that if her Honour was incorrect about the applicable standard, the Councils had in any event acted as a prudent person would: see J[2467]-J[2484] and J[3345]-J[3350]. That conclusion is reinforced by the fact that, at trial, the Councils accepted that what were described as the "Legislative Boundaries" imposed an obligation on them to act as a prudent person would and that they had complied with that standard. That was referred to and accepted by the primary judge: see J[1447]-J[1448], J[2483]-J[2484] and J[3345]-J[3348]. Further, we do not accept that the context of this proceeding raises any "fundamental policy concerns" of the type identified by S&P. The Councils could not replicate or "second-guess" the rating: see [1211] above. Their reliance on the rating, and the advice of their advisors, was entirely proper.

1.1.3 Councils' reliance on LGFS: S&P Appeal Grounds Matrix Row 46 and ABN Amro Appeal Grounds Matrix Rows 90-91 1484 The primary judge found that the Councils were entitled to rely on the advice of LGFS in relation to, and S&P's rating of, the Rembrandt notes: J[3346]-J[3348], J[3350], J[2467]-J[2484], J[1422] and J[1451]. 1485 S&P contended that the primary judge failed to have sufficient regard to the "evidence of standard industry" that the Councils were required to personally understand the products in which they invested and were not entitled to rely on LGFS to identify the risks and the appropriateness of the investment for each Council. That submission is rejected. ABN Amro submitted that the Councils should have been found to have failed to exercise reasonable care even though they had a financial adviser. It argued that the primary judge appeared to have assumed that a plaintiff cannot be guilty of contributory negligence where a professional has breached its duty to the plaintiff (citing Astley v Austrust Ltd (1999) 197 CLR 1). That submission is also rejected. 1486 These submissions fail on the facts and are inconsistent with the law. The contention that the Councils had failed to make reasonable efforts to understand the risks of the Rembrandt notes before investing was contrary to the following findings: 1. The Councils could never have done anything which would have enabled them to discover that LGFS had failed to disclose all the risks of the notes to them, nor that S&P's credit rating was not based on reasonable grounds: see Part 3 and [1125]-[1128] above; 2. The Councils relied on LGFS, their trusted financial adviser and confidant, to identify risks and assess the appropriateness of the investment for each of the Councils: see Part 2, Sections 1, 2, and 7 above, and Part 8, Section 2.2.5.1 above; 3. The Councils relied on the AAA rating from S&P, which they understood from the Investment Guidelines to be the "best independent information available" as to the creditworthiness of an investment: see Part 2, Sections 1, 2 and 7, [580], [784], [1292] and Part 9 above; 4. The Councils understood the product was a structured credit product which was liquid and had a high level of security consistent with a AAA rating from S&P, and believed such information to be from reliable sources (that is, LGFS and S&P): see [130] above; 5. The Councils were not obliged to understand the mechanics of credit default swaps and the integers of the Rembrandt notes in order to act as a prudent person, which was acknowledged in the Investment Guidelines by the fact that ratings were stated to be the best independent information available as to the creditworthiness of an investment: see Part 2, Section 3.1 and [1292] above; 6. The Councils would not have gained an understanding from reading the Pre-Sale Report and the Post-Sale Report of the risks of the notes, as S&P acknowledged that many principal risks were not disclosed (see [1029], [1056], [1167]-[1178] and [1268] above) and in any event, any reasonable investor acting prudently would have been satisfied that S&P, an expert ratings agency, had assessed all of those risks and concluded that the capacity of the Rembrandt notes to pay interest and principal was consistent with a AAA rating: see Part 2, Section 5 above; 7. The Councils would have been misled, if they had read the Pre-Sale Report (see [49]-[50] above) and the Post-Sale Report (see [53] above) in full, as to one of the key risks of the notes by the misleading statement that "spread widening, and no corresponding defaults, is beneficial to the structure": see [1029], [1056], [1167]-[1178] and [1268] above; and 8. The Councils would never have been able to understand the ABN Amro term sheet and LGFS did not suggest to them that they needed to read it: see [1029], [1056], [1167]-[1178] and [1268] above. 1487 In that context, it is important to recall that a prudent person will ordinarily have available the defence that they had selected a reasonably careful person and acted upon the skilled advice that they had received upon such a question: see [1480(1)] above. Here, that is what the Councils did. As the primary judge found, the Councils "trusted LGFS as experts in investments by local government and, in every case, were led to believe by LGFS that this AAA rated investment was a suitable one for a council to make": see Part 8, Section 2.2.1 above and J[1422]. In those circumstances, the Councils discharged their obligation to act as a prudent person by relying upon the advice of their trusted investment adviser, LGFS, which professed to be an expert in the local government investment industry. 1488 Finally, it is necessary to address the fact that although the Councils were not in the business of investing, each employed an officer responsible (among other responsibilities) for investments: J[1418]-J[1422] and J[1446]. That fact is neutral. As the Councils submitted, they were empowered to exercise their functions, including their investment function, in a number of possible ways. There was no requirement that the Councils, having obtained independent financial advice in relation to the Rembrandt notes, second-guess that advice in order to act as a prudent person. Moreover, this was not a case where they had delegated their entire responsibility to a third party; nor in any event, did the third party (LGFS) draw to the Councils' attention any material error in the rating: Australian Securities and Investments Commission v Healey (2011) 196 FCR 291 at 342 [215]. ABN Amro's submission that the primary judge appears to have made an assumption that a plaintiff cannot be guilty of contributory negligence where a professional has breached its duty to the plaintiff is without warrant. The primary judge's findings make it clear that her Honour was addressing the Councils' position in the context of their factual circumstances, not by the general overarching "assumption" ABN Amro seeks to have attributed to her.

1.1.4 Councils' consideration of the Pre-Sale Report and the Post-Sale Report and other documents: S&P Appeal Grounds Matrix Rows 41 and 42 and ABN Amro Appeal Grounds Matrix Rows 90, 91 and 94 1489 The primary judge accepted that many Council officers did not read or understand the documents in relation to the Rembrandt notes that LGFS provided to them: see [1029], [1056], [1167]-[1175], [1178] and[1268] above and J[1422]. The primary judge rejected, however, the contention that the Councils' failure to read was a "substantial failure to exercise care on the part of the decision makers". 1490 S&P challenged the latter finding. S&P contended that the primary judge erred because the Councils' failure to read such material constituted a failure to comply with their obligation to understand the nature of the investment that they were making when purchasing the Rembrandt notes. ABN Amro made a similar submission. In support of that contention, S&P referred to Wingecarribee Shire Council at [1166]-[1167] where Rares J said that "a reasonable person [(let alone a prudent person)] … ought to have looked at [a] document and at least begun to read it to understand why it had been sent and what it was conveying about the potential … investment". 1491 The primary judge provided extensive reasons for rejecting the contention that the Councils' failure to read was a "substantial failure to exercise care on the part of the decision makers". J[1455]-J[1467], J[2467]-J[2484] and especially at J[2471]. S&P did not address these extensive reasons but chose to challenge this aspect of the reasons and a statement by the primary judge that S&P had no expectation that the S&P Reports would be read. That statement must be understood in the context in which it was made. For example, the primary judge stated: 1465 Once this evidence is taken into account certain other propositions become apparent and undermine S&P's contention of imprudence on the part of the [C]ouncil officers for not having read and understood the S&P [R]eports. The propositions are these: (1) S&P published a system of stand alone ratings where the relevant information for an investor was contained in the rating itself and the accompanying definition S&P assigned to the rating. (2) S&P took no step to ensure that a person relying on its rating did so only in the context of whatever report S&P might happened to have published at the same time. (3) S&P seems to have had no system to ensure that it did not assign a rating unless it had also published an accompanying report (and the present case shows this to be so). (4) S&P did not refer to its reports in its formal letters assigning ratings. (5) S&P did not take any step to ensure that the person who had obtained the rating ensured that they gave to any prospective investor any S&P report which explained how S&P had reached the rating. 1466 The inferences to which these facts lead are inescapable: (a) S&P never expected that investors would all obtain, read and understand those reports, and (b) S&P did not believe it was necessary for investors to do so in order to understand S&P's rating. 1467 In these circumstances the fact that LGFS provided the S&P [R]eports to many of the councils (not all before they decided to invest), wrongly believing it to explain the structure and the risks of the investment, does not support the contention of imprudence. S&P, the author of the reports, did not consider that investors had to read the reports in order to understand the rating. (Emphasis added.) As is readily apparent, the statement in italics was just part of the primary judge's reasons. 1492 S&P then took issue with the last sentence - "S&P, the author of the reports, did not consider that investors had to read the reports in order to understand the rating". S&P again took that sentence out of context. On appeal, S&P contended that the primary judge had proceeded on a misconception that its reports were not necessary in order to understand the rating that was assigned to the Rembrandt notes and there was no system in place that required the report to accompany the rating: see J[1465]-J[1467]. That assertion, without more, is rejected and irrelevant. The question was not whether a prudent (or alternatively reasonable) person would have read the S&P Reports in making an investment decision. The question was and remains whether the Councils had in any event acted as a prudent person (or alternatively reasonable person) would. Here, in the circumstances, the answer was and remains yes. For example, it must be recalled that the S&P Reports were published after ABN Amro was authorised to disseminate the rating (see [49]-[55] above) and there was no requirement for the S&P Reports to be communicated to potential investors who relied on the AAA rating: see [55], [744] and [752] above. 1493 Indeed, it would not have mattered if all the Councils' witnesses had read the S&P Reports. The S&P Reports did not disclose all of the risks of the Rembrandt notes: see [1176]-[1177] above. If they had read it, it would not have caused the Councils to conclude that the Rembrandt notes, with a AAA rating from S&P together with LGFS' recommendation, were not a suitable investment for the Councils: J[2467]-J[2484].

1.1.5 Council Officers' understanding of the Rembrandt notes: S&P Appeal Grounds Matrix Rows 43 and 44 and ABN Amro Appeal Grounds Matrix Row 91 1494 S&P and ABN Amro submitted that the primary judge erred in failing to find that although industry practice required the Councils to understand the nature of the investments they made, the Council officers failed to exercise reasonable care by failing to understand one or more of the basic risks of the Rembrandt notes or in failing to take adequate steps to understand the risks. These Appeal Grounds are rejected. 1495 First, the "requirement". S&P submitted that the requirement was contained in the Investment Guidelines: see Part 2, Section 1.3 above. Those Guidelines were as their name suggests - guidelines. ABN Amro relied instead on the NSW Local Government Investments Best Practice Guide, and in particular the caution contained within that document that Councils should "not invest in products [they] do not understand and take the time to learn/understand available products": see [25] above. Both documents had no official status and did not contain a binding legal obligation. There was no failure to exercise due care because, after the product failed, it was established that the Councils did not understand some aspect or aspects of the product. The Councils knew and understood that the Investment Guidelines and the Best Practice Guide warned the Councils not to invest in products that they did not understand. The Councils' evidence was that they believed that they understood the product sufficiently at the time that they invested in it (J[2484]), that they were entitled to rely upon LGFS' advice and that they reasonably believed that they knew everything about the product that they needed to know: J[1472], J[1473], J[2484], J[1451 and J[3345(5)]. The Council officers recognised their own limitations in understanding financial products and relied on a trusted adviser, LGFS, so that their limitations should not deprive them of suitable investment opportunities. 1496 As the Councils submitted: 1. The Councils relied on LGFS, their trusted financial adviser and confidant, to identify risks and assess the appropriateness of the Rembrandt notes for each of the Councils: J[3345]. 2. The Councils were entitled to rely on that advice in establishing that they acted with reasonable care (NMFM Property at 380-381 [494] and Learoyd v Whiteley at 730-731): J[3348]. 3. The Councils could never have done anything which would have enabled them to discover that LGFS had failed to disclose all the risks of the notes to them, nor that S&P's rating was not based on reasonable grounds: J[2769], J[2773] and J[2775]. 4. The Councils would not have gained an understanding from reading the S&P Reports of the risks of the notes, as S&P acknowledged that many principal risks were not disclosed, and, in any event, any reasonable investor acting prudently would have been satisfied that S&P, an expert ratings agency, had assessed all of those risks and concluded that the capacity of the notes to pay interest and principal was consistent with a AAA rating: J[3345(5)] and J[1461]. 5. The Councils were not obliged to understand the complex structure and risks of Rembrandt notes in order to act as a prudent person. The Councils understood, from what they believed to be reliable sources, that the product was highly liquid (as LGFS had offered a 24 hour guarantee) and had a high level of security consistent with a AAA rating from S&P: J[3345(3)]. 1497 In all the circumstances, these Appeal Grounds fail. As we have said on more than one occasion, the witnesses' evidence made clear that "they did not know what they did not know" and thus could never have asked the right questions to obtain the relevant information: see J[1620], J[1639] and [1177] above.

1.1.6 Hindsight evidence as to what the Councils would have done: S&P Appeal Grounds Matrix Row 45 1498 On appeal, S&P took issue with the primary judge's finding that the evidence of the majority of the council officers that they would not have invested in the notes if they had read the material provided to them by their financial adviser or understood one or more basic matters in relation to the notes should be disregarded as "hindsight": J[1422], J[1425] and J[1429]. S&P submitted that "a majority of the Councils' witnesses said that they would not have purchased the Rembrandt 2006-3 notes if they had read one or more items of the material that was provided to them or if they had understood one or more basic risks in relation to the notes". Indeed, S&P went so far to submit that "[t]hese admissions carry considerable weight and, if they are to be displaced, require 'a convincing explanation of how they came to be made' which justifies this course (Voulis v Kozary (1975) 180 CLR 177 at 193; see also Scalise v Bezzina [2003] NSWCA 362 at [66] …". 1499 S&P's submissions misstated the evidence. Four of the 12 PA Councils gave evidence that they did not read the Pre-Sale Report - Moree, Murray, Oberon and Orange. Mr Bokeyar of Parkes could not recall reading the Pre-Sale Report but he was not the decision maker: see T1680.32-34 and T1629.33-1631.16. The remaining Councils' witnesses either read the Pre-Sale Report (Cooma (T456-T457), Deniliquin (T811), Eurobodalla (T1147), Narrandera (T1277-T1278) and Ryde (T1793) or could not recall doing so: Corowa (T621-622) and Narromine (T1356-1357). 1500 No less importantly, the Council officers' evidence was that if the risks in the Pre-Sale Report had been explained to them, or had they known at the time of investing what they subsequently learnt about the risks attached to the notes, they would not have invested in them: see [1125], [1195], [1198]-[1202] and [1230]-[1235] above. That was not, and is not, surprising. 1501 In the end, this Appeal Ground may be put to one side. As the primary judge identified at J[2484], whether the Councils acted reasonably in purchasing the notes and satisfied their obligations to understand the products in which they invested is a matter for objective, not subjective, determination having regard to all the facts and circumstances at the relevant time.

1.1.7 Councils breached the Local Government Act: ABN Amro Appeal Grounds Matrix Rows 92 and 94C 1502 ABN Amro made a further submission that the Councils should have been found to have been contributorily negligent in circumstances where the Rembrandt notes were not "securities" within the terms of the Ministerial Order and, therefore, investment in them was prohibited. We reject these Appeal Grounds for the reasons at [1272]-[1301] above.

1.1.8 LGFS' Appeal Grounds: LGFS Appeal Grounds Matrix Rows 110 and 111 1503 LGFS challenged the primary judge's finding that the Councils had not failed to take reasonable care and were not contributorily negligent for the following reasons: 1. The Councils did not make an assessment of risk; 2. The Councils did not ask LGFS about risks associated with volatility and complexity; 3. The Councils failed to read the Pre-Sale Report and thus failed to appreciate or ask about facts of which they ought reasonably to have had notice; 4. The Councils failed to adopt policies to ensure that they did not invest in products where liquidity was an issue; 5. The NRB Councils did not make it clear to LGFS that they were relying on LGFS; and 6. The Councils did not tell LGFS of their difficulties in understanding structured products or the documents provided to them. 1504 These Appeal Grounds are without foundation and are dismissed for the reasons in this Part (Part 13, Section 1) and Part 8 above.

1.1.9 Conclusion 1505 The detailed elaboration in the Appeal Grounds of supposed error by the primary judge (none of which was established) was misplaced. Merely selecting, or emphasising, one or more considerations over others that were properly taken into account in reaching the conclusion does not demonstrate error. The Councils did not fail to take reasonable care and were not contributorily negligent.

2.1 Introduction 1506 This section of the judgment concerns apportionment of the losses suffered by the Councils and LGFS. The primary judge held: 1. Each of LGFS, S&P and ABN Amro liable for one-third of the losses of the Councils; and 2. Each of S&P and ABN Amro liable for one-half of LGFS' losses. 1507 ABN Amro challenged these findings: ABN Amro Appeal Grounds Matrix Rows 95, 95A, 95B and 95C. LGFS challenged these findings: LGFS Appeal Grounds Matrix Rows 106-108. S&P challenged these findings: S&P Appeal Grounds Matrix Rows 46I and 46J.

2.2.1 Applicable Principles 1508 The question of apportionment of loss is a matter of judgment and discretion on which reasonable minds might differ. 1509 In Podrebersek v Australian Iron and Steel Pty Ltd (1985) 59 ALJR 492 at 493-494, the High Court stated, in context of contributory negligence, that: A finding on a question of apportionment is a finding upon a "question, not of principle or of positive findings of fact or law, but of proportion, of balance and relative emphasis, and of weighing different considerations. It involves an individual choice or discretion, as to which there may well be differences of opinion by different minds": British Fame (Owners) v Macgregor (Owners) (1943) AC 197, at p 201. Such a finding, if made by a judge, is not lightly reviewed. 1510 Here, the primary judge assessed the correct questions, principally: 1. The relative culpability of the conduct of each of LGFS, S&P and ABN Amro. In other words, the nature of each one's wrongdoing and its seriousness relative to that of the others; and 2. The relative importance of the conduct of each of those parties in causing the loss. 1511 The losses in issue are those of the Councils and LGFS.

2.2.2 Councils' losses 1512 ABN Amro's contention on appeal was that the primary judge erred in failing to find that the culpability and causative effect of the conduct of LGFS and S&P was significantly greater than that of ABN Amro. LGFS submitted that the primary judge erred in not finding that ABN Amro and S&P were responsible for a greater proportion of the Councils' losses than LGFS. S&P's position on appeal was that if its liability to the Councils and LGFS was affirmed on appeal (as it has been), then the primary judge's allocation of responsibility for loss should not be disturbed. S&P submitted that not only was it open to the primary judge to find that LGFS, S&P and ABN Amro were equally responsible for any losses suffered but that finding was preferable on the evidence. We agree with S&P. The primary judge's allocation of responsibility for loss should not be disturbed.

2.2.3 LGFS' losses 1513 As we have said, each of S&P and ABN Amro was found liable for one-half of LGFS' losses. LGFS' losses included its settlement payment to StateCover. There is no basis for distinguishing between their respective responsibilities. The assessment of their respective positions demonstrates that their degree of culpability and responsibility for LGFS' losses is not shown to be other than equal. The detailed elaboration in the Appeal Grounds of supposed error by the primary judge (none of which was established) is not directed at questions of principle. Instead, S&P and ABN Amro impermissibly seek to invoke a judgment different from that formed by the primary judge by emphasising one or more considerations over others that were properly taken into account in forming the ultimate conclusion.

2.3 AHAC's submissions: AHAC Appeal Grounds Matrix Rows 12-16 and 20-22 1514 AHAC submitted that LGFS' liability should be reduced with the result that it reduce the amount LGFS was entitled to recover from AHAC: AHAC Appeal Grounds Matrix Rows 12-16 and 20-22. 1515 In particular, AHAC submitted that: 1. The primary judge erred in failing to find that LGFS was entitled to damages payable by S&P and ABN Amro in a sum which equated to the amount which LGFS was liable to pay to the Councils in respect of its breach of fiduciary duty in each case: AHAC Appeal Grounds Matrix Row 12; 2. Alternatively, the primary judge erred in not holding that the Councils' claims against LGFS for breach of fiduciary duty was to be treated as apportionable claims based upon the reasoning set out at J[3485]: AHAC Appeal Grounds Matrix Row 13; 3. Alternatively, the primary judge erred in holding that the effect of the proportionate liability provisions of the Civil Liability Act was to defeat the entitlement of LGFS for a full indemnity by way of damages from S&P and ABN Amro in respect of its loss which consisted of the sums which it was liable to pay to the Councils: AHAC Appeal Grounds Matrix Row 14; 4. The primary judge erred in failing to find that LGFS was entitled by way of damages from S&P and ABN Amro to a full indemnity in respect of the amounts it was found liable to pay to the Councils: AHAC Appeal Grounds Matrix Row 15; 5. Alternatively, the primary judge erred in finding that the liability of LGFS in respect of the Councils' claim should be in the proportion of one-third, when that liability ought to have been held to be a substantially lesser proportion: AHAC Appeal Grounds Matrix Row 16; 6. The primary judge erred in holding that the effect of the proportionate liability provisions of the Civil Liability Act was to defeat the entitlement of LGFS for a full indemnity by way of damages from S&P and ABN Amro in respect of its loss which consisted of the sum which it was liable to pay to StateCover: AHAC Appeal Grounds Matrix Row 20; 7. The learned primary judge erred in failing to find that LGFS was entitled by way of damages from S&P and ABN Amro to a full indemnity in respect of the amount it was liable to pay to StateCover: AHAC Appeal Grounds Matrix Row 21; and 8. Alternatively, the primary judge erred in finding that the liability of LGFS in respect of the StateCover settlement should be in the proportion of one-third, when that liability ought to have been held to be a substantially lesser proportion: AHAC Appeal Grounds Matrix Row 22. 1516 None of these Appeal Grounds were addressed by AHAC in their written or oral submissions. In the matrix, AHAC referred to LGFS Appeal Grounds Matrix Rows 106-108 and stated that it relied on LGFS' submissions in relation to those Appeal Grounds. Those Appeal Grounds have been addressed in Part 13, Sections 2.1 and 2.2 above and are rejected for the same reasons.

PROPORTIONATE LIABILITY UNDER the CORPORATIONS ACT AND THE ASIC ACT

3.1 Introduction 1517 The damages awarded in favour of the PA Councils were apportioned as between LGFS, S&P and ABN Amro under the proportionate liability provisions of the Corporations Act and the ASIC Act. The PA Councils contend that this should not have occurred and that they should have the benefit of joint and several judgments in each case: PA Councils Appeal Grounds Matrix Rows 132-133. 1518 The primary judge found that each of ABN Amro, S&P and LGFS contravened s 1041E of the Corporations Act: J[2239] (with respect to LGFS), J[3178] and J[3246] (with respect to ABN Amro), and J[2905]-J[2910] and J[3339] (with respect to S&P). Her Honour also found that each also contravened s 1041H. The finding of combined contraventions is at J[3339]. However, neither there nor elsewhere is it possible to discern clearly the particular findings directed only to the contraventions of s 1041H. This is significant in the resolution of the cross-appeal. 1519 Findings at J[3339] against each of LGFS, S&P and ABN Amro of contravention of s 12DA of the ASIC Act were also made. This is the general provision prohibiting conduct in relation to financial services that is misleading or deceptive or likely to mislead or deceive. Accordingly, the provisions of s 12GF(1) of the ASIC Act were engaged. The PA Councils' submissions were directed to the provisions of the Corporations Act. 1520 The primary judge (at J[3485]) held, correctly in our opinion, that damages for contravention of s 1041E of the Corporations Act were not apportionable. However, her Honour held that in this case, those claims arose from the same facts as the contraventions of s 1041H which are apportionable, adopting the reasoning of Barrett J (as his Honour then was) in Reinhold v New South Wales Lotteries Corporation (No 2) (2008) 82 NSWLR 762. 1521 The PA Councils contend that the damages awarded should not have been apportioned under the relevant provisions of the Corporations Act. It is evident from the PA Councils' submissions that they have proceeded on the footing that the primary judge found that the claims under s 1041E were apportionable. We do not think this was the case although it is not, in part, entirely free from doubt. The primary judge at J[3485] plainly said to the contrary. It seems her Honour proceeded on the basis that the facts which established contraventions of s 1041E also make out contraventions of s 1041H of the Corporations Act and s 12DA of the ASIC Act. However, in doing so, her Honour placed reliance on the reasoning in Reinhold. As we will explain, this was misplaced. To the extent that her Honour did so we have concluded that she was in error. Even if it were accepted that the contraventions of ss 1041E and 1041H were founded on the same facts, we consider that the damages from the cause of action founded on the contraventions of s 1041E ought not to have been apportioned as between LGFS, S&P and ABN Amro. Rather, each ought to have been jointly and severally liable for those damages. We have also concluded that the finding that the facts were the same in relation to both sets of contraventions was erroneous. 1522 To the extent that there were also contraventions of s 1041H of the Corporations Act and s 12DA of the ASIC Act it is not, in her Honour's reasons, possible to separate the facts supporting these from the facts sustaining the non-apportionable claims for contravention of s 1041E. However, the claims made, as pleaded, differentiated the facts relied upon as between s 1041E and s 1041H. Whilst there is some overlap, there were additional facts pleaded, which required to be proved, to establish the claim made under s 1041E. 1523 The damages caused by these contraventions of ss 1041E or 1041H and s 12DA of the ASIC Act are the same. Where damages, in those circumstances, proceed from an apportionable claim (s 1041H) or alternatively a non-apportionable claim (s 1041E) then the remedies, to that extent, available to the PA Councils are mutually inconsistent. This gives rise to an election on the part of the PA Councils. Plainly, by bringing this cross-appeal the PA Councils elect the remedy of judgment for damages without apportionment proceeding from the cause of action founded on the contraventions of s 1041E. 1524 It will be sufficient for our analysis to focus on the provisions of the Corporations Act although our reasoning and conclusions are apt also for the proportionate liability provisions under the ASIC Act, mutatis mutandis. We have come to these conclusions for the reasons which follow. 1525 The PA Councils contend that on a proper construction of s 1041L, including the exclusion of s 1041E from the definition of apportionable claims, claims for loss or damage arising out of a contravention of s 1041E are not apportionable. We do not understand, in the way already explained, that the primary judge held otherwise. 1526 Conversely, LGFS, S&P and ABN Amro submit that the PA Councils' claim based on conduct done in contravention of s 1041E of the Corporations Act was both an apportionable claim and a claim to which the ordinary principles of contributory negligence applied. As we have said, this is not the approach that was taken by the primary judge. 1527 Accordingly, it will be necessary to consider the proper construction of the proportionate liability provisions in the Corporations Act as well as the ASIC Act and their application to the facts in this case.

3.2 Proportionate liability 1528 Proportionate liability and contributory negligence provisions were introduced by the Commonwealth, States and Territories following an inquiry established by the Attorneys-General of the Commonwealth and New South Wales in 1994. 1529 The inquiry was the result of growing concerns as to the rise in litigation against professional people, and auditors in particular, who were being pursued, not by reason of their greater culpability, which may not have been great, but rather because they carried professional indemnity insurance with cover sufficient to meet large damages awards: the so-called "deep pockets syndrome". This in turn had led to a significant rise in premiums for such insurance cover. 1530 Proportionate liability broadly means that liability rests with all defendants in proportion to their contribution to the plaintiff's loss. 1531 The Commonwealth amended the Corporations Act and the ASIC Act, responding to draft model provisions. The States and Territories also agreed to introduce amending legislation. The intent was to achieve a nationally consistent regime in relation to proportionate liability. The contributory negligence provisions may be regarded as part of such a regime. 1532 This objective has not been achieved. There are important differences between the Commonwealth provisions, found variously in the Corporations Act, the ASIC Act and the Competition and Consumer Act 2010 (Cth). Those differences are significant in the context of this cross-appeal.

3.3 Statutory framework 1533 Part 7.10 Div 2 of the Corporations Act contains provisions for prohibited conduct concerning financial products, financial services and financial markets other than insider trading provisions. 1534 Under this division, ss 1041A, 1041B, 1041C, 1041D and 1041E proscribe conduct including market manipulation, false trading, market rigging, dissemination of information about illegal transactions, and false or misleading statements. Failure to comply with any of these sections is an offence and, with the exception of s 1041E, each is also a civil penalty provision. Section 1041F prohibits a person from inducing another person to deal in financial products. Section 1041G prohibits dishonest conduct in relation to a financial product or a financial service. Contravention of either s 1041F or s 1041G is an offence. 1535 By contrast, s 1041H proscribes conduct in relation to a financial product or a financial service that is misleading or deceptive conduct. However, failure to comply with this provision is neither a criminal offence nor a civil penalty provision although it may lead to civil liability under s 1041I. 1536 Section 1041I provides relevantly: Civil action for loss or damage for contravention of sections 1041E to 1041H (1) A person who suffers loss or damage by conduct of another person that was engaged in in contravention of section 1041E, 1041F, 1041G or 1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention. (1A) Subsection (1) has effect subject to section 1044B. Note: Section 1044B may limit the amount that the person may recover for a contravention of section 1041H (Misleading or deceptive conduct) from the other person or from another person involved in the contravention. (1B) Despite subsection (1), if: (a) a person (the claimant) makes a claim under subsection (1) in relation to: (i) economic loss; or (ii) damage to property; caused by conduct of another person (the defendant) that was done in contravention of section 1041H; and (b) the claimant suffered the loss or damage: (i) as a result partly of the claimant's failure to take reasonable care; and (ii) as a result partly of the conduct referred to in paragraph (a); and (c) the defendant: (i) did not intend to cause the loss or damage; and (ii) did not fraudulently cause the loss or damage; the damages that the claimant may recover in relation to the loss or damage are to be reduced to the extent to which the court thinks just and equitable having regard to the claimant's share in the responsibility for the loss or damage. 1537 Division 2A provides for proportionate liability for misleading and deceptive conduct. 1538 Section 1041L provides: Application of Division (1) This Division applies to a claim (an apportionable claim) if the claim is a claim for damages made under section 1041I for: (a) economic loss; or (b) damage to property; caused by conduct that was done in a contravention of section 1041H. (2) For the purposes of this Division, there is a single apportionable claim in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind). (3) In this Division, a concurrent wrongdoer, in relation to a claim, is a person who is one of 2 or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim. (4) For the purposes of this Division, apportionable claims are limited to those claims specified in subsection (1). (5) For the purposes of this Division, it does not matter that a concurrent wrongdoer is insolvent, is being wound up or has ceased to exist or died. 1539 Section 1041M provides: Certain concurrent wrongdoers not to have benefit of apportionment (1) Nothing in this Division operates to exclude the liability of a concurrent wrongdoer (an excluded concurrent wrongdoer) in proceedings involving an apportionable claim if: (a) the concurrent wrongdoer intended to cause the economic loss or damage to property that is the subject of the claim; or (b) the concurrent wrongdoer fraudulently caused the economic loss or damage to property that is the subject of the claim. (2) The liability of an excluded concurrent wrongdoer is to be determined in accordance with the legal rules (if any) that (apart from this Division) are relevant. (3) The liability of any other concurrent wrongdoer who is not an excluded concurrent wrongdoer is to be determined in accordance with the provisions of this Division. 1540 Section 1041N provides: Proportionate liability for apportionable claims (1) In any proceedings involving an apportionable claim: (a) the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damage or loss; and (b) the court may give judgment against the defendant for not more than that amount. (2) ... (3) In apportioning responsibility between defendants in the proceedings: (a) the court is to exclude that proportion of the damage or loss in relation to which the plaintiff is contributorily negligent under any relevant law; and (b) the court may have regard to the comparative responsibility of any concurrent wrongdoer who is not a party to the proceedings. (4) This section applies in proceedings involving an apportionable claim whether or not all concurrent wrongdoers are parties to the proceedings. (5) A reference in this Division to a defendant in proceedings includes any person joined as a defendant or other party in the proceedings (except as a plaintiff) whether joined under this Division, under rules of court or otherwise. 1541 Section 1041O provides: Defendant to notify plaintiff of concurrent wrongdoer of whom defendant aware (1) If: (a) a defendant in proceedings involving an apportionable claim has reasonable grounds to believe that a particular person (the other person) may be a concurrent wrongdoer in relation to the claim; and (b) the defendant fails to give the plaintiff, as soon as practicable, written notice of the information that the defendant has about: (i) the identity of the other person; and (ii) the circumstances that may make the other person a concurrent wrongdoer in relation to the claim; and (c) the plaintiff unnecessarily incurs costs in the proceedings because the plaintiff was not aware that the other person may be a concurrent wrongdoer in relation to the claim; the court hearing the proceedings may order that the defendant pay all or any of those costs of the plaintiff. (2) The court may order that the costs to be paid by the defendant be assessed on an indemnity basis or otherwise. 1542 Section 1041P provides: Contribution not recoverable from defendant A defendant against whom judgment is given under this Division as a concurrent wrongdoer in relation to an apportionable claim: (a) cannot be required to contribute to any damages or contribution recovered from another concurrent wrongdoer in respect of the apportionable claim (whether or not the damages or contribution are recovered in the same proceedings in which judgment is given against the defendant); and (b) cannot be required to indemnify any such wrongdoer. 1543 Section 1041R provides: Joining non-party concurrent wrongdoer in the action (1) The court may give leave for any one or more persons to be joined as defendants in proceedings involving an apportionable claim. (2) The court is not to give leave for the joinder of any person who was a party to any previously concluded proceedings in respect of the apportionable claim.

3.4 The proportionate liability provisions under Div 2A of the Corporations Act 1544 Sections 1041L-1041S introduced a significant change, for those cases covered by them, in relation to the recovery of damages. Joint and several liability in effect was removed and certain concurrent wrongdoers rendered liable, in relation to a claim, limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damages or loss. 1545 Its application is mandatory. The court may give judgment against the defendant for not more than that amount: s 1041N(1)(b). 1546 Other Commonwealth legislation introduced proportionate liability regimes: the ASIC Act (Subdiv GA) and the Competition and Consumer Act (Pt VIA). We will consider these in due course. 1547 Similar but different legislation has been introduced in the States and Territories. It is sufficient to mention two of these: the Civil Liability Act (Pt 4) and the Wrongs Act 1958 (Vic) (Pt IVAA). 1548 The provisions in the Civil Liability Act (s 34(1)) and the Wrongs Act (ss 24AF and 24AG) are in substance of similar effect. They provide that the apportionable claim provisions apply to a claim for economic loss or damage to property in an action for damages (whether in tort, in contract, under statute or otherwise) "arising from a failure to take reasonable care". Claims for damages for personal injury are excluded. 1549 Section 1041L(1) of the Corporations Act contains significant differences. For example, s 1041L(1) defines an apportionable claim as being a claim for damages made under s 1041I for economic loss or damage to property caused by conduct that was done in a contravention of s 1041H. Section 1041L(4) limits apportionable claims to those specified in subs (1). It is a claim "made", not a claim "established", which meets this description. It is not necessary to await the judgment of a court in respect of such a claim before it is afforded the status of an "apportionable claim": cf Reinhold at 769 [18]-[22]. Obviously the assessment of proportionate liability, if any, must necessarily be the product of relevant findings of fact and law by the court. Thus s 1041N(1) provides that "[i]n any proceedings involving an apportionable claim" the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to the proportion of the damage or loss claimed which the court considers just having regard to the extent of the defendant's responsibility for the damage or loss. 1550 It may be that although being an apportionable claim no apportionment in fact is made where it is not established in the proceedings by judgment that there is a concurrent wrongdoer. On the other hand, it may be established that there is a concurrent wrongdoer but, by reason of the exclusion in s 1041M, that person does not have the benefit of apportionment. Despite either of these circumstances, the claim made would be, from the outset, an apportionable claim but as it transpired not one resulting in apportionment. 1551 Section 1041O provides for a potential adverse costs order against a defendant in proceedings "involving an apportionable claim" in relation to failing to notify the plaintiff "as soon as practicable" of a person who the defendant has reasonable grounds to believe may be a concurrent wrongdoer. A defendant, in those circumstances, must be able to identify that the claim is an "apportionable claim" in order to be in a position to give such notice. They cannot wait until judgment in the proceedings. The claim is identifiable as an apportionable claim because it is "a claim for damages made under section 1041I … caused by conduct that was done in a contravention of section 1041H": s 1041L(1). 1552 The judgment in Reinhold, relied upon in this respect by her Honour, and the decision of the Victorian Court of Appeal in Godfrey Spowers (Victoria) Pty Ltd v Lincolne Scott Australia Pty Ltd (2008) 21 VR 84, upon which LGFS, S&P and ABN Amro rely, accordingly must be considered bearing these differences in mind.

3.5 The cross-appeal by LGFS, S&P and ABN Amro 1553 The first question in this cross-appeal is whether, as LGFS, S&P and ABN Amro contend, a claim for damages made under s 1041I for economic loss caused by conduct that was done in contravention of s 1041E may fall within the definition of an apportionable claim as defined in s 1041L. However, even if that question is answered adversely to them, further questions fall to be considered. They arise from the way we apprehend the primary judge approached and determined the issue of apportionment. 1554 The questions are these: 1. Was the conclusion of the primary judge at J[3485] that the (pleaded) contraventions of ss 1041H and 1041E arose from the same facts erroneous? 2. Whether or not the primary judge was in error in concluding that the contraventions of ss 1041H and 1041E arose from the same facts, did she, in any event, err in entering a judgment which apportioned the damages equally as between LGFS, S&P and ABN Amro? Should the judgments, rather, have been joint and several?

3.6 Consideration 1555 The starting point with respect to the first question is the text and context and purpose of the provisions of the Corporations Act to which we have referred: Project Blue Sky at 381 [69]. 1556 Each of LGFS, S&P and ABN Amro made submissions but it will be convenient to consider these in a composite manner. That said, S&P seems to want to run with the hares as well as the hounds on this issue. In other submissions (dated 5 December 2013, at [26] on the issue between it and LGFS concerning whether damages awarded against LGFS for breach of fiduciary duty are apportionable under s 1041L of the Corporations Act) it appears to support the construction for which the PA Councils contend in their cross-appeal. 1557 LGFS, S&P and ABN Amro contend that the ordinary meaning of s 1041L makes clear that a claim for contravention of s 1041E that is founded on the same conduct that gives rise to a contravention of s 1041H will mean that both claims will be apportionable. 1558 Their submission is that s 1041L focuses on a claim that is "caused by conduct that was done in a contravention of section 1041H" and that the use of the word "conduct" in the section is important because it focuses attention on the physical acts that give rise to a claim under s 1041I, rather than the legal label that is attached to that conduct. Accordingly, they contend, in determining whether there is an apportionable claim, the relevant inquiry is whether the damage claimed under s 1041I was caused by misleading or deceptive conduct. The result, they submit, is that if it is established that there is a claim under s 1041I for damages that was caused by misleading or deceptive conduct then the claim will be apportionable irrespective of whether the claim is formally framed by reference to ss 1041E, 1041F, 1041G or 1041H. 1559 They further submit that had the legislature intended to limit the operation of s 1041L only to contraventions of s 1041H there would have been no need to use the words "conduct that was done in" in s 1041L, and that in accordance with ordinary rules of statutory interpretation these words should be given meaning. They contend that the construction of s 1041L advanced by them does so. 1560 We do not accept these submissions for the reasons which follow. 1561 Nor do we accept their submission that the absence, in the text of s 1041IL, of an express exclusionary provision relating, relevantly, to s 1041E, or for that matter ss 1041F or 1041G tells in favour of their construction. To the contrary, we regard the absence of those sections and the reference only to s 1041H as pointing to a construction that it is only claims made for damages for loss or damage "caused by conduct that was done in a contravention of section 1041H" which are apportionable claims. When s 1041L(1) is read together with s 1041I(1) it is apparent that claims for damages made for loss or damage caused by conduct that was done in contravention of ss 1041E, 1041F and 1041G are, by implication, excluded. 1562 Section 1041L does not apply merely to a claim alleging misleading or deceptive conduct and which might point to contravention of a number of provisions answering that general rubric ranging from s 1041A through to s 1041H. Rather, it specifically requires that the claim be a claim for damages made under s 1041I for relevant loss or damage caused by conduct "that was done in a contravention of section 1041H". It is this expressly identified conduct which is the subject of a claim made that meets the statutory definition of an "apportionable claim". No other conduct meets the definition. 1563 It is important to appreciate that s 1041I expressly enables civil action for contraventions of ss 1041E, 1041F, 1041G or 1041H but it is only s 1041H which is expressly identified in s 1041L. So, too, is the position in relation to the contributory negligence provisions found in s 1041I(1B)(a). Significantly, within s 1041I itself, a distinction is drawn between the four provisions identified under s 1041I(1) as giving rise to civil actions whereas under s 1041I(1B)(a) it is only a claim made in respect of conduct done in contravention of s 1041H which attracts the contributory negligence provision. This same distinction is carried through to s 1041L(1). These support the narrow reach of s 1041L(1) to conduct done in contravention of s 1041H and not any other of the sections identified in s 1041I(1). 1564 Nothing in s 1041L(1) turns on the use of the words "conduct that was done in a contravention of …". This merely picks up the same language used in s 1041I in respect of each of the four sections there expressly identified. 1565 There are evident policy considerations why the proportionate liability scheme is limited to claims for damages made under s 1041I for loss or damage caused by conduct in contravention of s 1041H. As we have explained, conduct done in contravention of any of ss 1041E, 1041F and 1041G, which are each expressly identified in s 1041I, constitutes an offence. That is not the case with conduct done in contravention of s 1041H. This alone provides sufficient reason to understand why s 1041L is confined to conduct done in contravention of s 1041H. 1566 Apportionment of a damages award meets the objective of confining the liability of concurrent wrongdoers to an amount reflecting that proportion of the damage or loss that the court considers just having regard to the defendant's responsibility for the damage or loss: s 1041N(1)(a). However, apportionment may work hardship on a successful applicant who finds one or more concurrent wrongdoers unable to meet their portion of the damages awarded. 1567 LGFS, S&P and ABN Amro submit that the explanatory material for the proportionate liability regime evidences no legislative intention to exclude s 1041E from the operation of the proportionate liability regime. Rather, they contend, the explanatory material indicates that the only class of conduct that the legislature intended to exclude from the operation of the proportionate liability regime was "intentional torts and claims involving fraud" (see Explanatory Memorandum to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth) at [5.352]) and that this exclusion of such claims was expressly given effect by s 1041M(1) of the Corporations Act. 1568 The aim evidently is to exclude conduct involving particular moral culpability. Certainly s 1041M(1) reflects this objective. Likewise, ss 1041I(1B)(a) and 1041L(1) exclude from the benefit of contributory negligence and proportionate liability those concurrent wrongdoers who contravene the offence provisions, ss 1041E, 1041F and 1041G, with their attendant mental elements of moral culpability. 1569 Contravention of any of those provisions constitutes an offence. Section 1041E concerns the making of a statement or disseminating information that is false in a material particular or is materially misleading in circumstances when the offending person does not care whether the statement or information is true or false, or the person has actual or putative knowledge of those matters. Section 1041F contains elements of knowing or reckless conduct which is misleading, false or deceptive. Section 1041G involves dishonest conduct. Legislative policy points to conduct which, under Div 2, constitutes an offence being excluded from the proportionate liability regime and, in our opinion, s 1041L(1) and also s 1041I(1B)(a) upon our construction achieve that end. 1570 Section 1041H, by contrast, contains no necessary element of knowledge or dishonesty. It does not require proof of a mental element: Australian Securities and Investments Commission v Stone Assets Management Pty Ltd (2012) 205 FCR 120 at 129 [33] and [36]. A person may innocently contravene the proscription against engaging in conduct in relation to a financial product or a financial service that is misleading or deceptive or likely to mislead or deceive. 1571 LGFS, S&P and ABN Amro submit that the words "conduct that was done in a contravention of section 1041H" should be given their plain meaning: that is, as including any conduct that contravenes s 1041H (even if it also contravenes another provision, such as s 1041E). They contend that the evident purpose behind s 1041L(1) was to include all conduct that meets the description of conduct that is "misleading or deceptive or is likely to mislead or deceive" (s 1041H(1)) unless the conduct is expressly excluded. For example, s 1041M excludes from the scope of Div 2A a concurrent wrongdoer who intended to cause or fraudulently caused the economic loss or damage and s 1041H(3) excludes from the scope of s 1041H conduct contravening certain other provisions. They submit that if it were intended that s 1041L exclude conduct that contravenes s 1041E that could have been expressly stated. 1572 We do not agree. The reason for the excision of these sections from the reach of s 1041H was explained by Lander J in Selig v Wealthsure Pty Ltd (2013) 94 ACSR 308 at 453 [1089]-[1091]. We respectfully agree with his Honour's analysis and conclusions. [1089] Specifically, however, s 1041H(3) provides that conduct that contravenes s 670A (misleading or deceptive takeover document) or s 728 (misleading or deceptive fundraising document) or conduct in relation to a disclosure document or statement within the meaning of s 953A or conduct in relation to a disclosure document or statement within the meaning of s 1022A is not conduct that contravenes s 1041H. [1090] The reason why conduct of the kind mentioned in s 1041H(3) is not conduct which s 1041H(1) proscribes is because each of those sections have their own section that provides for a remedy for contraventions, independently of s 1041H. Section 670B provides a remedy for a contravention of s 670A against the persons mentioned in the table to s 670B(1). A remedy is given for a contravention of s 728 by s 729, but only as against the persons mentioned in the table in s 729(1). The remedy for failing to comply with s 953B(1)(b) is given by s 953B(2) but only against the persons mentioned in s 953B(3). The remedy for failing to comply with s 1022B(1) is given by s 1022B(2) but only against the persons mentioned in s 1022B(3). A person who suffers damage as a result of a contravention of any of ss 670A, 728, 953B(1) and 1022B(1) is given a remedy, but only against the persons mentioned in the sections giving the remedies. [1091] There is no need for s 1041H to proscribe the conduct contemplated in ss 670A, 728, 953B(1) and 1022B(1) because that conduct is already proscribed and the persons who suffer damage already have a statutory remedy, although only against the particular persons who are identified in the sections giving the remedy. Because these sections target particular persons, it would be inappropriate to proscribe that conduct in general terms because it would apply to any person who has engaged in the proscribed conduct. 1573 While amendments were introduced to s 1041H(3) in July 2013, the provision in this case is the same as it was in the case before Lander J. These aspects of the decision of Lander J were overturned on appeal, by majority (Mansfield and Besanko JJ): Wealthsure Pty Ltd v Selig [2014] FCAFC 64. With respect to Mansfield and Besanko JJ, for the reasons just stated we agree with the conclusion reached by White J in Wealthsure on appeal that the expression in s 1041L that "the claim for the loss and damage is based on more than one cause of action (whether or not of the same or a different kind)" refers only to causes of action which are themselves apportionable claims. 1574 Indeed s 1041M is consistent with these policy considerations underpinning the construction we have given to s 1041L. As we have observed, s 1041M expressly excludes the liability of a concurrent wrongdoer in proceedings involving an apportionable claim if that concurrent wrongdoer intended to cause the economic loss or damage to property that is the subject of the claim or where the concurrent wrongdoer fraudulently caused the economic loss or damage to property that is the subject of the claim. Thus, as we earlier explained, even a claim made under s 1041I for loss or damage caused by conduct in contravention of s 1041H rendering it an apportionable claim may not result in an apportionment of liability where the provisions of s 1041M are applicable. 1575 The cases involving State legislation such as Reinhold and Godfrey Spowers take a different approach, but that is because of the significant textual and contextual differences in the apportionment provisions of that legislation from that found in the Corporations Act, the ASIC Act and other Commonwealth legislation. 1576 It is of assistance to consider the proportionate liability regimes under the ASIC Act as well as the Competition and Consumer Act. As we will explain, they have adopted, in substance, the same framework, although with some structural differences, as that found in the Corporations Act. 1577 The proportionate liability provisions under Subdiv GA in Pt 2, Div 2 of the ASIC Act apply to actions for damages made under s 12GF for economic loss or damage to property, which covers conduct of a wide range, the subject of discrete sections (Subdiv C, ss 12CA to 12CC and Subdiv D, ss 12DA to 12DN): s 12GP of the ASIC Act. 1578 However, as under the Corporations Act, the proportionate liability provisions are confined under s 12GP to claims referrable to conduct done in contravention of the general misleading and deceptive conduct provision - s 12DA. Contravention of s 12DA, unlike contravention of other provisions in Subdivs C and D, does not require any unconscionability, and is neither an offence nor capable of attracting the imposition of pecuniary penalties: ss 12GB and 12GBA of the ASIC Act. 1579 Such is the same in relation to the Competition and Consumer Act, which provides for the application of proportionate liability under Pt VIA, s 87CB to claims for damages under s 236 of the Australian Consumer Law (ACL). Section 236 provides that a claimant may recover damages if he or she has suffered loss or damage because of conduct in contravention of a provision of Ch 2 or 3 of the ACL, which covers a wide range of conduct. 1580 However, again, as under the Corporations Act, the proportionate liability provisions are confined under s 87CB to claims referrable to conduct in contravention of but one provision - here, s 18 of the ACL, which again is the general misleading and deceptive conduct provision. This provision, unlike the majority of the other provisions in Chs 2 and 3 (other exceptions being, for example, ss 85, 96(2), 132A), is neither capable of attracting the imposition of a pecuniary penalty under s 224(1) for contravention, nor requires proof of the unconscionability of the conduct to establish contravention. While offences are dealt with in a separate chapter, s 225 contemplates that conduct which may attract a pecuniary penalty under s 224(1) may also constitute an offence and prevents "double punishment" of such conduct. The general misleading and deceptive conduct provision (s 18) is not included in s 224(1), and is thus distinguished from conduct marked by the statute as worthy of punishment. 1581 Section 87CC of the Competition and Consumer Act and s 12GQ of the ASIC Act are also very similar to s 1041M of the Corporations Act, and their inclusion is consistent with an approach excluding deliberate wrongdoing or unconscionable behaviour from the benefit of the proportionate liability regime. Under s 87CC and s 12GQ, concurrent wrongdoers who intended to cause the economic loss or damage to property or who fraudulently caused the loss or damage are excluded from the proportionate liability provisions. 1582 Provision for damages under s 12GF of the ASIC Act is also similar to the Corporations Act in that s 12GF, as with s 1041I of the Corporations Act, provides that damages are available for contravention of a range of provisions, but also contains subs (1B) dealing with contributory negligence, in which it is stipulated that damages for economic loss or damage to property caused by conduct in contravention of s 12DA (the generic misleading and deceptive conduct provision) are to be reduced to the extent the court thinks just and equitable having regard to the claimant's share in the responsibility. 1583 Section 137B of the Competition and Consumer Act provides for a reduction in the amount of damages recoverable in circumstances of contributory negligence where a claim is made under s 236(1) of the ACL in relation to economic loss or damage to property as a result of the defendant's conduct in contravention of s 18 of the ACL. 1584 Nothing stated by Middleton J in Dartberg is contrary to the views we have expressed as to the meaning and effect of the proportionate liability provisions in the Corporations Act. Indeed, when referring to these in passing at 456-457 [18]-[19] his Honour appears to have accepted, as we do, that the regime applies to causes of action pleaded. This gives meaning to the words "claim for damages made" found in s 1041L(1). This is to be distinguished from his Honour's analysis of Pt VIAA of the Wrongs Act, which was relevantly involved. As was observed by Middleton J at 458 [29]-[31]: [29] As the respondents observed, in drafting the provisions of Pt VIAA of the Wrongs Act, the legislature deliberately chose to define "apportionable claim" by reference to an action for damages arising from a failure to take reasonable care. The provisions do not require that the claim itself be a claim in negligence or for a breach of duty - it only requires that the claim arise from a failure to take reasonable care. The expressions "arising from" or "arising out of" are of wide import - see the discussion in Stephenson A, "Proportional Liability in Australia - The Death of Certainty in Risk Allocation in Contract" (2005) 22(1) ICLR 64 at 71-73, and generally McDonald B, "Proportionate Liability in Australia: the Devil in the Detail" (2005) 26(1) ABR 29. [30] In my view, Pt IVAA could apply in the circumstances of this proceeding according to its own terms. Where a claim brought by an applicant does not have as one of its necessary elements any allegation of failing to take reasonable care, an additional enquiry into the failure to take reasonable care may become relevant in the course of a trial to determine the application of Pt IVAA. Even though the claims in this proceeding themselves do not rely upon any plea of negligence or a "failure to take reasonable care" in a strict sense, a failure to take reasonable care may form part of the allegations or the evidence that is tendered in the proceedings. At the end of the trial, after hearing all the evidence, it may be found that Pt IVAA applies. [31] In these circumstances, where a respondent desires to rely upon Pt IVAA of the Wrongs Act, it will need to plead and prove each of the statutory elements, including the failure to take reasonable care. In a proceeding where the applicant does not rely upon any such failure, then the need for a particularised plea by a respondent may be particularly important for the proper case management of the proceedings: see eg Ucak v Avante Developments Pty Ltd [2007] NSWSC 367 at [41]. It would be desirable at an early stage of proceedings for a respondent to put forward the facts upon which it relies in support of the allocation of responsibility it contends should be ordered. If a respondent calls in aid the benefit of the limitation on liability provided for in Pt IVAA of the Wrongs Act, then the respondent has the onus of pleading and proving the required elements. The court, after hearing all the evidence, will then need to determine, as a matter of fact, whether the relevant claim brought by the applicant is a claim arising from a failure to take reasonable care. 1585 These observations concerning the Wrongs Act have no application to the relevant provisions of the Corporations Act or the other Commonwealth legislation we have considered. 1586 Finkelstein J, correctly in our view, when considering the proportionate liability scheme under Pt VIA of the then TPA in BHPB Freight Pty Ltd v Cosco Oceania Chartering Pty Ltd (No 2) [2008] FCA 1656, accepted that an "apportionable claim" was limited to one brought for damages pursuant to s 82 TPA for a contravention of s 52. This reflects the confined language of s 87CB(1) of the TPA in the same vein as s 1041L of the Corporations Act limits an apportionable claim to one made under s 1041I for conduct in contravention of s 1041H. 1587 Likewise, Lander J in Selig (at 445 [1045]) concluded in relation to s 1041I(1B) (the contributory negligence provision) that it had been deliberately drawn to only apply to a claim made under s 1041H and that the other sections, including s 1041E, for which s 1041I provides a statutory cause of action, had been deliberately omitted in a consideration of s 1041I(1B). We respectfully agree. His Honour, unsurprisingly, came to the same view concerning Div 2A. In that respect, he stated (at 452 [1084]) that this division only applies where there has been a contravention of s 1041H and has no application where the plaintiffs have succeeded on other statutory and common law causes of action. Again we agree. 1588 It follows that the primary judge erred in applying Reinhold. For the same reasons we do not consider that Godfrey Spowers assists the proper construction of s 1041L. 1589 Accordingly, in our opinion, the omission of s 1041E from the definition of apportionable claims in s 1041L reflects the legislature's intention that conduct prohibited by s 1041E, the making of a false or misleading statement or dissemination of information which the person knows or ought to have known is false or misleading, or otherwise does not care whether the statement or information is true or false, should be treated differently to conduct contravening s 1041H. Liability under s 1041H, as we have explained, may arise even where the conduct is innocent and there is no allegation that the defendant knew or ought to have known that the conduct it engaged in was misleading or deceptive. By contrast, s 1041E imposes a mental requirement of involving actual or constructive knowledge or recklessness. The legislature has deliberately excluded defendants whose conduct contravenes s 1041E from having the benefit of apportionment provided for by s 1041N. For the same reasons, the legislature also excluded contraventions of s 1041F and s 1041G from the definition of apportionable claims. 1590 It also follows, for the same reason, that only claims made under s 1041I in respect of conduct in contravention of s 1041H may be subject to the contributory negligence provisions under s 1041I(1B). Furthermore, as we mentioned at the outset, these conclusions apply, mutatis mutandis, to the relevant provisions of the ASIC Act.

3.6.1 What facts established contraventions of s 1041E and s 1041H 1591 The primary judge expressly accepted that the proportionate liability provisions in ss 1041L-1041S do not apply to a finding of conduct done in contravention of s 1041E: J[2124] and J[3485]. However, at J[3485] her Honour was persuaded by LGFS' submission that the s 1041E claims arose from the same facts as the contraventions of s 1041H which are apportionable. LGFS relied on what Barrett J had said in Reinhold to suggest that because the s 1041E cause of action "arises from the same facts and relates to the same loss as the s 1041H cause of action" then it too is apportionable. This same path of reasoning was followed in relation to the findings of contravention of s 1041E and s 1041H as against each of ABN Amro and S&P. In so doing her Honour was led into error. 1592 It is not correct to say that the s 1041E claims arose from the same facts as the contraventions of s 1041H. The latter claims, as we have explained, do not require proof of the mental elements which are the subject of s 1041E namely, that the person (defendant) when they made the statement or disseminated the information either did not care whether the statement or information was true or false, or alternatively, the person knew or ought reasonably to have known that the statement or information was false in a material particular or was materially misleading. Those additional facts were pleaded by the PA Councils in their statement of claim as against the cross-respondents, as we will shortly explain. 1593 In the same vein, use of language such as "arises from the same facts" is not apt in the present case. It no doubt emanated from the language of s 34(1)(a) of the Civil Liability Act - "claim … in an action for damages…arising from a failure to take reasonable care …". However, for reasons we have explained, the language of s 1041L and its statutory context are materially distinguishable from the Civil Liability Act which was the subject of the decision in Reinhold. 1594 The facts required to be established to make out a breach of s 1041H may form part of those necessary to prove a claim under s 1041E. However, to make good a claim in respect of conduct done in contravention of s 1041H it would not be necessary to plead or to prove that the statement or information was "false in a material particular" or "materially misleading" or that when that person made the statement or disseminated the information they did not care whether the statement or information was true or false or that they knew or ought reasonably to have known that the statement or information was false in a material particular or is materially misleading: s 1041E. In other words, to make out a contravention of s 1041H will ordinarily require fewer facts to be established than in a case founded on contravention of s 1041E and such was the case here. 1595 Section 1041L identifies what is an apportionable claim. Such a claim as we have observed is one "made under section 1041I" for loss or damage "caused by conduct that was done in a contravention of section 1041H". It is important then to see just what claims were made by the PA Councils as against each of LGFS, S&P and ABN Amro. 1596 This requires consideration as to the way the PA Councils pleaded their cases against each of LGFS, S&P and ABN Amro. 1597 At statement of claim (SOC) [93]-[94] there are rolled up allegations of conduct by LGFS in contravention of ss 1041E and 1041H of the Corporations Act as well as s 12DA of the ASIC Act. The material facts pleaded with particulars alleged, again in a rolled up fashion, that LGFS made statements that were false in a material particular and materially misleading, for example SOC [94.5], and that LGFS knew or should have known certain things. 1598 However, at SOC [94B] the allegations concerning each of the pleaded misrepresentations are expressed in the language of s 1041E and said to be in contravention of only that provision. Section 1041H is not there pleaded. 1599 In the alternative at SOC [95] there is pleaded certain disclosure failures on the part of LGFS which it is alleged LGFS must have known were relevant to the PA Councils' assessment of the investment. This was said to be in contravention of s 1041H. Of course, there was no need to prove such alleged knowledge to make out a contravention of s 1041H. Proof of the failure to disclose would be enough. 1600 The same allegations were alleged to be in contravention of s 1041E using the language of that provision. Those allegations were irrelevant to a case founded on conduct in contravention of s 1041H. 1601 The separation of the facts pleaded as against S&P is clearer. At SOC [121], broadly, it is alleged that S&P engaged in conduct in contravention of s 12DA of the ASIC Act and s 1041H of the Corporations Act by communicating to the PA Councils that the Rembrandt notes were AAA rated. 1602 At SOC [122] the very same allegations of fact are made in support of the allegations of contravention of s 1041E but then additionally, relevantly, it is pleaded that the circumstances set out under SOC [113] constituted the making of a statement and/or the disseminating of information that was materially misleading and it was likely to induce persons in Australia to apply for or acquire Rembrandt notes in circumstances where S&P ought reasonably to have known that the statement or information was materially misleading. These additions were necessary factual allegations for establishing a contravention of s 1041E but not, as the pleader understood, necessary for the case, pleaded at SOC [121], based on a contravention of s 1041H. 1603 The very same distinction as between s 12DA of the ASIC Act and s 1041H of the Corporations Act on the one hand and s 1041E of the Corporations Act on the other, is drawn in the pleading against ABN Amro at SOC [134]-[135]. 1604 It is convenient then to consider the relevant findings of contravention of provisions of the Corporations Act in relation to each of LGFS, S&P and ABN Amro and how these respond to the construction we have given to the proportionate liability provisions. 1605 LGFS was found to have contravened s 1041H and, to a limited extent, also s 1041E. The latter contravention was causative, even if not solely, of the PA Councils acquiring the CPDOs. As the primary judge stated the statements made to Corowa, Orange, Moree, Oberon, Deniliquin, Murray, Cooma, Narromine and Ryde were false in a material particular and materially misleading and likely to induce those Councils into acquiring the product and were intended by LGFS to do so: J[2238]. Those findings by her Honour were not necessary to make out the s 1041H contravention. However, the reasons for judgment do not distinguish the facts in this way. 1606 The findings against S&P and ABN Amro in favour of the PA Councils was that their conduct contravened s 1041E as well as s 1041H: J[3339]. Again, the findings supporting the contraventions of each provision were not the subject of discrete findings by the primary judge. 1607 However, findings of contravention in relation to s 1041E and s 1041H should properly be tied to the facts relied on in the pleadings. This is necessary in order to establish just what conduct was done in contravention of each section. This has implications for a proper assessment of proportionate liability should it arise. Once this is done, it becomes apparent that the facts sustaining the contravention of each provision could not be the same.

3.6.2 Joint and several or apportioned damages awards 1608 To the extent that each of LGFS, ABN Amro and S&P were concurrent wrongdoers in the claims for economic loss suffered by the PA Councils caused by their respective conduct in contravention of s 1041H, those fell to be treated as apportionable claims and to be determined in accordance with the provisions of Div 2A: s 1041N(2)(a). To the extent that they were each found liable for the same economic loss caused by their conduct in contravention of s 1041E these were not apportionable claims. Under s 1041N(2) the former are to be determined in accordance with the provisions of Div 2A and the non-apportionable claims are to be determined in accordance with the legal rules that, apart from Div 2A, are relevant. 1609 That being so the PA Councils in relation to their claims for damages for economic loss would be entitled to joint and several judgments against each cross-respondent in respect of the damages flowing from their conduct in contravention of s 1041E and for judgments involving apportionment, as provided for in s 1041N(1), in respect of the conduct done in contravention of s 1041H. The contraventions of s 1041E cannot be ignored, which, in effect, is what the primary judge did. 1610 Whilst the damages assessed in respect of each cause of action would be in the same amount, by reason of the proportionate liability provisions and to that extent, the damages remedies for these two separate causes of action brought pursuant to s 1041I are mutually inconsistent. This entitles the PA Councils to elect the remedy they want. Self-evidently, by bringing this cross-appeal they have made their election clear: that available for making out their cause of action based in the contraventions of s 1041E. 1611 Accordingly, ABN Amro and S&P will each be liable for 100% of the PA Councils' losses for the conduct they engaged in in contravention of s 1041E. LGFS will be liable for 100% of the losses caused to Cooma, Corowa, Deniliquin, Moree, Murray, Narromine, Oberon, Orange and Ryde to whom it represented that the Rembrandt notes were tailored for local councils, that being the conduct that the primary judge found was a contravention of s 1041E.

PRE-JUDGMENT INTEREST 1612 These issues were addressed by the primary judge in a separate judgment dated 1 March 2013 (the March Judgment): [2013] FCA 144. The primary judge found that the Councils and LGFS were entitled to pre-judgment interest on their assessed damages at the rate of 4% above the cash rate last published by the Reserve Bank of Australia as set out in Practice Note CM16 - Pre-judgment Interest. 1613 ABN Amro, S&P and LGFS appealed these findings. ABN abandoned its Appeal Grounds: ABN Appeal Grounds Matrix Rows 96-98B. S&P maintained its Appeal Grounds: S&P Appeal Grounds Matrix Rows 57, 57A and 57B. However, these Appeal Grounds do not arise because they were consequential on S&P succeeding in its other Appeal Grounds. None of those Appeal Grounds were upheld. 1614 LGFS' Appeal Ground was consequential on the Appeal Grounds of ABN Amro and S&P succeeding: LGFS Appeal Grounds Matrix Row 121. ABN Amro abandoned its relevant Appeal Grounds and S&P's Appeal Grounds were dismissed. This Appeal Ground therefore fails.

COSTS 1615 In the March Judgment, the primary judge made various costs orders. ABN Amro and S&P appealed against some of those orders. 1616 ABN Amro appealed the finding that LGFS' costs of defending StateCover's claims were recoverable against ABN Amro: ABN Amro Appeal Grounds Matrix Row 98C. This Appeal Ground was consequential on ABN Amro succeeding in its Appeal Grounds in the StateCover Proceedings in relation to equitable contribution. Those Appeal Grounds failed. Therefore, this Appeal Ground also fails. 1617 S&P appealed the findings that it was liable to pay the Councils' costs and LGFS' costs: S&P Appeal Grounds Matrix Rows 58 and 58A. Again, these Appeal Grounds do not arise because they were consequential on S&P succeeding in its other Appeal Grounds, which have been dismissed.

PART 14: INSURANCE ISSUES - APPEALS BY AHAC AGAINST LGFS

1. INTRODUCTION 1618 AHAC relevantly insured LGFS for the period 30 June 2007 to 30 June 2008 under a claims notified contract of insurance entered into on 31 August 2007 (Insurance Contract): J[3537]. AHAC denied liability under the Insurance Contract. 1619 The policyholder under the Insurance Contract is FuturePlus. The "Insured", relevantly, is defined to mean the policyholder and the policyholder's subsidiaries existing at the inception of the policy period, noted under Endorsement Number 12 as including LGFS. 1620 LGFS in its cross-claim against AHAC alleged that LGFS was entitled to indemnity from AHAC in respect of LGFS' liability to StateCover and the Councils under the Insurance Contract. AHAC had denied cover to LGFS primarily on the basis of it failing to comply with its alleged duty of disclosure under s 21 of the Insurance Contracts Act 1984 (Cth) (the ICA). AHAC contended that before entry into the Insurance Contract LGFS knew that its AFSL did not permit LGFS to deal in or give advice in respect of derivatives, that the Rembrandt notes were or might have been derivatives, and that no compliance procedures of LGFS or FuturePlus had been invoked to attempt to determine whether the Rembrandt notes were or might have been derivatives. AHAC had contended that LGFS knew that these matters were relevant to the decision of AHAC whether to accept the insurance risk in relation to LGFS and that LGFS did not disclose them. Alternatively, AHAC's case was that a reasonable person in the circumstances could be expected to know that the matters were so relevant. 1621 The primary judge held AHAC liable to indemnify LGFS. 1622 The issues raised by AHAC's appeal are as follows. 1623 First, AHAC claims that its liability was reduced to nil by s 28 of the ICA because of a non-disclosure by LGFS, in breach of the duty created by s 21 of the ICA: AHAC Appeal Grounds Matrix Rows 1-6. 1624 Second, AHAC relies on the exclusions in Endorsements 16 and 17 and, in relation to StateCover, cl 3.3 of the Insurance Contract. The primary judge held none of the exclusions applied. 1625 Third, AHAC contends that the settlement of StateCover's claim against LGFS, for which the primary judge held AHAC was liable to indemnify LGFS, was not reasonable. 1626 However, there are two threshold issues which arise on LGFS' notice of contention. LGFS contends that it did not owe any such duty of disclosure. LGFS also contends that even if there was a duty, the non-disclosure case fails at the outset if its AFSL authorised it to sell and advise in relation to the Rembrandt notes, which turns on whether the Rembrandt notes were "debentures" as defined by s 9 of the Corporations Act. LGFS contends that the primary judge should have held that the Rembrandt notes were "debentures". We will deal with these two issues first.

2.1 Did LGFS owe the s 21 of the ICA duty of disclosure?: LGFS Appeal Grounds Matrix Row 125 and AHAC Appeal Grounds Matrix Row 24 1627 LGFS had argued successfully that it was not a party to the Insurance Contract: J[3614]-J[3620]. AHAC submits that this argument was not open to LGFS because it had not been raised by the LGFS pleading, and that the primary judge should not have permitted it to be advanced. We agree with the reasons of the primary judge as to this pleading point set out at J[3614]-J[3615]. There is no need to repeat these. 1628 AHAC submits that LGFS was a "party" to the Insurance Contract because FuturePlus acted as its agent. We do not agree. The evidence does not support a conclusion that FuturePlus was acting in the negotiation for, and entry into, the Insurance Contract as agent for LGFS or any of its other subsidiaries. Rather, it acted as principal and was the contracting party. By definition, under the Insurance Contract, LGFS was one of the "Insured". It thus was a beneficiary under the Insurance Contract but contractually so, not as a party by operation of the law of agency. Additionally, although not a party, it had, as we will explain, a right to recovery under the Insurance Contract, pursuant to s 48 of the ICA. 1629 Section 48 of the ICA provides that a person who is not a party to the contract but is specified or referred to in the contract, relevantly here, by name, as a person to whom the insurance cover under the contract extends, has a right of recovery under the contract. Endorsement Number 12 is in terms that "[i]t is hereby noted and agreed that the following Subsidiaries shall be included in this policy". Only FuturePlus completed a proposal form for the insurance cover. The Insurance Contract was made between AHAC and FuturePlus. They are the "parties" to the Insurance Contract. That, by definition, LGFS is an "Insured Entity" and therefore one of the "Insured" does not affect this result. A party to a contract of insurance, depending on the particular kind of policy, need not necessarily be an insured person under it. Likewise an insured person need not be a party, as is the case here in relation to LGFS. 1630 Nonetheless, the primary judge held that LGFS owed a duty of disclosure to AHAC under s 21 of the ICA by virtue of ss 48(2) and (3) of that Act: J[3620]. LGFS challenges this conclusion. It submits that the term "insured" in s 21 means an insured who is a party to the contract, not an insured who is not a party to the contract, and that the s 21 duty of disclosure did not extend to it, a conclusion unaffected by s 48(3) of the ICA. LGFS relies on the reasons of Clarke JA (Meagher JA agreeing) in CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25 at 46. Accordingly, LGFS submits that it did not owe a duty of disclosure, and that the non-disclosure case fails as the statutory basis is not enlivened.

2.2 Discussion 1631 Section 11 of the ICA provides that: insured and insurer include a proposed insured and a proposed insurer, respectively. 1632 Section 21 of the ICA relevantly for this purpose provides: The insured's duty of disclosure (1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: (a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant. 1633 Section 48 provides: Entitlement of named persons to claim (1) Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the person's loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract. (2) Subject to the contract, a person who has such a right: (a) has, in relation to the person's claim, the same obligations to the insurer as the person would have if the person were the insured; and (b) may discharge the insured's obligations in relation to the loss. (3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured. 1634 Whilst obiter, we, nonetheless, respectfully agree with the general observations of Clarke JA in Grey at 45-46 that the ICA in using the words "insurer" and "insured" is speaking to the parties to the contract and that there is a clear dichotomy between a party and a person who is not a party but who is entitled to benefit under the policy. That said, it needs to be borne in mind that "insured" and "insurer" includes, by definition, a "proposed insured" and a "proposed insurer". Thus, "insured" under s 21, which provides for the pre-contractual duty of disclosure, has the extended meaning of "proposed insured". The "insured" in s 48 is the insured who is the party to the contract. 1635 This dichotomy is particularly evident when s 48 of the ICA is considered, where the distinction is drawn between, on the one hand, a "person who is not a party to a contract" who is, relevantly, named as a person to whom the insurance cover provided by the contract extends and, on the other hand, the "insured". . 1636 We do not think that the use of the word "insured" in s 21 of the ICA rather than "party to the contract of insurance" affects this conclusion. This is so because when the duty of disclosure under s 21 arises and endures there are no parties to a contract of insurance. No such contract has been entered into. In s 21 "the insured" having the duty of disclosure "before the relevant contract of insurance is entered into" means, as defined, the "proposed insured" who is proposing to enter into a contract of insurance with the insurer, meaning, as defined, the "proposed insurer". This description fits FuturePlus as the insured but not LGFS. 1637 There would be no need for Endorsement Number 12 if LGFS and the other subsidiaries were parties to the Insurance Contract. The agreement noted in the preface to Endorsement Number 12 that the subsidiaries "shall be included in this policy" is an agreement reached between AHAC and FuturePlus. The expression "shall be included in this policy" meets the statutory description in s 48(1) of the ICA of, relevantly, a person who is not a party to the contract specified by name as a person to whom the insurance cover provided by the contract extends. 1638 It matters not that LGFS was, by definition, under the Insurance Contract, one of the "insured". We are concerned with the meaning of "insured" on the proper construction of the ICA, not the Insurance Contract. 1639 Section 48(2) imposes on the person who is not a party to the contract, but who has a right of recovery, the same obligations to the insurer as the person would have if the person were the insured. In a similar vein, under s 48(3) the insurer has the same defences to an action under s 48 as the insurer would have had in an action by the insured. 1640 It was upon this basis that the primary judge concluded that LGFS was placed in the same position as FuturePlus and subject to the same duties of disclosure as FuturePlus. This was an implicit reference to the s 21 duties of disclosure. 1641 We have reached a different conclusion. Section 48(2) confines the person's obligations to those which are "in relation to the person's claim". We do not regard this as referrable to the pre-contractual obligations of FuturePlus under s 21 of the ICA. 1642 The distinction has important ramifications, not only in relation to identifying who it is that owes the s 21 duty of disclosure, but also in identifying the remedies available to the insurer under the ICA for non-disclosure. The insurer has no other remedies outside of the ICA in relation to a failure by the insured to disclose a matter to the insurer before the contract was entered into: s 33. 1643 We would adopt, respectfully, what Clarke JA stated in Grey at 46: Accordingly where s 21 speaks of the duty of an insured to disclose the matters set out in s 21(1) it is talking about the party who proposes to enter into a contract of insurance in the context of those provisions in the Act which spell out the consequences of the failure by a person who has entered into the contract to comply with that duty. A similar approach is taken in those sections which deal with misrepresentation. The remedies offered to an insurer where an insured fails to comply with the duty of disclosure, or makes a misrepresentation before entering into the contract, are contained in s 28. Broadly, if the failure was fraudulent or the misrepresentation was made fraudulently the insurer may avoid the contract, that is, avoid it from its inception (s 28(2); s 11(1)). If the failure or misrepresentation was not fraudulent there is no right to avoid the contract but the liability of the insurer may be reduced under s 28(3). Further s 31 empowers the court in the circumstances set out there to disregard the avoidance but only in "proceedings by the insured", and s 33 provides that Div 3 of Pt IV (ss 28-33) is, in effect, a code. What is clear from these provisions is that the obligation to disclose, and not to make misrepresentations, is cast upon a person intending to enter into a contract of insurance and the consequences of non-compliance are visited only upon persons who actually enter into such a contract. What is of greater importance is the fact that there is no obligation to disclose, or not misrepresent, before a contract is entered into, imposed upon a person entitled to recover the amount of a loss pursuant to s 48(1). Nothing in s 28 provides that anything he or she does, or fails to do, before the contract is concluded in any way disentitles him or her from successfully maintaining a claim. 1644 We do not think it was intended that where a non-party who is, under the contract, defined as one of the insured failed, fraudulently, to comply with the duty of disclosure under s 21, this could result in the avoidance of the contract between the insurer and the innocent insured, the other party to the contract. 1645 Nothing in Advance (NSW) Insurance Agencies Pty Limited v Matthews (1989) 166 CLR 606 at 616 detracts from these conclusions. We agree with the observation of the primary judge at J[3574] that Matthews relates to a question of duty of disclosure where there is more than one insured who is a party to the contract of insurance and not, as here, an insured who is not a party to the contract. 1646 AHAC contends that its construction of s 21 and s 48 removes the injustice which would exist if an entity which intended to be covered by a contract of insurance and knew of the existence of a duty of disclosure was relieved of the consequence of non-disclosure because, on a basis which might properly be described as technical, it did not become a party to the contract of insurance. 1647 We do not consider that this follows. In this case, AHAC, before entering into the Insurance Contract, knew which entities were to be covered by it including LGFS which it named as a subsidiary in Endorsement Number 12. It chose to deal only with FuturePlus as the putative policyholder or, in the language of the ICA, the "proposed insured". It could easily have required that all of the subsidiaries, including LGFS, which were intended to be covered become parties to the contract and therefore liable to the s 21 disclosure regime. It did not do so. 1648 Alternatively, it could have advanced a case before the primary judge that FuturePlus failed in its obligations to make full s 21 disclosure in relation, relevantly, to LGFS. No such case was advanced by AHAC. 1649 AHAC contends that its construction of s 48(3) would not have the effect of imposing an obligation of disclosure on entities which had no opportunity to consider the question of disclosure prior to the formation of the contract of insurance. This, it submits, is so because the duty of disclosure under s 21 is subject to the giving of a warning by the insurer as required by s 22. This, too, does not follow. The s 22 obligation required AHAC to give the notice to FuturePlus, the "insured" for the purposes of that provision, consistent with its meaning in ss 21, 28, and 48, amongst others. 1650 Section 22 imposes an obligation on the insurer to inform the insured as to the general nature and effect of the duty of disclosure. Failure to give such notice deprives the insurer of exercising a right in respect of a failure to comply with the duty of disclosure, unless that failure was fraudulent. 1651 Those provisions are directed as between the parties to the contract and not, as here, LGFS, which as the primary judge correctly identified, draws its rights to recovery from s 48. 1652 Accordingly, for these reasons, no duty under s 21 was imposed on LGFS.

2.3 Were the Rembrandt notes a debenture?: LGFS Appeal Grounds Matrix Row 123 and AHAC Appeal Grounds Matrix Row 23 1653 This issue was considered in Part 4, Section 1.1.4.4 above and is dismissed for those reasons.

3.1 Did LGFS breach its s 21 duty of disclosure?: AHAC Appeal Grounds Matrix Rows 1, 2 and 3 1654 AHAC contends that, assuming that contrary to our finding there was a duty under s 121, the primary judge erred in finding that LGFS did not breach its duty of disclosure pursuant to s 21(1) of the ICA: J[3621]-J[3630]. Section 21 of the ICA is set out at [1632] above. 1655 LGFS' AFLSs did not permit LGFS to deal in, including selling or giving advice in respect of, derivatives. The primary judge found that LGFS did advise councils to purchase the Rembrandt notes: J[2147]. Her Honour also found that LGFS dealt in the Rembrandt notes: J[2132]. 1656 If the Rembrandt notes were derivatives and LGFS both dealt in them and advised in relation to them, it was in breach of its AFSL. The advice and the dealings took place before the entry into the Insurance Contract. 1657 AHAC did not allege directly that LGFS knew that it was not authorised to deal in or advise in relation to the Rembrandt notes. AHAC alleged that the "matter" under s 21(1) of the ICA which was known to LGFS and not disclosed comprised the following three alternatives. In each case one of the matters said to be known was that its AFSL did not permit it to advise about, or deal in, derivatives. First, that the Rembrandt notes were "derivatives". Second, that by reason of its knowledge of the terms and characteristics of the Rembrandt notes, that they "might well" be "derivatives". Third, that the effect of the terms of the Rembrandt notes was that their value varied by reference to variations in the value of the underlying credit default swap indices: J[3552]. Thus, on AHAC's case, as the primary judge observed at J[3553], with respect to each alternative the question was whether the combination of the existence of the licence limitation and the existence of the other matter were matters relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. 1658 The primary judge found that LGFS knew that its AFSL did not permit it to deal in derivatives. However, as her Honour noted at J[3622], the starting point in this context was that the AFSLs authorised LGFS to deal in securities which included debentures. Thus the relevant issue for LGFS was always whether it was dealing in securities. If it was, then as the primary judge found, LGFS knew that its activities were authorised by its AFSL. Her Honour then concluded, correctly in our opinion, that LGFS' concern was to ensure that it dealt in securities so it would not have conceived of its responsibility as ensuring that the products it dealt with were not derivatives because, unless they were securities or another nominated exception, many products would satisfy the basic characteristics of a derivative. 1659 LGFS submits that there is no connection between each "matter" alleged to have been known and the terms of LGFS' AFSLs, which permit advice and dealings in "securities", because whether an instrument has the characteristics of a "derivative" says nothing about whether it is a "security". This is so because, as the primary judge correctly observed at J[3622], the AFSL authorised LGFS to deal in securities which included debentures and under the Corporations Act securities are an exception to the meaning of derivatives. We accept this submission. 1660 The primary judge found that Mr Hilder and Mr Tischler, the relevant minds of LGFS, did not know that the Rembrandt notes were derivatives and did not suspect that they were derivatives: J[3621]. The latter finding appears to be in response to the case of AHAC that Mr Hilder and Mr Tischler knew that the Rembrandt notes may well be derivatives because they had the characteristics of derivatives. 1661 In relation to the issue whether LGFS had breached s 912A(1) of the Corporations Act by failing to maintain necessary competence, her Honour said the following at J[2947]: … It is apparent from the evidence that LGFS simply never turned its mind to the question whether the product was a derivative or not when there were numerous indicators that should have alerted LGFS to this possibility. LGFS knew that the value of the Rembrandt notes varied by reference to the value of the underlying credit default swap indices which, of itself, should have raised the question of the legal character of the product in LGFS's mind, given that it knew that its AFSL did not authorise it to advise about or deal in derivatives. So too for the fact that LGFS knew that credit default swaps are themselves derivatives and that the product involved credit default swaps, albeit notional ones. Mr Tischler described the product as involving exposure to "credit derivatives" yet said he never turned his mind to the prospect that such a product was probably also a derivative and thus outside the scope of LGFS's AFSL. On these grounds it is difficult not to conclude that LGFS did not maintain the competence required to provide the financial services covered by its licence because it did not have the competence to realise when there was a real and obvious question about whether a product was covered by its licence at all. 1662 In a different context, her Honour said at J[3531]: Apart from these considerations I do not accept that LGFS knew that it was acting in breach of its AFSL when it marketed and sold the notes to the councils. This issue is resolved in the context of the dispute between LGFS and AHAC in LGFS's favour. LGFS ought to have known this to be so but it did not in fact know the Rembrandt CPDO notes were a derivative. 1663 Her Honour rejected the AHAC case regarding non-disclosure insofar as it concerned the actual knowledge of LGFS: J[3622]-J[3629]. AHAC submits that there are a number of flaws both in the fact-finding and regarding the approach her Honour took. 1664 AHAC's submissions on this point attempt to discredit the evidence of both Mr Tischler and Mr Hilder to a significant extent based on what AHAC contends they knew, should have known and what they should have done in assessing whether the Rembrandt notes were derivatives. However it was that each of them reasoned the question, even accepting that it was only Mr Hilder who, in terms, thought the Rembrandt notes were securities, the fact is each gave evidence that they did not consider that the Rembrandt notes were derivatives. Derivative here is used in the sense that it was not a security. 1665 The findings and observations of the primary judge concerning the attack made upon the credit of each of Mr Tischler and Mr Hilder are expressed in strong terms. Her Honour found as a fact "the proposition that LGFS knew that the Rembrandt notes were derivatives or suspected they were but deliberately refrained from finding out [is] fanciful": J[3621]. This finding refers inclusively to the Rembrandt 2006-3 notes. The third alternative "matter" is but a subset of the second. In a similar vein, her Honour considered that the attacks on their credibility should be given "short shrift": J[3624]. Her Honour, in this respect, believed the evidence of Mr Hilder and Mr Tischler (at J[3621]-J[3622] and J[3624]-J[3628]), each of whom was cross-examined for a number of days. She had the well-known advantage of a trial judge and her finding is not "glaringly improbable": Fox v Percy at 128 [29], citing Brunskill v Sovereign Marine & General Insurance Co Ltd (1985) 62 ALR 53 at 57. 1666 AHAC's submissions attribute to LGFS conduct which it characterises as either deliberately or recklessly in breach of the Corporations Act, and to Mr Hilder and Mr Tischler at least reckless conduct during 2006 and dishonesty when giving evidence. Section 140(2) of the Evidence Act 1995 (Cth) applies. We accept LGFS' submission that, even without giving appropriate weight to the advantage of the primary judge, the evidence upon which AHAC relies falls well short of the quality of evidence required to establish such serious allegations. This is particularly so when regard is had not just to their evidence but the evidence as a whole. Other reasons apart, neither Mr Hilder nor Mr Tischler had any personal interest in the litigation. Mr Hilder was retired and had no ongoing connection to LGFS when giving evidence. 1667 Importantly, as the primary judge correctly observed at J[3628]: Moreover, as LGFS said, the characterisation of the product as not a debenture and thus not a security and thus a derivative in which LGFS was not authorised to deal is hardly a straightforward process, as the competing submissions of the parties and my reasons for concluding against LGFS on this issue disclose. 1668 That this was so seems to have been accepted by AHAC which made the submission that the resolution of the question whether the Rembrandt notes were a derivative or, alternatively, a debenture and therefore a security, involved complex legal questions. However, it then submitted that this runs counter to the argument accepted by the primary judge and not in favour of it. The first part of this submission accords with the finding of the primary judge. However, the second part does not. This is perhaps due to a misunderstanding on its part as to what it was that the primary judge in fact concluded at J[2947] and J[3531]. We do not apprehend her Honour to be stating that LGFS knew or ought to have known that, properly analysed, the Rembrandt notes were a derivative and not a debenture and therefore not a security and therefore outside LGFS' AFSLs. 1669 The reasons must be read as a whole. Her Honour, as we have said, observed how complex the resolution of those questions was. We understand her Honour to be saying no more, in the context of considering alleged breaches of s 912A(1) of the Corporations Act, than that LGFS ought to have known that the Rembrandt notes had certain characteristics of a derivative. The question is what flows from this? As her Honour correctly observed at J[3622] speaking of Mr Holder and Mr Tischler: … LGFS's concern was to ensure it dealt in securities so it would have conceived of its responsibility as ensuring that the products it dealt in were securities. It would not have conceived of its responsibility as ensuring that the products it dealt in were not derivatives because, unless they were securities or another nominated exception, many products would satisfy the basic characteristics of a derivative. (Emphasis added.) and then at J[3630] her Honour went on to say: … Having characteristics of a derivative …. did not indicate [that] the product was not a security. 1670 Her Honour's finding that LGFS breached, on competency grounds, s 912A(1) of the Corporations Act because those involved were not alert to the possibility that (upon detailed analysis) the notes possibly were derivatives must be seen in this light. 1671 In other words, Mr Hilder and Mr Tischler should have seen this possibility. This was no warrant for disbelieving their evidence as to what they knew concerning the Rembrandt notes. 1672 The term "known" in the phrase "every matter that is known to the insured" has its ordinary English language meaning: Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735 at 745 [37] (Davies AJA, Meagher JA agreeing). In s 21 of the ICA "knows" means considerably more than believes or suspects: Permanent Trustee Australia Limited v FAI General Insurance Company Limited (in liquidation) (2003) 214 CLR 514 at [30] (McHugh, Kirby and Callinan JJ). 1673 The primary judge rejected the allegation of actual knowledge of the matters alleged or even that LGFS had suspicions to that end, even assuming that suspicions may constitute a matter. 1674 AHAC's submissions have an underlying theme that the Rembrandt notes were derivatives, as though this were obvious and beyond doubt. The primary judge ultimately arrived at a conclusion that they were, but did not, as we have explained, consider this to be obvious or beyond doubt but rather as the product of her distillation of complex matters of fact and law. After detailed consideration, although, to some extent for different reasons, we have come to the same conclusion. However, this conclusion is neither obvious nor self-evident. 1675 We have given careful consideration to the many submissions of AHAC attacking the credibility of Mr Hilder and Mr Tischler, as well as the detailed and lengthy responsive submissions by LGFS on the evidence. These detailed countervailing contentions on the evidence were placed before the primary judge. Nothing put by AHAC demonstrates any of the findings were glaringly improbable or contrary to compelling inferences: Fox v Percy at 128 [29]. 1676 The core submissions are set out and reasoned at J[3621]-J[3630] and, contrary to AHAC's submissions, we find her Honour's reasons cogent and persuasive. We have considered these in detail and agree with her Honour's findings and the reasons for them. There is no need to rehearse them here. Her acceptance of the evidence of each of Mr Hilder and Mr Tischler is founded upon extremely strong grounds which are articulated in the trial judgment. There is no basis for interfering with those findings. We find no appealable error in respect of her findings.

3.2 LGFS' knowledge: AHAC Appeal Grounds Matrix Rows 3 and 4 1677 This ground argues that the primary judge erred in finding that a reasonable person in the circumstances of LGFS would not have known that the matters set out in (a) and (b) below were matters relevant to the decision of AHAC whether to accept the risk of insuring LGFS and, if so, on what terms. (a) that the AFSL of LGFS did not permit LGFS to advise about or deal in derivatives; and (b) the Rembrandt notes which had been sold by LGFS and about which LGFS advised may well be derivatives, because they had the characteristics of a derivative. 1678 AHAC's case about the knowledge of LGFS was based on LGFS' asserted knowledge that its AFSL did not permit it to deal in derivatives combined with asserted knowledge of three alternatives: that LGFS knew the Rembrandt notes were derivatives; or LGFS knew the Rembrandt notes may well be derivatives; or LGFS knew the characteristics of the Rembrandt notes which were characteristics of a derivative. AHAC Appeal Grounds Matrix Row 4 also relates to each of these three alternatives, but with the provisions of s 21(1)(b) of the ICA in mind. 1679 It is important to appreciate just what knowledge it is that s 21(1)(b) concerns. Davies AJA (Meagher JA agreeing) explained this in Beard at 745 [38]-[39]. [38] Section 21(1)(a) of the Act looks to two aspects of the knowledge of the insured: first, knowledge of a matter and, secondly, knowledge that the matter is relevant to the decision of the insurer whether to accept the risk. … [39] If the insured did not know that the matter was relevant to the decision of the insurer whether to accept the risk, then par (b) comes into operation. It applies when there was a matter known to the insured and a reasonable person in the circumstances could have been expected to know that the matter was so relevant. 1680 This, we apprehend, is also the approach adopted by Einstein J in Green in his capacity as liquidator of Arimco Mining Pty Ltd (in liq) v CGU Insurance Ltd (2008) 67 ACSR 398 at 421 [91]. Likewise, Young J in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Insurance Cases ¶60-813 stated at 74,998: Although the language of sec. 21 is awkward, in my view it means that if a reasonable person in the circumstances could be expected to know that a matter is relevant it must be disclosed and whether that be the case or not, if the insured actually knows the relevant thing, that is enough. However, the insured must have actual knowledge of the thing, the mere fact that he ought in the ordinary course of business to have known is insufficient. In this respect I agree with Tarr on Australian Insurance Law at p 85. 1681 In the same vein, Rolfe J stated in Thompson v Government Insurance Office of New South Wales (Unreported, Supreme Court of New South Wales, Rolfe J, 15 June 1994) at 63-64: The duty of disclosure extends to every matter specified in subs (a) and subs (b) provided it is a matter known to the insured. To fall within subs (a) the matter must be that which the insured knows to be a matter relevant to the decision of the insurer. … However a different test is propounded in subs (b). One moves from actual knowledge, save that the matter must still be known to the insured, to a deemed knowledge in the insured, as a reasonable person in the circumstances. 1682 Lastly, as Tadgell J explained it in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co Ltd (1991) 6 ANZ Insurance Cases ¶61-028 at 76,877: … one is concerned only with the existence of matters that were known to the insured before the contract of insurance was entered into, and not with matters of which he ought to have known. Those matters alone are to be disclosed that, being known to the insured at the relevant time, fall within para (a) or para (b) of s 21(1). 1683 Were it necessary it is also supported by the Second Reading Speech of the Insurance Contracts Bill 1984 which included: Clause 21 … clearly states that the insured's duty is only to disclose those facts which he knew, or which a reasonable person in the circumstances could be expected to have known, to be relevant to the insurer's assessment of the risk. Paragraphs 61-62 (Pt IV - Disclosures and Misrepresentations) of the Explanatory Memorandum to the Insurance Contracts Bill 1984 (Cth) are to like effect. 1684 Nothing in CGU Insurance Limited v Porthouse (2008) 235 CLR 103 affects this conclusion. 1685 Accordingly, the inquiry is not whether a reasonable person could be expected to know the "matter" even if the insured did not in fact know the matter. Rather, it is that when a matter is known to the insured, could a reasonable person, in the circumstances, be expected to know that the matter is relevant to the risk decision of the insurer? Thus, breach of s 21 is to be judged against the insured's knowledge of the matter and either their knowledge of its relevance to the decision of the insurer or against the knowledge of that relevance being imputed, employing the objective test of what in the circumstances a reasonable person could be expected to know. The latter deals with a situation where the insured's appreciation of the relevance of a known matter is not reasonable. 1686 In other words, applying this construction, s 21 is not breached by a failure to disclose a matter which is not actually known by the insured. 1687 The primary judge concluded that LGFS did not know the first two alternative matters relied upon: first, that the Rembrandt notes were derivatives and second, that, by reason of its knowledge of the terms and characteristics of the Rembrandt notes, they might well be derivatives. And as we have observed, the third alternative is but a subset of the second. 1688 Given these factual findings no such disclosure was required. LGFS was not required to disclose matters of which it had no knowledge. 1689 It was unnecessary for the primary judge to consider whether a reasonable person could have been expected to know the matters as distinct from the separate question of their relevance to the insurer's decision. 1690 Even if we are wrong as to the proper construction of s 21 in this respect, we agree with the conclusions of the primary judge that a reasonable person could not have been expected to know of the matters asserted by AHAC. 1691 We agree with the primary judge's reasoning at J[3630] that a reasonable person, in the circumstances as at August 2007, could not be expected to have known that the Rembrandt notes were not securities but derivatives in which LGFS was not, by its AFSL, authorised to deal, even assuming this were a matter relevant to the insurer's decision whether to accept the risk. 1692 That a reasonable person in the circumstances knew that the Rembrandt notes were "derivatives", or "may well be" "derivatives" or had the characteristics of a "derivative", was not of itself a fact that was relevant to the risk decision. The fact could be so relevant only if it informed the question of whether LGFS was licensed to deal in, or advise in relation to, the Rembrandt notes. The propositions repeatedly advanced by AHAC based on that fact, assuming it to be a fact, did not inform the risk. This is so because the question relevant to LGFS' AFSLs is whether the Rembrandt notes were "securities", not "derivatives". A reasonable person would have understood that the fact which informed the risk, and thus the fact relevant to AHAC's decision, was whether LGFS was licensed to deal in, or advise about, the Rembrandt notes or, perhaps, whether the Rembrandt notes were "securities". 1693 As to the third alternative, again, the fact that the value of the Rembrandt notes may fluctuate by reference to the underlying credit indices does not speak to the relevant risk, namely that LGFS had sold instruments it was not licensed to sell. A reasonable person in LGFS' position would have considered whether it was licensed to deal in the Rembrandt notes to be relevant, not the fact that the value of the Rembrandt notes may fluctuate by reference to the underlying credit indices. 1694 As her Honour stated, having the characteristics of a derivative, a matter upon which AHAC focussed, did not indicate that the product was not a security: the legal character of the product being obviously contestable. 1695 A reasonable financial adviser no doubt might conclude, whether by reference to their own consideration of the Rembrandt notes or with the benefit of specialist legal advice, that the Rembrandt notes were a derivative in the sense that they were not securities. However, it is at least equally likely that they might conclude that the Rembrandt notes were securities because they were debentures. 1696 We think it correct, as the primary judge said, concerning this legal character of the Rembrandt notes, that a reasonable person is not required always to be right, nor need they always obtain legal advice if there does not appear to be any need to do so. Nonetheless, if they had done so they may well have obtained an opinion that the Rembrandt notes were securities because they were debentures. This is not mere speculation. As it transpired LGFS post-contractually did seek an opinion from Mallesons Stephen Jaques who did give such an opinion that the Rembrandt notes were debentures and thus securities. The submission put to the primary judge, and repeated before us, that a reasonable person could be expected to have known that the Rembrandt notes may well be derivatives ignores these realities. AHAC, in our opinion, has asked the wrong questions and answered them as to what was relevant to the risk for the purposes of s 21(1) of the ICA. 1697 We have already explained that AHAC has misunderstood and overstated the conclusions of the primary judge: J[2947] and J[3531]. Properly understood they are not at odds with what is found at J[3630]. This is just another example of focussing on the question whether the Rembrandt notes were derivatives or had the hallmark of a derivative, rather than whether they were a security. 1698 For these reasons this Appeal Ground fails.

3.3 Was the duty of disclosure waived?: AHAC Appeal Grounds Matrix Row 5 1699 AHAC challenges the finding that because it did not require a proposal form from LGFS, it was deemed, pursuant to s 21(3) of the ICA, to have waived compliance by LGFS with its duty of disclosure in respect of the matters set out below: (a) that the AFSL of LGFS did not permit LGFS to advise about or deal in derivatives; and (b) the Rembrandt notes which had been sold by LGFS and about which LGFS advised may well be derivatives, because they had the characteristics of a derivative. 1700 AHAC did not require LGFS to complete an insurance proposal form. Rather, it advised FuturePlus' broker by email dated 4 June 2007 that only FuturePlus as the "holding named corporation" was required to fill out the proposal form together with a financial planner's addendum. It also advised that for subsidiaries of FuturePlus what was required were copies of audited financials/management reports and further business details "in your submission". This was referring to the proposal form to be submitted on behalf of FuturePlus. This proposal form was filled out, as requested, only by FuturePlus. FuturePlus was named as the "proposer". It was signed on behalf of FuturePlus by its chair, Mr Peter Woods. 1701 The primary judge concluded at J[3631] that if an insurer does not insist on a completed proposal form from the insured, then the insured has failed to answer any question in a proposal form and thus s 21(3) is engaged. Her Honour also concluded that as the proposal form submitted related only to FuturePlus and only asked about dealings in derivatives, LGFS' argument as to waiver in accordance with s 21(3) should be accepted. 1702 Section 21(3) of the ICA provides that: (3) Where a person: (a) failed to answer; or (b) gave an obviously incomplete or irrelevant answer to; a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter. 1703 We are of the opinion that AHAC did waive any s 21 duty of disclosure on the part of LGFS, but for reasons which differ from those of the primary judge. To the extent that AHAC challenges her Honour's reasons we accept its submissions. 1704 We are of the opinion that before s 21(3) is enlivened there must have been a question in a proposal form which the proposed insured has failed to answer or in respect of which the proposed insured has given an obviously incomplete or irrelevant answer. 1705 "Proposal form" is defined in s 11 of the ICA to include, relevantly, a document containing questions to which a person is asked to give answers (whether in the document or not) where the answers are intended (whether by the person who answered them, by the insurer or by some other person) to be used in connection with a proposed contract of insurance. 1706 The definition is inclusive in nature. Completion of an on-line proposal has been held to constitute a proposal for the purposes of s 21(3): Celik v NRMA [2000] NSWSC 380 at [10] and [29]-[33]. 1707 In Orb Holdings Pty Ltd v Lombard Insurance Company (Australia) Limited [1995] 2 Qd R 51, referring to ss 21(3) and 27, Fitzgerald P said at 53: … The rationale behind those provisions is that obviously incomplete information puts the insurer on inquiry and, if it omits to inquire, it has waived its right to rely upon the insured's failure to disclose or misrepresentation. 1708 The requirement for a proposal form under s 21(3) is a positive one. The statutory inquiry is not relevant where no proposal form exists. The questions in the proposal form were directed to FuturePlus, not LGFS. It cannot be said that LGFS failed to answer a question or gave an obviously incomplete or irrelevant answer to a question. 1709 However, that is not the conclusion of the matter. Section 21(2)(d) provides that the duty of disclosure does not require disclosure of a matter as to which compliance with the duty is waived by the insurer. 1710 Section 21(3) provides alternative examples of what will be deemed to be waiver of compliance. This provision is not a codification of circumstances which may constitute a waiver. 1711 Here, assuming LGFS had the relevant duty of disclosure, compliance with it was waived by the insurer when it made clear that it did not require a proposal form to be filled in by LGFS but required only financial statements. It would be surprising if, assuming the existence of the duty, AHAC could rely on non-compliance by LGFS when it had stated that all that it required were financial statements and that it did not require a proposal form to be completed. That is, beyond what was contained in, relevantly, the financial statements for LGFS, AHAC positively stated that it required no other information. 1712 It follows that, although we disagree with the reasoning of the primary judge, we nonetheless consider that AHAC waived compliance with the statutory duty of disclosure which we have assumed, for present purposes, lay with LGFS. 1713 This Appeal Ground fails.

3.4 Did any non-disclosure have a causative effect?: AHAC Appeal Grounds Matrix Row 6 1714 AHAC challenges the finding that if the matters set out in (a) and (b) below had been disclosed to AHAC by LGFS, AHAC would nonetheless have entered into the Insurance Contract on the same terms and conditions: J[3632]-J[3633]: (a) that the AFSL of LGFS did not permit LGFS to advise about or deal in derivatives; and (b) the Rembrandt notes which had been sold by LGFS and about which LGFS advised may well be derivatives, because they had the characteristics of a derivative. 1715 For the purposes of this Appeal Ground, which concerns the provisions of s 28 of the ICA, we have assumed, contrary to our conclusion, that LGFS owed AHAC a s 21 duty of disclosure and breached it as alleged. 1716 The primary judge found for the following reasons that AHAC did not establish that it would have had a lesser liability but for the non-disclosures. AHAC did not prove that, had the alleged facts been disclosed, it would not have entered into the insurance contract on the same terms. Accordingly, s 28(3) of the ICA was not engaged to reduce AHAC's liability to LGFS. 1717 The primary judge's finding is based on her Honour having observed AHAC's witnesses Ms Harvey and Ms Uhrik give evidence. It is correct that her Honour did not conclude that as witnesses they lacked credibility. This is only to say that her Honour found that each was honest in giving their evidence. This is not a reason necessarily to accept their evidence. The primary judge did not accept their evidence on this question because she concluded that it was informed by hindsight and by the way in which AHAC framed its case: J[3633] read with J[3605]-J[3612]. The primary judge's findings appropriately took into account their evidence in cross-examination. 1718 We find no reason to interfere with her Honour's relevant findings of fact. We do not regard as obvious, as AHAC contends, that because the Rembrandt notes "may well have been a derivative" and "therefore outside the scope of LGFS' AFSL" that AHAC would have excluded liability arising from activities concerning those notes. That is the point the primary judge made at J[3632] when she observed, not for the first time, that the fact that the notes had characteristics of a derivative would have been immaterial. AHAC did not advance a case that LGFS knew its AFSL did not permit it to deal in the notes. The inference which AHAC contends is obvious is in effect one which follows only from knowledge that LGFS was not licensed to deal in the notes. 1719 The primary judge concluded that the facts were consistent with the asserted non-disclosure not affecting AHAC's decision to accept the risk: J[3633] (against the background of J[3607]-J[3612]). Those facts support her Honour's findings having observed the witnesses giving evidence. 1720 We will consider the substance of these findings. 1721 The primary judge found that the best evidence of what AHAC would have done following disclosure of the "matter" said to be required is what happened after these claims were notified. After notification of the claims in May 2008, AHAC again insured LGFS for the 2008/09 year on relevantly the same terms as in the 2007/08 policy. AHAC did so without making any further enquiry about the circumstances about which it had been notified although AHAC thought that the Rembrandt notes were a "high-risk instrument", knew LGFS had been dealing in a product described as a "Constant Proportion Debt Obligation" and thought the Rembrandt notes "sounded like a derivative". That AHAC did not consider a dealing in derivatives of itself to relevantly inform the risk, in relation to the FuturePlus group of companies, was, as her Honour concluded, further demonstrated by the fact that when it entered into the 2007/08 policy AHAC knew from answers given by FuturePlus to questions asked in the proposal form to the effect that FuturePlus offered a "third party trading" service, 29% of the income from which was derived from investments in "derivative instruments". 1722 Further, the primary judge found (at J[3608] read with J[3633]) that AHAC would not have understood the allegedly undisclosed facts to be relevant to an assessment of risk as Ms Uhrik and Ms Harvey did not know what a CPDO, a CDO or a "credit index linked floating rate note" was. AHAC's submission is that the knowledge of Ms Uhrik and Ms Harvey of the terms of a CDO, CPDO, or credit index linked floating rate note is irrelevant and that LGFS' submissions overlook the affidavit evidence of Ms Harvey in her first affidavit at paragraph 31: If it had been brought to my attention that LGFS had been advising any of its clients to buy notes whose value was determined by reference to two credit default indices, I would have thought that those words, in the context of describing an investment, sounded like the description of a derivative product. AHAC submits that Ms Harvey was not challenged about this evidence. 1723 However, Ms Harvey could not describe the features of a "derivative" and did not know whether a CDO was a "derivative". From May 2008 she thought CPDOs were a "high risk" product but caused AHAC to insure LGFS, and also knew that FuturePlus had a trading service which dealt in "derivatives". The conclusion of the primary judge that AHAC considered it did not need to know about the products LGFS was selling when deciding to insure FuturePlus at J[3608] read with J[3633] is well supported on the evidence. 1724 Ms Harvey was relevantly cross-examined and she conceded that she could not say that AHAC would have taken any particular action in relation to the 2007/08 policy had AHAC been told that the Rembrandt notes might be a "derivative". That concession by Ms Harvey, of itself, we accept, is fatal to AHAC's appeal on this ground. 1725 AHAC submits that knowledge of Ms Harvey or Ms Uhrik of the terms of the CPDO, a CDO or a "credit index linked floating rate note" is irrelevant. It submits that the real issue is what the underwriters would have done if they had been told that LGFS' AFSL did not permit dealing in derivatives and that the insured was dealing in a product that might be a derivative. 1726 However, as we have already observed, and as the primary judge stated, in this context, at J[3632], the fact that LGFS knew it was dealing in products outside the terms of its AFSL was not one of the asserted facts on which AHAC relied. The non-disclosure case run by AHAC, built on its three alternatives concerning derivatives, did not extend to whether dealing with these was outside the AFSL. It is no answer to this obvious point to say that Ms Uhrik was not cross-examined as to whether AHAC would still have insured LGFS with respect to claims connected to the Rembrandt notes. 1727 As the primary judge accepted, despite knowing these facts, AHAC was so keen to keep FuturePlus' business that it was prepared to cut its premiums to do so: J[3607] read with J[3633]. AHAC was prepared to accept the risk associated with the FuturePlus group dealing in these derivative instruments. 1728 AHAC's approach to insuring the risk is explained as FuturePlus was an important customer of AHAC and Ms Uhrik was concerned that AHAC should insure FuturePlus: J[3609] read with J[3633]. These findings are amply justified. 1729 AHAC submits that Ms Uhrik's evidence, referred to by her Honour at J[3570], was that notwithstanding that FuturePlus was an important customer of AHAC, Ms Uhrik would only accommodate requests to insure if it was the right decision for AHAC to write the piece of business. AHAC further submits that this evidence was not explicitly rejected, even though referred to, by the primary judge and its rejection does not sit with the finding at J[3633] that the evidence of AHAC's witnesses did not lack credibility. 1730 It is not necessary that a trial judge explain every reason or refer to every piece of evidence supporting their findings of fact. As we have explained, her Honour's reasons are cogent and supported by sufficient reasons based in the evidence. We have explained the context and consequences of the credibility finding. 1731 Next, the primary judge found that, for the reasons already identified by her, the facts which AHAC alleged should have been disclosed did not inform the risk AHAC was asked to accept. This was so because, picking up a familiar refrain, as her Honour accepted, whether LGFS was licensed to deal in the Rembrandt notes may have affected that risk but the asserted facts said nothing about whether LGFS was in fact licensed to deal in these notes: J[3610] read with J[3633]. 1732 This again emphasises the lack of connection between the non-disclosure alleged and AHAC's submissions. The evidence of each of Ms Uhrik and Ms Harvey, referred to in this context, misses this central tenet of the case run by AHAC at trial. 1733 Moreover, as we mentioned, the primary judge did not accept their evidence on this question for cogent reasons to which we have referred. It was evidence which her Honour concluded was based on hindsight and which should be rejected. There was a clear basis in the evidence for so concluding. 1734 AHAC submits that its "failure" to inquire about LGFS' trading service was irrelevant and that the obligation to disclose falls upon LGFS. AHAC submits that it was not AHAC's responsibility to dig and investigate matters that were either known to LGFS to be relevant to AHAC's decision to insure the risk or a reasonable person would have known to have been so relevant. This finding, it submits, was an error on the part of the primary judge amounting to an impermissible reversal of onus. 1735 We do not agree. Her Honour was there not dealing with a "matter" not disclosed. Rather, in accepting LGFS' submissions, she was describing a circumstance which reinforced her earlier conclusion that, irrespective of facts such as FuturePlus gaining 29% of its third party trading service income from investments in derivative instruments, AHAC was nonetheless keen to keep FuturePlus' insurance business. This finding was descriptive of AHAC's tolerance for risk. 1736 There is a further relevant fact. The primary judge found (at J[3612] read with J[3633]) that AHAC did not concern itself to obtain a copy of LGFS' AFSLs. Nonetheless, AHAC submits that it was entitled to assume that LGFS was acting within its AFSLs, that it had not been told otherwise and that Ms Uhrik had said that she expected there would be disclosure that the activities of the insured were or may have been beyond the terms of its AFSL. 1737 However, as the primary judge repeatedly observed, as have we, evidence of that kind was not relevant to the matters which AHAC asserted, on its case, ought to have been disclosed. AHAC's case is not that LGFS knew it was acting outside the scope of its AFSL, yet that is the fact AHAC says would have caused it to have acted differently. 1738 This Appeal Ground fails.

3.5 Exclusion in Endorsement 17: AHAC Appeal Grounds Matrix Rows 7 and 8

3.5.1 Introduction 1739 AHAC advances two arguments in reliance on Endorsement 17, both of which were rejected by the primary judge at J[3646]-J[3664]. First, AHAC contends that the chapeau to Endorsement 17 is a separate exclusion disconnected from the sub-paras which follow, so that the insurance extends only to financial planning advice and services which are authorised by LGFS' AFSL. Second, AHAC contends that Endorsement 17 excludes any liability arising out of a circumstance, not limited to the occasion identified in the chapeau to Endorsement 17, where LGFS has not disclosed a conflict of interest and contends that LGFS' liability does so arise. 1740 LGFS submits that for the reasons given by the primary judge, AHAC's reliance on Endorsement 17 was correctly rejected for three reasons. First, the effect of the chapeau to Endorsement 17 is that the endorsement applies only to "financial planning advice", which LGFS did not provide to the Councils and the Endorsement is not engaged: J[3658]. Second, the words "financial planning advice and services that the Insured is authorised to provide under an Australian Financial Services License (sic)" in the chapeau to the Endorsement are descriptive of the scope of the exclusion, and are not a separate exclusion to the otherwise broad insuring clause (cl 1): at J[3659]. Third, LGFS did not have a conflict which was not disclosed. 1741 Endorsement 17 is in the following terms: The following exclusions apply to Claims arising from financial planning advice and services that the Insured is authorised to provide under an Australian Financial Services License (sic): Commingling (sic) of funds arising out of, based upon, attributable to or in any way connected with any actual or alleged commingling (sic) of funds by the Insured or any inability or failure of the Insured to pay, collect, safeguard or account for client funds. Failure to disclose conflict of interest arising out of based upon, attributable to or in any way connected with the failure of any Insured to adequately disclose any conflict of interest. Excessive Fees arising out of, based upon or attributable to Claim for the reimbursement of fees, commissions, costs or other charges paid or payable to the Insured, or any third party claim based upon allegations against the Insured of excessive fees, commissions, costs or other charges. Margin lending & gearing arising out of, based upon, attributable to or in any way connected with the actual or alleged giving of any services, advice or recommendations by or on behalf of the Insured regarding financing, margin lending, investment gearing or any other of debt. In all other respects this policy remains unaltered.

3.5.2 Was Endorsement 17 engaged? 1742 AHAC submits that an ordinary reading of the opening words is wider than a mere description as Endorsement 17 is an exclusionary provision in which the opening words prescribe the relevant activity to which the exclusions apply and, relevantly, that activity is required to have been carried on pursuant to authorisations under an AFSL. 1743 The primary judge distinguished the expression "financial planning advice and services" from "financial advice and services". Her Honour concluded that LGFS was not providing the Councils with financial planning advice and services. 1744 AHAC submits that the reference in the Endorsement to "financial planning advice and services" is intended to refer to "financial services" as defined in the Corporations Act, as it is financial services which are the subject of authorisation pursuant to an AFSL. 1745 AHAC relies upon the following findings made by the primary judge which it submits are relevant to the proper construction of Endorsement 17: 1. By s 766A(1) of the Corporations Act, a person provides a financial service if they provide financial product advice or deal in a financial product (J[2126]); 2. Financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products or could reasonably be regarded as being intended to have such an influence (s 766B) (J[2126]); 3. Dealing in a financial product includes applying for or acquiring a financial product and disposing of a financial product (s 766C) (J[2126]); 4. The Councils' acquisition of the Rembrandt 2006-3 notes from LGFS involved the acquisition of a financial product. In selling the Rembrandt 2006-3 notes to the Councils LGFS was engaged in dealing in a financial product and providing a financial service (J[2132]); and 5. LGFS gave the Councils "financial product advice" both as defined in s 766B of the Corporations Act and otherwise in accordance with the ordinary meaning of that phrase, and its advice to the Councils was to invest in the Rembrandt 2006-3 notes (J[2147]). 1746 AHAC submits that the services LGFS was found to have provided to the Councils were provided purportedly pursuant to LGFS' AFSL and that accordingly those services trigger the opening words in Endorsement 17 and the exclusions that follow. 1747 AHAC seeks to rely upon the Code of Professional Practice introduced by the Financial Planning Association of Australia (July 2011 edition), which includes the following definition of "financial planning service": Financial planning service: is a service of which the Member or his or her associates does one or more of the following for a client: (a) Provides a recommendation, an opinion or a report, that is intended to influence a prospective client or client in making a decision in relation to: i. a particular product or class of products, or an interest in a particular product or class of products; and/or ii. a particular strategy in the management of the client's financial circumstances. (b) Deal in a product or products as a result of a recommendation, opinion or report provided by the Member or his or her associates; and (c) Deal in a product or products pursuant to an authority provided by the client and includes the authority or power of attorney to operate managed discretionary accounts. 1748 AHAC submits that the Code's definition of "financial planning" is consistent with ordinary usage which does not confine financial planning advice to advice to individuals as opposed to bodies corporate or governmental bodies. Each of the Councils was engaged in planning the investment of its surplus funds in a way which gave a return while allowing for its liquidity requirements. LGFS gave advice in respect of that planning. Thus, AHAC submits, this captures the services which her Honour found that LGFS provided to the Councils. 1749 Consequently, AHAC submits that the primary judge ought to have found that the activities of LGFS fell within financial planning services and that those services were outside the scope of the AFSL by reason of which no cover applied. 1750 LGFS submits that the chapeau to Endorsement 17 confines the exclusions to "financial planning advice and services". 1751 It submits that the concept of "financial planning advice and services" is well understood as a matter of ordinary English language, namely a retail service provided to individuals, and small proprietary companies controlled by individuals as part of their wealth management, in relation to personal and family wealth management. It submits that the service provided by LGFS to the Councils is not of that character, rather, LGFS sold a complex financial instrument to wholesale customers which, as the primary judge held, is not "financial planning". Thus it contends Endorsement 17 is not engaged. 1752 LGFS submits that this construction is reinforced by the following. 1753 First, the immediate context of the words the "financial planning advice and services", namely the four exclusions created by Endorsement 17. Each of those exclusions is directed to the possible conduct of a financial planner. The first exclusion relates to the mixing of what are likely to be trust funds held for a financial planner's client. That exclusion, the mixing of funds, self-evidently has no application to LGFS' business, which includes a deposit taking service. Similarly, the exclusion of claims arising from excessive fees is applicable to what is generally understood to be "financial planning", but has no or limited application to a deposit taking and product sales business. The margin lending exclusion is also an exclusion directed to well-known but sometimes problematic advice given by some financial planners. The failure to disclose a conflict of interest exclusion is of the same character. It is directed to the conflicts that a financial planner may have, such as recommending to a client products for which the planner receives an undisclosed commission. That exclusion has no application to a business of operating in the investment market, which involves borrowing and lending and buying and selling, with a view to profit. 1754 Second, it is wrong to equate "financial planning advice and services" with any "financial service" as defined by the Corporations Act. AHAC's construction ignores the word "planning" and in doing so attempts to significantly expand the exclusion. There is no cause to construe an insurance policy other than on the basis that the words used have their well understood meaning. Had the parties intended Endorsement 17 to apply to all "financial services" as defined by the Corporations Act, they would have used that language. Instead the Endorsement is expressly directed to a different and narrower concept. 1755 Third, to the extent the Endorsement is ambiguous, extrinsic evidence is admissible to construe Endorsement 17. The extrinsic evidence demonstrates the construction adopted by the primary judge is correct. To AHAC's prior knowledge FuturePlus had, from long before 2007/08, a "substantial" financial planning business: J[3652] and J[3659]. Before entering into the insurance contract for the 2007/08 year AHAC obtained a separate "Financial Planners Professional Liability Insurance Proposal Form" from FuturePlus, which was relevant only to the financial planning part of FuturePlus' business. This is to be distinguished from the Civil Liability Insurance Proposal Form which was also completed by FuturePlus. We note also that the AFSL details in the Financial Planners Professional Liability Insurance Proposal Form concerned not those of LGFS but, unsurprisingly, those of FuturePlus. The licence number provided by FuturePlus was 238445. The licence number for LGFS was 245642. This extrinsic evidence shows that Endorsement 17 applied to the "financial planning" business referred to in the chapeau to Endorsement 17. Further, the limitation of Endorsement 17 to only the "financial planning" part of FuturePlus' business is expressly stated in the proposal sent by AHAC to FuturePlus' broker. The same language was adopted by Marsh, the broker, in the placement slip. The extrinsic evidence shows that Endorsement 17 was not objectively intended to have application to LGFS' conduct in selling products. Moreover, there is no evidence and no finding that LGFS carried on a financial planning business. 1756 We accept these submissions made by LGFS. In doing so we have not had regard to the content of the Code of Professional Practice referred to by AHAC. It was not before the primary judge. In any event, it post-dates the insurance contract by approximately 4 years. The context of the quote is unknown. 1757 It follows that we find no error on the part of the primary judge in this respect. The exclusions had no operation in relation to the claims made by LGFS.

3.5.3 Does the insuring clause apply only to conduct within LGFS' AFSL? 1758 Given our conclusion that Endorsement 17 has no application to LGFS it is strictly unnecessary to consider this point. Nonetheless for the sake of completeness we will do so. It is convenient first to set out the general insuring clause (cl 1): 1. Insurance Cover The Insurer shall pay on behalf of the Insured for any Civil Liability and Defence Costs arising out of a Wrongful Act, which gives rise to a Claim made against the Insured during the Policy Period or the Discovery Period. … 2.19 Wrongful Act means any act error or omission committed or attempted or allegedly committed or attempted by the Insured or by any other person for whose Wrongful Act the Insured is legally responsible, arising out of the provision of, or failure to provide, services to third parties provided in the course of the Insured Entity's business. All related or continuous Wrongful Acts shall be considered a single Wrongful Act. 1759 AHAC submits that on its proper construction, Endorsement 17 excludes liability to indemnify in respect of claims arising from financial planning advice and services that the insured is not authorised to provide under an AFSL. 1760 AHAC submits that if this were not the proper construction of Endorsement 17 an anomalous situation arises where, for example, a claim arising out of a failure to disclose a conflict of interest, where the advice being given was authorised by an AFSL would be excluded, but a claim arising out of a failure to disclose a conflict of interest would not be excluded if the advice was not authorised by an AFSL. In AHAC's submission, this demonstrates that the structure of the Endorsement is that it has as a starting point the notion that financial planning advice and services not authorised by an AFSL are excluded from cover. Then, in respect of financial planning advice and services which are authorised, there are specific further exclusions. 1761 AHAC further submits that there is nothing uncommercial or contrary to the objective of an indemnity insurance policy for the policy to have as a starting point that the activities of the insured must be lawful in order to attract indemnity. It points to the following in support of this submission. By s 911A(1) of the Corporations Act, a person who carries on a financial services business must hold an AFSL covering the provision of the financial services. Pursuant to s 1311(1) of the Corporations Act, a person who provides a financial service which is not authorised by the provisions of an AFSL commits an offence. As discussed above, the existence of the obligation to indemnify in respect of "Civil Liability" hinges upon the commission of a "Wrongful Act". "Wrongful Act" in turn is related to the provision of services to third parties in the course of the insured entity's business. A starting premise that the insured's business is being conducted lawfully is not unusual. 1762 AHAC submits that it is distinctly uncommercial to construe Endorsement 17 on the basis that, provided the insured provides financial planning advice and services unlawfully, that is, outside the scope of its licence, it is covered for all of the activities set out in Endorsement 17 but, if it is licensed, then cover for those activities is excluded. 1763 AHAC's construction is, in effect, that Endorsement 17 requires that the insurance contract not respond to a claim in relation to advice or services which are not authorised by LGFS' AFSL. We agree that this construction requires Endorsement 17 to be read, not as four exclusions but as the chapeau, in effect, being a separate general exclusion. We do not accept that this is the proper construction and agree with the following submissions by LGFS which reflect the reasons of the primary judge at J[3659]. 1764 As AHAC would have it, although appearing in an endorsement creating four specific exclusions, the introductory words be read as if part of, or a limitation upon, the insuring clause: J[3654]. The language of Endorsement 17 is inconsistent with AHAC's construction. The Endorsement relevantly reads "[t]he following exclusions apply to Claims arising from financial planning advice and services that the Insured is authorised to provide under an Australian Financial Services [Licence] …". The words in the chapeau after "arising from" are words of limitation. The primary judge's construction gives the words their "natural and ordinary meaning", as is required when construing an insurance contract: Selected Seeds Pty Ltd v QBEMM Pty Ltd (2010) 242 CLR 336 at 345 [34] and Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510. AHAC's construction, in contrast, requires that the words both before and after the phrase "is authorised to provide under an Australian Financial Services [Licence]" be ignored. We observe, in this respect, that Endorsement 17 expressly provides in its concluding words that "[i]n all other respects this policy remains unaltered". This underlines that the Endorsement is entirely exclusionary in its effect but does not operate otherwise to amend the general insuring clause. 1765 AHAC's argument requires that either only part of the chapeau is in effect a separate exclusion (that the advice must be within LGFS' AFSL) or, contrary to the language of the insuring clause, the cover is limited to financial planning advice and services. That is not the intention of the parties as is shown by the language of the insuring clause. AHAC's construction should be rejected as it disconnects the words AHAC relies on from the context of Endorsement 17. 1766 Further, "whilst regard must be had to the language used in an exclusion clause, such a clause must be read in light of the contract of insurance as a whole, 'thereby giving due weight to the context in which the clause appears'": Selected Seeds at 344 [29] and Darlington Futures at 510. AHAC's construction requires that words in the chapeau to the Endorsement, which, as a matter of language, describe the occasion on which the exclusions created by the Endorsement will apply, should be read as a general limitation to the insuring clause. That is not the effect of the chapeau, which is rather to delineate the operation of the exclusions in the following paragraphs of the exclusion: J[3655] and J[3659]. 1767 The anomaly which AHAC postulates does not arise. Objectively, from the content of the FuturePlus Financial Planners Professional Liability Insurance Proposal Form the parties knew that FuturePlus and two of its subsidiaries (LGSS and Energy Industries Superannuation Scheme Pty Limited) carried on "financial planning" businesses, implicitly, under AFSLs which authorised those entities to carry on those businesses. Against that background, the words in the chapeau to Endorsement 17 are descriptive of the business from which the "Claim" must arise in order for the exclusion to apply. They are words which identify the operation of the exclusion. They do not operate as a general limitation on the insuring clause: J[3656] and J[3659]. 1768 The construction reached by the primary judge is commercially sound: J[3657] and J[3659]. 1769 The construction contended for by LGFS is consistent with the insuring clause including claims for restitution, which is apt to capture the rescission claim in this case. Against the mutually known background of the Corporations Act, the inclusion of an order for "restitution" in the insuring clause is an objective indication that an "unlicensed to deal" claim was intended to be insured. 1770 The primary judge accepted at J[3657] that in the absence of language which directly says so, the parties should not be taken as having objectively intended that the insurance cover be limited to circumstances in which the insured was acting wholly within its AFSL. The potentially considerable limitation on the scope of the cover argued by AHAC should not be introduced by anything less than clear language. That language does not exist in this case. 1771 Accordingly, we are of the opinion that even if Endorsement 17 applied to LGFS it did not operate to exclude liability for the claims made on the basis that LGFS acted outside its AFSL, if that fact be assumed only for this purpose.

3.5.4 Conflict of interest: LGFS Appeal Grounds Matrix Row 124 and AHAC Appeal Grounds Matrix Row 8 1772 Alternatively, AHAC submits that having found that LGFS had a liability to the Councils by reason of a breach of fiduciary duty which involved the failure by LGFS to disclose a conflict of interest, the primary judge erred in finding that Endorsement 17, which excluded the application of the policy to claims arising from financial planning advice and services "arising out of based upon, attributable to or in any way connected with the failure of any Insured to adequately disclose any conflict of interest", did not exclude the claim by LGFS because the advice given by LGFS was not financial planning advice. 1773 This Appeal Ground also fails for the reasons given by the primary judge as we have just explained in relation to the construction issue. 1774 Upon the assumption, contrary to our conclusion, that Endorsement 17 is engaged LGFS submits that it is an exclusion for a "Claim" "arising out of, based upon, attributable to or in any way connected with the failure of [LGFS] to disclose any conflict of interest". The exclusion is engaged by a claim arising out of a failure to disclose a conflict of interest. A relevant conflict and non-disclosure is necessary. For the reasons set out in Part 8, Section 2.3 above, LGFS did have a relevant or material conflict (in the sense of a relevant conflict of duty and duty or duty and interest) and that conflict was not disclosed. The breach of fiduciary duty finding has not been set aside. 1775 However, even if that conflict is a relevant "connected" conflict (which we do not need to decide), this Appeal Ground fails at the threshold because the Endorsement did not apply to LGFS for the reasons just stated.

3.6 Exclusion in Endorsement 16: AHAC Appeal Grounds Matrix Row 9 1776 Alternatively, by this ground AHAC submits that the primary judge erred in finding that the claim by LGFS was not excluded by Endorsement 16 of the policy by which proprietary trading is excluded from cover: J[3677]-J[3678]. 1777 Endorsement 16 provides that AHAC is not liable for any "Civil Liability" or "Defence Costs": Arising out of, based upon or attributable to: (iii) a proprietary trading loss, or a business loss where the Insured Entity is acting on its own behalf or as principal. 1778 "Civil Liability" is defined as: … a legally enforceable obligation to a third party to pay damages, or to make restitution in accordance with an award of a court, tribunal or a regulator under whose jurisdiction the Insured is bound. 1779 Her Honour held at J[3677]-J[3678]: … LGFS's liability to the councils is not a liability arising out of, based upon or attributable to a proprietary trading loss. LGFS's liability has nothing to do with the concept of a proprietary trading loss. LGFS's liability arises from having sold to the councils a product that failed in circumstances where LGFS breached various duties and responsibilities to StateCover and the councils. This loss is not a loss by reason of LGFS's proprietary trading or trading on its own account in any way. It is loss of a third party for which LGFS is liable within the meaning of Civil Liability as defined in the policy and outside and entirely unconnected with any notion of proprietary trading losses. AHAC's focus on the selling of the notes to the councils which LGFS purchased for that purpose as an act of proprietary trading overlooks the context of the provision as a whole. The provision is concerned with Civil Liability arising out of, based upon or attributable to proprietary trading losses. LGFS did not suffer any loss by reason of selling the notes to the councils. To the contrary, LGFS made a profit out of that activity. LGFS's loss arises by, is based upon and is attributable to the councils' claims against LGFS. 1780 AHAC submits that this reasoning ignores the structure of the policy and the wording of the exclusion for the following reasons: 1. First, the policy is a liability policy - it is not a policy which grants indemnity to an insured who sustains "a proprietary trading loss" or a business loss. It is only triggered where a third party sustains the loss in circumstances where the definition of "Civil Liability" is satisfied; 2. Second, liability under the policy is only triggered once a defined "Civil Liability" occurs. As noted above, that liability exclusively refers to "a legally enforceable obligation to a third party" (emphasis added); 3. Third, cover which would ordinarily be available for "Civil Liability" will nevertheless be excluded in the event Endorsement 16 applies. This endorsement excludes any liability when the "Civil Liability" arises out of or is based upon or is attributable to "a proprietary trading loss, or a business loss where the Insured Entity is acting on its own behalf or as principal". Thus, there is a need to ascertain whether the "Civil Liability" came about in those defined circumstances; 4. Fourth, the clear intention of the policy must be that "Civil Liability" as defined (that is in the sense of legal obligation to a third party) will only apply where the third party has sustained loss that has resulted from an act, error or omission. However, where the loss arises out of an insured's proprietary trading, it is excluded from cover; 5. Fifth, the correct approach to the interpretation of exclusion clauses has been settled by the High Court in Darlington Futures at 510; 6. Here, LGFS engaged in proprietary trading by buying and selling the Rembrandt notes on its own behalf. The liability arose out of that proprietary trading. The exclusion applies; 7. The use of the word "loss" in the phrase "proprietary trading loss" is awkward. A liability cannot arise out of a trading loss of the insured. The word "loss" should be disregarded to give a sensible meaning to the provision. 1781 We have assumed that this last submission is that the word "loss" where it appears twice should be ignored. Against those submissions and particularly the last of them AHAC then submits that the purchase by LGFS of the Rembrandt notes and their on-sale to the Councils was proprietary trading. It was trading, involving the purchase and sale of a product. It was proprietary because the purchase and sale was by LGFS on its own account and not on behalf of any other person, so far as the dealings with the Councils were concerned. 1782 As to the question whether the Civil Liability can be said to arise out of, be based upon or attributable to that proprietary trading AHAC submits that the liability arose out of the sale of the Rembrandt notes by LGFS to the Councils. It further submits that if the Councils had not bought the Rembrandt notes there would be no liability and that it is the purchase of the Rembrandt notes by the Councils which gives rise to any prospect of liability. 1783 AHAC's construction of Endorsement 16 requires the word "loss" where twice appearing be read out of the endorsement for the benefit of the proferens. We accept the submission made by LGFS that this is to invert each part of the process of construction required by Darlington Futures Limited at 510: These decisions clearly establish that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity. 1784 Indeed, if AHAC's constructive process were followed the exclusion clause relevantly would read as follows: The Insurer shall not be liable to make payment for Civil Liability and Defence Costs [a]rising out of, based upon or attributable to … a proprietary trading or a business where the Insured Entity is acting on its own behalf or as principal. 1785 The language of the exclusion is inconsistent with AHAC's construction. The exclusion applies only to "a proprietary trading loss, or a business loss". LGFS' liability to the Councils is not of that character. Its liability is for losses caused to the Councils substantially by LGFS' misleading or negligent conduct in advising or informing the Councils about the Rembrandt notes. 1786 Deleting the word "loss", whether where it first appears or twice would, in effect, rewrite the exclusion. 1787 The language is clear. The Endorsement has the effect of making clear that proprietary trading losses and business losses are not insured. 1788 A court should always strive to give meaning to all of the language used. There was no rectification suit at trial. This is not one of those exceptional cases where a clear mistake allows the court to rewrite a contract to avoid absurdity or inconsistency: Fitzgerald v Masters (1956) 95 CLR 420 at 426-427 (Dixon CJ and Fullagar J). Nor is the intention AHAC contends for apparent. We accept the submission by LGFS that instead, read with the insuring clause and LGFS' known business of dealing in its own products, the apparent purpose is to exclude only losses on buying and selling and not a liability for negligent or misleading advice. AHAC's construction substantially changes the meaning of the contract by reducing the scope of the insurance provided, which objectively was not intended. Finally, AHAC's submission is contrary to the contra proferentem rule, in that it requires (asserted) ambiguity to be resolved in favour of the proferens, namely AHAC itself: Darlington Futures Limited at 510. 1789 That rule should apply with particular rigour where the relevant clause contains AHAC's standard policy wording for professional indemnity policies. Although contained in an endorsement, the effect of the Endorsement is to replace the standard cl 3.2 of the contract. The relevant sub-cl (iii) precisely reproduces the standard sub-cl (iv) of cl 3.2 of the policy wording. The effect of Endorsement 16 is only to delete from the standard wording sub-cl 3.2(ii) but to otherwise repeat and renumber the subsequent clauses. 1790 The rewriting AHAC proposes, which we set out above, produces an unsatisfactory result in the remaining language. The clause refers to "a proprietary trading loss". Without deleting the "a" as well as "loss", "a proprietary trading" makes no sense. Deleting both words changes the subject of the sentence, and if the same change is made to "a business loss" the whole sentence ceases to make sense. 1791 The construction adopted by the primary judge is consistent with the balance of Endorsement 16. In contrast, AHAC's construction gives the exclusion in para (iii) significantly broader operation than the preceding exclusions. We do not think this to have been the objective intention. Rather the exclusions are objectively intended to be of a similar character. 1792 Contrary to AHAC's submission the relevant exclusion in Endorsement 16 has utility. It makes clear, at least, that despite the width of the insuring clause (cl 1), the cover is directed to third party claims against the insured, not the insured's own proprietary trading losses. This is reinforced in circumstances where, as we have mentioned, the provision forms part of AHAC's standard wording. We agree that there are circumstances in which Endorsement 16 may have effect to exclude a claim that would otherwise be covered. An example might be where the insured was a participant in a partnership or beneficiary of a trust of which it was manager and suffered a proprietary trading loss while other partners or beneficiaries may have a claim for the insured's provision of services to the partnership or trust. So construed the redundancy asserted by AHAC does not arise. Endorsement 16 excludes liability for the insured's own losses, not LGFS' liability for the losses of a third party. 1793 The difficulty AHAC asserts in relation to the phrase "Civil Liability" is not readily apparent. A "Civil Liability" is, relevantly, a "legally enforceable obligation". A "legally enforceable obligation" can arise out of a "loss". 1794 Finally, AHAC's reliance on Endorsement 16 fails as the "proprietary trading" (if any) was not the proximate cause of LGFS' loss. We will deal with this in more detail below. 1795 Endorsement 16 has no application. This Appeal Ground fails.

3.7 Exclusion cl 3.3: AHAC Appeal Grounds Matrix Row 17 1796 AHAC challenges the finding that the liability of LGFS to StateCover did not fall within the scope of exclusion cl 3.3. 1797 The StateCover claim, summarised at J[2980]-J[2990], was as follows. 1798 In late 2006 LGFS, in its capacity as StateCover's funds manager, caused StateCover to subscribe for Rembrandt 2006-2 notes with a subscription price of $10 million. The Rembrandt 2006-2 notes "cashed out", resulting in an alleged loss to StateCover. StateCover suffered a loss in the order of $9.3 million: see Part 2, Section 6 above. 1799 In the StateCover proceedings, StateCover claimed damages for that loss, together with significant interest and costs. Initially that claim was only against LGFS. After LGFS pleaded a proportionate liability defence, StateCover joined S&P and ABN Amro as respondents in those proceedings. The claims against LGFS are summarised at J[2982] and were for breach of contract, negligence and misleading or deceptive conduct. The primary judge's finding is that the claims in negligence and for misleading or deceptive conduct were independent of, and not parasitic upon, the contract claims. LGFS settled that claim by paying $2.7 million plus agreed costs of $475,000 to StateCover. StateCover's claims against each of LGFS, ABN Amro and S&P were dismissed by consent. LGFS succeeded in its claim against AHAC for the full amount of the settlement, $3.175 million, together with an indemnity for its "Defence Costs" attributable to the claim by StateCover. 1800 AHAC submits that LGFS' liability to StateCover arose in consequence of a pleading by StateCover in its statement of claim that it was an express term of the "Letter Agreement" dated 14 September 2004 that all transactions be initiated in full compliance with board approved strategy and policy. Further, the StateCover statement of claim pleaded that the investment policy and risk policy both prohibited investments in derivative instruments and that by investing in the Rembrandt 2006-2 notes on behalf of StateCover, LGFS breached that express term. AHAC submits that each cause of action pleaded against LGFS in the StateCover claim arises out of or is based upon or is attributable to a liability that LGFS had to StateCover and which was assumed or accepted by LGFS under the Letter Agreement. 1801 The primary judge found that the Rembrandt notes were a derivative instrument. AHAC submits that although her Honour made no express finding, it can be inferred from the finding that the Rembrandt notes were derivatives that LGFS breached the express term in the agreement with StateCover that all transactions be initiated in compliance with board approved strategy and policy. AHAC then submits that this breach is the proximate cause of LGFS' liability to StateCover. 1802 Her Honour's rejection of AHAC's submission depends on two points of construction. 1803 The first is whether "such liability" in cl 3.3 refers to a liability of the same type or to any liability howsoever arising. AHAC submits that the ordinary use of language is that "such" liability is a liability of the same type. 1804 The second point concerns the phrase "in the absence of such contract or agreement". AHAC submits that whatever the proper construction of "such liability", LGFS would have had no liability to StateCover in the absence of the relevant agreements because they were the only bases of the relationship. 1805 We agree with the submissions put by LGFS, which broadly reflect the conclusions of the primary judge, as follows. 1806 Clause 3.3 is an exclusion which excludes loss "[a]rising out of, based upon, or attributable to any liability to a third party assumed or accepted by [LGFS] under any contract or agreement". It is subject to an exception "to the extent such liability would have attached to [LGFS] in the absence of such contract or agreement". 1807 The words "such liability" in cl 3.3 are not a reference to the excluded contractual liability. These words are part of the exception. They mean the same liability as would have attached irrespective of the contract. The scope of the exclusion is not to be determined without regard to the exception within the exclusion clause: J[3714]. The words "such liability" in the exception mean the liability to a third party referred to in the earlier part of the exception. StateCover had only one claim, although a number of causes of action were pleaded. On the proper construction of cl 3.3, if LGFS were liable to StateCover in negligence or for misleading or deceptive conduct then the exclusion has no application. That construction accords with the words used, and the evident purpose of the exclusion. The primary judge found that LGFS was exposed to liability to StateCover in tort and under statute: J[3715]. Indeed, her Honour stated that LGFS would have had great difficulty in avoiding a duty of care to StateCover and that the Rembrandt notes were a "profoundly unsuitable" investment for a body such as StateCover: J[3717]. 1808 AHAC's contrary alternative construction that once there is a liability in contract for a loss, the exclusion applies, would give the exception no work to do. 1809 The chapeau to cl 3 directs attention relevantly to a "Civil Liability", and the exclusion is of a "Civil Liability [relevantly a legally enforceable obligation] … [a]rising out of, based upon, or attributable to any liability to a third party assumed or accepted by [LGFS] under any contract or agreement except to the extent such liability would have attached to [LGFS] in the absence of such contract or agreement" (emphasis added). The prospective legally enforceable obligation arose because of the asserted negligence on the part of LGFS in providing services to StateCover, and arose irrespective of the Letter Agreement. It is the provision of the services, not the existence of the agreement, which constitutes the relevant assumption of responsibility. Similarly, LGFS' obligation not to engage in misleading or deceptive conduct, or to pay damages if it does, is a legislative requirement binding upon LGFS. This exists apart from any contractual obligation. Exposure to liability in tort or under statute would have arisen absent contract, for example, as LGFS submits, if LGFS was providing the service as a volunteer, under a contract which was void or in some other circumstance in which there was no contract. These causes of action, to employ the language of the primary judge at J[3715], were not parasitical to the contract claims. 1810 AHAC's contrary contention is that LGFS was liable to StateCover pursuant to a term of the agreement between LGFS and StateCover in circumstances where the liability would not have arisen in the absence of such agreement. The primary judge rejected that argument: J[3714]-J[3715]. Her Honour was correct for the following reasons. 1811 First, it is necessary to identify the relevant agreement and the duties owed by LGFS to StateCover under that agreement and at law. At the time StateCover invested in the Rembrandt 2006-2 notes the agreement between LGFS and StateCover was recorded in the Letter Agreement. The issue is whether LGFS' liability arose completely under and because of the Letter Agreement, and otherwise would not have been incurred in LGFS performing its funds management function. It did not so arise. Liability would have been incurred in the absence of such agreement. LGFS in performing a funds management function owed a duty to exercise reasonable care. 1812 The duties imposed on LGFS, by reason of the function performed, were concurrent duties in contract and tort: Astley v Austrust Limited at 21-23 [46]-[48]. StateCover pleaded the implied duty to exercise due care and skill in its statement of claim. The tortious liability included but also extended beyond the obligation to exercise care to comply with the StateCover investment policy. For example, arguably LGFS owed a duty to exercise reasonable care to cause StateCover to buy only suitable products. 1813 StateCover also pleaded that a term was implied into the Letter Agreement (the reference to "Outsourcing Agreement" in the pleading is clearly a typographical error) by s 12ED of the ASIC Act. The perceived liability to StateCover arose under the term implied by s 12ED of the ASIC Act as to due care and skill. This liability is not within the operation of the exclusion. 1814 The promise relied on by AHAC, and by StateCover as one of its claims in its pleading, appears from the words in the Letter Agreement "[i]n undertaking these functions [that is as funds manager] LGFS will comply with the policies and requirements of StateCover". AHAC's case appears to be that LGFS' prospective liability to StateCover had arisen only from the contention that the Rembrandt notes were "derivatives" and that, in causing StateCover to buy the notes, LGFS had breached its contractual promise to comply with the StateCover policy. That is not the case. In performing the function of funds manager LGFS had the power to, and assumed responsibility to cause StateCover to, acquire and dispose of investments, and owed a duty to StateCover to exercise reasonable care to comply with StateCover's policies and requirements: see Woolcock at 530-531 [22]-[24]. If LGFS breached the agreement with StateCover it also breached its common law and statutory duties. That is consistent with StateCover's pleading of concurrent duties, and overlapping allegation of a breach of duty of care to competently advise. 1815 AHAC's submissions characterising StateCover's case as not being a failure to advise case are incorrect. StateCover pleaded a duty to provide "investment management services with due care and skill" and pleaded a breach including a failure to advise and a failure to properly investigate. The breach relied on was a breach of that duty in tort. 1816 For these reasons, this Appeal Ground fails. Exclusion 3.3 was not engaged.

3.8 Was an excluded cause a proximate cause?: AHAC Appeal Grounds Matrix Rows 10 and 18 1817 AHAC submits that the primary judge erred in failing to find that, because one of the proximate causes of the loss of LGFS was a cause excluded by the policy, AHAC had no liability to indemnify LGFS. 1818 Where there are two proximate causes of a loss, one within the scope of the policy and the other falling within the exclusion clause, the insurer has no liability to indemnify: Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] QB 57 at 69 and 74-75; City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739 at 744-745. 1819 It may be accepted that if the liability arises from matters falling within the scope of Endorsement 16, then AHAC is not obliged to indemnify, even if the liability could also be attributed to a cause falling outside the exclusion and within the scope of the cover. 1820 The same principle applies if a proximate cause of the loss is a cause excluded by Endorsement 17, relating relevantly, to conflict of interest, referred to above. 1821 AHAC submits that the primary judge erred by not applying the exclusions and erred in not applying the principle that if there are two proximate causes of a loss, one within the scope of the policy and the other falling within the exclusion clause, the insurer has no liability to indemnify. 1822 Clause 3.3 is qualified by the expression "arising out of, based upon or attributable to". AHAC submits that any negligence claim or any statutory misleading or deceptive conduct claim brought by StateCover originates in or springs from the Letter Agreement between LGFS and StateCover thus constituting two proximate causes of the loss and thereby invoking the Wayne Tank principle. 1823 These grounds primarily fail because the exclusions relied on by AHAC are not engaged. 1824 For other reasons, AHAC's submissions on these grounds fail at the threshold. They conflate two concepts. Whether the StateCover claim is within the cl 3.3 exception does not raise a question of the interrelationship between an insured proximate cause and an excluded proximate cause. The issue, as we have explained, is one of construction of cl 3.3. Apart from the claim in contract the liability would likely also have attached absent that contract. Thus the exclusion does not apply. Questions of proximate cause do not arise. For reasons we have already identified, liability likely would have attached to LGFS in negligence and for misleading or deceptive conduct. Each of those causes of action arose irrespective of contract. 1825 However, should we be wrong about that and our conclusions concerning Endorsement 16, we are nonetheless of the opinion that "proprietary trading" was not the proximate cause of LGFS' loss. 1826 We agree that in relation to the Councils' claim against LGFS, the relevant loss was caused by what LGFS said or did not say, not by LGFS' ownership of the Rembrandt notes or "proprietary trading". The "proprietary trading" was not the effective, operative or proximate cause. Whether LGFS owned the notes or was selling an instrument owned by a third party was irrelevant to LGFS' liability to the Councils. That reasoning also applies to the breach of fiduciary duty claim as the liability in equity arises from what was said or left unsaid, and the conflict existed in either event. 1827 AHAC's alternative contention was that the primary judge erred in finding that LGFS' loss consisting of the amount of its liability to the Councils for breach of fiduciary duty was not caused by the same conduct of S&P and ABN Amro which the primary judge found was a cause of LGFS' loss consisting of its loss on the resale of the LGFS Retained Notes: AHAC Appeal Grounds Matrix Row 11. This Appeal Ground was not addressed by AHAC in its written or oral submissions. We can identify no error in the reasoning of the primary judge. This Appeal Ground fails.

3.9 Whether the settlement of the StateCover proceedings was reasonable?: AHAC Appeal Grounds Matrix Row 19 1828 AHAC challenges the finding that the settlement of the StateCover claim by LGFS was reasonable: J[3716]-J[3719]. 1829 AHAC raises two arguments: whether the settlement was reasonable, and whether the settlement was in accordance with LGFS' duty of utmost good faith. 1830 AHAC submits that the evidence called by LGFS demonstrated that the settlement was not reasonable having regard to the merits of the litigation. 1831 It also submits that the evidence of Mr Peter Lambert, the Chief Executive Officer of LGFS, demonstrated that the settlement involved a breach of LGFS' duty of utmost good faith to AHAC as it showed that LGFS thought it was a good idea to settle with StateCover not because it had analysed the exposure to risk, but because of the view that AHAC would be liable to pay the sum, whatever it was, to LGFS. 1832 The primary judge determined that the good faith issue should not be permitted to be raised as it was not pleaded. However, AHAC submits that because it did not admit the reasonableness of the settlement this put the question of reasonableness, including good faith, in issue. 1833 We do not agree. It was too late to raise that case at trial. It should have been pleaded with particularity. If it had been pleaded it may well have been capable of being met with evidence and not only from Mr Lambert. A non-admission by AHAC of the reasonableness of the settlement does not mean that LGFS had to positively prove good faith. 1834 Nonetheless we will consider the submissions regarding good faith. 1835 There is no issue on appeal as to the applicable principle. If the settlement was a result of the insured not acting in good faith towards the insurer or a settlement in which the insurer's interests were sacrificed, then the settlement is not reasonable: Broadlands Properties Limited v Guardian Assurance Company Limited (1984) 3 ANZ Insurance Cases ¶60-552 at 78,323-78,325. 1836 AHAC submits that an objective reading of the evidence before LGFS at the time it made the decision to settle the StateCover proceedings demonstrates that it was completely indifferent to its obligations under the policy. It points in particular to the following evidence. 1837 A briefing note to the LGFS board prepared by Norton Rose, lawyers, on or about 24 May 2011, regarding the proposed StateCover settlement, included the following: If Chartis is willing to make a contribution to the StateCover settlement amount, LGFS would need to be prepared to pay the balance of the settlement amount without recourse to indemnity from the insurer ... Even though LGFS would still seek to recover from S&P and ABN [Amro] contribution to or indemnity for the amount it would have to pay, we would not recommend proceeding with this course (and releasing Chartis from the claim in relation to StateCover) unless Chartis is prepared to make a substantial contribution (ie around $2,500,000). Chartis was the trading name of AHAC. 1838 Accordingly, as at May 2011, LGFS was advised not to compromise its indemnity claim for less than 80% of the total settlement sum, regardless of the fact that LGFS would still seek to recover contribution from S&P and ABN Amro. 1839 The board briefing note also refers to the possibility of approaching ABN Amro and S&P to attempt to persuade them to make a contribution to the StateCover settlement in exchange for LGFS giving up its claims against them. The briefing note states: "[i]n this regard we note that any contribution by ABN [Amro] and S&P would need to be significant in order to justify LGFS giving up its claims against these parties". 1840 A letter from Norton Rose dated 9 August 2011 advised LGFS as to the reasonableness of the StateCover offer and the implications for LGFS of accepting it. It contained Norton Rose's views as to the likelihood of LGFS being able to recover some or part of the settlement sum from ABN Amro, S&P and AHAC which included that: 1. There is a risk that LGFS will only be able to recover a proportion (rather than the whole) of the settlement sum from ABN Amro and/or S&P; 2. The risk of making no recovery from ABN Amro or S&P is low; and 3. LGFS' prospects of obtaining an order that AHAC indemnify it in respect of the settlement sum are strong. 1841 AHAC emphasises that the relevant evidence of Mr Lambert in cross-examination was to the effect that the advice which LGFS had before settlement was that it had a very strong case and very strong prospects of success in defeating the StateCover claim. LGFS had advice that its prospects of success with respect to the proportionate liability defence concerning S&P and ABN Amro were very strong and that if its proportionate liability defence succeeded S&P would pay 100% of the loss. 1842 AHAC submits that the most cogent documentary evidence is the letter dated 9 August 2011 from Norton Rose and the Circular Resolution from Mr Lambert dated 10 August 2011. Mr Lambert's evidence was that the contents at para 1.4(1), (2) and (3) of the Norton Rose letter comprised the totality of the reasons given by those lawyers about why the StateCover settlement should be accepted. Those paragraphs, AHAC points out, contain no analysis of the prospects of success of the StateCover claim. The summary contained in Mr Lambert's Circular Resolution is, as the primary judge described it, the essence of the reasons why the board of LGFS decided to settle. AHAC submits that the heart of that reasoning was in para 2 of the summary, which is in the following terms: From the perspective of a lay person involved in the case I believe that this settlement should be accepted, because it effectively decreases the 'worst case' scenario from a $10m loss to a $3mill loss without changing the expected outcome of $0 cost to LGFS. This expected outcome assumes that we may recover some or all of this payment from ABN [Amro] and/or S&P. Any balance remaining would be recoverable under the insurance policy should the court rule in our favour in that matter. 1843 The following exchange occurred in cross-examination: Was your approach to settlement [of] this, Mr Lambert, 'we can pay this $3 million because we'll pick it up from the insurer, come what may'?....Come what may, yes. 1844 We reject AHAC's submissions that LGFS failed to prove that the settlement was reasonable, judged objectively, based on the material which was available to it at the time of the settlement: Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited (1998) 192 CLR 603 at 653 (Hayne J). 1845 The primary judge correctly identified the question as being whether the settlement was objectively reasonable. There was considerable evidence to sustain her Honour's conclusions concerning the risks to which LGFS would be exposed in litigation with StateCover, not least being her Honour's views as to breach of duty by LGFS. 1846 The most compelling reason supporting the conclusion that the settlement was reasonable is the implicit and unchallenged finding by the primary judge that LGFS would likely have been liable to StateCover in negligence: J[3717]-J[3718]. Moreover, it seems that the effect of the settlement was that LGFS settled for approximately 25% of its potential liability, and retained its right to pursue S&P and ABN Amro for contribution. This alone supports the finding that the StateCover settlement was reasonable. 1847 LGFS was StateCover's funds manager and was responsible for StateCover's investment portfolio, and in practical terms determined StateCover's risk appetite. If anything, as we will explain, the StateCover duty case against LGFS was stronger than the Councils' case. StateCover is a mutual insurer. Those investments it made had to be balanced between producing returns and availability to meet claims, including spikes in claims. StateCover's breach of duty case was stronger than the Councils' case for a number of reasons. First, the term of the Rembrandt 2006-2 notes compared to StateCover's liabilities, the illiquidity of the notes, there being no promise by LGFS to buy those notes back, the potential fluctuations in the market value of those notes and the risks associated with the notes. Second, the fact that LGFS knew what StateCover's investments were and the demands on those investments. Third, that LGFS as funds manager made the decision to invest for StateCover. LGFS, consistent with the complete delegation of StateCover's investment function to it, did not warn StateCover of risks associated with subscribing for the Rembrandt 2006-2 notes. No question of reliance arose as LGFS was the decision maker. 1848 That the primary judge after a long trial found LGFS would likely have been, but for the settlement, liable to StateCover demonstrates, at least, that there was a substantial risk of a judgment adverse to LGFS in the suit brought against it by StateCover. 1849 The only real question in relation to damages was LGFS' proportionate liability defence. S&P and ABN Amro denied any liability to StateCover. On the basis of S&P and ABN Amro's defence of the Councils' claims, it is highly likely both would have continued to deny StateCover's claim. That created a risk appropriately to be taken into account in assessing the reasonableness of the settlement. 1850 At the time of the settlement StateCover's claim against LGFS was about $12 million (loss of approximately $9.3 million plus interest) plus costs. LGFS settled that claim for about a quarter of that amount, plus agreed costs. At the time of the settlement LGFS was facing the additional exposure of further interest and the further costs incurred by StateCover in prosecuting the matter to a trial lasting three months, a period which would have been lengthened by the StateCover proceedings. In the event of a total failure of its defences and cross-claims, LGFS would also have been exposed to the costs of S&P and ABN Amro and its own costs in relation to the StateCover proceedings. 1851 There is no suggestion that LGFS could have negotiated a better settlement. Inevitably such settlements require prudent judgment. The prospect of complete success needs to be balanced against the risks of failure. The latter, in this case, were substantial. Settlement of a complicated commercial case with the attendant risks to which we referred for around 25 cents in the dollar was reasonable. 1852 Finally, LGFS had legal advice from a major law firm to the effect that the offer LGFS ultimately accepted was "very attractive". This, it seems to us, was sound advice in light of all that we have explained. This included advice not only as to the possibilities of recovering the whole or part of the settlement sum from ABN Amro and S&P, to which AHAC referred in its submissions, but also the possibility that it may not be able to recover any of that amount from them. In viewing the risks it faced, as is evident from Mr Lambert's Circular Resolution, the worst case scenario of a $10 million loss was contemplated. The advice from Norton Rose to which AHAC refers must be seen in context. This was advice as to whether or not to accept a settlement offer at a significant discount. 1853 AHAC's assertion that LGFS "was completely indifferent to its obligations under the [p]olicy" in settling the StateCover proceedings is not supported by the evidence. Rather, the evidence is to the contrary. AHAC would not participate in the settlement. LGFS was required to negotiate an agreement with AHAC that the settlement sum be treated as a "Civil Liability". Further, AHAC, having not confirmed the indemnity informed LGFS that it should act as a prudent uninsured: J[3716]. These matters are inconsistent with LGFS ignoring the terms of the policy. 1854 As the primary judge correctly observed (at J[3716]) the fact that LGFS believed that it had a good claim against AHAC does not suggest that the settlement was in bad faith. Objectively that belief suggests the opposite. That LGFS settled with StateCover tends to prove that LGFS believed that the settlement was, at least, a reasonable settlement and also that LGFS recognised a risk that it may not be insured. We accept the submission that if LGFS had thought it was certainly covered there is no reason why it would have agreed to the settlement as, on that hypothesis, LGFS was not at risk on the StateCover claim. Nor would it have had reason to be out of its money while it sued AHAC. The objective facts demonstrate that LGFS wished to preserve a position where it could maintain its claim against AHAC but accept an offer which was "very attractive". 1855 In that context the options available to LGFS were identified by LGFS' solicitors. The first option was to settle with StateCover and to settle LGFS' claim against AHAC in relation to the StateCover proceedings at the same time: para 4.1(1) of Norton Rose's note. The second option was to procure AHAC's agreement to a settlement being treated as a "Civil Liability" and then to settle and pursue the claim against AHAC: para 4.1(2). The first option is explained and Norton Rose advised that they "would not recommend proceeding with this course ... unless [AHAC] is prepared to make a substantial contribution (ie around [$2.5 million])". 1856 That LGFS considered that it may be able to recover part of the settlement from ABN Amro or S&P does not advance AHAC's argument. The claim for contribution or damages potentially reduced AHAC's liability. That the 9 August 2011 advice from Norton Rose refers to that possibility does not support AHAC's allegation of bad faith; it shows LGFS was acting on good advice. 1857 Mr Lambert's evidence does not support AHAC's bad faith submissions. Mr Lambert knew that there was a risk that LGFS could be liable to StateCover. He had received advice in the form of summaries. Mr Lambert did not concede that he failed to seek advice as to the prospects of success on particular aspects of the claim. However, he did say that he had always found it very difficult to get advice from lawyers as to the exact probability of success. This hardly evidences a lack of good faith. Rather, it recognises the reality that litigation is to one degree or another uncertain. As Mr Lambert said, LGFS settled because "here was a settlement of substantially less than the amount claimed, and it was in our commercial interests to make that settlement". Objectively that was a reasonable step to take in the circumstances. It was a reasonable settlement reached in good faith. 1858 No error on the part of the primary judge has been established. This Appeal Ground fails.

PART 15: ORDERS 1859 The parties are directed to confer and bring in agreed orders to give effect to these reasons for judgment including the question of costs by 4:00pm on 13 June 2014. If the orders cannot be agreed, then the parties are to file a joint document which identifies the areas of agreement, the areas of disagreement and, for the areas of disagreement, the reason or reasons for that disagreement by 4:00pm on 13 June 2014. I certify that the preceding one thousand eight hundred and fifty- nine (1,859) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Jacobson, Gilmour and Gordon.

ATTACHMENT A - GLOSSARY OF DEFINED TERMS TERM DEFINITION ABN Amro ABN AMRO Bank NV, an investment bank and the creator of the Rembrandt notes. AFSL Australian financial services licence. AHAC American Home Assurance Company. Anti-DPN A new product developed by ABN Amro which became the CPDO. ASIC Australian Securities and Investments Commission. ASIC Act Australian Securities and Investments Commission Act 2001 (Cth). AUD Australian dollars. Bathurst Bathurst Regional Council. BBSW Bank Bill Swap Rate, a reference rate based on the interest rates at which banks borrow unsecured funds. bps Basis points, generally used to describe percentage changes in prices. One basis point or bp is equivalent to 0.01%. Castle A series of ABN Amro CPDOs. CDO Collateralised debt obligations, another structured financial product, being a different product from the CPDO. CDS A credit default swap contract, or a contract relating to credit default risk. A typical CDS involves one party (the protection seller) selling to another party (the protection buyer) protection against the risk of a credit event. CDSs may be actual or notional. CDS default payment The sum paid by the protection seller to the protection buyer on the occurrence of a credit event (see CDS above). CDS premium fee The fee paid by the protection buyer to the protection seller for protection against the risk of a credit event (see CDS above). CDX The CDX North America Investment Grade Index, which references US credit default swaps. Civil Liability Act Civil Liability Act 2002 (NSW). Community income CPDO notes The Rembrandt 2006-3 notes which LGFS purchased and sold to the Councils. LGFS named these notes "community income notes" and referred to them as such in its dealings with Councils. Cooma Cooma-Monaro Shire Council. Corporations Act Corporations Act 2001 (Cth). Corowa Corowa Shire Council. CPDO Constant proportion debt obligation and was the name given to the new financial product developed by ABN Amro in 2006. CPDO notes were issued in series by special purpose vehicles under names including Castle, Chess, and, in Australia, Rembrandt. CPDO Evaluator A mathematical tool for modelling CPDOs and rating CPDO index transactions. The model was developed by S&P and launched on 22 March 2007. CPDO letter A standard form letter prepared by LGFS entitled "CPDO - The Next Generation" designed to introduce the CPDO to councils. Councils The PA Councils and Bathurst. CPPI Constant proportion principal insurance, another financial product which pre-dated the CPDO. An ABN Amro DPN is a type of CPPI. Deniliquin Deniliquin Shire Council. DLG New South Wales Department of Local Government. DLG 2006 circular A circular issued to all councils by the Director-General of the Department of Local Government on 27 November 2006. DPN Dynamic Participation Note, ABN Amro's CPPI product. ECD Group ABN Amro's London based Exotic Credit Derivatives Group, responsible within ABN Amro for structuring, trading and marketing structured credit products such as CDOs and CPPIs. Eurobodalla Eurobodalla Council. FRNs A floating rate note, another financial product. FuturePlus FuturePlus Financial Services Pty Ltd, the head of the company group of which LGSS and its subsidiary LGFS formed part after LGSS' acquisition of LGFS in October 2004. GFC Global Financial Crisis. Globoxx The Globoxx Index, which is made up of the CDX and iTraxx weighted 50% each Grove report A report issued by Grove Research and Advisory about the Rembrandt CPDO dated 16 November 2006. ICA Insurance Contracts Act 1984 (Cth). iTraxx The iTraxx Europe Index, which references European corporate default swaps. LGFS Local Government Financial Services Pty Ltd. LGFS community income notes brochure A brochure prepared by LGFS in order to market the community income notes (or the Rembrandt CPDO or Rembrandt 2006-3 notes) to councils. LGFS Retained Notes $26 million of the Rembrandt 2006-3 notes retained by LGFS and not sold to the Councils. LGFS Sold Notes $19 million of the Rembrandt 2006-3 notes sold by LGFS to the Councils. LGSS Local Government Superannuation Scheme owned by FuturePlus. LIBOR The London Interbank Offered Rate, a reference rate based on the interest rates at which banks borrow unsecured funds. LTAS The long-term average spread of the indices referenced by the financial product, in the case of the CPDO the Globoxx index (the combined iTraxx and CDX indices weighted 50% each). Local Government Act Local Government Act 1993 (NSW). Mandate Letter Contract between ABN Amro and LGFS made in October 2006 in respect of the Rembrandt 2006-3 notes. Ministerial Order An order made by the Minister for Local Government and amended from time to time specifying the forms of investment in which a council may invest, pursuant to s 625(2) of the Local Government Act. Moody's Moody's Investors Service Inc, a ratings agency. Moree Moree Plains Shire Council. MR Mean reversion speed, the speed with which credit spread levels are expected to return to their average level after a period where they deviated from the historically observed mean. Murray Murray Shire Council. Narrandera Narrandera Shire Council. Narromine Narromine Shire Council. NAV Net asset value. NRB Councils The Councils that did not enter into a Right Balance Agreement with LGFS - Bathurst, Deniliquin, Eurobodalla, Moree, Murray, Narrandera, Narromine, Oberon, Orange, Parkes and Ryde. NSW Local Government Investments Best Practice Guide A draft document prepared by two industry bodies, Local Government Financial Professionals and Local Government Managers' Association. Oberon Oberon Shire Council. Orange Orange City Council. PA Councils Twelve councils in New South Wales comprising Cooma, Corowa, Deniliquin, Eurobodalla, Moree, Murray, Narrandera, Narromine, Oberon, Orange, Parkes and Ryde. Parkes Parkes Shire Council. Pre-Sale Report Report prepared and issued by S&P about Rembrandt 2006-2 on 11 August 2006. It is called a pre-sale report because the Rembrandt 2006-2 notes were issued on 5 September 2006, after the publication of this report. Post-Sale Report Report prepared and issued by S&P about Rembrandt 2006-3 on 16 November 2006. It is called a post-sale report because the Rembrandt 2006-3 notes were issued on 31 October 2006, before the publication of this report. R-2 Ratings Letter Ratings Letter dated 5 September 2006, issued by S&P to ABN Amro confirming a public credit rating of AAA to Rembrandt 2006-2. R-3 Ratings Letter Ratings Letter dated 31 October 2006, issued by S&P to ABN Amro confirming a public credit rating of AAA to Rembrandt 2006-3. RAMP Rating analysis meeting paper, a report by a primary analyst used in S&P committee meetings to assist in determining what rating should be assigned to a product. Ratings Letters The R-2 Ratings Letter and the R-3 Ratings Letter. RB Councils The Councils that entered into a Right Balance Agreement with LGFS - Cooma and Corowa. Rembrandt 2006-2 The first issue of the CPDO notes in Australia, relevantly, the subject of the purchase by StateCover. Rembrandt 2006-3 The second issue of the CPDO notes in Australia (AUD$45 million), also referred to by LGFS and the Councils as community income notes, relevantly, the subject of the purchase by LGFS and on-sale of part of them to the Councils. Rembrandt notes The Australian issue of ABN Amro's CPDO, being Rembrandt 2006-2 and Rembrandt 2006-3. Right Balance Agreement Agreement offered by LGFS to some of the councils and into which two councils entered (Cooma and Corowa). Right Balance brochure A brochure describing LGFS' Right Balance service provided to some councils in or about 2005. Right Balance letter A standard form letter prepared by LGFS designed to accompany the Right Balance brochure sent to some councils in late 2005 and 2006 in respect of the Right Balance service. Right Balance Service The services provided by LGFS to the RB Councils set out in Schedule 1 to the Right Balance Agreement. Ryde Ryde Council. S&P Standard & Poors, a division of McGraw-Hill Companies Inc, and a ratings agency. S&P Reports The Pre-Sale Report or the Post-Sale Report, insofar as there are no material differences between the two. SCM Group ABN Amro's Structured Credit Marketing Group. SOC Statement of claim. Surf CPDO The generic name given by ABN Amro to its CPDO product. Surf Presentation A marketing presentation prepared by ABN Amro about the CPDO intended to be provided to ABN Amro clients. StateCover StateCover Mutual Limited. TPA Trade Practices Act 1974 (Cth).

LOCAL GOVERNMENT FINANCIAL SERVICES PTY LIMITED (ACN 001 681 741)

AMERICAN HOME ASSURANCE COMPANY (ABN 007 483 267753)

LOCAL GOVERNMENT FINANCIAL SERVICES PTY LIMITED (ACN 001 681 741)

AMERICAN HOME ASSURANCE COMPANY (ABN 007 483 267753) Seventeenth Respondent NSD 502 of 2013

LOCAL GOVERNMENT FINANCIAL SERVICES PTY LIMITED (ACN 001 681 741)

ABN AMRO BANK NV (ARBN 84 079 478 612) Third Respondent NSD 503 of 2013

LOCAL GOVERNMENT FINANCIAL SERVICES PTY LIMITED (ACN 001 681 741)

MCGRAW-HILL INTERNATIONAL (UK) LIMITED Fourteenth Respondent NSD 504 of 2013

LOCAL GOVERNMENT FINANCIAL SERVICES PTY LIMITED (ACN 001 681 741)

ABN AMRO BANK NV (ARBN 84 079 478 612) Fourteenth Respondent NSD 505 of 2013

AMERICAN HOME ASSURANCE COMPANY (ABN 67 007 483 267) Sixteenth Respondent NSD 522 of 2013

LOCAL GOVERNMENT FINANCIAL SERVICES PTY LIMITED (ACN 001 681 741)

LOCAL GOVERNMENT FINANCIAL SERVICES PTY LIMITED (ACN 001 681 741)

MCGRAW-HILL INTERNATIONAL (UK) LIMITED Fifteenth Respondent NSD 524 of 2013

MCGRAW-HILL INTERNATIONAL (UK) LIMITED Third Respondent