Lindale Financial Services Limited & J G Handley v The Colonial Mutual Life Assurance CA73/97 [1998] NZCA 251 (17 March 1998)

Last Updated: 14 December 2021

_{Lindale Financial Services Ltd & J G Handley v The Colonial Mutual Life Ass Soc}

Ltd

Status Court of Appeal Judgments (Archive)

Court of Appeal

CA73/97

17 Mar 1998

Blanchard J - Tipping J - Williams J

Appellant: Lindale Financial Services Limited & John Graham Handley Respondent: The Colonial Mutual Life Assurance Society Limited Judgment by: Blanchard J - Tipping J - Williams J

Coram No.: 3

Appellant's Counsel: J G Miles QC and D J Cooper Respondent's Counsel: G P Barton QC and J L Land Filing date: 22 Apr 1997

Hearing Year: 1998

Keytitles: Civil procedure, Summary Judgment, Fresh evidence, Insurance, Contract, Construction, Pleadings, Amendment,

Fair Trading, Implied term, Set off, Preliminary hearing, Setting aside judgment, Costs

Judgments: CA7397

CIVIL PROCEDURE - summary judgment - further evidence admitted for purposes of appeal because of unusual course of events in High Court including raising of new argument by plaintiff following hearing - insurance agent raising arguable defence that insurers failure to notify changes to terms of life policies resulted in collapse of scheme utilising commission payments and cash withdrawals from policy holders accounts to obtain fully paid policies.

IN THE COURT OF APPEAL OF NEW ZEALAND CA73/97

BETWEEN LINDALE FINANCIAL SERVICES LIMITED

First Appellant

AND JOHN GRAHAM HANDLEY Second Appellant

AND THE COLONIAL MUTUAL LIFE ASSURANCE

Respondent Coram: Blanchard J Tipping J

Williams J

Hearing: 1 and 2 December 1997

Counsel: JG Miles QC and DJ Cooper for Appellants GP Barton QC and JL Land for Respondent Judgment: 17 March 1998

_{JUDGMENT OF BLANCHARD J}

Introduction

I have had the advantage of reading in draft the judgment of Williams J. For the reasons set out in his judgment I

have taken the view that the additional evidence for the appellants and the respondent should be received.

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I am content to adopt Williams J's statement of the facts, recognising, however, that it properly gives them the construction which is most favourable to the appellants. The account given by deponents for the appellants, including Mr Handley, coupled with the way in which the defence now put forward appears to have been overlooked until the very last minute, does not inspire confidence. However, I remind myself that the burden lies on a plaintiff to establish on an application for summary judgment that the defendant has no fairly arguable defence. Where a factual assertion made by the defendant is, in the light of the evidence as a whole and an application of common- sense, very improbable, the Court is entitled to disbelieve it, even at this preliminary stage of the proceeding; but if the Court is of the view that it could be true, then the proper approach is to accept what is deposed to.

I therefore agree with Williams J that, although there is room for scepticism about the assertions by Mr Handley and Mr Lambourne that they were not notified of the changes to the life policy terms, the Court ought not at the summary judgment stage simply to find that their sworn statements are incapable of belief. It is possible that a Judge at trial may find, on balance of probability, that they were not properly informed by Colonial.

I also concur in the view that it is arguable that by the beginning of 1995 Colonial must have appreciated that a scheme to which Lindale was a party existed in relation to all or some of the policies arranged by Lindale.

The defence

In summary, the defence now advanced is along the following lines:

1) Lindale was engaged in selling life insurance as agent of Colonial as part of a scheme which relied upon certain features of Colonial's policies and which would not be viable if those features were varied. It is accepted that Colonial had a power of variation as to future policies but Lindale says it was placed in a false position when changes were made in the policy terms without its knowledge. It would not have continued selling policies on the

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basis of its scheme if informed of those changes. The defence does not rely upon showing that Colonial was aware of the details of the scheme.

2) The appellants admit that the decision of Policy Management Ltd (PML) to stop payment of premiums (in August 1995) had nothing to doing with the changes, for neither Lindale nor PML was then aware of them; but they say that, if it were not for the changes, premium payments could have been resumed (with the

consequence that policies would not have been lapsed and Lindale's premium account with Colonial

thrown into substantial debit) after the difficulties which actually caused cessation of premiums had been overcome (by 20 December 1995). The undisclosed changes are thus said to be the reason for the collapse of the scheme.

3) Substantial losses are said to have been caused to Lindale because of Colonial's failure to notify it of the adverse changes which were being made. That failure is said to constitute misleading and deceptive conduct (s9 of the Fair Trading Act 1986) and/or breach of an implied term of the agency agreement and/or to give rise to an equitable set-off.

4) The unnotified changes are said to have:

(a) Imposed a penalty fee on partial cash withdrawals under the life policies; and

(b) Required policy holders to continue making premium payments after partial withdrawals were made.

(The changes were effected in the fourth version of the policy and so applied only to policies issued after January

1995. It was conceded in argument that, on the basis of the evidence now before the Court, the change to the benefits payable on death - made in the third version of the policy - had no serious monetary impact on the scheme and could not have been a cause of its failure.)

Colonial's duty to advise changes

It is strongly arguable that Colonial had a duty to inform Lindale of changes to the policy terms. Lindale had itself a duty to explain those terms to its clients when selling them Colonial products: cl 4.11 of the multi-agents agreement, incorporating s11 of the Code of Business Practices for Life Insurance

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Companies. If it was not kept up to date by Colonial it could not properly fulfil its own duty.

The Early Reduction Fee

Clause 2.5.6 was in the following form in the first and second versions of the policy:

Early Reduction Fee

There is an Early Reduction Fee if any of the following occurs before the full term of the Policy and within ten years after the commencement of the Policy or subsequent increase according to section 2.4.2:

(a) you cease to pay the Investment Benefit Premium;

(b) you reduce the amount of Investment Benefit Premium (including any increases in regular premiums);

(c) you decide to terminate the Policy.

The fee will be applied at the time of cessation or reduction of premium, or termination of Policy as the case may be. The amount of the fee will be between 1% to 35% of the Investment Benefit Premiums paid (excluding any Additional Lump Sums).

In later versions the reference to the percentages was omitted but it is clear from material issued by Colonial that the same practice continued in fixing the fee.

Clause 3.2 previously read:

Cashing-in your Policy

This Policy does not usually have a cash-in value until it has been in force for two years and two years' premiums have been paid. However, where an Additional Lump Sum has been paid, a special cash-in value will be available immediately in respect of the units purchased by the lump sum.

If your Policy has a cash-in value, subject to Section 2.5.6 you may elect to cash it in full or in part. If it is only partially cashed, the remaining units will stay in your Investment Account and you may continue to pay further premiums in the

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usual manner. Upon withdrawal of the full value of the Investment Account, the Policy will terminate.

We will be pleased to advise you of the current cash-in value of your Policy and to discuss any alternative courses of action.

In the fourth version of the policy it was changed to:

Cashing-in your Policy

This Policy does not usually have a cash-in value until it has been in force for two years and two years' premiums have been paid. However, where an Additional Lump Sum has been paid, a special cash-in value will be available immediately in respect of the units purchased by the lump sum.

If your Policy has a cash-in value, subject to Section 2.5.6 you may elect to fully or partially cash it in.

Full Cash-in

When the Policy is fully surrendered the full Investment Account less the Early Reduction Fee will be paid and the

Policy will then terminate.

Partial Cash-in

If the Policy is partially cashed, then the maximum cash-in value of the Policy shall equal the investment value less the Early Reduction Fee. Once a partial cash-in has occurred, the Early Reduction Fee shall be retained in the Investment Account on a reducing basis. The remaining units after a cash-in will remain in our Investment Account and premium payments will continue in the usual manner.

The balance of each premium received in respect of a policy (after deduction of amounts paid in respect of additional death or disablement benefits and of fees due under the policy), known as an “Investment Benefit Premium”, was invested in a fund called the “Investment Account”. It was expressed as units and additional units were credited whenever a further such premium was paid. Income on assets of the fund and any capital appreciation or depreciation were reflected in changes in the values of units. The level of the investment benefit was therefore linked to both premium payments and the investment return on the assets of the fund. On the maturity date Colonial promised to pay the full value of the Investment Account calculated by multiplying the number of units held by the most recently declared Unit Cash-in Price.

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Various management fees charged by Colonial were described in cl 2.5, including the Early Reduction Fee which, on the express wording of cl 2.5.6, was to be charged if before maturity and within 10 years after the commencement of the policy, the policy holder ceased to pay the premium, reduced the amount of the premium or terminated the policy.

Clause 3.2 applied where a policy had a cash-in value but cl 2.2 stated that a policy did not have such a value until it had been in force for two years and two years' premiums had been paid (unless an additional lump sum had been paid in). The reason for this was not given but was probably related to the level of fees charged during the initial period of the policy. The cross-reference in the earlier version of cl 3.2 to cl 2.5.6 indicated that an Early Reduction Fee would be charged when a policy was entirely cashed in. The earlier version of the policy might on a superficial reading of these clauses have been understood as enabling a cashing-in without application of any Early Reduction Fee where not all of the cash-in value was withdrawn so that some units remain in the Investment Account. If, however, the full value of the Investment Account was withdrawn the policy terminated, which would bring cl 2.5.6 into play, enabling Colonial to deduct an Early Reduction Fee.

But if such a literal reading were adopted, the policy could have been manipulated so as to produce a grotesque

result. On the construction advocated by the appellants the net result as between a policy holder who elected to withdraw all of the value of the Investment Account and a policy holder who initially withdrew 99% would have differed so radically in favour of the policy holder as to cast real doubt upon such an interpretation. A 100% withdrawal would be net of an Early Reduction Fee (an amount usually set at a great deal more than 1% - it could be up to 35%). But, it is argued, this substantial fee could be almost completely avoided by withdrawing 99% (without fee) and then, presumably after a short interval, withdrawing the final 1%, to which perforce only a much reduced Early Reduction Fee could apply.

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As the viability of the policy scheme for the insurer must have rested upon its fee structure it seems to me that these provisions, admittedly clumsily drawn, ought not to be read so as to open such a loop-hole. This distinction between the way in which fees applied to total and almost total (but technically partial) withdrawals would be lacking in any commercial justification.

In their affidavits Messrs Theyers and Vaughan support the appellants' interpretation of the original cl 3.2 but neither is a qualified lawyer and both seem simply to have picked up Mr Bhanabhai's interpretation, accepting it as correct for the purpose of giving their opinions on the importance for the scheme of such a supposed change.

It is of course impermissible to look at the subjective intention of one party (Colonial), but I believe that a fair objective view of the policy document as a whole will require the clause to be construed as permitting the deduction or retention of an amount proportional to the fee which would be deductible on termination. Thus the change made to cl 3.2 in fourth version does not seem to have been unfavourable to the policy holder.

It is significant that it was not this question which troubled Mr Bhanabhai in his negotiations with Colonial towards the end of 1995.

Continuance of premiums

Mr Bhanabhai's concern was with the other change to the wording of cl 3.2, relating to the requirement that premium payments should continue after a partial cash withdrawal. It will be recalled that the earlier version of the clause said that the policy holder “may continue to pay further premiums in the usual manner”, whereas the new cl

_{3.2 said that “premium payments will continue in the usual manner.”}

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Not without some hesitation, I have come to the conclusion that an arguable defence does exist in relation to this

second change to cl 3.2, which did attract Mr Bhanabhai's expressed concern during the negotiations just mentioned. It is, however, strange that in the litigation this point has emerged at such a late stage, having apparently been abandoned earlier when the notice of opposition was amended, and it is to be noted that Mr Bhanabhai raised it with Colonial only within the very limited context of the withdrawals relating to the Giltrap policies (arranged by Jason, not Lindale), notwithstanding the ostensible disadvantage for all policy holders subjected to the requirement. Nevertheless, Mr Bhanabhai did stress in his correspondence with Colonial that it was not accepted by PML that a partial withdrawal of cash values necessarily required a continuation of premiums. He made this point in putting a proposal to Colonial in a letter of 19 December 1995 and eventually he obtained agreement in respect of the Giltrap policies that cash withdrawals would be paid out by Colonial without insistence on premiums continuing.

There is also the evidence of Mr Vaughan, an actuary, that in October 1995 he drew PML's attention to, inter alia, this policy change which he thought to be important. He says he advised PML that it would not be prudent for it to pay premiums until it had “clarity about the degree to which the diminution in the financial security values of the policies could be sustained in practice.” Some of Mr Vaughan's advice was based on misinterpretation of the policy, but not on this point.

For Colonial it is submitted that its solicitors' letter of 11 April (para 8.1) relaxes the requirement across the board, i.e for all policies, but the letter itself is not explicit on this question. There is accordingly a possibility that at trial the appellants may be able to establish that premium payments which had earlier been stopped were not resumed because this change to the policy undermined the viability of the scheme which Lindale was operating with PML.

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Summary

The position which I reach is as follows:

1) It is arguable that by the beginning of 1995 Colonial knew that the policies being arranged by Lindale were being utilised as part of a scheme involving Lindale, PML and an unknown financier. Colonial was obviously suspicious by that time that commission and other payments which it was making to Lindale were being used to fund premiums.

2) Colonial had an obligation to Lindale to notify it of any changes to the terms of policies being offered by

Colonial.

requirement (as from January 1995) that premium payments were to continue following a partial withdrawal; and that this constituted deceptive and misleading conduct (or breach of an implied term of the agency agreement).

4) It is arguable that because of its alleged knowledge (para 1 above) Colonial should have appreciated that whatever the detail of the scheme, a significant change to the arrangements about partial withdrawals might adversely affect participants, including Lindale, and that if such a change were not notified losses could be caused to those participants.

5) It is arguable that if Lindale had known of the changes referred to in para 3 above it would have realised that the future of the scheme was in jeopardy and would not have arranged further policies and paid away into the scheme commissions etc. received after the date of the change. Putting the matter in another way, it is arguable that it was the changes to cl 3.2 which caused PML not to reinstate premium statements and thus led to the lapsing of the policies.

6) However, it is not suggested that Colonial had ever agreed to facilitate any scheme and it is conceded that Colonial had reserved the right to change the terms of issue of any further policies (even to cease issuing them completely). So it appears that any loss to Lindale must have been confined to losses in relation to moneys put into the scheme after the date of the change.

7) Arguably, if the propositions in paras 1 to 5 above can be established, the appellants have a defence and/or right of equitable set-off against Colonial's claim to the extent that it relates to moneys, now irrecoverable on the collapse of the scheme, which it

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paid into the scheme from commission and other payments received from Colonial after the policy change in January 1995.

The appellants' case bristles with difficulties but I am not prepared on the evidence now before the Court to say that it is incapable of fairly being argued.

Bonuses and ex gratia payments

I think it quite probable that there has been a drafting omission in the clawback clause and that when referring to commissions therein the parties are to be taken to have also meant the bonus and ex gratia payments. However, I prefer to leave this matter open for argument, possibly following an application for rectification of cl 5.5.

Orders

The Court being in agreement as to the result, the following orders are made: (a) The summary judgment entered by the Master is set aside.

(b) Summary judgment is entered for Colonial against Lindale and Mr Handley for liability on Colonial's claim for the clawback of commissions;

(c) We direct trial of the question how much that liability should be and of the question of liability and quantum for the clawback of bonuses and ex gratia payments:

(d) We direct trial on all issues of liability and quantum pertaining to Lindale's cross-claim for non-notification of the policy changes;

(e) We remit the matter to a Judge of the High Court for such pre-trial directions as may be necessary to advance the litigation on the foregoing basis.

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Costs

The appellants must however take responsibility for the very considerable complications which have arisen and for the need for this matter to have been brought to this Court. They signally failed to bring before the Master in good time the defence now found to be arguable, instead chopping and changing and raising many unmeritorious points. (No blame attaches to present counsel who were not then instructed.) Although a plaintiff bringing a summary judgment application in a case of this complexity runs the distinct risk of failure, the appellants have by their conduct unreasonably increased Colonial's expense in relation to its application. For its part Colonial appears to have been unwise in attempting to stigmatise the scheme as akin to pyramid selling, which, even if it had been fair comment, simply introduced into argument largely irrelevant matters.

However, most of the blame for the present unfortunate situation, as outlined by Tipping J in his judgment, is attributable to the appellants. Therefore, notwithstanding the result of the appeal, it is the view of all members of the Court that the appellants should contribute to the respondent's costs on a fairly generous basis. The costs orders made in the High Court are set aside but the appellants are to pay the respondent's costs in both Courts in

of counsel for the respondent incurred in relation to this appeal.

Solicitors

Bell Gully Buddle Weir, Auckland, for Appellants

Kensington Swan, Auckland, for Respondent

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IN THE COURT OF APPEAL OF NEW ZEALAND CA 73/97

BETWEEN LINDALE FINANCIAL SERVICES LIMITED

First Appellant

AND JOHN GRAHAM HANDLEY

Second Appellant

AND THE COLONIAL MUTUAL LIFE ASSURANCE SOCIETY LIMITED

Respondent

Coram: Blanchard J Tipping J

Williams J

Hearing: 1 and 2 December 1997

Counsel: J G Miles QC and D J Cooper for Appellants G P Barton QC and J L Land for Respondent Judgment: 17 March 1998

_{JUDGMENT OF TIPPING J}

I have found this a troublesome case whose history strikes me as a vivid example of summary judgment

proceedings gone wrong.

The background has been described in Williams J's comprehensive judgment which I have had the benefit of reading in draft. Summary judgment proceedings are designed for cases where it is clear there is no defence to the plaintiff's claim.

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While it is entirely proper for the Court to take a robust approach when ascertaining whether proffered defences have any arguable validity or are simply a smokescreen, there are limits. Defendants should not be deprived of the opportunity of a full trial, unless the plaintiff clearly demonstrates that there is no reasonable possibility of the defence succeeding. While summary judgment proceedings are a valuable and desirable short cut in clear cases, care must be taken not to allow excessive robustness to work an injustice to the defendant.

This proceeding started to go wrong when the parties prevailed on the Master to hear an aspect of them as a preliminary point. While this was no doubt intended to save time and trouble, the approach has ended up causing a lot more time and trouble than it saved. In giving judgment on the preliminary point, the Master gave the appearance of rejecting Lindale's stance, not only on the preliminary point, but on all other points which were not at that stage before him. It is understandable that Lindale felt its position on these other issues had been pre- determined. Matters than developed as described by Williams J, leading to the bizarre consequence that there was distinctly more evidence filed on essential issues in this Court than in the High Court. This Court was put in the position of addressing what had become at least from the evidentiary point of view a substantially new case.

The first step I would take in deciding the issues in this case is to say that, with all respect to the Master, his

judgment cannot stand. The second step is to see whether, on the basis of the evidence and the issues in this

Court, Colonial has demonstrated a case for summary judgment.

I am of the view that the Master's judgment cannot stand essentially for two reasons. I have already forecast the first. It seems clear enough that the preliminary point (what the Master called pre-trial legal argument) related simply to the issues arising out of the Life Insurance Act 1908. Lindale had every reason to think that the case would proceed in two stages; with the second stage arising only if Colonial succeeded, as it did, at the first stage. Against that background, the Master in his first judgment dealing with the so-called preliminary point said that he was

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“completely satisfied” that all of Lindale's defences, including those not yet before him, were unpersuasive. Indeed, the Master emphasised his point by using very strong language. He said that all Lindale's defences were “completely devoid of merit, at law, in equity and morally”.

The problem is, of course, that the Master had heard no argument on the defences beyond those relating to the Life Insurance Act 1908. As later events demonstrated, not all the evidence relating to the additional defences had been presented to him either. When the Master came to consider the additional defences in his second judgment, the appearance of pre-judgment deriving from what he had said in his first judgment was, at least to Lindale, overwhelming. It would, with respect, have been better, in the light of the misunderstanding which presumably led the Master to say what he did in his first judgment, for him not to have continued to adjudicate on the case, which should then have been referred to another Master or a Judge.

This unfortunate sequence of events was further compounded when the Master proceeded to find in his second judgment that Lindale's method of financing amounted to a pyramid selling scheme. The Master took the view that the method of financing was “at the very heart” of the case. Whether that was so or not, it is clear that the suggestion of a pyramid selling scheme came in submissions filed by Colonial after the oral hearing which led to the second judgment. There was no advance warning that this point would be taken and Lindale was given no opportunity of addressing the pyramid selling contention, either in evidence or in submissions. In those circumstances the Master should really, with respect, have given Lindale an opportunity to address the point. Colonial have to some extent brought this difficulty into the case and on themselves by introducing in reply what appears to have been a completely new point.

In the light of these matters, the only tenable way for this Court to proceed is to examine the application for summary judgment and the defences raised de novo and without reference to the Master's second judgment, with which Lindale understandably professes itself dissatisfied.

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At one point I was attracted to the view that the proceedings should be remitted to the High Court for further

consideration of the second stage of the summary judgment application by another Master or by a Judge, but because we heard detailed argument, basically on a de novo basis, I am content to adjudicate on the matter in this Court without wishing to establish any sort of general precedent. Any such general precedent would effectively convert this Court into a Court of first instance and deprive us of the benefit of the views of a first instance Court on the matters arising.

Looking at the case afresh, as we have, it seems clear that the key aspect of Lindale's defence is its assertion that Colonial failed to notify it of material changes in the policy terms. The details have been discussed in the judgments of the other members of the Court, and I will not repeat them.

The starting point must be that when Lindale planned its use and financing of the policies it had no right to expect that their wording and terms would necessarily remain unaltered indefinitely. While Colonial had the right to change the wording and the terms, Lindale was entitled to appropriate notice of any such changes. Lindale asserts that it did not receive such notice. That issue must go to trial.

If Lindale succeeds in establishing that it did not receive notice, the issue then becomes what loss it suffered, not as a result of the changes themselves, but as a result of Colonial's non-notification of them. Although it is linked with Colonial's claim for recovery of commission, Lindale's cross-claim on the basis of non-notification, whatever its precise legal designation, i.e. counterclaim or setoff, is really a claim for damages for non-notification of the changes. That is so whether one characterises the non-notification as misleading conduct or breach of an implied term.

On this basis, Lindale cannot resist Colonial's claim for commission claw-back, except perhaps in relation to quantum (the commission/bonus issue, to

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which I shall return). Subject to quantum, Lindale is contractually bound to return the commissions in issue. What Lindale is really seeking to do, as well as putting in issue the quantum of Colonial's contractual claim, is to demonstrate that its cross-claim for damages for non-notification of the policy changes should be seen as sufficient to prevent any form of summary judgment being given in Colonial's favour, both on liability as well as quantum. In these circumstances that overplays Lindale's hand.

I consider the appropriate course is to direct that judgment be entered for Colonial to the effect that Lindale is contractually liable to pay it whatever is the correct quantum of its commission claim, such to be determined at trial. At the same trial, Lindale should have the opportunity of establishing its cross-claim. To do so it will have to prove non-notification and what loss it has suffered as a result. At the trial, Colonial will be entitled to judgment for whatever it establishes as the correct amount of the commission claw-back, and Lindale will be entitled to judgment

for such amount as it establishes as its loss for non-notification, assuming, of course, that it can establish non-

notification. On this basis, the trial will have a clear focus and each side will have the opportunity of presenting its case to best advantage.

In establishing the quantum of its claim, Colonial will have to face the issue whether bonuses and other like payments qualify as commission for the purposes of the claw-back clause. That is not a point upon which we should adjudicate at this stage. In commercial terms, there would appear to be little logic in providing for claw-back of commission, but not of bonuses or other like payments. This, however, is what the clause seems literally to say.

There is no claim for rectification before the Court at the moment, and even if there was, I do not consider it would be right, without any evidence directed to the point, to assume that Colonial would inevitably obtain rectification if such is necessary.

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In summary therefore I would allow the appeal with the consequences set out in the judgment delivered by Blanchard J. At the trial which will ensue there will effectively be three issues: first, the quantum of Colonial's claim, essentially whether bonuses and like payments come within the concept of commission; second, whether Colonial notified Lindale of the relevant policy changes; and third, if it did not, what loss to Lindale resulted from such non- notification.

Solicitors

Bell Gully Buddle Weir, Auckland, for Appellants Kensington Swan, Auckland, for Respondent Page 18

IN THE COURT OF APPEAL OF NEW ZEALAND CA 73/97

BETWEEN LINDALE FINANCIAL SERVICES

First Appellant

AND JOHN GRAHAM HANDLEY Second Appellant

AND THE COLONIAL MUTUAL

LIFE ASSURANCE SOCIETY LIMITED

Respondent

Coram: Blanchard J Tipping J

Williams J.

Hearing: 1 and 2 December 1997

Counsel: J G Miles QC and D J Cooper for Appellants G P Barton QC and J L Land for Respondent Judgment: 17 March 1998

_{JUDGMENT OF WILLIAMS J.}

Introductory

In the second of judgments delivered on 11 November 1996 and 27 March 1997, Master Thomson entered summary judgment for the respondent, Colonial Mutual Life, (“Colonial”) against the appellants, Lindale Financial Services and its guarantor Mr Handley, for $24,253,287.41 plus interest at 13.75% per annum from 1

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February 1996 to the date of payment plus costs of $40,000 and disbursements of $275.

At the same time he entered summary judgment for Colonial against a Mr Lambourne and his company, Jason

Investments Limited for $710,623.19 plus interest at 10% from 1 February 1996 to the date of payment plus costs of

$10,000 and disbursements.

Both claims for summary judgment were heard together because they raised similar issues. This judgment will refer to the Lambourne/Jason claim up to the date of Master Thomson's judgment but that claim has now settled and will require no separate consideration other than arising out of the fact that Mr Lambourne made an affidavit filed in this Court in support of the Lindale appeal.

At the same time as he heard those two summary judgment claims, Master Thomson also heard a claim for summary judgment issued in April 1996 by a company called Policy Management Limited against Colonial for repayment of some $29m. of premiums said to have been paid by it on a block of 3518 Colonial policies written by Lindale and Jason, together with a declaration that Colonial could not lapse those policies and that they remained in force. Putting it broadly, that claim was the corollary of the claims against Lindale and Jason.

The principal cause of action by Policy Management was for monies had and received having been paid under mistake, namely, that Colonial complied with the Life Insurance Act 1908 when such was not the case. The claim also alleged misleading or

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deceptive conduct under the Fair Trading Act 1986 raising questions as to Colonial's demutualisation, suggested breaches of Australian legislation, the jeopardising of policy holders' rights, and further allegedly misleading or deceptive conduct in relation to a policy issued by Colonial called LifeWise in ways later discussed. Those particularly related to loan collateral, the charging of an early reduction fee and the policy on partial cash withdrawals.

The learned Master held that Colonial had arguable defences to that claim and dismissed the application for summary judgment. No appeal was brought and that matter also drops out of separate contention although, again, it will be necessary to discuss that claim in this judgment and in particular to discuss evidence given by a Mr Bhanabhai, a solicitor and director of Policy Management.

Course Of Hearings

Whilst, from Colonial's viewpoint its claims against Lindale and Jason were relatively straight forward despite the sums involved and thus suitable for summary judgment, the way in which the claims proceeded in the High Court and on appeal became protracted, complicated, and with only passing reference to the requirements of the Rules. For present purposes it is necessary to note only the salient features and those aspects which bear on the determination of this appeal.

Lindale was appointed an agent of Colonial by agreements dated 30 July 1990 and 22 August 1994. Its

obligations were guaranteed by Mr Handley. Pursuant to those agreements, Lindale was paid commissions in the

normal way. The agreement

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of 22 August 1994 was terminated on 11 August 1995 by notice from Colonial to Lindale. That termination was accepted. By 19 January 1996, Lindale's commission account with Colonial was in debit in the sum for which summary judgment was ultimately ordered. On 9 February 1996 Colonial issued its summary judgment application against Lindale and Mr Handley. Its claim was in conventional form for a claim by an insurer for commission overpaid to its agent.

Lindale and Handley filed a notice of opposition on 29 March 1996. For reasons which will appear, it is pertinent to note that the defences pleaded included unsuitability for summary judgment because of factual conflict; misconduct by Colonial; that the premium repayment was not due; that there was no obligation on the part of policy holders to pay premiums as all policies were illegal through Colonial's breach of the Life Insurance Act 1908; and that Colonial had repudiated its obligations under the LifeWise policies in various ways including:

(a) “Varying the LifeWise policies ... by changing the terms on which funds could be withdrawn” thereunder.

(b) In “repudiating its obligations ... to pay claims covered by the policies or making cash withdrawals” under them.

However, an amended notice of opposition filed on 18 April 1996, whilst repeating the other defences and adding an allegation that Colonial had engaged in misleading or deceptive conduct under the Fair Trading Act 1985 omitted all references to any defences based on the LifeWise policies or repudiation by Colonial of its obligations thereunder. The principal defences then claimed were for technical breaches alleged against Colonial under the Life Insurance Act 1908 (which, if upheld,

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may well have invalidated a large proportion of all the business transacted by Colonial in this country over the past

60 years or more).

Unusually for summary judgment an order was made consolidating the hearing of all three applications on the basis that there were common questions of law and fact in each. On 11 June 1996 the parties consented to the Life Insurance Act 1908 questions arising in the three claims being determined before the hearing of the balance of the summary judgment applications.

That hearing took place on 26 June 1996. Some time later the learned Master issued a memorandum indicating that he was ready to deliver an interim judgment but seeking confirmation by counsel as to the issues to be determined. There was sharp disagreement between counsel as to the issues which the learned Master should cover, counsel then acting for Lindale and Mr Handley also making the point that they had always expected that the

claimed defences other than those arising under the Life Insurance Act 1908 should be dealt with at a further

hearing.

The learned Master commenced his judgment of 11 November 1996 by reciting the questions in counsel's consent memorandum but continuing (p.6) that:

“in hindsight, and despite the consent of counsel, I think that the summary judgment procedure will rarely (if ever)

_{be amenable to pretrial legal argument.”}

and going on to say that his view was that he should determine all issues arising from the claimed

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illegality of Colonial's policies not just the Life Insurance Act 1908 issues.

The learned Master then carefully considered all the claimed defences arising out of alleged breaches of the Life Insurance Act 1908. He rejected them all. No appeal was brought against those findings. He regretted that questions of validation of any policies under the Illegal Contracts Act 1970 had not been argued and considered a possible defence available to Colonial under the Judicature Act 1908 s.94A(2), before formally answering the questions posed by counsel. He then concluded (p.44) that:

“...I am completely satisfied that the defences of Lindale and Handley, Jason and Lambourne, and the claim of

_{[Policy Management] are all completely devoid of merit at law, in equity, and morally.”}

but deferred entering formal judgment for seven days to enable the defendants to make submissions.

Following submissions on costs there were further interlocutory applications including one for an adjournment of a hearing then fixed for 16 December 1996. One of the grounds advanced was that Mr Handley had a stroke on 20

September 1996 which left him partly paralysed with his concentration skills and thus his ability to instruct his lawyers impaired. There was also an application by the defendants to file further affidavits.

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On 16 December 1996 the learned Master granted the adjournment and fixed a further hearing for the Lindale and Jason cases for 12 February 1997, recording that Lindale and Jason had sought leave to file further affidavits because of their understanding that the claim would proceed in two stages. The learned Master permitted the affidavits to be filed de bene esse but directed that they be “strictly limited to the defences set out in the notices of opposition” and were to be filed in sufficient time before the hearing to allow Colonial to file affidavits in reply. The learned Master also said that he would rule on 12 February 1997 whether the further affidavits would be admitted and would then hear final submissions and deliver a decision.

In his reserved judgment delivered on 27 March 1997 following the hearing on 12 February the learned Master

began by referring to the remaining defences appearing in the Notices of Opposition and to the fact that, at the hearing on 12 February, Lindale and Jason had sought to raise a number of new defences. He then said that the financing of the policies was at the heart of the matter. This was a reference back to a matter discussed in his earlier judgment in which he had noted that the evidence suggested that none of the premiums payable on the large number of policies written by Lindale and Jason were being paid either by the lives assured or by their employers and that the defendants had failed to explain the source of payment of the premiums or to dispel Colonial's suspicion that they were being paid from commissions earned by the agents. The learned Master then commented (p.5):

“[Colonial] says that if the method of selling was sustained only from commissions from new business then the whole operation was a pyramid selling scheme and would only work if it could continue to grow exponentially.

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Eventually a limit is reached in such self funding arrangements and if premiums stop that will be to the detriment of the insurer for whom policies are only profitable if they are long term. Colonial had a real concern made known to Lindale and PML yet its concerns were never answered when first raised and still have not been answered.

The defendants refusal to “come clean” about the method of funding inspires the Master to take a robust and realistic judicial attitude to the defendants when they now attempt to run new defences not indicated in the notices of opposition.”

It seems probable that the reference in that passage to a “pyramid selling scheme” echoed a submission to that effect made by Colonial in submissions it filed on 19 February 1997.

The learned Master then turned to the two alleged breaches by Colonial under the agents' agreement on which Lindale and Jason relied, namely, changes to the policies without notice, and new conditions being imposed for cash withdrawals. Those were defences which Lindale and Jason sought to reintroduce, having omitted them from their amended Notices of Opposition. It was asserted in reliance on the Code of Business Practice for life insurance companies that if the agents did not know of changes made to Colonial policies then they were misrepresenting Colonial's product and were in breach of their duty to their customers. In response to a submission that the agents would not have continued selling the policies had they known of the changes, the learned Master held (p.6):

“I say at once in respect of that submission that if the defendants would not have sold the policies as amended by the plaintiff if they had been aware of the changes that they cannot complain too loudly if they are now required to pay back commissions which they claim they would not have wished to have earned in the first place.”

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He then detailed two more defences on which Lindale and Jason relied, namely that Colonial was required to comply with the Code of Business Practice and that the Code should be a part of the agency agreement by implication. The learned Master rejected those defences on the basis that the Code of Business Practice did not replace statutory obligations on insurers and included a voluntary complaints procedure and observed (p.8):

“Anyway ... apart from PML there had been no complaints made alleging misrepresentation of the policies by any other policy holders”.

He rejected the implied term argument on the basis that the agency agreements were commercially effective without such a term and went on to hold (p.8) that:

“The raising of such defences under the guise of breaches of the Fair Trading Act, in my view is tenuous, to say the least.”

Even if such were not the case, he held that the alleged defence was statute barred under s.43(5) of that Act and that the matters raised in Policy Management's claim were not supported by the evidence, recording Colonial's submission that (p.9):

“... with one exception which relates to the policy wording change in respect of cash withdrawals, the policy wording changes have not been previously raised with Colonial. I was told that Colonial has had the opportunity to research the position in relation to the cash withdrawal change and the evidence is clear that the brokers were advised of that change. Such change was implemented in April 1994 in a new proposal form which all policy holders were required to sign, and did sign. It is submitted that such evidence is inconsistent with the assertions now made by the defendants that none of the policy wording changes were ever advised to them.”

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The learned Master went on to hold that the issue was not whether a policy holder could have relied on any implied term concerning the payment of premiums, but whether Colonial had caused the premiums to terminate by determining the broker agreement.

The learned Master then turned to quantum defences, saying at (p.10) “no complaints about the calculations were ever raised until the submissions made on 12 February”, it was then too late for those issues to be raised and that no further affidavit evidence should be allowed in relation to them. He reached that conclusion partly on the basis that Colonial had investigated as many of those issues as was possible in the time available and (p.11) “has been able to demonstrate to me that the complaints are groundless”. He therefore made a formal order admitting the

affidavits on behalf of Lindale and Jason only to the extent that they dealt with the claimed defences under the Fair

Trading Act 1986 and entered judgment as earlier noted.

One of the grounds of appeal was that the unorthodox procedure adopted in the High Court was prejudicial to Lindale and Mr Handley because the learned Master had decided to enter summary judgment in advance of hearing their submissions and that that unfairness was compounded by his receiving submissions from Colonial after the 12 February 1997 hearing alleging that they were operating pyramid selling schemes. It was submitted that, in effect, the learned Master determined the whole of the summary judgment applications in a hearing devoted only to issues under the Life Insurance Act 1908 and should thereafter have disqualified himself. It was also submitted that receipt by the learned Master of Colonial's submissions after the 12th February hearing containing the new allegation of pyramid-selling schemes which were

Page 28

not raised by the claim, was unfair and unsupported by evidence and was made when the appellants had no opportunity to respond. It was submitted that the learned Master was wrong to hold that the financing of the policies was “at the very heart” of the claim and that his conclusions were, in any case, in error having regard to the further evidence which the appellants sought to adduce on appeal.

That evidence consisted of two further affidavits by Mr Handley - one of 24 pages - the affidavit by Mr Lambourne, and affidavits by a Mr Vaughan, an actuary, and a Mr Theyers, an investment analyst. As a precaution against their being admitted in this Court, Colonial filed a fourth affidavit by a Mr May, its general manager, to add to those he had sworn earlier together with affidavits by a Mr Morgan and a Mr Vincent, former employees of Colonial and by a Ms Ormrod, an actuary.

In addition, Lindale and Mr Handley applied to this Court for leave to raise a fresh ground of opposition to the summary judgment application which was, effectively, the ground deleted from its original notice of opposition relating to the LifeWise policies.

In this Court, Colonial opposed those applications, partly on the basis that the filing of its submissions after the 12

February 1997 hearing was occasioned only because of lack of time to present them on that day, but principally on the basis that Lindale and Mr Handley should be held to the amended Notice of Opposition on which they had argued the summary judgment application. It was submitted that in the High Court there was no evidential foundation for the claimed defences other than in four substantial affidavits, one in the Jason claim, which were not served until 4 and 6

Page 29

February despite the learned Master's order of 16 December 1996. These raised new matters concerning the policy wording changes and cash withdrawals, plus fresh allegations concerning administrative errors.

Counsel for Colonial submitted there was no predetermination of the summary judgment in Master Thomson's

judgment of 11 November 1996. He made rulings on the questions for decision and his comments concerning

summary judgment should be seen in the light of the fact that the only remaining defence then raised was under the Fair Trading Act 1986 and in that regard there was no evidence before him. It was also submitted that the Master's second judgment dealt fully with the remaining issues in relation to that defence and properly rejected the attempts by the defendants to raise new matters. It was submitted that financing of the premiums was an important issue relevant to credibility.

After hearing extensive argument, the Court granted the applications by Lindale and Mr Handley.

A perusal of both the reported and unreported decisions of appeals in summary judgment matters from and including Pemberton v Chappell [1986] NZCA 112; [1987] 1 NZLR 1, shows that applications for leave to adduce additional evidence or to amend pleadings are lodged in about half such appeals.

Whilst, as this Court said recently in Maclean v Stewart (CA 288/96 20 August 1997), the search at first instance in summary judgment matters is to see whether the plaintiff has demonstrated that the defendant has “no bona fide defence, no reasonable

Page 30

ground of defence, no fairly arguable defence” (Pemberton (supra) at 3 per Somers J), it may be timely to repeat what this Court said in Hankins v Prudential Building and Investment Society of Canterbury (in liquidation) (CA

359/91 3 July 1992, p.10) that on a summary judgment appeal:

“The general principles are that leave to admit further evidence should not be given unless the evidence is such that it could not with due diligence have been discovered before the trial by the parties making the application, and unless it is such that it would, if admitted, at least have an important influence on the result: Sulco Ltd v E S Redit & Co Ltd & Anor [1959] NZLR 45, 72. An appeal from a summary judgment is no different in this respect from an appeal from any other judgment: Langdale & Anor v Danby [1982] 3 All ER 129 HL, followed by this Court in Redmayne v Bank of New Zealand (CA 257/91 judgment 13 May 1992).”

As far as pleading amendments in summary judgment applications are concerned, whilst “the Courts have to deal with this class of case as realistically and untechnically as they can consistently with justice to defendants” (BNZ Finance Ltd v Smith & Leuchars [1991] 3 NZLR 659(L), 668 per Cooke P), the position generally remains as held by this Court in Body Corporate No.95035 v Auckland Regional Council (1993) 6 PRNZ 559, 563-4:

The Court is reluctant on a summary judgment application to prevent a defendant raising on appeal a defence which is open on the evidence and to which no further evidence could usefully have been directed by the plaintiff had it been raised in the notice of opposition. That is the case here. But more importantly, it is well settled that a jurisdictional point may be raised at any time: NZ Apple and Pear Marketing Board v Apple Fields Ltd [1989] 3

NZLR 158(L), 166 per Richardson J; and see too per Casey J at pp 175-176.”

Whilst we would not wish to provide any encouragement whatsoever for applications for late amendment on

appeal, having regard to the most unusual procedure adopted in the High Court we reached the view that the evidence which

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Lindale and Mr Handley sought to adduce might be important in the result even though it was plainly available to the appellants prior to the second hearing before Master Thomson. and even though, as Mr May's last affidavit showed, Colonial, too, had a wealth of extra evidence which could have been put before Master Thomson had the issues put before us by the appellants been timeously put before him.

Narrative : Agency agreements

Turning to the facts, Lindale and Mr Handley respectively became agent for and guarantor to Colonial from 16 July

1990. The agency contract required Lindale to observe the Code of Business Practices for life insurance companies and contained a standard provision for Colonial to advance money to Lindale against prospective commissions bonuses and allowances with such advances becoming a debt payable on demand. Clause 4.4 entitled Colonial to modify rates of commission on 14 days' notice generally, and expressly referred to its right to adjust the rate of commission within 18 months from the commencement of a policy if its terms were altered, amended, or rewritten in any way. Clause 4.5 provided that if a premium remained unpaid for more than a month in respect of a policy in force for less than 12 months the prospective commission advanced should be debited to Lindale's account. Clause 4.7 provided for a full accounting between the parties 18 months after the agreement was terminated, termination being open to either party under Clause 5.1 on seven days' notice, without assigning reasons.

On or about 22 August 1994 Lindale and Colonial entered into what was called a multi-agent agreement in place of the 1990 contract. The circumstances in which it

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came to be signed will be considered later. For present purposes it is sufficient to note that the termination provisions were repeated and that all “commissions, bonuses, ex gratia and other payments” were to be credited to the commission account. Colonial again had the right to “modify or vary future rates of commission or remuneration or bonus” on 14 days' notice with the power to adjust the commission following alterations, amendments or rewriting of a policy being extended to those in force for less than two years. Clause 5.5 read:

“The Agent agrees in respect of products offered in the past or in the future by the Colonial Group which are subject to commission write back that if any premium or instalment of premium is not paid within the period of one (1) calendar month after it becomes due in respect of any policy which has not been in force for a period of twenty- four (24) months from the commencement date, then the amount of commission previously credited to the Agent in

respect of such policy shall be debited to the Account by way of default penalty in accordance with Colonial Group

normal practice.”

Clause 5.5 in its terms only empowered commission to be debited back if premiums were not paid within one month in relation to policies in force for under two years. In this appeal Lindale asserted, in relation to quantum, that that clause debarred the writing back of bonuses or ex gratia or any payments other than commission.

Terms of Policies

It is next convenient to turn to the terms of the Colonial policies sold by its agents. Page 33

When Lindale first became a Colonial agent one of the policies which it sold was what was called the “LifeWise”

policy. It was a policy pursuant to which the net premium was available to buy units in an investment account.

The wording of the LifeWise policy has changed over the years since 1990 with different versions or printings commencing in September 1990, January 1992, December 1992 or January 1993 and January 1995. The provisions of those policies which are common to them all and relevant to this case include:

(a) The introduction (Clause 1.1) made it clear that the amount of the premium invested would be the net sum remaining after the deduction of “any fees which are due under the policy.”

(b) The benefits payable on maturity would vary through a number of factors including, in all versions current after that of January 1992, “the payment of the fees described in this policy.”

(c) On maturity the policyholder would receive the full value of the investment account being the number of units held multiplied by the most recently declared unit cash-in price.

(d) Section 2 (para 2 of the prefatory notes) made it clear that the policy usually had no cash-in value until it had been in force for two years and premiums had been paid for that period, provided that “any premiums and fees

Page 34

payable must be paid on the due date” and also made it clear that from the net premium due to secure additional benefits “we will then deduct any fees which are due under the policy”, the amounts and incidents of which appeared in a policy schedule.

(e) Under the heading “late or non payment of premiums”, Clause 2.2 said that if premiums were not paid on due

date additional death or disablement premiums “or fees due” would be met by debiting the investment account if the

policy had a cash-in value.

(f) Then, under the heading “When the Policy has a Cash-in Value”, Clause 2.2.2 provided: “2.2.2 Where the Policy has a Cash-in Value

To keep your additional death or disablement cover in force, we will debit these premiums to your Investment Account. Any fees due will also be debited to your Investment Account. If the outstanding premium is subsequently received, the total amount of that premium will be applied to your Investment Account.

Where amounts are debited to the Investment Account, units will be cancelled to meet the debit. This will reduce the cash-in value of your LifeWise Policy.

If no premium has been paid for more than 13 consecutive months the Policy will be altered to reflect the cessation of premiums. Where applicable, an Early Reduction Fee described in Section 2.5.6 will be debited against the value of the Investment Account. (Refer to Section 2.3 on Permanent Discontinuation of Premiums).

If at any time the value of the Investment Account is insufficient to meet any amounts to be debited to it, your Policy will be terminated and no benefit will be payable.”

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The provisions concerning the Early Reduction Fee were changed during the currency of the policy and it is those changes on which Lindale heavily relied on appeal.

In the first two versions, that is those which were in operation up to the end of 1992 or early 1993, Clause 2.5.6 read:

“2.5.6 Early Reduction Fee

There is an Early Reduction Fee if any of the following occurs before the full term of the Policy and within ten years after the commencement of the Policy or subsequent increase according to section 2.4.2:

(a) you cease to pay the Investment Benefit Premium;

(b) you reduce the amount of Investment Benefit Premium (including any increases in regular premiums); (c) you decide to terminate the Policy.

The fee will be applied at the time of cessation or reduction of premium, or termination of Policy as the case may

be. The amount of the fee will be between 1% to 35% of the Investment Benefit Premiums paid (excluding any

Additional Lump Sums).”

whilst, in the versions in force from late 1992 or early 1993 onwards the last sentence was altered so that that paragraph read:

“The fee will be applied at the time of cessation or reduction of premium, or termination of Policy as the case may be. The early Reduction Fee will not apply to Additional Lump Sums.”

The second change on which Lindale relied on appeal was section 3.2 headed “Cashing-in your Policy” where in the three versions in force up until January 1995 the relevant section read:

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“If your Policy has a cash-in value, subject to Section 2.5.6 you may elect to cash it in fully or in part. If it is only partially cashed, the remaining units will stay in your Investment Account and you may continue to pay further premiums in the usual manner. Upon withdrawal of the full value of the Investment Account, the Policy will terminate.”

whereas, in the January 1995 version, that section was altered to read:

“If your Policy has a cash-in value, subject to Section 2.5.6 you may elect to fully or partially cash it in.

Full Cash-in

When the Policy is fully surrendered the full Investment Account less the Early Reduction Fee will be paid and the

Policy will then terminate.

Partial Cash-In

If the Policy is partially cashed, then the maximum cash-in value of the Policy shall equal the investment value less the Early Reduction Fee. Once a partial cash-in has occurred, the Early Reduction Fee shall be retained in the Investment Account on a reducing basis. The remaining units after a cash-in will remain in our Investment Account and premium payments will continue in the usual manner.”

Section 5.1 dealt with the automatic termination of the policy and said that:

“In the first two years from the Commencement Date of the Policy, any premiums not paid within one month of the

due date will lead to an automatic termination of the Policy, unless an Additional Lump Sum has been paid to create a cash-in value.”

It will be necessary to examine the effects of those changes in greater detail later.

Information to Agents

Since another of the major issues between the parties which emerged in the High Court and finally came into sharp focus on appeal was the extent to which

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Colonial advised Lindale of the changes in its LifeWise Policies - particularly those relating to cash withdrawals and the early reduction fee - it is now convenient to consider the evidence to date on that topic.

Colonial produced brochures relating to LifeWise which spoke of such policies providing “collateral for loans and it gives you access to money when you need it”, and emphasised the flexibility of the cover and the warranty that the price of the investment units would not fall below their last declared values.

As far as information to agents was concerned, the evidence on appeal contained the following:

(a) Colonial said that it sent bulletins to its agents on a regular basis which included notification of any changes. One such was a marketing bulletin dated 31 January 1991 advising that if agents were not “printing a laptop presentation it is important that you use the manual notes provided”. The bulletin spoke of a reduction fee payable only on permanent reduction or cessation of premiums, not only temporary suspension and in a passage posing the question as to whether LifeWise cash values were “net of all fees and charges” the postulated answer was that “any possible reduction fee has also been removed making the cash value a true bottom line”, though the cash values given were only an illustration, not a guarantee of a rate of return.

A further marketing bulletin dated 7 November 1991 in answer to a question as to whether Colonial's illustrations showed net returns after the deduction of tax and all fees said that “for cash values on LifeWise we have simply deducted any possible early reduction fees from the accumulation value” and that the early reduction fee applied only when the annual premium was permanently reduced.

(b) The rate book given to Mr Handley set out the conditions under which the early reduction fee would be paid which said that “ a fee between 0% and 35% of the premiums paid may be charged ... using a sliding scale”. Mr Handley said he was never given any other version though he said that when LifeWise started

he got updated pages of the ratebook, a specimen policy and, as with other Colonial products, computer

disks for presentations to customers. He

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acknowledged receiving further disks during his agency. It is to be noted that the code of business practice for insurers requires agents to show customers cash values for policies at years 3, 5 and 10. The laptop presentation would have shown both the fund or investment value at those dates as against the cash or surrender value with the difference being the early reduction fee. Quotes generated by the computer system for customers also showed the fees.

(c) A form of proposal sent to Jason and Lindale and used after 15 March 1994 included an acknowledgment that Colonial could alter the surrender or loan values, although they were to be retained until the new surrender or loan values exceeded the last advised value. The form also included an acknowledgment in relation to LifeWise that in the “first 10 years ... the surrender value will be less than the investment value of the policy because early reduction fees will be applied on cessation or reduction of premiums and on withdrawals within the first 10 years ...”. Mr Handley raised with Colonial concerns about the form but none about the statement quoted.

(d) A series of “Link-up” marketing brochures gave details at various dates of such matters as the cash-in price of LifeWise policies, net of tax and management charges.

(e) A client services bulletin dated 28 April 1993 admitted on appeal on which Colonial heavily relied. Three pages long and distributed to master agents and brokers, it dealt almost entirely with early reduction fees. It said that such fees were charged on all LifeWise policies in force for less than ten years when contributions ceased or decreased or the policy was surrendered and that “these products have now been on the market for two years and the process of charging ERFs need to be clarified so that you can correctly advise your clients”. The calculation of early reduction fees was fully set out. In relation to partial surrenders of LifeWise policies in force for two years with contributions paid for the whole of that period the Bulletin said:

“If a client requests a part surrender and maintains the level of original contributions, the Cash-in Value of the policy will be calculated as the value of units less the ERF that would apply should the policy have discontinued on that date. The ERF is earmarked in the Investment Account of the policy, and the maximum cash available at any time will be equal to the current value of units less any ERF that might apply on policy discontinuance.”

Though acknowledging receipt of most of this material including updated computer disks for presentation to customers, in his affidavit admitted on appeal Mr Handley said of the 28 April 1993 Bulletin: “I have never previously

seen that document and I do not believe a copy was ever sent to me. There is no copy of the document in my

files”. And he said “I was never told about

Page 39

any changes to the terms of the LifeWise policies.” He continued by saying that “None of the computer disks provided ever referred to any policy changes.” Although he acknowledged that the disks stated surrender values from which the early reduction fees had been deducted he said “I never understood those surrender values to apply where there was only a partial withdrawal”.

Mr Lambourne supported him in an affidavit sworn in this Court. Of the 28 April 1993 bulletin he, too, said that he

“does not recall ever having seen this document previously”.

As against that, in this Court Colonial put in affidavits by Mr Morgan who was Colonial's broker manager during the

Lindale agency and from a Mr Vincent, who was Colonial's northern region broker manager during that period.

Mr Morgan was only able to say that all agents were automatically advised of all alterations to policies and that he knew from his discussions with Messrs Handley and Lambourne that they, as experienced and successful brokers depending on commissions for their livelihood, were aware of changes made from time to time and their effect. Mr Vincent said that he visited agents such as Messrs Handley and Lambourne when policy changes were made and discussed those changes with them. He was unable to recall specifically discussing the changes in the early reduction fee and cash withdrawal provisions with Messrs Handley or Lambourne, but had no doubt that he would have done so. He did not comment on the 28 April 1993 Bulletin.

Narrative : Facts

Both Lindale and Jason were spectacularly successful in the writing of Colonial LifeWise and Whole of Life policies. Jason wrote 790, Lindale 2,728. They attracted commissions of up to 129.5% of annual premiums on new business, such

Page 40

commission being payable to the broker immediately and in advance of any premium being received by Colonial. Premiums on new business written by Jason and Lindale amounted to $2m in 1992 rising to $4.4m and $10.6m in the next two years and $12m in the 1995 year up to August. Commission paid over the duration of the agency agreements totalled over $35m because the sums insured were so large: the Whole of Life policies averaged

$350,000 with $1m as a maximum and the total sum insured at 1 January 1996 topped $445m. According to Messrs Handley and Lambourne, their agencies were handling a significant proportion of the whole of Colonial's life insurance business.

Colonial, on the other hand, became concerned from late 1993 onwards as to whether the business was

sustainable in the sense of the premiums continuing over many years and sought information about that from the

agents as LifeWise policies were not profitable for Colonial until they had been in force for a number of years..

It seems that Colonial was not initially given the information which it sought. The parties reached the point in late

1993-early 1994 where termination was considered. However, by March 1994 Colonial said it was prepared to continue to accept LifeWise proposals from Lindale provided the company signed the multi-agent agreement and a declaration which included an acknowledgment that cessation of premiums in the early years of a policy was likely to lead to losses arising out of the establishment charges, a further acknowledgment that in the first ten years of the LifeWise policies the surrender value would be less than the investment value and that “early reduction fees will be applied on cessation or reduction of premiums and on withdrawals within the first ten years”.

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Other negotiations took place between the parties during this period and the evidence includes a letter from Mr Handley to Colonial of 18 April 1994 which, amongst other things, comments on Colonial's then intention to withdraw the LifeWise policies despite Mr Handley's wish to have “access to a service where the cash values (not investment values) of policies are available quickly and effectively”.

Even after the execution of the multi-agent agreement in August 1994, Colonial continued to make inquiries as to the overall structure of Lindale's business and its possible tax implications. On 20 September 1994 it advised that it was not prepared to accept further LifeWise business without that knowledge.

Lindale obtained a report from Price Waterhouse on 9 September offering the opinion that its insurance arrangements appeared to be designed for the long term and were commercially sound. When Colonial continued to press for more information Lindale raised privacy issues as far as insured persons were concerned.

On 10 November 1994 Colonial wrote to Lindale saying that LifeWise had generally been withdrawn for new business but would be reinstated for Lindale alone at least until 31 December 1995 if the required information was given. That offer was repeated on 20 December 1994

The parties signed a confidentiality agreement on 21 December 1994 whereupon Colonial was given material relating to the tax implications of Lindale's business and submitted it to its solicitors. Lindale answered the solicitors' inquiries

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about the nature of its business in a long letter dated 11 March 1995 which included the following passages:

“The arrangements quite simply are designed to provide financial structures benefiting all parties by using life insurance products to create collateral security in order to allow premiums to be financed.

Loans employed to pay premiums, or to fund business activities can be repaid utilising financial instruments such

as bonds with a guaranteed and bankable maturity value which are entered into by way of recovery of costs through the future surrender value of a life insurance policy. The life cover simultaneously provides certainty of debt repayment in the event of a claim and additional financial security...

Most life insurance policies are not recognised by bankers as providing adequate collateral security to repay future debts, i.e. their future maturity values cannot be relied upon to repay a future known debt, unlike a financial instrument such as a bond which can be relied upon to guarantee a future fixed sum on maturity.

Bankers generally only regard the present value “declared” cash value of a policy as adequate security, and even then only a percentage of it, unless it is “capital guaranteed” as are the contracts under this arrangement which have “warranted” values.

... Premiums are financed as and when required. Any borrowing is maintained as low as possible in order to keep interest costs low. A bond or instrument which is acceptable to a lender, as a guarantee of principal repayment, provides security for funds borrowed. Over time, the surrender value of the policy increases eventually to a point where it equates to the total accumulated costs incurred, and thereby offers a cost recovery option.

... a decision can be made as to whether to totally recover costs and expenses incurred either by surrender or borrowing against the value of the policy, or as alternative, to maintain the cash value of the policy and revert the program to a vanishing premium basis. The vanishing premium basis is the intent of the program in order to ensure the benefits are maintained for the long term. In this case the cash value of the policy will keep the insurance cover afoot for the life of the insured, subject to the policy returns being maintained by the insurance company.

... The key personnel have no access to the investment portions of the life policies. Financial protection is afforded by way of the fact that the life cover underwrites the finance utilised to pay the premiums.

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...Up front commission is not used directly to assist with start-up funding of costs. It is reserved as margin security to meet any shortfall if there is inadequate security to finance premiums over the term due to significant bond value fluctuations as a result of interest rate changes.

... As adequate security increases after year 5 then the commission becomes available for repayment unless it has been previously deducted by way of annual management fees charged over the term of the program.”

Despite further meetings no resolution was reached and on 2 August 1995 Colonial wrote to Lindale terminating the agency with effect from 11 August.

All the premiums under the 3,518 policies were payable by automatic payments. The next payments were all due

on 7 August. Virtually none were received, the automatic payment authorities having been cancelled.

Mr Bhanabhai said that Policy Management was the beneficial owner and manager of the LifeWise policies sold by Lindale and Jason. He asserted in an affidavit that it was merely coincidental that the automatic payments were cancelled five days after the notice to Lindale and four days before the agreement terminated. He said Policy Management cancelled the automatic payments because Colonial had made a number of errors in the direct debiting of premiums from September 1994 onwards. He put in evidence draft letters which Colonial proposed to send to affected policy holders from September 1994 onwards saying that failures to debit premiums had arisen through computer errors and proposing means for overcoming the problem and any consequent automatic lapse. He also put in evidence five letters to a particular policy holder between February-May 1995 rectifying administrative oversights and a memorandum from Colonial to Mr Handley of 29 July 1995 regretting that that

Page 44

customer's policy had lapsed because of its administrative errors and advising of its reinstatement.

Mr Bhanabhai claimed that the automatic payment arrangements were suspended from July 1995 because of such errors and until the problems were resolved. He did not suggest that Colonial was forewarned that Policy Management was considering cancelling the automatic payments nor of the reason. He claims that lists later provided by Colonial to reconcile the position still contained errors. That notwithstanding he acknowledged that:

“Reconciliation had mostly been achieved by the end of October 1995 so that were it not for PML and South Pacific [the financiers] concerns about, amongst other things, the plaintiff's attempt to unilaterally change the loan and withdrawal provisions of the LifeWise policies, the direct debits would have been reinstated.”

Mr May of Colonial said that that reconciliation followed a meeting on 10 October 1995 with Mr Bhanabhai in which he, Mr May, pointed out that administrative errors had occurred in only a tiny proportion of the 3,518 policies and could never have justified cancellation of all the automatic payments. With certain exceptions which appear trifling, Mr Bhanabhai's firm advised Colonial on 20 December 1995 that the reconciliation was correct and complete. That seems to have brought that aspect of the matter to a conclusion.

Though the extent of Colonial's knowledge of the way in which the LifeWise policies written by the brokers were financed is in considerable dispute, it seems reasonably clear that Colonial were largely, if not totally, unaware prior to 11 August

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1995 that Policy Management claimed to be the beneficial owner of most, if not all, of the 3,518 policies. It was only in evidence admitted in this Court that it emerged that as part of the funding for the policies, Lindale paid the commission and the vast majority of the bonuses it received by way of loan to a company called South Pacific

Treasury Limited to secure or manage life insurance cover arranged by Lindale. Pursuant to a contract between

those parties dated 18 May 1995 the amount paid by Lindale to South Pacific Treasury will be due for repayment in

2013. The agreement replaced two earlier agreements. South Pacific Treasury had $100 capital until 1996 when it was increased to $200,000.

The loan is secured over the life cover element of the life policies under group employee schemes, but Mr Handley said that as those schemes have now collapsed because Colonial lapsed most of the policies the loan arrangement is of no value to Lindale and so the principal sum and interest will not be repaid in 2013, thus causing loss to Lindale which has an irrecoverable loan to South Pacific Treasury. He did not say why the loan is irrecoverable.

Mr Bhanabhai, however, said that the finance used to pay the premiums on the policies was arranged by a company called South Pacific Funds Management Limited, and that the security for those payments was Colonial's obligation to pay on death a guaranteed sum of not less than the premiums paid together with a guarantee of stated values, the flexibility to suspend premiums or pay in instalments or lump sums, the ability for parties other than the owner or life insured to pay the premiums, and “accessibility to represented values and the ability to make cash withdrawals during the term of the policy”.

Page 46

Mr Bhanabhai said that Policy Management also relied on the availability in the LifeWise policies of a special death benefit of $50,000 together with a “vanishing premium” component in the Whole of Life cover. Premiums under such policies 'vanish' when the policies accrue an investment value and bonuses sufficient to cover the cost of life cover for the rest of the term of the policy without further payments He said that Policy Management also relied on the availability of cash withdrawals arising from the brochure saying “LifeWise ... gives you access to money when you need it.” He also stated that:

“At no stage was it represented by [Colonial Mutual] that the ability to make a partial cash withdrawal was dependent on premiums being continued to be paid or premium arrears being cleared.”

Mr Bhanabhai asserted that he was unaware of the changes in the LifeWise policies until Mr Vaughan pointed them out in October 1995. He said that Policy Management believed that the original LifeWise policy contained “terms that would always apply” when a claim was made on maturity, a request was made to withdraw cash or a loan was raised against the policy. He also averred first, that Policy Management believed that it was under no obligation to pay premiums if Colonial was in breach of the policy through administrative mistakes and, secondly, that the policies could never be lapsed for non-payment of premiums.

In September 1995 a company called Giltrap Equity Reversions Limited, a company beneficially owned by Policy

Management, sought loans and cash withdrawals on about 40 of the policies written by Jason. These were the

first cash

Page 47

withdrawals sought in relation to any of the Lindale and Jason policies. Loans of $44,898.60 were paid on 28

September 1995 but the cash withdrawals were held up despite, Mr Bhanabhai says, his being told that they could be made without penalty.

Part of the delay was caused by the necessity to re-execute assignments but it seems clear that Colonial also endeavoured to withhold payment of the withdrawals until payment of premiums was reinstated. Policy Management objected to that on 2 November 1995 and Mr Bhanabhai's firm threatened legal proceedings. When Colonial still dallied over paying, Mr Bhanabhai's firm sought to tie continued premium payments to proposed changes in the policies “to establish firm surrender values and achieve unconditional security” and also sought to avoid lapse. By 7 November 1995 Mr Bhanabhai's firm said that Policy Management would undertake to pay the premiums as long as the withdrawal sum was paid and that the firm had been put in funds to cover the premiums in respect of all policies at risk of lapsing, a comment repeated on 15 November 1995.

On 21 November 1995 Colonial wrote saying that it was entitled to withhold payments because it was “an expressed condition in each partial withdrawal application form that the policy owner continued to pay premiums”. It proposed to apply part of the money from the cash withdrawals to meet the outstanding premiums.

On 19 December 1995 Mr Bhanabhai's firm declined to allow money from the partial withdrawals to be used to meet outstanding premiums and said that a partial withdrawal did not “necessarily require a continuation of premiums”. He proposed a

_{Page 48}

settlement either by 75% of the cash-in value being paid out, or by Colonial retaining 25% in a separate account.

On 20 December 1995 a firm called Grant Samuel and Associates Limited, acting as advisers for South Pacific Funds Management, wrote to Colonial asserting that South Pacific had a ”controlling beneficial interest” in the policies and had arranged financing for the premiums in conjunction with the “legal owner” Policy Management. The letter asserted a number of concerns about Colonial's attitude including unilaterally altering the security value of policies and imposing other conditions suggested as being outside industry practice. The letter said that the arrears of premiums were able to be paid and ongoing premium payments reinstated on receipt of a number of undertakings by Colonial. As they included ensuring that all policies remained in force; that surrender or cash values not be used to pay premiums; that Colonial provide a number of assurances as to its financial stability; that it guarantee not to reduce the surrender, cash or loan values; that it discuss and disclose its proposed demutualisation; and that it discontinue any communication to insured parties, it seems tolerably plain that the letter was intended to put pressure on Colonial in the current negotiations rather than with any expectation of acceptance.

Colonial replied on 22 December 1995 giving assurances as to its own financial position, declining to accept the

stringent conditions proposed and indicating its intention to lapse the policies after seven working days if premiums were not paid.

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Mr Bhanabhai's firm did not seek to obtain an injunction against Colonial to prevent the policies' lapse but, in a move which seemed to have an echo in the principal defences it originally argued before Master Thomson, attacked Colonial itself.

On 4 January 1996 his firm wrote on behalf of Policy Management to the Australian Insurance and Superannuation Commission and to Colonial in Melbourne lodging very serious complaints - including illegal actions - couched in what would appear to be extravagant terms concerning Colonial's actions in relation to the matters which are at the heart of this claim. The complaints in the former letter reflected many in the evidence already reviewed but additional issues included a suggestion that Colonial was over-extended in its purchase of the State Bank of New South Wales, that it may have insufficient reserves to support its New Zealand business, and that its proposed demutualisation might prejudice policy-holders. Policy Management was said to be likely to hold 60-80% of the life fund base of Colonial in New Zealand within 5-7 years. The letter suggested that would jeopardise Colonial's policyholders especially when “massive cost overruns ... [are] combined with the ... premium discontinuance rate”, coupled with a suggestion that Colonial's reserves in Australia would not be available to support the New Zealand business. The letter said that Policy Management's actuary had suggested:

“... that it will be advantageous for CML to lapse policies at this time of the year as it will be able to hide the revenue losses significantly by freeing up liability reserves to achieve a cash flow advantage.”

Answers were sought to various queries as to the legality of Colonial's setting off surrender values against premiums due and the purchase of a bank by an insurer, as

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to a policy holder's rights on demutualisation and a considerable number of other issues going well beyond the payment of premiums on the policies and their possible lapse.

The letter to Colonial in Melbourne contained a copy of that to the Australian Insurance and Superannuation Commission and asked for an undertaking that Colonial New Zealand would not lapse policies pending resolution of the complaints.

The evidence does not disclose any responses Mr Bhanabhai's firm may have received. On 8 January 1996

Colonial lapsed 2,934 of the 3,518 policies (including 2,627 of the 2,728 written by Lindale), those being the policies where premiums remained unpaid. As a result default penalties on those in force for less than 2 years were debited

against Lindale's account on 19 January. That threw it into debit in the sum for which summary judgment was

sought. Demands for payment were made on Lindale and Mr Handley on 19 January 1996. The appellants' solicitors responded on 1 February saying no more than that the “demands were without foundation and inaccurate”.

In parallel with this Colonial and Mr Bhanabhai's firm continued to negotiate over the partial withdrawals. On 10

January 1996 Colonial agreed to pay 75% of the available cash value in the hope that premiums might recommence. The amount was $462,038.42. Several follow-up letters were sent including one on 28 March

1996 when Mr Bhanabhai's firm asserted that:

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“In terms of the Lifewise policy there is an absolute obligation to meet any requests for cash withdrawals. There is no qualification of any sort to a policyholders right to payment and there are no conditions about payment of premiums or other matters. The obligation is definite and absolute.”

Finally, on 11 April 1996 Colonial's solicitors wrote to Mr Bhanabhai reiterating their client's preparedness since 10

January 1996 to pay out 75% of the cash value of the policies without an assurance as to the continuation of premiums. As far as the LifeWise policies were concerned the solicitors said that the policy could either be fully cashed in and surrendered or partially cashed in with premiums continuing and referred to Clause 3.2 of the policy document as varied, saying that if the full cash value was paid out and premiums did not continue, the policy would terminate. The letter offered Mr Bhanabhai a cash withdrawal of 99.9% of the cash values without an assurance as to the continuation of premiums but said that if premiums were not paid the policy was likely to terminate for lack of cash value.

On 29 April 1996, 99% of the cash value of a number of Jason's - not Lindale's- policies, $624,239.20, was paid to Policy Management. Earlier that month, it had issued the claim earlier mentioned against Colonial. Optimistically, in view of the matters discussed in this judgment, summary judgment had been sought. As earlier noted, Master Thomson dismissed that application.

On 29 May 1996 Colonial wrote to Grant Samuel and Associates terminating the correspondence between them on the basis that South Pacific Funds Management was “in no better position to continue premium funding than it was in mid-1995 when premium payments ceased” and rebuffing the suggestion that lapsing the policies was

_{Page 52}

improper. In this Court, Mr Barton QC said that Colonial would have reinstated the lapsed policies at any time up to the date of that letter.

It remains to add that on 11 June 1997 Lindale and Mr Handley sued Colonial for breach of contract and under the

Fair Trading Act 1986, asserting that those plaintiffs had never been informed of changes in the policies and that

that was in breach of Colonial's obligations. It was further alleged that the group employee schemes over the lives

of employees of various companies by way of the LifeWise and Whole of Life policies were all beneficially owned by Policy Management and the premiums were paid with finance arranged by South Pacific Treasury to which Lindale paid commissions. Damages sought were the amount of the summary judgment plus accruing interest.

Actuarial Evidence

In October 1995 Policy Management instructed Mr Vaughan, an experienced actuary with a lengthy involvement in insurance, to advise it. It was Mr Vaughan who informed Policy Management of the changes to the LifeWise policies.

In Mr Vaughan's evidence in this Court he commented on the changes including such inconsequential matters as whether the printing of the General Manager's signature on the policies reflected precisely who was the General Manager at the time of issue and on the identical format of the various versions. He said that life companies usually make “substantial disclosure of alterations to policy terms and conditions to its agents and other parties, including updating policy owners”. As far

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as the change in the partial cash withdrawal provision of the LifeWise policies was concerned, Mr Vaughan said that Colonial had sought to impose the early reduction fee retrospectively, to restrict the partial cash-in values and to require the policy owner to commit to continuing to pay premiums and that this was financially detrimental for Policy Management as it reduced the security value of the contract.

Mr Vaughan made the obvious point that a change from saying that “you may continue to pay premiums in the usual manner” to saying that “premium payments will continue in the usual manner” restricted the availability of partial cash withdrawals and postponed the impact of the “vanishing premium” arrangement. He estimated the aggregate early reduction fees which may have been imposed on the whole block of the LifeWise policies at July

1995 was in the range of $4.5m-$6.5m and, given that a number had only recently been issued at that date, may have been $4m-$5m higher. He concluded:

“The security value of the total block of contracts would thereby be destined for a period of slow growth in the immediate future. This is because PML would have been paying substantial premium sums in the expectation of growth of the investment value of the contracts only to find that such growth was substantially reduced through the rapid rise in the quantum of the imposed Early Reduction Fees.”

Although no complaint had earlier been made on the topic, Mr Vaughan also commented on changes to the special death benefit provisions which he said reduced the policies' face value.

Ms Ormrod's affidavit commented on the alterations to the special death benefit. She said that the reduction from

the formula of the total of the investment

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account plus $50,000 to a maximum of $50,000 had no effect upon any of the policies written by Lindale or Jason as all had a special death benefit under $50,000. The second change, making the maximum apply per life insured rather than per policy, affected a maximum of 68 lives insured and the total reduction in death benefits under the policies written by Lindale and Jason would be less than $25,000.

Since the special death benefit changes were not in the forefront of the appellants' submissions in this Court, that matter can be put to one side after noting the minuscule effects calculated by Ms Ormrod. As far as Mr Vaughan's evidence is concerned, whilst his comments may well be correct, they proceed on the basis:

1. That an early reduction fee would be actually taken in each case of a partial cash-in whereas the altered policy provides for the fee to be retained in the investment account on a reducing basis. The result is that the investment account grows no more slowly because the total sum within it remains as it would have been if an early reduction fee was not payable. All that happens is that the amount in the account is divided. But the policy holder continues to get the benefit of growth in the units (unless the policy holder discontinues premium payments or surrenders the policy when the fee is actually charged as has always been the case).

2. That Colonial has changed the wording of individual policies after issue. Although, initially, Colonial may have suggested that wording changes could be applied retrospectively, that was rapidly accepted as being in error. Policies issued before any changes continue to be governed by their original wording.

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Those issued after the changes were governed by their amended terms. Although there is some force in Lindale's comment that it never saw the policies after submitting proposals, because they were sent direct to the policy holder by Colonial, specimen policies were provided to Lindale at the commencement of its agency as were further copies when changes were made (although Mr Handley denied receiving the latter). It must also be the case that Policy Management saw the policies when it took assignments and became the beneficial owner and, of course, the changes should have been obvious enough to those such as Policy Management who had the opportunity to compare the two. It was not suggested that Colonial had any obligation to advise existing policy owners of changes in the terms of policies issued subsequently even if an insured effected policies at different dates. Further, Colonial gave every new policy holder a 14 day “free look” period within which to consider the terms of the policy and cancel the contract if it was unacceptable.

3. Mr Vaughan's comment also appears to overlook the fact that all the evidence suggests strongly that Colonial was largely unaware that Policy Management claimed to be the beneficial owner of nearly every one of the 3,518 policies, at least until about the time the agency agreement was terminated. As far as Colonial was aware, the

great majority of the policies were issued to employees of various companies. They or their employees were, on

the face of the policies, the owners of the policies and were responsible for the premiums. Only a handful of assignments to Policy Management had been registered before premiums ceased. Policy

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Management did not pay any of the premiums on any of the 3,518 policies directly. When an employer effected a group of policies for its employees the policies were issued with the company as the owner and the premiums were paid from a bank account in the name of the company. Even when ownership was transferred to Policy Management premiums continued through the same account as previously. Indeed, when Colonial visited a number of the employers in October 1995 it was told that the insurance had been sold on the basis that there would never be any cost to the employer or their employees and all employees were entitled to be insured irrespective of personal circumstances or positions. Under the Life Insurance Act 1908, s.58, Colonial is not affected by notice of any unregistered interest

Following on from that, though the way in which the scheme was set up and financed may now be somewhat clearer as the result of the filing of the affidavits by Messrs Vaughan and Theyers in this Court, it is clear that Policy Management, Jason and Lindale were all unaware of the policy wording changes until Mr Vaughan pointed them out in October 1995. Even then, there were no complaints about any detrimental effect of the changes until the initial notice of opposition in this case: all the negotiations following the discovery of the wording changes related to Policy Management's efforts to get access to cash withdrawals and Colonial's attempts to have the monthly premiums of about $2.5m reinstated (other than the cash withdrawal question being raised by Grant Samuel on 20

December 1995).

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A Pyramid Selling Scheme?

As earlier noted, the suggestion that Lindale's sale of the LifeWise policies and the financing of the premiums amounted to a “pyramid selling scheme” only surfaced in Colonial's submissions filed after the February 1997 hearing.

As a result, Lindale obtained leave in this Court to file an affidavit from a Mr Theyers, a chartered accountant and management consultant who has advised Lindale and Policy Management since early 1995. He said that the group employment schemes were not “pyramid selling schemes” as that term is defined in the Fair Trading Act

1986 s.24, because they are not “primarily an opportunity to sell an investment opportunity rather than an opportunity to supply goods or services” and there is not an increasing number of sellers.

He said that the group employee scheme operated by Lindale selling life policies to companies on their employees' lives. He claimed that those policies were beneficially owned by Policy Management or its subsidiaries. He said that Policy Management or its subsidiaries paid the premiums - although that does not seem to be borne out by

other evidence - and held a percentage of the value of the life cover for the company or its employees. It managed

the portfolio and procured finance to pay the premiums.

In respect of each assured, according to Mr Theyers both a LifeWise and a Whole of Life policy were generally issued, though of the 3,518 policies 1,171 were Whole of Life and 2,314 LifeWise and about 57% of the Jason/Lindale policies did not

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have both. The former was an investment policy with an element of life cover and was available for use as collateral for borrowing. The ability to borrow was essential to the group employees' scheme as it provided security for borrowings to fund future premiums. He said the partial cash withdrawal availability was a key feature as the cash supported the Whole of Life policy, so that that policy reached the “vanishing premium” point after a period. Policy Management was able to accelerate the point of self sufficiency by obtaining the partial cash withdrawal from the related LifeWise policy. At that point the policy could be traded or secured on an established international market. Lindale, he said, received commissions and bonuses from Colonial most of which it lent to South Pacific Treasury.

The number of policies under management was such that it could be effectively managed so that the Whole of Life policies did not need further premiums and there was no need to pay premiums beyond a point where the policies' value or security became sufficient to meet the future cost of the life cover. The result was that the policies would, on the death of the life insured, realise a sum considerably greater than the premiums and the cost of financing.

Mr Theyers said that the group employee schemes were able to sustain the continuing premium payments prior to the wording changes and were “not dependent on ongoing or escalating commission receipts” and were therefore not pyramid selling schemes. But, he said, the changes in the terms of the LifeWise policies meant that the group employment schemes became unviable and no longer capable of being financed because of “substantial reductions to the value of the portfolio of policies ... causing a combined reduction in security value of between $17m and

$20.4m.”

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He continued:

“Practically, the change imposing the Early Reduction Fee on Partial Cash Withdrawals eliminated the possibility of PML partially cashing the Lifewise policies to accelerate the vanishing premium aspect of the Whole of Life policies. Moreover, not only did CML seek to rely on this change to the policy wording in relation to policies issued after the change but also in relation to policies issued prior to the change. This had a serious effect on the viability of the Schemes. That is because an essential part of the Schemes was the ability to make a partial withdrawal from the Lifewise policies and to apply that partial withdrawal towards Whole of Life policies so that the Whole of Life policies

sold in conjunction with the Lifewise policies would reach vanishing premium point more quickly. Once the ability

to make partial withdrawals was impeded by the application of the Early Reduction Fee, the opportunity to link the two sorts of policy in that way was lost.”

Mr Theyers' description of the schemes set in place by Lindale, Jason and Policy Management, admitted only in this Court, is the clearest description in the evidence to date as to the way in which the scheme operated.

For the purposes of this appeal, I take the view that, on the evidence so far adduced, the scheme is not a pyramid selling scheme as defined by the Fair Trading Act 1986 s.24.

Conclusions

Because the evidence in the High Court and admitted on appeal was so considerable and, as earlier shown, the way in which the appellants and Policy

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Management approached the matter changed so radically from time to time, this judgment has been lengthened beyond what would normally be expected.

It is, however, now appropriate to summarise the position.

A matter which bulked largely in the evidence and the decisions in the Court below was whether the writing of Colonial's policies by Jason and Lindale and the way in which the premiums were paid were such as to require increasing business for the policies written to continue. Coupled with that were questions as to how the payment of premiums was being financed and whether Colonial knew of the scheme.

However, whilst it is understandable that Colonial would have been concerned about those matters in order to assure itself as to the sustainability of the scheme given that large numbers of policies and considerable premiums being generated and whilst it followed that the learned Master regarded the financing of the policies as being at the very heart of the case, in my view, as the evidence now stands, those matters are of lesser importance and are certainly not determinative of the appeal.

It is axiomatic that when any insured person effects insurance, they undertake a responsibility to pay the premiums

- at least for a period if it is a “vanishing premium” policy - and take the consequences of probable lapse for default in payment. How insured persons meet premiums is a matter for them.

Naturally an insurer is concerned to try and ensure the continuation of the policy because policies such as those under consideration only become profitable for an

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insurer after they have been in force for a number of years. Even so, an insurer accepting risk under policies such

as these also accepts that the policy will be unprofitable if it is terminated at an early date. That applies even where there is a large block of policies for sizable amounts involving considerable premium obligations such as those being considered in this case.

So in my view it matters little how the policy owners or those paying the premiums on their behalf intended to finance those payments.

As a sidelight, however, I take the view that Colonial could not profess complete ignorance of the way in which the scheme was being funded and operated. Not only is it a highly experienced insurer which must have been aware of the international market to which Mr Theyers referred, but it was also given a certain amount of information by Lindale and its advisers in response to its inquiries, the most explicit of which was Lindale's letter to Colonial's solicitors' of 11 March 1995.

Turning from that to the relationship between Colonial and its policy holders, I would place little reliance on the correspondence which passed between Policy Management and Mr Bhanabhai's firm on the one hand and Colonial and its solicitors on the other during the period September 1995-April 1996. That seems no more than a commonplace negotiation in which Colonial was endeavouring to obtain reinstatement of the considerable premium stream and Policy Management was endeavouring to obtain access to cash withdrawals on the policies.

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Of considerably more importance is that it is clear that Colonial and its policy holders are bound by the wording of the Whole of Life and LifeWise policies. Some will be in the original wording. Those issued after the dates earlier discussed will be as amended. All have effect and bind both insurer and insured according to their tenor. Colonial cannot rely on the wording changes introduced after December 1994 as regards the charging of an early reduction fee if the policy was issued prior to that date. Similarly, holders of policies issued after December 1994 cannot resist the application of the early reduction fee in terms of the document. Colonial has, of course, the right to change the wording of the policies it issues from time to time as envisaged by the agency agreement and the fact that the holder of a Colonial policy fails to check the wording of that policy against one effected later is entirely a matter for the policy holder. It was not argued that Colonial was under any obligation to point out changes which were plain on the face of the policy to someone who effected two policies in that fashion.

That applies just as much to Policy Management as to any other policy owner. No duty could be imposed on Colonial not to change the terms of its policies just because Policy Management had set a scheme in place which was reliant on the policies containing certain terms, even if those changes in wording caused it loss or caused the scheme to founder. That is particularly the case when Colonial was largely unaware of Policy Management's interest in the policies until after 7 August 1995.

That leaves for consideration the position as between Colonial and its agents and in particular whether Colonial

had an obligation to inform its agents of changes in

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the wording of the policies they were selling and, if so, whether it breached that obligation.

There can be no doubt that as a matter of business practice, as part of the principal-agent relationship and under the code of practice for life insurance officers, Colonial was under an obligation to advise its agents of changes in the wording of its policies.

However, in considering the crucial question on this appeal - whether Colonial has demonstrated that Lindale received advice of the changes, particularly that relating to the early reduction fee - there is a sharp difference in the parties' evidence.

The principal document to which Colonial points as satisfying its obligation is the client services bulletin of 28 April

1993. It appeared to be common ground that if Lindale received that bulletin it was sufficiently informed of the changes to the policies and of the way in which the early reduction fee would be dealt with in the future. As evidence that Lindale received that bulletin, Colonial relied on a number of matters including:

(1) The monthly brochures it sent to all agents together with its regular bulletin, changes to the rate book and the amended computer disks, the last being required to show the position to prospective insured persons at years 3, 5, and 10.

(2) Its right under the agency agreement to amend the policies, which should have alerted agents to the likelihood that such would occur.

(3) Its proposal of 15 March 1994 and the acknowledgement which it contained. Page 64

(4) Lindale's letter to Colonial of 18 April 1994.

(5) Other correspondence and discussions between the parties, particularly those relating to the financing of the policies, and the frequent discussions between Messrs Handley, Vincent and Morgan.

(6) Importantly, the obligation on the agents to familiarise themselves with all material sent by Colonial to ensure that they were not misrepresenting policies to members of the public.

Against that, however, Mr Handley said that he was unaware of the changes. There are, in my view, two

important pieces of evidence bearing on that question.

The first is that Mr Handley (and Mr Lambourne) say, on oath, that they had never previously seen the 28 April

1993 Bulletin and held no copy in their companies' files. When they acknowledged receiving so much of the material just referred to, it would be extraordinary if that Bulletin, the one particularising the policy wording changes crucial to this case, was the only document never received by them, and that the changes in the computer disks did not highlight the change.

However when a deponent is prepared to risk possible prosecution for perjury and the opposing party is unable to prove definitively that the critical document was received, the situation is not one where the well known dictum in Eng Mee Yong v Letchumanan [1980] AC331,341 applies.

The second point is that the principal change in the LifeWise policy relevant to this appeal occurred in December

1994-January 1995 with effect from the latter month. It thus occurred after Colonial had discontinued offering the

LifeWise policy generally and during the period of about three months when Lindale and Colonial were

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negotiating as to whether Lindale alone would be permitted to continue to offer LifeWise. That matter was resolved at the end of 1994 and Lindale continued to sell LifeWise for the balance of the agency. It is conceivable, however, that information from Colonial about the change was not received by Lindale during this period although that, too, seems unlikely given that Lindale was the only company where continued sales of LifeWise were being contemplated.

The upshot of all of that, however, is that as the evidence now stands Colonial is unable to demonstrate that Lindale might not have a defence to its application for summary judgment in that it is unable to demonstrate that it complied with its obligations to inform Lindale of all changes in its policies.

That does not mean, however, that Lindale should be wholly successful on this appeal. The change in approach to the early reduction fee only occurred from about late 1992-early 1993 and the change in the cash withdrawal policy only occurred following the alterations in the policies in December 1994-January 1995. For the reasons earlier discussed, those changes could not possibly affect policies issued prior to those dates and could not affect policies issued after those dates which were not part of the arrangement which Lindale had with Policy Management. In terms of the agency agreement, it therefore follows that Colonial was entitled to reverse payments it had made to Lindale following termination of the agreement. The result is that there must be money payable by Lindale to Colonial. Unfortunately, the evidence did not deal precisely with this issue so it is not possible to determine the amount incontestably due. For that reason, the appeal should be allowed on quantum but dismissed as far as liability is concerned.

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Although it may now perhaps be only peripheral given that finding, the final matter which should be covered is Lindale's submission that Colonial was not entitled to debit the bonuses and ex gratia payments made to it in terms of the multi-agent agreement.

As earlier noted, Clause 5.1 of that agreement required commission, bonuses, ex gratia and other payments to be paid into the commission account while Clause 5.4 gave Colonial the power to vary rates of commission, remuneration or bonus, particularly where policies were altered. A letter of 15 March 1994 which formed part of the contract set out the rates of commission clawback on policies. Clause 5.5, earlier set out, contained an agreement by the agent that policies would be subject to commission writeback if premiums were not paid within one month and the policy had been in force for less than two years.

Lindale asserted that because, in its terms, Clause 5.5 only dealt with commission, it debarred the writing back of bonuses, ex gratia or other payments. However, in the view I take of the case, such may not be the case. Clause

5.5 dealt with the specific situation of the writing back of commissions if certain conditions were met. It did not expressly deal with bonuses and ex gratia payments and, if bonuses were paid because particular levels of performance were achieved then, if subsequent events retrospectively reduced that level of performance, it may be the case that the parties would have intended that bonuses would be similarly reduced and Colonial would therefore be able to recover any bonuses then seem to be overpaid.

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Similarly, although the parties did not elaborate on what ex gratia payments may have been made, it may be that the same formula should apply.

However, as the other members of the Court have noted, that interpretation may not be free from doubt and may be affected by the subsequent conduct of this case, particularly any application for rectification and accordingly no final decision shuld be reached on that matter on this appeal.

In summary therefore, I would allow the appeal on quantum but dismiss it as far as it relates to liability of the appellants to the respondent.

I concur in the orders proposed by Blanchard J as to the disposal of the appeal.

.................................................

WILLIAMS J.

Solicitors:

Bell Gully Buddle Weir, DX CP 20509, Auckland

_{Kensington Swan, DX CP 22001, Auckland}

Appellant's Counsel: J G Miles QC and D J Cooper

Respondent's Counsel: G P Barton QC and J L Land

End of Document