Hospital Products Limited v United States Surgical Corporation and Others [1984] HCA 64; (1984) 156 CLR 41, applied.

Equity - General principals - Fiduciary obligations - Conflict of interest and duty - Conduct occasioning harm - Causation - Life insurance company and agent.

Maguire v Makaronis [1997] HCA 23; (1997) 71 ALJR 781; Brickenden v London Loan & Savings Co [1934] 3 DLR 465, considered.

Contract - General contractual principles - Construction and interpretation of contracts - Implied terms - Business efficacy - Terms implied by law.

Shirlaw v Southern Foundries (1926), Limited [1939] 2 KB 206; Hospital Products Limited v United States Surgical Corporation and Others [1984] HCA 64; (1984) 156 CLR 41; Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 50 ALJR 769; Ansett Transport Industries (Operations) Pty Limited v The Commonwealth of Australia and Others [1977] HCA 71; (1977) 139 CLR 54; Secured Income Real Estate (Australia) Limited v St Martins Investments Proprietary Limited [1979] HCA 51; (1979) 144 CLR 596, applied.

Contract - General contractual principles - Construction and interpretation of contract - Custom and usage - Implication by custom and commercial usage.

Con-Stan Industries of Australia Proprietary Limited v Norwich Winterthur Insurance Australia Limited (1985 - [1986] HCA 14; 1986) 160 CLR 226, applied.

Defendant: M W D White QC, R J Oliver, G L Sealy

NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA LIMITED

CHRIS POULSON INSURANCE AGENCIES PTY LTD (No 5)

An agency agreement between the plaintiff (hereinafter referred to as "NML"), a life insurance company, and the defendant (hereinafter referred to as "CPIA"), its agent, came to an end in September 1990. In December 1991, NML commenced proceedings against CPIA claiming moneys paid under mistake of fact and commissions advanced. CPIA has conceded that it owes the sum of $29,975 to NML, and that claim requires no further consideration other than calculation of interest. In response to the claim, CPIA made counterclaim for damages on the grounds of breach of contract and fiduciary duty. Its claim arises out of the issue of a particular policy of insurance by NML, sold by CPIA, which proved to be disadvantageous to the interests of the company, and of the ensuing actions taken by NML to mitigate loss occasioned by the policy. CPIA contends that those actions caused it harm by loss of future commissions payable with respect to those policies and that the occasion of harm was a breach, both of an implied term comprised in the contract and of the fiduciary relationship claimed to exist between the parties.

The defendant, by its counterclaim pleaded (inter alia) breach of contract:

29 ... it was an implied term of the agency that the plaintiff would do all that was reasonably within its power to enable the contract to be performed including that it would not do or cause to be done anything which might result in the lapse ... of the Z policies.

30 In breach of the term referred to in paragraph 29 hereof the defendant encouraged or caused the holders of the Z policies to terminate their respective Z policies or alternatively to allow those policies to lapse less than two years after their inception."

In 1969, Christopher Poulson commenced work as an agent of NML, and in 1976 following the incorporation of CPIA, of which he was a director, the company assumed that role. In February 1989 the parties entered into an agency agreement which provided (inter alia) that:

"2.1 The Agent accepts an appointment as agent of National Mutual and National Mutual authorises the Agent to obtain on its behalf, new life insurance, disability insurance, superannuation and any other business from time to time authorised by National Mutual.

2.2 The parties acknowledge that the sole legal relationship between them shall be that of principal and independent contractor."

The Agent shall, if a Company or partnership appoint a Director, employee or partner as the case may be to assist in the conduct of its business as the Authorised Representative of the Agent. Such appointment shall be subject to approval in writing by National Mutual."

Recognition that under some circumstances the principal might have been liable through "apparent" agency was afforded by cl 13.1 which provided:

The Agent shall not engage in internal replacement of policies referred to in National Mutuals Standard Practices. In the event that it does so, National Mutual may in the sole discretion of National Mutual's Authorised Officer, vary the amount of commission payable to the Agent."

CPIA was entitled to employ sub-agents (cl 19) but such was subject to approval by and registration with NML. CPIA in turn employed agents, and different terms of agency existed between them. At least so far as the "Z" policies were concerned, those agents were to receive a commission based on the first year's premium. The relationship of principal and agent ceased, in less than felicitous circumstances, in September 1990, a date subsequent to the issue of the "Z" policies.

The entitlement to commission was governed by the following terms:

Subject to any provision to the contrary elsewhere in this Agreement, an entitlement to commission will be established by:

14.1 The lodgement by the Agent of a completed proposal; and

14.2 The acceptance of that proposal by National Mutual; and

14.3 The policy remaining in force for the period set out in the relevant Remuneration Schedule; and

14.5 Lodgement of a deduction authority with the insured's employer or bank."

The calculation of commission entitlement was complex and depended on the type of policy, length of benefit term, periodicity of premium payments, and the like. Additional sums of commission were payable on the basis of a volume calculation and a persistency rate determined by reference to the agency's historic renewal rate. Further benefits attached to the agency by means of an office allowance and certain loan entitlements. The policies which are the subject of this action were classified as new business security plan policies and attracted the following rates of commission (D1.2, 728 - 731):

Benefit Term (years to age 65) subject to a minimum of the lesser of:

(b) contracted period during which guaranteed cover is provided;

Benefit Term (years to age 65) subject to a minimum of the lesser of:

(b) contracted premium paying term; and subject to a maximum of 35.

(b) contracted premium paying term; and subject to a maximum of 35.

1 New Business Commission is credited to the Account as follows

(a) New Business Commission - First Policy Year - Credited on completion of the policy.

(i) Yearly-paid and single premium paid policies - Credited on completion of the policy.

(ii) Non yearly-paid policies - Credited on payment of the first premium due in the second policy year.

(c) New Business Commission - Third, Fourth and Fifth Policy Year -

(i) Yearly-paid and non yearly-paid premium policies - Credited on payment of the first premium due in respect of each of the third, fourth and fifth policy years. Should a premium due in any of the third, fourth or fifth policy years be not paid in the relevant year, entitlement to associated commission will be deferred until such time as the premium is paid. Entitlement to commission on premiums paid late is conditional upon the appointment being current at the date of premium payment in the relevant policy year.

2 NEW BUSINESS COMMISSION - FIRST POLICY YEAR is calculated as set out in the Table above, subject to paragraphs 3 to 8 below.

3 Benefit Term, for commission purposes, is the number of premium-paying whole years to the policy anniversary nearest to:

4 Cover Guarantee Term is the number of whole years to the policy anniversary nearest to age 65 during which guaranteed cover is provided by the policy.

5 Commission Term is the number of whole years applicable to the commission calculation as set out in the Table above.

6 Commission Premium is the premium applicable to the commission calculation as set out in the Table above is defined to be:

(ii) Single premium policies - the annual premium for an equivalent sum insured and policy term.

For whole of life policies the maximum equivalent policy term is:

7 For the purposes of commission calculation, annual premium and single premium includes, in all cases, any loading for health, occupation, pursuits and pastimes. For all Tables the relevant policy fee is also included. The relevant policy fee for Flexipol is that appropriate to the frequency of premium payment and for all other Tables it is the annual policy fee.

8 Premium additions to a policy attract New Business Commission payable as if the addition was a new policy.

9 NEW BUSINESS COMMISSION - SECOND POLICY YEAR is calculated as follows

(i) Yearly-paid and non yearly-paid policies - 33 1/3% of New Business Commission - First Policy Year.

(ii) Single premium paid policies - 66 2/3% of New Business Commission - First Policy Year.

(b) EXP, KEP and KES - 100% of New Business Commission - First Policy Year

(c) ART - 25% of New Business Commission - First Policy Year

10 NEW BUSINESS COMMISSION - THIRD, FOURTH AND FIFTH POLICY YEARS is calculated as follows

(i) Yearly-paid and non-yearly paid policies - 20% of New Business Commission - First Policy Year.

(b) EXP, KEP and KES - 100% of New Business Commission - First Policy Year.

11 Quality Service Incentive is credited in respect of the sixth and subsequent Policy Years subject to

(a) the premium being due and paid under the policy in the relevant Policy Year

(b) this appointment being current during the relevant Policy Year and

(c) the policy being in a 'protected' status as defined below.

12 For the purpose of this Section, 'protected status' shall have the meaning prescribed by National Mutual from time to time and advised to all Agents.

13 Quality Service Incentive is credited quarterly in arrears in respect of eligible premiums received in that quarter.

14 Premiums received will be calculated as follows:

- premium debt plus interest at the beginning of the quarter

- less premium debt plus interest at the end of the quarter."

A further bonus was payable at the discretion of the relevant manager. The purpose was to provide incentive to the agent to "service" the contracts, so as to ensure long-term profitability for the principal whilst affording a good early return to the agent. This action is concerned only with commissions claimed to be payable with respect to years three, four and five of the "Z" policies, and it is not necessary to consider the intricacies of the varying methods and calculation, except to state that the commissions actually paid to CPIA with respect to the "Z" policies amounted to 120% of the first year's premium of each policy. The commissions can be conveniently categorised as:

1 Payment of sixty per cent of the first year's premium payable at the time of completion of the policy documents.

2 Payment of 20% of the second year's premium, often paid in the first year of the existence of the policy.

3 Payment of 12% of the third, fourth and fifth years' premium, payable at the time each policy was renewed.

In addition, the bonus payment determined on the gross value of policies sold by the agent in any one year was a direct benefit received by the defendant as a consequence of the sale of the "Z" policies, so that the total commission entitlement amounted to 120%.

In 1989 NML introduced the BSDPZ ("Z") policy. Initially marketed in Victoria, its sale was extended in 1990 to other states. In essence, it was an endowment policy without the provision of death cover (more accurately, it contained a component based on death cover foregone). It was commenced by an initial annual premium, the majority of which in this case amounted to $100,000. Thereafter the value of the policy was designed to increase at a rate greater than the cost of succeeding annual premiums. That increase in value permitted the policy holder to borrow the amounts of succeeding premiums against the security of the policy, ensuring continuation without further recourse to his or her own money. Whilst the policy holder could borrow from sources external to NML, the scheme permitted the amount to be borrowed from the life insurance company. Many policy holders maintained the borrowing from within the scheme. The policy was designed to remain in force over a lengthy period so that the policy holders were required to be of or under 30 years of age. In the instances under consideration, the policies were invariably taken out by an older family member for a younger beneficiary. An example of the designed operation of the policy is shown in a projection document produced by NML (D1.1 272) which was used by agents in the marketing of the policies. The document is reproduced as Annexure A to this judgment.

The heading "Cover Forgone" is not relevant since it simply governs one of the formulae used in calculation. The reference to a taxation rate would appear to be little more than a marketing aid, since only in exceptional circumstances could a policy holder expect to have premium payments allowed as a deduction. Projected figures illustrate that in the second year the policy was anticipated to have a value of $161,124 which would permit the obtaining of a loan and the payment of interest, leaving a net cash value to the policy. The process would be repeated so that, in theory, the value to the policy would continue to increase without further contribution. It may be that the result projected in the document would accord with the investment of the sum of $100,000 with the ensuing return of compound interest after thirty-five years. Such was the theory. From the vantage of NML, the policy was flawed. It was committed to the payment of commission at the commencement of the policy, whilst the value of that policy was determined as at the first day of its continuation, whilst interest payments on each loan were calculated on a normal basis throughout the year. Calculations, varying according to assumptions made, indicate that NML could expect to incur losses of between $62.7m and $77.8m (D1.3, 286). That the policy was seen to be attractive was shown in an agent's newsletter dated 5 February 1990 (D1.3, 051) which stated:

"This is not your February newsletter. It is an urgent advice to clients only about a rare opportunity to capitalise on an anomaly in calculations made by actuaries at Australia's second largest life insurance company. The life office has discovered the mistake and is withdrawing the product on Wednesday, 14th February ... It is all made possible by insurance companies being too smart by half in their efforts to out-sell their competitors."

A more sober assessment was provided by an officer of NML (D1.3, 286 - 295) in the following terms:

"The cash values for most full commission conventional policies currently imply a level of cross subsidy between durations in-force. Effectively these products have been priced on the assumption that losses on early surrender will be recovered from profits on surviving policies.

The sales tracks developed for BSDPZ were however predominantly based on early surrender and thus exploited this feature. Significant losses can therefore be expected if these sales tracks are followed through and surrender values are left unaltered.

In addition the method used to calculate cash values on surrender is to calculate the surrender value based on the date premiums are paid to rather than the actual date of surrender. As a result, if a policy is paid annually in advance, the cash value immediately after a premium is paid will be calculated as at the end of that policy year and will remain constant throughout the year. This feature of the surrender value basis has been used extensively to promote Business Insurance and BSDPZ in particular. If a significant proportion of policies take advantage of this feature losses are incurred on early duration surrenders. This method of calculating cash values should be altered as soon as possible for all policies.

It should be noted that most of the anomalies that have been exploited in the sale of BSDPZ are present to varying degrees in other conventional products particularly those used for Business Insurance. There is a need therefore to review cash value and bonus rates for all conventional products."

The policies were made attractive to prospective policy holders by the offer of the agent to rebate all or a substantial portion of commission payable on the acceptance of the proposal. In many cases, the rebate enabled a policy holder to enter into the policy without the making of contribution. Given that, subject to certain circumstances, the first two years' commissions were paid on the acceptance of the proposal, NML was committed to the payment of $121,600 in return for the premium of $100,000. Year two could be regarded as cost neutral, whilst in years three, four and five, NML was required to pay each year a commission of $18,240. In addition, the projected figures indicated that the optimum return for a policy holder would be around years five to seven. When the extent of projected loss became apparent to senior management, steps were taken to discontinue further sale of the policies and to vary their terms so as to reduce the exposure of the company to future detriment. It is the nature of those altered terms and their timing which constitute the claimed causes of action comprised in the counterclaim. Central to the defendant's case is the proposition that, having introduced a new product, the plaintiff was required, by virtue of a contractual and fiduciary duty, to maintain its effectiveness and not take steps to reduce its own exposure to harm at the expense of its own agents. The problems associated with the policies became apparent in January 1990 and modifications effected to the conditions on which proposals would be considered. A set of projected figures was prepared which presented a less advantageous return than that which accompanied the 1989, early-1990 documentation. An example (D1.1, at 252) indicates that a tax advantage was not regarded as a relevant component and that the optimum return to any policy holder would occur in the second and third years of the policy, with a subsequent decline into loss if the loan against policy option was maintained. The document is reproduced as Annexure B to this judgment.

A comparison with the original projection shows that there had been significant variation:

The variation was in part a result of calculation designed to make the policy less attractive or, depending on vantage, more realistic. But it also represented a projected valuation based on changed economic circumstances following the economic events of 1987. As can be seen from the bonus rate determined by NML with respect to BSP policies (D1.3, 109) there had commenced a decline in return on policies generally.

A number of other changes were made to the conditions of acceptance. The interest rate was increased to 15.5% (although for some reason that figure appears on the earlier presentation) and the policy holders were required to acknowledge that the rate could be further varied. The cash value was expressed in terms of "an end of year" value and any surrender of the policy for an intervening period was to be calculated on a proportionate monthly basis. In addition, at least in Tasmania, intending policy holders were required to furnish a "letter of comfort" (D1.3, 037 - 038) which stated the amended terms and required the proposer to acknowledge that he or she had discussed the "features" of the proposed policy with the agent.

Despite these variations, the policy remained attractive to those introduced to the scheme. However, the optimum return was achieved at a far earlier time and a prudent investor was unlikely to maintain the policy for an extended period. NML was entitled to effect the variation and all policies which are the subject of these proceedings were issued in accordance with the amended conditions. The defendant was made fully aware of the new basis on which proposals would be accepted (D1.1, 260, D1.3, 75 - 78), although since some of its initial presentations to clients had been made before modification, further meetings with and presentations to clients were required. NML, having withdrawn the product from the market and effected modification to those policies to which it was committed, proceeded to make it more attractive to the policy holders to obtain an optimum return at the earliest time. At the time of first renewal, the policy holders were required to pay a further premium of $100,000 (or a proportion thereof depending on the original policy). They could do so by borrowing the relevant sum against the security of the policy. To facilitate the lending process (since the policy holder was first required to pay the premium before borrowing against the policy) NML offered to provide an "express service" for processing whereby it would provide a company cheque by 3.15pm on the day of receipt by it of a policy holder's bank cheque by 10.30am. At the same time, NML wrote to each policy holder advising of the advantage of borrowing the maximum amount against the policy and permitting the policy to "lapse" once any residual value was negated by the amount of interest due with respect to the loan. The terms of one such letter and annexures (D1.3, 132) are set out to illustrate the method used by NML to effect its purpose:

With the renewal of the above policy upon us, I thought you might be interested in the attached computer printout which sets out some projected (illustrated) values in respect of the policy. Please pay particular attention to the notes at the bottom of the printout in analysing the information.

1 The policy has no surrender value until two years' premiums have been paid and the policy has been in force for two complete years.

2 The illustrated surrender value (assuming no debt) at the 25 month point ie after payment of the third premium, is less than the sum of the surrender value at the 24 month point and the premium due at that time. You may conclude from this that if early cancellation of the policy is being contemplated, it is better not to pay the third premium.

3 The policy provides that a maximum loan of $1280.48 may be applied for now, subject to payment of the second premium due at this time. After payment of stamp duty, a net payment of $127609.83 would be available.

Should you choose to take the maximum loan on the policy you may be interested in the 'Express Service' offer we are able to provide assuming certain conditions are met. The effect of the Express Service offer is that if the conditions are met, we will make available a cheque for the net loan value at 3.15pm on the working day on which a bank cheque for the second years' premium is received by 10.30 am that same day.

You may also be interested to know that if you choose to take the maximum loan set out above and then not pay any interest which subsequently accrues, the policy will lapse in a few months time. This is because the policy debt will then exceed the underlying value of the policy.

I trust that this information is of assistance to you.

PS No interest will be charged on late payment of the premium within 30 days of renewal date of the premium. However, if the premium remains outstanding at the end of the 30th day, the policy will automatically lapse, and no benefit whatsoever will be payable. No subsequent application for revival of the policy will be accepted by National Mutual.

This offer provides the opportunity to collect a loan cheque at 3.15 pm on the same day the second years' premium is paid, provided the following eligibility conditions are satisfied.

1 The second years' (sic) premium is paid by BANK CHEQUE and is hand delivered to Dion Owen, Claims Manager, 3rd Floor 119 Macquarie Street, Hobart by 10.30am sharp on the day the cheque is required.

2 The cheque is accompanied by the attached Policy Loan Agreement which is completed correctly in every respect (see B below).

3 The Policy document is provided for our safe keeping.

4 The loan applied for is the maximum loan available under the policy.

5 Where the loan cheque is collected by the owner of the policy, the owner provides suitable identification, and signs as having received the cheque.

6 Where the loan cheque is collected by other than the owner of the policy, the person collecting the cheque provides authorisation satisfactory to us on the attached Policy Loan Agreement form, and signs as having received the cheque.

7 The owner agrees to have the stamp duty deducted from the gross loan value, rather than paying the stamp duty separately in cash.

The following notes are provided to help you ensure that the form is completed correctly first time, to avoid payment delays.

2 The Policy Loan Agreement must be signed by the OWNER(S) of the policy. The owner's name is shown in the 'name of the payee' space.

5 Any changes to the form should be noted by the OWNER of the policy using the full signature for this purpose, not simply initials.

6 A contact name and telephone number should be included in the space provided, to enable us to clarify any issues which arise in the processing of the loan payment.

SHOULD THE CONDITIONS SET OUT ON THIS PAGE NOT BE SUITABLE TO YOU, WE WOULD BE HAPPY TO ADVISE YOU HOW LONG THE LOAN PAYMENT IS LIKELY TO TAKE."

All relevant policy holders (which included members of the Poulson family) took advantage of the terms of the offer and, when the residual value equalled the remaining interest due, the policies were "journaled out" and ceased to be. No issue is taken with the lawfulness of NML vis-a-vis each policy holder who received a substantial profit for little or no contribution. There can be little doubt but that NML attempted to minimise its loss in a number of ways which included responsibility for the payment of commissions for years three, four and five. Its position has always been that the terms of the policy made it inevitable that the policies would be surrendered early and that any future commission should be seen as illusory. There can be little doubt (as evidenced by memoranda of company officers) that exposure to payment of commission was a factor in its decision-making process. Three phases of conduct require consideration. The first concerns a period before NML management advised the defendant that the conditions of acceptance varied from those earlier presented. The second relates to the nature of the changes made at the time of acceptance and thereafter until the defendant ceased to be an agent. The third covers the conduct of NML in its "express service" offer in February 1991 at the time when the agency relationship had ceased.

CPIA, through its director Poulson, became aware of the existence and general terms of the "Z" policy at a meeting with another agent, Chris Falkiner, in December 1989. Recognising its benefit, CPIA arranged on the following day for the completion of four proposals on behalf of clients, one of whom was a member of the family of a sub-agent employed by the company. The proposals forwarded to Melbourne for processing were subsequently returned, since acceptance or otherwise was required through the Tasmanian office, rather than that of Victoria. On 14 January 1990, Poulson attended a meeting with senior executives of the Tasmanian branch, during which he outlined the method by which the policies were to be marketed. The presentation disclosed the following:

1 An initial premium of one month would be paid at the time of the completion of the proposal.

2 Within one or two months each policy would be converted to one in which the premium was paid annually. The effect of this change was that, on conversion, CPIA became entitled to the second year commission.

3 CPIA would use the payment of commission for years one and two (eighty per cent of the premium) as a rebate to each client. The balance of rebate would be provided from the "volume bonus" payment made by NML at the end of March 1990.

4 Thereafter the policies could be, at the discretion of the policy holder, self-funding.

It is a reasonable inference that both CPIA and NML were aware, as of that meeting, that there would be further advantage to CPIA by the payment of commission for years three, four and five of any renewed policies. The figures shown on the initial projection (D1.1, 272) and the evidence of policy holders support the conclusion that there was an expectation that the policies would remain in force for terms of five years or more. In part, it was perceived that there might be tax advantage in maintaining the policies for a reasonable length of time. Following the meeting, CPIA was authorised to obtain six more "Z" policy proposals only. Records indicate that some eleven proposals were prepared (all by Poulson) between 22 and 24 January. At the time of and immediately subsequent to the meeting on 14 January, Tasmanian management of NML commenced a series of measures designed to inhibit the attractiveness of the "Z" policies, and to isolate any loss from the Tasmanian ordinary accounts or returns to ensure that they were shown as figures referable to the national rather than local organisation. The process generally accorded with similar steps taken in other regions. One of the complaints made by the defendant is that there was, in Tasmania, unlike other regions, lack of proper consultation between management and agent, and that such shows absence of faith and propriety. There was ill-feeling between the state manager, Terry Smith, and Chris Poulson, and it may be that a more comprehensive form of consultation between principal and agent would have lessened the ill-feeling. But such, without more, does not establish breach of contract or duty. There was consultation at a national level with an organisation entitled CPPA which represented agents and which, at one stage, had as its president Falkiner, the agent who had introduced Poulson to the nature of the "Z" policies (D1.3, 124), and it is reasonable to expect that agents did not look favourably on decisions which would affect their returns. Communication of conditions of acceptance was effected by letters addressed to CPIA and through a corporate information sheet (D1.3, 075). Those communications coincided with the decision by NML to set a time frame for the cessation of future sales of the policies and to alter the conditions of acceptance. CPIA was authorised to market "Z" policies, but any proposals which had not been received (D1.3, 034) by 5pm on 6 February 1990 were to be subject to the amended conditions.

On 1 February, NML informed CPIA (D1.1, 204(a)(ii)) that a financial report confirming the client's ability to fund the premium for "Z" policies would be required before acceptance. On 2 February, CPIA was authorised to market "Z" policies without numerical limitation. Between 2 February and 5 February, CPIA, through its managing and sub-agents, completed a further fifty-two policy proposals. The concentrated effort to complete as many proposals as possible supports the conclusion that CPIA was aware, through its director, that the time available for sale and profit was limited. Differing arrangements made with clients depended on whether the policy was "sold" by Poulson or by a sub-agent employed by CPIA. Proposals entered into through Poulson were mostly made on the basis there would be a full rebate of premium. Proposals negotiated with sub-agents were subject to retention of one month's premium as commission for the sub-agent, an arrangement previously agreed between CPIA and its sub-agents. Those sub-agents were ordinarily entitled to the first year's commission payable with respect to policies sold by them, as their own remuneration, and they had agreed to forego that entitlement with respect to the "Z" policies. Nevertheless, the sub-agent received approximately $8,000 upon the acceptance of each proposal. On 5 February, CPIA was advised (D1.1, 204(a)(i)) that the "Z" policy proposals already submitted were not acceptable to NML under the "normal terms". NML indicated that it was prepared to offer an acceptance basis, subject to compliance with conditions, with the reservation of a "right to alter them or rescind them upon written notice". The terms were:

"(i) Due to the uncertain retention rate of large policies, 4th and 5th year commission will not be paid until renewal in the respective years ...

(ii) If a yearly premium is paid, we will pay 1st and 2nd year commission.

If the policy is paid monthly then commission will be paid quarterly. If the frequency of payment is altered to yearly, then the balance of the 1st and 2nd year commission will then be paid. If a cheque swap at 31/5/90 is arranged for this we will require Bank cheques for the balance of the yearly premium.

(iii) Volume bonus will be paid on the Qualifying Remuneration generated at your standard rates. This will be paid on 31/3/90 and calculated manually (sic).

(iv) We will advise you in the next few weeks as to the effect of the Q/R generated on Agent Development Loan Levels. A national policy on this is being developed now. You should assume at this stage that the Q/R, or at least part of it, will not be counted. We are very unsure of what the outcome will be."

Prior to the receipt of this letter, CPIA had submitted a number of proposals to NML. By virtue of the letter of 5 February, it was aware that there were to be changes to the terms of acceptance. Further details provided in a subsequent memorandum of 21 February (D1.1, 260) from the state manager to CPIA outlined the new conditions attached to acceptance of proposals. The relevant terms were:

"1 No commission will be paid until the expiration of 14 days after we have received a receipt from the client acknowledging receipt of the policy (i e after the free look period expires).

2 Acceptance of the business is dependent upon National Mutual receiving:

(a) a letter of comfort signed by the proposer, precisely in the format set out in Appendix 1 and

(b) a presentation signed by the proposer in the form approved by Head Office. (At the time writing we are still awaiting document.)

Naturally, these signed documents must be received by us before we can hand over the policy documents.

3 You should be aware that the current surrender value illustrations, and loan interest basis is now different from that envisaged prior to Friday 17th February 1990. These changes apply to all BSDPZ policies. The new presentation will highlight the impact of the changed approach. It is vital that the client and you understand that both the s/v basis and the loan interest basis may be changed at any time in the future.

6 Standard rates of commission will apply to the first $100,000 of business. Where more than one person in the same family is covered, the $100,000 cut off will apply on a per family basis. Business in excess of this limit will attract commission at 25% of standard rates. You should be aware that the maximum commission term is (65 minus age at entry) or 35 years whichever is the lesser.

7 Where premiums are paid yearly, first and second year commission only will be paid in the first year (i e no fourth and fifth year commission will be paid). Any overpayments paid by Victoria Branch in respect of business submitted there will be reversed shortly. Naturally, clearance of the cheques is also a pre-requisite to payment of commission.

8 Where premiums are paid monthly, 'first' year commission only will be paid in the first year. The physical payment will occur monthly, based on the number of months premiums received (and cleared) at the time of processing.

9 In the event that the frequency of payment is altered from monthly to yearly, the balance of the first and second year's commission will be paid on clearance from the bank in respect of the relevant cheque. In this event, you should give us adequate warning so that we may make the necessary arrangements with a minimum of stress (and hence potential error) on the staff involved.

10 Standard volume bonus will be paid on this business. However, the basis of determining expected QR for the year will reflect the 'extra-ordinary' nature of this business. Expected QR calculated as at 31st March 1990 will therefore be determined as follows:-

[4 times (QR to date excluding BSDPZ QR)] plus BSDPZ QR

ADL will not be paid in respect of this 'extra-ordinary' QR. However, it is my expectation that a payment of the General Manager's discretionary bonus of approximately 17% of BSDPZ QR will be made in lieu of the provision of ADL.

I draw your attention however to the provisions of your Agency Agreement which specifies that National Mutual is committed only to paying volume bonus in any year in the range of 12% to 16% of QR (all agents aggregated). It seems inevitable to me that the 16% upper limit will be exceeded (and perhaps by a large margin) in calendar 1990 which would result in agents having to repay the excess amounts. I strongly urge you to be careful in this regard. For example, if Volume Bonus were clawed back on a pro-rata basis, and if the national average volume bonus for calendar 1990 were 24%, then each agent would only have 'earned' 16/24ths of the volume bonus actually paid to them.

In other words, in this event, all of the (approx) 17% would need to be refunded!."

The letter of comfort (D1.3, 037 - 038) required the proposer to confirm that he or she had discussed with the agent the features of the proposed investment. The letter stated:

"I take this opportunity to confirm that I have discussed with your agent Mr ..., the features of the proposed investment only insurance policy which has been effected on the life of ...

1 This is a special policy which has had life cover forgone for a premium discount.

2 It is an investment insurance policy and that should the life insured die during the term of the policy, the amount payable by National Mutual would be the greater of

(b) the premiums paid plus interest credited in accordance with the Life Insurance Act and that any debits by way of loans, unpaid premiums and interest would be deducted from my gross plan benefits.

3 It is a regular premium paying contract and that any loans effected against the security of the policy are not available until two (2) years premiums have been paid and that the policy has been in force for more than twelve (12) months.

4 If the policy is entered into with the purpose of surrendering within two (2) to five (5) years from the commencement date of the policy there is also a risk that the profit from the policy could be assessed under Section 25 or Section 25A of the Income Tax as it could be deemed to be a 'profit making scheme'.

5 The illustration of benefits produced by National Mutual provides figures as illustrations only and that future values cannot be guaranteed.

6 The Important Policy Notes confirm that Bonuses constitute distribution of profits and have the effect of increasing the benefits of the policy.

7 There are two types of Bonuses - Annual and End, Annual Bonuses once added to the policy cannot be removed and are paid in full when the benefit becomes payable. End Bonus (which is currently only available from the 6th year) depends upon economic and investment conditions at the time the payout is made and therefore is not guaranteed.

8 The Commissioner of Taxation takes the view as expressed in IT2504 that the interest on amounts borrowed to purchase a life insurance policy is not deductible.

9 I confirm that I accept all responsibility for all private financial and legal advice received and acted upon and that such information is not binding upon National Mutual and/or its agents or representatives.

I acknowledge having discussed the proposed investment only insurance policy with your agent, Mr ... and I am totally satisfied with the information that has been supplied and I further acknowledge that the tax, accounting and legal implications have been considered and accepted by me.

The amended projection figures were furnished shortly thereafter. Between 2 and 5 February 1990, CPIA had completed a further fifty-two proposals. It was now required to make a fresh presentation to each client and obtain assent to the letter of comfort. It is relevant that at this stage no proposer was bound to proceed with the investment. In any event, each had the further option of a fourteen day "cooling off" period. Likewise, CPIA elected to continue with its marketing strategy with the knowledge of the altered terms. The defendant does not contend that NML was precluded from withholding acceptance of proposals until the terms were met, and any variation of the terms of commission was accepted by CPIA and constituted the contract. That, of itself, does not meet CPIA's claim that there had been a breach of an implied term to treat the agent in good faith. CPIA, having completed the procedures in early March, forwarded the documentation to NML and, after processing, all were accepted and policies issued. Premiums were paid, policies converted into annual premiums, rebates effected and commissions credited to CPIA. Each sub-agent had received a commission equivalent to one month's premium, and it is possible CPIA received a similar payment in one or two cases. Further, CPIA received the additional sums of "volume bonus". The period late December until early March can be regarded as the first phase of the conduct about which complaint is made. Relations between Poulson and the state manager of NML, Smith, continued to deteriorate. A number of factors, doubtless including the conduct of both parties with respect to the "Z" policies, contributed to that deterioration and it is not necessary to give further consideration to them. The contract of agency was terminated on 21 September 1990. During this period, NML took further decisions affecting the future viability of the "Z" policies. Those decisions included a strict examination of commission entitlements (D1.1, 326, 327, 331, D1.3, 99 - 100), the separation of financial reporting terms (D1.1, 321 - 324), discounting of surrender values (D1.1, 340, 365(a), 378 - 379) and an evaluation of the financial implications of a continuation of the policies (D1.1, 341 - 350). An assessment was made that the terms of the policy rendered a two year surrender advantageous to the policy holder and reduced the exposure of NML. Despite the evidence of Smith that commission obligations were not a factor since no-one realistically expected the policies to be renewed beyond year two, the documentation points to the opposite conclusion (D1.1, 382). In September 1990, NML advised, through its personal business bulletin (D1.3, 108 - 109), alterations to the bonus and interim bonus rates. This period represents the second phase of the conduct. Thereafter, NML proceeded to announce details of surrender values of the policies (D1.3, 127 - 131), a process culminating in the express service offer previously outlined. Although no longer an agent for NML through CPIA, Poulson was involved in meetings with and gave advice to the policy holders, and all (including members of the Poulson family) borrowed the maximum amount permitted by the value of each policy and allowed the residual value to be debited against interest due, thereby bringing it to an end. Each policy holder did so, many having sought the advice of Poulson, in order to obtain a substantial financial advantage.

The defendant's action is based on a contractual and fiduciary duty that the plaintiff would take all proper steps to promote and maintain the policies, not to alter their terms so as to disadvantage its agents, and to take no steps which could result in the denial of the commission to which the agent was, in the ordinary course of a commercial transaction, entitled.

"That National Mutual would do all that was reasonably within its power to enable the agency agreement to be performed including that National Mutual would not do or cause to be done anything which might result in the lapse or early termination of the Z policies."

The implied term relied upon is that implied by law from the nature of the contract itself and the obligation which it creates (Asia Pacific Resources Pty Ltd v Forestry Tasmania 101/1997). Two propositions are advanced, namely, that the term should be implied as being necessary to provide efficacy, and, secondly, that inherent to the nature of the contract exists a term that the principal may not fail to perform its part of the bargain so as to deprive the agent of remuneration.

CPIA was a sole or tied agent. The agreement between the parties was designed to achieve the maximum retention by a policy holder of any policies sold. It was in NML's interest to retain custom, and the remuneration afforded the agent, structured as it was over a five year period with the additional provision of persistency bonus, was designed to provide the agent with an incentive to "service" the clients. But explicit in the agreement was the acknowledgment that policies were not always renewed and that many factors may operate to occasion non-renewal. An example will suffice to illustrate the question. Bonuses paid on life insurance and endowment policies are calculated in accordance with the investment performance of the company. Recourse may be had to capital reserves to provide consistency, but if bad investment policies are pursued, then the altered bonus rates may cause policy holders to transfer business to a better performing company. Accepting that the investment decisions were less than prudent, or even negligent, does there remain an implied term in the agency agreement for the company to persist with unrealistic payments (so as to prevent the loss of renewal business) in order to preserve the commission entitlements of its agents? The proposition advanced by the defendant can be stated in the following terms: should a principal, having entered into a contract with a third party, on discovery that the continuation of that contract is commercially disadvantageous and in the absence of an express term, persist (solely for the benefit of an agent) with that contract which it can otherwise lawfully bring to an end? To imply such a term in that situation would be unreasonable. The question is, how integral is it to the core or essence of the agency relationship? A test is whether its absence renders the contract commercially ineffective.

The relevant time for consideration of the existence of such a term is the date of the agreement. The intention of the parties was to sell and maintain in force insurance products for common commercial benefit. The defendant advances the position that there could be no intention that one would obtain advantage at the expense of another. But the converse is equally valid in that neither party could expect to suffer detriment for the benefit of the other. It was not a necessary ingredient of the commercial objective of the parties that, had they put their minds to the circumstances of the "Z" policies (Shirlaw v Southern Foundries (1926), Limited [1939] 2 KB 206), an uneconomic defence of a product was necessary to make the agency agreement work in a practical sense, or that its absence gave rise to an unworkable situation (Hospital Products Limited v United States Surgical Corporation and Others [1984] HCA 64; (1984) 156 CLR 41, Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 50 ALJR 769). Mutuality of interest cannot be determined by reference to the perception of one of the parties. NML permitted the continuation of the marketing of "Z" policies at a time when it knew that such would be deleterious to its corporate interest. In doing so, it kept faith with those intending policy holders who were aware of their existence and permitted the agents to continue with marketing, albeit with different conditions. But the projected figures provided by NML were forward estimates only. The company had not guaranteed the earlier figures. In providing revised projections, it attempted to reduce the expectations of others and thus reduce its own exposure. But it was still open to the agent to take no special steps to market them or for the clients to complete proposals. Had the company arbitrarily rejected each and every proposal submitted by the defendant, then it might be a breach of an implied term, "not to capriciously or unreasonably reject business introduced to it by one of its sole agents". But such a term can be identified as of the date of the agreement. The terms sought to be implied in this case can only be identified or articulated by reference to events occurring subsequent to the agreement and lack of clarity or precision of the claimed term which remained unidentified until a particular occurrence is a factor militating against its existence (Ansett Transport Industries (Operations) Pty Limited v The Commonwealth of Australia and Others [1977] HCA 71; (1977) 139 CLR 54). The conduct of NML in making it advantageous to a policy holder to borrow against the policy and make a "windfall" gain, even though intended to effect surrender was not unlawful and did not preclude the policy holder from maintaining the policy. If policies were maintained, the defendant was entitled to further commission. The decision was that of the policy holder acting in self-interest. Even assuming that there existed a general implied term of the nature contended for, it was the decision of each policy holder, not the plaintiff, which caused the "surrender" of each policy. In 1991, the plaintiff provided advice to policy holders, which proved to be in their best interests, and each took advantage of that advice. It is not necessary to imply the terms sought in order to give business efficaciousness to the agency agreement. The agreement provided for the payment of commission upon the occurrence of an event, that is, the renewal of a policy. There is no need to imply a term dependent on the occurrence of a different event, namely, the non-renewal of a policy in circumstances where the principal, acting lawfully, makes renewal less advantageous.

It is contended that a term is implied by law which requires each party to do whatever is necessary to enable the other party to take intended benefits of the contract (Secured Income Real Estate (Australia) Limited v St Martins Investments Proprietary Limited [1979] HCA 51; (1979) 144 CLR 596, Hospital Products Limited v United States Surgical Corporation (supra)). As framed, the proposition is too broad to permit a finding. Refined, the defendant's submission stated:

"That if National Mutual did or caused to be done anything which resulted in the lapse or early termination of the 'Z' policies, it would nevertheless pay CPIA any remuneration to which CPIA would, pursuant to the agency agreement, otherwise have been entitled."

Faulty management, discussions concerning takeovers, or a reputation for slowness might all result in policy holders deciding to take their business elsewhere. In such circumstances, it would not be open to imply a term that the company continue to pay commissions foregone. One of the actions taken by the plaintiff to lessen its exposure to loss was the increase in the interest rates chargeable with respect to loans against policies. Such a commercial decision may result in early surrender of policies, but such could not be said to give rise to a duty to pay commission on non-renewed policies. The cases relied upon by the defendant (Luxor (Eastbourne) Limited and Others v Cooper [1941] AC 108, Alpha Trading Limited v Dunnshaw Patton Limited [1981] QB 290, and R D J International Pty Ltd v Preformed Line Products Pty Ltd [1996) 39 NSWLR 417) relate to abandonment, repudiation or rescission of the original contract, not to an extraneous event (the decision of the policy holders not to renew) and do not advance the defendant's case. But more fundamental reasons exist for determining that the term contended for ought not be implied by law.

1 It is the nature of an endowment policy that bonus and surrender rates are fixed from time to time and can be varied in accordance with the financial circumstances of the company. That is the nature of a mutual life company or society. The interests of all members of the company or society must be considered in relation to returns made to particular categories of policy holders. Alteration of bonus or surrender values, or the provision of accelerated or deferred values lie at the heart of each life or endowment policy issued. Decisions concerning those matters might enhance or inhibit the rate of renewal, but such does not, by implication, involve the consequence that any detriment which reduces the commission of an agent is a breach of contract.

2 The original agreement pre-dated the marketing of the "Z" policies. Before the plaintiff accepted the proposals (an event giving rise to commission entitlement) it clearly stated the terms of acceptance. It required each proposer to sign a letter of comfort (D1.1, 246) and to sign the policy notes which included (D1.1, 248) reference to variation of interest rates, non-guarantee of future value and the term:

"9 All cash values shown are end of year values. Surrender for intervening periods will be calculated on a proportionate monthly basis."

These conditions formed the basis on which, one year later, policy holders decided to maximise return and not renew the policies. The defendant was required, through its agents, to bring to the attention of and explain the implication to each proposer. If such terms constituted a breach of an implied term of agency, then the defendant assented to it. It was not required to take special steps to market the policies. That it did so evidences a belief that it would obtain advantage by the continued intensive promotion of the policies. That conduct makes it difficult to discern a pre-existing term that the plaintiff would take no steps to inhibit the renewal of policies. Renewal of each policy would be determined by each policy holder at each year of renewal, in accordance with the interests and needs of such policy holder. The terms complained of were integral to each policy before acceptance. On the defendant's case, the implied term could be expressed:

"... not to issue policies which provide only short-term benefit thus inhibiting rates of renewal."

The defendant claimed, in the alternative, that the term could be implied by reason of custom, relying on the principle stated by the High Court in Con-Stan Industries of Australia Proprietary Limited v Norwich Winterthur Insurance Australia Limited (1985 - [1986] HCA 14; 1986) 160 CLR 226. Even if there had been evidence (rather than assertion or recollection) that on no previous occasion had National Mutual taken steps to bring about the early surrender of a policy, such does not establish custom. Evidence of non-occurrence may give rise to inference, but does not establish a course of custom so that the converse exists as a term of a contract. The defendant relied on the evidence of James Russell, an account of which is stated in some detail in National Mutual v Poulson (No 4) 11/1998. Taking a view of his evidence most favourable to the defendant, the following salient points emerge:

1 A life insurance company has a special relationship with a "tied" agent and should support the interests of such agent.

3 It is unusual for a life insurance company to alter the terms of a policy once issued.

4 Such a course impinges on the relationship between the life insurance company and "tied" agent.

5 Any alteration, lawful vis-a-vis the policy holder, ought not impact on the rate of commission of such agent.

The evidence does not establish a term implied by custom.

Custom must be notorious and strictly proved. As the High Court stated in Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (supra):

"...the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract." Gibbs CJ, Mason, Wilson, Brennan, Dawson JJ at 241.

The evidence of Russell does no more than state a set of general propositions and expectations. It falls far short of establishing a custom concerning the right of remuneration in the circumstances subject to consideration. Indeed, it is difficult to ascertain how any custom could exist where diverse and unanticipated commercial activities create a need to change policy or require adjustment to a particular enterprise or marketing strategy.

The defendant's pleadings in relation to this head of claim state:

30D(a) At all material times the plaintiff owed a fiduciary duty to the defendant.

There existed the relationship of principal and agent between the parties, which relationship gave rise to the said duty;

(i) The plaintiff knew at some date after September 1989 and by 22 March 1990 at the latest that it would change its past and usual practice and would not support agents, including the defendant, in relation to Z policies and would not encourage or cause policy holders, including the policy holders resulting from proposals submitted by the defendant, to keep the Z policies in force;

(ii) The plaintiff failed to reveal to the defendant the following matters of which it had knowledge;

(A) on or before the Z policies were first released for marketing, in or about September 1989, at Board and/or Senior Executive level, that the policies were likely to result in the plaintiff incurring financial losses;

(B) as the Z policies were marketed in the Australian eastern mainland States in late 1989 and early 1990, that the plaintiff had had confirmed to it, including at Board and/or Senior Executive level, that the policies were likely to result in its incurring financial losses;

(C) by in or about 14 January 1990, when the defendant, by its servant or agent Chris Poulson, made a representation to the plaintiff, by its servants or agents Terry Smith and others, about how the defendant proposed to market the Z policies, that the Z policy was not a profitable product for the plaintiff;

(D) by late in January 1990, after the plaintiff's servant or agent Terry Smith met with senior executives officers of the plaintiff in Melbourne about marketing the policies in Tasmania, that the Z policy was not a profitable product for the plaintiff;

(E) by 30 January 1990, that the plaintiff had expressly calculated in its office in Melbourne that the plaintiff would incur losses in respect of the Z policies and that payment to the agents was a significant aspect of those losses;

(F) by 30 January 1990, at its senior executive level in Hobart, that the 'cash values' and the 'maximum loan available' figures of the Z policies were not commercially viable;

(G) by 2 February 1990, when the plaintiff, by its servant or agent Rod Wing, authorised the defendant, by its servant or agent Chris Poulson, to sell or cause to be sold further Z policies, that some action which was likely to affect the plaintiff's commission and other payments would be taken about the likely losses to the plaintiff from the marketing of the Z policies;

(H) by the 22nd March 1990, the plaintiff, by its servant or agent Terry Smith, by his own decision or on direction from a more senior executive, had resolved to take steps to deprive the defendant of its commission and other payments due on Z policy premium years three, four and five;

(I) by the letter signed by Terry Smith, dated 14 August 1991, to the Z policy holders that the financially sensible action to take was to allow the policies to lapse;".

The pleadings and the closing submissions of learned senior counsel for the defendant are contradictory. The pleadings aver the existence of the relationship of the principal/agent, whilst the relevant written submission contends:

"8.16 In any case CPIA was not an 'agent' of NM in the strict sense. CPIA had no power to enter into binding contractual relations with third parties on behalf of NM.

See Bowstead on Agency 15th ed at 4, and The Laws of Australia Title 8.1 - Agency [para2]."

It may be that counsel felt more confident in arguing for a finding of the existence of a fiduciary relationship, absent agency, since its existence might militate against such a relationship. Aside from the fact that the parties conducted their respective cases on the existence of an agency relationship, there is evidence that the parties acknowledged the capacity of the defendant to bind the plaintiff in respect of the renewal of certain policies since the agency agreement (D1.2, 718) cl 13.1 provides:

"The Agent shall not engage in internal replacement of policies referred to in National Mutual's Standard Practices. In the event that it does so, National Mutual may in the sole discretion of National Mutual's Authorised Officer, vary the amount of commission payable to the Agent."

In any event, the agreement is entitled "Agency Agreement", whilst cl 2.1 refers to appointment of an agent and the "glossary of terms" refers to (D1.2, 724) defines "corporate agent" as meaning a company "which has entered into an agreement to carry on business as an Agent of National Mutual". The finding of the Court is that the relationship between the parties was that of principal and agent. But the existence of a fiduciary relationship is not necessarily determined by reference to a disparity of duty or power. It is not correct to say, as learned counsel for the plaintiff contended, that "fiduciary duties are rarely mutual". The existence of a fiduciary relationship gives rise to certain duties, the nature and extent of which are defined by the nature of the relationship. One does not take disparity of duty as a starting point in order to determine whether there exists a fiduciary relationship. Mutuality of duty arises from the relationship and although there may be significant differences in the respective duties, they are a consequence and not a cause of the relationship. As Mason J said in Hospital Products (supra) at 96:

"The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman [1966] UKHL 2; [1967] 2 AC 46 at 127), viz, trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners."

There was such a relationship in existence between the plaintiff and defendant. There was mutuality of duty, although the categorisation of duties faltered.

1 the decision by the plaintiff to encourage policy holders not to retain their policies breached a duty of good faith and to pay regard to the commercial interests of its agent. It was aware of the marketing strategy proposed by the plaintiff which relied on a commission return to CPIA in years three, four and five, permitted continuance and then, despite that awareness, took steps to inhibit renewal.

2 knowing the marketing strategy proposed by the defendant, the plaintiff had failed to make proper disclosure that it would take steps to alter the benefits attached to the policy, thereby reducing the likelihood of renewal, with a consequent loss of commission.

The director of CPIA, Poulson, was an experienced agent. He perceived significant benefit from the sale of the policies. Through him the company was aware that there was a limited time frame during which the policies would be available. The defendant acted with alacrity. Some proposals were completed on the day on which Poulson first became aware of the existence of the policies and a method of sale. In January, Poulson interrupted his holiday to effect sales and the intense activity during the weekend of 3/5 February belies any claim that these were ordinary transactions. The capacity to rebate commission amounting to $100,000 would lead any experienced agent to the conclusion that benefit was to be had at the expense of the principal. The rebating of the commission lay at the centre of the ability to achieve the high volume of sales, thereby increasing benefit to the agent at the cost of the principal. Failure by the plaintiff to reject the marketing strategy presented by Poulson was not a matter of bad faith. NML permitted continuance of the strategy, since it was legally and morally bound to permit the sale of its product. It was not obliged to discuss its inner deliberations concerning minimisation of loss with its agent until it had reached a concluded position. When the plaintiff had reached a decision concerning the terms of acceptance, it advised the defendant in correspondence and through its bulletins (D1.1, 260, D1.3, 75 - 78). The decision to vary bonus rates was notified promptly (D1.2, 551 - 556, D1.2, 636 - 638, 648 - 649, D1.3, 108 - 109). There was no obligation to further advise CPIA after the agency agreement ended in September 1990. But there remain two fundamental reasons why the claim of breach of duty should be rejected. The defendant was advised of the new terms of acceptance before the proposals were tendered to NML. It was aware of the new projections and any analysis of those figures would show to an average person that the optimum return would be obtained early in the life of the policy. Renewal of policy beyond year two was not commercially viable and such was, or ought to have been, obvious to the defendant. It continued with intensive marketing since it knew that despite the altered projections and the likelihood of non-renewal, it stood to make significant profit by continuance. The financial records of CIPA support this conclusion. Those records, discerned from within the thickets of accounting, disclose that CPIA received commissions (including volume and discretionary bonuses) in excess of $6m. Allowing for rebating the payment of commission to sub-agents, CPIA received at least $1.2m in commissions from the sale of "Z" policies. By a process of "accrual" accounting, the sum of $1,069,996 was shown as "Z" related income for the year ending 30 June 1990, with a further sum of $334,687 (paid before 30 June 1990) shown in the accounts for the following year. Varying draft documents were prepared in May/June 1990, which showed differing approaches, doubtless designed to minimise tax and the use of a "suspense" account permitted the deferral of income to the following year.

It is not necessary to conduct detailed analysis of the varying figures, since on any approach there was considerable return. On one set of figures (P1.3) CPIA received $1,213,826, whilst the tax returns disclose that, at least, a total of $1,050,676 was paid. The return to CPIA shows that it was aware that the amended projections would still afford high return, even though the policies were likely (and intended) to be of short duration. It possessed that information and belief before submitting the proposals in March 1990. Thereafter the plaintiff proceeded to minimise its own exposure to loss in accordance with the information made known in February 1990. The subsequent change of bonus was reflected in all policies and the only "new" mechanism employed was the "express" service offered in 1991. The second fundamental reason is the absence of causation. Whilst NML created a structure designed to achieve early profit to policy holders, there was no nexus between any claimed "non-disclosure" or conduct and the event (that is, non-renewal) claimed to give rise to harm. It was open for any policy holder to persist with the policy, thus giving rise to an entitlement to commission. Each policy holder (including members of the Poulson family) made, often with advice from Chris Poulson, a decision on commercial grounds not to renew the policy. They eventually received, after all, a windfall profit of some $1.5m.

That each would do so was apparent from the February projections. CPIA proceeded with the transactions with that appreciation. The question can be considered from another perspective. National Mutual may have withdrawn the policy in January, or limited the number of policies permitted to be sold. Such action would have caused greater loss to the agent. National Mutual could have rejected some of the policies submitted by CPIA. In doing so, it might have incurred some liability, but might thereby have lessened harm to itself. It was certainly lawful to reject a proposal, and, although capricious rejection might have impinged on the agency relationship, it would have lessened its potential commitment to policy holders. The plaintiff attempted, as best it could, to offer responsibility to potential clients and its agents. It chose a middle course.

It is not necessary to consider in detail the implications of the decision of the Privy Council (determining an appeal from the Supreme Court of Canada) in Brickenden v London Loan & Savings Co [1934] 3 DLR 465 or the controversy which surrounds it (see J D Heydon, (1994) 110 LQR 328, and S Moriarty, (1998) 114 LQR 9) since either acceptance or rejection of its authority results in the same conclusion. In the advice given in Brickenden, Lord Thankerton expressed the proposition that:

"When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, non disclosure would have taken is not relevant."

In Maguire v Makaronis [1997] HCA 23; (1997) 71 ALJR 781, Kirby J upheld the continued application of the proposition in Australia, but concluded that it did not rule out any test of causation. In his view, stated at 804, he said:

"The rule in Brickenden has survived a long time. It has been frequently applied, especially in recent years. It contains within its formulation words which adequately meet the need for there to be some connection to the breach so as to exclude events which are too remote. Thus it must be shown that any facts not disclosed by the fiduciary were 'material'. What is forbidden is 'speculation'. In my view, the rule in Brickenden can quite comfortably co-exist with the exposition of principle by Street J in Dawson. Facts will not be 'material' if the relevant loss would have happened if there had been no breach. Both Lord Thankerton in Brickenden and Street J in Dawson [Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Limited (1966) 2 NSWLR 211] were simply saying that, once a breach of fiduciary duty is shown, the inquiry is not a simple one as to what caused subsequent losses. Equity must strive to repair the breach of fiduciary duty lest the fiduciary in default could be exonerated too easily, the beneficiary suffer a double disadvantage: the courts being seen to wink at wrong-doing."

In Re Dawson, Street J (as he then was) concluded that any enquiry following a breach of trust was not whether the loss was caused by the breach, but whether the loss would have happened if there had been no breach. That approach has been approved in Australia (Whitehouse and Another v Carlton Hotel Proprietary Limited [1987] HCA 11; (1987) 162 CLR 285), Canada (Guerin et al v R [1985] 13 DLR 4th 321) and the United Kingdom (Target Holdings Ltd v Redferns and Another [1995] UKHL 10; [1996] 1 AC 421, Lord Browne-Wilkinson at 437).

The majority of the court (Brennan CJ, Gaudron, McHugh and Gummow JJ) in Maguire (supra) did not regard the question of causation as having arisen, but did not exclude causation from the consideration of an equitable remedy. They stated at 789 - 780 that:

"Where the subject matter of the transaction is, for example, the sale of a business, intervening changes may render more complex the decree for rescission. In some circumstances, the purchaser seeking rescission by reason of fraudulent misrepresentations by the vendor, may be entitled to an indemnity for trading losses incurred, both before the purchaser disavowed the transaction and thereafter whilst the business was maintained for the benefit of the vendor; but the indemnity will extend only to that part of the trading losses which were 'directly occasioned' by the falsity of the vendor's misrepresentations. To this extent issues of 'causation' may arise in cases of rescission for fraudulent misrepresentation. But that is not this case.

Different considerations arise where the plaintiff seeks one or other of the further remedies referred to by the Lord Chancellor in Nocton v Lord Ashburton, namely an account of profits, as a personal rather than proprietary remedy, or, as another personal remedy, compensation for that which the plaintiff has lost 'by [the fiduciary] acting', to use the Lord Chancellor's phrase, in breach of duty. Likewise where what is sought is a proprietary remedy in the nature of a constructive trust. In these instances, there directly arises a need to specify criteria for a sufficient connection (or 'causation') between breach of duty and the profit derived, the loss sustained, or the asset held.

Where the plaintiff seeks recovery of a profit, the necessary connection has been identified in this Court by asking whether the profit was obtained 'by reason of [the defendant's] fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position.'"

In the circumstances of this case, the only "non-disclosure" was that of the internal considerations of NML in January. When those considerations had been concluded, NML announced its altered terms of acceptance to CPIA. Even if failure to advise of internal considerations constituted a breach, the issue remains whether any loss of commission would have happened if there had been disclosure. The answer would be no, since CPIA continued with the marketing of policies for its own gain and any disclosure may have simply alerted it to the possibility that the gain might be less. In any event, any loss flowed, not from its absence of knowledge, but from the decision of policy holders to surrender their policies.

A representative selection of policy holders gave evidence on behalf of the defendant. The purport of their evidence was that each entered into the endowment policy with a view to maintaining the investment for a minimum period of five to seven years. Each is accepted as an honest witness. But it does not follow that the accounts given are reliable in detail. On the first presentation given to each it may well be that there was an expectation derived from the projected figures that the benefits attached to the endowment policy were best realised after five to seven years. The belief that there was tax advantage, in some cases, reinforced that expectation. I accept that the advice provided to them by CPIA was consistent with their expectation that the policy would remain in force for between five to seven years. Even so, given that the policies purported to be for a thirty-five year period and required the insured to be below a certain age, the position of CPIA can be seen as being one of medium-term gain. The account given by most of the witnesses who were policy holders reflects their state of mind as of the date of the first presentation. It is difficult to discern whether their memory accorded only with the first presentation, or whether they had insufficient appreciation of the altered position as of late February, early March. At the second presentation, CPIA was required to explain the altered terms of acceptance, including the projected figures, bonus rates, interest payment and the like.

I accept that the differences between the two proposals were outlined by Poulson, but that the advice given was that the policies remained a good investment. Some policy holders might still have believed that they would retain the policies for a period longer than two to three years, but would doubtless have reviewed their position annually and made decision on the basis of economic return. The evidence of other policy holders that they intended long investment is likely to be a recollection of the combined effect of presentations and does not reflect a clear memory or understanding of what transpired at the second meeting. Certainly the policy holders skilled in financial matters were aware, as of the date of the second presentation, that the best return would be had by early surrender. But even if the Court accepted that each policy holder had, as of the date of the second presentation, a clear intention to maintain the policies over a longer period, it would not advantage the defendant. It was the knowledge of CPIA, held through its director, which is conclusive. It was experienced in the import of projected figures, rates of return, bonus rates and the like. The projections applied by the plaintiff and the alteration of conditions of acceptance clearly show that optimum benefit was to be had at an early stage. Accepting that people act in financial self-interest, it ought to have concluded that there was strong likelihood that most policy holders would not renew their policies beyond two to three years.

The defendant claimed damages for the loss of commission payable upon the renewal of the "Z" policies in years three, four and five of their term. Assuming that each of the policies had been renewed for each of those years, the amount of lost commission has been calculated in the sum of $1,822,500. That amount is claimed to be the loss occasioned by the breach of contract. Given that CPIA possessed a favourable retention rate, it is claimed that most of the sixty-two policies would, absent intervention, have been renewed and the full amount of commission become payable. The claim for damages made in the alternative is to be assessed on different principles, but the defendant does not claim damages under this heading at a sum greater than the maximum permitted by reference to the action in contract.

The parties have requested that an assessment of damages be made under both headings, irrespective of any findings as to liability. It is appropriate to so do. For the purpose of this action the Court accepts that the defendant would be entitled to an award of damages assessed in accordance with the principles stated in Hungerfords and Others v Walker and Others [1989] HCA 8; (1988) 171 CLR 125.

Accepting that CPIA was entitled to receive commission in years three, four and five of the existence of the policies, it is possible to quantify its loss. The defendant was entitled to receive twelve per cent of the yearly premium for each of those years. It had sold fifty-three policies at $100,000 per policy, four at $50,000 and five at $25,000. The total of premiums payable amounted to $5,625,000 per year, entitling CPIA to commission amounting to $675,000 for each year, and an overall return of $2,025,000. The evidence shows that CPIA had an historic ninety-seven per cent retention or persistency rate. In a memorandum prepared by a company officer (D1.2, 496), an estimate of a seventy-five per cent renewal rate was made. One would expect some attrition, since some policy holders could be expected to need access to capital or profit before year five. Some might surrender early, and some nearer to year five. The probability of early surrender is increased by the nature of the return shown in the projected figures. A fifteen per cent surrender rate will be assumed, but allowing for the fact that the sum of those policies might not have been surrendered until years four and five, a ten per cent contingency will be afforded. If that be erroneous, it advantages the defendant. Averaging early surrenders, the loss suffered by CPIA would amount to $607,500 per year, making a total of $1,822,500. Interest due on that sum is calculated at a rate of ten per cent, which, if compounded over four, five and six years (being the time elapsed since each year of renewal) would permit the following calculation until 31 January 1998:

Interest on that sum for the period 1 February 1998 to the date of judgment is calculated to be $38,953. In the event that the Court had upheld the defendant's counterclaim on the basis of breach of contract, a sum of $2,161,025 would have been awarded as damages in accordance with the summary:

The defendant seeks an award of damages based on the loss suffered by CPIA incurred by the non-payment of "New Business" commission for years three, four and five, and limits its claim to the sum of $2,025,000. In limiting its claim, it does not concede that the Court is precluded from assessing damages on the basis of profits made by the plaintiff and general detriment to itself. It simply accepts a maximum quantification of any award. The plaintiff submits that any award of damages should simply restore CPIA to the position it would have been in had there been no breach. Central to the defendant's claim is that it expended much time and resources in marketing the policies with the clear understanding held by both parties that, because of rebating, its return would primarily be gained for its commission for years three, four and five. It claims the breach caused that loss. It has not been necessary, thus far, to make findings concerning the credibility of opposing witnesses, except in relation to the policy holders. It is possible to determine the breach or otherwise of contractual and fiduciary duty without recourse to any assessment. However, such findings are required in the assessment of the respective claims of enhancement and detriment. Those findings, insofar as they may be required for the determination of the prior questions of breach of contractual and fiduciary duty, would not advantage the defendant. CPIA entered into the marketing with alacrity. It could see significant benefit even in the short-term. The success lay in the rebating of commission. In effect, CPIA took advantage of a not ungenerous commission rate, referrable to more ordinary policies, in order to benefit itself at the expense of the plaintiff which had introduced a "flawed" policy. The claim by Poulson that it was his intention that the policies remain in force for ten to fifteen years is not accepted. The claim is belied by the figures in both presentations and his own understanding of the implications inherent in the policies themselves. The second set of figures certainly showed that the value had decreased from the second year. Other witnesses certainly perceived such to be the case. The claim is further weakened by the evidence that there were taxation implications in any concession that policies were purchased only for short-term gain. In part answer to a challenge based on the existence of the projection figures, Poulson stated that he did not understand the change to accelerated surrender values at the time of the second presentation. It is difficult to accept his response, since it is contrary to the documentation presented to and explained by him to others (D1.1, 248, D1.1, 260, D1.3, 075), and Note 9 of the "important policy notes".

Poulson had little hesitation in 1991 in causing the surrender of the policies and giving like advice to others. Yet the surrender was based on judgment gained from material existent in 1990, the only significant change being the "express service" offer. Evidence of the "non-expert" policy holders that they intended long retention does not enhance his position. I have already found that their recollection was probably based on a compilation of events of both presentations. But, if that be incorrect, then two other conclusions are permitted. Either, Poulson did not clearly explain the significant changes to policies to his clients, or left them with the impression that optimum benefit would still be had by long retention. Neither conclusion enhances his credibility. Two collateral issues impact on credit. He did not make proper disclosure of a relevant document in an affidavit of discovery, nor was his explanation of failure convincing. The second involves his evidence, and that of his accountants, concerning his taxation returns. Each tax payer is responsible for his or her own returns; the professional adviser prepares and counsels, but ultimately the propriety or otherwise of the return is determined by the maker. The relevant taxation records do not explain a significant sum omitted as taxable income, the deferral of moneys received and banked as income for the following year or changes of descriptions of entries, all of which enhanced the tax position of CPIA but not Poulson's moral stature. The affairs of CPIA were inextricably linked with the Poulson family trust and the allocation and distribution of moneys does not show commitment to the spirit of taxation legislation.

My conclusions are not intended to constitute findings of unlawful conduct and are limited to issues affecting credibility. CPIA, through its director, knew that the "Z" policies scheme would advantage itself to the detriment of its principal. It ought not be further advantaged by a significant award of damages. Any duty of fair dealing breached by the plaintiff (and the Court has found none) can be met in equity by the failure of the defendant to deal fairly with its principal, and the need of that principal to minimise its loss. The defendant sought to enhance its position by a critique of the evidence of Terry Smith, the then Tasmanian manager of NML. The import of the critique was that his evidence was self-serving and evasive and his answers unresponsive to the questions of counsel. If his evidence could not be regarded as reliable, then the Court could more readily conclude that he acted in bad faith with the purpose of harming the commercial interests of CPIA, a tied agent. That there was tension between Poulson and Smith is common ground. But the Court does not accept the critique. Smith was not a compliant witness and was judgmental in his perception of the course of conduct followed by CPIA. But his answers to counsel illustrate pedanticism, rather than mendaciousness. Smith insisted on precision of question before affording reply. His answers were defensive in that they conveyed no more than the witness considered appropriate. Rancour derived from a perception that CPIA had betrayed the corporate good rather than as a consequence of desire to harm the commercial interests of CPIA. Where there be difference (and there remained little) then the Court prefers the evidence of Smith. The Court certainly does not conclude from the evidence, and the manner of its giving, bad faith on the part of Smith or the plaintiff.

But there remains a more significant factor. CPIA has obtained benefit in excess of $1,200,000 by its involvement in these transactions. Moneys rebated did not include the volume and discretionary bonuses calculated by reference to the total sale of policies. Even accepting that CPIA had some expectation of future profit for year three, four and five renewals, it nevertheless determined that it would obtain significant return without such commission. It earned that income from an outlay of resources expended over a maximum of thirty days. It did not suffer detriment by involvement. At best, it lost a benefit anticipated on the basis that either the policy holders would not act in self-interest, or that the plaintiff would continue to act in a commercially self-defeating manner. If there was a breach of fiduciary duty between the date Poulson outlined to NML the marketing scheme and the date when the company provided amended terms of acceptance, then the plaintiff has received adequate return for its work performed in that period. If the provision of amended terms of acceptance itself constitutes breach, then the fresh presentations required of CPIA were, nevertheless, rewarded. If there be breach subsequent to the date of "sale" of the policies, then the conduct of the defendant disentitles it to an equitable remedy. No sum of damages ought be awarded for breach of fiduciary duty.

It is common ground that the plaintiff is entitled to $29,975 plus interest. Interest calculations have been made on a simple rather than compound basis, which until 20 February 1998 amounts to $18,518, with a daily rate of $8.21 thereafter. The plaintiff is entitled to recover the sum of:

1 That judgment be entered for the plaintiff in the sum of $48,878_._