That obligation was subject to cl 3.2 which dealt with a defined term being a "Guarantee Fallaway Event", that deals with default of the investor and certain events of a force majeure character. It is unnecessary to consider this qualification to cl 3.1, save to note that it is possible that some of these events might occur before 25 June 2012.
12 The "Guarantee Payment Amount" was defined relevantly for present purposes as the greater of zero and the Guarantee Amount (here, $10 million) minus the "Dynamic Portfolio NAV" for that "Dynamic Portfolio on the Maturity Date".
13 The crucial definition is that of Dynamic Portfolio NAV. (There is no separate definition but I would understand NAV to be an abbreviation or acronym for net asset value. It may, however, be beyond the evidence to make this assumption. No argument took place about that. For present purposes I will not give any weight to this assumption that that is what NAV stands for.)
14 The definition of "Dynamic Portfolio NAV" was:
" Dynamic Portfolio NAV means, in respect of a date, the sum of the Active Asset Portfolio Value and the Fixed Income Portfolio Value minus the sum of any outstanding fees, expenses or liabilities of an Investor in connection with this agreement on that date."
15 The presently relevant date is, of course, the Maturity Date, being 25 June 2012, for the calculation of the Guarantee Payment Amount on that date. However, the Dynamic Portfolio NAV was relevant for other purposes beyond the calculation of the Guarantee Amount: importantly, the calculation of the "Equity Gap" determining when shares or other "Active Assets" were to be sold and the investor was to be moved into (wholly or partly) "Fixed Income Assets" and vice versa. These points of change are defined as the "Sell Trigger" and the "Buy Trigger". In those calculations, as in the calculation of the Guarantee Payment Amount, it is clear from the terms and the structure of the Agreement that the purpose of the ascertainment of the "Dynamic Portfolio NAV" is to arrive at a value referable to the market for the assets concerned.
16 The two crucial elements of any Dynamic Portfolio NAV are, first, the "Active Asset Portfolio Value" and, secondly, the "Fixed Income Portfolio Value". The former is not relevant, for present purposes, because all relevant Sell Triggers were activated during the Global Financial Crisis and all "Active Assets" being Units in the Managed Funds were switched to "Fixed Income Assets". These latter assets were initially, after the operation of the Sell Triggers, cash and units in cash management trusts. Later, all these funds were used to purchase zero coupon bonds in amounts and for sums set out in the table in [5] of the primary judge's reasons.
17 The zero coupon bonds were bonds under which Westpac promised to pay the face value of the bonds on maturity (25 June 2012) totalling $10,024,567.07. These bonds were purchased by the values of the funds the product of redemption of the Active Assets, such redemption amounts totalling $7,791,168.82. These funds represented 6,991,816.29 Units in the five funds prior to redemption. (See the table in [5] of the primary judge's reasons.)
18 Two things may be noted at this point. First, the difference between $7,791,168.82 and $10,024,567.07 is the discount to face value of the zero coupon bonds at maturity and is a function of the market and interest rate conditions at the point of purchase by reference to the time to maturity. This discount may be likely to be appropriately viewed on revenue, rather than capital, account for an investor such as Mr Coco for either accounting or tax purposes. Secondly, whilst both the figures of $7,791,168.82 and $10,024,567.07 have a relationship to the value of the zero coupon bond, the former being the market value at the time of purchase pursuant to the agreement with Mr Coco, and the latter being the face value at the time of maturity, the number of Units sold or redeemed from the Funds (6,991,816.29) is a figure completely unrelated to value. It is simply the number of Units or divisions into which the five funds were divided and which were owned beneficially by Mr Coco and which were the subject of redemption. It has no necessary conceptual link with value, certainly not at any particular day. The number of units held by or for an investor in a given fund simply reflected the amount invested in the fund divided by the price of a unit in that fund at the date of purchase. The number of units held by Mr Coco in each of the five funds comprising his Active Asset Portfolio varied considerably despite his investment in each being the identical sum of $2 million.
19 One then comes to the crucial integer of the definition of "Dynamic Portfolio NAV", being the definition of "Fixed Income Portfolio Value" (there now being no Active Assets and so no relevant "Active Asset Portfolio Value"):
" Fixed Income Portfolio Value means for a day, the aggregate value of the Fixed Income Assets in the Fixed Income Portfolio on that date, which is to be calculated by multiplying the number of Units invested in zero coupon bonds by the market value for such zero coupon bonds, as determined by the Asset Allocation Advisor in its sole discretion from time to time."
20 Whilst there are no Active Assets, the definition of "Active Asset Portfolio Value" should be noted:
" Active Asset Portfolio Value means for a day, the aggregate value of the Active Asset in the Active Asset Portfolio on that date, which is to be calculated by multiplying the number of Units in the Managed Fund by the most recent exit price published with respect to the Managed Fund."
21 The debate before the Court centred upon the meaning of the phrase in the definition of "Fixed Income Portfolio Value" "which is to be calculated by multiplying the number of Units invested in zero coupon bonds by the market value for such zero coupon bonds."
22 Two aspects of the whole clause that are contrary to its literal wording should be noted at the outset. First, no provision is made for the valuation of cash or units in a cash management trust, they being the other two types of Defined Fixed Income Asset, apart from zero coupon bonds issued by Westpac having a maturity on the Maturity Date. No doubt, they could be taken as having a nominal value equivalent with their apparent face value; but they obviously should be valued, as both parties agreed. Thus, the phrase commencing with "which is to be calculated …" only applies to zero coupon bonds.
23 Secondly, the formula commencing with "which is to be calculated …" cannot be taken literally. The value of the zero coupon bond at maturity is its face value. To multiply $10,024,567.07 by 6,991,816.29 would produce an absurd result which both sides say is wrong.
24 Mr Coco's submission was that the market value of each zero coupon bond was $1. This was produced by recognising that at maturity the value of the zero coupon bond was the same as its face value - dollar for dollar. Thus the value was $1 for $1. There are some difficulties with this approach in terms of the underlying evidence. I am, however, prepared to approach the resolution of the appeal on the basis that this approach has some legitimate resonance in the evidence and is a shorthand way of expressing value.
25 The difficulty with accepting the argument is, however, the absurdity of this as a multiplicand of the "number of Units invested in zero coupon bonds" for the stated purpose. The number produced by this multiplication has no relationship to value, standing alone. To multiply the number of Units in the Managed Funds that were redeemed by any number such as one or less representing the per dollar value of the zero coupon bond purchased with the funds produced by the redemption of those Units to derive a sum representing value of the zero coupon bond is irrational and absurd. Here, by chance, it gives $6,991,816.29, which has a rough equivalence to a capital value of the bonds (which was in fact $7,791,168.82). However, there is no reason in principle why a particular fund should not have relatively few units, each having a much higher value than units in another fund. The approach taken by Mr Coco, if the units in that fund were converted into zero coupon bonds, would produce a figure bearing no relationship to the capital value.
26 Nor would the multiplication of the two figures identified by Mr Coco make any sense at any earlier point in time in order to calculate the Equity Gap. In such circumstances, the figure would be a fraction of 1 (the precise fraction depending upon the discount attributed by market forces to the bonds). Thus a sum would be derived as the present value of the bonds as a percentage of the number of Units in unrelated Managed Funds that were redeemed in order to produce funds with which to invest in the zero coupon bonds.
27 I reject a construction of the relevant definition that produces a value for the bonds that is disconnected from underlying notions of value.
28 Westpac submitted that the market value of "such zero coupon bonds" had to be calculated by reference to the value per Unit. That is, there had to be an attribution of the value per Unit of the value (discounted or face, depending upon the time at which one was assessing the value) of the bonds. This would give one, by multiplying this per Unit value by the number of Units, the value of the bonds.
29 Whilst this meaning requires some inserted reading of "per Unit", it does make logical use in the calculation of the number of Units. It does, however, work backwards from a known value (that of the zero coupon bonds) being the very value derived. Thus, subject to one possibility, the calculation is redundant.
30 The possible circumstances that would make this part of the definition not redundant would be if the investor in the position of Mr Coco had only (by the product of the redemption of his Units) contributed in part to the purchase of the zero coupon bond. In that case a valuation based on this calculation would be meaningful, separating out his share of the value of the bond from its discounted or face value as a whole.
31 There was some doubt in the Agreement as to whether it would be possible for this to occur. In any event, this way of looking at the clause does reflect a similar structure as found in the definition of "Active Asset Portfolio Value."
32 Mr Coco submitted that a construction should be preferred which best brought about a result which saw only capital protected, not one which captured a revenue return to restore the guarantee amount. One can understand the intrinsic fairness in what promotes this approach. I do not, however, accept that this supports the adoption of an illogical and arbitrary approach merely because it brings about a practical result, in the circumstances that have happened.
33 Even if it be accepted that Westpac's interpretation is redundant, I prefer it to an arbitrary and absurd approach to a clause attempting to reach a real value.
34 Whether or not the contract, properly construed, accords with pre-contractual representations and conduct will be the subject of the balance of the proceedings. The utility of the proceedings for damages may have to await maturity of the investment. There would, however, be immediate utility in the proceedings if a claim under the Australian Securities and Investments Commission Act 2001 (Cth), s 12GM were to be propounded, as was obliquely foreshadowed on the appeal.
35 For the above reasons, the Court should, in my view, make a declaration as follows:
"On the proper construction of the Westpac Guarantee Portfolio Service Asset Allocation Advisory Agreement between the appellant and the respondent, the definition of "Fixed Income Portfolio Value" in the definitions in the Asset Allocation Rules in the said agreement should be construed such that the part of the definition being 'which is to be calculated by multiplying the number of Units invested in zero coupon bonds by the market value for such zero coupon bonds' means that the number of Units invested in zero coupon bonds is multiplied by the market value per Unit for such zero coupon bonds, which latter value is to be derived by dividing the market value of the zero coupon bonds at the relevant date by the number of Units sold in order to invest in the zero coupon bonds".
36 The orders that I would make are: