Correspondence: 05/12/2000 - Letter from Me Jeremy Lever QC to Mr Alan Nash, 5 Dec 2000 p align = right> Monckton
Chambers
5th December 2000
Mr Alan Nash
The Equitable Assurance Society
Walton Street
Aylesbury
Bucks HP21 7QW
Dear Alan,
- I hope that it wll be
helpful to you if I let you know my own conclusions about the "legal issue"
after the discussion that we had on Friday, which I found very useful in clarifying
my own thinking. As always, I write exclusively in my capacity as a member
of the Society and not in a professional legal capacity.
- The point that you made
about solvency requirements seemed to me to be of the greatest significance.
It raised in my mind the question whether the non-GAR policies under which
contributions have been paid between 1989 and mid-2000 can give a competitive
return if they are weighed down by the cost of satisfying the more onerous
solvency requirements that will be applicable to, and only to, the GAR policies,
under some if which further contributions continue to be paid. While a purchaser
of the Society may be able to find a way of getting the non-GAR policies converted
into new policies that will not suffer from that disadvantage, I surmise that
that would mean crystallizing the immediate loss on the non-GAR policies and
that a purchaser would greatly prefer that the decision of the House of Lords
was essentially reversed rather than having merely to be circumvented for
the future.
- At the risk of being
a bore, I venture to stress certain points, partly because some of them emerged
as a result of what was said at the meeting but were, perhaps, not fully articulated
at the meeting, partly because not everyone at the meeting appeared to find
some of the points easy to grasp and partly because I am conscious of the
fact that I did not myself express the chain of argument as clearly as, I
hope, I do below.
- To imply a term
into a contract one has to look at the situation as it was when the contract
was made, including what was then forseeable.
- When the GAR policies
were being marketed I do not think that anyone would have forseen, let
alone assumed, that the GAR option would be neutralized by the attribution
to a GAR policy of one terminal bonus if the GAR option was not exercised
and a lower terminal bonus if the option was exercised.
- Unless the Board
were legally and successfully to attribute different terminal bonuses
to a GAR policy according to whether or not the GAR option was exercised,
it is obvious that the considerations that necessitate different solvency
requirements for GAR policies and non-GAR policies would necessitate differentiation
of terminal bonuses as between the two classes of policy.
- It follows from
(ii) and (iii) that , when the GAR policies were being marketed, no-one
could have foreseen, let alone assumed, that, whatever the terms of future
with-profits policies, the Board would not differentiate terminal bonuses
as between the GAR policies and different, new, with-profits policies.
- I think that there
was general agreement at our meeting that when the Society ceased to issue
new GAR policies and began to issue non-GAR policies, the Board could
have differentiated between terminal bonuses allocated to policies according
to whether they contained or did not contain a GAR option.
- Even if the Board
had been correct in believing that it could allocate to a GAR policy one
terminal bonus if the GAR option was not exercised and a lower one if
it was, there are powerful arguments for saying that the Society should
still have pursued different investment policies with regard to the funds
contributed under GAR policies and the funds contributed under non-GAR
policies. This is because, in certain economic conditions, the Building
Society-type security coupled with a (high) guaranteed annuity rate offered
by GAR policies, if the GAR option was exercised, would have resulted
in a better annuity than an ordinary with-profits annuity - in the economic
circumstances in question there would simply not be sufficient profits
to attribute to the policy if the option was not exercised to induce the
policy-holder not to exercise the option. This is a point with regard
to which Adrian Howard-Jones spoke at some length at the meeting because
if it is correct, it is crucial. If the point is correct, then the Society
was acting in an economically irrational way if, when making investment
decisions, it did not take into account the distinct economic characteristics
of GAR policies, and in particular, the risk that in certain economic
circumstances, the option might be exercised - with a resultant need to
allow for that possibility.
- If, in making investment
decisions, the Society ought to have taken into account the distinct economic
characteristics of GAR policies ( and ought to have done so even if it
had been correct in believing that it could allocate to a GAR policy one
terminal bonus if the GAR option was not exercised and a lower one if
it was), then the necessary corollary is that the Board was acting in
an econmically irrational way in not differentiating from Day 1 between
terminal bonuses according to whether policies did or did not contain
a GAR option.
- No-on in the 1980s
could have foreseen, let alone would have assumed, that the Board would
act in an econmically irrational way with regard to terminal bonuses when
it ceased to market new GAR policies and began to market non-GAR policies.
- If that is correct,
then it is impossible to imply, whether into GAR contracts or into the
Society's Articles, a term that the Board would not differentiate between
terminal bonuses allocated to policies according to whether they did or
did not contain a GAR option since that would be to imply a term that
the Board would act in an econmically irrational way.
- Yet that is unfortunately
how the Board did act, and it was not to be expected that the Society
would instruct Counsel to advance to the House of Lords an argument that
proceeded on the premise that the Borad had acted in an irrational way
(and therefore certainly not in a way which anyone would have assumed
ex ante that the Board would act).
- Therefore the Society
was not in a position to represent the non-GAR policy-holders on this
issue in the House of Lords.
- Therefore -
- the gates of
the courts of justice ought not now to be closed to the non-GAR policy-holders
on the ground that, represented by the Society, they have had their
say, and
- there was never
advanced on behalf of the non-GAR policy-holders a cogent argument
as to why, although the Board had acted in an economically irrational
way in the past, it was not constrained to do so in the future.
- I understand clearly
-
- that, given the
uncertainty of litigation, the time that it takes to reach a conclusion
and your belief that, at least in the absence of an effective reversal
of the House of Lords decision, a sale is unavoidable, you wish to avoid
anything that might jeopardize the effectuation of your hoped-for sale.
- that it would be
disagreeable for the Board were the Courts to conclude that its policy
with regard to terminal bonuses had been econmically irrational from 1989
onwards and that, as an indirect consequence of that fact, the Society
should have declined to act as representatives of the non-GAR policy-holders
on the differentiation issue that was, for the first time, directly up
for decision in the House of Lords.
- that it would be
very undesirable for the Society to do anything further in relation to
the House of Lords decision otherwise than under effectively irresistible
pressure from dissaffected policy-holders.
- As to 4(i), I would have
thought that it was very desirable in any event to include in any contractual
arrangements for the sale of the Society provisions covering the possibility
of further litigation with reference to differentiation of terminal bonuses.
Otherwise there may be opposition to the sale on the ground that the benefit
of such litigation, if favourable to non-GAR policy-holders, would ensue to
the benefit of the buyer - the buyer would get a Society without the black
hole which is currently believed to exist but would have paid a price appropriate
for a Society with a black hole. The fact that the contingency was covered
by the contractual arrangements should make a buyer more rather than less
confident that the sale would go through. In this connection one cannot exclude
the possibility of further litigation if the Society does not pursue the course
that I suggested, namely, as a first step, taking the advice of Leading Counsel
who has not been involved to date, as to whether arguments along the lines
outlined above would have any real chance of success.
- As to 4(ii), I think
that the members will not think worse of the Board for giving way to pressure
to enable an important legal question to be tested if the Board is independently
advised by properly instructed Counsel that the point is reasonably arguable.
- As to (iii), I think
that EMAG could be relied on to bring the necessary pressure, unless, on the
basis that a bird in the hand was worth two in the bush, it was convinced
that by so doing it was prejudicing the effectuation of a sale which the Board
believed to be necessary in the interest of members, something of which the
committee of EMAG is not at present convinced.
- I am authorized by the
Committee of EMAG to say that I have discussed the contents of this letter
with them and they are in agreement with the letter.
I hope that you will not think
it inappropriate that I am copying this letter to Jenny Page since we felt that
her added presence and contribution as a non-executive Director had been helpful
in making our meeting as constructive as I hope that it was.
With kind regards,
Yours sincerely,
Jeremy Lever
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