Neutral Citation Number: [2007] EWHC 1603 (Comm)
Case No: 2005 FOLIO 946
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERICAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 13/07/2007

Before:

MR JUSTICE CHRISTOPHER CLARKE
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Between:

	BRAD SCOTT HUNTINGTON	Claimant	
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	(1)	IMAGINE GROUP HOLDINGS LTD
(2)	IMAGINE UNDERWRITING LTD	Defendants	

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Mr Andrew Clarke QC & David Lascelles (instructed by Memery Crystal LLP) appeared for the Claimant
Mr Alan Boyle QC & Mr David Wolfson (instructed by Fulbright & Jaworski LLP) appeared for the Defendants

Hearing dates: 19th - 29th March 2007
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Judgment

MR JUSTICE CHRISTOPHER CLARKE: 
The history

Overview

1.	The claimant, Mr Brad Huntington (“Mr Huntington”) is a Canadian citizen. He qualified as a lawyer in the provinces of Alberta and British Columbia in Canada, as a barrister and attorney in Bermuda, where he acted for several years as the general counsel of a major Bermuda based reinsurance group; and as a solicitor in England and Wales. He has an MBA from INSEAD.

2.	Mr Huntington was the co-founder with Mr Thomas Gleeson (“Mr Gleeson”) of the Imagine Group of companies. That group includes:

(i)	Imagine Group Holdings (“Holdings”), the first defendant, which is incorporated in Bermuda;

(ii) Imagine Insurance Company Limited (“Imagine Insurance”), the operating 
      subsidiary of Holdings, incorporated in Barbados; and

(iii) Imagine Underwriting Limited (“Imagine Underwriting”), the second 
      defendant, an indirect subsidiary of Holdings.

For the most part it is not necessary to distinguish between Holdings and Imagine Insurance and, unless it is, I shall refer to them as “Imagine”. 

3.	Brascan Corporation (“Brascan”) is a company listed on the New York and Toronto stock exchanges. In late 2005 it was renamed Brookfield Asset Management. At all relevant times Mr George Myhal (“Mr Myhal”) was a Managing Partner in, and the Chief Operating Officer of, Brascan and a director of Holdings. Mr Bruce Robertson was also a Managing Partner in Brascan.  Brascan was one of the companies that Mr Huntington and Mr Gleeson approached in order to obtain capital for their new venture. Brascan had until 1997 owned a large Canadian insurance company called London Life, which had a Barbados-based reinsurance subsidiary called London Reinsurance Group.

4.	Mr Mike Daly (“Mr Daly”) had prior to 2000 been the chief financial officer of London Reinsurance Group. He introduced Mr Huntington and Mr Gleeson to Mr Myhal with a view to Brascan investing in Imagine. As a result, in late 2000 Brascan made, through one of its indirect financial subsidiaries Trilon International Inc (“Trilon”), a Barbadian company, a substantial investment in Imagine. Mr Myhal was then the President and CEO of Trilon. Trilon was later purchased and amalgamated into Brascan in 2002.  

5.	The parties’ investment in Imagine was made pursuant to a Subscription Agreement dated as of 6th September 2000 (although signed in late 2000) between (i) Holdings, (ii) Trilon, (iii) Golden 1 Holdings Ltd, (“Golden 1”), which was Mr Huntington and Mr Gleeson’s investment vehicle, (iv) Mr Gleeson and (v) Mr Huntington. Under that Agreement the parties made a $200,000,000 investment. Trilon and Golden 1 agreed to subscribe for shares in Holdings. Trilon agreed to subscribe for (a) 1,750,000 preference shares for $175,000,000 and (b) 225,000 common shares for $22,500,000; and Golden 1 agreed to subscribe for 25,000 shares for $2,500,000. These shares were to replace the 12,000 common shares that had previously been issued to Mr Gleeson and Mr Huntington. Brascan made a further $ 100 million investment in Imagine in December 2002. Other third party investors subscribed $ 100 million in September 2004.
	
6.	Recital B of the agreement recorded that it was the parties’ intention to incorporate Imagine Insurance as a wholly owned subsidiary of Holdings which was to engage in “the Business” which was defined as:

“the formation and operation of a worldwide finite risk insurance and reinsurance group focused on the provision of customized risk financing products to meet customers’ risk, capital and asset management needs ..”

7.	A Shareholders’ Agreement was entered into between the same parties as of the same date. It contained a similar statement of intention as in the Subscription Agreement.

8.	At the same time contracts of employment were negotiated for Mr Huntington and Mr Gleeson, who became co-chief executives of Holdings. Mr Gleeson left Imagine in acrimonious circumstances in Spring 2003. These contracts contained terms relating to a Long Term Incentive Plan (“LTIP”). Mr Huntington and Mr Gleeson are referred to in some of the documentation as “the founders”.  Mr Daly became an executive director of Holdings.  His contract contained terms relating to participation in the LTIP similar to those of Mr Huntington and Mr Gleeson, save that his entitlement was to 12.5% (as opposed to 17.5%) of the relevant pool.

9.	Mr Huntington’s contract of employment with Holdings (“the contract”) was contained in a letter described as “Effective 1st September 2000”. It was entered into pursuant to a previous legally binding “Overview Agreement” between Mr Huntington, Mr Gleeson and Trilon. It provided for a base salary of $ 335,000 and a cost of living payment of $ 180,000. Under the heading “Long-Term Incentive Plan (“LTIP”)” it read: 

“You shall be entitled to participate in the Corporation’s Long Term Incentive Plan. Pursuant to this plan, you will be entitled to a 17.5% share of any amount paid to senior executives. The LTIP will serve to fund both Founder’s/Key Man Profit Share and Long Term Bonus (see Definitions) for certain employees in the form of allocation of Stock Appreciation Rights (“SARs”) to employees.

Your eligibility to participate in the LTIP as a combination of Founder’s/Key Man Profit Share and Long Term Bonus will vest evenly over five years, commencing the first year immediately succeeding the current year. Allocations will be determined and finalized no later than 3 months after year-end using IIHL’s annual audited financial statements.

One-fifth of the balance of any amount in the LTIP i.e. SARS shall be vested at the end of each year to the senior executives. The remaining unvested portion shall be retained as SARs and will vest rateably over time. All allocations shall be subject to Clawback (see Definitions).

At your option, you can elect to have up to 25% of your annual LTIP vest immediately and receive this portion in cash at the same time the yearly SARs are determined. The minimum 75% of your annual LTIP allocation will vest as SARs in accordance with the preceding paragraph.

The LTIP, both vested and unvested portions thereof, shall be paid in cash to you or your heirs on death or disability. If you decide to leave you shall forfeit any unvested amounts due to you under the LTIP.

10.	Under the heading “LTIP Mechanics” the agreement provided:

“The LTIP shall be increased (decreased) at the end of each year by an amount equal to 20% of the “non-investment Adjusted Net Income (see definitions)” gained (lost) by the Corporation.  Non-investment Adjusted Net Income shall be the Adjusted Net Income less the amount of interest, dividends or capital gains received and any investment foregone by virtue of investment constraints placed by Imagine on the assets relating to the Corporation’s invested surplus.”

11.	The contract provided that in the event that  Mr Huntington’s employment  was terminated without cause or he terminated it for good reason he would be entitled to any amounts due (both vested and unvested portions) to him under the LTIP with any unvested amounts due to him as they vested rateably as defined. 

12.	The contract contained the following definition of “Adjusted Net Income”:

“Adjusted Net Income for any financial year shall equal: (1) IICL’s U.S. GAAP common shareholders equity at the end of the respective year as set forth on the relevant audited financial statements plus 100% of any positive adjustment or 100% of any negative adjustment, as appropriate, required to be made to bring US GAAP earnings into line with aggregate true economic valuation of contractual insurance premiums and liabilities on a present value basis using actual projected asset returns, less (ii) IICL’s U.S. GAAP common shareholders equity at the start of the respective year as set forth on the relevant audited financial statements plus 100% of any positive adjustment or 100% of any negative adjustment as appropriate, required to be made to bring US GAAP earnings into line with aggregate true economic valuation of contractual insurance premiums and liabilities on a present value basis using actual projected asset returns and further adjusted for any capital contributions and withdrawals and dividends made during the year.

13.	“Clawback” was defined as follows:

“To the extent that the true economic valuation used in the determination of any particular year’s Adjusted Net Income proved to be materially overstated or understated as a result of adverse development of the assets and liabilities, then the number of unvested SARs allocated to an employee in respect of such year shall be restated so as to incorporate such development as if it had been properly reflected at the time of the initial determination of the Adjusted Net Income”. 

14.	“Founder’s/Key Man Profit Share and Long Term Bonus” was defined as:

“Such amounts attributed to the LTIP shall be used to find Stock Appreciation Rights (“SARs”) whose economic value shall mirror that of the common shares (including any dividends) of IICL. Such SARs shall vest to the employees over 5 years”.  

15.	The effect of these provisions is as follows:

(a)	at the end of each financial year a calculation would be made of two things (i) Imagine Insurance’s GAAP common shareholders equity  plus (ii) the projected net present value (“NPV”) of future income, such as premiums, less liabilities, such as claims. 

(b)	from the amount thus calculated there would be deducted the amount calculated on the same basis at the end of the previous financial year;

(c)	the difference between the two would constitute the Adjusted Net Income 

(d)	from the Adjusted Net Income there would be deducted the  amount of interest, dividends or capital gains received, and also a sum representing any investment income foregone on account of investment restraints placed on Imagine’s use of assets representing its invested surplus. (This could, for instance, arise if Imagine had to retain capital in liquid or short term assets in order to support Imagine Insurance).  The resulting amount is the non-investment Adjusted Net Income. 

(e)	The LTIP for the year would be 20% of the non investment Adjusted Net Income;

(f)	Mr Huntington would be entitled to “17.5% of any amounts paid to senior executives”. The parties are in dispute as to whether that means, as Mr Huntington contends, 17.5% of the LTIP pool for the year calculated as in (e), or, as Imagine contends, 17.5% of the portion of the LTIP pool habitually attributed by Imagine to senior executives, namely 17.5% of 50% of the LTIP (being 10% of the non investment Adjusted Net Income).

(g)	Mr Huntington’s entitlement was prima facie to be paid to him in SARs to be vested as to 20% in each of five years.  If he decided to leave (as opposed to having his employment terminated or his terminating it for good reason) he would forfeit any unvested amounts;

(h)	But he could elect to have up to 25% of his annual LTIP vest in cash, in which case the remainder would vest rateably over time, i.e. at the rate of 18.75% for the remaining 4 years.

(i)	The unvested SARs in respect of any particular year were subject to restatement if the NPV used for the particular year’s Adjusted Net Income turned out to be overstated.

16.	The calculation of an NPV was a core methodology of Imagine. The NPV of every transaction entered into by Imagine was estimated at inception, using sophisticated actuarial analysis and modelling, in order to quantify the net present value of the cash flows of assets less liabilities. The NPV was continuously revalued over the life of the transaction. This was done by a group of senior employees in Barbados known as the Underwriting Support Team (“UST”) and scrutinized by the relevant underwriting committee, to whose meetings Mr Myhal and Mr Robertson were invited, and often attending,  as observers. 

17.	In September 2000 Mr Huntington, Mr Gleeson and Mr Daly were the only employees with contracts entitling them to participate in an LTIP in the manner that I have described.  But as Imagine grew it (or a subsidiary) recruited new employees. In the case of the more senior employees the contracts referred to their right to participate in the Imagine LTIP in general terms. For example, on 30th July 2002 Mr Huntington wrote to a Mr Grealy setting out the terms of an offer of employment with Imagine International Reinsurance Ltd , which included the following:
“The Company has an incentive profit sharing plan to which your eligibility will be assessed on an annual basis. Allocations are purely discretionary and are determined based upon individual contributions to the bottom line profitability of Imagine. The profit sharing pool equates to 10% of the NPV contribution of deals completed during the year less total operating expenses.” 

In addition some employees, mainly those who had been acquired when Imagine had acquired other businesses had different bonus provisions in their contract entitling them to a bonus related to the performance of the business in relation to which they were employed. 

18.	It is common ground between the parties that in September 2000 they contemplated that a more detailed document recording the terms of the LTIP would have to be drawn up and agreed. Mr Huntington contemplated that the terms of the Imagine LTIP would be set out in this document; that those terms would be consistent with the terms set out in his contract and those of Mr Gleeson and Mr Daly; and that they would be applicable to other employees, to whom the document would be distributed, save that the latter would not be entitled to specific percentages of the pool.  It was for this reason that subsequent contracts with employees contained only a brief reference to the LTIP. 

19.	From early 2001 to May 2003 discussions took place between Mr Huntington and Mr Myhal as to the appropriate terms for an LTIP.  In May 2003 such a plan was agreed between Mr Huntington and Mr Myhal and recorded in a document which I shall call “the May LTIP”. 

The dispute

20.	One of the principal issues that divides the parties is as to the status of the May LTIP. Mr Huntington contends that it was agreed by him as the LTIP that would be applicable to those who were entitled to participate in an LTIP and did not enjoy specific contractual rights that differed from it. For those who did enjoy such rights (such as himself) the May LTIP would not become applicable unless and until such persons agreed that it should. Imagine contends that the May LTIP was agreed by Mr Huntington as a plan that was applicable to all those whose contracts entitled them to participate in the Imagine plan, or who were treated as so entitled, including himself and Mr Daly. 

21.	After the end of each calendar year Imagine calculated the LTIP pool. LTIP awards were made to employees without specific LTIP entitlements upon the basis of recommendations made by Imagine’s senior management. 

22.	From about the beginning of 2004 Brascan had it in mind to replace the LTIP by a share option scheme. Plans were made for an IPO of Holdings on the New York Stock Exchange. Brascan thought that the LTIP was inappropriate for a company that was to go public and that it should be replaced by a conventional bonus and share options.

23.	Disputes arose between Mr Huntington and Brascan when Mr Huntington proposed the pool for 2004 and how it should be allocated. Those disputes covered two matters (i) the proposed cancellation of the LTIP and its replacement by a share option plan; (ii) whether two transactions known as “LION” and “Dan Re” should, as Mr Huntington contended, be included in the pool for 2004. LION was a transaction under which Imagine obtained (indirectly) the right to a stream of insurance commissions. Dan Re was the purchase of an underwriting business.

24.	Under the terms of the contract allocations were to be determined and finalized no later than 3 months after the year end i.e. no later than March 31st 2005.  This did not happen. Discussions took place between late March and early May 2005 in which Mr Huntington sought to reach agreement with Mr Myhal and others at Brascan. Some measure of agreement was reached in a conversation between Mr Huntington and Mr Myhal on 5th May 2005.  

25.	In the end, on 18th May 2005 Mr Huntington claimed that he was “forced to the position of the implied termination of the original terms of my employment agreement”. He contends that Imagine was in repudiatory breach of his contract in (a) failing to make any determination or allocation of his 2004 LTIP entitlement; (b) manifesting a settled intention to exclude Dan Re and LION from the pool; and (c) insisting on its ability to impose changes to his LTIP. 

26.	Mr Huntington agreed to work on for a short period in order to effect a handover and in the hope that a negotiated resolution of the dispute would be possible. It was not.  In consequence he left Imagine’s employment on 30th August 2005. 

The Issues

27.	Colman J ordered a trial of seven issues. The first issue, which relates to whether Imagine Underwriting is responsible for a proportion of Mr Huntington’s basic salary, and therefore for a portion of any damages for wrongful dismissal, is no longer a live one.  Holdings have confirmed that it will treat any judgment entered in Mr Huntington’s favour as a judgment against itself. Mr Huntington is content with that position.  The live issues are as follows:

“1	  	No longer alive.

2.   	It being agreed that it was a term of Mr Huntington’s employment that he participate in a Long Term Incentive Plan (“LTIP”), what were the terms of that plan and, in particular:

a.	were the terms those contained in the letter of 1st September 2000 (including the definition sheet referred to therein) attached to the Particulars of Claim.

b.	Insofar as the terms were those in that letter at the time the contract of employment was entered into, when and how the same were varied (if at all)

c.	To what percentage of the total LTIP allocation was Mr Huntington entitled 

3.	How should two particular transactions have been accounted for in relation to Mr Huntington’s LTIP entitlement for 2004 (whatever the terms of the LTIP may be found to have been) namely those concerning (i) Danish Re and (ii) LION.

4.	Whether D1 and D2 were in repudiatory breach of contract by:

a.	failing to make any determination or allocation of Mr Huntington’s LTIP entitlement for 2004. In that regard was any such failure consequent upon a failure by Mr Huntington promptly to prepare board papers necessary for the finalisation of the LTIP allocation and/or

b.	maintaining an entitlement (and settled intention) to leave the Danish Re and LION transactions out of the accounting exercise to establish Mr Huntington’s 2004 TIP entitlement and/or

c.	maintaining its entitlement (and settled intention) unilaterally to remove from Mr Huntington’s contract of employment his LTIP rights.

5.	Whether:

a.	the board of D1 was acting honestly and in good faith in excluding the Danish Re and Lion transactions from the 2004 LTIP

b.	the fact that the board of D1was acting honestly and in good faith in that regard deprives what would otherwise amount to a repudiatory breach of contract (if that is established) of that quality

6.	If D1 and D2 were in repudiatory breach of contract, did Mr Huntington accept that repudiatory breach in order to bring his contract of employment to an end with effect from 30th August 2005. Or, is it the case that by working from 18th May to 30th August 2005 Mr Huntington waived any material breach or breaches of contract as he might otherwise be able to establish and rely upon and/or he affirmed the contract.

7.	In the circumstances of the termination of his contract of employment (as they are found to be) has Mr Huntington lost what was previously his entitlement to the unvested portions of previously awarded LTIP entitlements.” 

Does the contract give Mr Huntington an LTIP entitlement to share in the LTIP?

28.	There can, in my judgment, be no doubt that the contract gave Mr Huntington an entitlement to participate in the LTIP as specified in the letter of 1st September 2000. That letter describes Mr Huntington as being entitled to such participation and sets out in considerable detail the “mechanics” of the LTIP. The fact that the parties envisaged drawing up and adopting a more detailed plan does not detract from the enforceability of the contractual provisions contained in the contract. The key terms of the LTIP are set out in sufficient detail to be enforceable. I have no doubt that the parties intended that they should be, not least because a share in the LTIP was the major component of Mr Huntington’s remuneration. 

 17.5% of what?

29.	Whether Mr Huntington was entitled to 17.5% of the non-investment Adjusted Net Income or to 17.5% of 50% of it is a question of construction of the contract.  The parties’ previous negotiations and their subsequent conduct are not admissible as aids for that purpose; by contrast with the circumstances and context in which the agreement was made and its objective aim which are: Prenn v Simonds [1971] 1 WLR 1381; James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583; Investors Compensation Scheme v West Bromwich Building Society [1988] 1 WLR 495.

30.	The contract itself is poorly drafted.  Clarity is not assisted by the fact that “LTIP” is used to refer to both the plan and the amount or pool of money that is to be shared; and the expression “Founder’s/Key Man Profit Share and Long Term Bonus” appears, looking at the letter alone, to serve little purpose save as a means of explaining that the amounts attributed to the LTIP will fund SARs. More importantly the contract does not make entirely clear whether the 17.5% is to be 17.5% of the whole of the pool, the whole being 20% of the “non-investment Adjusted Net Income”; or of some lesser amount constituting “any amounts paid to senior executives”, with, as Imagine suggest was to be the case, a separate pool for other new employees. 

Pre-contract discussions

31.	Mr Myhal’s initial evidence was that Mr Huntington and Mr Gleeson had shown him two draft employee incentive plans produced by American lawyers (Le Boeuf, Lamb, Greene & MacRae) for potential investors under one of which 10% was to go to the founders and other key men, and under the other of which 10% was to go to the employees. He said that the founders i.e. Messrs Huntington and Gleeson, were to share in the former but not the latter. This is not correct. Mr Myhal identified the two plans as (i) the Imagine Insurance Holdings Limited Founders Profit Participation Plan” and (ii) the “Imagine Insurance Holdings Limited Management Incentive Profit Participation and Phantom Stock Plan”. Under the terms of plan (i) only Golden 1 and its shareholders were to be entitled to participate. Under the terms of the former Messrs Gleeson and Huntington were to be the sole initial participants with power to nominate additional participants. 

32.	On the second day of his evidence Mr Myhal said that Imagine did not, in the event, proceed with the latter plan, but that instead the founders were provided with a 10% interest in the company financed by Brascan, and their participation in the LTIP of September 2000 “to the tune of 10% …economically put them in the same position as it would be reflected in the founders profit participation plan”. 

33.	Mr Huntington’s evidence, which I accept, was that prior to the making of the contract Mr Myhal had explicitly rejected the idea of two separate LTIP pools (as had been specified in the above documents) one of which was to be exclusively for the founders. He collapsed the two pools into one (using some of the phrasing from the two plans referred to in paragraph 31) so as to create one pool. The expression “Keyman” had not been used in those documents to refer to the personnel who had been intended to benefit from plan (ii).  That was a word adopted by Mr Myhal to describe those who would have been covered by the non-founders plan.

34.	I regard it as legitimate to take into account as an aid to construction the fact that at one stage the parties had had in mind that there should be two plans, of which one would be for the founders, and one that should not be so limited but apply to a wider category (including the founders); that that idea was rejected, so that what was under consideration was a single pool; and that the expression “Keyman” was adopted by Mr Myhal, the initial drafter of the letter, in the manner described by Mr Huntington.  

35.	Against that background it seems to me that, on its true construction, the letter of 1st September 2000 gave Mr Huntington an entitlement to a 17.5% share of  20% of the non investment Adjusted Net Income.  My reasons are as follows.

36.	The letter provides for a single LTIP pool of 20% of the “non-investment Adjusted Net Income”: see the definition of “LTIP Mechanics”. That pool is to fund both the Founders and the Keyman Profit Share for certain employees in the form of SARs. Mr Huntington’s entitlement is to participate in that LTIP.  The contract contains no reference to a sub-division of that pool, unless the reference to “a 17.5% share of any amounts paid to senior executives” can be treated as entitling the company unilaterally to determine a proportion of the LTIP that is to be paid to such executives, and thereby, in effect to create such a subdivision.  

37.	I do not regard the language used as apt for that purpose. The purport of the letter, taken as a whole, is to explain that the LTIP will benefit certain employees who are either founders or key men. It is these individuals, who in the nature of things will be senior executives, who will share in the pool, which will (subject to the option in the fourth paragraph) be vested to them at the rate of 20% for each of five years. I do not regard the “certain employees” whose SARs the LTIP is to fund (see the second sentence of the first paragraph) as being a wider class than the “senior executives” who are to share in the LTIP. 

38.	If that were so, it is difficult to see how the third paragraph of the contract was to operate. That paragraph provides for one-fifth of the balance of “any amount in the LTIP” to vest at the end of each year to the senior executives and that the remaining unvested portion “will vest ratably” over the succeeding four years. By this means the balance of the amount of the LTIP in respect of any particular year will have been used up.  If, however, “senior executives” means (at any rate initially) only Messrs Huntington, Gleeson and Daly (“the triumvirate”),  and senior executives are only to share in 50% of the LTIP pool, one-fifth of “any amount in the LTIP” will not be vested to those senior executives at the end of each year. Thus, if 20% of the non investment Adjusted Net Income (and hence the LTIP) for 2001 is           $10,000,000 the senior executives, thus defined, will, under their contracts, be entitled, on Imagine’s interpretation, to have vested to them after the end of 2001 at most one-fifth of $ 5,000,000 (the 10% of the non investment Adjusted Net Income allocated to senior executives) i.e. $ 1,000,000 between them. (In fact their entitlement will be less, since their aggregate entitlement was to 47.5% - 17.5% + 17.5% + 12.5% - of the amount paid to senior executives). 

39.	Nor will the remaining unvested portion of the LTIP vest rateably over the subsequent four years. The remaining unvested portion will be 80% of the original amount of the LTIP – in the above example $ 8,000,000. If, in respect of the succeeding four years, the senior executives receive only their contractual entitlement, then by the end of the fifth year will have had vested in them only 47.5% (their aggregate share) of $ 4,000,000 (being the remaining balance of half the LTIP) . Even if over the remaining four years they receive $ 4,000,000 that will still not exhaust the balance. 

40.	The more natural reading of both the first and third paragraphs is that the LTIP is to remunerate senior executives, who include but are not limited to the triumvirate; that the triumvirate are between them entitled to 47.5% of the whole pool; and that the pool will vest in favour of the senior executives at 20% per year over a five year period.  

41.	Further, if the intention had been that Mr Huntington’s entitlement extended only to a 17.5% share of whatever sum (being less than 20% of the non-investment Adjusted Net Income) Imagine decided to pay to the senior executives as a subset of the employees whose bonus the LTIP was to fund, it would have been easy to say so. Either the LTIP could have been divided into separate pools in respect of only one of which would he have an entitlement to a share; or the letter could have made plain that Mr Huntington was only entitled to 17.5 % of a portion of the LTIP. The contract could also be expected to have specified some mechanism by which that portion was to be determined.

42.	This construction of the contract is consistent with the importance of the role for which Mr Huntington was to be remunerated, described in the contract as “to assist in the development and execution of Imagine’s reinsurance and asset management companies”. 

Post contract allocations

43.	As Imagine hired new employees, such as Mr Grealy, it agreed with some of them, who were to be involved in finding and negotiating new business opportunities (known as “producers”), that they would be entitled to participate in the Imagine LTIP. Mr Huntington and Mr Gleeson would tell them that they would be able to share in approximately one half of the total pool (i.e. in 10% of the non investment Adjusted Net Income).  As a result, when Mr Huntington came to determine how the pool should be shared, he would initially divide the total value of the pool into two pots. Individuals could receive allocations from each pot, if they had both a producer and a management function. The proposed allocations were discussed with senior management and were subject to the approval of Imagine’s board. When, however, the letters were sent out to individual employees whose entitlement had been reached by an allocation from each pot, telling them what they would get, their share was not expressed as a share of two different pots. 
 
44.	Mr Huntington set out in his witness statement a table showing the internal allocation methodology for the allocations to him for the years 2001 to 2003 and his proposal to Brascan in March 2005 for the year 2004: The penultimate column is his percentage share of the whole LTIP. 

Year	Producers 
%	Producers
$	Management
%	Management 
$	% of
Total	Total	
2001	14.78%	   409,270	39.44%	1,092,000	27.11	1,500,000	
2002	0%	              0	25.46%	   557,800	11.25	   557,800	
2003	4.96%	   500,000	35.18%	3,500,000	20.11	4,000,000	
2004
	9.57%	1,281,000	40.00%	5,375,000	24.78%	6,638.472	
	      
45.	As is apparent from that table Mr Huntington received for both 2001 and 2002  well over 17.5% of the management pot. However, this method of presentation hides the fact that, in respect of the year 2002, the allocation of $ 557,800 represented 17.5% of 50% of the LTIP i.e. 10% of the non-investment Adjusted Net Income (“the 10% figure”). $557,800 was 25.46% of the amount of the LTIP that was in fact allocated to the senior management, not 25.46% of “the 10% figure”.

The allocation in respect of 2002

46.	Mr Huntington’s evidence was that in the first quarter of 2003 Mr Myhal and Mr Robertson artificially reduced the 2002 allocations to be paid to him and Mr Gleeson from the levels recommended by him. 

47.	On 13th March 2003 board meetings of Imagine Insurance and Holdings took place in Barbados. Mr Myhal and Mr Robertson were present at the meeting of Imagine Insurance by invitation. Mr Daly presented the 2002 LTIP calculation and allocation for board review. The board resolved to approve the aggregate calculation but only to approve the allocation at a later date. Mr Myhal’s evidence was that this was as a result of concerns raised about Imagine’s results and its failure to meet the projections put forward in its business plans.

48.	 On 21st March 2003 Mr Robertson proposed in an e-mail to Mr Huntington that the allocation should be reduced from the figures proposed to $ 1.1 million  in respect of Messrs Huntington and Gleeson and $ 1 million in respect of Mr Daly, and that a portion of the LTIP should be unallocated and remain in reserve. $ 1,115,625 would amount to 17.5% of the entire pool. Mr Robertson was not involved in the subsequent reduction to $ 557,800. 

49.	Brascan were then in dispute with Mr Gleeson, whose performance they regarded as having been poor. There was an acrimonious meeting with him in Toronto after which they wanted to dismiss him.  According to his evidence Mr Huntington then had a discussion with Mr Myhal about how to “maintain and craft” a legal position that would not lay Imagine open to an application by Mr Gleeson for summary judgment, since there was no defence.  He suggested that Imagine should take advantage of the rather unclear language of the agreement and “take a position that the reference to senior executives, although it was intended to imply the whole pool”, meant that Mr Gleeson was only entitled to 17.5% of half of it. Mr Myhal decided to adopt this suggestion.

50.	In order to ensure that the stance Imagine was taking was consistent, Brascan needed Mr Huntington and Mr Gleeson to receive the same share of the LTIP.

51.	Mr Huntington said that he was told that the reduction did not relate to his performance and that, if he agreed to it, some evening-up process would be taken later. It was made clear to him that he had little option but to accept this and he did so.  Several years later in September 2004 he was granted an option over 1,550,000 ordinary shares of Holdings and understood from his discussion with Mr Myhal and Mr Robertson that some part of that related to the value that Brascan felt was owed to him in respect of the 2002 LTIP year.

52.	Mr Gleeson’s employment was terminated by a letter of 24th March 2003, of which Mr Huntington received an advance copy and which he sent on to a director of Imagine to sign, which told him:

“Your LTIP allocation for 2002 totalled $ 550,000 being 17.5% of the Senior Management Pool. Of this amount 25% has vested and accordingly we will pay you $ 137,500 immediately”.

53.	Mr Gleeson did not accept this to be correct and internally there was an accrual of a larger figure against any potential liability of Imagine. Eventually a settlement was reached in which the amount of the settlement was in excess of 17.5% of the 10% figure.

54.	On 27th March 2003 Trilon exercised the option given to it under the Shareholders’ Agreement to purchase all of “Golden 1” shares in Imagine at book value if, by the 18 month anniversary of the date of the agreement, Imagine Insurance had not issued the number of preferred shares necessary to produce a $240,000,000 increase in its capitalization.  

55.	Mr Gleeson was subsequently in litigation with Imagine in both Bermuda and Toronto. In the course of the Toronto litigation Mr Huntington explained, in an e-mail of 29th August 2004 to Ms Gillian Scott, of Imagine’s Toronto lawyers, the position in relation to the 2002 LTIP allocation in the following terms:

“With respect to the LTIP allocations for the 2002 year there were various internal discussions between senior management about the allocations – these included proposed allocations to Tom [Gleeson] and myself in the range of $ 1.2 to $ 1.2m (sic). This was a reduction from the previous year and reflected the fact that Imagine had many, many more mouths to feed in 2002 than previously and it was going to be very, very difficult to give Tom and myself the same allocation as in 2001 (i.e. US$ 1.5m). The final decision made by the Board of Directors was to further reduce this amount for BOTH Tom and myself down to the minimum level which was contractually stated in our contracts (going from recollection I think this is 17.5% of the pool). There is some room for discussion about whether this should be applied to the entire pool (i.e. 20%) or to what had been the concept of a senior pool, which would have formed the top half (or 10%) of the total pool. The confusion arises because the contracts still refer to a Senior Pool but this concept was dropped and does not exist in the LTIP program adopted by Imagine. In any event, the dollar allocation to EACH of Tom and myself for the 2002 LTIP allocation was $ 557,800.00. It may be helpful to know that the highest allocation made to any employee for the 2002 LTIP year was US$ 1,000,000 – given to Mike Daly, as per my recommendation to the board.” 

56.	Imagine rely on this e-mail as showing, by the words which I have put in bold, that Mr Huntington well recognized that what he received in respect of 2002, being 17.5% of the 10% figure, represented his contractual entitlement, and, by the words that I have underlined, that the reference to “senior executives” in the contract signified that Messrs Huntington and Gleeson were to have an entitlement to 17.5% of a senior pool, being the 10% figure.

57.	Mr Huntington’s evidence was that when he wrote this e-mail he did not, as is apparent, have the letter of 1st September 2000 in front of him, and was speaking “in code”, because he could not very well say that the defence which Imagine was putting forward was not very strong; and that his statement that the contracts still refer to a senior pool which would have formed the top half of the total pool was inaccurate – as, in literal terms, it was.  Even so, the impression that he was seeking to convey was that the true meaning of the contract. although open to another interpretation, was that Mr Gleeson was only entitled to 17.5% of a portion of the LTIP. 

58.	Mr Huntington claimed that his reference to the concept having been dropped and not existing “in the LTIP program adopted by Imagine” was a reference to the LTIP agreed in September 2000, because Mr Gleeson never came within the May 2003 LTIP. I think that the likelihood is that when he referred to “the LTIP program adopted by Imagine” he was referring to the May LTIP, since (a) it is more accurately so described; (b) the phrase appears in a sentence which earlier refers to “the contracts”; (c) in the first paragraph of the e-mail he refers to the Board having the “absolute and final say”, which is a provision found in the May LTIP and not the letter of 1st September 2000; and (d) Mr Gleeson’s allocation was being worked out when the May LTIP was close to agreement. 

59.	Mr Myhal’s written evidence was to the effect that the main reason for the reduction in the amount that the founders received in 2002 compared with what Mr Huntington had proposed was that he and Mr Robertson regarded the results for 2002 as unusually bad and that, whilst having no concerns about Mr Huntington’s performance, they felt constrained to treat both chief executive officers in the same way. The tenor of his oral evidence was to the effect that 2002 was “not an exceptional year”, and that, in the light of that, Brascan did not wish to pay Mr Gleeson a large bonus. So they decided to pay him the minimum to which he was contractually entitled; in those circumstances it was inappropriate to pay Mr Huntington, with whom, however, they had no quarrel, any more.

60.	I regard Mr Huntington’s account of how the 2002 figure for him and Mr Gleeson came to be reduced to $ 557,800 as likely to be correct. I think it unlikely that he has invented the discreditable account of fashioning a defence to Mr Gleeson’s claim. Having been instrumental in doing so I do not find it surprising that he wrote in the terms that he did on 29th August 2004. I do not accept that the main reason for the reduction in the amount that Mr Gleeson and Mr Huntington were to receive for 2002 was that 2002 was a particularly bad year. A 2003 press release about Imagine Insurance’s results for the 2002 year noted that its net income had doubled over 2001, its net underwriting income had almost tripled and Mr Gleadall (the Chairman of the Group) was recorded as commenting that “We are very pleased with our results in 2002”. Even allowing for “spin” these public statements do not suggest an unusually bad year. 

61.	I, further, accept that an indication was given to Mr Huntington that the reduction in respect of 2002 would be made up to him. Mr Myhal accepted in evidence that:

“we did not give him any absolute assurance that we would make him whole on any amount with interest, but we certainly gave him every expectation that he would be treated fairly and generously and he had a very rosy future in our organisation going forward.”

62.	A document (“the option calculation document”) which Mr Huntington discovered on an old laptop during the weekend prior to the trial formed a basis for his discussion with Mr Robertson and Mr Myhal in September 2004. It contained a calculation of the number of options that he would need (2,108,759) in order to make him whole in respect of, inter alia, (a) the value of the LTIP amount that he had lost in respect of 2002 and (b) the loss attributable to the purchase by Brascan of the shares of “Golden 1” in Imagine. Mr Huntington in fact received only 1,550,000 options.  Mr Myhal and Mr Robertson regarded these as referable only to Mr Huntington’s losses by reason of Trilon’s purchase of the shares formerly held by “Golden 1”. 

63.	The option agreement “as of September 30 2004”, by which Mr Huntington was granted the options, records the grant as relating “exclusively to your past service with the Imagine Group”. Since the 1,550,000 figure was a compromise it is not possible to say from the figure alone whether it is referable only to the loss of shares in “Golden 1”. It seems to me likely from the evidence of Mr Huntington and Mr Myhal, the option calculation document, and the option agreement itself, that Mr Huntington was given to understand in 2003 that he would be looked after later because of the reduction of his allocation in respect of 2002 and that the grant of options in 2004 was intended at least in part to take account of that.  

64.	I have set out the position, as I find it to be, in respect of the post contract allocations, because a considerable amount of evidence and submission has been directed towards it. In the absence, however, of a plea of variation or waiver, the parties’ post-contractual behaviour is not a guide to the interpretation of their contract. Nor is any subjective view that Mr Huntington took as to what the contract meant. 

Was there a variation of the contract?

65.	The May LTIP, which was agreed by 8th May 2003 between Mr Huntington and Mr Myhal was entitled the “Imagine Insurance Long Term Incentive Plan”. It  included the following terms:

“Purpose

To provide management of Imagine with a long-term incentive reward plan. The Long Term Incentive Plan (“LTIP”) will provide designated employees with a financial participation in specified businesses of the Imagine Group under their direct control.

Background

In 2000, Brascan Financial and the founders of Imagine (collectively the “Shareholders”) collectively invested US$ 200 million cash to form the Imagine Group. With this initial capital, management has been charged with building and expanding Imagine’s businesses. Such businesses shall include the finite risk insurance and reinsurance business and such other businesses as shall be explicitly agreed by the shareholders to be the subject of the LTIP (“the LTIP Business”). 

Subject to the terms and conditions of this LTIP, in each and every year twenty percent (hereinafter the “Specified Percentage”) of the Income (as hereinafter defined) earned from the LTIP Business will be credited to the global LTIP fund. Of this amount, one half (or 10%) would ordinarily be expected to be allocated specifically to individuals and team members directly involved in the production of income.

All income earned and capital gains realised on the capital funds provided by the shareholders shall be for the sole account of the Shareholders and shall not form part of the LTIP incentives hereunder. In addition, to the extent that explicit capital support from one or more of the Shareholders is required to support the LTIP Business (related to bank lines, letters of credit, guarantees or other forms of explicit capital support) the Shareholder(s) providing such support will be entitled to charge the LTIP and be paid a market rate for the use of such support.

…………….

Eligibility

Participation in the LTIP will be open to key employees of Imagine designated by the Board of Directors as participants from time to time. At the end of each  year, the amount to be credited to the LTIP in respect of that year’s performance shall be allocated among the participants having regard to economic performance and such other criteria as shall be determined by the Imagine Board of Directors from time to time. A separate balance shall be maintained for each participant under the LTIP. All allocations to individuals in the LTIP will be recommended by the senior management of Imagine and shall be subject to the final approval of the Board of Directors of Imagine, whose decision shall be final and binding.

Vesting

No later than 120 days after the end of each calendar year, an amount equal to the Specified Percentage of the Income of the LTIP Business for that year will be credited to the LTIP. The Specified Percentage annual credit will be allocated to all LTIP participants as approved by the Imagine Board. Allocations shall vest over a five-year period on each annual scheduled payment date for distributions. The vesting shall be calculated at twenty five per cent (25%) at the time of allocation of a subject years LTIP with the other seventy five percent (75%) vesting in four equal parts over the remaining four years of the five year vesting term.

……….

Income Calculation

Following receipt by Imagine of the annual audited financial statements a calculation shall be performed to determine the amount to be credited under this LTIP. The amount to be credited to the LTIP in each year (the “Income” as used in this document) will be calculated each year using the accounting net income, before tax, of the LTIP Business determined in accordance with International Accounting Standards GAAP subject to a number of adjustments. The effect of these adjustments will be to exclude from Income any investment earned on the shareholders capital account and include any provision for reserves, as deemed necessary by the Board of Directors of Imagine, to provide for unforeseeable future events. 

Election of Allocation

Within thirty days of each allocation, each participant shall irrevocably elect one of the following alternatives with regard to the prior underwriting year’s allocation to their LTIP account: (i) with respect to vested and unvested amounts, to apply their allocation, in whole or in part, to acquire a long-term equity like component – called Phantom Equity Appreciation Rights (“PEARS”), or (ii) with respect to vested and unvested amounts, to elect a short term liquid option (the “Short Term Option”) – via a deposit of their allocation, in whole or in part, into a notional account which shall accrue interest at a short term government bond yield designated by the Board of Directors of Imagine until distributed. If there is a failure to elect, alternative (ii) will be the default option ……

Phantom Equity Appreciation Rights

Participants in the LTIP who elect to receive PEARs shall be granted Pear’s equal to the monetary value of their allocation to PEARs (their “LTIP Entitlement”). The number of PEARs to be issued shall be equal to the LTIP Entitlement divided by the year-end book value per common share of Imagine, according to the GAAP financial statements as determined by the Board of Imagine after reflecting the issuance of the PEARs. Participants will lose all PEARs compounding if they leave the company (other than for reasons as set out in the second paragraph of the Termination section) during their first five years of their employment (vesting of the capital portion over the five year period remains unaffected by this provision - i.e. Unvested portions of capital will also be lost). After five years, compounding on unvested portions (only) will be lost if they leave their employment (other than for reasons as set out in the second paragraph of the Terminations section) and go to work for a competitor within a twelve month period after leaving their employment with Imagine (employees who retire or exit the industry will not be penalized).

Such PEARs shall be economic rights only and shall not entitle the holder to any security, shareholder or other similar right or interest in Imagine. An LTIP participant shall not be entitled to elect to receive PEARs to the extent that the granting of the PEARs or the receipt of the PEARs would be contrary to applicable law, including, without limitation, securities law

Liquidity

Vested amounts under the Short Term Option may be withdrawn at any time on 30 days written notice to the Company. Unvested amounts under Short Term Option elections may not be withdrawn until vesting has occurred. Any amounts (vested or unvested) elected under the PEARs option may only be cashed-in when Participants leave their employment with the Company or there is a Liquidity Event (as defined) However, LTIP participants may apply, and the Board of Imagine will consider on an ad hoc basis, making loans to individuals against the vested balance in their LTIP account (including PEARs) in certain circumstances if, and when, warranted. Any such loans shall be at the sole discretion of the Board of Directors of Imagine. Such loans will bear interest at the US dollar prime rate or relevant currency related equivalent and will be secured by the LTIP balance and other collateral acceptable to Imagine from time to time.

A “Liquidity Event” means (i) those events contemplated in the second paragraph of the Termination section of this LTIP, or (ii) the sale by Brascan Financial of more than 50% of the common shares of Imagine.

…..

Termination

LTIP or PEAR participants who are terminated for cause or voluntarily depart before a scheduled payment date will forfeit their entitlement to any and all unvested amounts (including Pear’s and/or accrued interest) payable under the LTIP.

In the event of retirement, death, long-term disability, or termination by Imagine without cause, LTIP or PEAR participants will be entitled to receive any vested and unvested amounts when otherwise due.

Board Decisions

The Board of Directors of Imagine will have the right to construe, interpret, administer, amend or cancel the LTIP, at any time, provided that any amendment or cancellation of the LTIP will not affect the right of any participants to any payments under the LTIP that have been allocated or accrued to that date. The decision of the Board on any matter regarding the LTIP will be final and binding on the LTIP participants.”

66.	The important features of the May 2003 LTIP for present purposes are these:

(i)	The LTIP fund was to be 20% of the Income, which was to be the Income of the LTIP Business, being Imagine’s finite risk insurance and reinsurance business and such other businesses as should be explicitly agreed by the Shareholders; Imagine contends that the LION and Dan Re transactions did not constitute finite risk insurance or reinsurance business.

(ii)	The participants were to be key employees designated by Imagine Insurance’s Board of Directors.

(iii)	Allocations, approved by the board, were to vest as to 25% at the time of allocation and thereafter equally over the next four years.

(iv)	Participants could choose to take their allocation in PEARs or a short term liquid option;

(v)	Vested amounts under the short term option could be withdrawn on 30 days notice. Amounts elected under the PEARs option could only be cashed in on leaving employment or upon a liquidity event (as defined). 

(vi)	Voluntary departure or termination for cause would affect a forfeiture of any unvested amounts. Termination by Imagine without cause would entitle a participant to receive any vested or unvested amount when otherwise due.

(vii)	The Board could cancel the LTIP at any time but this would not affect the right of any participants to any payment under the LTIP that had been allocated or accrued to that date. 

The history of the May LTIP

67.	As I have said, the parties to the contract recognized that a more detailed document would have to be drawn up recording the terms of the LTIP, which was to apply not only to the founders and Mr Daly but also to other Imagine employees. Brascan had indicated through Mr Myhal that they wanted there to be only one plan. The course of the negotiations reveals that there were a number of potential drafting issues including the following:(i) should there be one plan or two; (ii) who should administer the plan or plans; (iii) who should decide on eligibility for participation in the plan or plans; (iv) who should decide on allocations; (v) how should any LTIP rights vest; (vi) should senior management have a right to loans; (vii) if there were to be two plans, what would the inter-relationship between them be; (viii) the start and termination dates of the plan or plans. 

68.	In March 2002 Mr Huntington drafted two LTIP plans, which on 14th March 2002 he e-mailed to Mr Myhal and Mr Robertson, amongst others. The first was entitled the “Employee Long Term Incentive Plan (LTIP)” and was for “certain key senior officers of [Holdings] and its subsidiaries and affiliates”. Article IV provided that “employees of the company” should be eligible to participate. The second was described as the “Senior Management Long Term Incentive Plan (LTIP)” and was also for “certain key senior officers of [Holdings] and its subsidiaries and affiliates”. Article IV provided that “senior officers of the company” should be eligible. Under the Employee plan 10% of the change to the Adjusted Book Value of the Company from the prior financial period was to constitute the potential allocation to the participants under the program. Under the Senior Management plan 20% of the change to the Adjusted Book Value of the company from the prior financial period was to be allocated to potential allocation (sic) to the participants. From that amount there was to be deducted “the value of any allocations for the year in question to any LTIP plans which are junior (i.e. within the Company and available to all employees)”. 

69.	Both programs contained a provision that:

“Subject to each Participant’s relevant employment Agreement (which shall supercede the provisions hereof) in the event that a Participant is terminated by the Company without cause or the Participant terminates their employment with the Company for good reason (see definition) they will be entitled to any amounts due (both vested and unvested portions) under this LTIP Program/Senior LTIP Program, with any unvested amounts due as they vest ratably as set out above. Termination of a Participant for cause shall entitle the Participant only to the vested portions of any Stock Appreciation Rights under this [LTIP Program][Senior LTIP Program]”.

70.	The draft Employee plan provided for equal vesting over 5 years. The Senior Management Plan provided for 25% vesting in year one and equally thereafter.  

71.	Both plans provided that they should:

“….continue until amended, repealed or terminated by the Company which events may occur at any time without the requirement of notice to Participants and which shall be in the sole discretion of the Company. Any amendment, repeal or termination of the LTIP/Senior LTIP Program shall not affect existing and outstanding allocations of interests, which shall continue in accordance with the provisions of Article VII and Article V above”. 

72.	The Senior Management plan would plainly have applied to Messrs Huntington, Gleeson and Daly; and the Employee plan was one for which they were eligible.  It is, thus, apparent that at an early stage Mr Huntington contemplated participating in a plan or plans which the Company could at any time cancel.  

73.	On 29th March 2002 the following e-mail exchange took place between Mr Daly and Mr Huntington:

“I know you have been busy. Here is a list of issues I believe that are still outstanding from various e-mails and discussions I have had with you over the last few weeks. We should set some time aside, at your convenience and go through these. Please let me know how you want to proceed.

……

3.	Finalization of the LTIP plans – documentation, Board UWR of Plan, employees execution of plans, notification to staff of allocation and payment of 2001 vested amounts. [Brad Huntington] – can’t do anything till Trilon gets back to us on LTIP”.

74.	On 27th June 2002 Mr Huntington e-mailed to himself a discussion document with an “Overview of LTIP Requirements”. This document, which was an amalgam of points made by the triumvirate and which was not seen by Mr Myhal until after the commencement of these proceedings, set out 13 numbered points, including the following:

“3)	“Value contribution” is GAAP – adjusted to reflect Present Value of transactions entered into during the year. The cash flows to be discounted should be;

a.	for transactions where amounts are certain, the actual amounts;

b.	for amounts which are uncertain, the average of all simulated outcomes (ie includes all loss scenarios)

c.	asset returns should be estimated at risk free unless there is a contractually stipulated rate and/or the board has specifically approved a separate asset strategy for the transaction from which a different return profile can be estimated

6	Must reflect all value contributions created by management – not just in the reinsurance business.
….

9	As there will be a senior management and one or more operating unit pools, the senior pool should be defined as the 20% allocation minus anything that is allocated to the junior pools

10	Allocation to be made by senior management and approved by board”

75.	This document again deals with the terms of a plan or plans that would apply to Messrs Huntington, Gleeson and Daly as well as others. As is apparent from the May LTIP, point 6, which Mr Gleeson was very keen on, was not accepted. 

76.	Point 3 reflects the manner in which NPVs were habitually calculated within Imagine. Thousands of simulations would be made of possible outcomes (according to the probabilities of their occurring). Each of these simulations would produce cash flows of different amounts. Imagine then calculated an NPV of those cash flows and took the mean of the NPVs.  The NPVs would be derived using the “duration adjusted risk free rate” i.e. a rate of interest which a lender would charge for a loan for the average duration of the relevant liabilities if the loan was without risk – essentially the “swap” rate that banks charge each other to swap credit. This rate involves no loading for risk. It was used upon the footing that, if you take the mean of the simulations, you will already have discounted to the extent necessary the possibility of adverse (and favourable) consequences. To use a discount rate that was not risk free would, therefore, be to double count the risk. This methodology was used in every transaction modelled by Imagine and was a fundamental aspect of the calculation. The NPVs would have been dramatically reduced if a higher discount rate had been used.

77.	The Boards of Holdings and Imagine Insurance met on Friday 28th June 2002. At a previous board meeting of Imagine Insurance on 14th March 2002 the 2001 allocations had been approved in principle on the basis that further discussions between the Imagine principals and directors needed to take place. 

78.	The minutes of  Imagine Insurance record that:

“It was noted that the LTIP Plan components and calculations of the December 31 2001 final amounts were still being discussed among Tom Gleeson, Brad Huntington and representatives of Brascan Financial. The matter was therefore further deferred until discussions among all parties were finalized”.

79.	On the same day a meeting took place in New York. Messrs Myhal, Huntington, Gleeson and Daly met and discussed the LTIP. Mr Robertson was part of the overall discussions about the LTIP but may not have been at the meeting itself (although he was present in New York for the Board Meeting). The meeting was not very productive. There was a discussion of some of the topics in Mr Huntington’s overview document. Mr Myhal said that he would revert with a revised version of the LTIP plan, as, in the event, he did. 

80.	On 22nd July 2002 Mr Myhal e-mailed to Mr Huntington and Mr Gleeson a draft “Management Long Term Incentive Plan”. It was some 2 ¾ pages long. On 23rd July Mr Huntington copied it to Mr Daly. This document defined the purpose of the plan in the following terms:

“Purpose

“To provide management of Imagine with a long-term incentive reward plan. The proposed Management Long Term Incentive Plan (“LTIP”) will provide designated Imagine managing partners (currently Tom Gleeson, Brad Huntington and Mike Daly) and other senior executives with a financial participation in the finite-risk reinsurance business of Imagine under their direct management.” 

81.	Under the heading “Background” the draft stated:

“In 1999, Trilon and Golden I (the “Shareholders”) collectively invested $200 million cash to form Imagine. With this initial capital, management have been charged with building and expanding Imagine’s finite-risk reinsurance business (the “LTIP Business”).”

 Under the heading “Eligibility” the draft stated:
		
“Participation in the LTIP will be open to designated managing partners and other senior executives of Imagine as selected by the Board of Imagine from time to time”.
	
   And under the heading “Distributions”:
“At the end of each year, an amount equal to 20% of the Earned Income of the LTIP Business for that year will be credited to the LTIP.”

82.	As is apparent from the above Mr Myhal was only prepared to accept that the LTIP should be paid in respect of income generated by Imagine’s finite risk reinsurance business. A prime reason for Mr Myhal’s position was that Mr Gleeson was keen to expand Imagine’s business beyond its core activities e.g. into conduit financing. 

83.	The draft also provided that:
“The Board of Directors of Imagine will have the right to construe, interpret, administer, amend or cancel the LTIP, at any time, provided that any amendment or cancellation of the LTIP will not affect the right of any participants to any payments under the LTIP which have accrued to date. The decision of the board on any matter regarding the LTIP will be final and binding on LTIP participants.”

84.	Mr Myhal’s draft was commented on internally, with substantial proposed amendments, by Messrs Gleeson and Daly. Mr Huntington then made further amendments. None of them suggested the removal of their names from the first “Purpose” paragraph. Mr Daly’s amendments included a substitution of “broad-based financial service” for “finite-risk reinsurance” in the definition of LTIP business. 

85.	Mr Huntington’s amendments included a substitution of “Imagine’s businesses” for “Imagine’s finite-risk reinsurance business” in the definition of LTIP business, and a provision that the plan should be referred to as the “Managing Partner Plan” and that the Managing Partners (i.e. the triumvirate) should have the power to carve out sub plans from this plan. These latter proposals were consistent with points 6 and 9 in his overview document of 27th June.  If accepted they would have had that effect that the plan was to be for the Managing Partners subject to their right to create sub-plans subject to the same terms. 

86.	By July Mr Myhal had approved the draft allocations. In July 2002 draft letters were produced to be sent to the recipients of an LTIP allocation for 2001. The letters informed the recipients what their allocation for 2001 was and also told them that “Awards are subject to the terms of your employment agreement and to the specific conditions of the LTIP. You will be sent the formal LTIP document in the near future”. Messrs Gleeson and Daly agreed, in e-mail correspondence to which Mr Huntington was a party, that they should send letters to themselves. The letters were not, in fact, sent to them.   But they were sent to others.  

87.	On 6th August 2002 Mr Huntington e-mailed to Mr Myhal a version of Mr Myhal’s draft of 22nd July, which contained his proposed amendments, with the following comment:

“I understand that Mike [Daly] is coming up to Toronto to see you later this week with a view to trying to finalize the LTIP plan for Imagine. Attached are our collective comments/revisions on the last draft of the plan – which I think encompasses all of the discussions we had in NY”.

88.	This version had a number of significant amendments. These did not include 
any change to the first paragraph, which still referred to the triumvirate. 

89.	They did include, amongst several other changes the following: 

(i)   	The wording of the first paragraph (“Purpose”) was changed from:

“… a financial participation in the finite-risk reinsurance business of Imagine under their direct management …”    to 

“… a financial participation in the business of the Imagine Group under their direct management …”

(ii)    	The wording of the second paragraph (“Background”) was changed 
	from:

“… have been charged with building and expanding Imagine’s finite-risk reinsurance business (“the LTIP Business”) …”   to
“… have been charged with building and expanding Imagine’s business (“the LTIP Business”) …”
(iii)    The wording of the third paragraph (“Eligibility”) was changed from:                        
“Participation in the LTIP will be open to designated managing partners and other senior executives of Imagine as selected by the Board of Imagine from time to time.”   to
“Participation in the LTIP will be open to designated managing partners and other senior executives of Imagine as selected by the designated managing partners from time to time.”
(iv)  	The wording of the fourth paragraph (“Distribution”) was changed from:
“At the end of each year, an amount equal to 20% of the Earned Income of the LTIP Business for that year will be credited to the LTIP. Of this amount, one-quarter will be paid to the LTIP participants within 30 days after approval by the Board of Imagine together with one-fifth of the opening balance in the LTIP account for that year. The remaining three quarters will be added to the balance in the LTIP”   to
“No later than 90 days after the end of each year, at the first Imagine Board meeting of each calendar year an amount equal to 20% of the Earned Income of the LTIP Business for that year will be credited to the LTIP. This 20% annual credit will be allocated to all LTIP participants as determined by the managing partners in consultation with the Imagine Board. The amount allocated to LTIP participants will vest evenly over a five-year period with the first such distribution payable 12 months after the initial allocation. For members of the Managing Partner Plan 25% of an individuals annual designated amount together with any accrued interest income may, at the participants option, be paid in cash to the Senior LTIP Pool participants within 30 days after approval by the Board of Imagine together with one-fifth of the opening balance in the LTIP account for that year. The remaining amount will be added to the individual’s balance in the LTIP Plan account… ”

	     	(v)     The re-draft also provided that:
“The Managing Partners may designate sub plans to individual business units under the Imagine Group (which plans shall be substantially on the same terms and conditions of this Plan) and any aggregate percentage allocation to such sub plans of the overall 20% hereunder shall be deducted from the participants’ rights under this Managing Partners Plan”.

(vi)  	Mr Myhal’s definition of “Earned Income” was changed from:
“The net present value of any future cash flows over a five year term, calculated using conservative actuarial and discount rate assumptions, for reinsurance transactions completed during the year will be added to net income.” to
“The net present value of any future cash flows, calculated using appropriate actuarial and discount rate assumptions, for all financial services transactions completed during the year will be added to net income.”

90.	The e-mail of 6th August 2002 would have indicated to Mr Myhal (as must have been apparent to him before) that Mr Huntington was putting forward for agreement a document that would be applicable to, amongst others, Mr Huntington himself. Mr Huntington’s pleaded case was that by July 2002 the negotiations were no longer for an LTIP document that would cover all LTIP participants. This is, as Mr Huntington acknowledged, clearly wrong. 

91.	On 12th August 2002 Mr Myhal sent Mr Gleeson and Mr Huntington a memorandum commenting on the revised draft. These included the observation that:

“… .the LTIP plan that we are discussing is appropriate for the finite-risk reinsurance business but we are not comfortable extending this plan to other business activities until the precise nature of those activities has been determined”.

   Under the heading “Eligibility” he said:

“You have proposed the creation of two separate plans, one for the Managing Partners and one for all others. We don’t understand the significance of having two plans. Our preference is to have one plan encompass everybody and not create two separate classes. We also need to make it explicit and clear that the Board will ultimately approve eligibility and allocation”.       		[Underlining added].

 “Everybody” plainly included the Managing Partners.

92.	Mr Myhal’s memorandum also included the following:

“4.	Deferred Payout

As above, we feel that all people should be treated equally. We can either extend the immediate 25% vesting to everyone or have some combinations of your two proposals…. ”

93.	On 14th August Mr Daly e-mailed Messrs Gleeson and Huntington expressing the view that they should meet in New York before the production conference which was to take place in Barbados between 23rd and 26th September and “don’t leave until we have a document that we all can live with”. The idea was to present a final document to the producers on that occasion.

94.	A further draft of the plan was produced dated 25th September 2002. In this draft the first two paragraphs read:

“Purpose

To provide management of Imagine with a long term incentive reward plan. The Management Long Term Incentive Plan (“LTIP”) will provide designated key management with a financial participation in specified businesses of the Imagine Group under their direct control.

Background

In 2000 Trilon and Golden 1 (“the shareholders”) collectively invested US$ 200 million cash to form the Imagine Group. With this initial capital, management has been charged with building and expanding Imagine’s businesses. Such businesses shall include the finite risk insurance and reinsurance business and such other businesses as shall be explicitly agreed by the Shareholders to be the subject of this LTIP (the “LTIP Business”).

……

Eligibility

Participation in the LTIP will be open to key management of Imagine designated by the Board of Directors as participants….”

95.	The omission of express reference to Mr Huntington, Mr Gleeson and Mr Daly (either in the first or the third paragraphs), was consistent with the Brascan requirement, by now accepted, for there to be one plan covering everybody. It did not arise out of any proposal by Mr Huntington that the document under negotiation should now apply only to employees other than those three. It is also apparent from the definition of LTIP Business that point 6 of Mr Huntington’s Overview document of 27th June (“must reflect all value contributions created by management”) had gone. 

96.	The 25th September draft also incorporated vesting provisions which conformed with Mr Myhal’s proposal in his 12th August memorandum to the effect that vesting for all participants would take place as to 25% at the end of the first year; and then in equal amounts for the next four years. The 25% could be taken either in cash or SARs.

97.	The minutes of the Imagine Board Meeting of 26th September record:

“The LTIP plan components are still under discussion by Tom Gleeson, Brad Huntington and representatives of the shareholders."

The 25th September draft was part of those discussions. 

98.	Mr Huntington produced a further draft in November 2002. The paragraphs headed “Purpose”, “Background”, and “Eligibility” were the same.

99.	The minutes of the Imagine Insurance board meeting of 27th November 2002 record that:
“Mr Brad Huntingdon reported that he had presented a slightly revised LTIP document to the shareholder on November 19, 2002 in Bermuda. The shareholder did not see any issues which were not resolvable. The document was passed on to legal counsel for final review and concurrence.”

100.	On 17th January 2003 Mr Huntington wrote to Mr Daly and Mr Gleeson an e-mail which included the following:
“As part of our LTIP discussions with Brascan we need to determine whether they will accept (i) the setting up of sub-programs in the LTIP, and (ii) variance in vesting according to the duration of different types of liabilities.”

101.	On 29th January 2003 Mr Myhal sent a further draft of the LTIP plan to Mr Huntington and Mr Gleeson (“the Myhal draft”). This draft contained the same wording for the “Purpose”, “Background” and “Eligibility” paragraphs and, therefore, the same definition of the “LTIP Business”.  The Myhal draft (like earlier drafts) covered all those who would be entitled to participate in the LTIP. It was not divided into a senior management LTIP and an employee LTIP, nor did it provide for the creation of sub-plans as discussed by Mr Huntington in his 17 January 2003 e-mail. It provided that allocations of the LTIP would be made each year and that the amount allocated would vest over a 5 year period. 25% would vest at the end of the first year, and the remaining 75% would vest in four equal parts over the remainder of the 5 year vesting term. 
.
102.	The Myhal draft was accompanied by two memoranda, one in relation to SARs (“the Sars memorandum”) and one in relation to the definition of LTIP Income (“the Income memorandum”). The covering e-mail proposed that Mr Gleadall, as Chairman of Imagine, would provide these memoranda to Mr Huntington in order to describe the way in which income would be calculated and the SARs would be priced. Mr Myhal’s idea was to reduce the main document to 3 pages, with the details set out in memoranda. 
103.	The first two sentences of the first paragraph headed “Phantom Equity Appreciation Rights” in the May LTIP and the second of the two paragraphs so headed were in the same terms (with the substitution of PEARs for SARs) as the second paragraph in the SARS memorandum. The provision in the May LTIP under the heading “Liquidity” regarding loans was taken word for word from the equivalent section in the Myhal draft. The definition of “Liquidity Event” was adapted from the SARS memorandum. The language in the May LTIP in relation to Termination was very similar to that contained in the Myhal draft. The language under the heading “Board Decisions” was identical.
104.	On 30 January 2003, Mr Huntington replied acknowledging receipt of the revised documents, noting that he would review them and discuss any issues or amendments at “our Toronto meetings”. 

105.	On 11th February 2003 the triumvirate attended a Board Meeting of Trilon Financial in Toronto, at which they made a presentation describing Imagine’s business. There was a further meeting on 13th February between the triumvirate and Messrs Myhal and Robertson in which the LTIP was to be discussed. It was not. The meeting was dominated by heated exchanges between Mr Gleeson and the two representatives of Brascan on matters not material to the present case.

106.	On 16th February 2003 Mr Daly sent an e-mail to Mr Huntington in which he referred to the fact that Mr Huntington would be discussing with Mr Robertson or Mr Myhal the vesting period that would apply to Mr Gleeson and Mr Huntington and asked them to discuss what was being considered for himself. He indicated that vesting over a 10 year period was unacceptable. Mr Huntington replied: “I was going to suggest 12 years for you given that you love it here so much”. His e-mail reply did not suggest that the request was irrelevant because the document under discussion would not affect Mr Daly or Mr Gleeson.

107.	On 13th March 2003 the Board of Imagine Insurance approved the 2002 LTIP aggregate calculation but resolved that the allocation to individual participants would be approved at a later date. 

108.	On 21st April 2003 Mr Huntington sent a further draft of his 2002 LTIP calculations to Mr Myhal and Robertson and said:
“George, Bruce,
I have been trying to finalize letters to all our employees for the 2002 LTIP allocations which we have discussed a few times (and which we have previously approved the pool size … but not individual allocations at the board level). I have made a number of adjustments since we last talked and accordingly I wanted to run these by you. I also wanted to see if we could reach agreement on the “Plan document” narrative which we discussed last time in Toronto and which I would like to distribute to the employees.”

He enclosed a list of 2001 actual and 2002 proposed allocations (which included Mr Daly but not himself).

109.	During the period from February to May 2003 there were further discussions between Mr Myhal and Mr Huntington about the LTIP document. 

110.	On 1st and 2nd May 2003, e-mail correspondence took place which originated from or was copied to Mr Huntington, Mr Myhal, Mr Robertson and Mr Daly. On 1st May 2003 Mr Huntington e-mailed as follows: 
“Attached is some wording I would propose on the compounding of the LTIP. Does this coincide with what we discussed the other day? I am having staff meetings in Dublin commencing tomorrow and am hoping we can agree something before then. If you are in agreement, I would copy this into the two page document (the exec summary version) you produced on the LTIP previously." 

111.	He appears to have been referring to the shortened version of the LTIP     document, together with supporting memoranda, which Mr Myhal had sent to him on 29th January 2003; and to have been seeking to agree the LTIP document in order to send it to employees together with their 2002 LTIP allocations.
112.	 By this stage it had been agreed that the previous term whereby participants in the LTIP could take their benefits in the form of Stock Appreciation Rights should be replaced by a term that they could take Phantom Equity Appreciation Rights. 

113.	On Friday 2nd May 2003, Mr Robertson replied to Mr Huntington’s e-mail of 1st May making various drafting suggestions. In the course of his e-mail he said:

“Finally, it should be clear that the availability of PEARs can be withdrawn at any time”

114.	About half an hour later Mr Daly commented on Mr Robertson’s suggestions.  In the course of his e-mail he said:
“I am also a little concerned about the statement the Board having the ability to withdraw the PEARS at any time. This is one of the main reasons I (and I assume others) joined. It is in my contract that PEARS (SARS) is part of my overall comp. package. Isn’t [sic] a little harsh for the Board to have the unilateral ability to withdraw such a program or do you just mean accumulation mechanism.” 

115.	Mr Robertson replied the same day saying:

“I have talked to Brad about it and he didn’t have a big problem - the concept of the withdrawal of the plan is for clarity purposes only as the entire LTIP can be cancelled at any time as it is.”

116.	Mr Huntington accepted that he had indicated to Mr Robertson that he did not have a problem with the ability of Imagine to cancel the plan (which, according to his evidence, he regarded as not affecting the triumvirate). Mr Huntington’s unchallenged evidence was that, after the e-mail referred to in paragraph 114, he told Mr Daly that he was not to worry: “It does not apply to you without your consent”.  Even if this was said, about which I am somewhat sceptical, Mr Myhal was never told of this exchange and Mr Robertson’s understanding was not contradicted.  The fact that Mr Daly thought that the negotiations were going to affect him, is, however, some confirmation of how they would have appeared to someone in Mr Myhal’s position. 

117.	Thereafter drafting amendments were agreed and incorporated into the LTIP document and Mr Huntington prepared what he termed the “final” LTIP document, being the May LTIP. Those terms had been agreed between Mr Huntington and Mr Myhal in the course of various telephone discussions between 21st April and 8th May 2003. Amongst other changes, under “Purpose” the plan now referred to “designated employees” and under “Background” a sentence was added to the third paragraph:

"Of this amount, one half, 10 per cent would ordinarily be expected to be allocated specifically to individuals”       

The promulgation of the May LTIP

118.	On 8 May 2003, Mr Huntington e-mailed to all employees of Imagine entitled to participate in the LTIP (other than himself) saying:
“I am pleased to enclose your LTIP allocation and supporting documentation”.
The attachments were described as “allocation letter & election form.pdf” and “Imagine LTIP FINAL document.pdf”. The latter document was the May LTIP. The accompanying letter began:

“The Board of Directors of Imagine Insurance Company Limited (“Imagine”) has now approved both the aggregate and individual allocations for the Imagine Long Term Incentive Plan (“LTIP”) for the 2002 underwriting year. The LTIP program is attached for your reference and the detailed terms and conditions thereof shall govern all LTIP allocations.”		

Conclusions on the application of the May LTIP

119.	Imagine’s case is that Mr Huntington agreed that the May LTIP would be applicable to him and that his LTIP entitlement is to be found in the contract read with, and varied by, the LTIP document.  Mr Huntington’s contention is that the May LTIP was agreed as the plan which would apply to those employees who had been told that they would be participants in a plan but to whom no plan document had yet been provided. But it would not apply to others, such as himself, who had specific contractual entitlements, unless and until they agreed that it should do so. As he put it:

“ ..what is always implied in all of these discussions is that it relates to what we have been discussing, which is trying to get this general plan for employees finalised.  It does not, in my view, and was  never certainly addressed as meaning a negotiation of  one plan that would override other potential plans or agreements that Imagine had at that point in time.”
 
120.	What was agreed is to be decided objectively: by examining what passed between Mr Huntington and Mr Myhal, representing Imagine for this purpose, in order to determine what those communications would have conveyed to a reasonable person in their respective positions. Approaching the question in that manner, I am satisfied that the agreement that Mr Huntington reached with Mr Myhal was, as Imagine contends, an agreement that the May LTIP plan should set out and apply to all those, including himself, who were (or would become) entitled to participate in the Imagine LTIP plan and the pool of 20% of Imagine’s income therein referred to. The May LTIP was negotiated, agreed and distributed on that basis. To that extent Mr Huntington’s contract was varied.  I have reached that conclusion for the following reasons. 

121.	The negotiations between Mr Huntington and Mr Myhal, which relevantly began in March 2002, took place in the context of an understanding that there would have to be discussions about, and agreement as to, a further document embodying the LTIP plan that was to apply both to Mr Huntington and others and to be the definitive document in respect of the overall plan. There was a continuing negotiation for more than a year as to what the terms of the LTIP should be. As was apparent from the express wording of the early drafts, the negotiation covered the position of the Managing Partners, as Mr Huntington called the trio of himself, Mr Gleeson and Mr Daly, as well as others. At one stage in the negotiations Mr Huntington was arguing for the right on the part of the Managing Partners to create sub-plans. Mr Myhal resisted that and indicated that Brascan wanted a single plan covering everybody. “Everybody” included Mr Huntington himself. Thereafter negotiations continued as before on the footing that there would be a single plan covering all the participants.  Nothing happened during the course of the negotiations to indicate that at or beyond a certain (unidentified) point the negotiations were no longer to be about terms applicable to everyone, and would not apply to Mr Huntington.  In those circumstances the removal of the names of the managing partners from the draft and the use of the expression “designated key management” in the September and November drafts, and “designated key employees” in the May LTIP, did not signify that the whole basis of the negotiations had changed. The negotiations concerned a single pool and the rights of all the participants in respect of their share in it. 

122.	Mr Huntington claims that, when negotiating the terms of the LTIP he was doing so in his capacity as one of the senior executives of the company seeking to negotiate with the shareholder the terms of a plan that had been promised to the employees to whom it was necessary to give incentives. He was not engaged in a negotiation in respect of his own contract. But at no stage during the prolonged negotiations did he suggest to Mr Myhal that he was only acting in the former capacity, or that the terms of the plan that he was negotiating would not apply to himself (or to Mr Gleeson and Mr Daly). The “Eligibility” criterion expressed in the May LTIP contemplated an LTIP amount in which all participants would share on the terms set out in the plan. In those circumstances Mr Myhal was entitled to understand (as in fact he did) that Mr Huntington was agreeing a document that would apply to all LTIP participants including himself. If Mr Huntington intended that what was under discussion should not supercede the provisions of his employment contract he could readily have done so.

123.	 Mr Huntington suggested, in the course of his evidence, that, even if the plan or plans that had been agreed mentioned the three managing partners by name, the plan[s] would still not have applied to him because they were only a “framework” or “overall structure” and some further agreement was needed for them to affect his contract. I cannot accept this. The reasonable reader of a document put forward for agreement by Mr Huntington and referring to him in terms would be entitled to assume that, if agreed, it was to apply to him, in the absence of some reservation that made it clear, that, despite its terms, it was not to do so. He would not regard it as necessary to have a separate agreement, or explicit statement, that it should do so. 

124.	Although, in the circumstances that I have described, later drafts did not refer to the triumvirate by name, the understanding of the parties must, objectively speaking, have remained the same. Mr Andrew Clarke, QC, for Mr Huntington submitted that the removal of the names marked the genesis of a new type of plan. But nothing in the communications indicated that the old basis of negotiation was dead and that a radically different one had been born. 

The letter of 8th May 2003

125.	Attached to Mr Huntington’s e-mail of 8th May 2003 was a letter the first paragraphs of which read:

“The Board of Directors of Imagine Insurance Company Limited (“Imagine”) has now approved both the aggregate and the individual allocations for the Imagine Long Term Incentive Plan (“LTIP”) for the 2002 underwriting year. The LTIP program is attached for your reference and the detailed terms and conditions thereof shall govern all LTIP allocations.
Your allocation for the 2002 underwriting year is $ x”	(Bold added).
126.	That letter was sent to:

(a)	 	Mike Daly;

(b)	 	Jason Fisher, Maria Nicholls and Patrick Grealy;

(c)	 	Bob Forness;

(d)	 	Steve Grill; Jeff Stevenson; David Koegel; Guy Cloutier, Morton  
          Helge, Hugh O’Donnell, Peter Norris and Jean Francois Bahier.

(e)	 	Lars Dehn and David Dodson.

127.	Mr Daly was the only managing partner other than Mr Huntington still with Imagine. The employees in category (b) had contracts with Imagine that referred to participating in Imagine’s profit sharing plan. Mr Forness in category (c) was persuaded to change from his contract, which related to the Convergence Capital division and gave him a share in its profits, to a contract which would entitle him to participate in the Imagine LTIP. The amount of his allocation under the May LTIP ($ 300,000) was more than he would have got under the former contract. Negotiations were well in hand before the letter informing him of his allocation. A draft contract was provided before May 2003. Mr Huntington sent him the latest draft of a contract on May 16th, and Mr Forness later signed it. That contract incorporated the provisions described in “the long term incentive plan document”. This was the May LTIP.

128.	 In category (d) Mr Grill never signed a written contract and was employed pursuant to a verbal agreement made with Mr Gleeson. A draft contract of 17th May 2002 provided for him to be subject to a separate LTIP document to be produced.  He was told that he would benefit from the Imagine LTIP plan, i.e. that he would participate in the sharing of 20% of income, and he was treated as entitled so to do. He claimed to be entitled to a million dollars over the first few years to make up for the options he had had at Merrill Lynch. In effect he had an oral entitlement to share in the Imagine LTIP.  Messrs Stevenson and Koegel were employees of Enterprise Re which Imagine acquired in 2001. Mr Stevenson was allocated $ 50,000 despite the fact that his entitlement under his contract was to a negative figure, as an incentive to encourage him to come (as he subsequently did) onto standard Imagine LTIP terms. In practice both were treated as entitled to participate in Imagine’s LTIP.  The remainder of those in category (d) had contracts from 2001 or 2002 which stated that they would be entitled to earn “long term bonus/incentives” which would be a function of the increase in the net economic value of the Imagine Group each year and which would vest equally over five years, but did not expressly use the term “the LTIP plan”.  In 2004 Mr Norris entered into a revised contract which expressly referred to the LTIP. 

129.	In category (e) the position of Mr Dehn is unclear. Imagine’s belief is that he had a contract in similar terms to those in category (d). So far as Mr Dodson was concerned, he had a consulting arrangement and, at any rate for 2002, was given a special allocation. Both Mr Dehn and Mr Dodson were always treated by Imagine as entitled to participate in Imagine’s LTIP.

130.	Mr Huntington’s evidence was that the letter was sent to Mr Daly and other 
addressees who should not have received them; and that it was an act of sloppiness on his part that this occurred. I do not accept this. In my judgment Mr Huntington sent the letters to those to whom they should have been sent; namely those who were, or were treated as, entitled to participate in the Imagine LTIP – in Mr Forness’ case a little prospectively. 

131.	Consistently with this, as I have said, on 21st April Mr Huntington had sent Mr Myhal and Mr Robertson his 2002 LTIP calculations which listed all those in categories (a) – (e) above. The accompanying e-mail included the sentences “I have been trying to finalize letters to all of our employees for the 2002 LTIP allocations which we have discussed a few times…..I also wanted to see if we could reach agreement on the “Plan document” narrative which we discussed last time in Toronto and which I would like to distribute to the employees””. As this e-mail shows the parties were proceeding on the basis that the letter would be circulated to those entitled to participate in the LTIP. 

132.	Mr Sekse, who was previously on terms which entitled him to share in the profits of Convergence Capital, did not receive the May LTIP on 8th May 2003. But he did receive it on 21st July 2003 when he was offered a new contract, under which he moved to employment within the group as opposed to any individual division, and became entitled to participate in the Imagine LTIP. 

133.	Of those employees of Imagine to whom Mr Huntington did not send the letter, one was Anthony Breaks, who was engaged in relation to conduit finance, and another was Chris Parker, who was engaged in relation to Convergence Capital. There were five others who were employed on a Lloyd’s based contract and bonus scheme giving them a percentage of the profits of a managing agent (Greenwich see paragraph 244 below), which Imagine acquired as from 31st December 2002.  Later some, but not all, of them came over to a standard Imagine contract.  

134.	The unifying characteristic of those to whom the letters were sent is that they were or were about to be participants in Imagine’s standard LTIP, the terms of which were intended to be set out in the May 2003 LTIP. Those sent the letter did not include employees who only had a right to share in the profits of some particular part of Imagine’s business.  

Post May 2003 events

135.	The nature of the agreement made in May 2003 is to be determined as at the time when it was made. I consider what happened thereafter only for the purpose of seeing whether it casts any light on what must have been the content of  the communications between the parties prior to the May LTIP.

Vesting of allocations made in respect of 2001 - 2004

136.	The contract did not provide an option to have the initial vesting of Mr Huntington’s annual entitlement taken as to 25% in SARS. But it did provide an option to take 25% in cash, with the balance vesting over a four year period as SARs. In March 2002 the triumvirate discussed how vesting was to work for them in relation to 2001. They interpreted their entitlement as being an entitlement to a 25% initial allocation, whether taken in cash or shares. On March 14th 2002 the Board of Imagine approved the allocation in principle on the footing that further discussion needed to take place between the Imagine principals and the directors. The allocation provided for the triumvirate to take 25% initially; but did not specify that the 25% allocation had to be taken in cash. 

137.	 In respect of 2001 Mr Huntington and Mr Gleeson took their initial vesting as to 25% in cash. Mr Huntington’s 25% was $ 375,000. Mr Daly took his in SARS.  What appears to have happened is that Mr Myhal, in discussion with Mr Daly, accepted that the triumvirate could take their allocation as to 25% in year 1 (whether in cash or Sars),  but took the view that, when it came to finalizing the LTIP the same right should extend to all relevant employees. His 12th August 2002 memorandum expressed the view that all participants should be treated equally, and that one way to do so was to extend the facility that the triumvirate enjoyed to others. 

138.	In respect of 2002 Mr Huntington and Mr Gleeson again took their initial 25% vesting in cash. Mr Huntington took $ 139,450.  Mr Daly took his 25% in SARs. In respect of 2003 Mr Huntington took 25% of his award of $ 4 million in PEARs.   

139.	In those circumstances I do not regard the fact that, in respect of 2003, Mr Huntington took the initial 25% of his $ 4,000,000 award in PEARs as showing that he was thereby accepting that the May LTIP applied to him. In view of the fact that the triumvirate had claimed (whether rightly or wrongly) to be entitled to 25% vesting in SARS in respect of 2001 and 2002 (although only exercised in those years by Mr Daly), and that Mr Huntington had accepted that but wanted the right to be extended to other employees, the fact that Mr Huntington took his initial 25% vesting in SARS in respect of 2003 is not referable only to an agreement by him of a term giving him that entitlement as part of the negotiations for the May LTIP.

Conflict of interest

140.	In 2004 an issue arose as to the interpretation of the May LTIP and in particular the section of it that reads as follows:

“Election of Allocation

Within thirty days of each allocation, each participant shall irrevocably elect one of the following alternatives with regard to the prior underwriting year’s allocation to their LTIP account: (i) with respect to vested and unvested amounts, to apply their allocation, in whole or in part, to acquire a long-term equity like component – called Phantom Equity Appreciation Rights (“PEARS”), or (ii) with respect to vested and unvested amounts, to elect a short term liquid option (the “Short Term Option”) – via a deposit of their allocation, in whole or in part, into a notional account which shall accrue interest at a short term government bond yield designated by the Board of Directors of Imagine until distributed. If there is a failure to elect, alternative (ii) will be the default option ……

141.	The question was whether a participant was (a) bound to make an election (PEARs or short term option) in respect of the whole of his allocation, both vested and unvested, or (b) whether it was possible to make a different allocation as between vested and unvested amounts. In an e-mail of 12th May 2004 from Mr Huntington to Mr Daly and Maria Nicholls Mr Huntington said:

“I am somewhat conflicted on the issue of interpretation of the LTIP plan due to how I have historically taken my allocations, but I enclose the relevant section of the final LTIP plan together with a legalistic view of the issues on both sides”

142.	He then set out the section and expressed the view that a court would interpret the document in sense (b).

143.	It is not clear from the 12th May e-mail why exactly Mr Huntington regarded himself as conflicted. Imagine submit that it was because his LTIP entitlement was also governed by the May LTIP. Mr Huntington’s evidence was that he regarded himself as “somewhat conflicted”, because, since there was a provision in the contract that he could take out 25% in cash and the rest in SARS, of which he had availed himself in respect of 2001 and 2002, he might be seen as favouring the second interpretation of the LTIP – or at least as not being a wholly independent arbiter. 

144.	I accept this evidence for three reasons. Firstly, only Mr Huntington can know what his thought processes were and I do not believe that he was inventing them. Secondly, while it can be said that there was no real conflict unless he was bound by the May LTIP, it is noticeable that Mr Huntington only states himself to be “somewhat conflicted”. Thirdly, the expressed ground for the conflict arises from the way in which historically he had taken his allocations. That must refer to the fact that in respect of 2001 and 2002 he had taken 25% in cash and the remainder in SARS. His entitlement to both of those allocations arose before the May LTIP was agreed.  

The share option plan

145.	Throughout 2004 there were extensive discussions about replacing the LTIP with a share option plan. Such a replacement could only have gone ahead, without a breach of Mr Huntington’s contract, if the May LTIP, under which the Board had a right of cancellation or amendment, applied to him. Mr Huntington did not suggest during these discussions in 2004 that, whilst Imagine could cancel the plan for other participants, they could not do so in respect of him because his rights were solely contained in the contract which contained no power of cancellation. That circumstance does not appear to me to advance the case of either side. Imagine cannot point to a moment in 2004 when Mr Huntington stated that the May LTIP applied to him; Mr Huntington cannot point to a time in 2004 when he clearly stated that it did not. In the absence of details of any proposed plan for the future the issue as to whether Imagine could cancel the LTIP was not to become a live one until the following year.  

146.	None of the events that I have described causes me to doubt the analysis that I have set out in paragraphs 119 - 124 above.

Estoppel

147.	Mr Huntington contends that Imagine is estopped from claiming that his entitlement is governed by the contract of 1st September 2000 as varied by the May LTIP. Imagine alleges that Mr Huntington is estopped from claiming that his entitlement is governed solely by that contract. Mr Huntington’s alleged estoppel is founded on Imagine’s response of 3rd May 2005 to his memorandum of 20th April 2005. I deal with that in paragraphs 164 -168 below. 

148.	Imagine’s estoppel is based upon the contention that Mr Huntington led Imagine, represented by Mr Myhal and Mr Robertson, to proceed on the basis that the May LTIP governed the operation of the LTIP for all employees and senior management entitled to participate in it including himself.  Since I have already held that the communications that passed between Mr Myhal and Mr Huntington were, objectively construed, such as to constitute an agreement that the May LTIP should apply to him, I do not propose to consider the alternative claim based upon estoppel any further than to say that it does not appear to me that the matters set out in paragraph 9B of the defence establish  with the necessary clarity the representation necessary to found an estoppel; nor does it appear to me established that Imagine acted in reliance upon any understanding that the May LTIP applied in a manner that would render it inequitable for Mr Huntington to resile from that position. 

Repudiatory breach

The facts

149.	Mr Huntington contends that Imagine was in repudiatory breach of his contract in three respects:

(i)	it failed to make an LTIP determination and allocation in respect of 
	him for the year 2004 by 31st March 2005 or thereafter;

(ii) 	it maintained that it was entitled to leave out of account when 
calculating Adjusted Net Income for LTIP purposes sums in relation to Danish Re and LION;

		(iii)	it maintained an entitlement and intention unilaterally to remove 	
			Mr Huntington’s contractual rights.

150.	On 31st March 2005 Mr Huntington reminded Mr Myhal by e-mail that he had said in Barbados (on the occasion of the Board meeting) that he would talk to Mr Robertson about the LTIP pool allocation and asked whether this had been resolved from their end. Mr Myhal replied that there had been a number of discussions but that he needed to discuss matters further with new investors. 

Mr Myhal’s Memorandum of 6th April 2005

151.	On 6th April 2005 Mr Myhal sent Mr Huntington a memorandum headed “2004 Variable Compensation” attached to an e-mail which said “We need to make the announcements on the LTIP soon”. In it he set out what he described as the board’s various concerns with the variable compensation plan as “we formulated our plans for raising capital and going public through a distribution of Imagine’s common shares”. He indicated that for three reasons the directors thought that it was no longer appropriate to pay out 20% of the company’s net underwriting earnings. He said that since, in the context of going public, shareholders required the management’s interests to be more directly aligned with theirs, the plan was to replace the existing LTIP with a more typical share option plan and to implement that change as soon as possible. 

152.	He described Brascan’s current practice in relation to share options, which was to allot to senior executives such number of options as would mean that the value of their variable compensation was up to 3 times the value of their base salary, producing in Imagine’s case annual option grants to the most senior executives of options having a value of approximately $ 1.3 million, roughly comparable with what the most senior executives had received annually. 

153.	He said that his strong preference was to adopt this plan immediately:

“The alternative of course, would be to follow our existing LTIP plan for one more year as you have suggested. If we agree to go down this path, we need to arrive at a payout amount that is fair to the shareholders and takes into account some of the deficiencies and adjustments described above.”

He went on to say that, in his view, this meant making major adjustments to the NPV schedule that he had been shown in Barbados namely:

(a)  	eliminating Dan Re and LION, which he described as not 
fitting “the classic definition of a reinsurance transaction as contemplated when the LTIP was envisaged” from the calculation;

(b)  	applying an appropriate capital charge (which he suggested 
was $ 7.5 million) to reflect the constraint placed by reinsurance activities on capital investment because of the requirement to maintain restricted cash to support the reinsurance activities; and 

(c)  	adequately catering for possible fess and fines arising from the 
current SEC investigation (as to which see paragraph 254 below).

Mr Huntington’s Memorandum of 20th April 2005

154.	On 20th April 2005 Mr Huntington wrote a long memorandum, which he sent to Mr Myhal, which was expressed as “further to your written memorandum of April 6th and our previous verbal discussions at the board meetings in Barbados (March 21st and 22nd)”, and described as “a formal response to your thoughts regarding how to change Imagine’s variable compensation plans”.  His memorandum recognized that in practice Brascan could use its voting shares in Imagine to amend or vary the LTIP plan; and went on to consider the implications of doing so.

155.	Under the heading “Current/Historical entitlements” he said:

“In the main, most employees’ rights and entitlements are as set forth in the LTIP plan. This plan creates a pool of 20% of Income (as defined in the plan, but which essentially is the NPV from operations of the company, excluding investment return on the initial shareholder funds of the company.  Certain employees (myself and Mike Daly) have employee entitlements which pre-date the written LTIP document and which have details of the 20% pool written into their employment contracts. These latter employment agreements also specify contractual minimum participations in the pool (being a contractually stated 17.5% in my case). However, other than the above two exceptions, employment agreements for all remaining employees have the LTIP incorporated by reference into their employment contract ...”

156.	The memorandum explained the historical practice for calculating income.  Mr Huntington pointed out that although several individual discussions had taken place between various directors (primarily himself and Mr Myhal) about changes, no change had been agreed at board meetings and no discussions about specific change had occurred (as opposed to generic discussions of possible future change). 

157.	Under the heading “Mode of Change and the Way Forward” Mr Huntington wrote:

“With respect to changing the LTIP plan, two different issues need to be addressed. The first relates to variable compensation up to the date of any change (specifically the 2004 year allocations and the 2005 stub period), while the second relates to how to change the plan in the future.

Past Performance

Regarding the issue of variable compensation for past performance, it is a straightforward matter of contract law that one party cannot unilaterally change the terms of its contract with another party. This is especially so on a retroactive basis. Each of the employees of Imagine have, in good faith and based on their contracts with the company, worked diligently during the 2004 calendar year and the first four months of 2005 calendar year to produce significant value to the shareholders of Imagine. Based on this, I cannot see how the variable compensation for the Company can be interpreted otherwise than to apply the LTIP plan on a basis consistent with previous years and as the plan was originally intended.” 

158.	The above paragraph was a plain indication that, whilst the LTIP could be changed for the future, rights up to the change had to be honoured.

159.	The memorandum went on to discuss the suggestion that the Dan Re and LION transactions should be left out of the LTIP calculations. In relation to Dan Re Mr Huntington said that there were no fewer than four previous examples of acquisition-type transactions that had been taken into the LTIP pot for value calculation purposes. He described the LION transaction  as identical in nature to the SPI transaction which “had been taken into the LTIP without objection on the part of Brascan”.

160.	Under the heading “Going forward” he suggested that the best way to proceed was to set forth clearly to key employees the specifics of their 2005 package under the proposed option plan; and that the success of these discussions (in the sense of keeping the employees motivated) would hinge on reinforcing Mr Myhal’s statement made at a conference in Ontario in 2004 that the intent was not to change the overall economics for these recipients but to alter the format. He ended by saying:

“On a personal note, I would also like to request your suggested specific option allocations for myself in 2005 and going forward so that I can properly evaluate the incentive compensation package you are offering as an amendment to my existing package...”

He also observed that a suggested cap on the level of options of three times annual compensation (excluding bonuses) was a suggestion of a decrease in incentive compensation of approximately 50% or 60% in his case and asked Mr Myhal if that was his intent. He indicated that he was available for discussion at any time.

	      Mr Myhal’s e-mail of 3rd May 2005

161.	On 3rd May 2005 Mr Myhal replied: 

“Basically, in order to resolve the 2004 LTIP issue and help us move on, where we’ve come out is as follows:

For 2004

We have adjusted the LTIP pool NPV calculation that you presented totaling $ 125,861 to reverse the Dan Re (39,386) and LION items (37,146) for the reasons explained in my earlier memo. The revised balance on this basis is $ 49,429. We have decided not to deduct a capital charge for 2004 …..On this basis the 2004 LTIP pool is            $ 9,885. In addition, we are not opposed to paying special one-time bonuses to those individuals that worked over and above the normal call on the Dan Re and Lion transactions…

For 2005

We are preparing a management compensation plan to be presented at our first full board meeting (probably in August/September). This plan will be consistent with what we have previously stated and will be specific in amount so that individuals can develop some expectation of what it means for them…Please note that this plan will cover the senior management team including yourself , Mike Daly, Bob Forness and others…

Finally if there are some managers who feel that these determinations violate the terms of their employment contracts then we should sit with each of them to discuss our compensation approach and philosophy. If at the end of that meeting they remain uncomfortable then we should negotiate a fair and amicable basis for departure”.

162.	Mr Myhal intended the words underlined to refer to what he had said at the 2004 conference in Ontario to which Mr Huntington had referred in his 20th April memorandum. He told me that the last paragraph was not included because he believed that what he had said in the preceding paragraphs did violate the terms of employees’ contracts but because he wished to indicate that if employees were uncomfortable with the change Brascan would not stand in the way of their leaving and would negotiate some fair and amicable basis for their departure.

163.	Whatever Mr Myhal’s private thoughts, if LION and Dan Re should have been included in the LTIP, the e-mail of 3rd May indicated that those employees who did not agree would have to accept it or leave on terms to be agreed.  

Estoppel

164.	Mr Huntington relies on the failure of Mr Myhal to contradict his assertion, made in his memorandum of 20th April 2005 (see paragraph 155 above), that his rights in relation to the LTIP lay under the contract as constituting, in context, a representation or acceptance that he was so entitled, from which Imagine could not fairly resile in the light of the fact that, in reliance upon it, he acted on the assumption that that was accepted, and never considered, or asked lawyers to consider, that the position might be different or that his contract had been varied. 

165.	In order for any representation or convention to found an estoppel the representation or the manifestation of the assumption must be clear and unequivocal.  Such a representation can arise by implication from what is said. Similarly the acts of the person alleged to be estopped may manifest an assumption, even though not spelt out in terms, if the only reasonable conclusion from his conduct is that he is proceeding on that assumption. But the circumstances in which a representation of the necessary clarity may be derived from a failure to pick up on a point made by the alleged representee are likely to be limited.

166.	I do not regard the exchanges between Mr Myhal and Mr Huntington as constituting, impliedly, a representation or acceptance by Imagine, or a manifestly shared assumption that, so far as the LTIP was concerned, Mr Huntington’s rights were derived from the contract alone (which hereafter I call “the proposition”) for two reasons. 

167.	Firstly, the words on which the estoppel is based do not clearly state that Mr Huntington’s LTIP entitlement was only to be found in the contract. Mr Huntington‘s evidence was that he thought that was implied; but it does not seem to me that that was clear. It was not in fact clear to Mr Myhal who took the passage to be a statement of Mr Huntington’s concern that his contractual minimum participation of 17.5% in the LTIP pool should be respected under the new arrangements. That would be consistent with the fact that the wording refers to a pool defined by the May LTIP (“..entitlements are as set forth in the LTIP plan. This plan creates a pool of 20% of Income”), details of which are written into the contracts of the triumvirate together with minimum participations. The letter does not suggest any distinction between the details of the pool in the May LTIP and the details of the pool as applicable to the triumvirate. 

168.	Secondly, it does not seem to me that Mr Myhal’s response was such that Mr Huntington was entitled to assume that Mr Myhal was indicating an acceptance of the proposition. The April 2005 memorandum was a nine page document, containing a number of points. Mr Myhal’s e-mail of 3rd May was less than a page in length; and was largely composed of a statement of what Imagine intended to do, rather than an engagement with the several points raised in the memorandum to which it was a response. The final paragraph indicated that Imagine was going to act in the way proposed even if some managers felt that what was proposed violated the terms of their contracts. But that does not constitute an acceptance, let alone a clear acceptance, of the proposition.   

The telephone conversation of 5th May 2005

169.	On 5th May 2005 Mr Huntington had a conversation with Mr Myhal on the telephone. Mr Huntington suggested that Brascan was likely to be concerned about paying out cash in respect of LION and Dan Re before Imagine had received the return of its outlay. He and Mr Myhal agreed that it should be possible to agree a vesting mechanism which would address that concern by having, in respect of the two transactions, a cash basis of vesting so that, as money was realised on these transactions, cash would vest in the participants.  Mr Huntington also referred to the need to come to an agreement on the way forward in respect of the replacement of the LTIP. 

170.	Mr Huntington reported to Messrs Forness, Doyle and Daly the same day by e-mail that Mr Myhal had “tentatively agreed” to Mr Huntington’s suggestion that Dan Re and LION be put into a separate account for LTIP purposes on the footing that cash would be paid out to the participants in respect thereof as cash was realised by Imagine on these transactions.

Mr Huntington’s note of 6th May 2005

171.	 On Friday 6th May 2005 Mr Huntington sent Mr Myhal an e-mail with a note of the 5th May conversation which he thought reflected “what we agreed (with more detail)”. He added:

“…if you are in agreement I would ask that you e-mail me by return so that I can proceed to let the various interests know that a solution has been found and they should stop panicking”

172.	The note included the following:

“2004 Underwriting Year

Your concern for the 2004 underwriting year NPV centered on two transactions – LION and Danish Re. You have agreed to drop the other issues you had raised concerning capital charges etc. It is assumed that the only deductions for the year end aggregate NPV calculations provided to you in Barbados are actual expenses, the regular LOC capital charges (as historically calculated) and the 5% annual buffer calculation (as historically calculated)..

As I understand it, the concern from Brascan’s point of view is to avoid having to part with cash to employees as part of the 20% profit share until such time as the principal which has been invested in [LION and Dan Re] has been re-paid/retrieved/repatriated by Brascan. We agreed that we would negotiate a mechanism that would allow these two transactions to go into the LTIP pool, but solve the above concern.

It was proposed that these two items go into the LTIP 2004 pool on a modified basis -ie. we would eliminate the normal vesting under the LTIP for these two transactions and instead substitute a cliff payment mechanism that would occur the date on which Brascan achieved the above referenced re-payment/retrieval/repatriation date. Other than this change, all other normal LTIP plan provisions would apply….Until such date has occurred, no payments under the LTIP would be permitted to employees in respect of these two transactions. The transactions would be subject to the normal true-up provisions of the LTIP plan (providing for positive and negative changes in the future to continue to be taken into the plan). 

It is necessary to agree what will constitute the re-payment /retrieval /repatriation of principal [the paragraph then goes on to make suggestions as to how this should be done].

The NPV value for LION as at 12/31/2004 was US$ 37.146 million before allocation of expense loadings and US$ 29.387 million after allocation of expense loadings. The NPV for Danish Re as at 12.31.2004 was US$ 29.387 million before allocation of expense loadings and US$ 23.248 million after the allocation of expense loadings. The total contribution of these two transactions to the aggregate NPV pool calculations (after expense loadings) is thus US$ 52.635 million, creating value in the 20% pool equal to US$ 10.527 million, Accordingly US $ 10.527 million will be subject to the above special rules”.  

2005 Underwriting Year

We will make it clear to employees that you are eliminating the LTIP plan with effect as of January 1st 2005. However, you are not yet in a position to tell individuals the specifics of the replacement plan, or the specifics of individual allocations to them for 2005 and for future periods. You have stated that you hope to have such details for the meeting of the board of directors in London in August or September. It is not possible to ask employees to give up contractual rights in exchange for something that is not yet defined. Thus I suggest that we inform them of the elimination of the plan and ask them to withhold  judgment/action regarding the new plan until such time as it is clearly defined to them. Brascan and Imagine would agree that such action by employees would not prejudice or constitute a waiver of the rights of employees under their employment contracts.”

173.	On Monday 9th May 2005 Mr Myhal e-mailed back saying:

“In principle, I believe your memo reflects my understanding subject to my comments below. Both Bruce and I feel that we need to be very clear how the mechanics will work so there is little chance for disagreement down the road. In particular, there are two areas of concern:

1.  Dan Re – our invested capital today supports two businesses – the run-off business and the core business. It may be difficult to cleanly distinguish one business from the other. I’d like to avoid if possible the situation where we calculate a large profit on the run-off business but discover that we’ve only earned a meagre return on the core business.

2.  LION – mechanically this investment will be much simpler to track. Our concern however is that the cash flows are NPVd at a very low rate (risk-free rate). We certainly can’t borrow money at that rate and believe that for investments such as this, a higher rate is more reasonable.

Anyway, Bruce will speak to Mike about how we can reduce this to a set of bullet points that we can all understand so that we avoid an argument down the road”

174.	In addition to the communications referred to above Mr Huntington had left a number of voicemail messages with Mr Myhal which he did not return.  In the end Mr Huntington made arrangements with Miss Anne-Marie Kerman, Mr Myhal’s personal assistant, to have a conference call with him at 0900 EST on Wednesday 18th May. She assured him that Mr Myhal would be there. She was not, however, aware that Mr Myhal was due to travel to Brazil on 17th May and not to return until Tuesday 24th.  At the time Mr Huntington thought that Mr Myhal could not have overlooked the fact that this call was due to take place. 

18th May 2005

175.	At 1024 Bermuda time on 18th May Mr Huntington sent an e-mail to Mr Myhal and Mr Robertson, expressing his disappointment and frustration that the telephone call arranged could not take place. This included the following:

“…The discussions on this matter have dragged since Imagine’s board meeting in Barbados in March, and Imagine is now very clearly breaching its own plan rules as to the timing of award allocations, as well as its written contracts with its employees.

The variable comp. is the single most important motivator for Imagine’s staff. Every week my employees ask if there has been any movement on the issue and every week I am forced to make excuses for the delay. The unnecessary (and perhaps intentional???) delay on your part in agreeing the 2004 variable comp. has now become a large de-motivating factor for each and every one of Imagine’s staff – including myself. …

I would like to see if there is a way forward on this issue by the end of the week. I would ask that you contact me on either of the following numbers as soon as possible, or e-mail me with a time that we can have a conference call”

176.	Very shortly thereafter  Mr Robertson, who had previously spoken to Mr Myhal about his conversation on 5th May, e-mailed to Mr Huntington:

“My apologies – George had asked that I call you yesterday but I got jammed with the time difference. My understanding is that you and George agreed to the core portion of the LTIP and that there would be some earn-out element to compensate the team for the excess value created on account of the Danish Re and the commission finance deal.

From my perspective, I thought it is now acceptable to have you communicate the base level of LTIP and the allocations thereof.

I have a call scheduled with Mike later today wherein I planned on discussing how we document (in some form) how the earn-out would be calculated and paid. If you want to participate on that, please do so.

To round out the list of comp issues, we need to settle the terms for the 4 senior managers and then collectively we need to turn our minds to a comp plan for our producers. Is there anything else outstanding from your perspective?”

177.	The reference to an agreement of “the core portion/base level of the LTIP” is a reference to the LTIP without LION and Dan Re.  That represented about half the pool. The reference to an “earn-out element ”was not a reference to an NPV calculated at some discount rate, let alone a risk-free rate. The distinction is apparent from Mr Robertson’s e-mail to Mr Daly on the subject of the LTIP on May 26th :

“I was trying to come up with some earn-out formula and I think I’m making too big a deal of it. Please re-run the means using a 9% discount rate – the NPV should be chopped in half on that basis”.

178.	At 1050 Bermuda time Mr Huntington e-mailed to Bruce Flatt, the chief executive officer of the Brascan Group, as follows:

“I am taking a step in e-mailing you that I had hoped never to get to …however, I am at the end of my tether and don’t know where else to turn. I am including two documents purely for some background information (along with the most recent e-mail to George being at the
          	     bottom of this e-mail.  There are other e-mails and discussions which 
		    have taken place.  This is not intended to give you everything, just a 
sense of where we are at. As you will see, I seem to be at a stalemate in my relationship with George and Bruce.

If you would like a meeting to discuss/resolve this, I will take the next flight to Toronto or NY. Equally, if you choose to not get involved then I understand that position as well. Either way, I have enjoyed my time at Imagine and bear no hard feelings.”

Mr Huntington sent Mr Flatt his memoranda of 6th and 20th April; he did not send him his e-mail and note of 6th May or Mr Myhal’s response of 9th May.

179.	At 1052 Mr Huntington replied to Mr Robertson:

“Although I thought George and I were close to some sort of agreement on a resolution, his response to my note about it raised as many questions as answers …”

180.	 At some time in the afternoon Bermuda time,  Mr Flatt e-mailed:

“I will read all the material, and I will speak to both George and Bruce on the matter. As I have little knowledge of the past compensation plans and the operations of Imagine, I would rather not get directly involved.

I certainly hope that cooler heads will prevail and that your last paragraph does not come about.”

181.	Mr Huntington replied:

“I would echo your last sentence. However, I wanted you to know how desperate most of the employees at Imagine have become. I don’t really like/want to go over George and Bruce’s head on this but turning our incentive package into a large demotivating item has become a real issue.

Trust me that I will continue to try my best to resolve this with George and Bruce”

	     The conversation with Mr Robertson on 18th May

182.	Mr Huntington later had a conversation with Mr Robertson. During the course of it it became apparent to Mr Robertson that Mr Huntington had thought that agreement had been reached with Mr Myhal that Dan Re and LION would go into the LTIP at the figures that had been proposed, and to Mr Huntington  that that was not going to happen.  The discussion concerned (i) the calculation in respect of Dan Re, where Mr Robertson wanted the run-off and the continuing business separately valued; and (ii) the appropriate capital charge for LION, which Mr Robertson said should be higher than the risk free rate. Mr Huntington did not indicate in this conversation that he intended to resign if the issue was not resolved to his satisfaction.  

183.	The upshot of this conversation was that there was no agreement as to how Dan Re and LION should be dealt with so far as the LTIP was concerned. Nor did Mr Robertson put forward any detailed proposal for replacing the LTIP with effect from 1st January 2005. Mr Robertson gave this evidence:

“Q.   What you had done was move away from an LTIP based calculation with a different vesting period to what you describe as an earnout formula.  That is where you had reached, is it not?
A. 	 I think we were, you know, as far as we were concerned, again going back to Mr Huntington's memo here, I think this was the memo that was referencing cliff payments and what have you, yes, there was this element of earnout, there was an element of an appropriate capital charge and there was also this element effectively of trying to separate out the capital so we could properly calculate something in connection with Dan Re. (Day 6,)”

184.	In effect Mr Robertson did not accept that Dan Re and LION should go into the LTIP on the footing upon which transactions had historically gone into the LTIP, namely at an NPV calculated at the risk free discount rate. He proposed some form of as yet undefined earnout provision, and contemplated an inclusion of a capital charge for LION, and some different calculation in respect of Dan Re. As Mr Robertson accepted in evidence, he and Mr Huntington agreed to disagree.  

185.	At 2023 Bermuda time Mr Huntington e-mailed to Mr Flatt:

“Just to advise that I feel that my discussions with George M. and Bruce R. have reached an impasse….at the end of the day we appear to be at a position of agreeing to disagree on the Imagine variable compensation scheme. In particular we disagree on the size of the 2004 Imagine profit share, with George/Bruce/Brascan wanting (in my view) to retroactively change the profit sharing mechanism for 2004 …

Whilst I can empathise with the end goal of Brascan in trying to better align the interests of the group with how it incentivizes its other investments, the fact remains that Imagine and its employees have a contractual relationship which was established in a manner different to that which is Brascan’s norm. Changes to this arrangement require mutual consent and cannot be done on a unilateral, retroactive basis.
Absent any mutual agreement to the contrary, I am forced to the position of implied termination by Imagine/Brascan of the original terms of my employment agreement (which, absent the wrongful termination would have continued until September 2007). Subject to the above I propose that I affect a handover of the Imagine management to your designated appointee by July 1st 2005.

It is obviously with a heavy heart that I write this. However, I do wish Imagine the strong, healthy future that it richly deserves”.

	       Events after 18th May 2005

186.	The e-mail referred to in the last paragraph did not set out the upshot of the conversation with Mr Robertson. On 20th May Mr Huntington sent Messrs Myhal and Robertson his e-mail of 18th May to Mr Flatt. Mr Myhal replied that both of them were in Brazil and had discussed it; and that he would call on Tuesday of the following week. 

187.	On either 24th or 25th May Mr Huntington spoke to Mr Myhal and Mr Robertson. They made it clear that they were maintaining the stand they had taken in respect of the 2004 LTIP and the cancellation of the scheme for 2005. Mr Myhal asked to be provided with detailed employee allocations. On 25th May Mr Huntington offered to consider an extension of the time for a handover and asked for a proposal as to the process of resolution of his contractual dispute. On 26th May he e-mailed Mr Myhal and Mr Robertson with detailed employee allocations. 

188.	 On about 3rd June agreement was reached, as recorded in Mr Robertson’s e-mail of 8th June, that Mr Huntington would “continue as CEO in accordance with your contract without prejudice to your right to argue and our right to contest that you ha[d] been constructively dismissed as of 18th May ...”After 18th May Mr Huntington ceased to go to Imagine’s offices except for meetings with a client or an outside third party. 

189.	On 27th July 2005 the Board of Holdings resolved to remove Mr Huntington from his position as CEO with effect from 30th June 2005. On 30th August 2005 Mr Huntington’s solicitors wrote bringing his contract to an end with immediate effect. 

190.	On 15th September 2005 the Holdings Board ratified and approved the calculation of the 2004 LTIP and its allocation to plan participants as effected by Messrs Gleadall, Myhal and Lochan (to whom authority had been delegated at the 9th June meeting). This included LION, where the NPV was discounted at 7%. The use of 7% reduced the LTIP attributable to LION from about $ 37 million to about $ 33 million. The 2004 LTIP did not include Dan Re. Mr Huntington was allocated over $ 3,000,000.

191.	In November 2005 it was agreed at a meeting attended by Messrs Robertson, Daly, Forness and Sekse, that Dan Re could purchase reinsurance to close Dan Re’s 2004 and prior years which would crystallize the value of Dan Re’s old book and generate an NPV which could be included in the 2005 LTIP calculation. 

   The 2005 LTIP

192.	In respect of 2005 the LTIP structure remained in place; and Imagine made LTIP awards. But there was also a large “net negative accretion” on deals bound in 2004 and earlier years. As a result Imagine operated a “clawback”.  LTIP participants were notified of a reduction in their prior years’ unvested amounts. According to Dan Re’s calculations the clawback on Mr Huntington’s notional unvested LTIP account reduced his unvested LTIP from the 2001 to 2004 awards from about $ 5.8 million to about $ 1.85 million. The LTIP treatment of Dan Re remained a continuing topic of discussion between the senior management of Imagine and Brascan. In respect of the 2005 LTIP a provisional figure was inserted in respect of Dan Re. 

2006

193.	The LTIP was replaced with effect from 1st January 2006 by four separate long-term incentive schemes.  

194.	 In December 2006, after a report from PWC on Imagine’s model (which was designed to calculate the expected NPV of the Dan Re portfolio as at 31st December 2004), Dan Re was included in the 2005 LTIP at about $ 26.9 million, this being an estimated NPV of Dan Re’s old book.   

The Law

195.	A party to a contract will be held to have repudiated it if “the acts or conduct of the party evince an intention no longer to be bound by the contract”: per Lord Coleridge CJ in Freeth v Burr (1874) LR 9 CP 208 at 213. For that purpose the court must examine the totality of the party’s conduct prior to the acceptance of the alleged repudiation. It is no bar to the acceptance of a repudiatory breach that the breach is anticipatory in that it consists of a threat not to perform obligations that are due to be performed in the future. But a statement that a party will not honour his obligations in the future, which, unaltered, would have been repudiatory, may cease to be so in the light of any withdrawal of that threat before the alleged repudiation is accepted:  Norwest Holst Group Administration Ltd v Harrison [1985] IRLR 240. 

196.	The obligation to pay the agreed remuneration is one of the fundamental terms of a contract of employment. An attempt to alter that obligation in a substantial way is a breach that is necessarily repudiatory. As Judge, LJ, with whom the rest of the Court agreed, put it in Cantor Fitzgerald International v Callaghan  [1999] IRLR 234, para 42:

“Where, however, an employee unilaterally reduces his employee’s pay, or diminishes the value of his salary, the entire foundation of the contract of employment is undermined. Therefore an emphatic denial by the employer of his obligation to pay the agreed salary or wage, or a determined resolution not to comply with his contractual obligations in relation to pay and remuneration, will normally be regarded as repudiatory. To the extent that Gillies [1979] IRLR 457 suggest otherwise, it does not accurately reflect the relevant legal principles.”

197.	The court cited with approval the position adopted as common ground by the parties in Rigby v Ferodo Ltd [1987] IRLR 516:

“The unilateral imposition by an employee of a reduction in the agreed remuneration of an employee constitutes a fundamental and repudiatory breach of the contract of employment which, if accepted by the employee, would terminate the contract of employment.”

198.	If Mr Huntington was entitled to have either the Lion or the Dan Re transactions included in the LTIP in which he was entitled to participate, a determined resolution not to include either of them, and to calculate his entitlement to share in the LTIP accordingly, would constitute a repudiatory breach.  

Good faith

199.	Mr Huntington asserts that, in refusing to include the LION and Dan Re transactions in the 2004 LTIP with an NPV value calculated using the risk free rate, Mr Myhal and Mr Robertson acted in bad faith, their refusal being based on no better basis than that they were large transactions which would entitle Mr Huntington and others to very significant sums. Imagine contend that their refusal to include those transactions was made bona fide. At one time Imagine contended that, if that was so, Imagine was not in breach. 

200.	Having heard both Mr Myhal and Mr Robertson,  I accept that, whether they were right or wrong, they acted in good faith.  They honestly thought that neither transaction was finite risk insurance business (and that LION was an investment not an insurance transaction); and that Dan Re represented a diversification away from such business. 

201.	But, if what was said and done amounted to a repudiatory breach of Imagine’s obligations towards Mr Huntington, the fact that they acted in good faith will not alter the position: Transco v O’Brien [2002] IRLR 444.

Do the LION and Dan Re transactions fall within the definition of LTIP business (as Mr Huntington asserts and Imagine denies)?

202.	The May LTIP provided a definition of LTIP business in the following sentence:

“Such businesses shall include the finite risk insurance and reinsurance business and such other businesses as shall be explicitly agreed by the shareholders to be the subject of the LTIP (“the LTIP Business”). 

203.	Whether or not the LION and Dan Re transactions should be included depends, therefore, on whether they came within the description “finite risk insurance and reinsurance business”.  Mr Huntington does not contend that, if the two disputed transactions only fell within the second limb of the definition, a decision not to include them can be impugned on the grounds of irrationality or caprice. 

204.	 “Finite risk insurance and reinsurance business” is not a term of art in the sense that it has some generally accepted market meaning. It is a phrase of some elasticity. The May LTIP provided no definition of it; and the parties are in dispute as to what it meant. In those circumstances the task for the court is to determine what, in the light of what the parties said and did, the reasonable observer would take them to have meant in May 2003.  

205.	It was not suggested that the parties intended the first limb of the definition of LTIP business to be limited to the writing of insurance/reinsurance contracts by Imagine Insurance itself.  More problematic is to know what sort of limitation the parties contemplated by the word “finite risk”.

206.	Imagine contends that a transaction constitutes finite risk business where, if a loss materializes, the amount the insurer is obliged to pay is contractually limited.  A transaction would not be within the definition simply because it was entered into through the medium of a subsidiary company which Imagine could allow to go into liquidation. 

207.	Mr Huntington contends that the term cannot be so limited. Most reinsurance products have some form of contractual limit (although not reinsurances to close nor an unlimited whole account quota share).  According to him the key characteristic of a finite risk transaction is that it is one where Imagine would use its:

“modelling skills to transactions involving underlying insurance/reinsurance assets/premiums to enable it to create a structure which was effective to limit risk and create profit”.

The limitation of risk might be contractual or structural (e.g. the use of some form of corporate vehicle or trust) or both; and the modelling on which the NPV calculation would be based would identify whether the transaction had positive value.

208.	An examination of what the parties intended is rendered more difficult not only by the lack of precision of the phrase “finite risk” but also by the fact that the parties used other imprecise terminology, and in particular the phrase “opportunistic transactions”. At one stage of the trial it was suggested by Imagine that LION and Dan Re were opportunistic, and not, therefore, finite risk transactions.   

209.	It is necessary to examine (i) such discussion as there was between the parties prior to May 2003 as to what was meant by finite risk business; (ii) some of the transactions that were included in the LTIP in respect of 2001 and 2002 (i.e. prior to the May LTIP) and the footing upon which they were so included; (iii) the evidence at the trial.  

Discussion between the parties prior to May 2003

210.	In October 1999 Imagine produced a Preliminary Private Placement Memorandum in relation to the proposed offering of 2,000,000 shares of Holdings. The memorandum stated that Imagine Insurance would offer “finite risk” insurance and reinsurance on a global basis. The Executive Summary stated:

“All of the Company’s finite risk products will contain contractual and structural protections against unlimited underwriting risks – hence the term “finite risk”. These protections will have a positive impact on the balance of risk and reward given to the Company under the terms of each contract…”          	  

211.	The body of the memorandum contains the following:

“Finite risk insurance and reinsurance products usually cover multiple classes of liabilities over multiple periods of time, thus providing an inherent diversification of risk to the providers of such products. Providers of finite insurance accept liabilities on a highly structured basis, through which the risk/reward profile of the issuer is positively affected by contractual protections. These contractual protections address underwriting risk which refers to the uncertainty as to the amount of a loss (“severity”) and the number of losses that will occur (“frequency”). In most finite risk products, the insurer or reinsurer imposes a limit on the total amount it will pay out as loss”…

212.	Under the heading “Low Volatility Finite Products” the memorandum indicated that Imagine intended to focus on long tail lines and that its contracts would be written on both an annual and a multi-year basis; and might be written to cover a single class of business or be combined with other lines under aggregate stop loss agreements, contractually or structurally capped quota share agreements or through reserve transfer agreements. It said that

“The Company intends to write reinsurance on both a pro rata (with contractual or structural capping of liability) and excess of loss basis, and also to assume risk by engaging in loss portfolio assumptions whereby a block of incurred but unpaid claims is assumed from another insurer or reinsurer…The Company’s primary line of products will be Low Volatility finite risk products. These are defined by the Company as finite products that are primarily purchased for capital management issues, and which meet the individual contract leverage constraints set forth in the Company’s underwriting guidelines established by the Board of Directors of Imagine Insurance from time to time”.

…………….					
Other Finite Products

The Company may also consider and accept underwriting submissions for finite products other than Low Volatility products”…

213.	Two things are apparent from this memorandum: (a) whilst the emphasis was undoubtedly on contractual protection reference is also made to structural protection either in addition, or as an alternative to, contractual protection; (b) a distinction was drawn between low volatility finite risk products and products which, although not low volatility, were still finite risk.  

214.	On November 2nd 2000 Mr Huntington, together with Mr Gleeson and Mr Daly, gave a presentation to the Trilon Board of Directors. The presentation indicated that Imagine would focus on specialised insurance products which were non-cyclical.  Mr Myhal said that this presentation reflected the business plan that had been discussed over the previous months i.e. before Brascan invested in Imagine.  

215.	 One of Mr Huntington’s powerpoint presentation slides contained the following:

“Finite Risk Reinsurance Review

•	Write similar risks to LRG, but less letter of credit intensive
•	Still have “assumption of risk” component
•	Contractually set dollar maximum limit of loss
•	Lower degree of risk than traditional  reinsurers
•	Dollar cap = greater certainty for asset-liability management
……”

216.	Mr Huntington explained that Imagine would be different to a normal reinsurance business because it would have a “Unique business focus”, which comprised “innovative capital products not risk-based products” (page 5 of the presentation).

217.	Another presentation was made by Mr Huntington to Brascan (previously Trilon) Financial Corporation on February 11th 2003. This was only a few months before the May LTIP. That presentation had a more extensive description.  Mr Huntington’s first point, in the Overview section, was that Imagine was a “Provider of finite-risk reinsurance coverage to P&C [property and casualty] insurers and reinsurers in North America and Europe”.

218.	On page 3 he set out a further definition:

“Finite Risk Reinsurance

Finite risk reinsurance describes coverage provided to insurance companies in which the limit is capped – there is a maximum limit of loss written into each contract

Finite coverage ordinarily involves some risk transfer (a 10% chance of a 10% loss)

…….
Entails a lower degree of risk than traditional reinsurance 

Dollar cap provides greater certainty for asset/liability management.”

219.	Page 8 of the presentation read as follows:

“Low Volatility Finite Transactions

Highly stable and actuarially predictable losses

Reserves inherently diversified by line of underlying risk

Reserves are considered high-cost to a client from risk-adjusted capital standpoint if held internally

Client seeks to finance own losses over time in an economically advantaged framework

Interests are aligned”

220.	The next page reads:

“Opportunistic Transactions

Unique opportunities outside of the core finite reinsurance business

Pricing very attractive relative to risk

Risks and rewards can be analysed with confidence

…..”
	
221.	Page 16 stated that “The average leverage of the portfolio of finite risk products that are not considered to be low volatility products as a whole will not ordinarily exceed 400%”. This is a figure that was taken from the underwriting guidelines. In the case of  low volatility (as opposed to opportunistic) finite risk products the risk/return ration would, accordingly, be lower. 

222.	It is apparent from those documents, of which Mr Huntington was the draftsman, that finite risk products could be low volatility or not. It was his evidence, which I accept, that the reference to opportunistic transactions was a reference to finite risk transactions which were not low volatility, and that Imagine’s original underwriting guidelines had used the term “opportunistic finite risk” (the distinction between the two types of finite risk – opportunistic and low volatility - being later abandoned on the grounds that the distinction did not matter). Mr Myhal ultimately accepted that finite risk transactions encompassed opportunistic transactions. 

223.	In September 2001 Imagine contemplated incorporating a reinsurance company in Ireland. A form of notice required under the Insurance Acts was filed in respect of Imagine International Reinsurance Limited. Under the heading “Summary of Risks to be covered” reference was made to IIRL’s plans to write reinsurance contracts to cover long tail line with a primary focus on low volatility. It added : 

“Transactions will also be considered which achieve the same goals as those above … but which are structured in formats other than pure reinsurance (such as through a purchase and sale agreement). IIRL may also underwrite reinsurance on both a pro rata (with contractual or structural capping of liability) and excess of loss basis.”

Previous transactions

224.	Numerous transactions have been included in the calculation of the LTIP since Imagine began. It is relevant to have regard to some of these in order to see whether their inclusion casts light on what in May 2003 the parties meant by finite risk.  Before embarking upon any such examination two things are, however, to be noted.

225.	Firstly, the fact that a transaction was included in an LTIP prior to 2004 (the year in respect of which the dispute arose) does not necessarily mean that the parties regarded it as a finite risk transaction. The wording of the May LTIP itself contemplates that not every transaction that Imagine enters into will necessarily fall within the definition. At the same time it is to be remembered that a prime reason for the restricted definition was to avoid the LTIP including some of the transactions that Mr Gleeson had been contemplating, including, but not limited to, conduit finance, which could scarcely be regarded as finite risk insurance business.  

226.	Mr Robertson’s evidence was that each year he would have lengthy discussions with Mr Myhal as to the inclusion of certain items in the LTIP; and that, whilst the underwriting transactions that were carried out were finite risk, there were other transactions which Brascan had serious doubts about but which were ultimately allowed to be included in the LTIP. So he did not regard the fact that a transaction was included in the LTIP as necessarily meaning that it was finite risk business. Mr Myhal’s evidence, likewise, was that there were a number of transactions which were allowed to go into the LTIP with reluctance, and after he had expressed reservations about them to Messrs Huntington and Gleeson as not being the sort of transaction that had been contemplated.  

227.	There were undoubtedly some transactions in the form of collateralised debt obligations, which were included in the LTIP although Mr Myhal did not regard them as finite risk and, as Mr Huntington put it, they were “in reality … fairly far removed from even my definition of "finite risk". I accept that there may well have been other transactions which were allowed into the LTIP with misgivings on Brascan’s part and where it was at best debatable whether they constituted finite risk business. 

228.	It seems, however, that, prior to the 2004 year, the only real bone of contention was SPI (see paragraph 230 below).  Prior to that year no transaction that Imagine had concluded was excluded from the LTIP on the ground that it did not constitute finite risk business.   

229.	Secondly, the parties understanding of what amounted to finite risk insurance/reinsurance may have altered over time. The question has to be looked at as at May 2003.

SPI

230.	One transaction included in the 2003 LTIP was a transaction known as SPI. That involved Imagine making a cash payment in return for the right to receive a stream of future commissions on certain long term care insurance products originated by an affiliate of Conseco Inc. Mr Huntington provided Mr Myhal with a copy of the proposed 2003 LTIP pool prior to the Holdings Board meeting of 9th March 2004. At that meeting the Board resolved that the calculation and allocation of plan participation should be delegated to a sub-committee of two directors who were authorised to agree on and finalise the details of a report to be presented to Brascan Financial Corporation, the main point of contention being the inclusion of SPI.

231.	Mr Myhal regarded SPI as not being a finite risk insurance transaction at all.  Imagine did not receive a premium in return for accepting the risk of a future event. It simply purchased an income stream at a discounted value.  He was concerned (a) that, if the SPI transaction was included in the LTIP, Imagine might end up paying bonuses, in part referable to SPI, prior to its realizing profits on the transaction; and (b) as to the appropriate discount rate to use to reflect the use of Brascan’s capital in purchasing the income stream.  In the event, after further discussion with Mr Huntington, which revolved round the question as to whether SPI fell within the definition of LTIP business, in April 2004 Mr Myhal and Mr Robertson approved the inclusion of SPI and the approved figures were tabled at the next board meeting.  Mr Myhal and Mr Robertson’s evidence was that they explained to Messrs Huntington and Daly that any further transactions of this nature would have to be considered on a deal by deal basis.

232.	Mr Huntington accepted that the Board passed the resolution to which I have referred and that there were one or two queries raised as to the SPI transaction. But he did not accept that SPI was a major contentious issue at the Board meeting (or any break-out meeting); that SPI was flagged for further consideration; that discussion then followed in respect of Mr Myhal’s concerns; or that SPI was included on a one-off basis. On his account there was a brief discussion with Mr Myhal and Mr Robertson about whether the transaction should go into the LTIP with an NPV calculated at a risk free discount rate (as subsequently happened – after a calculation had been made which showed that the purchase could be financed using internally generated cash flow) or at a discount rate reflecting the cost of capital to Imagine.   

233.	I prefer the evidence of Mr Myhal and Mr Robertson. I found their evidence on this point convincing and in accordance with the inherent probabilities.

LION

234.	The LION transaction was similar to the SPI transaction – in that case the commissions were renewal commissions on long term care policies originated prior to July 2003 – although the sums involved were considerably greater. The commissions were potentially payable over something like 10 years. Imagine paid $ 42.9m in order to receive about 50% of future annual commissions.  It did so by funding the purchase of the right to the commissions by LION 2004, a Delaware Trust, to which the rights were sold by an entity named Long Term Preferred Care. 
 
Conclusion on SPI and LION

235.	In my judgment, neither the SPI nor the LION transaction constituted finite insurance or reinsurance business. Whilst the commissions related to long term policies, and the income stream (which would depend on patterns of mortality) was assessed by the same sort of technique as was used to assess the income stream from insurance transactions, the SPI transaction involved, so far as Imagine was concerned, no insurance or reinsurance at all. Neither Imagine, nor any Imagine group company was acting as an insurer. The transaction was, in essence, a discounting of receivables.   

Enterprise Re

236.	In early 2001 Imagine paid $ 97.5 million for Enterprise Reinsurance Holdings Corporation (“Enterprise Re”), which had a current asset market value of  $ 100 million. It carried on business through subsidiaries, the two principal ones being in Bermuda and Denmark. The group was no longer issuing policies under its own name. The proposal submitted to the Board of Directors of Holdings described the products offered by Enterprise as capable of being “generically described as “Finite Risk” products”. The group had written 41 reinsurance agreements since inception, of which, at the time of its purchase, only 6 were in force with continuing insurance risk exposure. 5 of the contracts were whole account aggregate stop loss policies with contractual caps. In respect of those the attachment point was usually at, or slightly above, the reinsured’s targeted loss ratio. The reinsured was entitled to a profit commission if losses did not develop in accordance with a formula. The profit that was expected was in the main from a reinsurer’s margin plus any additional investment return over and above the interest credited on the funds provided by the reinsured at a specified rate. One of the transactions was a loss portfolio transfer with a contractual limit of $ 19.5 million for a premium of $ 14.9 million. 

237.	One of the advantages of the deal was that Imagine would gain (effectively for no consideration) the services of Enterprise Re’s experienced underwriting personnel, one of whom was very experienced in the finite risk field.  Imagine very quickly either commuted or ran off a number of these contracts with the result that it very soon collected in more than the capital it had paid out.  Mr Myhal’s evidence was that  Imagine did not intend that Enterprise Re should  continue operating Enterprise Re under its own name as an insurance or reinsurance company issuing policies; and that, after its acquisition, Enterprise Re did not issue a new Enterprise policy to anyone. 

238.	In a later passage it was put to him that the company was redomiciled to Barbados and continued to write business having changed its name to an Imagine corporate name. Mr Myhal was unaware that that had happened (no such indication appears in the proposal) but accepted what was put to him because he accepted that Mr Clarke had been briefed on the point. The circumstances in which, after acquisition, Enterprise Re wrote business and the type of business that it wrote are not apparent.  

Associated Chemical Insurance Ltd (“ACIL”) and Associated Chemicals Group (“ACG”)

239.	ACIL and ACG were two reinsurance companies in Bermuda, established by chemical manufacturers in the USA, which had written traditional reinsurance policies of chemical liability and manufacturing risks in the USA. ACG had written policies on an “occurrence” basis.  In 2001 both companies were purchased. The relevant NPVs went into the LTIP. No issue was raised about their doing so.

240.	 Mr Robertson accepted that these transactions were finite risk. Mr Myhal was asked this:

“Q. No contractual limit on liability; the limit on liability being provided, as I understand it, by single purpose vehicles being used for the acquisition.

A.  I am sure we protected ourselves in some fashion.  I do not know the specific nature of that protection, whether it was a dollar cap embedded in the contract or whether we used special purpose vehicles.  But I do not dispute it was a finite risk transaction. 
	
241.	The transactions were of some complication, the companies being acquired by the exercise of a put option on a purpose trust funded with loans from Imagine. Neither of them involved continuing underwriting of risks. Imagine was accepting, through an SPV, a pre-existing set of known liabilities. 

Fortress Re and Nordea Re

242.	These were two Luxembourg captive insurers with traditional exposures and policies. They were purchased in 2001 and 2004 and thereafter included in the 2001 and 2004 LTIPs. The underlying policies were very traditional. They were considered as finite risk.  Nordea was not involved in writing new business and was run off.  I infer that the same applied to Fortress Re 

 Folksamerica

243.	At the very end of 2001 Imagine entered into a transaction which involved a very large loss portfolio transfer, which Mr Myhal described as a “classic finite risk reinsurance transaction”, involving the reinsurance of a mixed bag of property and casualty liabilities including asbestos, breast implant liability and similar risks.   When I asked Mr Myhal wherein lied the limitation of the risk his answer was:

“My expectation would be it would either be explicitly contained in our reinsurance contract with Folksamerica or in some other document or mechanism, but that our loss would be limited to a maximum and we would not be exposed, for example, to unlimited asbestos liability.

   It is not clear what “mechanism” he had in mind.  

   Greenwich

244.	Syndicates 996, 994 and 1221 at Lloyd’s were managed by the Greenwich Managing Agency. On 31st December 2002 Imagine committed $ 20,000,000 in capital to Syndicate 994 for its upcoming underwriting year.   The capital was mainly contributed through a corporate vehicle; but part of it was contributed through the agency, which Imagine acquired the option to purchase. The business was very short tail.  The intention was to change the business plan so that the syndicate would become a specialist underwriter providing reinsurance to close to other syndicates. In fact, it took about six months to negotiate with Lloyd’s a closing down of the ongoing traditional underwriting stipulated in the syndicate’s business plan.  The fact that for a short period the syndicate was writing traditional business was unknown to Mr Robertson (whose responsibility for Imagine increased over time). If he had known about it he would have been concerned.  

245.	Both Mr Myhal and Mr Robertson regarded the Greenwich transaction as a finite risk transaction. So did Mr Huntington. Greenwich was, according to Mr Myhal,  accepted as a finite risk deal for the purposes of the LTIP plan because it had only a limited number of existing contracts, the exposure under which could be assessed, and no new traditional insurance was, so far as Mr Myhal and Mr Robertson were aware, being written. 

Reinsurance to close

246.	Several reinsurances to close  in respect of Lloyd’s syndicates, with unlimited liability, were written by subsidiaries acting, as Mr Huntington put it, “as separate silos of liability and capital”, and included in the LTIP. Of those Mr Myhal said:

“Q.  The way that transactions or insurance to close transactions were conducted was, as Mr Huntington has described by, using single purpose vehicles.

          	A.  Mm.

          	Q.  That is the way of limiting the loss in those cases, is it not?

          	 A.  Yes, I would accept that.

Q.  That is not a contractual limit of loss such as you have originally suggested.

A.  When we started Imagine, again as I said earlier, our  expectation was that we would be writing contracts, individual contracts, as Mr Huntington described, not large in number, perhaps large in size, with insurance  and reinsurance contracts, similar to the types of                                            business we had conducted through London Reinsurance Group for many, many years; our chief financial officer  was the same as was with London Reinsurance Group, I think he had every familiarity with the type of       business we were conducting previously, and our expectation was that the business going forward would be very similar.

Yes, it is true, Mr Huntington did propose and we did enter into other types of transactions which in my view did not fit the classic definition of finite risk, and -- but I stand by my witness statement that the plan was initially intended to enter into contracts that had a contractually set maximum dollar limit”.

247.	Mr Myhal also gave this evidence:

“Q. The way in which the reinsurance to close policies were dealt with was that any reinsurance to close was put into a single purpose vehicle again to protect it.  That is how the loss was limited.
          
A.  I have no doubt that management went to inordinate efforts to protect ourselves in some fashion.  Whether it was through special purpose vehicles or through contract -- or limits to losses embedded in the contracts.   I have no dispute that those would be finite risk. Indeed, I do not believe we disputed Greenwich or the inclusion of those contracts in the LTIP plan”.

248.	During the course of his evidence Mr Myhal expounded on his concept of finite risk in the following way:
“Q.  		The key to all of this is the structuring or limiting by structuring of risk; correct?
A.  		Yes, with -- just to be entirely clear, and I think volatility is actually a useful concept to discuss for a moment, because I believe Mr Huntington made reference to it, as did his Lordship, in that a classic traditional insurance contract would have extreme volatility in that the loss that might arise could be many, many times the premium collected, and obviously by -- when we discuss finite risk we are talking about a business that fundamentally is quite different, that we are looking at transactions which have a far lower risk return profile. So I do not know if that is helpful but yes, in our view, finite risk constitutes a series of transactions or business that is significantly lower in risk than traditional insurance business.
Q.	 It is producing a structure, which can be a contractual cap but which can be other aspects of a structure, which will limit risk.
A. 	 I would accept that.  It may.”
Dan Re

249.	The Dan Re transaction involved the purchase by Imagine Insurance of Dan Re (Bermuda) Limited (“Dan Re”) an ongoing underwriting business, from Dan Re Re Cayman Holdings Ltd. Dan Re was the provider of corporate capital to Syndicate 1400, via a subsidiary,  and had been a quota share reinsurer of that syndicate.  The vendor was a private equity fund which had sunk a lot of capital into the venture which had largely been eroded through previous underwriting activities. The purchase price was to be (in the event), $ 92.856 million (representing about 20-25% of Imagine’s capital), against an estimated book value at 31st December 2004, of $ 115 million. $ 47.905 million was paid in cash and another $ 44.950 million by a contingent interest bearing note payable in 2008, the amount payable depending on the adequacy of the reserves. Dan Re was intended to continue writing new traditional insurance and reinsurance business (its book consisted of  Property Catastrophe, Financial Institutions, and Accident & Health business), which would expose Imagine to high volatility.  In relation to some of this business, in particular catastrophe insurance, Imagine had few people with experience.  Such business exposed Dan Re to potential losses in excess of its capital base which were unknown and unquantifiable. 

250.	On 2nd August 2004 Mr Huntington e-mailed to Mr Daly, who had asked, inter alia, “Why are we concerned about buying [Dan Re] through [Holdings}. What are the consolidation problems of Imagine directly being associated with this purchase” the following reply:

“The main reason we don’t want to buy/own Dan Re under Imagine is to avoid issues with our business plan… Dan Re is a traditional insurer/reinsurer of property and commercial risks. The owners and management have made it clear that they will not sell to someone to put it in run-off. 

Thus it needs someone to buy it and operate it as an ongoing business. We on the other hand want to get the LPT [Loss Portfolio Transfer} out of it and maybe look at a prospective transaction. These would have to meet our normal return profiles…”

251.	Mr Huntington’s evidence was that his reference to “our business plan” was 
a reference to “the business focus that had been told to the rating agencies and [others]”, who thought of Imagine “with a fairly narrow focus”. That focus was consistent with what had been presented to the board of Brascan Financial Corporation in February 2003.  

252.	Mr Huntington first mentioned Dan Re to Mr Myhal at the Imagine production conference at Niagara Falls in October 2004. He described it as being a finite risk reinsurance transaction. 

253.	Towards the end of 2004, Mr Eliot Spitzer, the New York District Attorney and the SEC were investigating the possible misuse of finite risk transactions. They suspected that such transactions did not involve any real transfer of risk and were being used to manipulate companies’ financial results. 

254.	On 22nd November 2004 Holdings was served with a subpoena by the SEC in connection with its investigation. Many other companies dealing in finite risk reinsurance were also recipients of subpoenas.  Upon the issue of such subpoenas a number of rating agencies immediately issued a downgrade notice to all finite reinsurers, including Imagine. As a result Imagine had to increase its equity in order to preserve its “A” rating. This action also caused or contributed to the postponement of plans to float Holdings in the US.

255.	In those circumstances there was good reason for companies either to diversify from finite risk transactions; or not to characterize transactions as being finite risk, even if previously they would or might have been so characterised.  

256.	On 23rd December 2004 Imagine’s underwriting committee (attended by Mr Myhal) was given a preview of the Dan Re transaction. At the meeting only the intended terms were spelt out to the committee. 

257.	On 28th December 2004 Mr Forness, who was Imagine’s Chief Underwriting Officer responded to various points made by Mr Daly in an e-mail of that date. One of the points Mr Daly raised was:
“Should we have a curtailment of underwriting from 1/1/05 for the first 3-6 months until “traditional” underwriting guidelines reviewed / adopted /approved by Jimmy and Bob and we have a better handle on their [i.e. Dan Re’s] underwriting operations.” 
   Mr Forness replied:
“No, nor should we recommend one. Unlike Greenwich, we are not converting Dan Re from a traditional to a specialist underwriter. We are adding them to our business as an ongoing underwriting operation. We should not suspend underwriting unless and until we are making a decision to put the company into runoff. Otherwise the damage would be significant.” 

258.	In an e-mail of 28th December to Mr Huntington Mr Robertson noted that Dan Re was “a big transaction that changes the nature of Imagine to some extent”. 

259.	On 29th December there was circulated to the Board of Imagine Insurance about 200 pages of documents setting out the proposal to acquire Dan Re. 

260.	On the same day Mr Robertson sent Mr Huntington, just before midnight, an e-mail in which he raised a dozen sets of points on the Dan Re transaction. He observed that the deal seemed good, but that it was not just a case of buying a run off company (“It looks like you plan to keep running it”). He expressed a view that, if the NPV in respect of 2005 underwriting was only $ 2 million (as was calculated in the documents – see paragraph 265) he would prefer to “reinsure the book, fire everyone, take our discount and go home”.  He questioned what risk there was in the process, and how underwriting could be controlled; and asked “how do we ensure that they don’t blow away our capital?”  

261.	In his reply in the afternoon of 30th December Mr Huntington agreed that the biggest risk in the transaction was the ongoing underwriting. He recognised that Imagine was faced with the current structure as the sole option for 2005 at least; but that, if Imagine did not like what it saw in the first half of 2005 it would shut down quickly and convert it to a run off. He indicated that Imagine would endeavour to control risk for 2005 by tight rating constraints on underwriters and buying additional insurance protection, which would remove virtually all of the downside risk. In a telephone conversation with Mr Daly that night Mr Robertson continued to express concern about management and control of ongoing underwriting operations.

262.	At the Board meeting of Imagine Insurance on 30th December 2004 the Board  decided to go ahead with the Dan Re transaction, subject to a committee of any two officers or directors “finalizing the terms of the transaction after appropriate consultation regarding ongoing underwriting exposure with representatives of [Brascan]”. The transaction went ahead that day.

263.	The Executive Overview of the proposal contained the following:

“For the reasons described below, there exists an attractive opportunity for Imagine to structure a transaction which is immediately accretive to 2004 earnings, has structural protections against adverse loss development on old reserves and has significant positive NPV… The transaction also continues with the specialization of Imagine into niche areas where we identify large potential upsides with structured/managed downside risk. This specialization is additionally attractive in the current environment and allows Imagine to differentiate itself from the traditional “finite” niche”.

264.	The “current environment” was a reference to the SEC investigation. Mr Huntington described Imagine as: 

“.. desperate to try and categorise ourselves for business purposes to the rest of the market as being a speciality writer of reinsurance as opposed to a finite writer”.

even though, if the environment had not changed, Imagine would probably have categorised the transaction as finite risk.

265.	The proposal referred to three attractive features: (a) the initial discount in the purchase price as against the book value; (b) the imbedded time value of money in the assets representing the reserves – expected to be $ 22m; and the estimated value - $2m – on a very conservative basis of the 2005 underwriting year profit. It also referred to the fact that Imagine was open to traditional reinsurance underwriting risk in the future which “largely create[d] the downside/negative NPV outcome in the economic model presented” in the proposal. 

266.	The proposal went on to say:

“Historically, Imagine has only taken on traditional underwriting risk within contractual or structural silos that have limited or capped our exposure to such activities in a manner which prevents contagion or Armageddon type losses. The same is true of the Dan Re structure, albeit on a larger scale that (sic) we would normally authorise (notional capital at risk is $ 100m + interest on $ 50 m for three years at L + 100).”

267.	It then went on to discuss existing underwriting controls and future improvements therein. The mean NPV of $ 39,154 shown in the proposal was based on four components (a) the liabilities for 2003 and prior ; (b) the liabilities for the earned portion of 2004 as at 31/12/2004; (c) the liabilities for the unearned portion of 2004: and (d) the underwriting activity of 2005. The latter had an estimated NPV of $ 2 million.

268.	The Board did not then discuss whether or not the Dan Re transaction qualified for inclusion in the 2004 LTIP. That point arose on the occasion of the Board meeting of 22nd March 2005. 

269.	What the Board did discuss was whether or not Imagine had the ability or resources to manage the new business and consideration of how the ongoing underwriting was to be controlled. Mr Huntington indicated that Imagine would be adding additional capacity and that the underwriting committee would approve a specific business plan, specific guidelines and strict underwriting controls; together with the purchase of additional reinsurance if these controls were not adequate in the initial stages.

270.	Imagine’s Annual Report for 2004 stated:

"We characterize our offering as ‘specialty’ insurance and reinsurance products and services because they are distinctive from those provided by more conventional market participants. Imagine's business segments (and their contribution to net underwriting income for the year ended December 31, 2004) encompass Traditional 11%, Non-traditional 17%, Run-off 5%, Advisory 22% and Other Specialty Investment 45%. The claims run-off and traditional insurance and reinsurance segments are likely to see the strongest growth in 2005, largely due to the impact of the various parts of the Danish Re acquisition" (page 8, underlining added).

271.	The relevant wording in that part of the Annual Report is that of Mr Huntington himself. In an e-mail dated 17 March 2005. Mr Huntington circulated a draft of the narrative for Imagine’s Annual Report for 2004. His draft of this section concluded: 

"The claims run-off and traditional insurance and reinsurance segments are likely to see the strongest growth in 2005, largely due to the impact of the various parts of the Danish Re acquisition. It is a misconception that Imagine's sole (or even primary) business is the offering of ‘finite-risk’ products."
	
Imagine rely on this drafting as an indication of an appreciation by Mr Huntington that the Dan Re transaction was traditional insurance/reinsurance and not finite risk.

272.	Mr Huntington’s explanation for his draft wording was as follows:

“I am drawing a distinction between what Imagine historically operated as its finite risk business, which  was a very broad concept, and included a lot of transactions that the average insurance person on the street might not think fell within their knowledge of finite, and saying let us take advantage of that given the current environment [i.e. the SEC investigation] and let us try and figure out which of your products, notwithstanding we think they fall within finite risk as practiced by Imagine and as that term was known within Imagine, and see whether we can create different bifurcations of Imagine's products into other named categories; not because they are bad, not because it is outside of our core business, but because of what is going on in the environment.”  

273.	The Dan Re transaction closed on 22nd February 2005. Two days later AM Best, the rating agency, announced that they were putting Imagine’s rating under review. Within months Dan Re had significant losses arising out of a major European windstorm and Florida hurricanes.  

274.	In essence, the only sure cap on the risk assumed by Imagine in entering into the Dan Re transaction lay in the fact that Dan Re enjoyed limited liability status; so that Imagine’s loss would be limited to the capital it had contributed to the venture.  

The Board Meeting in Barbados on 23rd March 

275.	On 22nd March there was a board meeting of Holdings at which the approval of the 2004 LTIP calculation and the allocation to plan participants was deferred for the time being.  There is a dispute as to what took place on that occasion. Mr Huntington says that at the board meeting the participants focused on the overall amount of the LTIP with little, if any, discussion about individual constituents. 

The evidence of Mr Myhal and Mr Robertson

276.	The evidence of Messrs Myhal and Robertson, (described by Mr Huntington  as for the most part “a complete fabrication”), is that there was a detailed and vigorous discussion in a break out meeting lasting about an hour in which they explained why, in their view, the LION and Dan Re transactions fell outside the definition of LTIP business. 

277.	They said that Dan Re did not fall – either in the letter or the spirit – within the definition of LTIP business. It was a very significant departure for Imagine in that it exposed Imagine’s capital to traditional reinsurance risks which were very different from Imagine’s core business of finite risk insurance/reinsurance. 

278.	They also disputed whether the amount proposed to be included did in fact represent current net income for the purposes of the LTIP. Mr Myhal told Mr Huntington that it was absurd to suggest that $ 39 million was generated at the moment that Imagine entered into the transaction. He recognised that Imagine had included $ 31 million of negative goodwill in its accounts for 2004 but said that the fact that under GAAP Imagine was bound to record the difference between the purchase price and the net asset value of the company, did not mean that Imagine received income from the transaction when it was entered into. Mr Robertson said that in the real world a vendor would not sell a company for less than its worth.  

279.	The two of them indicated that they would be prepared to include Dan Re within the LTIP if a substantial amount of the $ 100 million paid for Dan Re could be paid back as a dividend to Imagine and they could be comfortable that Imagine was not exposed to any greater risk than the capital that was in Dan Re. 

280.	They claimed that LION, too, was not a finite risk reinsurance transaction but the purchase of an income stream for $ 50 million; and that Mr Huntington had failed to apply a proper cost of capital charge for the use of funds that were involved in financing the transaction. He had applied, as they understood, a US Government Treasury Bond rate whereas it would be necessary to borrow at 2% over Treasury rates to fund Imagine. Mr Myhal said that they would be prepared to include it in the LTIP but only with an appropriate capital charge. 

281.	Mr Huntington referred to the fact that a number of previous corporate acquisitions (e.g. Greenwich, Nordea Re and Enterprise Re) had gone into the LTIP in support of his argument that Dan Re should do so. 

Mr Huntington’s evidence

282.	Mr Huntington accepted that there was a break out meeting lasting about 15-20 minutes in a small vacant office. It was then that he produced the figures which showed the constituent parts of the LTIP. These included the NPV in respect of the Dan Re and Lion transactions. But there was and could have been no prolonged discussion because (i) the only paper that they had with them was the summary of the LTIP figures (Mr Robertson accepted that that was all he had); and (ii) it was not the habit of Messrs Myhal and Robertson, who do not have legal backgrounds, to approach matters by focusing on a definition. 

283.	Messrs Myhal and Robertson made some off hand remarks including Mr Robertson saying that he thought that they had got rid of the LTIP. (I am satisfied that something to that effect was said – it was a reference to the proposal that had been made in late 2004 that the LTIP should be replaced with effect from 1st January 2005). The two of them were caught off guard by the size of the LTIP and concentrated on the numbers involved.  There was no discussion as to whether any transaction fell within any contract or plan document. 

284.	I prefer the evidence of Mr Myhal and Mr Robertson as to what occurred on 22nd March. Having heard them give evidence, I do not accept that they have largely invented their account, or that they have treated a subsequent analysis of their objections as if they had articulated it at the time, when in fact they had not done so. I did not find persuasive the submission that the discussion which they relate could not have taken place because of the absence of documentation. The definition of LTIP business was well known to each of the three participants; and the points that were being made would not require, for persons with their knowledge, a further set of documents in front of them

Conclusion in relation to Dan Re

285.	It is common ground that a transaction is not incapable of being finite risk insurance/reinsurance business (“finite risk”) because it consists of the purchase of a corporation or other entity which, itself, had written insurance or reinsurance. 

286.	Equally, a transaction would not have been treated by an objective observer in the position of the parties as being finite risk simply because the business was written by a corporate vehicle which, if the worst came to the worst, could be allowed to fail.  On that footing any purchase by Imagine of a corporate insurer/reinsurer would constitute finite risk insurance business whatever the nature of the business carried on by the company. It is also unrealistic to suppose that, on a collapse of a subsidiary, Imagine’s loss would necessarily be limited to the capital that it had invested in it.  If Imagine allowed a substantial insurer/re-insurer which it owned to fail, it could well find itself in difficulty in doing business in the future because of the impact of such failure on its credit and insurance ratings. At worst it might have to cease underwriting. In reaching that conclusion I do not ignore the references to which I have cited in the preceding paragraphs to structural protection as an element of finite risk business. But I do not accept that the parties would have regarded the interposition of some corporate entity or trust as sufficient to turn a transaction that would not otherwise be regarded as finite risk into one that was.  

287.	Nor can the existence of a contractual cap in an insurance or reinsurance policy be the sole defining criterion of finite risk business. On that footing any insurance would fall within the definition however risky, speculative or volatile it might be, provided only that there was some cap (however high) on the amount that the insurer had to pay. Further, the proposition that a contractual cap was essential in any reinsurance policy written by Imagine (or a subsidiary of Imagine) is impossible to square with the inclusion in the LTIP of various RITCs transactions (where liability is unlimited) and of the Greenwich transaction, under which Greenwich was to continue as a specialist RITC writer..   

288.	What, as it seems to me, the parties must be taken to have had in mind by the use of the phrase “finite risk insurance and reinsurance business” was business where there would be a risk/reward balance that was markedly different to that applicable to a traditional reinsurance contract, in which the indemnity may be several multiples of the premium.  Such business would require a relatively high degree of predictability, with the result that Imagine, using its sophisticated modelling skills, could with considerable confidence assess the net cash flows from, and, therefore, the net present value of, the business; so as to be able to conclude that the risk of loss was modest and that there was a preponderant likelihood of profit (so that a positive NPV could be calculated). 

289.	Typically such business would involve (a) obtaining a sizeable amount of cash or other assets at the commencement of the transaction (either in the form of a premium, or, with the purchase of a reinsurance company, in the form of the company’s reserves) and (b) analysing a book of business already written and the claims already incurred, so as to determine, from the myriad of possibilities, the most likely outcome (and the range of possibilities e.g. whether a large loss lay only in the 99th percentile).  The present net value of the transaction would be calculated taking into account the time value of money.  A contractual cap on the business insured or reinsured, or, in the case of a reinsurance to close, on the several policies reinsured would, subject to one qualification, be a necessary, but not a sufficient characteristic. The qualification is that I would leave open for further consideration whether or not the existence of a policy which was unlimited in amount (a rare bird) in a group of policies or policies that were the subject of a loss portfolio transfer or a reinsurance to close would inevitably render the net cash flow insufficiently predictable for the transaction as a whole to be characterised as finite risk.    

290.	The NPV of the Dan Re transaction was calculated by reference to the four components set out in paragraph 267 above.  On their own the first three could be regarded as involving finite risk business, although predictability would progressively decrease and the third component might render the business close to the borderline.  

291.	But Dan Re was to continue, in respect of 2005 and beyond, to write traditional business, including property catastrophe with high volatility, without any limit as to the number of, or exposure under, the policies that could be written; so that Dan Re could be exposed to claims amounting to a multiple of its capital base. Imagine intended there to be underwriting controls (as there are or should be in the case of every reinsurer) and, if necessary, reinsurance protections. But business was not, in my judgment, finite risk because the underwriter of the corporation acquired was expected to be subject to such controls; or because the business would be made subject to reinsurance protections, which may fail or may be uneconomic. Underwriting controls and outward reinsurance are commonplace incidents of traditional reinsurance business.  Nor does the fact that Imagine could have stopped Dan Re from underwriting mean that its reinsurance business was finite risk.  

292.	In relation to the ongoing business Imagine was to carry on, through the medium of a limited company, a traditional underwriting book in a highly volatile field with a high risk/reward ratio. That seems to me far away from the type of structure that distinguishes finite risk (whether low volatility or opportunistic) from traditional reinsurance. The transaction was not limited to reinsuring historical risk the result of which would, with good modelling, be adequately predictable. Dan Re would be involved in prospective risk, in a volatile field, where the liabilities to be covered were unknown and unquantifiable.  

293.	Accordingly, as I hold, the Dan Re transaction was not finite risk insurance or reinsurance business. 

294.	Whilst recognising the impetus provided by the SEC investigation to the adoption of a narrow approach to finite risk, I find some confirmation of the conclusion I have reached by the characterisation which Mr Huntington himself, for some purposes, chose to make of the transaction: see paragraphs 270-1 above.    

Conclusion

295.	Since the Dan Re and LION transactions did not fall within the category of “finite risk insurance and reinsurance business” Imagine was entitled to omit them from the 2004 LTIP. Accordingly any failure on Imagine’s part not to include the two transactions or only to do so on a restricted basis was not a breach of Imagine’s obligations. 

296.	That conclusion renders it unnecessary to determine whether, if Imagine was in May 2005 in repudiatory breach because of the attitude it took in relation to Dan Re and LION, it ceased to be so because of what happened thereafter. I set out, however, my conclusions on that question below.

297.	The course of events after 3rd May 2005 appears in paragraphs 169 – 191 above.   

298.	Mr Myhal’s e-mail of 9th May expressed his agreement in principle with what Mr Huntington had set out in his memorandum of 6th May, subject to two specific areas of concern. What that exchange left unresolved achieving clarity as to the mechanics was (a) what precisely was to constitute “re-payment/ retrieval/ repatriation of principal”; (b) what Mr Myhal had in mind in respect of his concern about Dan Re; (c) the rate to be used for calculating the NPV on the LION transaction; (d) anything else that might come under the heading of “the mechanics”.   As to (b) Mr Myhal’s response suggested that he was not, or might not, be in agreement with the calculation of an NPV value for Dan Re that had been proposed.

299.	What was going through Mr Myhal’s mind at the time (although not set out in the 9th May e-mail) was that it was one thing to give a bonus to executives who had worked on the Dan Re run-off portfolio, the value of which could be assessed; but quite another to give them a bonus in relation to an ongoing investment, which might turn out to be unprofitable; and that those involved in running the future business should be compensated on some different basis in respect of that business. 

300.	Whilst Mr Myhal’s e-mail of 9th  May 2005 was conciliatory, it was not  an agreement to the inclusion of the LION or  Dan Re transactions in the LTIP on the basis upon which all transactions had previously gone into the LTIP, namely by means of an NPV of future net earnings calculated at a risk free discount rate. On the contrary, it proposed a different discount rate in respect of LION and presaged some different arrangement in respect of Dan Re. It was not an acceptance of the figure for NPV of $ 29.387 million referred to in Mr Huntington’s memorandum of 6th May. 

301.	The upshot of Mr Robertson’s telephone conversation of 18th May was that there was no agreement as to the basis upon which these two transactions would go into the LTIP. There was to be an earn out provision which, in the case of LION, would involve a higher discount rate and in the case of Dan Re would involve some different arrangement. Although Mr Robertson was not then a director of Imagine, he was the only person other than Mr Myhal with whom Mr Huntington was negotiating. Mr Myhal had asked Mr Robertson to speak to him. Mr Huntington was entitled to regard him as authorized by Mr Myhal on behalf of Imagine, to negotiate and express their joint views, particularly since by this time it was Mr Robertson at Brascan who had primary responsibility for Imagine.  

302.	If the LION and  Dan Re transactions constituted finite risk insurance or reinsurance business, then Mr Huntington was, in my judgment, entitled to have them go into the LTIP on the basis (“the historical basis”) upon which all other transactions had previously been included in the LTIP, i.e. by using a risk free discount rate. 

303.	I say that for four reasons. Firstly, the parties cannot have intended that the rate to be used should be at large or at the absolute discretion of Imagine. Secondly, the duration adjusted risk free discount rate was an integral part of Imagine’s NPV methodology. I accept that to use a different rate would be inconsistent with that methodology because it would discount the same risk twice. Thirdly, the May LTIP provided for the Income to be  calculated “using the accounting net income, before tax, of the LTIP Business determined in accordance with International Accounting Standards GAAP”. Taken literally this would mean that there was to be taken into account only income received during that year, although that might include any amount that fell to be taken to income as negative goodwill upon an acquisition. The parties cannot have intended that the LTIP should be so limited. They must have intended that the NPVs in the LTIP would be included in the same manner as heretofore (taking into account income in the future calculated  in accordance with GAAP). Fourthly. the inadequacy of the definition of “Income” arises because the intention had been – see paragraphs 101-102 above – for the plan to be promulgated and for there to be two explanatory memoranda. The Income memorandum was to provide that Income was to be calculated by a process that involved taking into account :

“.. the expected mean (taken from transaction models) of the net present value (“NPV”) of all future cash flows of the LTIP business, calculated using appropriate actuarial and discount rate assumptions ..”

That seems to me an indicator legitimately to be taken into account of what must have been intended. The appropriate rate, having regard to the basis of the NPV methodology, was the risk free rate.
 
304.	The effect of Mr Myhal’s e-mail of 6th May 2005 and the telephone conversation of 18th May 2005 was to make it apparent that the LION and Dan Re transactions were not to be included in the 2004 LTIP on the historical basis. 

Did Mr Huntington waive his right to rely on a repudiatory breach?

305.	 I do not regard Mr Huntington’s last e-mail of 18th May as by itself accepting any repudiation there may have been of his contract of employment. Such an acceptance is not to be found in a “qualified or conditional decision”: Yukong Line of Korea v Rendsberg Investments Centre of Liberia [1996] 2 Lloyd’s Rep 604. Rather he was indicating that he regarded Imagine’s conduct as repudiatory and that, in the absence of any further agreement, he would bring the contract to an end – as in the event he did by his solicitors’ letter of 30th August 2005. In the light of the contents of that e-mail and the agreement of 3rd June the fact that he continued to work after 18th May did not amount to an affirmation of his contract

306.	In those circumstances the question of whether Imagine was and remained in repudiatory breach has to be judged in relation to the period up to 30th August 2005. In that respect events after 18th May served to reinforce the position that Imagine had taken. There was never any suggestion between 18th May and 30th August 2005 that the two transactions should be included on the risk free basis and, in respect of Dan Re every indication that it was not going to be included in the 2004 LTIP at all. In the event it was not. 

307.	If, therefore, Mr Huntington had been entitled to have the LION and Dan Re transactions included in the LTIP Imagine, would, in my judgment, have been in repudiatory breach as at 30th August 2005. If, however, 18th May 2005 is the relevant date, then, a fortiori, Imagine would have been in repudiatory breach at that date also.  

Accrued rights

308.	The May LTIP provided that:

“The Board of Directors of Imagine will have the right to construe, interpret, administer, amend or cancel the LTIP, at any time, provided that any amendment or cancellation of the LTIP will not affect the right of any participants to any payments under the LTIP that have been allocated or accrued to that date…”

309.	The reference to payments “accrued to that date”, in addition to payments that have been allocated, indicates that, if the Board cancels the LTIP mid – year, the employees will have the right to participate in the LTIP in respect of their service up until the date of cancellation – what has been called  “the stub period”. The contrary was not suggested. Were it otherwise the Board would have been at liberty to cancel the LTIP on December 30th and, by that means, to disentitle the employees to a major part of their remuneration in respect of the calendar year. This cannot have been what the parties intended. 

310.	Discussion of the details of a share option scheme to replace the LTIP, which Mr Robertson had mooted as early as late 2003 or January 2004, began in the summer of 2004. Such a scheme would (subject to its terms) enable the participants to share in the profits of Imagine; but not in the same manner as the LTIP.  On 3rd September 2004 Mr Robertson circulated a draft memorandum which involved terminating the existing LTIP with effect from 31st December 2003 and its replacement by share options which would be granted over a ten year period. On 14th September 2004 Mr Huntington discussed the position further with Messrs Myhal and Robertson on the occasion of the Imagine Board meeting in Barbados. Nothing detailed was then on offer; but the discussion was in terms of the new option plan replacing the LTIP with effect from 1st January 2004. It was apparent that Messrs Myhal and Robertson wanted the LTIP to be replaced retrospectively so that the 2004 allocation would be made on the new basis. On 17th September Mr Huntington indicated to Mr Myhal in an e-mail that he regarded himself as entitled to a 5% share in the adjusted net income and would consider converting that into some other arrangement in the context of the conversion of Imagine’s LTIP plans. 

311.	On 8th October 2004 Mr Daly sent an e-mail to Messrs Robertson and Huntington which included the following:

“4.	"Does that mean the current plan is not terminating but effectively going into run-off?  Need documentation on mechanics. [Brad Huntington] Yes… do not think any documentation is required for people       who stay in the LTIP run-off (i.e. the original document still applies).  We need to do a document for conversion to the shares option."

312.	This e-mail contemplated that some individuals would, if they wished, simply have their rights under the LTIP run off. There was, however, at the time a dispute as to whether the public offering would amount to a “Liquidity Event” under the May LTIP.

313.	During the autumn of 2004 Mr Daly and Mr Huntington did some work with PWC and Sidley & Austin on the conversion from the LTIP to a share option plan, Brascan (Brookfield) having provided a statement of the Brookfield Asset Management plan.  

314.	On 15th October Mr Myhal attended the Imagine Producers’ conference at Niagara Falls at which he said that Brascan’s intention was not to reduce the quantum or amount of the LTIP but to change its form to a share option plan. In a later e-mail of 21st October 2004 Mr Myhal rejected a proposal for an option to be granted to key executives and others “working on the Form 20 prior to the distribution” equivalent to 7.5% of the equity of Holdings. Mr Huntington told me that this proposal was designed by him to provide value roughly equivalent to the allocation which that group had received during 2003 under the LTIP. Mr Myhal said that what he had in mind were modest and unexpected grants of say 50 to 100 thousand options “for up to 6 people “in addition to what we give them in February”. Mr Huntington regarded this rejection as indicating that Brascan wanted a completely free hand in making the 2004 allocations. He had not, however, expected that Brascan would agree: see his e-mail of the same date: “On the basis of “don’t ask – don’t get” I decided to ask for more than we are likely to receive.”

315.	On 10th November 2004 revised versions of documents supplied by Brascan were in circulation. These contemplated a termination of the LTIP from 1st January 2004 with a conversion of existing awards, and allocations of PEARs, into share awards. On 23rd November, however, the proposed IPO was put on hold in the light of the SEC subpoenas.

316.	In April and May 2005 Mr Myhal and Mr Huntington communicated in the terms that I have set out in paragraphs 151 - 187 above.  

317.	Mr Myhal’s 3rd May 2005 e-mail makes no reference to the position of any employee, including Mr Huntington, in relation to accrued rights and, in particular, any right to payment of any amounts that had been allocated or had accrued up to the date of the cancellation or amendment of the LTIP. 

318.	Mr Huntington, however, contends that the effect of the 3rd May e-mail is to indicate that accrued rights will not be respected. He relies on the fact (a) that in his memorandum of 6th April Mr Myhal had expressed a strong preference to adopt a share option plan to replace the existing LTIP immediately, the alternative being to follow the existing plan for one more year; and (b) that in his memorandum of 20th April 2005 Mr Huntington had raised the issue of the 2005 stub period and pointed our that the employees had worked diligently during the first four months of 2005. In those circumstances the announcement of a decision as to what was to be done “For” 2004 and 2005, without reference to the employees’ rights in respect of the stub period, and the statement that “if there are some managers who feel that these determinations violate the terms of their employment contracts” compensation should be discussed, was, in effect, a statement that rights in respect of the stub period would not be recognized.  

319.	I do not, however, regard the e-mail as indicating, and certainly not with the necessary clarity, that accrued rights will not be honoured. The plan for 2005 was not to be promulgated until August or September at the earliest. It could not be taken as read, that, when that plan came forward, the employees would find that their accrued rights had been ignored. Further, although the last paragraph of the 3rd May e-mail is an indication that employees were going to be invited to accept the plan or to leave on a fair and amicable basis to be negotiated, even that lays open the possibility that that basis will include a recognition of their entitlement in relation to the stub period. 

320.	Matters did not stand still. Mr Huntington’s note of 6th May 2005 (which Mr Myhal later said reflected his understanding - see paragraphs 173 above) contains the following passage:

“2005 Underwriting Year

We will make it clear to employees that you are eliminating the LTIP plan with effect as of January 1st 2005. However, you are not yet in a position to tell individuals the specifics of the replacement plan, or the specifics of individual allocations to them for 2005 and for future periods. You have stated that you hope to have such details for the meeting of the board of directors in London in August or September. It is not possible to ask employees to give up contractual rights in exchange for something that is not yet defined. Thus I suggest that we inform them of the elimination of the plan and ask them to withhold judgment/action regarding the new plan until such time as it is clearly defined to them. Brascan and Imagine would agree that such action by employees would not prejudice or constitute a waiver of the rights of employees under their employment contracts.”

321.	That paragraph reflects an understanding that Imagine intends to eliminate the LTIP plan with effect from 1st January 2005 and will announce that intention.   Imagine will indicate the specifics of a replacement plan and of individual allocations for 2005 at a later date; and meanwhile will be inviting the employees to suspend judgment on the footing that to do so would not waive their employment rights. Those rights would include a right to have their accrued rights under the May LTIP recognized. Until they knew what they were being asked to accept the employees’ failure to do anything would not prejudice them.

322.	The paragraph is not an indication that Imagine will renege on the employees accrued rights in respect of the period up to the date when the existing plan is cancelled and the new plan is clearly defined to them. Given that the new plan had not yet been crafted, it was too early to tell what its details would be (as Mr Huntington recognised) and what would be the allocation for 2005 – hence the need to suspend judgment.  It was perfectly possible that the employees would receive the same or more than their May LTIP entitlement in respect of the stub period, even if differently calculated.; or that, if they declined to remain as an employee under a scheme that was not the same as the May LTIP, that they would be allowed whatever their entitlement was for the stub period.  Since under the May LTIP Imagine had a right of cancellation they would have no legitimate complaint that Imagine had exercised it.    

323.	It was Mr Huntington’s case that the passage about the 2005 underwriting year set out in paragraph 172 above had not been discussed in the telephone conversation of 5th May but was something that he put into the memorandum. If that is so (and Mr Myhal was not clear whether the subject had been discussed in that telephone conversation) it seems to me even more difficult for Mr Huntington to claim that Imagine was repudiating its obligations in respect of the stub period. Mr Myhal’s broad agreement with Mr Huntington’s formulation is not an unequivocal indication that Imagine would not honour its obligations in respect of the stub period. 

324.	This is particularly so given that in such discussions as there had been prior to the 9h May e-mail, as Mr Myhal put it:

“….I do not think we ever took any issue that, you know, we would unilaterally extinguish an employee's contractual rights, and I think his expectation that employees need the specifics of the      replacement plan, I think we always accepted, absolutely.”

“……whenever this transition occurred we would have had to make sure we had an appropriate transition plan.  We were not at any time suggesting that someone should somehow be out of pocket as a result of this change from one plan to the other”

Delay in making a determination and allocation

325.	Under the terms of the May LTIP the allocations should have been made within 120 days i.e. by 1st May 2005. The LTIP could not finally be calculated without the audited year end accounts, since the calculation required knowledge of the asset returns from the initial Brascan capital and the actual expenses. As a result the figures, including the proposed allocations, were usually produced about seven days prior to the March Board meeting. 

326.	What happened in 2005 was this.  On 8th February 2005 Mr Robertson had asked Mr Daly and Ms Nicholls for a current LTIP schedule. A first draft of the LTIP calculation was produced by Ms Nichols on 10th February 2005. By 22nd February draft LTIP figures were in circulation amongst Imagine’s senior management. On 8th March 2005 Mr Daly e-mailed Mr Huntington with certain recommendations, proposed a revised pool figure, and told him that he should probably get it cleared with Messrs Myhal and Robertson during the next week. On 18th March Mr Huntington e-mailed to Messrs Forness, Doyle and Daly his draft of the LTIP allocations,

327.	In the event the final figures for the LTIP calculation were only presented by Mr Huntington at the 22nd March Board meeting. He himself was e-mailed the final figures by Ms Nichols on that day. Those figures included sizeable amounts in respect of LION ($ 37,146 m) and Dan Re ($ 39,386 m). These two figures contributed more than 50% of the total adjusted net income. They did not, however, come completely out of the blue. The NPV figures for each transaction were regularly monitored and updated and were available at each underwriting meeting and the increase over the previous year, would, in due course, go into the pool. Mr Myhal and Mr Robertson would have had a fairly good idea of the likely amount of the individual NPVs and of the total. The rough size of the LTIP for 2004 had been the subject of a meeting with Mr Robertson and Mr Myhal in Toronto in February. 

328.	I do not regard any delay on Mr Huntington’s part as having any significance for present purposes. It might have done if Mr Huntington was contending that failure to produce an allocation by March 31st 2005 was, itself, a repudiatory breach. That is not his contention. He complains of a failure to make an allocation based on an LTIP including both LION and Dan Re at any stage prior to 18th May or, indeed, 30th August.

329.	Imagine’s failure to do so was not caused by the fact that Mr Huntington’s proposals did not appear until the 22nd March Board Meeting. No complaint was made at the time in respect of the delay by Mr Huntington in providing the LTIP figures. An estimate of the pool could have been made from the continuously tracked NPV figures available to the Underwriting Committee.  The fact that Mr Huntington’s proposals were only provided on 22nd March and not about a week before made no real difference. What caused the problem was the controversy about whether the LION and Dan Re transactions should appear in the LTIP at all.  Apart from that there was no controversy.  

330.	Imagine was, as I find, not bound to include either Dan Re or LION in the LTIP.  On 5th May 2005 Mr Myhal accepted in principle that they should be included but subject to qualifications. In his e-mail of 18th May Mr Robertson, whilst maintaining the qualifications, agreed that LTIP participants could be notified of “the base level of LTIP and the allocations thereof” (i.e. the amounts derived otherwise than from LION and Dan Re) and that some “earn out” would be allowed in respect of the latter two. In effect Imagine had determined an LTIP entitlement and allocation for 2004 (apart from Dan Re and LION) by at the latest 18th May. In those circumstances Imagine was not in repudiatory breach. The LTIP amount and allocation other than in respect of Dan Re and LION was settled by 18th May.  If no controversy had arisen in respect of those two transactions the LTIP allocation would have been fixed sooner, probably by 1st May.  

331.	Accordingly, subject to any further submissions Counsel may wish to make in the light of this judgment, the answers that I would give to the issues are as follows:

1.	This issue no longer arises.

2.	(a) and (b)

The terms upon which Mr Huntington was entitled to participate in an LTIP of Imagine were originally those set out in the letter of 1st September 2000 (“the contract”). When the contract was made Imagine and Mr Huntington contemplated that a further document would have to be agreed between Mr Huntington and Imagine and drawn up recording the terms of the LTIP in greater detail, and that the terms of that document would govern Mr Huntington’s entitlement to participate in the LTIP (and the entitlement of all others who had a right to participate therein). The document that was agreed and drawn up between Mr Huntington and Imagine was the May LTIP. Thereafter the May LTIP governed Mr Huntington’s LTIP entitlement, and, to the extent that it did so, the   contract was varied. 

(c)

Mr Huntington was entitled to 17.5% of the total LTIP pool. 

3.	These two transactions were properly excluded from the 2004 LTIP because they fell outside the contractual definition of LTIP Business. 

4.	No. The Defendants were not in repudiatory breach of contract. 

5.	(a)	The board of Imagine acted honestly and in good faith insofar as they  excluded the Dan Re and LION transactions from the 2004 LTIP

(b)	But that fact would not have deprived what would otherwise amount to a repudiatory breach (had that been established) of its repudiatory quality.

6.	There was no repudiatory breach for Mr Huntington to accept. If there had been Mr Huntington would not have waived it by working from 18th May to 30th August,

7.	Yes, pursuant to the terms of the May LTIP.