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Cite as: [2007] EWHC 1603 (Comm)

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Neutral Citation Number: [2007] EWHC 1603 (Comm)
Case No: 2005 FOLIO 946

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERICAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL
13/07/2007

B e f o r e :

MR JUSTICE CHRISTOPHER CLARKE
____________________

Between:
BRAD SCOTT HUNTINGTON
Claimant
- and -

IMAGINE GROUP HOLDINGS LTD
IMAGINE UNDERWRITING LTD
Defendants

____________________

Mr Andrew Clarke QC & David Lascelles (instructed by Memery Crystal LLP) appeared for the Claimant
Mr Alan Boyle QC & Mr David Wolfson (instructed by Fulbright & Jaworski LLP) appeared for the Defendants
Hearing dates: 19th - 29th March 2007

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    MR JUSTICE CHRISTOPHER CLARKE:
    The history
    Overview
  1. The claimant, Mr Brad Huntington ("Mr Huntington") is a Canadian citizen. He qualified as a lawyer in the provinces of Alberta and British Columbia in Canada, as a barrister and attorney in Bermuda, where he acted for several years as the general counsel of a major Bermuda based reinsurance group; and as a solicitor in England and Wales. He has an MBA from INSEAD.
  2. Mr Huntington was the co-founder with Mr Thomas Gleeson ("Mr Gleeson") of the Imagine Group of companies. That group includes:
  3. (i) Imagine Group Holdings ("Holdings"), the first defendant, which is incorporated in Bermuda;
    (ii) Imagine Insurance Company Limited ("Imagine Insurance"[1]), the operating subsidiary of Holdings, incorporated in Barbados; and
    (iii) Imagine Underwriting Limited ("Imagine Underwriting"), the second defendant, an indirect subsidiary of Holdings.

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

  4. 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[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.
  5. 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")[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.
  6. The parties' investment in Imagine was made pursuant to a Subscription Agreement dated as of 6th September 2000 (although signed in late 2000) between (i) Holdings, (ii) Trilon, (iii) Golden 1 Holdings Ltd, ("Golden 1"), which was Mr Huntington and Mr Gleeson's investment vehicle, (iv) Mr Gleeson and (v) Mr Huntington. Under that Agreement the parties made a $200,000,000 investment. Trilon and Golden 1 agreed to subscribe for shares in Holdings. Trilon agreed to subscribe for (a) 1,750,000 preference shares for $175,000,000 and (b) 225,000 common shares for $22,500,000; and Golden 1 agreed to subscribe for 25,000 shares for $2,500,000. These shares were to replace the 12,000 common shares that had previously been issued to Mr Gleeson and Mr Huntington. Brascan made a further $ 100 million investment in Imagine in December 2002. Other third party investors subscribed $ 100 million in September 2004.
  7. 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:
  8. "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 .."
  9. 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.
  10. 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.
  11. Mr Huntington's contract of employment with Holdings ("the contract") was contained in a letter described as "Effective 1st September 2000". It was entered into pursuant to a previous legally binding "Overview Agreement" between Mr Huntington, Mr Gleeson and Trilon. It provided for a base salary of $ 335,000 and a cost of living payment of $ 180,000. Under the heading "Long-Term Incentive Plan ("LTIP")" it read:
  12. "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.

  13. Under the heading "LTIP Mechanics" the agreement provided:
  14. "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."
  15. 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.
  16. The contract contained the following definition of "Adjusted Net Income":
  17. "Adjusted Net Income for any financial year shall equal: (1) IICL's U.S. GAAP common shareholders equity[4] at the end of the respective year[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.
  18. "Clawback" was defined as follows:
  19. "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".
  20. "Founder's/Key Man Profit Share and Long Term Bonus" was defined as:
  21. "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".

  22. The effect of these provisions is as follows:
  23. (a) at the end of each financial year a calculation would be made of two things (i) Imagine Insurance's GAAP[6] common shareholders equity plus (ii) the projected net present value ("NPV") of future income, such as premiums, less liabilities, such as claims.
    (b) from the amount thus calculated there would be deducted the amount calculated on the same basis at the end of the previous financial year;
    (c) the difference between the two would constitute the Adjusted Net Income

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

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

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

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

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

    (i) The unvested SARs in respect of any particular year were subject to restatement if the NPV used for the particular year's Adjusted Net Income turned out to be overstated.
  24. 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.
  25. In September 2000 Mr Huntington, Mr Gleeson and Mr Daly were the only employees with contracts entitling them to participate in an LTIP in the manner that I have described. But as Imagine grew it (or a subsidiary) recruited new employees. In the case of the more senior employees the contracts referred to their right to participate in the Imagine LTIP in general terms. For example, on 30th July 2002 Mr Huntington wrote to a Mr Grealy setting out the terms of an offer of employment with Imagine International Reinsurance Ltd , which included the following:
  26. "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.

  27. 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[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.
  28. 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".
  29. The dispute

  30. 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.
  31. 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.
  32. 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.
  33. 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.
  34. Under the terms of the contract allocations were to be determined and finalized no later than 3 months after the year end i.e. no later than March 31st 2005. This did not happen. Discussions took place between late March and early May 2005 in which Mr Huntington sought to reach agreement with Mr Myhal and others at Brascan. Some measure of agreement was reached in a conversation between Mr Huntington and Mr Myhal on 5th May 2005.
  35. In the end, on 18th May 2005 Mr Huntington claimed that he was "forced to the position of the implied termination of the original terms of my employment agreement". He contends that Imagine was in repudiatory breach of his contract in (a) failing to make any determination or allocation of his 2004 LTIP entitlement; (b) manifesting a settled intention to exclude Dan Re and LION from the pool; and (c) insisting on its ability to impose changes to his LTIP.
  36. Mr Huntington agreed to work on for a short period in order to effect a handover and in the hope that a negotiated resolution of the dispute would be possible. It was not. In consequence he left Imagine's employment on 30th August 2005.
  37. The Issues
  38. 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:
  39. "1 No longer alive.
    2. It being agreed that it was a term of Mr Huntington's employment that he participate in a Long Term Incentive Plan ("LTIP"), what were the terms of that plan and, in particular:
    a. were the terms those contained in the letter of 1st September 2000 (including the definition sheet referred to therein) attached to the Particulars of Claim.
    b. Insofar as the terms were those in that letter at the time the contract of employment was entered into, when and how the same were varied (if at all)

    c. To what percentage of the total LTIP allocation was Mr Huntington entitled
    3. How should two particular transactions have been accounted for in relation to Mr Huntington's LTIP entitlement for 2004 (whatever the terms of the LTIP may be found to have been) namely those concerning (i) Danish Re and (ii) LION.
    4. Whether D1 and D2 were in repudiatory breach of contract by:

    a. failing to make any determination or allocation of Mr Huntington's LTIP entitlement for 2004. In that regard was any such failure consequent upon a failure by Mr Huntington promptly to prepare board papers necessary for the finalisation of the LTIP allocation and/or
    b. maintaining an entitlement (and settled intention) to leave the Danish Re and LION transactions out of the accounting exercise to establish Mr Huntington's 2004 TIP entitlement and/or

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

    5. Whether:
    a. the board of D1 was acting honestly and in good faith in excluding the Danish Re and Lion transactions from the 2004 LTIP
    b. the fact that the board of D1was acting honestly and in good faith in that regard deprives what would otherwise amount to a repudiatory breach of contract (if that is established) of that quality
    6. If D1 and D2 were in repudiatory breach of contract, did Mr Huntington accept that repudiatory breach in order to bring his contract of employment to an end with effect from 30th August 2005. Or, is it the case that by working from 18th May to 30th August 2005 Mr Huntington waived any material breach or breaches of contract as he might otherwise be able to establish and rely upon and/or he affirmed the contract.
    7. In the circumstances of the termination of his contract of employment (as they are found to be) has Mr Huntington lost what was previously his entitlement to the unvested portions of previously awarded LTIP entitlements."

    Does the contract give Mr Huntington an LTIP entitlement to share in the LTIP?
  40. There can, in my judgment, be no doubt that the contract gave Mr Huntington an entitlement to participate in the LTIP as specified in the letter of 1st September 2000. That letter describes Mr Huntington as being entitled to such participation and sets out in considerable detail the "mechanics" of the LTIP. The fact that the parties envisaged drawing up and adopting a more detailed plan does not detract from the enforceability of the contractual provisions contained in the contract. The key terms of the LTIP are set out in sufficient detail to be enforceable. I have no doubt that the parties intended that they should be, not least because a share in the LTIP was the major component of Mr Huntington's remuneration.
  41. 17.5% of what?
  42. 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.
  43. The contract itself is poorly drafted[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[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.
  44. Pre-contract discussions
  45. 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"[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.
  46. 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".
  47. 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.
  48. 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.
  49. Against that background it seems to me that, on its true construction, the letter of 1st September 2000 gave Mr Huntington an entitlement to a 17.5% share of 20% of the non investment Adjusted Net Income. My reasons are as follows.
  50. 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.
  51. 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[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.
  52. If that were so, it is difficult to see how the third paragraph of the contract was to operate. That paragraph provides for one-fifth of the balance of "any amount in the LTIP" to vest at the end of each year to the senior executives and that the remaining unvested portion "will vest ratably" over the succeeding four years. By this means the balance of the amount of the LTIP in respect of any particular year will have been used up. If, however, "senior executives" means (at any rate initially) only Messrs Huntington, Gleeson and Daly ("the triumvirate"), and senior executives are only to share in 50% of the LTIP pool, one-fifth of "any amount in the LTIP" will not be vested to those senior executives at the end of each year. Thus, if 20% of the non investment Adjusted Net Income (and hence the LTIP) for 2001 is $10,000,000 the senior executives, thus defined, will, under their contracts, be entitled, on Imagine's interpretation, to have vested to them after the end of 2001 at most one-fifth of $ 5,000,000 (the 10% of the non investment Adjusted Net Income allocated to senior executives) i.e. $ 1,000,000 between them. (In fact their entitlement will be less, since their aggregate entitlement was to 47.5% - 17.5% + 17.5% + 12.5% - of the amount paid to senior executives).
  53. 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.
  54. 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.
  55. 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.
  56. 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".
  57. Post contract allocations
  58. 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.
  59. 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.
  60. Year Producers
    %
    Producers
    $
    Management
    %
    Management
    $
    % of
    Total
    Total
    2001 14.78% 409,270 39.44% 1,092,000 27.11 1,500,000
    2002 0% 0 25.46% 557,800 11.25 557,800
    2003 4.96% 500,000 35.18% 3,500,000 20.11 4,000,000
    2004
    9.57% 1,281,000 40.00% 5,375,000 24.78% 6,638.472

  61. 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")[12]. $557,800 was 25.46% of the amount of the LTIP that was in fact allocated to the senior management[13], not 25.46% of "the 10% figure".
  62. The allocation in respect of 2002
  63. 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.
  64. On 13th March 2003 board meetings of Imagine Insurance and Holdings took place in Barbados. Mr Myhal and Mr Robertson were present at the meeting of Imagine Insurance by invitation. Mr Daly presented the 2002 LTIP calculation and allocation for board review. The board resolved to approve the aggregate calculation but only to approve the allocation at a later date. Mr Myhal's evidence was that this was as a result of concerns raised about Imagine's results and its failure to meet the projections put forward in its business plans.
  65. On 21st March 2003 Mr Robertson proposed in an e-mail to Mr Huntington that the allocation should be reduced from the figures proposed to $ 1.1 million in respect of Messrs Huntington and Gleeson and $ 1 million in respect of Mr Daly, and that a portion of the LTIP should be unallocated and remain in reserve. $ 1,115,625 would amount to 17.5% of the entire pool. Mr Robertson was not involved in the subsequent reduction to $ 557,800.
  66. 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.
  67. 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.
  68. 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.
  69. Mr Gleeson's employment was terminated by a letter of 24th March 2003, of which Mr Huntington received an advance copy and which he sent on to a director of Imagine to sign, which told him:
  70. "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".

  71. 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.
  72. On 27th March 2003 Trilon exercised the option given to it under the Shareholders' Agreement to purchase all of "Golden 1" shares in Imagine at book value if, by the 18 month anniversary of the date of the agreement, Imagine Insurance had not issued the number of preferred shares necessary to produce a $240,000,000 increase in its capitalization.
  73. Mr Gleeson was subsequently in litigation with Imagine in both Bermuda and Toronto. In the course of the Toronto litigation Mr Huntington explained, in an e-mail of 29th August 2004 to Ms Gillian Scott, of Imagine's Toronto lawyers, the position in relation to the 2002 LTIP allocation in the following terms:
  74. "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."

  75. 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.
  76. Mr Huntington's evidence was that when he wrote this e-mail he did not, as is apparent, have the letter of 1st September 2000 in front of him, and was speaking "in code", because he could not very well say that the defence which Imagine was putting forward was not very strong; and that his statement that the contracts still refer to a senior pool which would have formed the top half of the total pool was inaccurate – as, in literal terms, it was. Even so, the impression that he was seeking to convey was that the true meaning of the contract. although open to another interpretation, was that Mr Gleeson was only entitled to 17.5% of a portion of the LTIP.
  77. Mr Huntington claimed that his reference to the concept having been dropped and not existing "in the LTIP program adopted by Imagine" was a reference to the LTIP agreed in September 2000, because Mr Gleeson never came within the May 2003 LTIP. I think that the likelihood is that when he referred to "the LTIP program adopted by Imagine" he was referring to the May LTIP, since (a) it is more accurately so described; (b) the phrase appears in a sentence which earlier refers to "the contracts"; (c) in the first paragraph of the e-mail he refers to the Board having the "absolute and final say", which is a provision found in the May LTIP and not the letter of 1st September 2000; and (d) Mr Gleeson's allocation was being worked out when the May LTIP was close to agreement.
  78. 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.
  79. I regard Mr Huntington's account of how the 2002 figure for him and Mr Gleeson came to be reduced to $ 557,800 as likely to be correct. I think it unlikely that he has invented the discreditable account of fashioning a defence to Mr Gleeson's claim. Having been instrumental in doing so I do not find it surprising that he wrote in the terms that he did on 29th August 2004. I do not accept that the main reason for the reduction in the amount that Mr Gleeson and Mr Huntington were to receive for 2002 was that 2002 was a particularly bad year. A 2003 press release about Imagine Insurance's results for the 2002 year noted that its net income had doubled over 2001, its net underwriting income had almost tripled and Mr Gleadall (the Chairman of the Group) was recorded as commenting that "We are very pleased with our results in 2002". Even allowing for "spin" these public statements do not suggest an unusually bad year.
  80. 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:
  81. "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."

  82. 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[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".
  83. 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.
  84. 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[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.
  85. Was there a variation of the contract?
  86. The May LTIP, which was agreed by 8th May 2003 between Mr Huntington and Mr Myhal was entitled the "Imagine Insurance Long Term Incentive Plan". It included the following terms:
  87. "Purpose
    To provide management of Imagine with a long-term incentive reward plan. The Long Term Incentive Plan ("LTIP") will provide designated employees with a financial participation in specified businesses of the Imagine Group under their direct control.
    Background
    In 2000, Brascan Financial and the founders of Imagine (collectively the "Shareholders") collectively invested US$ 200 million cash to form the Imagine Group. With this initial capital, management has been charged with building and expanding Imagine's businesses. Such businesses shall include the finite risk insurance and reinsurance business and such other businesses as shall be explicitly agreed by the shareholders to be the subject of the LTIP ("the LTIP Business").
    Subject to the terms and conditions of this LTIP, in each and every year twenty percent (hereinafter the "Specified Percentage") of the Income (as hereinafter defined) earned from the LTIP Business will be credited to the global LTIP fund. Of this amount, one half (or 10%) would ordinarily be expected to be allocated specifically to individuals and team members directly involved in the production of income.
    All income earned and capital gains realised on the capital funds provided by the shareholders shall be for the sole account of the Shareholders and shall not form part of the LTIP incentives hereunder. In addition, to the extent that explicit capital support from one or more of the Shareholders is required to support the LTIP Business (related to bank lines, letters of credit, guarantees or other forms of explicit capital support) the Shareholder(s) providing such support will be entitled to charge the LTIP and be paid a market rate for the use of such support.
    …………….
    Eligibility
    Participation in the LTIP will be open to key employees of Imagine designated by the Board of Directors as participants from time to time. At the end of each year, the amount to be credited to the LTIP in respect of that year's performance shall be allocated among the participants having regard to economic performance and such other criteria as shall be determined by the Imagine Board of Directors from time to time. A separate balance shall be maintained for each participant under the LTIP. All allocations to individuals in the LTIP will be recommended by the senior management of Imagine and shall be subject to the final approval of the Board of Directors of Imagine, whose decision shall be final and binding.
    Vesting
    No later than 120 days after the end of each calendar year, an amount equal to the Specified Percentage of the Income of the LTIP Business for that year will be credited to the LTIP. The Specified Percentage annual credit will be allocated to all LTIP participants as approved by the Imagine Board. Allocations shall vest over a five-year period on each annual scheduled payment date for distributions. The vesting shall be calculated at twenty five per cent (25%) at the time of allocation of a subject years LTIP with the other seventy five percent (75%) vesting in four equal parts over the remaining four years of the five year vesting term.
    ……….
    Income Calculation
    Following receipt by Imagine of the annual audited financial statements a calculation shall be performed to determine the amount to be credited under this LTIP. The amount to be credited to the LTIP in each year (the "Income" as used in this document) will be calculated each year using the accounting net income, before tax, of the LTIP Business determined in accordance with International Accounting Standards GAAP subject to a number of adjustments. The effect of these adjustments will be to exclude from Income any investment earned on the shareholders capital account and include any provision for reserves, as deemed necessary by the Board of Directors of Imagine, to provide for unforeseeable future events.
    Election of Allocation
    Within thirty days of each allocation, each participant shall irrevocably elect one of the following alternatives with regard to the prior underwriting year's allocation to their LTIP account: (i) with respect to vested and unvested amounts, to apply their allocation, in whole or in part, to acquire a long-term equity like component – called Phantom Equity Appreciation Rights ("PEARS"), or (ii) with respect to vested and unvested amounts, to elect a short term liquid option (the "Short Term Option") – via a deposit of their allocation, in whole or in part, into a notional account which shall accrue interest at a short term government bond yield designated by the Board of Directors of Imagine until distributed. If there is a failure to elect, alternative (ii) will be the default option ……
    Phantom Equity Appreciation Rights
    Participants in the LTIP who elect to receive PEARs shall be granted Pear's equal to the monetary value of their allocation to PEARs (their "LTIP Entitlement"). The number of PEARs to be issued shall be equal to the LTIP Entitlement divided by the year-end book value per common share of Imagine, according to the GAAP financial statements as determined by the Board of Imagine after reflecting the issuance of the PEARs. Participants will lose all PEARs compounding if they leave the company (other than for reasons as set out in the second paragraph of the Termination section) during their first five years of their employment (vesting of the capital portion over the five year period remains unaffected by this provision - i.e. Unvested portions of capital will also be lost). After five years, compounding on unvested portions (only) will be lost if they leave their employment (other than for reasons as set out in the second paragraph of the Terminations section) and go to work for a competitor within a twelve month period after leaving their employment with Imagine (employees who retire or exit the industry will not be penalized).
    Such PEARs shall be economic rights only and shall not entitle the holder to any security, shareholder or other similar right or interest in Imagine. An LTIP participant shall not be entitled to elect to receive PEARs to the extent that the granting of the PEARs or the receipt of the PEARs would be contrary to applicable law, including, without limitation, securities law
    Liquidity
    Vested amounts under the Short Term Option may be withdrawn at any time on 30 days written notice to the Company. Unvested amounts under Short Term Option elections may not be withdrawn until vesting has occurred. Any amounts (vested or unvested) elected under the PEARs option may only be cashed-in when Participants leave their employment with the Company or there is a Liquidity Event (as defined) However, LTIP participants may apply, and the Board of Imagine will consider on an ad hoc basis, making loans to individuals against the vested balance in their LTIP account (including PEARs) in certain circumstances if, and when, warranted. Any such loans shall be at the sole discretion of the Board of Directors of Imagine. Such loans will bear interest at the US dollar prime rate or relevant currency related equivalent and will be secured by the LTIP balance and other collateral acceptable to Imagine from time to time.

    A "Liquidity Event" means (i) those events contemplated in the second paragraph of the Termination section of this LTIP, or (ii) the sale by Brascan Financial of more than 50% of the common shares of Imagine.
    …..
    Termination
    LTIP or PEAR participants who are terminated for cause or voluntarily depart before a scheduled payment date will forfeit their entitlement to any and all unvested amounts (including Pear's and/or accrued interest) payable under the LTIP.
    In the event of retirement, death, long-term disability, or termination by Imagine without cause, LTIP or PEAR participants will be entitled to receive any vested and unvested amounts when otherwise due.
    Board Decisions
    The Board of Directors of Imagine will have the right to construe, interpret, administer, amend or cancel the LTIP, at any time, provided that any amendment or cancellation of the LTIP will not affect the right of any participants to any payments under the LTIP that have been allocated or accrued to that date. The decision of the Board on any matter regarding the LTIP will be final and binding on the LTIP participants."
  88. The important features of the May 2003 LTIP for present purposes are these:
  89. (i) The LTIP fund was to be 20% of the Income, which was to be the Income of the LTIP Business, being Imagine's finite risk insurance and reinsurance business and such other businesses as should be explicitly agreed by the Shareholders; Imagine contends that the LION and Dan Re transactions did not constitute finite risk insurance or reinsurance business.
    (ii) The participants were to be key employees designated by Imagine Insurance's Board of Directors.
    (iii) Allocations, approved by the board, were to vest as to 25% at the time of allocation and thereafter equally over the next four years.
    (iv) Participants could choose to take their allocation in PEARs or a short term liquid option;

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

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

    (vii) The Board could cancel the LTIP at any time but this would not affect the right of any participants to any payment under the LTIP that had been allocated or accrued to that date.
    The history of the May LTIP
  90. 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.
  91. In March 2002 Mr Huntington drafted two LTIP plans[16], which on 14th March 2002 he e-mailed to Mr Myhal and Mr Robertson, amongst others. The first was entitled the "Employee Long Term Incentive Plan (LTIP)" and was for "certain key senior officers of [Holdings] and its subsidiaries and affiliates". Article IV provided that "employees of the company" should be eligible to participate. The second was described as the "Senior Management Long Term Incentive Plan (LTIP)" and was also for "certain key senior officers of [Holdings] and its subsidiaries and affiliates". Article IV provided that "senior officers of the company" should be eligible. Under the Employee plan 10% of the change to the Adjusted Book Value of the Company from the prior financial period was to constitute the potential allocation to the participants under the program. Under the Senior Management plan 20% of the change to the Adjusted Book Value of the company from the prior financial period was to be allocated to potential allocation (sic) to the participants. From that amount there was to be deducted "the value of any allocations for the year in question to any LTIP plans which are junior (i.e. within the Company and available to all employees)".
  92. Both programs contained a provision that:
  93. "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]".

  94. 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.
  95. Both plans provided that they should:
  96. "….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".

  97. 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.
  98. On 29th March 2002 the following e-mail exchange took place between Mr Daly and Mr Huntington:
  99. "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".

  100. On 27th June 2002 Mr Huntington e-mailed to himself a discussion document with an "Overview of LTIP Requirements". This document, which was an amalgam of points made by the triumvirate and which was not seen by Mr Myhal until after the commencement of these proceedings, set out 13 numbered points, including the following:
  101. "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"
  102. 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.
  103. 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[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[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.
  104. The Boards of Holdings and Imagine Insurance met[19] on Friday 28th June 2002. At a previous board meeting of Imagine Insurance on 14th March 2002 the 2001 allocations had been approved in principle on the basis that further discussions between the Imagine principals and directors needed to take place.
  105. The minutes of Imagine Insurance record that:
  106. "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".
  107. 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.
  108. On 22nd July 2002 Mr Myhal e-mailed to Mr Huntington and Mr Gleeson a draft "Management Long Term Incentive Plan". It was some 2 ¾ pages long. On 23rd July Mr Huntington copied it to Mr Daly. This document defined the purpose of the plan in the following terms:
  109. "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."
  110. Under the heading "Background" the draft stated:
  111. "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."

  112. 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[20].
  113. The draft also provided that:
  114. "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."

  115. 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.
  116. Mr Huntington's amendments included a substitution of "Imagine's businesses" for "Imagine's finite-risk reinsurance business" in the definition of LTIP business, and a provision that the plan should be referred to as the "Managing Partner Plan" and that the Managing Partners (i.e. the triumvirate) should have the power to carve out sub plans from this plan. These latter proposals were consistent with points 6 and 9 in his overview document of 27th June. If accepted they would have had that effect that the plan was to be for the Managing Partners subject to their right to create sub-plans subject to the same terms.
  117. 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.
  118. On 6th August 2002 Mr Huntington e-mailed to Mr Myhal a version of Mr Myhal's draft of 22nd July, which contained his proposed amendments, with the following comment:
  119. "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".

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

  122. They did include, amongst several other changes the following:
  123. (i) The wording of the first paragraph ("Purpose") was changed from:
    "… a financial participation in the finite-risk reinsurance business of Imagine under their direct management …" to
    "a financial participation in the business of the Imagine Group under their direct management …"

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

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

    (v) The re-draft also provided that:

    "The Managing Partners may designate sub plans to individual business units under the Imagine Group (which plans shall be substantially on the same terms and conditions of this Plan) and any aggregate percentage allocation to such sub plans of the overall 20% hereunder shall be deducted from the participants' rights under this Managing Partners Plan".

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

  124. The e-mail of 6th August 2002 would have indicated to Mr Myhal (as must have been apparent to him before) that Mr Huntington was putting forward for agreement a document that would be applicable to, amongst others, Mr Huntington himself. Mr Huntington's pleaded case was that by July 2002 the negotiations were no longer for an LTIP document that would cover all LTIP participants. This is, as Mr Huntington acknowledged, clearly wrong.
  125. On 12th August 2002 Mr Myhal sent Mr Gleeson and Mr Huntington a memorandum commenting on the revised draft. These included the observation that:
  126. "… .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.

  127. Mr Myhal's memorandum also included the following:
  128. "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…. "
  129. On 14th August Mr Daly e-mailed Messrs Gleeson and Huntington expressing the view that they should meet in New York before the production conference which was to take place in Barbados between 23rd and 26th September and "don't leave until we have a document that we all can live with". The idea was to present a final document to the producers on that occasion.
  130. A further draft of the plan was produced dated 25th September 2002. In this draft the first two paragraphs read:
  131. "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…."
  132. The omission of express reference to Mr Huntington, Mr Gleeson and Mr Daly (either in the first or the third paragraphs), was consistent with the Brascan requirement, by now accepted, for there to be one plan covering everybody. It did not arise out of any proposal by Mr Huntington that the document under negotiation should now apply only to employees other than those three. It is also apparent from the definition of LTIP Business that point 6 of Mr Huntington's Overview document of 27th June ("must reflect all value contributions created by management") had gone.
  133. The 25th September draft also incorporated vesting provisions which conformed with Mr Myhal's proposal in his 12th August memorandum to the effect that vesting for all participants would take place as to 25% at the end of the first year; and then in equal amounts for the next four years. The 25% could be taken either in cash or SARs.
  134. The minutes of the Imagine Board Meeting of 26th September record:
  135. "The LTIP plan components are still under discussion by Tom Gleeson, Brad Huntington and representatives of the shareholders."

    The 25th September draft was part of those discussions.

  136. Mr Huntington produced a further draft in November 2002. The paragraphs headed "Purpose", "Background", and "Eligibility" were the same.
  137. The minutes of the Imagine Insurance board meeting of 27th November 2002 record that:
  138. "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."

  139. On 17th January 2003 Mr Huntington wrote to Mr Daly and Mr Gleeson an e-mail which included the following:
  140. "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."

  141. On 29th January 2003 Mr Myhal sent a further draft of the LTIP plan to Mr Huntington and Mr Gleeson ("the Myhal draft"). This draft contained the same wording for the "Purpose", "Background" and "Eligibility" paragraphs and, therefore, the same definition of the "LTIP Business". The Myhal draft (like earlier drafts) covered all those who would be entitled to participate in the LTIP. It was not divided into a senior management LTIP and an employee LTIP, nor did it provide for the creation of sub-plans as discussed by Mr Huntington in his 17 January 2003 e-mail. It provided that allocations of the LTIP would be made each year and that the amount allocated would vest over a 5 year period. 25% would vest at the end of the first year, and the remaining 75% would vest in four equal parts over the remainder of the 5 year vesting term.
  142. .

  143. 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.
  144. 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.
  145. 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".
  146. On 11th February 2003 the triumvirate attended a Board Meeting of Trilon Financial in Toronto, at which they made a presentation describing Imagine's business. There was a further meeting on 13th February between the triumvirate and Messrs Myhal and Robertson in which the LTIP was to be discussed. It was not. The meeting was dominated by heated exchanges between Mr Gleeson and the two representatives of Brascan on matters not material to the present case.
  147. On 16th February 2003 Mr Daly sent an e-mail to Mr Huntington in which he referred to the fact that Mr Huntington would be discussing with Mr Robertson or Mr Myhal the vesting period that would apply to Mr Gleeson and Mr Huntington and asked them to discuss what was being considered for himself. He indicated that vesting over a 10 year period was unacceptable.[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.
  148. On 13th March 2003 the Board of Imagine Insurance approved the 2002 LTIP aggregate calculation but resolved that the allocation to individual participants would be approved at a later date.
  149. On 21st April 2003 Mr Huntington sent a further draft of his 2002 LTIP calculations to Mr Myhal and Robertson and said:
  150. "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).

  151. During the period from February to May 2003 there were further discussions between Mr Myhal and Mr Huntington about the LTIP document.
  152. On 1st and 2nd May 2003, e-mail correspondence took place which originated from or was copied to Mr Huntington, Mr Myhal, Mr Robertson and Mr Daly. On 1st May 2003 Mr Huntington e-mailed as follows:
  153. "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."

  154. 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.
  155. 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.
  156. On Friday 2nd May 2003, Mr Robertson replied to Mr Huntington's e-mail of 1st May making various drafting suggestions. In the course of his e-mail he said:
  157. "Finally, it should be clear that the availability of PEARs can be withdrawn at any time"
  158. About half an hour later Mr Daly commented on Mr Robertson's suggestions. In the course of his e-mail he said:
  159. "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."

  160. Mr Robertson replied the same day saying:
  161. "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."

  162. 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[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.
  163. Thereafter drafting amendments were agreed and incorporated into the LTIP document and Mr Huntington prepared what he termed the "final" LTIP document, being the May LTIP. Those terms had been agreed between Mr Huntington and Mr Myhal in the course of various telephone discussions between 21st April and 8th May 2003. Amongst other changes, under "Purpose" the plan now referred to "designated employees" and under "Background" a sentence was added to the third paragraph:
  164. "Of this amount, one half, 10 per cent would ordinarily be expected to be allocated specifically to individuals"

    The promulgation of the May LTIP

  165. On 8 May 2003, Mr Huntington e-mailed to all employees of Imagine entitled to participate in the LTIP (other than himself) saying:
  166. "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[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."

    Conclusions on the application of the May LTIP
  167. 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:
  168. " ..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."

  169. 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.
  170. 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[24]. The negotiations concerned a single pool and the rights of all the participants in respect of their share in it.
  171. 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[25].
  172. 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[26]. He would not regard it as necessary to have a separate agreement, or explicit statement, that it should do so.
  173. 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.
  174. The letter of 8th May 2003

  175. Attached to Mr Huntington's e-mail of 8th May 2003 was a letter the first paragraphs of which read:
  176. "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).
  177. That letter was sent to:
  178. (a) Mike Daly;
    (b) Jason Fisher, Maria Nicholls and Patrick Grealy;

    (c) Bob Forness;

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

    (e) Lars Dehn and David Dodson.
  179. 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[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 16th, and Mr Forness later signed it. That contract incorporated the provisions described in "the long term incentive plan document". This was the May LTIP.
  180. In category (d) Mr Grill never signed a written contract and was employed pursuant to a verbal agreement made with Mr Gleeson. A draft contract of 17th May 2002 provided for him to be subject to a separate LTIP document to be produced. He was told that he would benefit from the Imagine LTIP plan, i.e. that he would participate in the sharing of 20% of income, and he was treated as entitled so to do. He claimed to be entitled to a million dollars over the first few years to make up for the options he had had at Merrill Lynch. In effect he had an oral entitlement to share in the Imagine LTIP. Messrs Stevenson and Koegel were employees of Enterprise Re which Imagine acquired in 2001[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.
  181. 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.
  182. Mr Huntington's evidence was that the letter was sent to Mr Daly and other
  183. addressees who should not have received them; and that it was an act of sloppiness on his part that this occurred. I do not accept this. In my judgment Mr Huntington sent the letters to those to whom they should have been sent; namely those who were, or were treated as, entitled to participate in the Imagine LTIP – in Mr Forness' case a little prospectively.

  184. Consistently with this, as I have said, on 21st April Mr Huntington had sent Mr Myhal and Mr Robertson his 2002 LTIP calculations which listed all those in categories (a) – (e) above. The accompanying e-mail included the sentences "I have been trying to finalize letters to all of our employees for the 2002 LTIP allocations which we have discussed a few times…..I also wanted to see if we could reach agreement on the "Plan document" narrative which we discussed last time in Toronto and which I would like to distribute to the employees"". As this e-mail shows the parties were proceeding on the basis that the letter would be circulated to those entitled to participate in the LTIP.
  185. Mr Sekse, who was previously on terms which entitled him to share in the profits of Convergence Capital, did not receive the May LTIP on 8th May 2003. But he did receive it on 21st July 2003 when he was offered a new contract, under which he moved to employment within the group as opposed to any individual division, and became entitled to participate in the Imagine LTIP.
  186. Of those employees of Imagine to whom Mr Huntington did not send the letter, one was Anthony Breaks, who was engaged in relation to conduit finance, and another was Chris Parker, who was engaged in relation to Convergence Capital. There were five others who were employed on a Lloyd's based contract and bonus scheme giving them a percentage of the profits of a managing agent (Greenwich see paragraph 244 below), which Imagine acquired as from 31st December 2002. Later some, but not all, of them came over to a standard Imagine contract.
  187. 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.
  188. Post May 2003 events
  189. 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.
  190. Vesting of allocations made in respect of 2001 - 2004

  191. 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[29]. On March 14th 2002 the Board of Imagine approved the allocation in principle on the footing that further discussion needed to take place between the Imagine principals and the directors. The allocation provided for the triumvirate to take 25% initially; but did not specify that the 25% allocation had to be taken in cash.
  192. In respect of 2001 Mr Huntington and Mr Gleeson took their initial vesting as to 25% in cash. Mr Huntington's 25% was $ 375,000. Mr Daly took his in SARS. What appears to have happened is that Mr Myhal, in discussion with Mr Daly, accepted that the triumvirate could take their allocation as to 25% in year 1 (whether in cash or Sars), but took the view that, when it came to finalizing the LTIP the same right should extend to all relevant employees. His 12th August 2002 memorandum expressed the view that all participants should be treated equally, and that one way to do so was to extend the facility that the triumvirate enjoyed to others.
  193. 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.
  194. 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.
  195. Conflict of interest

  196. In 2004 an issue arose as to the interpretation of the May LTIP and in particular the section of it that reads as follows:
  197. "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 ……
  198. The question was whether a participant was (a) bound to make an election (PEARs or short term option) in respect of the whole of his allocation, both vested and unvested, or (b) whether it was possible to make a different allocation as between vested and unvested amounts. In an e-mail of 12th May 2004 from Mr Huntington to Mr Daly and Maria Nicholls Mr Huntington said:
  199. "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"
  200. He then set out the section and expressed the view that a court would interpret the document in sense (b).
  201. It is not clear from the 12th May e-mail why exactly Mr Huntington regarded himself as conflicted. Imagine submit that it was because his LTIP entitlement was also governed by the May LTIP. Mr Huntington's evidence was that he regarded himself as "somewhat conflicted", because, since there was a provision in the contract that he could take out 25% in cash and the rest in SARS, of which he had availed himself in respect of 2001 and 2002, he might be seen as favouring the second interpretation of the LTIP – or at least as not being a wholly independent arbiter.
  202. 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.
  203. The share option plan

  204. 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