New South Wales Supreme Court CITATION : Coco v Westpac Banking Corporation [2010] NSWSC 457 HEARING DATE(S) : 29 April 2010 JUDGMENT DATE : 14 May 2010 JURISDICTION : Equity JUDGMENT OF : Tamberlin AJ DECISION : On its proper construction the Westpac Guaranteed Portfolio Service Asset Allocation Advisory Agreement does not oblige Westpac to pay the plaintiff the sum of $3,008,183.72 claimed but Westpac is obliged to account to the plaintiff for $10,024,567.06. CATCHWORDS : CONTRACT – Construction – Commercial agreement – Guaranteed Portfolio Service – Meaning and extent of guarantee provision in investment scheme – Meaning of "Fixed Income Portfolio Value" – Meaning and effect of formula to calculate that value. LEGISLATION CITED : Uniform Civil Procedure Rules r 28.2 CATEGORY : Separate question Australian Broadcasting Commission v Australasian Performing Rights Assn Ltd (1973) 129 CLR 99 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 CASES CITED : Franklins Pty Ltd v Metcash Trading Ltd 264 ALR 15 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 PARTIES : Salvatore Coco (P) Westpac Banking Corporation (D) FILE NUMBER(S) : SC 2009/298753 COUNSEL : J C Kelly SC with E T Finnane (P) I Jackman SC with C Colquhoun (D) SOLICITORS : Uther Webster & Evans (P) Mallesons Stephen Jaques (D) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST TAMBERLIN AJ FRIDAY, 14 MAY 2010 2009/298753 SALVATORE COCO v WESTPAC BANKING CORPORATION JUDGMENT 1 HIS HONOUR: These reasons concern the determination of a question ordered by the Court under r 28.2 of the Uniform Civil Procedure Rules to be decided as a separate question namely whether: " Upon the proper construction of the Westpac Guaranteed Portfolio Service Asset Allocation Advisory Agreement entered into between the plaintiff and the defendant on or about 25 June 2007, and in the events which have happened, is the defendant obliged to: (a) pay the plaintiff $3,008,183.72 (or any other amount and if so what sum) in respect of the Guaranteed Payment Amount referred to in that agreement (minus any outstanding bank fees and charges) on 25 June 2012; and (b) account to the plaintiff for $10,024,567.06 (or any other and if so what sum) in respect of the redemption of the zero coupon bonds made the subject of the agreement?" Overview 2 In about mid 2007 Westpac Banking Corporation ("Westpac") offered a structured equity investment known as the Westpac Guaranteed Portfolio Service (the "GPS"). In general terms the Service had the following features as set out in a brochure published by Westpac. The main features of the GPS are described as follows: " Westpac's Guaranteed Portfolio Service (GPS) offers a unique investment opportunity. Access a diversified portfolio of six wholesale managed funds from BT, the 2006 Fund Manager of the Year, and a range of special features including 100% finance and 100% capital protection at maturity. Key Features of GPS 1 Exposure to award-winning Funds Gain exposure to a choice of six wholesale managed funds from BT ('Funds') the 2006 Fund Manager of the Year. These Funds offer investors exposure to a number of asset classes and investment styles, including Australian and International equities funds and a property securities fund. 2 100% lending Subject to credit approval, Westpac will lend you 100% of the investment amount as well as 100% of your first year's interest, thus helping to minimise your initial cash outlay. The minimum investment is $500,000 per investor. For investors who choose to invest in more than one Fund, the minimum per Fund is $250,000. 3 Daily liquidity GPS allows you to sell your funds daily at any time up until the Maturity Date. An early redemption fee applies for redemptions made within the first year. 4 Capital protection Westpac guarantees that your initial investment amount will be 100% protected at maturity. 5 Profit lock-in GPS has a profit lock-in feature, which means when the Fund's performance reaches a pre-defined level (the 'Profit Trigger') your capital protected amount will automatically increase by 20% of your initial investment. 6 Tax effectiveness Where a GPS investor takes advantage of Westpac's finance package to acquire units in these Funds, a portion of the interest cost may potentially be tax deductible to certain GPS investors. Suitable investors GPS may be suitable for wholesale investors who: Have limited readily available capital to help accumulate more wealth or diversify their portfolio Are looking to diversify their investment portfolio and reap the benefits of gearing by taking advantage of the 100% finance package available Are approaching retirement and want to access assets with growth potential with the safety of capital protection at maturity. The GPS Funds Build a diversified investment portfolio by choosing from the following selection of Funds on offer: BT Wholesale Core Australian Share Fund BT Wholesale Focus Australian Share Fund BT Wholesale MicroCap Opportunities Fund BT Wholesale Asian Share Fund BT Wholesale Core Global Share Fund BT Wholesale Global Property Securities Fund Investing in GPS and how it works GPS is an investment mandate that you give to Westpac to manage your investment in such a way that ensures it is worth at least its initial value at maturity. Under the terms of the GPS, Westpac is the Asset Allocation Advisor who implements a Dynamic Portfolio Management strategy. Dynamic Portfolio Management is a capital preservation technique which involves the active allocation between 'active' and 'passive' assets. Under the GPS, the active asset is the Fund and the passive asset is a zero coupon bond issued by Westpac ('Westpac Bond'). When you enter into the GPS, 100% of the investment capital will be placed into the Fund, thus offering the greatest potential for capital growth. However, should the value of the Fund drop to a point where a Sell Trigger is reached, the exposure to the Fund will be reduced and the exposure to the Westpac Bond will be increased. Conversely when the value of the Fund recovers and a Buy Trigger is reached, the exposure to the Fund will be increased and the exposure to the Westpac Bond will be decreased. These triggers are defined as the percentage fall in the value of the Fund that will result in the value of the Dynamic Portfolio falling to a value equal to the Bond Floor. The Dynamic Portfolio is an investment portfolio comprising the investment in the Fund and the Westpac Bond. The Bond Floor is the present value of the capital protected amount. The table below shows the Buy, Sell and Profit Triggers for each of the Funds. Managed Fund Sell Trigger Buy Trigger Profit Trigger BT Wholesale Core Australian Share Fund 12% 20% 45% BT Wholesale Focus Australian Share Fund 14% 23% 45% BT Wholesale MicroCap Opportunities Fund 14% 23% 45% BT Wholesale Asian Share Fund 14% 23% 45% BT Wholesale Core Global Share Fund 14% 23% 45% BT Wholesale Global Property Securities fund 12% 20% 45% At Maturity On the Maturity Date, you can either: 1 Continue to hold your units in the Fund without capital protection. Westpac may offer a capital protected investment with similar terms at that time. 2 Sell your units in the Fund. In either case, if the value of the Dynamic Portfolio on the Maturity Date is less than your original investment amount (adjusted for any early redemptions), Westpac will make a guarantee payment to you for the difference. If the Dynamic Portfolio contains any Westpac Bonds on the Maturity Date, the Westpac Bonds will be redeemed and the proceeds will be paid to you. For investors that have taken out an Investment Loan or Interest Loan, on the Maturity Date you can either: 1 Repay the loan(s) from your own funds and continue to hold your units in the Fund 2 Repay the loan(s) using the proceeds from the redemption of the Dynamic Portfolio. Since Westpac guarantees that the value of the Dynamic Portfolio will be at least equal to your initial investment, you will not be required to repay the principal of the Investment Loan from your own funds, irrespective of the performance of the Fund. If the Dynamic Portfolio contains any Westpac Bonds on the Maturity Date, the Westpac Bonds will be redeemed and the redemption proceeds will be used to repay your loan(s). Borrow to invest Borrowing to invest presents investors with many potential benefits, including the magnification of investment returns, the ability to diversify across more asset classes and the potential for a portion of the interest costs to be tax deductible. The table below outlines the interest rates and payment, options available with the GPS investment Loan. Interest Option Description Indicative Interest Rate * Variable Pay interest monthly in arrears at the varying monthly interest rate. 8.70% pa Fixed to 24 June 2008 Pay interest annually in advance initially on 25 June 2007 and thereafter on each 25 June for the term of the Investment Loan; at an interest rate which is fixed until 24 June 2008 and which may be varied each 25 June thereafter. 8.55% pa Fixed for the term Pay interest annually in advance initially on 25 June 2007 and thereafter on each 25 June for the term of the Investment Loan at an interest rate which is fixed for the term. 8.50% pa * Interest rates are indicative only. Actual interest rates on the Investment Loans will be determined by Westpac on 18 June 2007. Interest Loan Facility To help fund the first year's interest costs associated with your GPS investment Loan, you can also apply for an interest Loan Interest is paid annually in advance and the principal is paid on maturity in one year's time. You may apply for another Interest Loan each subsequent year. The interest rate on the GPS Interest Loan is currently fixed for one year at 8.55% p.a." 3 In June 2007 the plaintiff, Salvatore Coco ("Mr Coco") decided to participate in the GPS and he borrowed $10 million from Westpac which was used to purchase units in five separate BT managed funds on his behalf as follows: BT Wholesale Focus Australian Share Fund ("Focus") $2,000,000 BT Wholesale MicroCap Opportunities Fund ("Smaller") $2,000,000 BT Wholesale Asian Share Fund ("Asian") $2,000,000 BT Wholesale Core Global Share Fund ("Core") $2,000,000 BT Wholesale Global Property Securities Fund ("Property") $2,000,000 4 Mr Coco's investments lost value in the second half of 2008 and in early 2009 as a consequence of the large falls experienced across Australian and global markets due to the financial crisis. During this period, as a result of an application of "Sell Triggers", each of Mr Coco's managed investments under the GPS was progressively switched in accordance with the GPS to the UBS Cash Fund and then to the Westpac Bonds with a maturity date of 25 June 2012 which corresponded to the maturity date under the scheme. These zero coupon bonds were purchased at varying times and as a consequence the return associated with each of these bonds varied. Since the maturity value of the bonds is known, or fixed, when purchased then the value of the entire position of Mr Coco could be determined at any point in time by aggregating the value of each bond and then multiplying the amount by the relevant discount factor reflecting time to maturity and prevailing interest rates. From late 2008 to early 2009 the whole of Mr Coco's investment was transferred from what was known as the active asset portfolio to the fixed income portfolio pursuant to the terms of the agreement entered into by him with Westpac. 5 In these reasons, in order to determine the question raised, it is not necessary to set out the details of each dealing with respect to each fund over the period of redemption of the units. These dealings are described in detail in an affidavit by Mr Collison of Westpac. It is sufficient to consider the aggregate position whereby the total amount redeemed in the managed funds Units was $7,791,168 which was used to purchase zero coupon bonds with a maturity value of $10,024,567 on 25 June 2012. Set out below is a table which summarises the present position with respect to each of the Funds and the conversions which have taken place. Summary of Present Position Managed Fund No of Units Redemption Value Unit Value of Zero Coupon Bonds on Maturity Value of Zero Coupon Bonds on Maturity BT Wholesale Asian Share Fund 1,309,243.25 $1,576,196.14 $1.536192 $2,011,249.55 BT Wholesale Core Global Share Fund 1,734,605.38 $1,553,551.44 $1.156822 $2,006,628.72 BT Wholesale Focus Australian Share Fund 1,224,964.78 $1,565,100.49 $1.638279 $2,006,833.91 BT Wholesale Global Property Securities Fund 1,638,404.19 $1,547,880.51 $1.219077 $1,997,340.49 BT Wholesale Smaller Companies Fund 1,084,598.69 $1,548,440.24 $1.846318 $2,002,514.40 TOTAL 6,991,816.29 $7,791,168.82 $1.4337 $10,024,567.07 6 On the maturity date of 25 June 2012 it is common ground that Westpac will be obliged to account to Mr Coco for an amount of $10,024,567.07 and this will be done in part by discharging the loan to him of $10 million. In other words, assuming that the funds remain in Westpac Bonds, the parties agree that Question 1(b) should be answered in the affirmative. Relevant Terms 7 The GPS has a number of interrelated definitions which must be considered together with the definition of Fixed Income Portfolio Value. 8 Under the GPS Asset Allocation Advisory Agreement, Westpac in clause 3.1 agrees to pay to the investor an amount equal to the guaranteed payment amount for a dynamic portfolio as soon as practicable after the guarantee payment date. That date is the maturity date. 9 The guaranteed payment amount is defined to mean, in respect of a dynamic portfolio, the greater of (a) zero; and (b) the guarantee amount minus the dynamic portfolio NAV on the maturity date. The guarantee amount, for a dynamic portfolio, means the initial guarantee amount as at the investment date subject to certain deductions and, in this case, the relevant amount is $10 million. 10 The dynamic portfolio NAV is defined to mean in respect of a date the sum of the active asset portfolio value and the fixed income portfolio value. 11 It is common ground that there is no present active asset portfolio value and the dynamic portfolio NAV is now solely constituted by the "fixed income portfolio value" which is the critical definition for purposes of the present determination. 12 The expression "Units" is defined to mean units in each managed fund specified in the application form completed by an investor. 13 The expression "fixed income portfolio value" is defined to mean: "… for a day, the aggregate value of the fixed income assets in the fixed income portfolio on that date, which is to be calculated by multiplying the number of Units invested in zero coupon bonds by the market value for such zero coupon bonds … as determined by the Asset Allocation Advisor [Westpac] in its sole discretion from time to time." [Emphasis added] 14 The term "fixed income asset" means Westpac Bonds having a maturity on the maturity date and/or cash and/or units in a cash management trust or any combination of these assets. The term "fixed income portfolio" means in respect of a dynamic portfolio, the fixed income assets relating to that dynamic portfolio held by the investor. The expression "active asset", in respect of a dynamic portfolio means Units in the managed fund relating to that dynamic portfolio and "dynamic portfolio" is defined to mean each portfolio comprised of the active asset portfolio and the fixed income portfolio. There is a separate dynamic portfolio for each managed fund. Evidence 15 Professor Henker, Professor of Finance at Bond University and University of New South Wales, was called for Mr Coco. He gave evidence that in his opinion Westpac had not followed the direction in the definition and had not calculated the value in accordance with the formula because it had divided the undiscounted face value of the bonds by the number of Units and therefore produced the erroneous result that the value of each individual zero coupon bond purchased from the redemption funds would have a market value above a figure of $1. He said that the Westpac approach is wrong because a promise to pay $1 on maturity can only ever have a market value of no more than $1 and the market value of a zero coupon bond on maturity in the present circumstances cannot vary according to the source of funds used to buy the zero coupon bond which in this case is the redemption value of the Units in the five funds. The value therefore in accordance with the prescribed formula must be $6,991,816 that is to say the aggregate number of Units invested in the Funds multiplied by one dollar. 16 Mr Collison was called by Westpac. He is the Associate Director of the Fund Derivatives Section for Managed Funds for Westpac. His evidence is that when Westpac needs to "rebalance" and responds to a sales trigger there is a pool of money generated from the redemption of the Units and these moneys are invested in zero coupon bonds in the present case. The purchase price for the bonds is the amount which invested on the purchase date which will then accrue in value to a fixed maturity date without any interest payments in the interim. In this case that date is 25 June 2012. The face value on this approach is greater than the purchase price because it must incorporate a return for the investment. Mr Collison was cross-examined in relation to the consequence that on his approach the value of each zero coupon bond purchased would have a market value ranging between in round terms $1.15 and $1.84 as shown in the Summary Table set out in [5] above. " Mr Collison : A This promise to pay $2,002,514.40 [speaking in relation to the BT Smaller Companies Fund] … is our promise to pay so we will pay dollar for dollar at the face value that amount. Q What you do is you assume the promise to pay at the $2.002 figure and divide that by the number of Units, correct? A Yes. Q And by that means purport to identify the market value in the zero coupon bonds? A Yes. Q You say that produces a result in which the market value for Westpac's promise to pay zero coupon bonds on maturity, referable to that parcel, is a premium of some 80-odd per cent per zero coupon bond unit? A No, it is not a premium. Zero coupon bonds, per se, do not trade in units . They trade as dollar amounts. So, when the bonds were purchased they were purchased for a dollar amount to receive a dollar amount at a future date in each case at maturity. That is how bonds trade. They do not trade in terms of units. So, that argument holds if you would suggest that each dollar value was assigned exactly one unit. But clearly in this case, since units are derived as the original Units invested in the underlying managed funds for dollar for dollar, as in a dollar investment or a dollar face value, it does not translate to a dollar per unit of bond . It only translates where the dollar equates to one unit investment as defined Units in the agreement, but otherwise it is not relevant. …………… A … I determine the face value on a per unit basis for zero coupon bonds purchased and that face value is not one dollar, it is something different to one dollar . If you, I guess, correspond the unit, the zero coupon bond invested with the underlying managed fund, so you get a level of unit price referred to in my affidavit, similarly you can bundle the whole lot up and trade in aggregate and say there is 10 million and a bit worth of face value associated with the bonds. There is 6,991,000 Units originally subscribed for the underlying funds. So the face value must be $1.43 or whatever the number ends up being on a per unit basis … …………… A … Because we are talking about a distinct bond as we have defined it in terms of units as opposed to a bond that's generally purchased in the market. So as we apply it to the bonds that have been purchased and stated on a per unit basis, the value has to then be stated on a per unit basis so the discount factor would have applied to the face value on a per unit basis for the bond and then multiplied by the number of units . …………… Q So you contend do you, you maintain the position that by multiplying the number of units, the agreed $6.9 million figure with the market value as at maturity, undiscounted face value, you end up with a number which in this case ranges from 1.15 to 1.8 something? A Yes. Q Per face value dollar of each zero coupon bond? A Per unit. So the definition refers to the market value for such zero coupon bonds as determined by the asset allocation advisor. The definition here refers to the market value for such zero coupon bonds as determined by the asset allocation advisor in his sole discretion from time to time. … The market value or the value of those bonds on a per unit basis is referrable to the discount factor you refer to, together with the face value of those bonds on a per unit basis, so the market value for such bonds … as I determine it is a discounted factor multiplied by the face value on a per unit basis for those bonds. …………… A … I come back to my original point that the bonds are traded by reference to the face value and the discount factor , so as it relates to the face value, applying the discount factor which would apply equally to any bond at maturity is correct. So I don't disagree in that respect. But suggesting that the value of the bonds, the face value of these bonds as we've defined them and as outlaid in the agreement is a dollar is incorrect , because what is correct is that there is a face value associated with those bonds, there is a number of Units as we've defined them with respect to the agreement which leads to ultimately a dollar face value per Unit in terms of the agreement and that doesn't translate to a $1 per unit. …………… A What I am suggesting is that the Unit in this context translates to a unit per unit price of something greater than one. And so when you apply a discount factor to that which you can apply universally to any bond as you suggest with the same tenor, then you end up with a per unit market value." [Emphasis added] Legal Principles 17 There is no contest as to the applicable legal principles concerning commercial contracts. Where the language is unambiguous the Court must apply the language used. If it is open to two constructions, then that will be preferred which avoids capricious, unreasonable, inconvenient or unjust consequences: Australian Broadcasting Commission v Australasian Performing Rights Assn Ltd (1973) 129 CLR 99 at 109. A commercial contract must be given a businesslike interpretation and the contract must be read so as to determine what a reasonable commercial person would have understood by the language used having regard to surrounding circumstances known to the parties and the purpose and object of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]; Franklins Pty Ltd v Metcash Trading Ltd 264 ALR 15; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350. 18 It is important to have regard to the commercial circumstances which the document addresses and the objects which it is intended to secure and preference must be given to a construction supplying a congruent operation to the agreement read as a whole: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at [15] – [16]. Submissions for the Plaintiff 19 A zero coupon bond is a promise to pay a certain sum on a nominated future date without interest payments during the period up to maturity. On maturity the bonds will have a market value equal to their face value and this will include accrued interest on the purchase price of the bonds. At the time of issue the bonds are sold at a discount which reflects the prevailing interest rates and on maturity the bank pays the undiscounted face value of the bond. The account of Westpac in relation to Mr Coco's facility stated that purchases of zero coupon bonds using the proceeds from redemption of the plaintiff's Units in the managed funds totalled $7,791,168 which had a zero coupon bond value, on maturity, on 25 June 2012 of $10,024,567. It is common ground that on the maturity date the guarantee amount is $10 million. 20 The plaintiff submits that to calculate the "fixed income portfolio value" at the maturity date it is necessary to apply the definition which mandates that the figure must be calculated by multiplying the number of Units invested in zero coupon bonds by the market value for such zero coupon bonds as determined by Westpac in its sole discretion as at the maturity date. 21 It is common ground that as at the maturity date the number of Units invested in zero coupon bonds is $6,991,816. It is then necessary to multiply this figure by the market value of the zero coupon bonds. 22 The "market value of such zero coupon bonds" is the market value of zero coupon bonds of the same tenor (that is to say, bonds which mature on the same date) which must be valued at $1 per bond because this is what the paying entity must pay $1 for every dollar on its promise to pay to redeem the bonds. Accordingly, on this basis it is said that on the maturity date the plaintiff's fixed income portfolio market value is $6,991,816, that is, the total number of Units invested in the Funds multiplied by $1 which is the market value on maturity of a promise to pay $1. The resultant figure is less than the guaranteed amount of $10 million and therefore Westpac must pay to Mr Coco the difference of $3,008,184 in addition to the obligation to pay the sum of $10,024,567 and the question for determination must therefore be answered in the affirmative. 23 Counsel submits that this result is in accordance with principles applicable to the construction of commercial agreements having regard to not only the text but the surrounding circumstances and the purpose or object of the transaction and it represents a business common sense construction to achieve a commercial operation. The starting point must always be the language used and, if different constructions are open, preference will be given to one which avoids capricious unreasonable or uncommercial consequences. 24 There is said to be no ambiguity in the present case because the expression market value of a zero coupon bond on its maturity date can only admit of one construction, namely, that the value of each bond at its highest can only be its face value of $1. The definition is not concerned with the bond purchase cost plus accrued interest because in that case there would be no reason to refer to market value for "such" zero coupon bonds. Counsel refers to the agreement of the parties that there must be a determination of a unitary market value as opposed to simply multiplying the number of units in the managed funds by the bond purchase cost plus accrued interest. The relevant unitary monetary value is the value of a zero coupon bond of equal tenor conformably with the requirement to apply the agreed multiplier to the discounted face value of the bond. 25 The correct approach, it is submitted, it to identify the figure to be multiplied by the agreed number of Units and this results in the fixed income portfolio value. It is contrary to the calculation formula prescribed to first select the fixed income portfolio value and then work in reverse ("reverse engineer" the outcome) by dividing the face value on maturity to derive a unitary value regardless of the market value of equivalent zero coupon bonds. The exercise of a discretion to value in that way involves valuation of the wrong property. 26 Counsel further submits that the approach taken by Westpac will also result in an unreasonable and capricious outcome because it produces tax consequences which would mean that there was no guarantee of an effective 100 per cent capital protection at maturity since a substantial part of the amount is taxable as interest. That is a non commercial consequence and such a construction should therefore not be adopted. Submissions for Westpac 27 Counsel firstly directs attention to the first phrase in the definition of fixed income portfolio value, namely, the reference to "the aggregate value of the Fixed Income Assets in the Fixed Income Portfolio on that date", and submits that this makes it clear that what is to be valued is the "aggregate" amount in the fixed income portfolio on maturity. The case for the defendant, he says, does not give due weight to this first part of the definition which is the end result and objective of the exercise and Mr Coco incorrectly assigns overriding importance to the remainder of the definition which goes to the way in which the end result, the aggregate value of the fixed income assets, is calculated. Counsel observes that, in his affidavit, Professor Henker does not advert to the first part of the definition of fixed income portfolio value, which states what it is that has to be valued. Rather, he exclusively focuses narrowly on the language setting out the calculation exercise. He does not in his affidavit refer to any other definition in the scheme or examine the general purpose of the scheme. 28 Secondly, the plaintiff's approach only focuses on one element in the definition, namely, the multiplication exercise. 29 Thirdly, the approach is based on a wrong assumption that the per unit market value for the zero coupon bonds at the maturity date must be $1. This is based on the evidence from Professor Henker which is incorrect that the value of a zero coupon bond in this case on maturity must be its face value of $1. 30 Fourthly, there is nothing in any of the provisions of the GPS which requires that market value of zero coupon bonds must be $1 on the maturity date. It is silent on this point. 31 Fifthly, if the plaintiff's construction is correct, the fixed income portfolio value would be entirely unrelated to the actual value of the underlying investments and that value is ignored in that construction. The submission that the market value of the coupon bonds is not related to the underlying amount invested in those bonds arising from the redemption of the Units in the managed funds is wrong. 32 Sixthly, the argument advanced for Mr Coco would produce the commercially unrealistic result in this case that Westpac is obliged to pay him at least $13 million on 25 June 2012 regardless of the underlying performance of the market. This, in substance, imposes an obligation in the circumstances to achieve a guaranteed risk free enhancement of 30 per cent in the amount of the initial investment over five years. This is unlikely to be the intended commercial result because it extends the obligation beyond protecting the initial investment. Reasoning 33 The parties agree that a strict literal interpretation of the calculation method will not work because it will result in an absurd figure. If one multiplies the number of Units (6,991,816) by the market value of all the bonds ($10,024,567) a figure of about $70 billion will result. Therefore, some adjustment must be made to the calculation formula to give a sensible commercial operation to the formula. The parties agree that it is appropriate therefore to ascertain a unitary value for each zero coupon bond. 34 The subject matter to be determined is the "aggregate value of the fixed income assets in the fixed income portfolio". The calculation exercise is designed to achieve that result. This is a matter to which insufficient emphasis was directed, in my opinion, on behalf of the plaintiff or by Professor Henker. 35 It is agreed that the number of Units for the purpose of the definition is 6,991,816.28 being the number of Units invested in the Trust and switched to zero coupon bonds. 36 It is then necessary to determine the market value for "such" zero coupon bonds. The word "such" is important because it directs attention to the fact that the definition is concerned with "Units invested" so that the latter part of the definition can be read: "… by the market value for zero coupon bonds which were purchased from the funds resulting from units which have been redeemed." 37 It does not strictly make sense to refer to the concept of "Units invested" in coupon bonds because what is invested is the value of the redeemed Units, that is to say a conversion to a cash figure, in this case an aggregate figure of $7,791,168, and then an investment in zero coupon bonds. Accordingly, it is appropriate to calculate the market value by reference to the amounts redeemed from the units. The market value of each coupon bond therefore on the maturity date is ascertained by dividing the market value at maturity by the number of Units originally invested and this will give the missing integer in the multiplication exercise. The word "such" serves to link the market value for the zero coupon bonds with the underlying value of the "Units invested" and it is by reference to the underlying units that the market value for the zero coupon bonds is to be determined. In this case that result is $1.43 per unit looking at the overall exercise (10,024,567 divided by 6,991,816 to give the aggregate unit bond value on maturity). It is not correct to ignore the underlying value of the Units which were used to make the investment in the zero coupon bonds as submitted for the plaintiff. 38 The submissions for Mr Coco do not give due weight to the purpose and limited protective reach intended to be afforded by the guarantee. The approach taken on his behalf concentrates unduly on the latter part of the definition in isolation. It does not pay sufficient attention to the important opening phrase in the definition which sets out the objective of the exercise. Nor does it give due weight to the fact that the coupon bonds on the market are traded in dollar amounts and not as units. I do not agree that the face value of each zero coupon bond is equivalent to its market value at $1. Rather, in this case using the aggregate figure it has a market value in the order of $1.43. The agreement is silent as to any requirement that the unit bond coupon cannot be worth more than $1. 39 For the above reasons I prefer the submissions for Westpac. I consider that on the maturity date the number of units invested in zero coupon bonds multiplied by the market value as determined by Westpac will be $10,024,567 less any fees, expenses or liabilities as at that date. 40 Since the guarantee amount is $10 million and the dynamic portfolio NAV is in excess of that amount the guaranteed payment amount on maturity will be zero. 41 The questions asked must therefore be answered as follows: 1(a) No. (b) Yes. 42 In relation to costs the plaintiff is ordered to pay the costs of the defendant. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.