Firstnamed Plaintiff Secondnamed Plaintiff v Defendant

Firstnamed Plaintiff Secondnamed Plaintiff v Defendant - [2011] VSC 519 - VSC 2011 case summary — Zoe

[35]

"[90] In our view, that is not so. We accept that his Honour erred in the construction of cl 1.8 of the policy. As we see it, the proper construction of the clause was to allow the appellants to make switches on 3 days' notice, and to cancel before expiration of that notice, as they contended. But so to say does not necessitate the implication of daily publication and historic pricing terms. The most that can be said is that the proper construction of cl 1.8 would not be inconsistent with the implication of such terms. Having come to that point, it is then necessary to take into account the other relevant express provisions of the policy, about the construction of which we consider that the judge was correct; and in particular, cll 2.2(e), 3.2(e) and 4.20, which, upon their proper construction, are necessarily inconsistent with the existence of the alleged implied terms.

[91] Counsel for the appellants submitted that, having found that the effect of cl 1.8 was to afford the appellants the 3-day option for which they contended, it was necessary to imply daily pricing and historic price terms in order to afford the appellants the benefit of that for which they had contracted.

[92] We reject that submission too. As observed earlier in these reasons, the special terms of the policies, and in particular cl 1.8, gave the appellants the right to make unlimited switches between portfolios on 3 days' notice and to cancel a proposed switch without penalty before the expiration of the 3 days. But those terms did not give the appellants the right to make switches at a profit. It is one thing (which the law requires) to imply terms in order to yield to a party the benefits for which he or she has contracted. It is quite another (which the law does not require) to legislate for benefits which that party may have hoped, even expected, to derive, but for which he or she has not contracted. Especially is that so when, as here, there are express provisions of the contract (in this case, cll 2.2(e), 3.2(e) and 4.20) which enable the other party to act in a manner which frustrates such hopes and expectations.[14]''

[41]

"[112] According to the appellants, the judge's process of reasoning inverted the proper process of contractual construction by failing to consider first whether the policy or any special term of the policy enabled the respondent to dilute unit prices. But in our view it is the appellants who invert reason and the proper process of contractual construction. As has been explained, dilution was a natural consequence of Coneview investors arbitraging from the cash portfolio to the secure portfolio. It occurred because the Coneview investors sought to take advantage of an increase in the value of assets underlying the non-Coneview investors' units in the secure portfolio. Contrary to the appellants' case, dilution was not something which the respondent did or for which it needed to identify a contractual authority. It was something which occurred because the respondent did nothing to prevent it. What the appellants are seeking to do is to impose an unexpressed contractual obligation on the respondent to do something to prevent it.

[113] Counsel for the appellants put an alternative argument that, assuming it were necessary to take into account the number of units on issue at the time of determination of the unit price, the respondent would be bound to procure the redemption of sufficient of its own units or alternatively to procure the funding and issue of sufficient further units to the appellants to ensure that the value of the appellant's investment was not reduced by the effects of dilution.

[114] The judge rejected that argument too, and so do we. There is no express term to that effect and we see no sufficient basis to imply it. Such a term is not necessary in order to give the Coneview prosperity bonds business efficacy. The special terms of the policies, in particular the second paragraph of cl 1.8, gave the appellants the right to make unlimited switches between portfolios. But, as has already been observed, the special terms did not give the appellants 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.[18]

[115] 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 policy holders 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".

[116] For the same reason, it would be absurd to suggest that such a term was so obvious as to go without saying."[19]

[54]

5. 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.[30] This was for all practical purposes equivalent to giving immediate effect to a switch from the secure portfolio to the cash portfolio,[31] which was precisely the conduct that the Court of Appeal had decided was not permitted by clause 1.8.
6. 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.[32]
7. The cumulative effect of the defendant's conduct was to repudiate the policy of the plaintiff in the 2009 proceeding ... 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.
8. The financial circumstances of Argot and Mr Tyne are in no way relevant to the question of whether the defendant's conduct was repudiatory.
9. The plaintiffs' damages should be assessed on the basis that the defendant deprived them of the opportunity to take advantage of clause 1.8 of their policies. Many of the issues raised by the defendant go to calculation of damages and the steps legitimately available to minimise the defendant's losses, rather than the question of whether or not the defendant breached the plaintiffs' policies.
10. The calculation of damages should be undertaken by a special referee on the basis that the plaintiffs would have pursued their objective of maximising the benefits available to them from clause 1.8 and the defendant would have taken the steps legitimately open to it to minimise the cost to its shareholders of the plaintiffs doing so.
11. The special referee will need to be instructed as to:

[103]

47 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, 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. 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.[53] 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.[54] 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.

[136]

65 Obligations which the defendant is alleged to have breached are set out in the Further Amended Statement of Claim in the 2009 proceedings.[88] There was a pleading of the issue of the Argot policy and then the pleading of various terms, most of which are uncontroversial.[89] Some terms are, however, controversial, namely the allegation in paragraph 9(c) that Argot was entitled to have its investment premium "invested to one or more of a number of investment mandates or portfolios (each of which being a Portfolio)". The defendant submitted that although the alleged term does largely reflect the terms of clause 2.2(a) of the Argot policy, the allegation in the pleading has had added to it the word "mandate", which does not appear in the policy at any point. The policy does only speak of "portfolios" and is silent throughout as to their individual natures or characteristics. These allegations appear to be the basis of further allegations, particularly those contained in paragraphs 9A and 9B of the Further Amended Statement of Claim in the 2009 proceedings, to introduce the contents of the Customer Information Brochure issued by the defendant on 15 July 1999 ("the CIB") as a repository of contractual terms with which the express terms of the Argot policy are to be read. This process is carried further, and more directly, in paragraph 13(c) of this Further Amended Statement of Claim where it is alleged that it was a term of the Argot policy that: "The Defendant would maintain the Secure Portfolio in a manner that ensured compliance with the description of it set out in the relevant Customer Information Brochure". Paragraph 14 of this pleading follows on with the allegation that a breach of this, and other terms pleaded in paragraph 13 of the Further Amended Statement of Claim, were conditions of the Argot policy "the breach of which entitled Argot to terminate the Argot Policy". The defendant submitted that the final step in the chain of argument with respect to the CIB was taken in paragraph 62 of the Further Amended Statement of Claim in the 2009 proceedings, which is set out above.[90]

[192]

94 The second switch notice which the plaintiffs alleged was treated contrary to the requirements of Argot's policy was the switch notice received by the defendant at 23:01 hours on Tuesday 13 January 2009.[139] The switch notice was a notice of intention to switch from the Secure portfolio to the Cash portfolio but as a result of the defendant's treatment of the first switch notice, Argot at that time only held units in the Cash portfolio. In any event, it was submitted that no matter on which day the second switch notice was taken to be given (that is, on 13 January 2009 on Argot's construction of the policy or on 14 January 2009 on the defendant's construction which, as I have indicated, I regard as correct), it was a short selling notice because the switch requested by the first switch notice was either in the process of switch after close of business on 13 January 2009 (on the plaintiffs', Argot's, day count) or not due to be processed until after close of business on 14 January 2009 (on the defendant's day count). Accordingly, the earliest date that a new switch notice could have been given after the first notice was either Wednesday 14 January 2009 (on the plaintiffs' day count) or Thursday 15 January 2009 (on the defendant's day count). Accordingly, Argot's allegation of breach with respect to this notice fails.[140] In this respect, it should be noted that the Court of Appeal found that "short selling" was not permitted under the terms of the policy.[141] In this context, "short selling" was treated as the "... giving notice of intention to switch an investment before acquiring the investment, provided that the investment was acquired on or before the expiration of the notice".[142] The fifth switch notice, which Argot submitted was not treated in accordance with the terms of the policy, was received by the defendant at 00:22 hours on Saturday 17 January 2009.[143] This notice requested a switch from the Cash portfolio to the Secure portfolio for both Argot and Pegela. At that time (whether at Friday 16 January 2009 on Argot's day count or Monday 19 January 2009 on the defendant's day count), Argot was still invested in the Secure portfolio, so the result was an impermissible attempt by Argot to short sell. Argot remained invested in the Secure portfolio at the critical time because Switch Notice 3 (received at 19:44 hours on Wednesday 14 January 2009) and Switch Notice 4 (received at 19:28 hours on Thursday 15 January 2009) were cancelled by Argot and Switch Notice 2 was invalid due to short selling. As submitted by the defendant, Switch Notice 5 was given on the assumption by Argot that there is a moment of time, between the working day on which the switch is completed and the next working day, during which the policyholder can give a switch notice and thereby shorten the switching cycle of the receipt working day plus three working days set out in the Prosperity Bonds policy. As discussed above,[144] on the basis of the terms of the policy, I accept that there is no such moment of time. The basis upon which this was put by the plaintiffs was not made clear and it was not suggested by any of the parties that this was a situation which attracted any of the common law concepts or rules with respect to moments of time. Consequently, Argot's claim of breach with respect to the fifth switch notice fails.[145]

[284]

138 The plaintiffs sought to limit the effect of this finding by the Court of Appeal on the basis that it did not excuse the defendant from meeting the costs of the obligations it had assumed or given the defendant carte blanche to take any action to deprive the plaintiffs of the benefit of the special terms of the policies which was not prohibited by the express terms of the policy. It submitted further that if the defendant's contrary position were correct, the obligation of utmost good faith would be empty and would confer on the parties no greater rights or obligations than they would have had under the ordinary law of contract. I do not accept this submission. It is clear from the passages from the Court of Appeal judgment set out above that the Court had turned its mind to statutory obligations of good faith and rejected the submissions of the plaintiffs in this respect, both in the reasons for judgment and its orders and declaration.[193] In my view, this is also made abundantly clear by the emphasis given by the Court of Appeal in its judgment to the position that under the terms of the policies, the plaintiffs had no right to profitable arbitrage and, further, that the defendant was entitled to exercise its rights under the policy provision to frustrate their "hope and expectation of profits".[194] Additionally, in my view, the position of the plaintiffs in this context is not enhanced by reliance upon any common law obligation of good faith or duty to cooperate in effecting the contractual purpose[195] or the evidence of Dr Gribble and Mr Thornton in support of the proposition that the defendant cannot now be permitted to deprive the plaintiffs of the benefit of clause 1.8 simply because it regrets the bargain that it made.[196] There can be no duty to cooperate to bring about something which the contract does not require, or to give effect to a claimed right the contract does not confer. In my view, the approach taken by the Court of Appeal to the right to profitable arbitrage as claimed by the plaintiffs also disposes of these issues.

[303]

"Damages for loss of opportunity

15. The principles by which some loss or damage for the loss of an opportunity to enter into an alternative investment are to be established and quantified are well established.

16. The plaintiffs must establish:

(a) on the balance of probabilities, that their entry into the Prosperity Bond policies caused them to lose a commercial opportunity which had some, not merely negligible, value; and

(b) by reference to the degree of probabilities or possibilities, the value of the opportunity lost.

17. In Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 at 355, Mason CJ, Dawson, Toohey and Gaudron JJ described the manner in which this two stage enquiry is to be approached as follows:

"[T]he applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable."

18. In short, in a case such as this, a plaintiff must "establish that he could and would have entered into the different contract and that it would have yielded the benefit claimed": Gates v The City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 13 per Mason, Wilson and Dawson JJ. If it cannot do so, it will have not have established any loss.

19. If a plaintiff can establish that he or she could and would have entered into some non-negligible alternative investment opportunity, the value of that opportunity will be assessed by reference to the degree of probability of the claimed value of the investment actually coming to fruition, even if it is less than 50%: Malec v J C Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638 at 642-643 per Deane, Gaudron and McHugh JJ; Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 at 355-356.

20. The defendant does not accept that the plaintiffs' entry into the Policies actually deprived them of any alternative investment opportunity that would otherwise have been open to them. That is to say, while it may be the case that the plaintiffs would not have invested in the policies had it not been for the defendant's unconscionable conduct, it is for the plaintiffs to establish, to the satisfaction of the Court, that the fact that they did invest in the policies prevented them from making some other form of investment. If at the time there was no other investment opportunity that they found attractive, or if there was some attractive investment but they had the means to invest in it and decided not to for some reason, then the defendant's conduct could not be said to have caused them to miss an alternative opportunity. The relevant facts will be explored during the hearing. "

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