County Securities Pty Limited v Challenger Group Holdings Limited

2 The Challenger Group conducts its business in the financial services sector. As part of this business CHL structures transactions for its clients in equity markets.

3 Between June 2000 and June 2003, CHL entered into equity swap transactions (the "Equity Swap Transactions") with Australian Capital Markets Pty Ltd ("ACM") and Australian Capital Equity Pty Limited ("ACE") under which CHL agreed to deliver to ACM the economic profit or loss on a notional parcel of shares ("Notional Shares"). This involved: a. The acquisition of an amount of shares ("Physical Stock") equivalent to the Notional Shares.

b. The purchase of Physical Stock by CHL using the amount it received (which I will refer to as the "Collateral Amount") from ACM and ACE and money which CHL borrowed under margin loans (the "CHL Margin Loans").

c. On agreed dates each month ACM made a payment ("Floating Rate Payment") to CHL using an agreed interest rate formula. The formula was applied to the amount of the Australian dollar difference between the market value of the Notional Shares and the Collateral Amount.

d. Generally speaking, CHL then used the moneys it received from ACM to meet the interest due on CHL's Margin Loans.

e. At various dates the movement in the share price of the Notional Shares ("Share Variation Amount") was calculated under another agreed formula. If there was an increase in value, CHL would pay the Share Variation Amount to ACM. If there was a decrease in value, ACM would pay the Share Variation Amount to CHL.

f. CHL applied the Share Variation Amount it received from ACM to reduce CHL's Margin Loans. Any amount CHL paid to ACM was drawn down under CHL's Margin Loans.

4 Between June 2000 and June 2003 Kim Slater provided consultancy services on a part-time basis to the Challenger Group. The services he provided included managing the Challenger Group hedge book, and in particular, CHL's hedging of its liabilities and potential liabilities under the Equity Swap Transactions.

5 In June 2003 Mr Slater was the sole director and shareholder of the plaintiff, County Securities Pty Limited ("County").

6 In June 2003 County entered into an agreement (the "Agreement") with CHL for the purpose of novating the Equity Swap Transactions from CHL to County, as a result of which the Physical Stock was transferred to County. To effect the novation and fund the transfer, County arranged its own margin loan (the "County Margin Loan"). The County Margin Loan was secured over the Physical Stock.

7 The amount borrowed under the County Margin Loan and used to pay out the CHL Margin Loans was $6,346,056.00 (the "CHL Debt"). This amount was paid to Equity Margin Lenders Limited ("EML") which was then the provider to CHL of the CHL Margin Loans.

8 County pleads its claim on the basis that the CHL Debt included an amount of $423,599.35 which represented capitalised interest on the CHL Margin Loans which had not been paid. County claims it did not know about the capitalised interest component of the CHL Debt until March 2005.

9 County claims that it should not have had to pay to CHL the capitalised interest component of the CHL Debt. County seeks to recover this amount from the defendants, plus interest.

10 County puts its case on the basis of a breach of contract by the defendants, alternatively, contravention of either s 52 of the Trade Practices Act 1974 (Cth) ("TPA"), or s 42 of the Fair Trading Act (NSW) 1987 ("FTA") and, thirdly, unjust enrichment. Issues for Determination

11 The Court has to determine the following: A. What were the terms of the Agreement made between the plaintiff and the defendants.

B. Did Challenger and CHL give County a warranty that the CHL Debt did not include capitalised interest and was only made up of the principal amount borrowed by CHL to acquire the Physical Stock as varied by Share Variation Amounts.

D. Whether the payment made by County to extinguish the CHL Debt was a voluntary payment because it: (a) Was made for good consideration; and/or there was a conscious assumption of risk.

E. If County made a payment under a mistake of fact: (a) What was the amount of the payment.

(b) Did Challenger and CHL change their position on the faith of the payment by novating the Equity Swap Transactions and transferring the Physical Stock to County; and

F. Did Challenger and CHL represent to County (during the negotiation of the novation and transfer of the Equity Swap Transactions) that County would not be at risk of loss other than in circumstances where ACM defaulted on its obligations.

G. Did Challenger and CHL represent to County that CHL had applied the payments made by ACM to meet the whole of CHL's interest liability on the CHL Margin Loans.

H. If Challenger and CHL made either representation: (i) Was it misleading or deceptive.

12 Mr Slater has worked in stockbroking since 1984. He is very experienced in the derivatives market.

13 In 1997 Mr Slater was employed by County NatWest. In 1999 Solomon, Smith Barney acquired County NatWest and it was later acquired by Citigroup ("SBC").

14 Whilst at SBC Mr Slater was involved in the derivative capital markets area. In this capacity, between 1997 and 2000, Mr Slater set up and implemented equity swaps for ACM and ACE which were clients of SBC. The equity swaps related to shares in Seven Network Limited ("SEV").

15 In return for ACM and ACE paying to SBC a monthly interest amount, they received the benefit or detriment on a notional parcel of SEV shares. Under these swaps ACM and ACE paid SBC an amount equivalent to a nominated loan to value ratio ("LVR") on the notional acquisition price of the SEV shares. For practical purposes, this was the same as the Collateral Payment referred to earlier. It was set at about 48.7 per cent LVR. The idea was that as the price of SEV shares fluctuated on the stock exchange, either a Collateral Payment would be required to be made to SBC by ACM and ACE or the surplus over and above 48.7 per cent LVR would be paid to them. I should also add that when SBC acquired the SEV shares, apart from using the Collateral Payment, it funded the balance of the purchase price from an SBC related company.

16 SBC hedged its exposure under these swaps by acquiring the equivalent number of SEV shares, the subject of each swap.

17 In June 2000, when Mr Slater left SBC, he approached Alastair Davidson, the general manager of the investment banking division of one of the companies in the Challenger Group. Mr Slater told Mr Davidson that he had the swap business with ACE & ACM in relation to the SEV shares and that they were happy to transfer the business from SBC. Mr Slater asked Mr Davidson if the Challenger Group would be interested in the business. Mr Davidson said that the Challenger Group would be interested and he would talk to Bill Ireland, a director and chairman of CHL.

18 A number of discussions between Mr Slater and Mr Davidson ensued, during one of which Mr Davidson said that in relation to purchasing shares for the hedge the Challenger Group would have to set up a margin loan and would probably do so through Challenger Share Finance. During these discussions Mr Slater explained to Mr Davidson how SBC had operated the swaps (exhibit H, para 20). Mr Slater said that Mr Davidson responded by saying it sounded like good business and that was the way that the Challenger Group would run it.

19 Around about this time there was a meeting at the Quay West apartments attended by Mr O'Donnell, Mr Davidson, Mr Slater, Mr Ireland and John Barry, another director of CHL, following which Mr Davidson told either Mr Ireland or Mr Barry, in response to a question concerning Challenger's exposure, that there was no capital risk (exhibit H, para 22).

20 A short time after the Quay West meeting, Mr Davidson told Mr Slater that Challenger would take on the business and Mr O'Donnell was informed accordingly. In that respect, the SBC swaps were unwound and new swaps were set up between ACM and CHL. With regard to that, Mr Slater told Mr Davidson that the Challenger Group would need to put systems in place to make sure interest recovered from ACE was used to pay margin loan interest and Mr Davidson said that would happen.

21 At the time, Mr Slater said he was not a consultant employed by the Challenger Group, although he attended its offices and assisted in the preparation of the documentation and in the acquisition of SEV shares for the hedge.

22 In late 2000 Mr Slater spoke to Mr Davidson about working part time for the Challenger Group as a consultant and Mr Davidson told him he would speak to Mr Ireland about it.

23 In early 2001 Mr Davidson told Mr Slater that Mr Ireland had agreed that the Challenger Group would employ Mr Slater as a consultant to work three days a week at a rate of $700 a day. Mr Slater accepted. Essentially, although available to do work on other swaps, Mr Slater's role was to look after and monitor the Equity Swap Transactions.

24 Mr Slater commenced work as a consultant in June 2001. He was given a desk in the investment banking division area. Mr Slater's desk was near Mr Davidson's. Mr Slater had access to a Challenger Group computer and its email system. He continued to liaise with Mr O'Donnell of ACM and Mr O'Donnell's assistant, Kirsty Burnett.

25 As part of Mr Slater's consultancy, he placed orders on behalf of the Challenger Group in relation to either the purchase or sale of shares necessary for the hedge on the swaps. In performing this role, Mr Slater said he had nothing to do with the settlement of SEV shares which had either been purchased or sold. This was dealt with by a "back office" function within the Challenger Group. None of the employees in that back office worked in the investment banking division.

26 Mr Slater also said he was not involved in dealing directly with ACM or ACE in making requests for collateral payments or collateral variation payments. Nevertheless, he was aware such payments were being made and he said that within Challenger this was dealt with by the "middle office". According to Mr Slater, the middle office function relating to the ACM and ACE swap business was initially undertaken by Peter Savvas. Mr Savvas was replaced by Richard Matthews in mid 2002 and from March 2003 the function was performed by Sandy Basten.

27 As part of his continuing liaison role with Mr O'Donnell, Mr Slater said that when he received a request from ACM to increase the notional parcel of shares, or unwind any part of the swap, he would tell Mr Savvas. Later it was Mr Matthews he informed. In the case of Mr Basten, Mr Basten assumed Mr Slater's role about late April 2003 and dealt directly with ACM from then on.

28 Mr Slater said the function of the middle office was to monitor the performance of the Notional Shares, report to ACM about it and make requests of ACM for the payment of monthly interest and any Collateral Amount or Share Variation Amount. It was the responsibility of the middle office to tell ACM if there were any payments due to it from CHL for amounts of money equivalent to dividends on the notional parcel of SEV shares, or on refunds of collateral. This information was provided to ACM using spreadsheets. Mr Slater saw the spreadsheets and occasionally would check the figures in them for the current notional SEV share price and sometimes he inserted the figure in a spreadsheet to bring it up to date.

29 Examples of the spreadsheets referred to by Mr Slater are contained in exhibit C at pages 65 and 72 (during the time of Mr Savvas), at pages 106, 190 and 302 (during the time of Mr Matthews), and at page 329 (during the time of Mr Basten).

30 Mr Slater said that he was not involved in the establishment of the CHL Margin Loans, which were arranged at different times with different entities including Challenger Share Finance ("CSF"), Leveraged Equities Limited ("Leveraged Equities") and ultimately EML.

31 In his evidence in chief (exhibit H) and whilst he was in the witness box, as demonstrated by the expression on his face, Mr Slater was at pains to make it abundantly clear that during his consultancy with the Challenger Group he was never informed or made aware that interest payments which were received each month from ACM were not always used to pay interest on the CHL Margin Loans. Mr Slater said he believed that CHL had always paid the interest and had used the interest payments received from ACM to fund such interest payments.

32 In late 2002 or early 2003, a restructuring of the Challenger Group started to take place as a result of the involvement of companies associated with the late Mr Kerry Packer. Specifically, Mr Davidson told Mr Slater that the investment banking division would close down and that the Challenger Group would no longer want to be involved in the Equity Swap Transactions. Mr Davidson also told Mr Slater that it was likely that everyone would be out of their jobs. The possibility of County taking on the Equity Swap Transactions was mentioned and Mr Slater said he was interested. He told Mr Davidson that he thought that as long as the Notional Shares were hedged identically with the Physical Stock, he could put in place a margin loan in the same way that Challenger had done. He could see no risk to County if the business was transacted in this way.

33 Further discussions took place including one in which Mr Ireland said that Challenger had no problem with County taking over the Equity Swap Transactions. He said (exhibit H, para 89): "(Challenger) can do this and will transfer the business to County at no profit to Challenger." In response, Mr Slater said he replied: "Yes, County can do that. It will have to be subject to County being able to find a suitable margin lender, but I do not think there will be any problems with that."

34 Mr Slater then made enquiries about obtaining a margin lending facility for County and he also spoke to Mr O'Donnell, who thought that the proposal was okay subject to considering the "security issues", as County was "obviously … an inferior credit risk" compared with Challenger. In this respect, Mr Slater offered to provide ACM with security over real estate.

35 Mr Davidson left Challenger in January 2003 and over the next couple of months Mr Slater spoke to Mr Ireland and Mr Gilsenan. On one occasion, in about March 2003, Mr Slater told Mr Gilsenan that the transfer of business would involve consolidating all the CHL Margin Loans into one and transferring the consolidated loan to County's margin lender. As well, the SEV shares would need to be transferred from Challenger to County and there would be a need for legal documentation to record the novation of the Equity Swap Transactions from Challenger to County. According to Mr Slater, Mr Gilsenan agreed this would occur and said that Challenger "will transfer the business to County at no profit to Challenger". Mr Gilsenan also said the documentation would be prepared by Mr Molinari, the in-house counsel of Challenger Group (exhibit H para 95).

36 Mr Slater said that at no stage during any of the above discussions did anyone tell him that the balance of the CHL Margin Loans included capitalised interest. His evidence about this (exhibit H, para 96) was: "Had I been told this, I would not have agreed to have County take over the (ACM) swap business on the basis that I did, because to do so would have exposed County to a liability which it would have not been funded to cover under the swap arrangements novated to it from Challenger … I would not have agreed to it had I known about it."

37 Mr Matthews left Challenger in about April 2003, leaving no one else working in the investment banking division other than Mr Slater, who was then only working three days a week as a consultant. Shortly after this, Mr Gilsenen told Mr Slater he should work from home as new people were coming on board and Challenger needed Mr Slater's desk.

38 Mr Basten commenced work sometime after Mr Matthews' and Mr Davidson's departure from the Challenger Group. Although he got involved in the Equity Swap Transactions, it was Mr Slater who told him how they worked. The plaintiff cannot therefore rely on anything Mr Basten said to Mr Slater because Mr Slater was the real source.

39 On 13 May 2003 Challenger gave Mr Slater formal notice of termination of his consultancy with effect from 13 June 2003 (exhibit C, p 324).

40 Because Mr Slater was working from home he no longer had access to Challenger's email system or the computer previously provided to him. In this respect, he spoke to Mr Gilsenen about the need for the Equity Swap Transactions to be monitored. Mr Slater told Mr Gilsenan he was not prepared to do it unless he was paid to do so and Mr Gilsenan agreed to that arrangement.

41 Between May 2003 and 26 June 2003 Mr Slater was in regular contact with ACM and he also spoke to Mr Basten. He said that he did not receive any emails from Mr Basten, nor did he see any of the spreadsheets.

42 Mr Slater said that around about this time he became concerned that he had not seen any documentation relating to the transfer of the Equity Swap Transactions and Mr Basten assured him that it was "under control" and that Mr Molinari was drafting it. Because Mr Slater was keen to have a written commitment from Challenger, he sent the letter dated 12 June 2003, which is at p 326 of exhibit C. By that time County had put in place, through Merran Schoeffel at EML, a Margin Loan Account in County's name (the "County EML Account").

43 Mr Slater's evidence was that when he sent the letter dated 12 June 2003 he still had the belief that Challenger was continuing to pay all the interest due under the CHL Margin Loans and that when the Equity Swap Transactions were transferred to County, all interest payments due under the CHL Margin Loans would be paid up to date. Mr Slater said that no one at Challenger told him that the balance of the CHL Margin Loans included accrued unpaid interest.

44 Mr Slater's evidence was that in May/June 2003, in one of his discussions with Mr Basten, he said to Mr Basten (exhibit H, para 117): "Please make sure that ACM is paying its interest, and that is all being processed and it is all being received." Mr Basten replied:

Yes, that is all happening and everything is happening as it should."

45 On 23 June 2003 CHL, Challenger Life Limited, ACM, ACE and County entered into the agreement ("Novation Agreement"), a copy of which is at p 345 of exhibit C.

46 The Novation Agreement provided exhaustively for what was to happen. Essentially, the parties agreed that CHL would surrender its rights and be released and discharged from its obligations under each of four transactions ("Transactions") itemised in the schedule to the Novation Agreement and that County was entitled to equivalent rights and assumed equivalent obligations. Specifically, cl 2 provided: "With effect from and including the Novation Date: a. [CHL, ACM and ACE] have no further rights against each other or obligations to each other in connection with any Transaction; and b. subject to clause 9(c): i. [County] has the same rights against, and owes the same obligations to, [ACM and ACE] in connection with each Transaction;

ii. [ACM and ACE] have the same rights against, and owe the same obligations to [County] in connection with each Transaction,

as if [County] had been named as a party to the Transaction instead of [CHL]

(In this clause 2(b) a reference to the 'same' rights or obligations is a reference to rights or obligations which are the same in nature and character as those rights or obligations rather than the same as to the person entitled to them or obliged to perform them);" The Transactions were: (a) three swap confirmations dated 26 June 2002 (for 2,209,565 notional shares); 25 September 2002 (for 20,000 notional shares); and 25 September 2002 (for 20,000 notional shares); and

47 The Novation Agreement contained certain express representations and warranties of each of CHL, ACM and ACE, to the other parties including that: 18.1 "the terms of each Transaction are accurately recorded in the Confirmation for that Transaction and there is no dispute or grounds for future dispute between [CHL, the plaintiff, ACM and ACE] as to the terms of or performance obligations under each Transaction" (cl 3(b)); and

18.2 "it has no right of cross claim or counter claim against the other part in connection with any Transaction" (cl 3 (c)).

48 In addition, cl 4 of the Novation Agreement provided: Each of [CHL, ACM and ACE] acknowledge that the Schedule lists all transactions between them, and that, following the novation of the Transactions, there will be no remaining contractual obligations (under ISDA Agreements or any other documents) owed to or by [CHL] to or by the other Parties.

49 On 23 June 2003 the plaintiff, through Mr Slater, requested EML to effect the transfer to County of the facility held by CHL with EML which gave rise to the CHL Debt. Mr Slater, on behalf of the plaintiff, had contacted Ms Schoeffel at EML to be told the number of shares to insert in the transfer of the facility.

50 The request was made in the following terms: "Re Transfer of facility from Challenger Hedging Limited to County Securities

In conjunction with the off market transfer of 2254565 SEV shares from Challenger Hedging Limited to County Securities Pty Limited, please pay out the loan balance on account Challenger Hedging Limited from available funds in account County Securities Pty Limited."

51 Mr Slater did not ask Ms Schoeffel, or make any other enquiry as to what the balance on the margin loan was before making that request.

52 On 24 June 2003 Mr Slater signed the Share Transfer form relating to the 2,254,565 SEV Shares (exhibit C, p 351).

53 On 26 June 2003 settlement took place and the 2,254,565 shares were transferred from CHL to County in an off market transaction.

54 At settlement, the amount paid by County to discharge the CHL Debt was $6,346,055.02.

55 In summary then, the plaintiff accepted the novation of the swaps and the transfer of the SEV shares and in return paid out the CHL Debt and assumed the obligations of the novation. For their part, the defendants had the CHL Debt discharged in return for which they novated the swap confirmations, forwent the exit fee and transferred the SEV shares to the plaintiff.

56 Mr Slater said he believed at the time he signed the documents (para 128, exhibit H): " … that what was occurring with the transfer of the client's swap business to County from CHL was that County would be taking over the obligations of CHL under the current swap contracts between the clients and CHL; County would have transferred to it the SEV shares that were held by CHL to hedge its obligations under those swap contracts; the debts incurred by CHL to acquire those SEV shares would be transferred to the County EML account; and the SEV shares would be held by EML as security for the liability incurred by County to EML."

57 Mr Slater's evidence about his belief concerning the CHL Loans was as follows (exhibit H, para 129): "I also held the belief … that the loan balances on the CHL Margin Loan Accounts (to be transferred to the County EML Loan Account) would represent the amount of the principal that had been borrowed by CHL to acquire the SEV shares which CHL held to hedge its obligations under those swaps; and that such loan balances would not have included any accrued or unpaid interest."

58 In April 2005, nearly two years after the Agreement was entered into, Mr Slater identified what he thought was a discrepancy between the amount paid out by County on the CHL Debt at settlement, compared with what he thought the amount should have been. He came up with a figure of approximately $438,000 and asked Mr Matthews to check his calculations. As a result, Mr Slater came to the conclusion that the discrepancy was due to interest having been capitalised on one or more of the CHL Margin Loans prior to 26 June 2003. The amount of the "discrepancy" was subsequently refined. I will refer to this matter later in the Judgment. Before doing so, however, I should add that, in relation to the "discrepancy", Mr Slater conceded in cross-examination that he had access to all the relevant information prior to 23 June 2003 and the calculation was a simple one (T 112.4). Mr Slater also conceded that the "discrepancy" could have been identified "at a glance" (exhibit H, para 74). Mr Matthews agreed (T 34.35).

59 Both parties provided the Court with detailed written outlines which were handed up in Court on 28 February 2007. Counsel for both parties spoke to the written outlines.

What were The Terms of the Agreement made in June 2003.

60 In paragraph 15 of the ASOC, the plaintiff alleges that the Agreement was made partly in writing, party oral and partly by conduct. With regard to the written part, the documents are those identified in paragraph 20. The conduct is particularised in paragraph 15 as follows: "Insofar as the Transfer Agreement was made by conduct, it arose from the conduct of County and CHL in entering into transactions to effect the transfer of the Equity Swap business to County."

61 In relation to the formation of the contract, counsel for the defendants did not dispute either the writing or the conduct. However, they submitted that the Agreement contained no oral terms.

62 Particulars of the oral terms of the Agreement relied on by County are set out in para 15 of the ASOC as follows: "Insofar as the Transfer Agreement was made orally it was made between Kim Slater on behalf of County and Steve Gilsenan (the DFO of CFSL and a director of CHL) and William Ireland (the Managing Director of CFSL and a director of CHL) on behalf of CHL. These discussions occurred after Kim Slater had been informed by Alistair Davidson initially, and later Stephen Gilsenan and Sandy Basten (on behalf of CHL), that the Challenger Group no longer wished to carry on the Equity Swap Business.

In these discussions Steve Gilsenan and William Ireland on behalf of CHL offered to hand over the Equity Swap Business to Kim Slater (or to an entity he might nominate), for no profit to CHL or to the Challenger Group, for Kim Slater to undertake it on the same basis that CHL had conducted the business with ACM, and that CHL's internal lawyers would prepare the necessary documentation. Kim Slater accepted the offer on behalf of County."

63 In particular, counsel for County submitted that the discussions between Mr Ireland and Mr Slater and Mr Gilsenan and Mr Slater referred to in paragraphs 33 and 35 above constituted the express oral terms which formed part of the Agreement.

64 Mr Ireland did not give evidence and Challenger did not dispute that Mr Ireland had said to Mr Slater that Challenger would transfer the business to County at no profit to Challenger. However, Mr Ireland ceased to be managing director of Challenger on 9 April 2003, more than two months before the date the Agreement was entered into. He was replaced by Chris Cuffe as Acting Chief Executive Office (exhibit 2, tab 6). There is no evidence Mr Cuffe had any involvement with the matters in dispute.

65 In addition, shortly before his departure, Mr Ireland sent the letter dated 3 April 2003 (exhibit G) to Mr O'Donnell in which he made clear to Mr O'Donnell that CHL did not intend entering into any further Equity Swap Transactions and expected all obligations with regard to them to be settled no later than 26 June 2003 when the Equity Swap Transactions were due to terminate.

66 Importantly, exhibit G was sent by Mr Ireland at the behest of Mr Slater (T 57.43). In it, Mr Ireland told Mr O'Donnell: "We are aware that you have had discussions with a third party as to a possible novation of your position with (CHL). We confirm that we are prepared to consider a novation of the position in place of the early termination of the swap contract." (Emphasis added).

67 As to the conversation between Mr Slater and Mr Gilsenan referred to in paragraph 35, Mr Gilsenan said he did not use the words "at no cost to Challenger", but that he said there would be "no hit" for Challenger. In my assessment, this meant the same thing. Mr Gilsenan's evidence was that this, and other conversations he had with Mr Slater, were informal and he was not challenged about this. In this respect County submitted that Mr Gilsenan's recollection of saying that Challenger would not take a "hit" was consistent with an agreement that the transaction was to be done "at book", that is, there would be no profit in it for Challenger, nor any loss. Challenger would be making a profit if it received on settlement any amount which included capitalised interest because Challenger would be recouping an interest expense which it had incurred and recorded in its books and would thereby receive an amount greater than the book value of the assets and liabilities transferred to County.

68 County also relied on Mr Basten's evidence (exhibit L, para 13) that he was instructed by Mr Gilsenan that the transfer should be at no profit to Challenger.

69 Counsel for County submitted that the conversations on which it relied, set out above, meant that "the parties agreed the terms of the contract they proposed to enter into. Even if not thereby bound to complete the novation and transfer, the terms in which the parties intended to do so were objectively fixed." (see counsel's written outline dated 28 February 2007, para 6). The problem I have with this submission is that it ignores the fact of the Novation Agreement and the other contractual documents which the parties entered into on 23 June 2003 and their binding nature. When faced with this difficulty, counsel for the plaintiff, in his submissions in reply, sought to characterise the conversations set out above as constituting a "standing offer" by Challenger that if there was to be a novation of the Equity Swap Transactions, it would be on the basis of Challenger not making a profit out of it. The "standing offer" was said to be "irrevocable".

70 In the context of these discussions and Mr Slater's repreated evidence about his subjective beliefs, counsel for the plaintiff placed much reliance on Riverwood v McCormack (2000) 177 ALR 193 at 208. He may also have been alluding to those exceptional situations in which the Court finds a contract exists even if it is not easy to locate an offer and acceptance: see the discussion in Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153 at 177 per Heydon JA and Branir Pty Limited v Owston Nominees (No. 2) Pty Limited (2001) FCR 424 at 525 per Allsop J. However, this is not an exceptional situation.

71 Of more assistance and guidance to this Court is the High Court's decision in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd 219 CLR 165 at 179 of which, referring to that Court's earlier decision in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462 their Honours said: "This Court, in Pacific Carriers Ltd v BNP Paribas has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction (21)."

72 In light of what was said by the High Court in Toll v Alphapharm, Mr Slater's subjective belief and understanding arising out of the discussions he had with Mr Ireland and Mr Gilsenan are irrelevant; so too are Mr Gilsenan's instructions to Mr Basten that the transfer was to be "at book". That merely constituted Mr Gilsenan's subjective understanding of what would be included in the bargain if it went ahead.

73 In any event, I am not persuaded that the conversations relied on amounted to a "standing offer" or an "irrevocable offer" as submitted by County nor do they constitute oral terms of the Agreement. Looking at it objectively, the parties were still in negotiation. By their nature, the discussions relied on by County were no more than pre-contractual discussions.

74 In the first place, the discussions were informal. Secondly, as the letter from Challenger to ACM (exhibit G) reveals, Challenger merely stated it was prepared to consider a novation to an unnamed third party. Thirdly, in Mr Slater's case, as at 23 May 2003, Mr Slater was still negotiating the terms of any novation with Mr O'Donnell as Mr O'Donnell's e-mail of that date (exhibit 2, tab 2) discloses.

75 As well, as exhibit 4 (tabs 6, 7, 8 and 9) demonstrates, in April and May 2003 the defendants did not know whether the Equity Swap Transactions would be unwound or novated.

76 That things were still in a state of flux as at 12 June 2003 is demonstrated by Mr Slater's draft letter to Mr Basten of that date (exhibit C, p 326). The letter commenced: "The purpose of this letter is to seek agreement between (Challenger) and (County) that Challenger will agree to novate equity swap positions it holds on behalf of (ACE) to (County) at the close of business on June 23, 2003." Mr Slater went on to say in the letter: "No cash will be exchanged between Challenger and County, but Challenger will authorise (b) the transfer of the notional ACE loan to County, and (c) instruct its margin lenders to transfer all positions to (County's) account at (EML)."

77 Mr Slater made no mention in the letter of the alleged "no profit" or "no cost" or "no hit" terms that County relies on. He did however, refer to the fact that novation documents were being prepared. This task was in the hands of the defendants' in house counsel, Mr Molinari.

78 Moreover, at the time of the conversations relied on by County there was uncertainty about a whole range of matters. First, the identity of the parties was unclear: para 15 of the ASOC refers to "Kim Slater (or … an entity he might nominate"). Secondly, the subject matter could have been some or all of the following: the right to collect interest and fees; the obligation to repay collateral; the ownership of the SEV shares and the nature of the obligations to margin lenders. Importantly, price was not identified. Accepting that the words at "no cost to County" and "no profit to Challenger" were used, there is no evidence before the Court as to what profit Challenger made on the Equity Swap Transactions. The defendants point, by way of example, to the CHL Statement of cash flows (exhibit A, p 113) which shows interest payments to CHL of $369,357 and interest and other costs of $502,009 resulting in a deficit of $132,652.

79 Accordingly, I am comfortably satisfied that the contract made on 23 June 2003 consists of the transactions effected by the documents particularised in para 20 of the amended Statement of Claim without any oral term.

Did Challenger and CHL give County a warranty that the CHL Debt did not include capitalised interest and was only made up of the principal amount borrowed by CHL to acquire the Physical Stock as varied by Share Variation Amounts.

80 The plaintiff pleads the alleged warranty as an implied term of the Agreement. In support, it asserted a common assumption that interest was being paid on CHL's Margin Loans and not being capitalised and submitted (counsel's written submissions, para 18): "In light of the circumstances in which the contract arose and the fact that in the carrying out of the transfer transaction Challenger drafted a document for execution by County by which County requested payment of the balance of the whole of the EML Margin Loan, the Court should infer that Challenger did warrant that the balance of the loan of which it sought payment by County would be the appropriate amount to reflect the manner in which the parties both assumed the swap business had been conducted. That amount was the amount borrowed by Challenger to acquire the shares as adjusted by collateral variation payments. It did not include capitalised interest."

81 First of all, the alleged warranty is inconsistent with the express term of the Agreement pleaded by the plaintiff in paragraph 16(c) of the amended Statement of Claim as follows: "County would assume CHL's liability in respect of monies borrowed by CHL to acquire the Physical Stock."

This is exactly what happened when settlement occurred.

82 Apart from this, applying BP Refinery (Westport) Pty Limited v Shire of Hastings (1977) 180 CLR 266 at 283, a term of the type relied on by the plaintiff would only be implied in circumstances where the Court considered it would be: a. Reasonable and equitable to do so;

b. Necessary to give business efficacy to the Agreement; no term will be implied if the Agreement is effective without it;

d. Capable of clear expression; and not contradict any express term of the Contract.

83 The factual matters relied on are essentially those the plaintiff unsuccessfully sought to rely on to make out the oral term of the Agreement. The plaintiff also relies on the matters set out in paras 19 and 20 of Counsel's written submissions. In my opinion, those matters are nothing more than evidence of pre-contractual discussions which occurred between the parties. The Agreement speaks for itself and, applying the criteria in the BP Refinery case referred to above, there is no basis for implying the Warranty which the plaintiff asserts.

84 Issues D and E are predicted on the basis of the plaintiff's claim of unjust enrichment. In my opinion, the claim is flawed for the following reasons.

85 First, the legal right and obligations of the parties are governed by the Agreement as determined by the Court. As the High Court said in Equuscorp Pty Ltd v Glencallen Investments (2004) 218 CLR 471 at 483; (reference to authorities omitted): "The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification all proceed from the premise that a party executing a written agreement is bound by it."

86 As the defendants point out, (Counsel's written submissions para 80) there is a distinction between a non-contractual mistake, where a payment made is one that is not required under the Contract in respect of which it may be possible to recover the payment (see generally David Securities Pty Ltd v Commonwealth Bank of Australia (1993) 175 CLR 353 at 379) and a contractual mistake, that is, where a payment is required under a contract but in respect of which, in certain circumstances, the law allows rectification or rescission.

87 In my opinion, this part of the plaintiff's claim is based on a contractual mistake because, as pleaded by the plaintiff in para 16(c) of the amended Statement of Claim, the plaintiff was obliged to pay "CHL's liability in respect of monies borrowed by CHL to acquire" … the SEV shares. The plaintiff did this and received 2,254,565 shares in return.

88 In other words, there was no mistake made by the plaintiff when it made payment under the Agreement. The plaintiff did what it was obliged to do under the Agreement. To effect this, the plaintiff entered into an arrangement with EML, a third party, undertaking obligations to EML in return for EML closing out the CHL Debt. In reality, the plaintiff's complaint is that it was not supposed to make a payment which would include capitalised interest. That goes to the question of the terms of the Agreement and the plaintiff has failed on this issue. Looking at it this way, the relief which the plaintiff might have pursued was in the nature of rectification. But the plaintiff chose not to go down that path. As noted by the Hon K R Handley QC, the learned author of Estoppel by Conduct and Election (2006, p 169 note 51): "Equity will order rectification where one party believes that the document contains a particular term, and the other, who is aware of this belief and that it is mistaken, remains silent in order to profit from the mistake. See A Roberts & Co Ltd v Leicestershire CC [1961] Ch 555; Thomas Bates and Son Ltd v Wyndham's (Lingerie) Ltd (1981) WLR 505CA; Taylor v Johnson (1983) 151 CLR 422, 432-433; Tutt v Doyle (1997) 42 NSWLR 10CA, 12, 14-5." See also more recently Ryledar Pty Ltd v Euphoric Pty Ltd (2007) NSW CA 65 at 259 per Campbell JA.

89 Without it being necessary to decide, it is hard to see how the plaintiff could have succeeded in this case on the facts in obtaining an order for rectification (assuming a jurisdictional basis upon which the relief could have been granted).

90 The plaintiff's claim based on unjust enrichment therefore fails.

91 This heading encapsulates issues F, G and H set out earlier.

92 I accept Mr Slater's evidence that he always held the belief that CHL had paid interest on its margin lending facilities and he believed that CHL always used the payment of notional interest received from ACM each month to fund each monthly payment of interest. However, when it came to the settlement on 26 June 2003 Mr Slater did not bother to check how the amount of $6,346,056 was made up and it took him nearly two years to discover what he claimed was the mistaken inclusion in this amount of capitalised interest.

93 According to the plaintiff's case, the date of the first capitalised interest entry was 1 May 2002: see exhibit H, annexure 'A'. In this respect I accept the defendants' submission that there is no evidence of either of the representations pleaded in paragraphs 22 and 25 of the amended Statement of Claim having been made expressly by the defendants in the period 1 May 2002 - 23 June 2003.

94 As to issue F, to the extent that the alleged representation was made by Mr Ireland, Mr Davidson and Mr Gilsenan, Mr Davidson left the Challenger Group on 9 January 2003 and Mr Ireland was gone by 9 April 2003. The conversation with Mr Gilsenan about which Mr Slater gave evidence, which I accept, was that the proposed transfer of business would occur "at no cost to County … (and) no profit to Challenger." Mr Gilsenan did not put it differently when he recalled saying "as long as Challenger does not take any hit on the transfer".

95 First of all, as previously stated, this conversation was in the context of pre-contractual discussions. Secondly, without more, it cannot mean that County would not be at risk of incurring loss.

96 The only evidence of anything being said about the risk or possibility of ACM defaulting was evidence that Mr Slater said to Mr Davidson in December 2002 as follows (T 63.50): "Q. And it was you who explained to him, wasn't it, that the only risk of the business that you were seeking to introduce to Challenger was if ACM defaulted?

A. That was my view, that the only risk to Challenger was a potential default by ACM."

97 In those circumstances, I accept the defendants' submission that it could hardly be said that the defendants had some sort of an obligation to represent positively that County would be at no risk of incurring a loss. Mr Slater was relying on his own assessment of how the arrangement would work. The plaintiff therefore fails on issue F.

98 As counsel's written submissions demonstrate, County was focussing on issue G in order to make out its case of misleading and deceptive conduct. For convenience, I will refer to this issue as the "Interest Representation". The Interest Representation is specifically pleaded in paragraph 25 of the ASOC.

99 To reiterate, Mr Slater's belief was twofold. First, he believed that ACM paid the notional interest amounts each month and, secondly, that CHL always applied the amount paid towards the monthly interest due on the CHL Margin Loans.

100 Mr Slater's subjective basis for holding his beliefs are set out in paragraph 80 of exhibit H. However, as the defendants correctly submit, it is not so much what Mr Slater believed to be the case, but whether, looking at it objectively, the Interest Representation was made and, if so, was it misleading or deceptive (Equity Access Pty Ltd v Westpac Banking Corporation (1990) ATPR 40-994 at 50,950 and Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 202-203).

101 The evidence establishes that ACM made the notional interest payments to CHL. Specifically, Mr Matthews' evidence was that each month he mailed the spreadsheets to ACM usually with a covering e-mail containing a request that ACM make the interest payments (para 35, exhibit B). Mr Matthews said that ACM usually made the payments by direct deposit into a Challenger account (paras 38 & 78 of exhibit B).

102 Mr Matthews had taken over from Mr Savaas. Mr Slater's evidence was that this was at a point in time before CHL started to use external margin lenders (exhibit H, para 74). According to Mr Davidson, whose evidence I accept on this aspect, it was Mr Matthews who investigated the possibility of using external lenders to provide margin loan finance. It was Mr Matthews who then made the arrangements to put the CHL Margin Loans in place with the external lenders, Leveraged Equities and EML in about April or May 2002 which, coincidentally, is the date from which the plaintiff claims that interest started to be capitalised.

103 Mr Matthews' evidence was that he was aware that interest accruing on the Margin Loans provided by Leveraged Equities and EML was being capitalised, although he did not know the reason for this.

104 After Mr Matthews resigned from the Challenger Group on 19 March 2003 he started working for Mr Slater in preparing the spreadsheets which were sent to ACM. Mr Slater's evidence about this was (T73.15): "Q. Is it work that he undertook at your request?

A. The answer to that question would be, yes, Richard would have undertaken this work at my request because the reason for doing that is that there was a transition in Richard's departure and Mr Basten taking on the swap book and my desire was to make sure that there was a continuity in the transfer of those responsibilities and that the swap books were maintained in the proper fashion that they should have been.

Q. Another reason is, isn't it that you needed to rely on Mr Matthews to do this work because you couldn't have done it yourself?

A. I couldn't, no, Richard was responsible for maintaining the spreadsheets and I had no responsibility as I was unable to do it."

105 On 19 May 2003 Mr Slater nominated Mr Matthews as a representative of the plaintiff in its dealings with EML. As exhibit A, vol 7, tab 8 discloses, Mr Matthews was "authorised to either act on (County's) behalf, including giving dealing instructions and other instructions and requests and/or receive account information".

106 By e-mail sent on 18 June 2003 (exhibit 1, p 365), Mr Slater informed Ms Schoeffel of EML that Mr Matthews was to be included in the distribution of information because he was performing the plaintiff's back office function. At the same time Mr Slater asked for advice from Mr Matthews about how County should take over the Equity Swap Transactions from CHL (T 75.29, T75.27, exhibit C, p 318).

107 In light of that evidence, I accept the defendants' submission that Mr Matthews was County's agent and County cannot rely on Mr Matthews' conduct as the basis of establishing any representation made by the defendants, including the Interest Representation in or around 23 June 2003.

108 I also accept the defendants' contention that, to the extent the Interest Representation was implied or inferred from conduct, including a failure to inform Mr Slater that interest was being capitalised (see the second paragraph to the particulars of paragraph 21 picked up in the particulars to para 22; see also the particulars to paragraph 25), the case is one of representation by silence.

109 On this issue, Counsel for both parties referred the Court to the decision of the Full Court of the Federal Court of Australia in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 where, at 32, Black CJ stated: "Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of "mere silence" or of a duty of disclosure can divert attention from that primary question. Although "mere silence" is a convenient way of describing some fact situations, there is in truth no such thing as "mere silence" because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed."

110 With regard to the circumstances of this case, as already noted, in paragraph 80 of exhibit H Mr Slater set out the matters upon which he based his belief that interest on the CHL Margin Loans had not been capitalised.

111 First of all, Mr Slater pointed to the discussions he had with Mr Davidson, referred to earlier in this judgment and set out in paragraphs 18, 19, 20 and 21 of exhibit H, as well as the discussion which took place after the meeting at Quay West, referred to in paragraph 22 of exhibit H.

112 These discussions need to be put into proper perspective. First of all, the conversations in paragraphs 18-22 of exhibit H took place in the year 2000 when Mr Slater was trying to convince the Challenger Group to take on the Equity Swap Transactions. In that context, the conversations were nothing more than statements about future matters and the basis of them was reasonable until May 2002 because the business was conducted in the manner described until that point in time.

113 Secondly, Mr Slater said he overheard Mr Davidson make a statement to Mr Matthews about the background to the business coming to Challenger and Mr Slater's role in it (paragraph 63, exhibit H). At the time Mr Davidson made this statement to Mr Matthews, it was July 2001. Mr Matthews had only just started with the Challenger Group in Sydney (exhibit B, para 5). Again, what was said was accurate because Leveraged Equities and EML were not being used as external margin lenders at that point in time. In fact, the margin loan accounts with these external lenders were not opened until around April/May 2002: exhibit C at 83, 94.

114 Next, Mr Slater relied on discussions he had from time to time with Mr Matthews (paragraph 64 of exhibit H), the substance of which was that Mr Matthews told Mr Slater he had to go down to see the accounts department to make sure that the accounts department had received ACM's payment and that accounts were dealing with it. However, in none of the statements was there any reference about the funds received from ACM being used to pay the Margin Lenders.

115 Mr Slater said he also relied on the internal documents identified in paragraphs 67-70 of exhibit H, some of which were diagrams of how the Equity Swap Transactions operated. First, the documents do not contain any representation that interest was being paid. Secondly, in relation to one specific diagram (T 50.46), Mr Slater agreed in evidence that he was asked by Mr Matthews to read the document before it went to the data room to make sure it was correct. He sought to explain this away by saying that it still formed part of his belief because Mr Matthews had been the author of the document (T 91.12), but I do not accept that explanation.

116 In paragraph 80 (e) of exhibit H, Mr Slater identified e-mails which he stated "referred to interest payments being paid by (ACM) and which I could see were being sent or copied to persons such as Romal Almazo." Mr Almazo worked in the accounts department. At T 89.7 Mr Slater accepted, when giving evidence, that none of the e-mails informed him that interest was in fact being paid to the external margin lenders.

117 Finally, Mr Slater referred in paragraph 80 (f) to discussions with Mr Barry and Mr Bacon (paragraph 72, exhibit 11). Mr Slater's evidence was that he overheard a statement by Mr Davidson to Mr Barry and Mr Bacon that CHL was not exposed to a drop in the share price. Again, however, Mr Slater accepted whilst giving evidence that there was nothing said during this conversation which referred to the payment of interest to external margin lenders (T 89.14).

118 I accept the defendants' submission that in the overall circumstances of the case it was not reasonable for Mr Slater to assume and believe in June 2003 that interest was being capitalised. Apart from what I have mentioned, it is important to bear in mind Mr Slater's role. Mr Slater was engaged as a consultant to manage the Equity Swap Transactions, an integral part of which included looking after the hedge position maintained by CHL. In this respect Mr Slater received a copy of the terms and conditions from Ms Schoeffel of EML in December 2002 (T 95.3). Mr Slater agreed it would have been prudent to have read the terms and conditions and he could not be definite that he actually did before County took out its own loan with EML (T 95.13). Mr Slater also discovered the rate of interest by a direct communication with Ms Schoeffel (T 113.40).

119 As well as everything else, Mr Slater did not bother to check things out in terms of whether or not CHL was conducting the business in the way in which he said he believed it should have been as far as the Interest Representation was concerned. Mr Slater's evidence at T 68 and T 69 was as follows: "Q. Do you say during the entire time of your working as a consultant to Challenger, you did not take any step to monitor whether or not the business was in fact being conducted in accordance with the way in which you had outlined it should be conducted when you brought the business to Challenger, so far as the payment of interest to the margin lenders was concerned? A. I did not.

Q. You didn't look at a single statement, do you say? A. I did not.

Q. Did they come across your desk? A. No.

Q. Did you not even ask for one in the time leading up to when you were about to take over the business? A. No."

120 In other words, Mr Slater did no due diligence. I accept that the sort of things he might have been expected to carry out are those set out in paragraph 76 of the defendants' submissions.

121 Looking at it the other way, given that Mr Slater had brought the business to the Challenger Group and had been heavily involved in the Equity Swap Transactions from the moment he joined the Challenger Group as a consultant, I am satisfied that it was not reasonable of the plaintiff to expect the defendant to inform the plaintiff through Mr Slater of how the various transactions were being managed.

122 The evidence establishes that, as at June 2003, of the employees who remained at the Challenger Group, Mr Gilsenan did not know that interest was being capitalised, nor did Mr Basten. Nor was it suggested that the defendants' in house counsel, Mr Molinari, knew about it.

123 Accordingly, I am comfortably satisfied that Mr Slater's assumption in June 2003 that interest was being capitalised was not a reasonable assumption. Therefore, the plaintiff has failed to make out the Interest Representation.

124 It follows that the plaintiff's claims under s 52 TPA and s 42 FTA fail. In my opinion, they also fail for the additional and separate reason, namely, that Mr Slater was so extraordinarily careless in failing to conduct even the most cursory due diligence that he could not rely on the Interest Representation even if the plaintiff had established that it was made by silence on the part of the defendants: see Argy v Blunts and Lane Cove Real Estate Pty Limited (1990) 26 FCR 112 at 138.

125 I have referred to the matter of the "discrepancy" earlier in this judgment at paragraph 58. At the end of the day the defendants conceded that the statements of the external margin lenders disclosed that an amount of $338,639.84 of interest had accrued and this amount had been expensed but not paid to those lenders. In my opinion, the amount of $338,639.84 would have been the correct measure of the plaintiff's loss had it succeeded. I would also have awarded interest under s 100 of the Civil Procedure Act from the date of commencement of the proceedings.

127 Costs on the ordinary basis should follow the event. However, I will entertain submissions if either of the parties wishes to contend otherwise.

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