A What I am suggesting is that the Unit in this context translates to a unit per unit price of something greater than one. And so when you apply a discount factor to that which you can apply universally to any bond as you suggest with the same tenor, then you end up with a per unit market value." [Emphasis added]
Legal Principles
17 There is no contest as to the applicable legal principles concerning commercial contracts. Where the language is unambiguous the Court must apply the language used. If it is open to two constructions, then that will be preferred which avoids capricious, unreasonable, inconvenient or unjust consequences: Australian Broadcasting Commission v Australasian Performing Rights Assn Ltd (1973) 129 CLR 99 at 109. A commercial contract must be given a businesslike interpretation and the contract must be read so as to determine what a reasonable commercial person would have understood by the language used having regard to surrounding circumstances known to the parties and the purpose and object of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]; Franklins Pty Ltd v Metcash Trading Ltd 264 ALR 15; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350.
18 It is important to have regard to the commercial circumstances which the document addresses and the objects which it is intended to secure and preference must be given to a construction supplying a congruent operation to the agreement read as a whole: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at [15] - [16].
Submissions for the Plaintiff
19 A zero coupon bond is a promise to pay a certain sum on a nominated future date without interest payments during the period up to maturity. On maturity the bonds will have a market value equal to their face value and this will include accrued interest on the purchase price of the bonds. At the time of issue the bonds are sold at a discount which reflects the prevailing interest rates and on maturity the bank pays the undiscounted face value of the bond. The account of Westpac in relation to Mr Coco's facility stated that purchases of zero coupon bonds using the proceeds from redemption of the plaintiff's Units in the managed funds totalled $7,791,168 which had a zero coupon bond value, on maturity, on 25 June 2012 of $10,024,567. It is common ground that on the maturity date the guarantee amount is $10 million.
20 The plaintiff submits that to calculate the "fixed income portfolio value" at the maturity date it is necessary to apply the definition which mandates that the figure must 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 Westpac in its sole discretion as at the maturity date.
21 It is common ground that as at the maturity date the number of Units invested in zero coupon bonds is $6,991,816. It is then necessary to multiply this figure by the market value of the zero coupon bonds.
22 The "market value of such zero coupon bonds" is the market value of zero coupon bonds of the same tenor (that is to say, bonds which mature on the same date) which must be valued at $1 per bond because this is what the paying entity must pay $1 for every dollar on its promise to pay to redeem the bonds. Accordingly, on this basis it is said that on the maturity date the plaintiff's fixed income portfolio market value is $6,991,816, that is, the total number of Units invested in the Funds multiplied by $1 which is the market value on maturity of a promise to pay $1. The resultant figure is less than the guaranteed amount of $10 million and therefore Westpac must pay to Mr Coco the difference of $3,008,184 in addition to the obligation to pay the sum of $10,024,567 and the question for determination must therefore be answered in the affirmative.
23 Counsel submits that this result is in accordance with principles applicable to the construction of commercial agreements having regard to not only the text but the surrounding circumstances and the purpose or object of the transaction and it represents a business common sense construction to achieve a commercial operation. The starting point must always be the language used and, if different constructions are open, preference will be given to one which avoids capricious unreasonable or uncommercial consequences.
24 There is said to be no ambiguity in the present case because the expression market value of a zero coupon bond on its maturity date can only admit of one construction, namely, that the value of each bond at its highest can only be its face value of $1. The definition is not concerned with the bond purchase cost plus accrued interest because in that case there would be no reason to refer to market value for "such" zero coupon bonds. Counsel refers to the agreement of the parties that there must be a determination of a unitary market value as opposed to simply multiplying the number of units in the managed funds by the bond purchase cost plus accrued interest. The relevant unitary monetary value is the value of a zero coupon bond of equal tenor conformably with the requirement to apply the agreed multiplier to the discounted face value of the bond.
25 The correct approach, it is submitted, it to identify the figure to be multiplied by the agreed number of Units and this results in the fixed income portfolio value. It is contrary to the calculation formula prescribed to first select the fixed income portfolio value and then work in reverse ("reverse engineer" the outcome) by dividing the face value on maturity to derive a unitary value regardless of the market value of equivalent zero coupon bonds. The exercise of a discretion to value in that way involves valuation of the wrong property.
26 Counsel further submits that the approach taken by Westpac will also result in an unreasonable and capricious outcome because it produces tax consequences which would mean that there was no guarantee of an effective 100 per cent capital protection at maturity since a substantial part of the amount is taxable as interest. That is a non commercial consequence and such a construction should therefore not be adopted.
Submissions for Westpac
27 Counsel firstly directs attention to the first phrase in the definition of fixed income portfolio value, namely, the reference to "the aggregate value of the Fixed Income Assets in the Fixed Income Portfolio on that date", and submits that this makes it clear that what is to be valued is the "aggregate" amount in the fixed income portfolio on maturity. The case for the defendant, he says, does not give due weight to this first part of the definition which is the end result and objective of the exercise and Mr Coco incorrectly assigns overriding importance to the remainder of the definition which goes to the way in which the end result, the aggregate value of the fixed income assets, is calculated. Counsel observes that, in his affidavit, Professor Henker does not advert to the first part of the definition of fixed income portfolio value, which states what it is that has to be valued. Rather, he exclusively focuses narrowly on the language setting out the calculation exercise. He does not in his affidavit refer to any other definition in the scheme or examine the general purpose of the scheme.
28 Secondly, the plaintiff's approach only focuses on one element in the definition, namely, the multiplication exercise.
29 Thirdly, the approach is based on a wrong assumption that the per unit market value for the zero coupon bonds at the maturity date must be $1. This is based on the evidence from Professor Henker which is incorrect that the value of a zero coupon bond in this case on maturity must be its face value of $1.
30 Fourthly, there is nothing in any of the provisions of the GPS which requires that market value of zero coupon bonds must be $1 on the maturity date. It is silent on this point.
31 Fifthly, if the plaintiff's construction is correct, the fixed income portfolio value would be entirely unrelated to the actual value of the underlying investments and that value is ignored in that construction. The submission that the market value of the coupon bonds is not related to the underlying amount invested in those bonds arising from the redemption of the Units in the managed funds is wrong.
32 Sixthly, the argument advanced for Mr Coco would produce the commercially unrealistic result in this case that Westpac is obliged to pay him at least $13 million on 25 June 2012 regardless of the underlying performance of the market. This, in substance, imposes an obligation in the circumstances to achieve a guaranteed risk free enhancement of 30 per cent in the amount of the initial investment over five years. This is unlikely to be the intended commercial result because it extends the obligation beyond protecting the initial investment.
Reasoning
33 The parties agree that a strict literal interpretation of the calculation method will not work because it will result in an absurd figure. If one multiplies the number of Units (6,991,816) by the market value of all the bonds ($10,024,567) a figure of about $70 billion will result. Therefore, some adjustment must be made to the calculation formula to give a sensible commercial operation to the formula. The parties agree that it is appropriate therefore to ascertain a unitary value for each zero coupon bond.
34 The subject matter to be determined is the "aggregate value of the fixed income assets in the fixed income portfolio". The calculation exercise is designed to achieve that result. This is a matter to which insufficient emphasis was directed, in my opinion, on behalf of the plaintiff or by Professor Henker.
35 It is agreed that the number of Units for the purpose of the definition is 6,991,816.28 being the number of Units invested in the Trust and switched to zero coupon bonds.
36 It is then necessary to determine the market value for "such" zero coupon bonds. The word "such" is important because it directs attention to the fact that the definition is concerned with "Units invested" so that the latter part of the definition can be read:
"… by the market value for zero coupon bonds which were purchased from the funds resulting from units which have been redeemed."
37 It does not strictly make sense to refer to the concept of "Units invested" in coupon bonds because what is invested is the value of the redeemed Units, that is to say a conversion to a cash figure, in this case an aggregate figure of $7,791,168, and then an investment in zero coupon bonds. Accordingly, it is appropriate to calculate the market value by reference to the amounts redeemed from the units. The market value of each coupon bond therefore on the maturity date is ascertained by dividing the market value at maturity by the number of Units originally invested and this will give the missing integer in the multiplication exercise. The word "such" serves to link the market value for the zero coupon bonds with the underlying value of the "Units invested" and it is by reference to the underlying units that the market value for the zero coupon bonds is to be determined. In this case that result is $1.43 per unit looking at the overall exercise (10,024,567 divided by 6,991,816 to give the aggregate unit bond value on maturity). It is not correct to ignore the underlying value of the Units which were used to make the investment in the zero coupon bonds as submitted for the plaintiff.
38 The submissions for Mr Coco do not give due weight to the purpose and limited protective reach intended to be afforded by the guarantee. The approach taken on his behalf concentrates unduly on the latter part of the definition in isolation. It does not pay sufficient attention to the important opening phrase in the definition which sets out the objective of the exercise. Nor does it give due weight to the fact that the coupon bonds on the market are traded in dollar amounts and not as units. I do not agree that the face value of each zero coupon bond is equivalent to its market value at $1. Rather, in this case using the aggregate figure it has a market value in the order of $1.43. The agreement is silent as to any requirement that the unit bond coupon cannot be worth more than $1.
39 For the above reasons I prefer the submissions for Westpac. I consider that on the maturity date the number of units invested in zero coupon bonds multiplied by the market value as determined by Westpac will be $10,024,567 less any fees, expenses or liabilities as at that date.
40 Since the guarantee amount is $10 million and the dynamic portfolio NAV is in excess of that amount the guaranteed payment amount on maturity will be zero.
41 The questions asked must therefore be answered as follows:
1(a) No.
(b) Yes.
42 In relation to costs the plaintiff is ordered to pay the costs of the defendant.