[2012] VSC 177 (Croft J)

INSURANCE - Life assurance - Prosperity Bonds - Premiums and earnings invested in portfolios of assets divided into units - Policyholder entitled to switch between portfolios - Arbitrage profits gained by switching with the benefit of hindsight - Insurer prevented arbitraging by changing from historic to forward pricing of units - Contract - Interpretation - Plain and ordinary meaning - Clause of Prosperity Bonds entitling investor to switch investment between 'Cash Portfolio' and 'Secure Portfolio' on three days' notice to life company - Upon its proper construction, clause did not entitle life company to complete switch before the expiration of notice - Whether breach of Clause for life company to liquidate non-cash assets in Secure Portfolio before expiration of notice of intention to switch - Implied term - Obligations of good faith and fair dealing - Whether implied term of Prosperity Bonds that life company would keep proportions of non-cash assets and cash assets in Secure Portfolio as described in Product Disclosure Statement - Whether implied term that life company would enable policyholder to reap uplift in value of non-cash assets during days between receipt of notice of intention to switch and expiration of notice -

Whether breach of implied term or obligations of good faith and fair dealing to liquidate non-cash assets in Secure Portfolio before expiration of notice of intention to switch - Penalty - Whether liquidation of non-cash assets in Secure Portfolio before expiration of notice of intention to switch amounting to imposition of penalty - Damages - Whether liquidation of non-cash assets in Secure Portfolio before expiration of notice of intention to switch amounting to repudiation of Prosperity Bonds - Damages - Damages for loss of bargain to be assessed in accordance with The Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 - Whether, if repudiation not accepted but no further notices of intention to switch given, damages to be assessed as if notices had continued to be given - Application of rule in Jones v Barkly (1781) 2 Dougl 684; 99ER 434 - Time - Business hours - Whether day on which notice of intention to switch given counting as date of receipt if notice given after business hours - Res judicata and Anshun estoppel - Whether Life Company barred or estopped by Anshun estoppel from liquidating non-cash assets in Secure Portfolio before expiration of notice of intention to switch - Appeal dismissed.

COSTS - INSURANCE - Life assurance - Prosperity Bonds - Premiums and earnings invested in portfolios of assets divided into units - Policyholder entitled to switch between portfolios - Arbitrage profits gained by switching with the benefit of hindsight - Insurer prevented arbitraging by changing from historic to forward pricing of units - Whether judge erred in ordering that unsuccessful appellant should pay the costs of trial on an indemnity basis.

1 This is an appeal ('the Argot appeal') from a judgment given in the Commercial and Equity Division. There was also a second appeal ('the Pegela appeal') but it has now been settled. The judge dismissed the appellant's ('Argot's) claims against the respondent The National Mutual Life Association of Australasia Limited ('NML') for damages for alleged breaches of a National Mutual Prosperity Bond policy of life insurance ('the Policy').

2 The matter last came before this court in 2008 on appeal from a judgment given in the Commercial and Equity Division earlier that year ('the first trial'). That appeal succeeded in part inasmuch as the trial judge was held to have erred in the construction of cl 1.8 of the Policy. The matter was thus remitted to the Trial Division for determination of the following questions:

a) Whether the defendant [NML] committed any and what breach or breaches of cl 1.8 of the plaintiffs' Prosperity Bond policies.

b) In the case of any breach of cl 1.8, whether [Argot] is entitled to damages for breach of contract in respect of the breach and, if so, the amount of those damages.

3 After a trial lasting 17 days ('the second trial') the judge held that NML had committed a couple of 'technical breaches' of cl 1.8, comprised of completing switches before the expiration of three business days following receipt of notice of intention to switch, but that it was not shown that those breaches caused any damage. The judge rejected arguments that NML had committed further breaches of cl 1.8 by liquidating non-cash assets immediately upon receipt of notices of intention to switch.

4 The essential facts of the matter are set out in the judgment of this court on the last occasion.[1] Suffice it to say for present purposes that the Policy permitted Argot to invest amounts of money in either a Secure portfolio or a Cash portfolio or a mixture of each.

5 The portfolios were defined by cl 2.2 of the Policy, as follows:

1. Prosperity Bond has a number of investment portfolios; your choice at the Commencing Date is shown on your initial Statement of Benefits. Any change to your investment portfolio choice will be shown on a subsequent Statement of Benefits. Further details of investment portfolios are given in Section 3 below.
2. Your policy contains Accounts in one or more of the various Prosperity Bond investment portfolios. Each account is maintained in Units.

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

1. Whenever an amount is taken from an Account, a number of Units (determined by dividing that amount by the Unit Price) is subtracted from the number of Units in that Account.
2. We reserve the right to delay the application of money to or from an Account until midnight Australian Eastern Standard Time on the date to which your request applies. We will then use the Unit Price applicable at the end of the period of delay.

6 The features of the portfolios were explained in cll 3.1 and 3.2 of the Policy, thus:

1. All Prosperity Bond investment portfolios available at the Commencing Date are Prosperity Bond Market-Linked Portfolios. The assets of these Prosperity Bond Market-Linked Portfolios are held in our No 5 Statutory Fund.
2. Copies of the appropriate audited accounts and balance sheets are available on request.

1. No individual policy has any claim on specific assets of any investment portfolio.

1. Prosperity Bond Market-Linked Portfolios are divided into parts of equal value called Units which are used to keep track of your entitlements under this policy. Changes in market values of the investments in each portfolio are reflected in the Unit Prices which rise and fall as a result.
2. All investment income (including realised capital gains and losses) earned on the assets of a particular Prosperity Bond Market-Linked Portfolio, less any tax payable is credited to that portfolio.

1. We determine the Portfolio Net Value of each Prosperity Bond Market-Linked Portfolio at least once ever calendar month.
2. Unit Prices of Units in Prosperity Bond Market-Linked Portfolios are calculated as described in Section 4 below. They are usually declared on a daily basis, but may be declared more or less frequently.

4.20 'Unit Prices' are the dollar value of each Unit. The Unit Price in a particular Prosperity Bond Market-Linked Portfolio is calculated as follows:

(i) As soon as practical after a day as at which the Portfolio Net Value is determined, we determine a Benchmark Unit Price as at that date, by dividing the Portfolio Net Value by the total number of Units then held in that portfolio.

(ii) The Unit Price is then calculated by adjusting as we deem appropriate the Benchmark Unit Price most recently determined to take account of any fluctuations in the market value of the investments of the portfolio since the date as at which the Portfolio Net Value is determined...

8 Clause 3.3 of the Policy allowed for an investor to switch between investment portfolios:

1. You may switch investment portfolios by transferring amounts between the Prosperity Bond investment portfolios at any time. Minimum transfer amounts apply.
2. Corresponding adjustments to the number of Units will be made using Unit Prices as at the date to which your request for transfer applies.

1. Partial transfers from within the investment portfolio(s) you choose to switch from will be made by subtracting Units commencing with Units derived from the premium paid earliest and continuing date sequence as Units derived from each premium are exhausted.

1. We reserve the right to make a charge for switching of 0.5% of any amount you choose to transfer between Prosperity Bond investment portfolios. All switching charges will be waived for portfolio switches between the Cash and Secure portfolios.
2. If switching reduces your Account Balance in any portfolio to less than the minimum amount we then allow your Account Balance in that portfolio may, at our discretion, be transferred to other portfolios as we decide. We reserve the right to make a change for switching of 0.5% of amounts so transferred.
3. For portfolio transfers other than switches to the Cash and Secure portfolios, the first four switches in a policy year are free.

9 Clause 1.8 provided for Large Withdrawals, as follows:

1.8 Large Withdrawals

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

[NML] will waive its right to delay withdrawals and switches for 30 days, providing the investor gives three working days notice of its intention to switch or withdraw. The unit price will be the price on the day when the notice is given in writing. [NML] also agrees that should the investor change their mind prior to the completion of the

portfolio switch or withdrawal transaction and not proceed with the switch or withdrawal, no penalty will be involved.

10 In the first trial, Argot's and Pegela's principal claim was that cl 1.8 of the Policies conferred on them an option of three days' duration in which to switch (or to decline to switch) at prices ruling at the first day of the option period, and thereby gave them the ability to switch or decline to switch with the benefit of hindsight. NML was alleged to have breached cl 1.8 by giving effect to switches immediately on receipt of notice of intention to switch.

The reasons of this court on the last occasion

11 That claim failed before the judge at the first trial but succeeded before this court on appeal. The court held that upon the proper construction of cl 1.8 NML was not entitled to give effect to a Notice of Intention to Switch before the expiration of three business days' notice and, therefore, that completion of a switch could not take place before the expiration of the notice:

The natural and ordinary meaning[2] of three days' notice of intention to switch or withdraw is that it is forward notice of an event to take place in three days' time. If the switch or withdrawal were to take place on the day on which notice is given, the investor would have failed to give three days' notice. To treat the second paragraph of cl 1.8 as entitling the recipient of the notice to perform the switch or withdrawal at any time within the three days would require a drastic recasting of the words in the paragraph. It would also make no sense in the context of the whole of the clause. If an investor gives notice requesting a transfer or withdrawal on the day of the notice, the respondent is entitled under the first paragraph of cl 1.8 to delay the transfer or withdrawal for up to 30 days. The second paragraph of cl 1.8 provides that the respondent is only bound to waive that right to delay for up to 30 days if the investor gives three business days' notice of intention to transfer or withdraw.[3]

... in our view, the purpose of the second paragraph of Clause 1.8 was to accommodate an investor who wished to effect a transfer or withdrawal at the price applicable at the date of giving notice and wished also to avoid the possibility of a delay of 30 days. Its effect was that, in consideration of the investor giving the respondent three business days' notice of intention to transfer or withdraw, and therefore the opportunity for the respondent to do what it thought necessary or desirable to accommodate the transfer or withdrawal, the investor was to be permitted to revoke the notice if, during the period of notice, the price so moved as to make transfer or withdrawal undesirable from the point of view of the investor.[4]

... In our view, if an investor gives notice of an intention to make a transfer or withdrawal in three business days' time, there is nothing in the policy ... which authorises the respondent to complete the transfer or withdrawal before the expiration of three business days.[5]

12 It was on that basis that the matter was remitted to the Trial Division for the assessment of damages.

13 Following that decision, NML ceased giving immediate effect to notices of intention to switch and adopted instead a practice ('the early realisation policy') whereby, immediately upon receipt of a notice of intention to switch from the Secure portfolio to the Cash portfolio, it caused sufficient non-cash assets in the Secure portfolio to be converted to cash in order to complete the switch at the expiration of the three days' notice (at the conversion price applicable on the date that the notice of intention to switch had been given).

14 Consequently, if Argot or Pegela did not change its mind about proceeding with a switch, at the expiration of the three days' notice period NML would cancel such of Argot's or Pegela's units in the Secure portfolio as were the subject of the notice of intention to switch; pay out from the Secure portfolio to the Cash portfolio the cash which had been realised in the Secure portfolio by the liquidation of non-cash assets in readiness for completion of the switch; and issue new units in the Cash portfolio of equivalent value to Argot or Pegela. Alternatively, if during the three days' period of notice Argot or Pegela changed its mind about proceeding with the switch and so determined not to proceed with it, NML would cause the cash in the Secure portfolio realised by liquidation of non-cash assets in readiness for completion of the switch to be reinvested in the Secure portfolio in a mixture of cash and non-cash investments in accordance with NML's then current investment strategy for the Secure portfolio

15 As a result of the adoption of the early realisation policy, Argot and Pegela amended their claims below to allege that NML had breached cl 1.8 of the Policies in three ways, as follows:

(1) The defendant breached Clause 1.8 of the plaintiffs' policies from November 2000 to the date of the Court of Appeal's decision on 5 December 2008, by adopting the practice of giving immediate effect to notices of intention to switch.[6] In doing so the defendant deprived the plaintiffs of the opportunity to give effect to their strategy of maximising the benefits available to them from the special terms of the Policies, terms which the defendant had expressly agreed with the plaintiffs.

(2) The defendant further breached Clause 1.8, after the decision of the Court of Appeal, by adopting the practice of immediately converting all the non-cash assets in the secure portfolio to cash on receipt of a notice of intention to switch.[7] This was for all practical purposes equivalent to giving immediate effect to a switch from the secure portfolio to the cash portfolio,[8] which was precisely the conduct that the Court of Appeal had decided was not permitted by Clause 1.8.

(3) The defendant further breached Clause 1.8 by failing to put the plaintiffs in the position they would have been in had no notice of intention to switch been given if the plaintiffs revoked a notice of intention to switch. Rather the defendant's practice was to repurchase assets conforming to the secure portfolio mandate at the prices prevailing on the day of repurchase. This meant that the

secure unit price was different, and for practical purposes under the plaintiffs' strategy less, than it would have been had the defendant not converted the non-cash assets to cash.[9]

16 Argot, but not Pegela, also pleaded that, by so breaching its Policy, NML had repudiated the Policy and that Argot had accepted the repudiation thereby bringing the Policy to an end:

The cumulative effect of the defendant's conduct was to repudiate the policy of the plaintiff ... by showing an unequivocal intention not to be bound by Clause 1.8. Instead the defendant took, and intends to take, any action possible to deprive Argot of the benefit of Clause 1.8.

17 At the second trial, Argot and Pegela contended that the new practice of liquidating non-cash assets in order to be ready for completion was an artificial device which was calculated to do indirectly what this court had ruled on the last occasion could not lawfully be done directly.

18 Alternatively, it was said that the new practice denied the efficacy of Argot's and Pegela's rights under cl 1.8 to revoke a notice of intention to switch, without penalty, inasmuch as if the value of non-cash assets in the Secure portfolio increased in the period between giving notice of intention to switch and determining not to proceed, the effect of immediate liquidation of non-cash assets was to deprive Argot and Pegela of the benefit of the increase.

19 In the further alternative it was contended that the effect of NML's actions was that, instead of Argot and Pegela having units in the Secure portfolio of which the value was capable of increasing over the days between notice of intention to switch and withdrawal of the notice (by reason of the increase in the value of non-cash assets over that time), Argot and Pegela were left with units in a Secure portfolio which, to some extent, was converted into cash in anticipation of completion and consequently could not increase in value over the days between notice and withdrawal. In their submission, that amounted to a penalty within the meaning of cl 1.8.

20 NML admitted that it committed some 'technical' breaches of cl 1.8 during the period between 2 November and 8 November 2000 by completing one and possibly a couple more switches from the Secure portfolio to the Cash portfolio earlier than it should have, but it contended that any damage thereby caused was de mininis. It denied that adoption of the early realisation policy was a breach of cl 1.8.

(i) Giving immediate effect to notices of intention

21 The judge dealt first with the claim that NML breached cl 1.8 of the Policies by completing switches immediately upon receipt of notice of intention to switch. His Honour found that there had been a couple of breaches of that kind but that they were insignificant and that Argot and Pegela had not attempted to prove that they had suffered any loss and damage by reason of them:

... the defendant did concede some 'technical' breaches between 2 and 8 November 2000 in completing one switch earlier than it should have done. This was a switch from the Secure portfolio to the Cash portfolio. In the perspective of the nature and quantum of the claim of the plaintiffs in these proceedings any such conceded or similar breaches must be regarded as insignificant, and particularly absent any attempt to prove any loss and damage flowing from them (specifically). This is unsurprising, given the focus of the plaintiffs' case on the range of issues put by the plaintiffs (those set out above and the good faith and related issues) in relation to which they claimed the defendant was in breach over a long period of time, and significantly since the trial [in 2008]. For these reasons and having regard to the views I have formed in relation to these issues, I regard any conceded and any similar 'technical' breaches as insignificant and not matters to be considered for present purposes.[10]

(ii) NML's practice of, immediately upon receipt of a notice of intention to switch, converting all non-cash assets in the secure portfolio to cash

(a) Doing indirectly what is prohibited to be done directly

22 The judge dealt next with the allegation that NML acted unlawfully by doing indirectly what it was prohibited from doing directly. His Honour rejected that claim on the basis that there is a clear legal distinction between, on the one hand, giving effect to a switch by cancelling units in the Secure portfolio and issuing new units in the Cash portfolio and, on the other hand, taking steps short of cancelling units and issuing new units in order to be ready to give effect to a switch at the expiration of the three business days of notice. As his Honour explained:

As submitted by the defendant, the prosperity bond policy terms, the Court of Appeal and the expert witnesses all said the same thing: namely, that a switch is a transaction whereby units in one portfolio are cancelled and units in another portfolio created. Further, a switch is to be contrasted with the administration of assets underlying the policy in question, which is not dealt with in the policy and is not, aside from recognising its existence as being the domain of the defendant outside the contract,[11] the subject of the judgment of the Court of Appeal (or the trial judge, as a matter of fact).

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

contained in the Policies, solely in the control of the defendant as the owner of the relevant assets.[12]

(b) Doing what was for all practical purposes equivalent to giving immediate effect to a switch from the secure portfolio to the cash portfolio

23 Essentially for the same reasons, the judge also rejected the contention that NML breached cl 1.8 of the Policies because the 'practical effect' of liquidating non-cash assets in the Secure portfolio was to effect the switch from the Secure portfolio to the Cash portfolio. His Honour held that there was a substantive legal distinction with substantively different legal consequences between the two:

The major effect of a switch from the Secure portfolio to the Cash portfolio is that the policyholder ceases to hold Secure units and holds Cash units instead. The second effect of a switch is that it takes four business days to transition (switch back) to the other portfolio. Immediate liquidation, or early conversion, [within one portfolio] does not bring about either result, in or in substance. The plaintiffs continue to hold Secure units throughout the notice period. If they change their minds and withdraw the notice of intention to switch, then no further unit cancellations or allocations need be made; they simply continue to hold the same units they have held all through. They do not need to give a further notice or request to be switched back to the Secure portfolio or wait four working days to return, as they have never left it. The defendant conceded that it is true that after liquidation or early conversion of non-cash assets, movements in the Secure unit price during the balance of the notice period are similar to movements in the Cash unit price during the same period; but it is said that this is not the same as holding Cash units. It is simply a statement that the unit price performance is similar. In my view, this is a correct analysis of the position on the basis of the provisions considered and the views expressed by the Court of Appeal. ...[13]

24 The judge added that Argot's and Pegela's argument was also flawed in that it was premised upon an unfounded assumption that the Secure portfolio would always be constituted of a mix of equities, fixed interest and cash, as opposed to cash alone:

Further, the assumption that the Secure portfolio always holds a mix of equities, fixed interest and cash assets is untrue in any event. The Investment Instructions applicable to defensive asset portfolios allow for such portfolio to hold 100% cash. The defendant conceded that whilst it is true that this is not the normal asset allocation, it is nevertheless a permissible one, even in circumstances in which arbitrage is not occurring, for example where markets are experiencing unusual circumstances. The same thing, it was said, happens in the form of the cash drag effect, which is a normal consequence of entry into the Secure portfolio. These factors, in my view, demonstrate a fallacy in the reasoning underlying the plaintiffs' submissions, certainly to the extent of the assumption as to the composition of the Secure portfolio, as indicated above.[14]

25 Finally, the judge rejected Argot's and Pegela's contention that the effect of NML's practice of liquidating non-cash assets in the Secure portfolio was to impose a penalty. His Honour reasoned that 'penalty' in cl 1.8 has its ordinary legal meaning of a charge, fee or deduction imposed as a result of determining not to proceed with a notice of intention to switch; more generally, a sum payable in terrorem, which the result in this case was not:

In my view, the early conversion or immediate liquidation of non-cash assets in the Secure portfolio does not expose the plaintiffs to any sort of liability and does not result in any reduction in the value of their policies. On the contrary, as submitted by the defendant, the immediate liquidation of non-cash assets will have had an effect that the value of those assets increased slightly in the period prior to the cancellation of the notice. The fact that if the plaintiffs had not given a switch notice they would have remained in the Secure portfolio asset allocation and might possibly have obtained the benefit of a greater rise in the value of the assets is merely one factor that a policyholder must take into account when determining if and when to give a switch notice. The plaintiffs did accept that there is an opportunity cost in switching out of the Secure portfolio. It is fair to say that the opportunity cost in terms of asset appreciation foregone is merely an additional dimension of that cost. Consequently, it follows in my view, that immediate liquidation of the assets in the Secure portfolio is neither an incentive nor disincentive to the giving of a switch notice or the cancellation of a switch notice.[15]

In conclusion on this point, I am of the view that liquidation of non-cash assets in the Secure portfolio is not in any sense the imposition by the defendant of a penalty for the cancellation of a switch notice. Rather, it is a step contemplated by the Court of Appeal as consistent with and permitted by clause 1.8 of the prosperity bond policies...[16]

26 As set out in its notice of appeal, dated 18 May 2012, Argot's grounds of appeal were that:

1. The judge erred in not finding that NML had breached cl 1.8 of the Policies by:

a) between November 2008 and the date of this court's decision by adopting a practice of giving immediate effect to notices of intention to switch;

b) By thereafter adopting the practice of 'early conversion' of Secure portfolio non-cash assets to cash; and

c) By failing to put Argot in the position in which it would have been if it had not given a notice of intention to switch which it later revoked

2. The judge erred by not holding that NML breached cl 1.8 by engaging in conduct which deprived Argot of the valuable opportunity to exercise rights available to it under the Policies.

3. The judge ought to have found that, by its conduct in adopting the practice of giving immediate effect to notices of intention to switch, it failed to put Argot in the position in which it would have been if it had not given notices of intention to switch which it later revoked

3. and depriving Argot of the opportunity to exercise rights available to it under the Policies, NML had repudiated the Policies.

a) in his determinations of the day count and frequency of unit pricing; and

b) In failing to award Argot damages calculated on the basis that NML had managed and would have continued to manage the asset allocation of the Secure portfolio consistently with the description in the Customer Information Brochure and NML's investment instructions.

5. The judge erred in not holding that NML had breached its statutory and common law duties of good faith by exercising its administrative discretions to deprive Argot of the benefits of the Policies or to prevent or so as to minimise detriment to NML in providing those benefits.

6. The judge erred in holding that NML was not barred by principles of res judicata and Anshun estoppel from contending that it was entitled to engage in the practice of converting non-cash assets in the Secure portfolio upon receipt of a notice of intention to switch; not required to calculated unit prices daily or at least on any day on which a unit price was required; and arbitrarily to vary the composition of the Secure portfolio.

7. The judge erred in holding or finding that Argot was entitled to damages for a one month period only.

8. The judge erred in disallowing Argot's claim for interest on damages.

9. The judge erred in ordering that Argot should pay NNL's costs on an indemnity basis.

27 Some of those grounds were not mentioned in Argot's outline of submissions and others were not developed in oral argument. On that basis, we take Grounds 2, 7 and 8 to have been abandoned.

Grounds 1(a): Giving immediate effect to notices of intention to switch

28 Under Ground 1(a), it was contended that the liquidation of non-cash assets in the Secure portfolio immediately upon receipt of a notice of intention to switch to the Cash portfolio was precisely the kind of conduct which this court held on the last occasion was not permitted.

29 We reject the contention. What the court held on the last occasion was that NML was not entitled to effect a switch from the Secure Portfolio to the Cash portfolio until expiration of a notice of intention to switch given in accordance with cl 1.8. We agree with the judge in the second trial that liquidating non-cash assets within the Secure portfolio does not effect a switch from the Secure portfolio to the Cash portfolio. There is a clear, substantive legal distinction between the action of liquidating non-cash assets within the Secure portfolio in anticipation of or preparation for a switch and the action of effecting a switch by the cancellation of units in the Secure portfolio and the issue of new units in the Cash portfolio. The liquidation of non-cash assets in the Secure portfolio is neither in substance nor effect the cancellation of units in the Secure portfolio nor the issue of new units in the Cash portfolio.

(i) Doing indirectly what is prohibited to be done directly

30 Counsel for Argot referred to the statement of this court in its reasons on the last occasion, that:

The judge [in the first trial] placed some emphasis on the words 'the unit price will be the price on the day when the notice is given in writing'. His Honour reasoned that, if the price at which the transfer or withdrawal were to be effected was the price on the day that notice was given, the day of transfer or withdrawal should be that day. But, in our view, the purpose of the second paragraph of cl 1.8 was to accommodate an investor who wished to effect a transfer or withdrawal at the price applicable at the date of giving notice and wished also to avoid the possibility of a delay of 30 days. Its effect was that, in consideration of the investor giving the respondent three business days' notice of intention to transfer or withdraw, and therefore the opportunity for the respondent to do what it thought necessary or desirable to accommodate the transfer or withdrawal, the investor was to be permitted to revoke the notice if, during the period of notice, the price so moved as to make transfer or withdrawal undesirable from the point of view of the investor.[17]

31 In counsel's submission, the words 'the investor was to be permitted to revoke the notice if, during the period of notice, the price so moved as to make transfer or withdrawal undesirable from the point of view of the investor' conveyed that the effect of cl 1.8 was to confer on an investor who gave notice of intention to swap and then revoked the notice during the notice period the right to be placed in the same financial position as if the investor had not given notice of intention to switch. It followed, counsel said, that it could not be that 'the opportunity for [NML] to do what it thought necessary or desirable to accommodate the transfer or withdrawal' includes liquidating non-cash assets in the Secure portfolio as soon as notice of intention to switch was received. In

31 counsel's submission, that would be to do indirectly what was prohibited by cl 1.8 to be done directly.

32 The submission is not persuasive. Liquidating non-cash assets in the Secure Portfolio in anticipation of a switch of which notice of intention to switch has been given does not gainsay the right of Argot to revoke a notice of intention to switch if prices so move during the period of notice as to make the switch appear unattractive from Argot's point of view. It means no more than that, if NML chooses to adopt a practice of liquidating non-cash assets in the Secure portfolio immediately upon receipt of a notice of intention to switch from the Secure portfolio to the Cash portfolio, the occasions on which movements in prices of non-cash assets during the notice period may cause Argot to conclude that it is economically desirable to revoke the notice are likely to be more limited than otherwise would be the case.

33 Under cover of Ground 1(b), Argot further contended that NML was bound by an implied obligation to keep the proportions of non-cash assets and cash assets in the Secure portfolio more or less as they were described in the Product Disclosure Statements ('PDS') current at the time of Argot's entry into the Policy, or at least within the sort of range which the PDS contemplated. In counsel's submission, NML's liquidation of non-cash assets in the Secure portfolio immediately upon receipt of a notice of intention to switch to the Cash portfolio so changed the proportion of non-cash assets to cash assets as to breach that obligation.

34 We do not accept the argument. NML did not dispute that it was bound by an implied obligation to procure that the composition of the Secure portfolio, taken over the long term, complied more or less with the proportion of non-cash assets to cash assets which was envisaged in or by the PDS. Although the PDS were not contractual documents, and were not imported into the Policy terms as such, NML accepted that the PDS represented or reflected the basis upon which the parties entered into the Policy and so informed an objective perception of the parties' contractual intentions. As such, the obligation to maintain the proportion of non-cash assets to cash assets over the long term might properly be seen as one not to do anything relevantly to destroy or diminish the state of affairs on the basis of which the contract was struck.[18] It does not follow, however, that NML was precluded in the short term from liquidating non-cash assets in the Secure portfolio in anticipation of completion of a switch from the Secure portfolio to the Cash portfolio.

35 Argot contended that it was implicit in the second paragraph of cl 1.8 of the Policy that Argot was to have the opportunity of profiting from any increase in the value of non-cash assets during the period between the giving of notice of intention to switch to the Cash portfolio and the withdrawal of the notice. In turn, it was said, that implied that NML was bound to keep the composition of the Secure Portfolio over that period more or less in the proportions of non-cash assets to cash assets which were envisaged in or by the PDS, and in turn that precluded NML from liquidating non-cash assets in anticipation of completion.

36 As it appears to us, however, the very point of cl 1.8 was to make clear that NML was entitled in the short term between receipt of notice of intention to switch and the time for completion of the switch to liquidate non-cash assets in anticipation of completion. Under cl 3.3 of the Policy, a switch from the Secure portfolio to the Cash portfolio would ordinarily be effected on and at the Unit Price of units in the Secure portfolio current on the day of receipt of the request for switch. The second paragraph of cl 1.8 provides for an exception to the rule in the first paragraph in cases where the units to be switched 'would require the cashing of Units valued at more than $100,000'. Under the first paragraph, NML would have up to 30 days to ready itself for completion or, putting it more directly, up to 30 days for the encashment of the units to be switched and in that event the switch would be effected at the Secure portfolio unit price at the end of that period. Logic and common sense imply that the objective of the exception was to ensure that, in the case of a switch from the Secure portfolio to the Cash portfolio involving units of significant value (scil. $100,000 or more), NML would have the time necessary to liquidate assets in the Secure portfolio in readiness for the need to apply cash to the issue of new units in the Cash portfolio.

37 Certainly, the second paragraph of cl 1.8 amounts to a partial relaxation of the first, and thereby confers a benefit on Argot in that the first sentence of the paragraph reduces the time which NML is to have to ready itself for completion; which is to say reduces the time available to NML for the encashment of resources for completion, from 30 days to three Business Days. The second sentence of the paragraph confers an additional benefit in that it provides for completion at the price applicable on the date that notice is received. That shields Argot from any decline in the value of Secure portfolio units during the three Business Days between receipt of the notice and the time for completion. The third sentence of the paragraph confers a further benefit in that it allows Argot to withdraw a notice of intention to switch at any time before the switch is completed. Hence, as this court observed on the last occasion, if the price of Secure portfolio assets so moves during the period of notice as to make the switch appear undesirable from an appellant's point of view, it may withdraw its notice and keep its units in the Secure portfolio. There is nothing, however, in any part of the second paragraph of cl 1.8 which dispels the entitlement of NML which is necessarily implicit in the first

37 paragraph to employ the period between receipt of notice and completion of the switch to liquidate assets in the Secure portfolio in readiness to apply cash to the issue of units in the Cash portfolio upon completion.

38 We are fortified in that conclusion by the essential nature of the Policy. As has been seen, it provides for a debt due from the insurer to the policyholder which fluctuates according to the capital gains and losses and the income derived from the underlying assets in which the premium is invested. As such it is calculated to produce the sorts of results which would be achieved by the insurer investing the policyholder's premium on the policyholder's behalf in the policyholder's choice of portfolio at the policyholder's risk, with a right in the policyholder to require the insurer to liquidate the investment and repay the liquidated proceeds of investment upon the death of the insured or at the policyholder's request. Consequently, as this Court observed on the last occasion, the insurer does not guarantee results (except to the extent that protection against losses is sought and provided at extra cost). The policyholder's return on premium is limited according to the success or failure of the underlying investments in which the premium may be disposed.[19]

39 In our view, it would be fundamentally inconsistent with the essential nature of the Policy if the second paragraph of cl 1.8 were construed as trenching upon the entitlement of NML, recognised in the first paragraph of the clause, to use the period between receipt of notice of intention to switch to the Cash portfolio and the time for completion of the switch to liquidate underlying non-cash assets in the Secure portfolio in anticipation of completion.

40 In further support of Ground 1(b), counsel for Argot submitted that there could never be any benefit to Argot, and consequently there would be no utility in the third sentence of the second paragraph of cl 1.8, unless there were potential for the value of Secure portfolio non-cash assets and thus the value of Secure portfolio units to increase during the period between notice of intention to switch to the Cash portfolio and time for completion of the switch. It followed in counsel's submission that it cannot be that NML is entitled liquidate non-cash assets in the Secure portfolio in anticipation of completion. To do so would prevent any increase in the value of the liquidated assets accruing to the Secure portfolio and thus to the Secure portfolio units. And, in counsel's submission, that would be a clear breach of NML's implied obligation to do all such things necessary on its part to enable Argot to have the benefit of the provision.[20]

41 We do not think that submission to be persuasive. It assumes that Argot was forever the only policyholder invested in the Secure portfolio, and that the only notice of intention to switch from the Secure portfolio to the Cash which it might ever have given was one to switch all of its units in the Secure portfolio to Cash. In fact, until segregation Argot was only one among many policyholders invested in the Secure portfolio and, as long as that remained the case, it was possible for NML to liquidate sufficient Secure portfolio non-cash assets to complete a switch of which Argot had given notice of intention, and yet still leave sufficient non-cash assets undisturbed in the Secure portfolio to increase the value of the Secure portfolio and Secure Portfolio units generally. Of course, any increase in the value of the Secure Portfolio in those circumstances would not have been as great as it would if none of the non-cash assets had been liquidated in anticipation of completion. But that does not mean that Argot's ability to withdraw a notice of intention to switch from the Secure portfolio to the Cash portfolio was wholly lacking in value. Argot received the benefit of being able to 'switch back' at any time before the switch was completed.

42 Moreover, even if Argot were to become the only policyholder remaining invested in the Secure portfolio, and if Argot were to give notice of intention to switch anything less than all of its units in the Secure portfolio, the liquidation by NML of the corresponding proportion of Secure portfolio underlying assets would still leave sufficient underlying non-cash assets undisturbed in the Secure portfolio to be capable of generating some increase in value over the period between notice and the time for completion, and thus of having an upward effect on the value of the Secure portfolio and Secure portfolio units generally. Once again, the upward effect might not be as great as if none of the non-cash assets had been liquidated in anticipation of completion. But that does not deprive the right to recall the notice of intention to switch of its value or utility.

43 It follows in our view that it is neither logically nor factually correct to say that the last sentence of the second paragraph of cl 1.8 could only ever have been of benefit to Argot if NML were precluded from liquidating non-cash assets in anticipation of completion. To the contrary, it was only in the most unusual circumstances - which ultimately developed following segregation when Argot and Pegela became the only two policyholders invested in the Secure portfolio (and chose to act as one by giving simultaneous notices of intention to switch in relation of all of their units in the Secure portfolio) - that the liquidation of non-cash assets in anticipation of completion of a switch was bound to preclude any increase in the value of Secure portfolio prior to completion of the switch.

44 Circumstances of that kind could hardly have been foreseen at the time of entry into the Policy. Still less could it have been contemplated that, if they arose, NML would thereupon come under an obligation to provide sufficient of its own funds to ensure that, no matter how many notices of intention to switch might be given and revoked throughout the remaining life of the Policy; and no matter how much the value of non-cash assets underlying the Secure portfolio might increase or decrease over the periods between notice of intention to switch and the time for completion; and, therefore, no matter how much money might be required to achieve it, the value of Argot's investment in the Policy could only ever increase. As this Court observed on the last occasion:

... the second paragraph of Clause 1.8, gave [Argot] the right to make unlimited switches between portfolios. But, as has already been observed, the special terms did not give [Argot] the right to switch at a profit. Where the policy was intended to provide for guaranteed results, as with protection, it provided for them expressly. In other respects, the clear implication is that the policyholders were at risk.[21]

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

For the same reason, it would be absurd to suggest that such a term was so obvious as to go without saying.

45 Counsel for Argot referred to the fact that, on the last occasion, this court rejected a submission on behalf of NML that the court should eschew an interpretation of cl 1.8 of the Policy which it was said would lead to results that were inconsistent with the fundamental nature of the Policy as a medium term investment vehicle. On that occasion the court said that:[22]

It was further submitted for [NML] that, if the second paragraph of cl 1.8 bore the interpretation for which the appellants contended [ie. that NML was not permitted to complete a switch until the expiration of three business days after notice of intention to switch had been given], it would confer on the appellants a right to make gains from the Policies which were of a fundamentally different nature to the gains for which the policy as a whole provides. More particularly, it was said that whereas the policy provides generally for investors to make long-term gains from increases in the value of the assets in their portfolios, the construction of cl 1.8 for which the appellants contended would allow the appellants to make short term gains at the expense of other policyholders.

In our view that submission is not persuasive either. The respondent may well not have agreed to the second paragraph of cl 1.8 if it had sufficiently thought through the possibilities for exploitation of the clause. Non constat that the clause is to be given a meaning for which it does not provide.[23]

46 In counsel's submission, logic dictates that the same reasoning apply to NML's contention on this occasion that cl 1.8 ought not be construed as requiring NML not to liquidate non-cash assets in the Secure portfolio in anticipation of completion because to do so would confer on Argot a right to make arbitrage gains from the Policy which would be of a fundamentally different nature to the gains for which the Policy as a whole provides.

47 We do not agree. In our view, there is an important difference between the two. On the last occasion, the plain and ordinary meaning of the words of cl 1.8 were held to be that NML was obligated to wait until after the expiration of the three day period before giving effect to a switch.[24] Thus, the passage of the reasons just set out was directed to an argument advanced on behalf of NML that the plain and ordinary meaning of the words of the clause should be eschewed because their effect was opposed to the fundamental nature of the Policy. The court held that it was not enough to overcome the plain and ordinary meaning of the clause that it might be productive of financial consequences which NML had not animadverted.

48 In contrast, on this occasion there is no question of the plain and ordinary meaning of the terms of cl 1.8 prohibiting NML from liquidating non-cash assets in anticipation of completion. There is nothing in cl 1.8 or elsewhere in the Policy which states in terms that NML may not liquidate non-cash assets in anticipation of completion. There is, however, a strong implication in the terms of the first paragraph of the clause, and in the juxtaposition of that paragraph to the second, that NML is entitled to liquidate non-cash assets in anticipation of completion. In such circumstances, there would need to be a strong indication aliunde to imply an obligation on the part of NML to refrain from realisation of non-cash assets until the time for completion.

49 The fundamental nature of the Policy thus assumes real significance in assessing whether Argot is correct in its contention that such an indication is to be found in the fact that the realisation of non-cash assets in anticipation of completion will result in the reduction or elimination of arbitrage profits which might otherwise flow from cancellation of a notice of intention to switch. If the Policy were the kind of financial instrument which is commonly adapted to the generation of arbitrage profits, one might perhaps be more inclined to accept that it was necessary in order to give cl 1.8 business efficacy that the opportunity for arbitrage profits not be excluded. Here, however, the fundamental nature of the Policy - a medium term low risk investment product - renders the idea untenable.

Ground 1(c): Failing to put Argot back in the position it would have been

50 Under cover of Ground 1(c), counsel for Argot contended that, whatever might be said about an implied obligation to enable Argot to reap the benefit of any uplift in the value of non-cash assets during the period between notice of intention to switch and the time for completion, NML's practice of immediately liquidating non-cash assets in the Secure portfolio in anticipation of or preparation for a switch meant that, if the value of non-cash assets rose during the notice period and Argot chose not to proceed with the switch, Argot would be penalised because it would not be put back in the position in which it would have been if it had not given the notice of intention to switch. In counsel's submission, that amounted to the imposition of a penalty within the meaning of cl 1.8.

51 In our view, that submission is answered by what we have already said about the preferable construction of cl 1.8. In addition, however, it faces difficulties at four other levels. First, 'penalty' has an established legal meaning, to which the judge referred.[25] As his Honour explained, the fact that Argot may not be placed in as good a financial position as it would have been if it had not given notice of intention to switch does not fall within that meaning. And, in the absence of indications to the contrary, it is to be assumed that the word 'penalty' in cl 1.8 was intended to have that meaning.[26]

52 Secondly, assuming for the purposes of argument that 'penalty' was used in cl 1.8 in the broader sense of a 'disadvantage or loss resulting directly from some course of action'[27] or, as counsel for Argot suggested, as a disincentive against adopting some course of action, the way in which cl 1.8 is constructed implies that the 'course of action' which might otherwise have attracted the 'penalty' is a policyholder changing its mind about proceeding with a switch or withdrawal of which notice of intention to switch or withdraw has been given.

53 The provision for three days' notice of intention to switch is made in the first sentence of the second paragraph of cl 1.8. The unit price which is to apply if such a notice is given is expressly provided for in the second sentence. As a matter of ordinary syntactical implication, the price referred to in the second sentence applies to the switch which is referred to in the first. Contrastingly, there is provision in the third sentence, beginning with the words 'AXA Australia also agrees', for the investor to change its mind and not proceed with a switch. The same sentence provides that no 'penalty' will be involved. There, the ordinary syntactical implication is that the 'penalty' referred to is one which would otherwise have resulted from a change of mind about making a switch, as opposed to one which might have resulted from giving notice of intention to switch.

54 In summary, if it had been intended to refer to a penalty which might otherwise have been imposed on giving notice of intention to switch, it is to be assumed that there would have been an express reference in the third sentence back to the reference to a notice of intention to switch proceeding in the first sentence; just as there is an express reference in the second sentence (dealing with the unit price on the day of notice) back to the notice referred to in the first sentence. The absence of a cross-reference in the third sentence back to the notice of intention to switch referred to in the first sentence implies that the penalty which is envisaged is confined to a penalty for change of mind.

55 The penalty which Argot contends it would suffer as a result of not being put back in the financial position in which it would have been is a penalty for having given notice of intention to switch; not for revoking the notice. That is not the kind of penalty from which the third sentence of the second paragraph of cl 1.8 is designed to save Argot.

56 Thirdly, as a matter of the natural and ordinary meaning of the English language, it is a very long way from 'no penalty will be involved' to a contractual stipulation that NML shall add to the Secure portfolio such of its own cash and other resources as might from time to time prove necessary to ensure that the value of Argot's units in the Secure portfolio after revocation of a notice of intention to switch or withdrawal is no less than it would have been if Argot had not given the notice of intention to switch or withdraw. If the clause were interpreted in that way it would apply regardless of the length of the period or the amount of money involved. As has been explained, the extent and consequences of an obligation on the part of NML to put Argot back in the position in which it would have been if it had not given notice of intention to switch would be extraordinarily far reaching and onerous. Hence, it is to be assumed that, if the parties had intended to create an obligation of that kind, they would have used clear words to do so. In our view, cl 1.8 falls well short of the requisite degree of clarity.[28]

57 Fourthly, it does not detract from that conclusion that the judge in the first trial found that, before entering into the Policy, NML became aware of Argot's subjective intention to exploit the second paragraph of cl 1.8 to generate arbitrage profits. Whatever either party may have thought about the meaning of the Policy, the parties' intentions must be discerned objectively from the terms of the Policy.[29] Ex facie, and as expert testimony confirmed, they bespeak a 'mums and dads' long term, low risk investment product in relation to which the conception of arbitrage is anathema.[30]

58 If, however, subjective intentions were relevant (and in our view they are not), it would also be necessary to note that, at the time of entering into the Policy, NML believed that it had the power and entitlement under the Policy to do what was needed to prevent attempts by Argot to exploit the arbitrage opportunities which Argot considered cl 1.8 might yield it. Indeed, that fact was the basis on which the judge at the first trial awarded damages in favour of Argot for unconscionable conduct.

Ground 2: Depriving Argot of a valuable opportunity

60 What we have said about Ground 1 applies equally to Ground 2. For those reasons, we reject Ground 2.

61 Under Ground 3, it was contended that, taken alone or in conjunction with the few earlier breaches of cl 1.8 comprised of completing switches before the expiration of three Business Days after receipt of notice of intention to switch,[31] NML's practice of early realisation of non-cash assets evinced an intention no longer to be bound by the terms of the Policy which repudiated the Policy, and that Argot had accepted the repudiation, thereby bringing the Policy to an end. Counsel for Argot referred to aspects of evidence given by officers of NML to the effect that they considered that NML was entitled to do whatever was within the letter of the Policy to defeat Argot's attempts to generate arbitrage profits through repeated switches in and out of the Secure portfolio. Against that background, counsel submitted that NML's early realisations of non-cash assets were properly to be seen as repeated, calculated breaches of the Policy which entitled Argot to treat the Policy as over.

62 For the reasons given when dealing with Ground 1, we do not consider that NML's practice of early realisation of non-cash assets was a breach of cl 1.8 or otherwise of the Policy. Accordingly, we reject the idea that it amounted to a repudiation of the Policy. It follows that Ground 3 fails.

63 Counsel for Argot submitted that, because this matter could go further, we should determine the basis on which damages would be calculated if the early realisation of non-cash assets were a breach of the Policy. Not without some hesitation, we have concluded that we should do so.[32]

64 Counsel for Argot advanced two propositions as to the quantification of damages on that basis. The first was an argument that, in determining whether Argot was entitled to treat the adoption of the early realisation policy as a repudiation of the Policy, it was entitled to assume that, if it had continued to give notices of intention to switch after the time it ceased to do so, NML would have applied the early realisation policy to each of those further notices.

65 The judge made no finding to that effect and it does not appear that there was a great deal of evidence about it. Nor did counsel refer us to any in the course of oral argument. But, in the end, it does not seem that there is really much dispute about it. It is clear that NML considered that it was entitled to apply the early realisation policy to each of the notices of intention to switch which were submitted after this Court's decision on the last occasion. On that basis, it may be inferred it is more likely than not that, if Argot had continued to submit such notices, NML would have applied the policy to each of them for the foreseeable future.

66 Admittedly, as counsel for NML contended, the duration of the Policy was potentially very lengthy - between 50 and 60 years - and it is impossible to say whether Argot would have continued to submit notices of intention to switch throughout the whole of that period or, if so, how NML would have reacted. What can be said, however, is that, if it were a breach of the Policy to liquidate non-cash assets in anticipation of a switch, NML's adoption of the early realisation policy and intimation to Argot of NML's intention to continue to apply the policy would have evinced an intention no longer to be bound by the Policy (or at least that NML intended to fulfil the Policy only in a manner substantially inconsistent with its obligations and in no other way). In our view, that would have constituted a repudiation of the Policy which Argot would have been entitled to accept, as it purported to do.[33]

67 In that event, the damages to which Argot would have been entitled would have been damages for loss of bargain. In effect, that would have been the amount necessary to compensate Argot for loss of the chance to derive ordinary investment profits for the life of the policy and the chance to derive arbitrage profits from the exploitation of the Policy for the life of the Policy. The value of that chance would need to have been assessed in accordance with the principles essayed by the High Court in The Commonwealth v Amann Aviation Pty Ltd.[34]

68 On the evidence before us, however, it is impossible to do that. Apart from anything else, there are no findings about quantum and the only evidence in support of the allegation of loss is a computer model which purports somehow to predict the number of notices of intention to switch which Argot would have given over the life of the Policy, assuming that the Policy had not been determined; the number of such notices which would have been withdrawn before completion; and the arbitrage profits which would have resulted from each such withdrawal. To our way of thinking, all of that seems decidedly speculative and not least because the reliability of the model is suspect. Experts called by NML were trenchant in their criticism of the parameters, assumptions and methodology which the model entails. There is also no evidence or calculation of an appropriate contingency discount[35] and, given the potential duration of the Policy, the vicissitudes likely to afflict it and the kinds of securities comprising the Secure portfolio, the discount would likely be deep. Nor is there any evidence of calculation or basis for calculation of an appropriate vicissitudes discount[36] or the effects of taxation.[37]

69 It follows that, if the adoption of the early realisation policy had been in breach of the Policy, and if Argot had been entitled to accept the repudiation as bringing the Policy to an end, there would need to have been a further hearing for the assessment of damages in accordance with Amann principles. Whether it would have been appropriate to afford either party an opportunity to adduce further evidence in those circumstances would have been for the judge to decide.

70 The second component of Argot's submission on damages was an argument that, if the adoption of the early realisation policy were in breach of the Policy but did not constitute a repudiation of the Policy, damages for breach of the Policy ought nonetheless be calculated by reference not only to the loss of arbitrage profits which it was contended were suffered on the occasions when Argot gave a notice of intention to switch to which NML responded by liquidating non-cash assets in anticipation of completion, but also to the loss of arbitrage profits which it was conjectured would have been suffered in respect of a very large number of further notices that, according to the predictions generated by the computer model, would have been given throughout the life of the Policy and to which, it was assumed by the model, NML would have responded by the early realisation of non-cash assets in the Secure portfolio in each case.

71 In counsel's submission, Argot's entitlement to have damages so assessed flowed from the principle of dispensation applied by the High Court in Peter Turnbull and Company Pty Ltd v Mundus Trading Company (Australasia) Pty Ltd,[38] and more lately reconsidered in Foran v Wight,[39] that:

... whenever the promise of one party, A, is subject to a condition to be fulfilled by the other party, B, [and] ... although B is ready and willing to perform the contract in all respects on his part, A absolutely refuses to carry out the contract, and persists in the refusal until a time arrives at which performance of his promise would have been due if the condition had been fulfilled by B, A is liable to B in damages for breach of his promise although the condition remains unfulfilled.[40]

72 We do not accept that submission. If the early realisation policy were in breach of the Policy, it would follow that its adoption entitled Argot to treat the Policy as repudiated and so as at an end and thus to seek damages calculated in accordance with Amann principles. As has been explained, Amann principles include various discounts for vicissitudes. Equally, however, if the adoption of the early realisation policy did not repudiate the Policy, and the Policy remained on foot, there would be no room for application of the dispensation principle because the Policy would remain on foot for the benefit of both parties.

73 As Dixon CJ explained in Peter Turnbull, the principle of dispensation derives from Lord Mansfield's judgment in Jones v Barkly:[41]

... a plaintiff may be dispensed from performing a condition by the defendant expressly or impliedly intimating that it is useless for him to perform it and requesting him not to do so. If the plaintiff acts upon the intimation it is just as effectual as actual prevention. Jones v Barkley[42] is a case decided more than half a century before it was found possible to sue as for an anticipatory breach of contract. As will be seen from Lord Mansfield's judgment it went upon the principle which in my opinion controls the decision of this appeal. Lord Mansfield said: 'One needs only state what the agreement, tender, and discharge, were, as set forth in the declaration. It charges, that the plaintiffs offered to assign, and to execute and deliver a general release, and tendered a draft of an assignment and release, and offered to execute and deliver such assignment, but the defendant absolutely discharged them from executing the same, or any assignment and release whatsoever. The defendant pleads, that the plaintiff did not actually execute an assignment and release; and the question is, whether there was a sufficient performance. Take it on the reason of the thing. The party must shew he was ready; but, if the other stops him on the ground of an intention not to perform his part, it is not necessary for the first to go farther, and do a nugatory act.'[43] Thus too, Ripley v M'Clure,[44] which might at a later date have been decided as a case of anticipatory breach, was placed by Parke B upon the same ground. Lord Campbell CJ, in Cort v The Ambergate &c Railway Co[45] gave an account of Ripley v M'Clure[46] which brought the point out clearly:

There being an executory contract, whereby the plaintiff agreed to sell and the defendant to buy, on arrival, certain goods, to be delivered at Belfast at a certain price, payable on delivery, it was held that a refusal by the defendant before the arrival of the cargo to perform the contract was not of itself necessarily a breach of it, but that such refusal, unretracted down to and inclusive of the time when the defendant was bound to receive the cargo, was evidence of a continuing refusal and a waiver of the condition precedent of delivery, so as to render the defendant liable for the breach of contract.[47]

74 As that shows, the principle is directed to the dispensation by one party of another's need to tender performance where the latter is able to prove that, but for dispensation, he or she was or would have been ready and willing to perform within time. So, in this case, if Argot could prove that it was ready and willing to give notice of intention to switch but was told by NML that it would be met by early realisation of non-cash assets then, assuming that early realisation of non-cash assets were a breach of the Policy, Argot would be entitled to treat NML's intimation as a breach of the Policy and to sue for damages for breach of the Policy in respect of that notice of intention to switch. On the basis of the stated assumptions, Argot would also be entitled to treat the intimation as repudiation of the Policy and so bring the Policy to an end. But, assuming Argot chose not to terminate the Policy, the Policy would remain in force for the benefit of both parties and so, therefore, NML's intention to apply the early realisation policy to any further notices of intention to switch would need to be established on a notice by notice basis.

75 Contrary to the effect to counsel's submissions, the dispensation by NML of Argot from the need to tender a notice of intention to switch in respect of a designated switch or switches would not mean that the Policy was to be treated thenceforth as if the requirement of tendering a notice of intention to switch had been struck out of the Policy. Nor would it assist Argot if it were. For, as Kitto J explained in Peter Turnbull:[48]

It will be observed that when it is said that A's obligation is to be regarded as absolute because he has dispensed with fulfilment of the condition to which it was originally subject, it is not meant that the contract is to be treated as if the condition had been deleted from it. If that were the meaning of the principle it would not assist B in a case like the present, where the contract is in such terms that fulfilment of the condition is required, not only in order to entitle B to insist on performance of A's obligation, but in order to make definite what it is that A is bound to do. Here, for example, the respondent's obligation to deliver the oats was conditional upon the appellant's nominating a ship willing to receive them at Sydney at some time during the months of January and February. But the substance of the obligation was to deliver the oats at Sydney on board a duly nominated ship; and nothing short of an agreed variation of the contract could oblige the respondent to do anything different.[49] Consequently, if the condition of nominating a February ship were dispensed with in the sense of being treated as struck out of the contract, the respondent could not be said to have made default in delivery, for so long as no ship had been in fact nominated in accordance with the contract there was no delivery which he was obliged to make.

76 It is the same here. Ex hypothesi, the form of breach which is said to result from an application of the early realisation policy cannot occur until and unless a notice of intention to switch has been given to which the early realisation policy can be applied; or, more appositely, in relation to which there may arise an obligation on the part of NML to abstain from early realisation.

77 Because we have concluded that Grounds 1 to 3 fail, the approach taken by the trial judge to the assessment of damages arising from NML's failure to give effect to switch notices is of only minor significance. Nevertheless, it is necessary to deal with Ground 4(a).

78 Clause 1.8 requires the investors to give three working days of the intention to switch from Secure to Cash or vice versa. In essence, the question raised by Ground 4(a) is whether NML breached cl 1.8 by failing to make specific switches within the time required by the Policy. Argot claimed below that there were breaches in relation to the following switches.

Switch not effected till after 16:00, 14 January 2009

At that time Switch 1 had not been effectuated. Failure to make Switch 1 by the required time, thus making Switch 2 impossible

No non-cash assets in Secure portfolio, because of earlier direction to switch from Secure to Cash. Claim was really an objection to early conversion practice

Switch 3 governed and there was a breach in relation to 3

The allegations with respect to switches 6, 7 and 8 were withdrawn.

79 Clause 1.8 of the Policy, which gave Argot the right to switch between the investment policies, is set out at [9] above].

1.1 Flexibility

This policy provides a number of valuable options which may enable you to make adjustments to suit your changing needs.

You may: ...

(iii) switch investment portfolios; ...

We will be pleased to provide you with details of our then current administrative requirements and level of charges which affect these changes. The date to which your request for a change applies must be on or after the date your request is received by us at our Customer Service Centre. [Emphasis as contained in the Policies]

81 On 13 December 2001[52] NML notified Argot that a 14:00 hours cut off time applied to switch notices and that notices received after that time would be treated as having been given on the next working day.

82 In the proceedings below, Argot argued that the date on which the notice was given was to be treated as the day of receipt of the notice, even if it were received outside business hours and that if the following day was a working day it was to be counted as the first of the three days within which the switch had to be effectuated. For example, it was submitted that in the case of Switch Notice 1 (sent at 22:21 and received at 23:26 on Thursday 8 January) time began to run on the following day (Friday 9 January). Accordingly the Policy required NML to switch Argot's units by Tuesday 13 January. Argot also argued that NML's administrative requirement that a notice to be given within business hours and, more particularly the requirement that the notice be given by 14:00 on a business day, breached the second paragraph of cl 1.8 which provided that:

The unit price will be the day on which the notice is given in writing.

83 By contrast, NML submitted that a notice given outside business hours (or, as discussed below, after 14:00) was to be treated as received on the following working day (in the example given above, by Friday 9 January). The day on which the Switch Notice was deemed to have been received was to be excluded from the calculation, so that NML could not effectuate the first switch until Wednesday 14 January.

84 His Honour held that the provision in cl 1.1 (iii) relating to the date of the request for a change contemplated that someone 'would be there to receive the request and to take whatever action might be necessary' so that the Customer Service Centre had to be open and operating.[53] Thus the reference to working days in cl 1.8 meant 'usual business hours on a weekday other than a public holiday'.[54]

85 In any case cl 1.1 permitted NML to adopt an administrative policy imposing a reasonable cut off time for the receipt of switch notices. Having heard evidence about NML's need to allow time for the conversion of non-cash assets into cash in anticipation of a switch, his Honour held that the nominated cut off time of 2.00 pm on a working day was reasonable. In support of these conclusions he said that:

In my view, the plaintiffs' arguments based upon dividing or apportioning the twenty-four hour period of a day into the 'working day' of usual business hours and the other part or parts of the day would serve to defeat the express terms of the Policies in which time periods with respect to the switch notices are specified in terms of days, rather than parts of days. It is also contrary to the general position at common law that regard is not usually had to fractions of days for the purpose of construing time periods. This position is subject to express agreement to the contrary, but in the present case, the express terms of the Policies re-affirm the application of the general rule, rather than the contrary position.[55] Finally, the construction and approach of the plaintiffs with respect to the day count is, in my view, a manifestation of their position that the prosperity bond policies gave them a right to profitable arbitrage. This position has, however, been rejected by the Court of Appeal[56] and with that rejection goes any argument that the proper construction of the Policies with respect to the day count should be construed in a manner which would not detract from, if not facilitate, this position.[57]

86 His Honour went on to consider whether NML had breached the terms of the Policy by reference to these requirements. Having regard to the fact that the first Switch Notice (from the Cash to the Secure portfolio) was given well after working hours on 8 January, NML had not breached cl 1.8 by effectuating the switch after 16:00 on 14 January. Although his Honour did not say so explicitly, he implicitly accepted NML's submission that Friday 9 January (the day on which the Notice was taken to be given) was not to be included in the computation.

87 His Honour held that whether the second Switch Notice from Secure to Cash was to be treated as received on 13 January (as Argot contended) or on 14 January (as NML contended) there was no breach in relation to that notice because the Court of Appeal had previously held that the Policy prevented NML from transferring the units before the expiration of three working days. The second Switch Notice was in effect, a short selling notice, that is a notice in which an intention to switch was given before acquiring the investment on the basis of an assumption that the investment would be acquired on or before the expiration of the notice to switch. The earliest date at which the second Switch Notice could be given was, therefore, either on Wednesday 14 January according to Argot or 15 January according to the defendant. The second Switch Notice was in fact given at 23:01, on Tuesday 13 January.

88 His Honour held that the claim for damages in relation to the third Switch Notice (Secure to Cash) was, in effect, based on the submission that NML should not have realised non-cash assets in the Secure portfolio within the period of three working days. But at that time there were not in fact any non-cash assets held in the Secure portfolio. Because Argot's claim was inconsistent with his Honour's conclusion that 'early conversion' of assets to cash was permitted under the terms of the Policy, the judge held that NML's actions did not breach the Policy.

89 The fourth Switch Notice (also Secure to Cash) was the same switch as contemplated by Switch Notice 3, which had not been cancelled. His Honour considered that the provision in cl 1.8 permitting an investor to change his or her mind about a switch was not satisfied by giving a Switch Notice while an earlier notice covering the same switch was on foot and that in any case the subsequent notice did not satisfy the three working days requirement. Further, Argot had cancelled Switch Notice 4 before NML informed it that it did not consider that it was valid, so that no loss or damage had been suffered by Argot.

90 The fifth Switch Notice, (Cash to Secure) which Argot submitted was not treated in accordance with the terms of the Policy, was received by the defendant at 00:22 on Saturday 17 January 2009.[58] At that time, Argot held units in the Secure portfolio, because Switch Notice 3 (received at 19:44 on Wednesday 14 January 2009) and Switch Notice 4 (received at 19:28 on Thursday 15 January 2009) were cancelled by Argot and Switch Notice 2 was invalid due to short selling.

91 Argot submitted that there was a moment of time, between the working day on which the requested switch was completed and the next working day, during which the policyholder could give a switch notice. Because his Honour rejected the argument that a working day could be divided into 24 hours for the purposes of cl 1.8, he rejected that argument. Consequently Argot's claim of breach with respect to the fifth switch notice failed.[59]

92 Argot did not contest the trial judge's finding that a 'working day means normal business hours not on a weekend or public holiday'. Argot also accepted that the day on which the Notice was given was not to be included in the calculation of the three working days by the end of which the Switch was to be made.

93 However, Argot submitted his Honour wrongly held that it was open to NML to rely on its powers under cl 1.1 to provide that a Switch Notice sent after either 14:00 or 17:00 was not to be treated as received or given for the purposes of the Policy until the following working day. This was said to be a breach of cl 1.8, which provides that 'The unit price will be the day on which the day is given in writing'. It was submitted that the clause contemplated that the price should be fixed regardless of the time of day when the notice was given. Further, Argot argued that the reference to administrative requirements referred to matters such as fax numbers to which Notices should be sent and could not read in such a way as to conflict with the provision in cl 1.8 relating to the day on which the Unit price should be ascertained.

94 It was submitted that the judge had confused the requirement that NML switch units three working days after the receipt of the notice, with the provision in cl 1.8 that the Unit price was to be ascertained on the day on which the notice was given.

95 It followed, it was contended, that this Court should reject the view that NML was entitled to fix a 14:00 or /17:00 rule for receipt of the intention to switch. Thus, the Unit price was to be ascertained by reference to the day the notice was actually given (regardless of whether this was done outside the specified time) and the three working days should run from the working day following the giving of the Notice.

96 Argot's contention raises two related questions. These are:

(a) Did the Policy require that the Unit Price be ascertained by reference to the price which operated at the relevant time of the day on which it was given, even if the Switch Notice was received after working hours?

(b) Was NML entitled to require that a switch notice be given by 14:00 on a working day, for the purpose of calculating the period of three working days at the end of which the Notice was to be effectuated?

97 At first sight there is some attraction in the submission that the Unit Price must be ascertained by reference to the actual day on which the Notice is given, regardless of whether or not it was given during working hours. However, when cl 1.8 is read as a whole it is clear that the reference to 'the day on which the Notice is given' must be interpreted in light of the requirement that the investor give three working days notice of the intention to switch. It would be unnecessarily complex to read the reference to 'the price on the day on which the Notice is given' as meaning something different from the requirement that 'the investor [give] three working days notice of the intention to switch or withdraw'. For that reason, the provision relating to the giving of the Notice should be read in the same way in the first and second sentences of the second paragraph. Thus, if a Notice is given at Thursday 8 January at 23:00, the Unit Price is the price on Friday 9 October and the three working day period begins to run on Monday 12 October (Friday is excluded because it is the day on which the notice is treated as given[60]).

98 We also agree with his Honour that the imposition of a 14:00 deadline was an administrative requirement relating to the switching of investment portfolios, which was permitted under cl 1.1. NML relied on evidence explaining its need to have adequate time to liquidate non-cash investments in order to give effect to an instruction to switch the investment from Secure to Cash. A memorandum from Ms Vicki Carter of its Group Legal section dated 30 January 2009, directed that:

between receipt of the notice (prior to 2.00 pm) and close of business, all non-cash assets supporting the units subject to the switch should be converted into cash assets in order to prepare for the switch, and ensure that there are sufficient assets supporting the units that are to be transferred at the price at which they are to be transferred. [61]

99 In addition, a witness statement made by the Investment Performance Measurement Manager of NMLA, Mr Dale McMenamin said that:

The deadline for same day execution of instructions to redeem units in similar NMFM trusts which are marketed to external investors is normally 12 noon, but for dealings for NMLA the time is extended to 2 pm. 2 pm is also the latest time for [National Funds Management Ltd ('NMFM'] to inform Alliance Bernstein[62] of the Trusts' unitholder cashflow settlement requirements for that and future days, so that Alliance Bernstein can trade (sell or buy) underlying assets of the Trust(s) on that same day as necessary. These asset sales settle T + 3 (i.e. the third working day after the trade day T), in accordance with standard ASX settlement rules.

The time when cash becomes available from the sale of Trust units is complex. In order to be certain of obtaining cash in time to process a switch from Secure to Cash, instructions to sell Trust units within the Sector(s) and to sell assets within the Trust(s) must both be given four working days earlier. Generally, NMFM's desire is that the Trusts should be as close to fully invested as possible, with a small amount of free liquidity (a minimum of 0.5% at all times). Each day my staff, on behalf of NMFM, undertake a cash balance forecast for each Trust, involving consideration of net Trust inflows and outflows requested by NMLA from all relevant Sectors across all of its statutory funds and all amounts payable by the Trust over the next three days to settle current purchases and all amounts receivable in settlement of earlier sales. If all requests for redemption of Trust units cannot be met from the funds that are forecast to be available at the time the

relevant transactions are to be processed by UPS, assets within the Trust will be sold immediately, as the cash generated will not be available to the Trust to pay NMLA until the third day after the trade date. In addition, any request for redemption of Trust units on a Wednesday is more likely to require asset sales, as regular administrative Sectors~within-Composites 'rebalancing' transactions occur on that day. Basically, if instructions are given before 2 pm on Day T. the assets will be sold that day by NMFM through its manager and therefore value will be obtained by the Trust on Day T, but the Trust will only receive the cash on Day T+3. NMLA is not entitled to demand the cash on the day it sells its Trust units (Trusts often have constitutional provisions allowing delay of cash settlement to unitholders of up to 30 days), but NMLA would normally expect to receive its cash no later than Day T+3.

When NMLA wishes to acquire units in the Value Trust and or the Growth Trust as a result of inflows of funds into the Australian Shares Sector, it must give notice to NMFM by 2 pm at the latest on the day in question for execution and value to occur on that day. Again, the public deadline for the application for new units in NMFM trusts is earlier: 1 pm. Thus, if NMLA has an inflow of funds into the Sector on, say, a Wednesday evening, so that the funds arrive in the Sector before commencement of business on the Thursday, NMLA cannot obtain units in the Trusts before the close of business on Thursday. They are created on Thursday night and are notified to us by opening of business on Friday. If NMLA notifies NMFM by 2 pm on the Thursday, then units will be allotted to it in the Value Trust and or the Growth Trust after close of business on the Thursday, at close of day prices (prices determined by NMFM by reference to the value of assets in the Trusts at that time (i.e. 'forward' prices are used, and those units would be available to NMLA from the Friday morning onwards.[63]

100 In light of that evidence, we consider that it was reasonable for NML to exercise the power conferred by cl 1.1 to require that Switch Notices be received by 14:00 on a working day. We also note that all of the Switch Notices which were the subject of breach claims were received after 17:00. We agree with his Honour's conclusions relating to the character of Switch Notices 2 to 5, which are described above.

102 Counsel for Argot did not develop the contention that the judge erred in failing to award Argot damages on the basis that NML would have continued to manage the asset allocation of the Secure portfolio consistently with the description in the Customer Information Brochure and investment instructions. It is unnecessary, therefore, for us to say a great deal about it. Suffice it to say once more that, if application of the early realisation policy were a breach of the Policy entitling Argot to terminate the Policy, and it terminated the Policy on that basis, damages would fall to be assessed in accordance with Amann principles in the manner we have described.

Ground 5: Statutory and common law duties of good faith

103 As we apprehend the argument advanced under Ground 5, it was that NML was bound by statutory and common law duties of good faith in the exercise of its powers of administration of the Policy and it was a breach of those obligations to apply the early realisation policy to Argot's notices of intention to switch.

104 As we see it, that contention adds nothing to the express and implied contractual obligations arguments already considered and rejected. So far as a common law duty of good faith and fair dealing is concerned, although there may be debate about its scope in relation to commercial contracts,[64] it seems generally to be accepted that it does 'not operate so as to restrict decisions and actions, reasonably taken, which are designed to promote the legitimate interest of a party'.[65] In our view, NML's decision to realise non-cash assets in anticipation of completing a switch from the Secure portfolio to the Cash portfolio was one to promote its legitimate interest in complying with the terms of the Policy. It enabled NML to comply with its obligation of effecting completion at the price of units ruling on the day of notice of intention to switch, and at the same time it enabled NML to avoid dipping into its own resources to fund arbitrage profits which otherwise could have resulted from the withdrawal of the notice of intention to switch. Accordingly, we see no lack of good faith or fair dealing in the adoption of the early realisation policy.

105 Counsel for Argot prayed in aid the decision of the House of Lords in Equitable Life Assurance Society v Hyman[66] in which it was held that an insurance company which paid reduced bonuses to policyholders who had opted for a guaranteed rate of annuity was a breach of obligation implied from the reasonable expectation of parties that a policyholder who opted for a guaranteed rate of return would be better off than one who did not. Lord Woolf MR held that for the board of the insurer to pay differential dividends in the circumstances was an impermissible exercise of discretion because it was contrary to what the policy by implication necessarily required.[67] Similarly, but in terms more consonant with Australian conceptions of implied contractual obligations, Lord Steyn said:[68]

The enquiry is entirely constructional in nature: proceeding from the express terms of article 65, viewed against its objective setting, the question is whether the implication is strictly necessary. My Lords, as counsel for the GAR policyholders observed, final bonuses are not bounty. They are a significant part of the consideration for the premiums paid. And the directors' discretions as to the amount and distribution of bonuses are conferred for the benefit of policyholders. In this context the self-evident commercial object of the inclusion of guaranteed rates in the policy is to protect the policyholder against a fall in market annuity rates by ensuring that if the fall occurs he will be better off than he would have been with market rates. The choice is given to the GAR policyholder and not to the Society. It cannot be seriously doubted that the provision for guaranteed annuity rates was a good selling point in the marketing by the Society of the GAR policies. It is also obvious that it would have been a significant attraction for purchasers of GAR policies. The Society points out that no special charge was made for the inclusion in the policy of GAR provisions. So be it. This factor does not alter the reasonable expectations of the parties. The supposition of the parties must be presumed to have been that the directors would not exercise their discretion in conflict with contractual rights. These are the circumstances in which the directors of the Society resolved upon a differential policy which was designed to deprive the relevant guarantees of any substantial value. In my judgment an implication precluding the use of the directors' discretion in this way is strictly necessary. The implication is essential to give effect to the reasonable expectations of the parties. The stringent test applicable to the implication of terms is satisfied.

106 Assuming, without deciding, that such an analysis is applicable in this country, the answer to counsel's submission is once again that, for the reasons already given, it was not the commercial object of the inclusion of cl 1.8 in the Policy (as objectively construed) to impose on NML an obligation to pay out of its own funds sufficient throughout the remaining 50 to 60 years life of the Policy to ensure that, no matter how many notices of intention to switch might be given and revoked, and no matter how much the value of non-cash assets underlying the Secure portfolio might increase or decrease over the periods between notice of intention to switch and times for completion, and therefore no matter how much money might be required to achieve it, the value of Argot's investment in the Policy could only ever increase. In those circumstances, it is neither necessary nor reasonable to imply the existence of such an obligation.

107 Finally, on this aspect of the matter, counsel for Argot submitted that, however all that may be, the effect of s 32 of the Life Insurance Act 1995 (Cth) was to require NML to subjugate its own interests to those of Argot and so not engage in the practice of early realisation.[69]

108 The answer to that is essentially the same as this court's response to the appellants' invocation of s 32 on the last occasion.[70] It is that the plain and ordinary meaning of the 'interests of owners and prospective owners of policies referable to the fund' in s 32 is their interests as framed by their entitlements under the Policies. As has been explained, they had no entitlement to arbitrage profits under the Policies. The suggestion that liquidating non-cash assets in anticipation of completion gave priority to NML's own interests over Argot's interests is for that reason misplaced. In effect, it just repeats the claim, already rejected, that NML was bound by an implied contractual obligation to allow Argot to derive arbitrage profits from the exploitation of cl 1.8.

109 We repeat that, in our view, it was neither necessary to give business efficacy to the Policy nor reasonable to imply an obligation on the part of NML to put and to keep putting sufficient of its own funds into the Secure portfolio over the life of the Policy to eradicate the effects of any decline in the value of non-cash securities between the date of any notice of intention to switch to the Cash portfolio and withdrawal of the notice. For those reasons, we reject Ground 5.

110 The essence of the claims of res judicata and Anshun estoppel was that, because, by the time of the first trial, NML had already given consideration to the possibility of introducing an early realisation policy, albeit that NML did not implement that policy until after the last occasion that the matter was before this court; and because this court held on the last occasion that it was open to Argot and Pegela to seek to derive as many arbitrage profits as they might by exploiting cl 1.8, it is too late now, and it was too late before the judge in the second trial, for NML to contend that it was entitled to adopt the early realisation policy and so frustrate Argot's attempts to generate arbitrage profits.

111 We think that the argument is misconceived. The essence of res judicata and issue estoppel was explained by Dixon J in Blair v Curran[71] as follows:

A judicial determination directly involving an issue of fact or of law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion, whether that conclusion is that a money sum be recovered or that the doing of an act be commanded or be restrained or that rights be declared. The distinction between res judicata and issue-estoppel is that in the first the very right or cause of action claimed or put in suit has in the former proceedings passed into judgment, so that it is merged and has no longer an independent existence, while in the second, for the purpose of some other claim or cause of action, a state of fact or law is alleged or denied the existence of which is a matter necessarily decided by the prior judgment, decree or order.

Nothing but what is legally indispensable to the conclusion is thus finally closed or precluded. In matters of fact the issue-estoppel is confined to those ultimate facts which form the ingredients in the cause of action, that is, the title to the right established. Where the conclusion is against the existence of a right or claim which in point of law depends upon a number of ingredients or ultimate facts the absence of any one of which would be enough to defeat the claim, the estoppel covers only the actual ground upon which the existence of the right was negatived.

112 On the last occasion, there was no allegation of a cause of action of breach of cl 1.8 of the Policy committed by the adoption of an early realisation policy. Nor could there have been such an allegation; for the obvious reason that NML had not then adopted the policy. The breach which was alleged on the last occasion, and found to be proved, was one of breach of cl 1.8 of the Policy comprised of completing switches before the expiration of three business days after receipt of notice of intention to switch. The issue of early realisation of asset was not raised, still less decided as part of the judgment, and it was certainly not indispensable to any of the conclusions that were reached. Hence, there can be no question of res judicata or issue estoppel.

113 Anshun estoppel, or more accurately the extended principle expressed in Henderson v Henderson,[72] was described by the High Court in Port of Melbourne Authority v Anshun Pty Ltd[73] in these terms:

The critical issue, then, is whether the case falls within the extended principle expressed by Sir James Wigram V.C. in Henderson v. Henderson.[74] The Vice-Chancellor expressed the principle in these terms:

where a given matter becomes the subject of litigation in, and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time.

...

114 As the Court observed, the principle is one to be applied with caution:

Although it has been said that the principle operates so as to extend the doctrines of issue estoppel as well as res judicata, its application to cases of issue estoppel is to be treated with caution...

115 Accordingly, where there have been previous proceedings between parties, a defendant will not be held estopped from bringing forward a defence in subsequent proceedings between the parties unless, having regard to the nature of the plaintiff's claim in the earlier proceedings, and its subject matter, it is to be expected that the defendant would have raised the defence in the earlier proceeding and thereby enabled the relevant issues to be determined in the one proceeding. As the Court said:[75]

... there will be no estoppel unless it appears that the matter relied upon as a defence in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it. Generally speaking, it would be unreasonable not to plead a defence if, having regard to the nature of the plaintiff's claim, and its subject matter it would be expected that the defendant would raise the defence and thereby enable the relevant issues to be determined in the one proceeding. In this respect, we need to recall that there are a variety of circumstances, some referred to in the earlier cases, why a party may justifiably refrain from litigating an issue in one proceeding yet wish to litigate the issue in other proceedings e.g. expense, importance of the particular issue, motives extraneous to the actual litigation, to mention but a few. See the illustrations given in Cromwell v. County of Sac.[76]

116 Here, as has been explained, Argot's claim against NML on the last occasion was that NML had breached cl 1.8 of the Policies by completing switches on the day on which notice of intention to switch was given. At that stage, NML had not adopted the practice of early conversion of non-cash assets and, even if it had, it would not have been a defence to the allegation that it had breached cl 1.8 by completing switches on the day on which notice of intention to switch was given.

117 Perhaps, if the proceedings had turned out differently, the potential for NML to adopt the early conversion policy would have become relevant to the assessment of damages for breach of cl 1.8 committed by immediate completion. Depending on the way in which the proceedings had gone, the early realisation policy issue might have come in under the principle that:

where the defendant has the option of performing a contract in alternative ways, damages for breach by him must be assessed on the assumption that he will perform it in the way most beneficial to himself and not in that most beneficial to the claimant.[77]

118 Even so, however, the early realisation policy could not have become relevant unless Argot had succeeded in a claim that, by engaging in immediate completion, NML repudiated the Policy (which repudiation Argot accepted) and so afforded Argot a right to damages for loss of bargain. And as the earlier proceedings turned out (both at first instance and on appeal), Argot failed in its allegations of repudiation and so the matter was remitted to the Trial Division for assessment of damages for the individual breaches of contract occasioned by established instances of immediate completion. As far as that assessment is concerned, the possibility that NML might at some time in future adopt a policy of early realisation of non-cash assets was and remains irrelevant. Hence, there was and is no scope for Anshun estoppel in relation to that part of the claim.

119 As to the remainder of the claim, as has been explained, after the matter was remitted to the Trial Division, NML adopted the early realisation policy and Argot amended its statement of claim to allege that by adoption of the early realisation policy NML committed further breaches of the Policy which, taken by themselves or in conjunction with the earlier breaches of the Policy (resulting from early completion) amounted to repudiation of the Policy (which Argot accepted thus entitling it to damages for loss of bargain). In response to those new allegations, NML pleaded that it was lawfully entitled to adopt the early realisation policy. Since there was no earlier opportunity for NML to advance that plea in response to the allegation that it had breached the Policy by adoption of the early realisation policy, we consider that it was not unreasonable for NML not to advance the plea until it did.

120 In case it matters, we are also of the view that, because it appears that NML did not make a firm decision to adopt the early realisation policy until after the matter was remitted for the assessment of damages, there was good reason, apart from lack of opportunity, for NML to refrain from attempting to litigate the issue until it did.

121 In the result, we do not see how Anshun estoppel could apply. Hence, we reject Ground 6.

122 As we have said, we take Ground 7 to have been abandoned. If that is not the case, it suffices to dispose of it to refer to what we have already said about the assessment of damages.

123 Similarly, we take Ground 8 to have been abandoned. Counsel for Argot did not refer to it in his outline of argument or in oral argument; presumably for the reason that it depends on whether the judge was wrong in refusing to award any more damages than he did. For the reasons earlier given, we find no error in his Honour's assessment.

124 At the conclusion of oral argument we announced that we would put over argument on the question of costs until after we had determined the substantive issues in the appeal. We propose to allow counsel to make further brief submissions on costs following publication of these reasons. Subject to that issue, we consider that the appeal should be dismissed.

125 I have had the advantage of reading in draft the joint judgment of Nettle and Neave JJA. I agree that the appeal should be dismissed, substantially for the reasons their Honours give.

126 I wish to add, however, some further observations on the arguments that NML acted in breach of the Special Agreements policy and the Life Insurance Act by the application of NML's early conversion procedures. The facts of the appeal are set out in Nettle and Neave JJA's judgment, which I gratefully adopt.

The nature of the investment in the investment linked policy

127 Both Argot and NML agree that NML organized its management and record keeping of policies and investments in investment linked insurance contracts in terms of units in three layers. At the top level, a policyholder who invested a sum in a Product portfolio was allocated an Account which was credited with units in that Product. Under the policy issued to Argot, investment could only be made in Cash or Secure Product portfolios.[78]

128 Each of the Secure and Cash portfolios was regarded as a separate Product. Each Product for its part was credited with units in an underlying portfolio at an intermediate or 'Composite' level. Generally, the function of the Composite portfolio was to allow the pooling of all Product portfolios of a like nature. Each Product portfolio was credited with units in only one Composite portfolio. Thus, the Cash Product portfolio only held units in the Cash Composite portfolio and the Secure Product portfolio only held units in the Secure Composite portfolio.

129 Each Composite portfolio held units in a lower or 'Sector' level portfolio. Each Sector level portfolio was credited with an investment in a particular type of security, such as Australian shares. For example the Secure Composite portfolio was credited with units in various Sector portfolios such as Sector portfolios for Australian Shares, International Shares, Fixed Interest and Cash

130 The Sector portfolios were credited with units in further underlying unit trusts for which actual investments were held by a trustee. The price of each unit at the Product portfolio level could thus be calculated by tracing back values, using the unit method, to the value of the investments attributed to the Sector level portfolios.

131 The terms of the policy specified the use of the unit method in accounting for investment linked insurance contracts:

1. Prosperity Bond has a number of investment portfolios; your choice at the Commencing Date is shown on your initial Statement of Benefits. Any change to your investment portfolio choice will be shown on a subsequent Statement of Benefits. Further details of investment portfolios are given in Section 3 below.
2. Your policy contains Accounts in one or more of the various Prosperity Bond investment portfolios. Each account is maintained in Units.

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

1. Whenever an amount is taken from an Account, a number of Units (determined by dividing that amount by the Unit Price) is subtracted from the number of Units in that Account.
2. We reserve the right to delay the application of money to or from an Account until midnight Australian Eastern Standard Time on the date to which your request applies. We will then use the Unit Price applicable at the end of the period of delay.

a. All Prosperity Bond investment portfolios available at the Commencing Date are Prosperity Bond Market-Linked Portfolios. The assets of these Prosperity Bond Market-Linked Portfolios are held in our No 5 Statutory Fund.

b. Copies of the appropriate audited accounts and balance sheets are available on request.

c. No individual policy has any claim on specific assets of any investment portfolio.

a. Prosperity Bond Market-Linked Portfolios are divided into parts of equal value called Units which are used to keep track of your entitlements under this policy. Changes in market values of the investments in each portfolio are reflected in the Unit Prices which rise and fall as a result.

b. All investment income (including realised capital gains and losses) earned on the assets of a particular Prosperity Bond Market-Linked Portfolio, less any tax payable is credited to that portfolio.

d. We determined the Portfolio Net Value of each Prosperity Bond Market-Linked Portfolio at least once every calendar month.

e. Unit Prices of Units in Prosperity Bond Market-Linked Portfolios are calculated as described in Section 4 below. They are usually declared on a daily basis, but may be declared more or less frequently.

4.20 'Unit Prices' are the dollar value of each Unit. The Unit Price in a particular Prosperity Bond Market-Linked Portfolio is calculated as follows:

(i) As soon as practical after a day as at which the Portfolio Net Value is determined, we determine a Benchmark Unit Price as at that date, by dividing the Portfolio Net Value by the total number of Units then held in that portfolio.

(ii) The Unit Price is then calculated by adjusting as we deem appropriate the Benchmark Unit Price most recently determined to take account of any fluctuations in the market value of the investments of the portfolio since the date as at which the Portfolio Net Value is determined...

132 Importantly, cl 3.1(c) provided that no individual policy had any claim on any specific assets of any investment portfolio.

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

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

c. Partial transfers from within the investment portfolio(s) you choose to switch from will be made by subtracting Units commencing with Units derived from the premium paid earliest and continuing date sequence as Units derived from each premium are exhausted.

d. We reserve the right to make a charge for switching of 0.5% of any amount you choose to transfer between Prosperity Bond investment portfolios. All switching charges will be waived for portfolio switches between the cash and Secure portfolios.

e. If switching reduces your Account Balance in any portfolio to less than the minimum amount we then allow your Account Balance in that portfolio may, at our discretion, be transferred to other portfolios as we decide. We reserve the right to make a change for switching of 0.5% of amounts so transferred.

f. For portfolio transfers other than switches to the Cash and Secure portfolios, the first four switches in a policy year are free.

134 Clause 1.8 dealt with large withdrawals and - in the second paragraph - contained the provision that Argot argues gives rise to arbitrage rights:

1.8 Large Withdrawals

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

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

135 Under the terms of the policy, a switch from units in the Secure Product portfolio to units in the Cash Product portfolio would involve the cancellation of units in the Secure portfolio and the use of the amount credited to the policy holder arising from the cancellation to acquire units of equivalent value in the Cash Product portfolio.

136 In substance, all the switch transactions were initially effected by book entries and it is only at the underlying asset level (at the Sector level and below) that the need to purchase and sell assets may arise. NML sought to hold assets which as closely as possible matched the recorded asset values that determined policy liabilities. This ensured that NML's contractual liabilities to policy holders were matched by appropriate asset holdings. NML also held a small cash pool that could be used before the necessary asset transactions were effected.

137 Thus, for example, if there was a switch by a policy holder from units in the Secure Product portfolio to units in the Cash Product portfolio, some underlying equities and fixed interest investments may have had to be sold to yield cash which would bring the composition of assets held to match the composition of recorded assets values which are used to determine policy liabilities.

138 Argot submits that the policy gave it rights which enabled it to make arbitrage profits. Argot submits that it bargained for - and obtained - special rights within an otherwise standard form policy issued by NML. In particular, the second paragraph of cl 1.8 relevantly provides (emphasis added):

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

139 Argot submits that cl 1.8, in conjunction with other terms, gave the following rights:

(a) Argot could make unlimited, free switches of its investments between the market-linked investment portfolios known as 'Cash' and 'Secure'.

(b) Switches would be priced as at the day the relevant notice of intention to switch was given, with the switch effected three working days after the date of the notice.

(c) During the period of a notice, Argot could decide not to proceed with the switch. This right was particularly valuable in instances where market movements over the notice period implementing that switch had become disadvantageous.

(d) No penalty was involved if Argot decided not to switch.

140 Argot contends that these rights were valuable because the Secure portfolio was exposed to equity market fluctuations, but the Cash portfolio was not. Hence, Argot could:

(a) allow a notice from Secure to Cash to expire, so a switch to Cash priced as at the date of the notice would proceed, and any reduction in the value of Secure due to equity markets falling over the notice period would be avoided; or, alternatively

(b) not proceed with the switch to Cash in circumstances where equity markets rose over the period of the notice.

141 In its pleadings, Argot described the method by which it could make arbitrage profits as the Capital Preservation Strategy and the Revised Capital Preservation Strategy. The Capital Preservation Strategy is described as follows:

... The Capital Preservation Strategy avoids putative decreases in the Unit Price of the Secure Portfolio by ensuring that at all relevant times there is an extant Switch Notice from the Secure Portfolio to the Cash Portfolio. Observation of published Secure Unit Prices (alternatively, a proxy form them such as equity market indices) informs whether that Switch Notice should be allowed to proceed (in order to avoid a likely diminution in the Unit Price of the Secure Portfolio) or should be revoked (in order to benefit from a likely increase in the Unit Price of the Secure Portfolio). If a Switch Notice to Cash Portfolio is allowed to proceed, the Capital Preservation Strategy provides for a return to the Secure Portfolio as soon as possible.[79]

142 The Revised Capital Preservation Strategy was a little more complicated.[80] In any event, the Capital Preservation Strategy would have enabled gains to be made at the expense of NML (if NML did not engage in the early conversion procedure).

143 Under the Capital Preservation Strategy, a switch notice from Secure to Cash would be withdrawn if between the date of the notice and the expiration of the three day notice period the market values of equities rose. As the price at which the switch takes place is the unit price on the day of the notice, the policy holder would be worse off in allowing the switch to proceed rather than in remaining in the Secure product portfolio.

144 If, on the other hand, the value of equities fell during the three day notice period, the policy holder would be better off in allowing the switch from Secure to Cash to proceed, as the unit price at which the switch was effected would be the higher price pertaining prior to the fall in the value of equities. Under the Capital Preservation Strategy, a switch from Cash back to Secure would be made 'as soon as possible'. Accordingly, on switching back to the Secure portfolio ('as soon as possible'), the policy holder would be credited with more Secure units than the policy holder was previously credited with. This benefit arose as the value of the Secure units would have fallen in line with the fall in equity markets, but the policy holder would have been credited with the value of the Secure units prior to the market fall.

145 As equity markets tend to fluctuate, under Argot's strategy losses would have been avoided when the market fell and gains made when the market rose. As one can see, such a strategy would make significant profits through market fluctuations rather than through mere rises in the market.

146 The losses avoided when the market fell, however, would (on Argot's case) be at the expense of NML. NML would be required to value the Secure units at the unit price applying when the notice was given, but at the time of the conversion the value of the Secure units (reflecting equity values) would be less. On Argot's case, the losses accruing to NML as the market rose and fell would have increased whilst Argot's profits increased at the same time.

147 To meet this strategy, NML embarked on a policy of early conversion. As discussed above, the liabilities of NML to policy holders in investment linked policies are contractual liabilities sounding in debt. The assets that support the liabilities, and in particular the investments in the statutory fund, are not tied to any particular liability. In other words, none of the equities, fixed interest or cash holdings are dedicated or tied in some other way to any particular policy. As mentioned above, as a matter of practice the composition of the asset fund held by NML was managed to match the composition of the asset values by which the value of the policy was expressed (and the liabilities thereunder). For example, if 50 per cent of the value of the policy was valued by reference to equities, then NML sought to ensure that 50 per cent of the value of the assets it held (to meet its liabilities under the policy) was in equities.

148 To give effect to early conversion, when a notice of intention to switch from the Secure portfolio to the Cash portfolio was given by Argot, NML made book entries so that the value of the Secure portfolio was reflected in cash values and no longer reflected in part by equity values. Previously, the Secure portfolio's value was reflected by the values of equities, fixed interest and cash.

149 The notice also gave NML the opportunity to adjust the composition of assets held to meet its liabilities under the policy to align with the fact that the Secure portfolio was no longer reflected in part in equities and fixed interest. Whether this would require any equities to be sold would depend on other transactions that were also taking place at the same time within NML, and policy considerations of NML.

150 The consequence of NML's actions was as follows. If the value of equities fell during the three day period and the switch proceeded, NML would suffer no loss as the value of the units being cancelled on the conclusion of the three day period would be matched by the unit price on the day the notice was given. The policy holder would also suffer no loss. If, on the other hand, the value of equities rose during the three day period and the notice was withdrawn, then on the notice being withdrawn NML would alter the composition of the Secure portfolio to reflect the value of equities that the Secure portfolio had before the notice was given. The portfolio, however, would only have the same value as when the notice was given and as a result the policy holder would not have enjoyed any increase in the value of its Secure portfolio arising from the increase in the value of equities during the three day period.

151 NML says that it was entitled to engage in the early conversion practice that had this consequence, or rather, was not prevented from doing so.

152 Argot contends that the actions of NML were in breach of the terms of the policy and its obligations under the Life Insurance Act. Argot argues that NML was obliged to maintain the composition of assets by which the portfolio was valued at the day of the notice and was not permitted to alter the composition of assets by which the portfolio was valued to merely cash.

153 Argot relies on several arguments in support of its contention that NML breached the policy of insurance by its actions. First, Argot submits that the book entries made by NML (and any other consequential changes to the composition of the statutory fund) constituted an immediate switch which was held by the Court of Appeal in the prior appeal to be in breach of the policy.

154 Secondly, Argot submits that the notice to switch was a notice to switch the Secure portfolio as it then stood, when the notice was given, and that accordingly during the three day notice period the composition of assets by which the Secure portfolio was valued was bound to remain unchanged.

155 Thirdly, Argot submits that under the policy the policy holder was given the sole right to elect to switch from the Secure portfolio to the Cash portfolio, and the actions of NML deprived the policy holder of that right as NML had decided to change the Secure product portfolio into a Cash Product portfolio

156 Fourthly, Argot submits that the contractual right to withdraw the notice without penalty to the policy holder denied NML the right to carry out book entries (and, if it so chose, any necessary transactions) which left the policy holder with a Secure portfolio that would not enjoy any increase in the value of equities in the event that equities rose in value during the three day notice period. Or, put another way, Argot says that the right of the policy holder to withdraw the notice without penalty denied NML the right to alter the composition of assets by which the Secure portfolio was valued, so that the policy holder would not enjoy any increase in the value of equities during the three day notice period if the policy holder elected to withdraw its notice.

157 For its part, NML denies that there were any such contractual terms, and further asserts that on its proper construction the three day notice entitled it upon receipt of the notice to prepare for the switch by realising non-cash investments in the departing portfolio and reinvesting the amounts so realised in cash investments in the portfolio or taking any other steps to preserve the 'Portfolio Net Value'[81] on the day when the notice was given so as to ensure that the value of investments underlying the policy at the time when the switch is to be effected equals or exceeds the transfer amount and thus that it has funds from that portfolio available to fund the transfer amount.[82] In my opinion, the defence somewhat confuses book entries with transactions involving the sale and purchase of assets. Nevertheless, in substance, it submits that NML had the right to effect book entries to make changes to the composition of assets recorded as being held to ensure that NML did not make a loss by reason of the switch.

158 Fifthly, Argot argues that the early conversion practice was in breach of certain statutory obligations on the directors and NML. Argot contends that early conversion practices were in breach of obligations under ss 32 and 48 of the Life Insurance Act and s 13 of the Insurance Contract Act 1988.

159 Before turning to decide these arguments, it is necessary to have regard to the interpretation given to the policy by the earlier Court of Appeal decision.[83] The Court of Appeal held that cl 1.8 did not give Argot the right to make switches at a profit. Their Honours found that Argot did not contract for an entitlement to profit by arbitrage, but rather contracted for the right to switch subject to NML exercising such powers as it had to frustrate the hope and expectation of profits by Argot. The Court said:

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

We reject that contention too. It proceeds upon the same misconception as was advanced in support of the implication of a term as to the continuation of historical pricing practice. The appellants may have hoped, perhaps even expected, to derive profits from historical pricing arbitrage. But they did not contract for an entitlement so to profit. They contracted for the right to switch as and when they chose but subject expressly to the risk that the respondent could exercise the powers conferred on it by cll 2.2(e), 3.2(e) and 4.20) to frustrate the hope and expectation of profits.[84]

160 As to the construction of cl 1.8, the Court of Appeal said:

Its effect was that, in consideration of the investor giving the respondent three business days' notice of intention to transfer or withdraw, and therefore the opportunity for the respondent to do what it thought necessary or desirable to accommodate the transfer or withdrawal, the investor was to be permitted to revoke the notice if, during the period of notice, the price so moved as to make transfer or withdrawal undesirable from the point of view of the investor.[85]

161 The policy was an investment linked contract issued in accordance with the Life Insurance Act. The policy was required to have a life insured. There were tax benefits if the policy was not redeemed within 10 years. The investment linked policy offered by NML had not been designed for arbitrage trading. An additional term was introduced into cl 1.8 of the standard NML policy that Argot sought to use to make arbitrage profits. When the policy with the special cl 1.8 was initially issued, its potential use to make arbitrage profits was not realised by NML. No special premium was charged to meet the risk to NML of Argot making arbitrage profits at NML's expense.

162 As the Court of Appeal held in the first appeal, it is not against the terms of the policy to make arbitrage profits. Equally, the Court held it was not against the terms of the policy for NML to take steps within the terms of the policy to avoid incurring arbitrage losses.

Did early conversion constitute immediate switch?

163 Argot says that early conversion was a fiction. It submit that it was not a requirement of prudent administration. Argot contends that portfolios do not have assets 'in' them which are susceptible to conversion; rather, they are a simply a mechanism for pricing the units held by policyholders. Argot says that there was no evidence of the liquidation of any assets in order to convert the secure portfolio to purely cash assets. Argot points out that no trade confirmations were presented in evidence.

164 As mentioned above, cl 3.1(a) provided that the assets of the Prosperity Bond Market-Linked Portfolios were held in NML's No 5 Statutory Fund and that no individual policy had any claim on specific assets of any investment portfolio.

165 Argot submits that early conversion, like immediate completion (which the Court of Appeal had held was in breach of the policy), was a series of book entries that resulted in the policyholder's Secure units being priced by reference to cash assets, rather than a mixture of cash and equities.

166 Argots submit that, accordingly, the practice of early conversion was as much a breach of cl 1.8 as immediate completion was.

167 I do not accept this argument. A switch involved the cancellation of Secure units at the Product level and the creation of an equivalent value of Cash units at the Product level. On the other hand, early conversion involved changing the composition of the Secure Composite units that were credited to the Secure Product units in the Argot Account and, if required, making any consequential asset adjustments at the Sector level. I accept that the financial consequences of early conversion would have been similar to the financial consequences of switching, in that the units in the Argot Account would have been valued by reference to cash values rather than a mixture of equity, fixed interest and cash values. In my opinion, however, the consequential effective value changes did not constitute a switch within the meaning of the policy.

Was NML entitled to alter the composition of the Secure Product portfolio?

168 NML agreed that it was bound by an implied obligation to procure the composition of the Secure Portfolio, taken over the long term, to ensure that it complied more or less with a proportion of non-cash assets to cash assets which was envisaged in the product disclosure statement. Nevertheless, NML says that where a notice of intention to switch was given, there was no provision in the policy which prevented it from early conversion.

169 Argot contends that under the policy of insurance, Argot was offered two investment portfolios in which to invest: the Secure Portfolio and the Cash Portfolio. Further, under cl 1 of the Special Agreements (which accompanied the policy), it was provided:

Each investment in this Prosperity Bond may only be made in the 'Cash' and/or 'Secure' portfolios, and cannot be switched outside those portfolios by any person without the Policyowner's prior written consent.

170 Under cl 2.2(a) of the policy, it was provided that:

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

171 Argot contends that the location of the investment portfolio under the policy regime at any time lay exclusively with the policyholder and only the switching mechanism could take that away. Argot contends that early conversion by NML breached Argot's sole right to choose its investment portfolio.

172 NML refers to and relies on the findings of the Court of Appeal on the first appeal, where the Court addressed the three day notice provision for money being withdrawn from the Cash or Secure Portfolios:

Its effect was that, in consideration of the investor giving the respondent three business days' notice of intention to transfer or withdraw, and therefore the opportunity for the respondent to do what it thought necessary or desirable to accommodate the transfer or withdrawal, the investor was to be permitted to revoke the notice if, during the period of notice, the price so moved as to make transfer or withdrawal undesirable from the point of view of the investor.[86]

173 NML says that '[t]he opportunity to do what it thought necessary or desirable to accommodate the transfer' included early conversion. The Court of Appeal, however, was not addressing the issue of early conversion in the passage relied on by NML. Nevertheless, in my opinion, the contractual rights relied on by Argot did not prevent early conversion. The policy holder was still credited with holding the same units in the Secure Product portfolio. In my opinion, the change in the composition of the assets ultimately used to value the units in the Secure Product portfolio, in readiness for a switch (consequent upon the policy holder giving a notice of intention to switch) is not prohibited by the clauses relied on. The units credited to the Account of the policy holder were still units in the Secure Product Portfolio.

174 As mentioned above, NML agreed that it was bound by an implied obligation to procure the composition of the Secure Portfolio, taken over the long term, to ensure that it complied more or less with a proportion of non-cash assets to cash assets which was envisaged in the product disclosure statement.

175 NML says that the issue raised by early conversion is not whether NML had the power to make changes at the Composite level to allow all of the units in the Secure Product portfolio to be valued by reference to cash investments. Rather, the issue is whether, upon receiving notice of intention to switch to Cash, NML is contractually precluded from making changes that result in the Secure Product portfolio being valued by reference to cash investments. NML says there is no such term.

176 Further, NML says that there was no contractual term to prevent it from being able to meet the notice (if it went ahead) without loss to itself. NML contends that its motive in exercising a contractual right was irrelevant to the consideration of the issue at hand. NML says that it either had the right to early conversion or it did not.

177 NML submits that there is no express term that denies it the right to early conversion. NML says that the only arguable proposition is that early conversion somehow impermissibly denies Argot the benefits of its contractual rights.

178 Argot argues that NML's actions in early conversion did deny Argot the benefits of the second paragraph of cl 1.8.

179 I do not agree. There are significant benefits that the second paragraph of cl 1.8 brings to Argot which do not necessarily imply a right to arbitrage at NML's expense. First, the right to switch at a known price, rather than at an uncertain price in the future, is of benefit to Argot in making informed decisions. Secondly, the right of Argot to change its mind prior to completion is also of benefit. There are several reasons why Argot may change its mind. For example, it may form the view during the three day notice period that share prices may rise some time in the future after the period of notice was to expire, and withdraw the notice.

180 Early conversion did not prevent Argot from using cl 1.8 to avoid losses if the market fell during the period of the notice. A significant benefit to Argot under the second paragraph of cl 1.8 was that it could withdraw the notice if the market did not fall in the three day notice period. If the market did fall during the notice period (and the notice was not withdrawn), under the early conversion procedure adopted by NML, the loss in value of its Secure units that would otherwise be incurred by Argot would be avoided, but not at NML's expense. Nevertheless, an actual benefit would accrue to Argot. The moneys realised by the switch proceeding could be immediately switched back into Secure units, as provided under the Capital Preservation Strategy, as discussed above, enabling more Secure units to be acquired than were previously held.

181 Under the early conversion procedure, however, there was effectively an opportunity cost to Argot involved in Argot avoiding losses through the market falling during the three day period. The opportunity cost involved was that Argot lost the opportunity of making unrealised market gains if the market increased in value during the three day period. Nevertheless, no actual loss was realised if the notice to switch was withdrawn by the appellant because the market had risen.

182 In accordance with the above considerations, the three day notice period is consistent with NML being entitled to take such steps as it considered appropriate (within the terms of the policy) to prepare for a possible switch (which would likely occur if the market for equities fell during the notice period).

183 Accordingly, in my view, the suggested term that NML was not entitled engage in early conversion was not necessary to give business efficacy to the second paragraph of cl 1.8.

184 Argot argues that the early conversion procedure imposed a penalty on it if the switch did not proceed. I do not agree. I agree with the reasons of the learned trial judge and those of Nettle and Neave JJA on the issue of penalty.

185 In my opinion, the opportunity cost of withdrawing a switch notice (in the event that the market did not fall, or in fact rose) did not constitute a penalty. The opportunity cost arose on the giving of the notice. On giving notice, the opportunity arose to avoid a fall in the value of the units in the Secure Product if the equity market fell during the period of notice. If the market did fall, the loss of value could be avoided if the notice was not withdrawn. The notional price of the opportunity to avoid the reduction in value was the loss of the opportunity to make unrealised gains if the market rose during the notice period.

186 The opportunity cost does not arise because the notice is withdrawn. No penalty, liability or loss arises because of withdrawing the notice. Under the early conversion procedure, the opportunity cost is incurred in giving the notice in the first place and is the effective price of entering into a transaction that will avoid incurring loss if the market falls during the notice period and allows withdrawal of the transaction if the market rises (or does not fall).

187 Argot contends that the primary effect of the book entries by NML was to avoid any loss to NML if market prices declined and to prejudice Argot if market prices went up.

188 Assuming that it was not necessary for NML to sell any equities in order to make the book entries that it did, Argot argues that NML had no contractual right to make the book entries absent such transactions. In my opinion, regardless of whether it was necessary to effect the sale of any equities, the issue remains whether, on receipt of a notice, NML was prevented from preparing for a possible switch to insulate itself against any possible losses that may arise if Argot proceeded with the switch.

189 For the reasons given above, in my opinion there was no contractual term preventing NML from doing so. In my opinion, the existence of any contractual term does not depend upon whether NML was selling any equities to cash up or whether it was merely making book entries, as submitted by Argot.

Breach of Life Insurance Act

190 The policies offered by NML are 'investment linked contracts under s 14 of the Life Insurance Act (LIA)'. Argot contends that NML and its directors must comply with ss 32 and 48 of the LIA in 'the investment, administration and management of the assets of a statutory fund, ... give priority to the interests of owners and prospective owners of policy referable to the fund'.

191 Argot submits that a life company cannot exercise a judgment in a manner that advantages it at the expense of the policyholder. It refers to s 48(3), which provides that:

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

192 Argot submits that as a contract of life insurance, the policy is subject to s 13 of the Insurance Contracts Act 1984, which provides:

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

193 In my view, these clauses do not prevent NML taking prudent steps to avoid significant losses when there are sensible steps that it could and did take, which still permitted advantages to Argot under its strategy, but not at NML's expense.

194 In my view, all the arguments between the parties essentially devolve to the issue as to whether Argot had a contractual right to make arbitrage profits at NML's expense. It is clear that unless NML adopted the early conversion procedure (and all other things remained equal), Argot could make substantial profits at NML's expense. For the reasons given above, I do not consider Argot had such a right under the policy.

195 I agree with the reasons of Nettle and Neave JJA on the remaining issues on the appeal.

Eliminating the other products in respect of which the Fund is held, the hierarchy for each relevant policy is:

196 On the last occasion this matter was before the court, we announced that we would publish our reasons today and then hear any further submissions in support of and in opposition to Argot's application for leave to appeal against costs. For the avoidance of doubt, we stated then that, because the parties had already filed detailed written submissions on costs, they should come to court today ready to advance such further submissions as they might be advised and that, in view of the long delays which have attended the matter, it was most unlikely that we would allow a further adjournment.

Application for leave to file notice of ceasing to act

197 A week or so ago, Argot terminated its solicitors' retainer and, in correspondence with the solicitors for NML, announced that it did not propose to retain other solicitors until after we had published our reasons on the substantive issues today. NML's solicitors responded with repeated warnings that they would oppose any application for adjournment, and thus that Argot should retain other solicitors in readiness for today. Despite those warnings Argot has chosen not to retain other solicitors. But nor does it seek an adjournment. Instead, it has sent further written submissions on the letterhead of 'The Argot Unit Trust' signed by Scott F Tyne with an accompanying letter in which Mr Tyne requests that those further submissions be taken into account. At the same time, Argot's former solicitors seek an order pursuant to Rule 20.03 that they have leave to file a notice of ceasing to act.

198 In our view, the application for leave to file notice of ceasing to act should be granted but Argot's further written submissions should not be taken into account. No explanation has been offered as to why Argot is not legally represented and, in the absence of a satisfactory explanation, there is no occasion to consider whether we should consider the submissions of Mr Tyne, a layman.

Application for leave to appeal against costs

199 We turn to the question of costs. As the judge in the second trial observed, NML made three offers of compromise which Argot did not accept:

(a) First, an open offer in October 2001 [before the first trial] - offering Argot eleven and a half months' return at 15.9 per cent per annum (scil. more than $750,000);

(b) Secondly, a formal Offer of Compromise in March 2008 [at the conclusion of argument in the first appeal but before judgment in that appeal] - offering Argot damages and interest of $3,750,000, plus costs;

(c) Thirdly, a Calderbank offer in May 2009 [after judgment in the first appeal] - offering Argot eleven and a half months' return at 15.9 per cent per annum (more than $750,000).

200 Based on Argot's failure to accept any of the offers, the judge concluded that Argot should pay NML's costs of the first proceeding and the second proceeding to be taxed on an indemnity basis.

201 Argot submits that the judge erred in respect of the costs of the first proceeding in three respects. First, Argot contends that the judge failed to give appropriate weight to the fact that Argot was partially successful in the 2002 proceeding. Secondly, Argo says that the judge erred in holding or finding that Argot knew or ought to have known that its prospects of success were minimal and, therefore, acted unreasonably in refusing the offers. Thirdly, Argot submits that the judge erred in departing from what Argo describes as the usual practice that, where a plaintiff fails to beat an offer to settle, it may be ordered to pay the costs of the offeror but only from the date of offer and only as taxed between party and party.[87]

202 As to the first contention, Argot concedes that the damages which it recovered on the claims on which it succeeded were much less than the amounts which it sought. It submits, however, that, in view of its success in recovering damages for unconscionable conduct, the judge was wrong in principle to order that it pay costs of the first trial on an indemnity basis. In particular, Argo says that the finding that NML engaged in unconscionable conduct is not something to be sloughed off as a mere peccadillo, and hence that, so long as NML maintained the stance that it had acted appropriately, Argot had a legitimate interest in establishing the truth of the matter.

203 We do not think that submission to be persuasive. Contrary to the thrust of it, it is clear that the judge was conscious of Argot's success on the unconscionable conduct claim and took it into account. But, as his Honour explained, there were good reasons to discount it. Thus:

The plaintiffs [Argot] have, in these proceedings, achieved nominal success on two issues. The first was on the issue of the failure of the defendant to give notice of the impending change to forward pricing. The second was the requirement for the defendant [NML] not to complete a switch within the three day notice period. The plaintiffs were also successful in establishing an entitlement to damages for unconscionable conduct for borrowing expenses and management fees paid in respect of the period 17 October 2000 to 16 November 2000 in the course of the proceedings remitted to the Trial Division by the Court of Appeal. As indicated previously, the plaintiffs claimed damages in this respect for a considerably longer period and were, in the context of their original claim, nominally successful in establishing an entitlement for one month. The quantification of these damages was the subject of the hearing on 22 March 2012, out of which these reasons arise. As indicated previously, the monetary value of the damages awarded is relatively low, well within the jurisdiction of the Magistrates' Court.

Additionally, the plaintiffs had success on appeal on one aspect of the interpretation of clause 1.8 of the Prosperity Bond policies, but success did not lead them to an entitlement to damages. As submitted by the defendant, these outcomes have been achieved by the plaintiffs after ten years or so of litigation, which was aimed at obtaining contractual damages of hundreds of millions and, at one stage, billions, of dollars. In any event, the focus of the proceedings and the substantive relief sought by the plaintiffs was a monetary sum, damages - whether damages per se or damages in lieu of specific performance and whether or not the Prosperity Bond policies remained on foot. Consequently, in relation to the question of reasonableness of the rejection of settlement offers by the plaintiffs, it cannot be regarded as of significance that the settlement offers (other than the Offer of Compromise in March 2008) required the plaintiffs to terminate their Prosperity Bond policies. There are also other, more particular considerations, which, in my opinion, support the view that rejection of the offers by the plaintiffs was not reasonable because the offers required surrender of their policies:

... First, the plaintiffs have in fact left their policies invested in the cash portfolio (save during the period of the early 2009 switches), earning an ordinary cash return, which on the plaintiffs' own evidence was not a worthwhile investment: as both Messrs Tyne and Hawkins said in evidence, the returns of their Prosperity Bond policy without the Keller arbitrage returns were 'very unattractive'. Secondly, in other words, the only point of having the policies extant was to bring the litigation; if it was reasonable to settle the litigation, it was reasonable to surrender the policies and pursue the attractive alternative investments which the plaintiffs claimed were available to them. Thirdly, the Argot policy was surrendered in due course any way.

In the context of the plaintiffs' claims, the success on their part can, in my view, only be regarded as nominal and of no consequence when one comes to determine success at trial in the overall balance. As indicated previously, the plaintiffs would seek to have the Court exercise its discretion against this view or, put another way, place in the balance the fact that they enjoyed a small degree of success on their misleading and deceptive conduct and unconscionability claims, which would weigh against an order for costs on other than the usual basis as a manifestation of the Court's 'pejorative moral judgment' with respect to a claim of this kind. In my opinion, success in this respect is, in the context of the overall claims made by the plaintiffs and the time spent on these claims in the course of ten years of litigation, of minimal significance and does not raise the sort of 'moral judgment' issues that might be seen to arise in a proceeding where the unconscionable conduct was the main focus of that proceeding and substantially significant in the overall outcome of that proceeding.

204 With respect, we see no error in that part of his Honour's analysis. It cannot be gainsaid that, in the context of this litigation, the success which Argot achieved on those of its claims which were upheld was minimal.

205 In contrast, we think there is more substance in the second contention. Although it appears that the judge was aware of the risks of assessing the matter with the benefit of hindsight, and identified reasons to conclude that Argot was in a privileged position to assess its prospects of success, they were not the only factors which his Honour took into account.

... Hindsight is a wonderful thing, but should not be brought to bear on this assessment. Nevertheless, in the present circumstances the plaintiffs were ... in an unusually informed position from which to assess the likelihood of success of the proceedings, both prior to the commencement of the 2002 proceeding and subsequently.

The 2001 offer was relied upon by the defendant in support of its claim for indemnity costs. In this respect, it relied upon the fact that:

(a) the 2001 offer was received before the plaintiffs issued the 2002 proceeding;

(b) the plaintiffs had two months in which to consider and accept the offer;

(c) the 2001 offer was expressed very clearly; and

(d) the amount offered was far in excess of any entitlement the plaintiffs have ultimately proved.

Additionally, the 2001 offer was made at the time of settlement of Federal Court proceedings brought by the manager of the Investment Club of which the plaintiffs formed a part. There had, in the Federal Court, been a full trial of issues raised by Dr Keller, which largely foreshadowed the claims brought by the plaintiffs. The present plaintiffs were fully aware of the Federal Court proceedings, having been briefed about them by Dr Keller, having themselves sat in the Federal Court during the case and having retained solicitors to advise them about it. Additionally, there had been discovery, evidence of the defendant's witnesses and full cross-examination. After completion of the case and while awaiting judgment, Dr Keller accepted the defendant's settlement offer and the defendant extended an offer to all others who held Investment Club Prosperity Bond policies. One hundred and seventy or so investors accepted the offer, but six did not. On this basis, the defendant submitted that the present plaintiffs were therefore in a privileged and unusually advantageous position from which to form a view of the offer. They could have accepted it without incurring any cost or initiating proceedings, and they would have been in a far better position than that in which they now find themselves.

207 As the judge went on to explain, however, ultimately his decision was based on his conclusion that Argot had acted unreasonably in refusing the 2001 offer; that the offer much exceeded the damages which Argot was awarded; and that Argot did not quantify its claim until after the first proceeding. As his Honour put it:

More significantly, each offer was vastly in excess of damages to which the plaintiffs have ultimately been held to be entitled. As indicated, and in my view very significantly in terms of the application of the guidelines in Hazeldene, this is not a case where the offer merely exceeded the damages; it is a case where the damages ultimately recovered by the plaintiffs are very small compared with the value of the offer. The defendant submitted, and in my view with much force, that it is also relevant that any entitlement that the plaintiffs ultimately recover could have been recovered in the Magistrates' Court, a factor that illustrates 'just how wasteful and pointless this litigation has been - wasteful of not only the time and money of the defendant, but of the time, money and other resources of the Court'.

Additionally, I accept that the repeated failure of the plaintiffs even to quantify and justify the basis of their claims is a matter to be taken into account in considering the basis upon which costs are awarded. This failure has two aspects:

(a) First, there is the fact that the contractual damages claims, the plaintiffs' claims of substance and real value from their perspective, were only quantified after the defendant and the Court pressed them into quantifying them in 2010 - eight years after commencement. Furthermore, that quantification was clearly significantly defective, as is evidenced by the fact that it was halved only a week before trial, and by the concessions made by Mr Lyon in his evidence that he had failed to take important matters into account in arriving at his figures.

(b) Secondly, there was the failure of the plaintiffs to quantify, even in advance of the 22 March 2012 hearing, the minimal damages to which they are entitled. This failure illustrates the fact that the plaintiffs have never been interested in such damages: they have only ever been concerned with the extravagant contractual claims that, as the history of the proceeding shows, never had any foundation.

In my view, these factors point, overwhelmingly, to the conduct of the plaintiffs in not accepting the defendant's offer in 2001 as being unreasonable. It follows that the defendant is entitled to costs on an indemnity basis for the whole of the 2002 proceeding, bearing in mind that the 2001 offer was made before these proceedings commenced.

208 As it appears to us, that part of his Honour's analysis overlooks the determination of this court in the first appeal that Argot was correct in contending that NML's actions in completing switches before the expiration of three days after notice of intention to switch was in breach of contract; and also that, until it was decided in the first appeal that NML had not thereby repudiated the contract, it was reasonably arguable that NML had so repudiated the contract (which repudiation Argot had accepted) thereby opening the door to a claim for damages for loss of bargain which could have been much larger than the offer.

209 So far as we can see, nothing which occurred in the Federal Court proceeding detracted from that possibility or rendered it so improbable that the claim of repudiation would succeed as to make Argot's rejection of the 2001 offer unreasonable. To the contrary, until the point was ultimately decided against Argot in the first appeal - and that did not occur until after extensive argument on both sides and this court reserving its decision - there was a real possibility that Argot would succeed in the claim of repudiation and possibly, therefore, recover very substantial damages.

210 Additionally, it appears that the judge regarded it as pertinent that Argot did not quantify its claim until after the first proceeding. As we see it, that was also an error. The first trial was limited to the question of liability and dealt with on the basis that it was enough that the claim was qualified in terms of damages for loss of bargain. At that stage, it seems tacitly to have been accepted that, if Argot succeeded in the claim that NML had repudiated the contract, quantum could exceed the amount of the 2001 offer by a large amount. Accordingly, we do not accept that the failure of Argot to quantify its claim at that point can properly be regarded as reflecting on the reasonableness of its rejection of the 2001 offer.

211 Inasmuch as the judge failed to take those considerations into account, we conclude that the exercise of his Honour's discretion in relation to the costs of the first trial miscarried.

212 Argot's third contention raises similar considerations to the second. As the judge correctly explained, the usual practice is that, where a party has acted unreasonably in refusing an offer of compromise, that party may be ordered to pay costs on an indemnity basis. As has been noticed, the judge also considered that Argot acted unreasonably in refusing the 2001 offer. For the reasons we have stated, however, it appears that the judge was in error in coming to that conclusion. For the same reasons, we do not think it has been shown that Argot acted unreasonably in refusing that offer. In our view, Argot should be ordered to pay the costs of the first trial but to be taxed as between party and party.

213 Turning to the costs of the second trial, the judge reasoned as follows:

The defendant submitted that in accordance with the principles in Hazeldene's case, if the Court does not accede to the submission with respect to the 2001 offer, the Court should award indemnity costs to the defendant from 6 March 2008 on the basis that:

(a) the [2008] offer was simple, straightforward and extremely generous, especially in comparison with the trivial amounts to which the plaintiffs may be entitled; and

(b) given the state of the litigation after a prolonged trial and full argument on the appeal, and given the plaintiffs' prospects of success, it was unreasonable of the plaintiffs not to accept the offer of compromise. The plaintiffs were seeking to overturn many issues which had been decided against them in the long and comprehensive judgment of Redlich J. In due course they lost all the appeal issues, except for one, and comprehensively. Their prospects of success should be judged as having been weak and their failure to accept the offer of compromise as having been unreasonable.

41 In my view, having regard to the previous history of the matter, particularly the plaintiffs' knowledge of the Federal Court proceedings, having had full argument in the Court of Appeal, the nature of their claims, their lack of success, the magnitude of the offer and their failure or inability to quantify their claims, it was unreasonable on the part of the plaintiffs to refuse the Offer of Compromise. It follows that, on the basis of the principles in Hazeldene's case, an indemnity costs order should follow and take effect from 7 March 2008 on the basis of the Offer of Compromise. However, as I have already taken the view that this consequence should follow the plaintiffs' failure to accept the 2001 offer, this further finding is only of significance in the event that my views with respect to the 2001 offer were found to be in error.

214 Argot contends that the judge thereby misstated the nature of Argot's argument in the 2009 proceeding. As Argot says, in the second trial it did not dispute the determination of this court in the first appeal that, although NML acted in breach of contract in completing switches before the expiration of three days after receipt of notice of intention to switch, NML did not thereby repudiate the contract. The case which Argot advanced at the second trial was a new and different one of damages for repudiation of contract based on NML's adoption of the early conversion or realisation policy. Admittedly, the judge did not accept the argument, and this court has now upheld his Honour 's decision on the point. But, in Argot's submission, that is not a basis for saying that Argot acted unreasonably in advancing the new case.

215 The contention that the judgment misstated Argot's argument cannot be accepted in the broad terms in which it was put. As it appears to us, the judge was under no illusions as to the nature of the claims made in the second trial. Rather, his Honour considered that, in light of what this court had said about Argot's claims in the first trial, the prospects of Argot succeeding in the new claims ought not to have been regarded favourably; and that, in view of the 2008 offer and the small amount recovered in comparison to the 2008 offer, the prosecution of the 2009 proceeding was unreasonable.

216 Nevertheless, it does appear to us that the judge erred in the significance which his Honour attributed to the 2008 offer. For, as has been noticed, the 2008 offer was made before this court decided the first appeal and, at that point, it was hardly self-evident that Argot was without a realistic chance of succeeding in the appeal. Equally, it is fair to suppose that, if Argot had succeeded in the appeal, it might have recovered more by way of damages than the amount of the 2008 offer. Hence, it was not unreasonable for Argot to refuse the offer at that point.

217 Further, by the time this court gave judgment in the first appeal, the 2008 offer had expired and the further offer which was later made in March 2009 was for only $750,000 all in (including relief from an order that Argot pay 75 per cent of the costs of the first appeal). Thus, the choice which Argot faced when deciding whether to proceed with the 2009 proceeding was not whether Argot would be better off accepting an offer of $3,750,000 plus costs, as the judge appears to have conceived of it, but rather how likely it was that Argot's new claim for damages for repudiation of contract constituted of NML's adoption of the early conversion or realisation policy would yield more than a total of $750,000 all in. It is also significant, that the March 2009 offer does not refer to the early conversion or realisation policy, the allegation that it was a breach of the policy or, therefore, the essential subject matter of the 2009 proceeding.

218 Given that Argot had by then incurred the costs of the 2002 trial and the first appeal - which would surely have summed to more than $750,000 and the benefit of being relieved from the Court of Appeal costs order - and given at that point it was still reasonably arguable that the adoption of the early conversion or realisation policy was a repudiatory breach of contract which Argot had accepted, it is not at all obvious that Argot acted unreasonably in deciding to decline the 2009 offer.

219 Finally, if there were any doubt about that, we note that NML was sufficiently concerned about the prospect of Argot succeeding that NML was represented throughout both proceedings and both appeals by leading solicitors and eminent Queen's counsel, and that each of them devoted no end of forensic and scholarly industry to the defence of NML's position. That hardly suggests the degree of insouciance with which a large-scale commercial organisation might be expected to approach a manifestly hopeless claim.

220 It follows, in our view, that it falls to this court to re-exercise the costs discretion afresh in respect of the second trial. We are disposed to order that Argot pay NML's costs of the second trial to be taxed as between party and party.

221 It follows, for these reasons and those which we published earlier this morning, that we shall allow the application for leave to appeal against costs, treat the appeal against costs as instituted and heard instanter and allowed, set aside the orders as to costs passed below and in lieu thereof make orders as to costs in the terms we have described; which is to say that Argot should pay the costs of the first trial and the second trial, to be taxed as between party and party.

222 Otherwise, this appeal will be dismissed with costs to be taxed as between party and party.

223 We shall also make an order confirming the order already foreshadowed that the solicitors for the appellant have leave to file notice of ceasing to act.

224 Finally, in accordance with the minutes of orders by consent, we shall further order:

(1) In proceeding S APCI 2012 0096 orders 1 and 4 made by the Hon. the Chief Justice and the Hon. Justice Beach on 16 August 2012 be vacated.

(2) That the sum of $199,451.50 paid by the then second appellant as security for the respondent's costs of the appeal pursuant to orders made on 16 August 2012 be remitted to Pegala Pty Ltd.

[1] (2008) 21 VR 351; [2008] VSCA 247.

[2] McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, 589 [22] (Gaudron J) and 600 [73]-[74] (Kirby J); Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235; (2008) Aust Contract R 90-274 [7]-[13] (Spigelman CJ).

[3] [2008] VSCA 247; (2008) 21 VR 351, 359 [18].

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

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

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

[11] See Court of Appeal judgment, as to the purpose of clause 1.8 (2008) 21 VR 35, 359 [19] and 362 [34]; cf effects of dilution: [2008] VSCA 247; (2008) 21 VR 351, 380 [112] and 314 [128].

[18] Ansett Transport Industries v The Commonwealth [1977] HCA 71; (1977) 139 CLR 54, 61 (Barwick CJ) and 103 (Aickin J); Coachcraft Ltd v SVP Fruit Co Ltd (No 2) [1979] VicRp 21; [1979] VR 215, 226-7_; City of Camberwell v Camberwell Shopping Centre Pty Ltd_ [1994] VicRp 10; [1994] 1 VR 163, 186-7.

[19] See Life Insurance Act 1995 (C'th), s 14(4):

(a) 'the principal object of which is the provision of benefits calculated by reference to units the value of which is related to the market value of a specified class or group of assets of the party by whom the benefits are to be provided...

[20] Mackay v Dick (1881) 6 App Cas 251, 263; Butt v McDonald (1896) 7 QLJ 68, 70-1; Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596, 607.

[21] Expressum facit cessare tacitum: Aspdin v Austin (1844) 5 QB 671, 684 (Lord Denman CJ, Patterson, Coleridge and Wightman JJ); Ansett Transport Industries (Operations) Pty Ltd v Commonwealth [1977] HCA 71; (1977) 139 CLR 54, 73 (Mason J).

[22] [2008] VSCA 247, [23] and [24].

[23] Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181, 188 [11] (Gleeson CJ, Gummow and Hayne JJ).

[24] [2008] VSCA 247, [18].

[25] Reasons, [60], citing O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359; Legione v Hately [1983] HCA 11; (1983) 152 CLR 406, 445; and see now Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10; (2008) 234 CLR 237, 257 [59]; Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 290 ALR 595, 610 [64]-[82].

[26] Brett v Barr Smith [1919] HCA 4; (1919) 26 CLR 87, 93 (Isaacs J); Guthiel v Ballarat Trustee, Executors & Agency Co Ltd [1922] HCA 19; (1922) 30 CLR 293, 299 (Knox CJ; 391-5 (Isaacs J); Lewison & Hughes, The Interpretation of Contracts in Australia, [5.08].

[27] Oxford English Dictionary, meaning 2b.

[28] Con-Stan Industries of Australia Pty ltd v Norwich Winterthur (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226, 241 (Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ).

[29] Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253, 285 [99]-[101] (Heydon and Crennan JJ).

[30] See, for example, Gribble, XXN, T.1044 -1056.

[31] It is to be remembered that those earlier breaches, which were the subject of consideration at the first trial and on appeal on the last occasion before this court, were found by the judge on this occasion to have resulted in no more than nominal damage.

[32] Kuru v New South Wales [2008] HCA 26; (2008) 236 CLR 1, 6 [12].

[33] Shevill v Builders Licensing Board [1982] HCA 47; (1932) 149 CLR 620, 625-626; Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, 33 and 40; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623, 634 (Mason J).

[34] [1991] HCA 54; (1991) 174 CLR 64, esp 101-104 (Brennan J).

[36] Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473, 505-6; Burger King Corp v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558, [2001] NSWCA 187, [593], [700].

[37] Federal Commissioner of Taxation v Wade [1951] HCA 66; (1951) 84 CLR 105, 115; Cullen v Taperell [1980] HCA 10; (1980) 146 CLR 1.

[38] [1954] HCA 25; (1954) 90 CLR 235.

[39] [1989] HCA 51; (1989) 168 CLR 385.

[40] [1954] HCA 25; (1954) 90 CLR 235, 250 (Kitto J).

[42] (1781) 2 Dougl 684; 99 ER 434.

[43] Ibid 694; 99 ER 439, 440.

[44] [1849] EngR 830; (1849) 4 Ex 345; 154 ER 1245.

[45] [1851] EngR 510; (1851) 17 QB 127; 117 ER 1229.

[46] [1849] EngR 830; (1849) 4 Ex 345; 154 ER 1245.

[47] [1851] EngR 510; (1851) 17 QB 127, 148; [1851] EngR 510; 117 ER 1229.

[48] [1954] HCA 25; (1954) 90 CLR 235, 251.

[49] Maine Spinning Co v Sutcliffe & Co (1918) 86 LJ (KB) 382; 34 TLR 154.