Huntington v Imagine Group Holdings Ltd & Anor

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.

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

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 (Footnote: ²) 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.

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”) (Footnote: ³), 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.

The parties’ investment in Imagine was made pursuant to a Subscription Agreement dated as of 6^th 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.

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 ..”

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.

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.

Mr Huntington’s contract of employment with Holdings (“the contract”) was contained in a letter described as “Effective 1^st 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.

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.”

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.

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 (Footnote: ⁴) at the end of the respective year (Footnote: ⁵) 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.

“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”.

“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”.

The effect of these provisions is as follows:

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.

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 30^th 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.

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 (Footnote: ⁷). 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.

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”.

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.

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.

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.

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.

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 31^st 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 5^th May 2005.

In the end, on 18^th 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.

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 30^th August 2005.

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 1^st 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 30^th August 2005. Or, is it the case that by working from 18^th May to 30^th 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.”

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 1^st 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.

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.

The contract itself is poorly drafted (Footnote: ⁸). 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 (Footnote: ⁹); 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.

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” (Footnote: ¹⁰). 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.

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”.

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.

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.

Against that background it seems to me that, on its true construction, the letter of 1^st 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.

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.

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 (Footnote: ¹¹), 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.

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 “willvest 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).

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.

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.

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.

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”.

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.

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.

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”) (Footnote: ¹²). $557,800 was 25.46% of the amount of the LTIP that was in fact allocated to the senior management (Footnote: ¹³), not 25.46% of “the 10% figure”.

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.

On 13^th 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.

On 21^st 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.

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.

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.

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.

Mr Gleeson’s employment was terminated by a letter of 24^th 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”.

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.

On 27^th 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.

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 29^th 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.”

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.

Mr Huntington’s evidence was that when he wrote this e-mail he did not, as is apparent, have the letter of 1^st 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.

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 1^st September 2000; and (d) Mr Gleeson’s allocation was being worked out when the May LTIP was close to agreement.

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.

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 29^th 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.

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.”

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 (Footnote: ¹⁴) 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”.

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.

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 (Footnote: ¹⁵) 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.

The May LTIP, which was agreed by 8^th 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 balanceand 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.”

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

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.

In March 2002 Mr Huntington drafted two LTIP plans (Footnote: ¹⁶), which on 14^th 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] andits 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)”.

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]”.

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.

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”.

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.

On 29^th 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”.

On 27^th 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”

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.

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 (Footnote: ¹⁷)). 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 (Footnote: ¹⁸) 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.

The Boards of Holdings and Imagine Insurance met (Footnote: ¹⁹) on Friday 28^th June 2002. At a previous board meeting of Imagine Insurance on 14^th 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.

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”.

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.

On 22^nd 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 23^rd 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.”

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.”

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 (Footnote: ²⁰).

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.”

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.

Mr Huntington’s amendments included a substitution of “Imagine’sbusinesses” for “Imagine’sfinite-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 27^th 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.

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.

On 6^th August 2002 Mr Huntington e-mailed to Mr Myhal a version of Mr Myhal’s draft of 22^nd 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”.

This version had a number of significant amendments. These did not include

They did include, amongst several other changes the following:

Thee-mail of 6^th 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.

On 12^th 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.

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…. ”

On 14^th 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 23^rd 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.

A further draft of the plan was produced dated 25^th 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….”

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 27^th June (“must reflect all value contributions created by management”) had gone.

The 25^th September draft also incorporated vesting provisions which conformed with Mr Myhal’s proposal in his 12^th 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.

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

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

The 25^th September draft was part of those discussions.

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

The minutes of the Imagine Insurance board meeting of 27^th 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.”

On 17^th 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.”

On 29^th 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.

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.

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.

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”.

On 11^th 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 13^th 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.

On 16^th 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. (Footnote: ²¹) 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.

On 13^th 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.

On 21^st 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).

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

On 1^st and 2^nd May 2003, e-mail correspondence took place which originated from or was copied to Mr Huntington, Mr Myhal, Mr Robertson and Mr Daly. On 1^st 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."

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.

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.

OnFriday 2nd May 2003, Mr Robertson replied to Mr Huntington’s e-mail of 1^st 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”

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.”

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.”

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 (Footnote: ²²), 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.

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 21^st April and 8^th 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:

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 (Footnote: ²³) 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.”

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.”

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.

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 (Footnote: ²⁴). The negotiations concerned a single pool and the rights of all the participants in respect of their share in it.

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 (Footnote: ²⁵).

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 (Footnote: ²⁶). He would not regard it as necessary to have a separate agreement, or explicit statement, that it should do so.

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.

Attached to Mr Huntington’s e-mail of 8^th 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).

That letter was sent to:

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 (Footnote: ²⁷), 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 16^th, and Mr Forness later signed it. That contract incorporated the provisions described in “the long term incentive plan document”. This was the May LTIP.

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 17^th 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 (Footnote: ²⁸). 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.

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.

Mr Huntington’s evidence was that the letter was sent to Mr Daly and other

Consistently with this, as I have said, on 21^st 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.

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 8^th May 2003. But he did receive it on 21^st 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.

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 31^st December 2002. Later some, but not all, of them came over to a standard Imagine contract.

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.

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.

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 (Footnote: ²⁹). On March 14^th 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.

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 12^th 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.

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.

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.

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 ……

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 12^th 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”

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

It is not clear from the 12^th 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.

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.

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.

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

Mr Huntington contends that Imagine is estopped from claiming that his entitlement is governed by the contract of 1^st 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 3^rd May 2005 to his memorandum of 20^th April 2005. I deal with that in paragraphs 164 -168 below.

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.

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

On 31^st 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.

On 6^th 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 (Footnote: ³⁰) 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.

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.

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.”

On 20^th 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 6^th and our previous verbal discussions at the board meetings in Barbados (March 21^st and 22^nd)”, 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.

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 ...”

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).

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.”

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.

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”.

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.

On 3^rd 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”.

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 20^th 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.

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

Mr Huntington relies on the failure of Mr Myhal to contradict his assertion, made in his memorandum of 20^th 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.

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.

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.

Firstly, the words on which the estoppel is based (Footnote: ³¹) 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.

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 3^rd 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.

On 5^th 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.

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.

On Friday 6^th May 2005 Mr Huntington sent Mr Myhal an e-mail with a note of the 5^th 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”

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 (Footnote: ³²). 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). (Footnote: ³³).

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 1^st 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.”

On Monday 9^th 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”

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 18^th 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 17^th May and not to return until Tuesday 24^th. (Footnote: ³⁴) At the time Mr Huntington thought that Mr Myhal could not have overlooked the fact that this call was due to take place.

At 1024 Bermuda time on 18^th 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”

Very shortly thereafter Mr Robertson, who had previously spoken to Mr Myhal about his conversation on 5^th 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?”

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 26^th :

“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”.

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

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 …”

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.”

Mr Huntington replied:

“I would echo your last sentence. However, I wanted you to know howdesperate 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 continueto try my best to resolve this with George and Bruce”

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.

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 1^st 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,)”

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.

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 1^st 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”.

The e-mail referred to in the last paragraph did not set out the upshot of the conversation with Mr Robertson. On 20^th May Mr Huntington sent Messrs Myhal and Robertson his e-mail of 18^th 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.

On either 24^th or 25^th 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 25^th 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 26^th May he e-mailed Mr Myhal and Mr Robertson with detailed employee allocations.

On about 3^rd June agreement was reached, as recorded in Mr Robertson’s e-mail of 8^th 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 18^th May ...”After 18^th May Mr Huntington ceased to go to Imagine’s offices except for meetings with a client or an outside third party.

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

On 15^th 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 9^th 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 (Footnote: ³⁵). The 2004 LTIP did not include Dan Re. Mr Huntington was allocated over $ 3,000,000.

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.

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 (Footnote: ³⁶). 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.

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

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 31^st 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.

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.

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.”

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.”

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.

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.

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.

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.

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”).

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.

“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 (Footnote: ³⁷). 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.

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”.

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.

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 (Footnote: ³⁸)). 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.

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.

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.

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…”

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 affectedby 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”…

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 (Footnote: ³⁹) 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”…

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.

On November 2^nd 2000Mr Huntington, together with Mr Gleeson and Mr Daly, gave a presentation to the Trilon Board of Directors (Footnote: ⁴⁰). 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.

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

……”

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).

Another presentation was made by Mr Huntington to Brascan (previously Trilon) Financial Corporation on February 11^th 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”.

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.”

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”

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

…..”

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.

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.

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.”

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.

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.

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.

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.

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.

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.

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 9^th 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 (Footnote: ⁴¹) 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.

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.

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 (Footnote: ⁴²)); 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.

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.

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.

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.

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 (Footnote: ⁴³). One of the transactions was a loss portfolio transfer with a contractual limit of $ 19.5 million for a premium of $ 14.9 million.

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.

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.

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.

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.

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.

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

At the very end of 2001 Imagine entered into a transaction which involved a very large loss portfolio transfer (Footnote: ⁴⁴), 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.

Syndicates 996, 994 and 1221 at Lloyd’s were managed by the Greenwich Managing Agency. On 31^st 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.

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.

Several reinsurances to close (Footnote: ⁴⁵) 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.

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”.