Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5)

[2009] FCA 1586

FEDERAL COURT OF AUSTRALIA

Australian Securities & Investments Commission v Fortescue Metals Group Ltd [No 5] [2009] FCA 1586

CORPORATIONS - continuous disclosure - obligation to disclose information to ASX under Chapter 6CA Corporations Act 2001 (Cth) - relationship between continuous disclosure provisions of ASX Listing Rules and Corporations Act - agreements contemplating execution of fuller and more detailed agreements - mining project contingent upon completion of definitive feasibility study - notification to ASX in purported compliance with continuous disclosure provisions under s 674 - asserted binding legal effect of agreements - whether information disclosed by listed disclosing entity as to legal effect of agreements was incorrect or unreasonably based - whether entity ought reasonably to have come into possession of different information as to legal effect of agreements - relevance of subjective belief or opinion as to legal effect - whether opinion as to legal effect honestly held - whether legal effect of agreements as asserted by plaintiff was information that was not generally available for the purposes of s 674(2) - whether entity received legal advice as to effect of agreements and disclosure obligations - ex ante and ex post consideration of materiality for purposes of s 674(2) - correct approach - whether contravention of s 674(2A) by director allegedly involved in entity's alleged contravention of s 674(2)

CORPORATIONS - misleading or deceptive conduct under s 1041H – public disclosures made as to the binding legal effect of agreements - whether conduct in relation to a financial product or a financial service - relevance of belief or opinion - relevance of context at the time disclosures were made to market - whether disclosures were misleading or deceptive

CORPORATIONS - director’s duties - whether director breached duty to exercise reasonable care and diligence required by s 180(1) - whether disclosure about legal effect of agreements was honest and reasonable – legal advice obtained consistent with belief.

EVIDENCE - allegations of dishonesty no reasonable evidentiary basis for such allegations

EVIDENCE - standard of proof - Briginshaw standard - prescription of civil standard of proof in a civil penalty proceeding by s 1332 of the Corporations Act - prescription of balance of probabilities as standard of proof in a civil proceeding by s 140 Evidence Act 1995

EVIDENCE - applicability of rule in Jones v Dunkel to civil penalty proceedings - rule in Browne v Dunn - consequences of failure to comply with rule in Browne v Dunn

EVIDENCE - admissibility of transcripts of examinations under s 19 Australian Securities and Investments Commission Act 2001 - whether transcripts contain admissions

EVIDENCE - relevance of expert opinion of statisticians, stockbrokers and analysts in determining contraventions of continuous disclosure provisions

WORDS AND PHRASES – “information”, “aware”, “not generally available”,

Corporations Act 2001 (Cth), ss 79, 180(1), 674, 677, 761A, 764A, 995, 1001A, 1001B, 1001D, 1041E, 1041H, 1317E, 1317G, 1317L, 1332
Evidence Act1995 (Cth), ss 81, 87(1)(b), 140
Trade Practices Act1974 (Cth), ss 45D, 52, 155
Financial Services Reform Act 2001 (Cth)
Australian Securities & Investments Commission Act 2001 (Cth), s 19, 87
Corporations Regulations 2001, reg 7.1.01(a)
Criminal Code Act 1995 (Cth)
ASX Listing Rule 3A, 3.1, 19.12           

Supplementary Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2004 (Cth)
The Explanatory Memorandum to the Corporations Bill 1988, s 995
The Explanatory Memorandum to the Financial Services Reform Bill 2001

Adler v Australian Securities & Investments Commission (2003) 179 FLR 1 referred to
Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 considered
Ansett Transport Industries (Operations) Pty Ltd v The Commonwealth of Australia (1977) 139 CLR 54 considered
Aspdin v Austin (1844) 5 QB 671 cited
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 cited
Australian Broadcasting CorporationvXIVth Commonwealth Games (1988) 18 NSWLR 540 referred to
Australian Competition & Consumer Commission v Leahy Petroleum (2004) 141 FCR 183 considered
Australian Competition & Consumer Commission v Mayo International Pty Ltd (1998) ATPR 41-653 cited

Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd (2001) 115 FCR 442 referred to

Australian Securities & Investments Commission v Cycclone Magnetic Engines Inc [2009] QSC 58 referred to
Australian Securities & Investments Commission v Fortescue Metals Group Ltd [No 2] (2009) 176 FCR 529 cited
Australian Securities & Investments Commission v Macdonald (No 11) (2009) 256 ALR 199 distinguished
Australian Securities & Investments Commission v Maxwell (No 2) (2006) 59 ACSR 373 referred to
Australian Securities & Investments Commission v Narain (2008) 169 FCR 211 referred to
Australian Securities & Investments Commission v Rich [2009] NSWSC 1229 referred to
Australian Securities & Investments Commission v Rich (no 3) (2003) 21 aclc 920 referred to
Australian Securities & Investment Commission v Southcorp Ltd (2003) 130 FCR 406 considered
Australian Securities & Investments Commission v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1 cited
AWA Ltd v Daniels t/as Deloitte Haskins & Sells (1992) 7 ACSR 759 referred to
Azzopardi v The Queen (2001) 205 CLR 50 referred to
Bateman v Slayter (1987) 71 ALR 553 cited
Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 considered
Briginshaw v Briginshaw (1938) 60 CLR 336 considered
Buckland v Buckland [1900] 2 Ch 534 cited
Cadbury-Schweppes Pty Ltd v Pub Squash Co Pty Ltd [1980] 2 NSWLR 851 cited
Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45 referred to
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 referred to
Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing & Allied Services Union of Australia v Australian Competition and Consumer Commission (2007) 162 FCR 466 referred to

Council of the New South Wales Bar Association v Power (2008) 71 NSWLR 451 referred to

Dyers v The Queen (2002) 210 CLR 285 considered
Ex parte Dawes; in re Moon (1886) 17 QBD 275 cited
Fame Decorator Agencies Pty Limited v Jeffries Industries Ltd (1998) 16 ACLC 1,235 referred to
Faulkner v Thomas [2000] TASSC 159 considered
Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433 referred to
Foley v Classique Coaches Limited [1934] 2 KB 1 considered
Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 referred to
Glorie v WA Chip and Pulp Co Pty Ltd (1981) 55 FLR 310 referred to
Godecke v Kirwan (1973) 129 CLR 629 considered
G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 considered
Hall v Busst (1960) 104 CLR 207 considered
Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352 cited

Heydon v NRMA (2000) 51 NSWLR 1 considered
Hillas & Co Ltd v Arcos Ltd [1932] All ER Rep 494 considered
Hornsby Building Information Centre Pty Ltd v Sydney Building Information CentreLtd (1978) 140 CLR 216 cited
International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 cited
James v Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347 cited
Jobern Pty Ltd v Breakfree Resorts (Victoria) Pty Ltd [2007] FCA 1066 referred to
Jones v Dunkel (1959) 101 CLR 298 considered
Jubilee Mines NLv Riley (2009) 253 ALR 673 considered
MacKenzie v Childers (1889) 43 Ch D 265 cited

Manly Council v Byrne and Anor [2004] NSWCA 123 referred to

Masters v Cameron (1954) 91 CLR 353 referred to
Moffat Property Development Group Pty Ltd v Hebron Park Pty Ltd [2009] QCA 60 considered
Narain v Australian Securities and Investments Commission [2008] HCATrans 408 cited
National Exchange v Australian Securities and Investments Commission (2004) 22 ACLC 609 considered
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 referred to
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 cited
Pagnan SpA v Feed Products [1987] 2 Lloyd’s Rep 601 considered
Parkdale Custom Built Furniture Proprietary Limited v Puxu Proprietary Limited (1982) 149 CLR 191 cited

Payne v Parker [1976] 1 NSWLR 191 considered

Permanent Building Society v Wheeler (1994) 11 WAR 187 cited
Qantas Airways Limited v Gama (2008) 167 FCR 537 referred to
Randall v Aristocrat Leisure Ltd [2004] NSWSC 411 referred to
Re Bradberry; National Provincial Bank Ltd v Bradberry (1943) Ch 35 cited
Rich v Australian Securities & Investment Commission (2003) 203 ALR 671 cited
Rich v Australian Securities & Investment Commission (2004) 220 CLR 129 referred to
Rivkin Financial Services Ltd v Sofcom Ltd (2004) 51 ACSR 486 cited
RPS v The Queen (2000) 199 CLR 620 considered
S & I Publishing Pty Ltd v Australian Surf Life Saver Pty Ltd (1998) 88 FCR 354 cited
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 cited
Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310 considered
Singh v Minister for Immigration (2001) 109 FCR 152 referred to
Southern Cross Financial Group (Newcastle) Pty Ltd v Rodrigues (2005) 66 IPR 166 distinguished
Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248 referred to
Thorby v Goldberg (1964) 112 CLR 597 cited
Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 42 FLR 331 considered
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 cited
Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd (1994) 2 VR 106 distinguished

Trade Practices Commission v Abbco Ice Works Pty Ltd (1994) 52 FCR 96 cited

Uranium Equities Ltd v Fewster (2008) 36 WAR 97 referred to
Vinesv Australian Securities and Investments Commission (2007) 62 ACSR 1 considered
Vrisakisv Australian Securities Commission (1993) 9 WAR 395 cited
Walford v Miles [1992] 2 AC 128 considered
Weissensteiner v The Queen (1993) 178 CLR 217 considered
Wheeler Grace & PierucciPty Ltd v Wright (1989) 16 IPR 189 cited
Wilkinson v Feldworth Financial Services Pty Ltd (1999) 17 ACLC 220 referred to
Willis v Commonwealth (1946) 73 CLR 105 cited
Wright v Wheeler Grace & Pierucci Pty Ltd (1988) ATPR 40-865 cited
York Air Conditioning and Refrigeration (A/sia) Pty Ltd v The Commonwealth (1949) 80 CLR 11 cited

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v FORTESCUE METALS GROUP LTD and JOHN ANDREW HENRY FORREST

WAD 55 of 2006

GILMOUR J
23 December 2009
PERTH

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION	WAD 55 of 2006

BETWEEN:

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
Plaintiff

AND:

FORTESCUE METALS GROUP LTD (ACN 002 594 872)
First Defendant

JOHN ANDREW HENRY FORREST
Second Defendant

JUDGE:	GILMOUR  J
DATE OF ORDER:	23 December 2009
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1.The application is dismissed.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The text of entered orders can be located using eSearch on the Court’s website.

TABLE OF CONTENTS
PART 1: INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[1]
ASIC’s Application........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[12]
Two important allegations........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[27]
Relief........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[29]
FMG’s defence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[30]
Forrest’s defence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[34]
Dramatis Personae........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[38]
PART 2:  SUMMARY OF PRINCIPAL CONCLUSIONS........ ........ ........ ........ ........ ..	[40]
ASIC’s claims fail........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[40]
Postscript........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[69]
PART 3:  EVIDENTIARY MATTERS........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[72]
Standard of proof........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[72]
Jones v Dunkel........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[85]
Browne v Dunn........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[109]
Section 19 admissions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[114]
PART 4:  THE FRAMEWORK AGREEMENTS........ ........ ........ ........ ........ ........ ........	[134]
Early developments	[134]
The CREC Framework Agreement	[140]
Expediting the rail project	[156]
CHEC and CMCC Framework Agreements	[168]
PART 5: PUBLICLY KNOWN FACTS PRIOR TO THE AUGUST AND NOVEMBER 2004 ASX NOTIFICATIONS........ ........ ........ ........ ........ ........ ........ ........ .	[182]
DFS	[186]
An early stage project development concept	[199]
Summary of publicly known facts	[203]
PART 6:  THE AUGUST AND NOVEMBER 2004 NOTIFICATIONS TO THE ASX........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[205]
The 23 August Letter........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[207]
The 23 August Media Release........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[209]
The 5 November Letter........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[210]
The 5 November Media Release........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[212]
The 8 November Letter........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[214]
PART 7:  THE CONTINUOUS DISCLOSURE PROVISIONS........ ........ ........ ........ ..	[218]
History........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[218]
The provisions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[227]
PART 8:  CONTINUOUS DISCLOSURE: THE FOUR REQUIREMENTS........ ....	[240]
8.1:  INFORMATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[242]
8.2:  AWARENESS OF INFORMATION........ ........ ........ ........ ........ ........ ........ ........ .....	[253]
Were ASIC’s opinions as to the legal effect of the framework agreements self evident having regard to their terms?........ ........ ........ ........ ........ ........ ........ ........ ........	[266]
Was CREC arguably obliged to actually build or transfer the railway?........ ........ .	[282]
The price issue........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[291]
The scope of work........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[320]
ASIC’s other contentions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[323]
Modern contract law........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[328]
Was the opinion of FMG and Forrest honestly and reasonably held?........ ........ ....	[353]
Legal oversight and advice........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[358]
The position adopted by the Chinese Contractors........ ........ ........ ........ ........ ........ ....	[395]
FMG’s internal records........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[414]
FMG’s external communications........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[418]
The position adopted by FMG executives........ ........ ........ ........ ........ ........ ........ ........ .	[424]
Advanced framework agreements........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[455]
Draft Contract No: ABC123........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[460]
Comparison with other FMG documents........ ........ ........ ........ ........ ........ ........ ........ ...	[463]
Conclusion as to awareness of alleged information by FMG directors........ ........ ...	[465]
8.3:  WAS INFORMATION “GENERALLY AVAILABLE”........ ........ ........ ........ .....	[469]
8.4: MATERIAL EFFECT ON FMG’S SHARE PRICE........ ........ ........ ........ ........ .....	[472]
Materiality: s 674(2)(c)(ii) and s 677	[474]
Materiality: a commercial judgment	[481]
Materiality: the expert evidence	[491]
The ex ante expert evidence	[517]
Hypothetical disclosure CREC, CHEC and CMCC Information instead of the actual notifications (Questions 4 and 5)	[518]
Notifications actually made by FMG on 23 August, 5 and 9 November 2004 (Question 6)	[531]
Hypothetical release of CREC, CHEC and CMCC Information after the actual notifications (Question 8)	[549]
Hypothetical release of the actual framework agreements or their terms	[560]
The ex post statistical evidence: effect of the actual notifications in August and November (Question 7)	[565]
23 August notification: the facts	[565]
23 August notification: the experts	[574]
5 and 9 November 2004 notifications: the facts	[595]
5 and 9 November 2004 notifications: the experts	[598]
Materiality of the statements in the AFR Article	[609]
PART 8.5:  SUMMARY OF FINDINGS AS TO MATERIALITY	[626]
Ex ante evidence: hypothetical disclosure to the market of the CREC, CHEC and CMCC Information instead of the actual announcements	[626]
Ex ante evidence: the announcements actually made	[627]
Ex ante evidence: the hypothetical disclosure of the CREC, CHEC and CMCC Information at some time after the announcements actually made	[628]
Ex post statistical evidence: effect of the actual announcements in August and November (Question 7)	[629]
The statements in the AFR Article	[630]
PART 9: ASIC’S SECTION 1041H CASE	[631]
Misleading and deceptive conduct under the Act	[633]
Section 1041H: general principles	[642]
Was certain conduct in relation to a financial product or a financial service	[648]
General principles in relation to s 52 are applicable	[660]
The Representees	[671]
Relevance of media commentary	[672]
Reasoning	[681]
Approvals and Chinese requests for equity	[687]
Misleading and deceptive conduct – additional claims	[831]
Set price and DFS	[835]
Amounts “under agreement”	[858]
Deletion of “binding”	[865]
A diversionary tactic	[869]
PART 10: ASIC’S SECTION 180(1) CASE AGAINST FORREST	[883]
Conclusion	[903]
PART 11: ORDERS	[906]
Schedule ‘A’: Dramatis Personae
Schedule ‘B’: CREC Framework Agreement
Schedule ‘C’: CHEC Framework Agreement
Schedule ‘D’: CMCC Framework Agreement
Schedule ‘E’: Mallesons Letter

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION	WAD 55 of 2006

BETWEEN:

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
Plaintiff

AND:

FORTESCUE METALS GROUP LTD (ACN 002 594 872)
First Defendant

JOHN ANDREW HENRY FORREST
Second Defendant

JUDGE:	GILMOUR  J
DATE:	23 December 2009
PLACE:	PERTH

REASONS FOR JUDGMENT

PART 1:   INTRODUCTION

1. In 2004 and 2005 the first defendant, Fortescue Metals Group Ltd (FMG), was pursuing its aim to become a ‘new force’ in Western Australia’s iron ore industry, in competition with the BHP Billiton Group and the Rio Tinto Group.  FMG is a publicly listed company on the Australian Securities Exchange (ASX).  The second defendant, Mr John Andrew Henry Forrest (Forrest) was, at all material times, FMG’s chairman and chief executive officer.  FMG held mining tenements in the Pilbara region of Western Australia.  It planned to establish a mine there, and to construct a port at Port Hedland as well as a railway from the mine to the port in order to mine and export iron ore (the Project).  

2. In July 2004, FMG appointed Worley Pty Ltd (Worley) to manage the all-important Definitive Feasibility Study (DFS). The Project, including the mine, rail and port infrastructure, was entirely contingent upon the DFS proving to be ‘bankable’, that is to say sufficient to underpin the necessary finance required for the Project including the construction of the mine, railway and port.  At that time it was estimated that the cost of building this infrastructure was $1.85 billion.

3. From early in 2004, FMG and Forrest were negotiating with three Chinese building and construction companies over proposals for those companies to build the Project infrastructure.  In the second half of 2004, FMG executed three framework agreements, substantially in similar terms, with China Railway Engineering Corporation (CREC), China Harbour Engineering Company (Group) (CHEC) and China Metallurgical Construction (Group) Corporation (CMCC) (collectively the Chinese Contractors), concerning the construction, respectively, of the railway, port and mine.  Copies of the framework agreements, named respectively the CREC Framework Agreement, the CHEC Framework Agreement and the CMCC Framework Agreement, are contained in Schedules B, C and D respectively to these reasons. 

4. These framework agreements and in particular their arguable meaning and effect are at the heart of this complex case, which concerns the provisions of the Corporations Act 2001 (Cth) (the Act) dealing with continuous disclosure (Chapter 6CA), prohibited conduct (other than insider trading prohibitions) (Chapter 7, Part 7.10) and directors’ duties (Chapter 2D, Part 2D.1).

5. FMG made notifications in August and November 2004 concerning the framework agreements to the Australian Stock Exchange Limited, as the ASX was then known, in the form of letters dated 23 August 2004, 5 November 2004 and 8 November 2004 and related media releases dated 23 August 2004 and 5 November 2004. The media release dated 23 August 2004 was incorporated by reference into the letter of 23 August 2004. The media release of 5 November 2004 was incorporated by reference into the letter of 5 November 2004. Properly understood therefore, for the purposes of s 674 of the Act there were accordingly only three notifications to the ASX. It is convenient to adopt the labels used by the plaintiff, Australian Securities and Investments Commission (ASIC), in its pleading for these as follows:

   (1)Letter from FMG to the ASX dated 23 August 2004, ‘the 23 August Letter’; and FMG media release dated 23 August 2004, ‘the 23 August Media Release’

   (2)Letter from FMG to the ASX dated 5 November 2004, ‘the 5 November Letter’ and FMG media release dated 5 November 2004, ‘the 5 November Media Release’

   (3)Letter from FMG to the ASX dated 8 November 2004, ‘the 8 November Letter’.

6. FMG made these notifications to the ASX in purported compliance with the continuous disclosure provisions under s 674 of the Act and ASX Listing Rule 3.1. Section 674(2) requires a listed disclosing entity to notify the ASX as a market operator of information that is not generally available and is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the entity’s securities.

7. The notifications taken together reported, among other things, that FMG had executed binding agreements with each of CREC, CHEC and CMCC for each to build, finance and transfer the railway, port and mine respectively for the Project. 

8. In addition, over the period August 2004 to March 2005 FMG made further public statements to the same effect.  I will refer to the notifications and statements collectively, whether in whole or in part as ‘disclosures’.  

9. In March 2005 the framework agreements were the subject of an article in the Australian Financial Review newspaper (the AFR Article).  This article contained a number of negative assertions about the Project, including that the agreements did not impose any legally binding obligations on the Chinese Contractors.  This was contrary to the prior public position of the Chinese Contractors to the effect that the framework agreements bound them to construct the infrastructure.  

10. The AFR Article attracted widespread interest and further media commentary. 

11. ASIC commenced these proceedings in March 2006.  The statement of claim was substituted and amended several times before and at trial, culminating in an amended statement of claim of 1 May 2009 which ASIC labels ‘ASC’.  I will adopt that abbreviation. 

    ASIC’s Application

12. ASIC alleges that FMG did not have a genuine and/or reasonable basis for making these disclosures concerning the framework agreements.  It alleges that FMG engaged in a course of knowing and deliberate conduct to make the disclosures, by the notifications to the ASX and other statements, which were false, unqualified and emphatic as to the significance and effect of the framework agreements.  This puts in issue the alleged dishonesty of FMG, its board, and in particular, Forrest in making those disclosures. 

13. Accordingly, it says FMG contravened the continuous disclosure provisions under s 674 of the Act and engaged in misleading and deceptive conduct under s 1041H of the Act as well as under s 52 of the Trade Practices Act 1974 (Cth) (TPA). I have set out, by way of introduction, the allegations made by ASIC under s 1041H in Part 9 below.

14. ASIC says that Forrest was the architect of this course of conduct or, at the least, he was aware of it and did not prevent it, when he was evidently in a position to do so. ASIC says that, on the basis that Forrest authorised or approved the notifications to the ASX, he was involved in FMG’s contraventions of s 674(2) and consequently himself contravened s 674(2A) and, in turn, s 180(1) of the Act.

15. ASIC contends that the notifications to the ASX, which were republished by the ASX, had a positive material effect on the price of FMG’s shares.  ASIC does not contend that the other statements had such an effect. 

16. ASIC also contends that Forrest breached his duty as a director to exercise care and diligence as required by s 180(1) of the Act by failing to ensure that FMG both complied with its disclosure obligations and did not engage in misleading or deceptive conduct and, as a result, he exposed FMG to a risk of serious harm, including, among other things, these civil penalty proceedings.

17. Broadly ASIC’s factual contentions are as follows.In its disclosures, FMG said that the agreements with CREC, CHEC and CMCC bound each of them to build, transfer and finance the Project infrastructure.  It also represented that a contract price existed, although the 8 November Letter, according to ASIC, said it was subject to an agreed confirmation process.  As well, FMG represented that the agreements were in the common form of a well-known industry standard precedent for building infrastructure. 

18. ASIC says the misleading character of FMG’s disclosures appears clearly from a simple comparison of these with the actual terms of the framework agreements they were purporting to describe. 

19. The core of ASIC’s case under s 674 is its contention that the framework agreements did not, in their effect, oblige the Chinese Contractors to build, finance and transfer the infrastructure but at best, merely bound the parties to negotiate agreements which would have that effect, or, alternatively, were not binding at all. ASIC thus offers two alternative interpretations of the legal effect of the framework agreements. It is this “information” as to the asserted legal effect of each of the framework agreements which is central to what is described as the “CREC Information”, the “CHEC Information” and the “CMCC Information” (the Informations), which ASIC pleads ought to have been disclosed, variously, between 23 August 2004 and 24 or 29 March 2005 in the case of the CMCC framework agreement and 24 or 30 March 2005 in the case of the other two framework agreements. ASIC says that FMG was obliged to disclose the Informations to the ASX under s 674(2) because that information, for the purposes of s 677, a provision which interprets s 674(2)(c)(ii) by providing for when a reasonable person would be taken to expect information to have a material effect on the price or value of an entity’s securities was information which would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of FMG’s securities.

20. ASIC pleads the alleged contraventions of s 674(2) by FMG under three categories applying to FMG's alleged failure to disclose each of the Informations. There are three contraventions alleged under each category, one in respect of each of the Informations, but ASIC only presses a total of six rather than nine contraventions of s 674(2) as the alleged contraventions under the second category are pleaded in the alternative.

21. FMG submits, and I accept, that upon analysis, there are in substance only three possible contraventions of s 674(2), one in respect to each of the CREC, CHEC and CMCC Framework Agreements. I do not accept, as ASIC would have it, that there are 6 (or 9) possible contraventions because the alleged contraventions of s 674(2) relate to the omission to inform the market about the material terms and legal effect of the framework agreements.

22. The three categories are as follows.  First, ASIC asserts that FMG failed to disclose the Informations: ASC [136]-[140].  Second and alternatively, it is asserted that FMG’s purported compliance with the requirement that it notify information to the ASX under s 674(2) and Listing Rule 3.1 was not substantially accurate; further or alternatively was misleading or deceptive or likely to mislead or deceive persons who commonly invest in securities: ASC [141]-[145]. This was described in ASIC’s pleading as FMG’s disclosure of false information. Third and alternatively, it is asserted that FMG failed to correct these earlier false disclosures of information: ASC [146]-[153].

23. I agree, as FMG submits that the first and the third categories are almost identical.  This is because the first complains about the omission from disclosure of the Informations and the third complains about the omission from disclosure of effectively the same information.

24. As to the second category, ASIC’s assertion is that, on their proper construction, s 674(2) and Listing Rule 3.1 forbid substantially inaccurate disclosure, or disclosure that is misleading or deceptive or likely to mislead or deceive. FMG submits that on their proper construction, these provisions do not target such matters in that way but rather require the disclosure of omitted material. I accept this submission. Section 674(2) does not, in terms, impose an obligation upon FMG to correct information already provided to the ASX. The focus of the provision is upon the notification of information. It is a continuing obligation. This is ASIC’s first category. The fact that the later provision of information may, in its effect, correct a misstatement in a notification made earlier, is merely a consequence of compliance.

25. Accordingly, the pleaded s 674(2) claims, properly characterised, amount to a case that FMG failed or omitted to disclose the material terms and legal effect of the three framework agreements over the following periods:

    (1)       for the CREC Framework Agreement: 23 August 2004 to 30 March 2005

    (2)       for the CHEC Framework Agreement: 5 November 2004 to 30 March 2005

    (3)       for the CMCC Framework Agreement: 5 November 2004 to 29 March 2005.

26. There is some confusion in the pleading as ASIC also alleges that the contraventions continued up to 24 March 2005 (e.g. ASC [140]-[153]). The pleading, in effect, alleges three continuing contraventions of s 674(2) across the relevant periods, one in respect of each of the three framework agreements. The significance of the respective end dates for these periods is this. The AFR Article was published on 24 March 2005. A copy of the CMCC Framework Agreement was provided to the ASX on 29 March 2005 and copies of the other two framework agreements were provided to the ASX on 30 March 2005.

    Two important allegations

27. ASIC's cases include two further important allegations - that FMG and Forrest were aware at the latest by 17 August 2004, alternatively by 5 November 2004, that:

    ·     Chinese government approval would be required in order for the Chinese Contractors to finance and build the Project infrastructure; and

    ·     a condition of Chinese government approval would be that a Chinese investor take some form of equity interest in the Project.

28. The evidence demonstrates that at the relevant times various Chinese government agencies had a supervisory oversight of the overseas contracting activities of Chinese companies.  These agencies are the State-Owned Assets Supervision and Administrative Commission (SASAC), the Ministry of Commerce (MOC) and the National Development and Reform Commission (NDRC). 

    Relief

29. ASIC seeks, under various provisions of the Act, and the Federal Court of Australia Act 1976 (Cth) declarations of contravention of s 674(2) and s 1041H as against FMG; and s 674(2A) and s 180 as against Forrest as well as related pecuniary penalty; and compensation orders against each of FMG and Forrest, and an order under s 206C alternatively s 206E of the Act disqualifying Forrest from managing corporations.

    FMG’s defence 

30. FMG contends that its disclosures concerning the framework agreements were correct and that each was a binding first agreement for the construction, financing and transfer of the respective infrastructure, intended to have immediate legal effect.  FMG also emphasises the importance of context, namely what was known concerning the Project by the market, when disclosures were made.  In context it says the agreements were made at a time when, as the market knew, a number of matters were still in the process of development, particularly the DFS, but, despite that, they were agreements under which:

    (a)CREC, CHEC and CMCC agreed to build and transfer the infrastructure on the basis that FMG had to pay 10% of the value of the works before completion, such that the Chinese Contractors had agreed to take the financial risks involved in return for security over the resources;

    (b)the parties agreed that there would be more fulsome agreements in addition to, or in substitution for, the framework agreements but these would not detract from the binding nature of the framework agreements.

31. As such, FMG says, it did not breach the continuous disclosure requirements of the Act and Listing Rules nor mislead the market.

32. Further, FMG says its disclosures, to the effect that the framework agreements were binding agreements for the Chinese Contractors to build, finance and transfer the railway, port and harbour for the Project, were, in each case, an expression of opinion which was honestly and reasonably held.  

33. Accordingly, FMG says that by its notifications to the ASX on 23 August 2004 and 5 and 8 November 2004, in all of the circumstances including the market context, it did not contravene s 674(2), nor, by those notifications together with the other published statements, did it contravene s 1041H.

    Forrest’s defence

34. Forrest adopts FMG’s submissions in addition to his own.  He filed a limited defence relying on the privilege against self-incrimination and further or in the alternative the privilege against exposure to penalty.  His defences were not fully advanced until he filed a lengthy outline of written submissions at the conclusion of the trial.

35. He makes three submissions as to why he did not contravene s 674(2A) of the Act. First, FMG did not contravene s 674(2), and therefore he could not have been a person who was involved in a contravention of that subsection pursuant to sub-s (2A). Second, even if ASIC makes out its allegations pursuant to sub-s (2A) (which is denied), he did not contravene that subsection because, for the purposes of sub-s (2B), which is the due diligence defence to an allegation of a contravention of sub-s (2A), he:

    (1)took all steps that were reasonable in the circumstances to ensure that FMG complied with its obligations under sub-s (2); and

    (2)believed on reasonable grounds that FMG was complying with its obligations under that subsection.

    Third, he cannot be found to have contravened sub-s (2A) of the Act as the threshold element of being ‘involved in’ pursuant to s 79 of the Act has not been established, as he was not aware of the information ASIC says FMG was required to announce to the ASX.

36. Forrest then says that ASIC’s claim that he contravened s 180(1) of the Act is contingent upon ASIC:

    (1)succeeding in its claim(s) that FMG breached ss 674(2) and 1041H of the Act; and

    (2)proving that FMG’s contraventions were serious under s 1317G(1)(b)(iii) of the Act.

37. Further, Forrest says, if (which is denied) FMG contravened ss 674(2) and 1041H of the Act, the Court ought to find that Forrest did not contravene s 180(1) because:

    (1)he exercised a reasonable degree of care and diligence in the discharge of his duties;

    (2)at all material times, he acted honestly and reasonably believed he was acting in FMG’s best interests;

    (3)his conduct did not expose FMG to a foreseeable risk of harm;

    (4)FMG has not suffered damage as a result of his conduct; and

    (5)FMG benefitted from his actions; or

    (6)the Business Judgment Rule applies.

    Dramatis Personae

38. Annexed in Schedule ‘A’ is a dramatis personae.

39. In order to avoid constant repetition of formalities, I have referred to persons, including the second defendant, by surname.  In doing so, I do not intend to cause offence to any individual.  Where I have departed from this practice by including a title and/or a first name, this has been done to avoid confusion, for example when referring to a person sharing a surname with another person, or when reference is made to Mr “He” of NDRC, or when the context of the reference otherwise requires it.

    PART 2:  SUMMARY OF PRINCIPAL CONCLUSIONS

    ASIC’s claims fail

40. I have concluded that ASIC’s Application should be dismissed. 

41. Under s 674(2) of the Act and Listing Rule 3.1, FMG was obliged to immediately disclose to the ASX information which a reasonable person would expect, if generally available, to have a material effect on the price or value of FMG’s shares. This is information that its directors or executive officers were in possession of, or ought reasonably to have come into possession of, in the performance of their duties. The information which ASIC contends ought to have been disclosed (the Informations) in this case principally comprises an assertion as to the meaning and legal effect of the framework agreements. This assertion is necessarily the product of a judgment or opinion as to what is the meaning and legal effect of these agreements. There is no evidence that FMG by any of its directors or officers, including Forrest, ever held the opinions postulated by ASIC and which underpin its case as to what FMG ought to have disclosed as to the meaning and legal effect of the framework agreements. I find that the opinions contended for by ASIC do not self-evidently or obviously emerge upon merely reading the terms of the framework agreements.

1. ASIC contends that FMG through Forrest had no genuine and or reasonable basis for making its claims that the framework agreements were binding build and transfer agreements.  It has accused FMG, its board and in particular Forrest, of deliberate dishonesty in making those claims knowing that they were false, unqualified and emphatic.  It says that there is no evidence that FMG obtained any legal advice concerning the agreements, and that if it had obtained competent legal advice, it would have been aware of the legal effect of the framework agreements asserted by ASIC and forming part of the Informations.  It says that, in those circumstances, the misleading disclosures could not have been made by a responsible company or board of directors.

2. This transpired to be a surprising submission for ASIC to make. 

3. In fact FMG did have the benefit of competent professional legal oversight and advice in relation to its agreements, including the framework agreements.  Mr Peter Huston and his assistant Hsin-Luen Tan of Troika Legal Ltd had, prior to October 2004, been available to advise FMG.  Huston was described by ASIC in its pleading as a qualified, experienced and practising commercial solicitor.  From early October 2004, Huston and Tan joined FMG as employees.  It is apparent that one of Huston’s principal roles, at least from that time, was to oversee and ensure the legal enforceability, or as Forrest sometimes said, the “bankability” of FMG’s agreements.  This is evident from an email dated 3 October 2004 sent by Forrest to FMG’s senior executives and Graeme Rowley, another of FMG’s directors.

4. Forrest had known Huston for a number of years prior to this.  Huston acted as solicitor for Anaconda Nickel Ltd in proceedings in the Supreme Court of Western Australia culminating in an appeal to the Full Court: Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101. These proceedings concerned the enforceability of a short letter said to be a “heads of agreement”. In certain respects it bears a remarkable similarity to the framework agreements. The majority (Ipp J; Pidgeon J agreeing) held that the heads of agreement was a valid and binding agreement.

5. Huston helped prepare the draft as well as the final 8 November Letter concerning the three framework agreements provided by FMG to the ASX that day.  He attended a meeting with Mr Tony Walsh, Assistant Manager Issuers of the ASX, on 8 November 2004 relevantly to discuss this draft for the purpose of providing further information to the ASX as to the terms of the framework agreements.  I have concluded that, for this purpose, Huston would have considered the terms of the related 5 November Letter and the three framework agreements referred to in that letter.  He did not advise the FMG Board or Forrest that these agreements were not legally binding or that the 5 November Letter was to that extent incorrect or not reasonably based.  Given his role in FMG, had he formed that view, I find that he should have and would have informed the board. That he did not, entitled the board and Forrest to continue to regard the disclosures concerning the legal effect of the framework agreements as correct, or at least that they were reasonably based.  

6. That this was so is fortified by evidence of actual advice given by Huston to the FMG board that the framework agreements were legally binding as disclosed. 

7. The FMG board minutes of its 22 January 2005 meeting, attended by Huston, record his advice to the board that the CMCC Framework Agreement was binding.  So too did an email sent by him on 30 March 2005 to Forrest, Christopher Catlow, David Liu, Rowley, Alan Watling and other FMG executives concerning the AFR Article in which he repeated this advice, relying in particular upon the Anaconda decision. The 30 March 2005 email was not disclosed in ASIC’s pleading. While the minutes of the 22 January board meeting were set out as a particular of two allegations concerning FMG’s and Forrest’s knowledge of the Chinese Contractors’ attitude towards the framework agreements and of the legal effect of the agreements, ASIC did not particularise the material passage in the minutes where Huston’s legal advice to the board was set out, nor did it refer to this passage in its opening or closing submissions. This is so, despite the fact that, in relation to ASIC’s s 674 case, it asserted, amongst other things, that FMG ought to have been aware of the legal effect of the framework agreements asserted by ASIC by first obtaining competent legal advice. Huston was a very experienced and competent commercial solicitor.

8. I was not referred to these documents during the trial until the closing address by Forrest’s senior counsel, Mr Myers QC.  Their content, combined with other evidence, demonstrates that there was no basis for ASIC to assert dishonesty on the part of FMG, its board and in particular, Forrest.  I make the same criticism of the description applied to FMG and by implication its board and particularly Forrest in the way ASIC’s case was opened.  It was asserted that FMG engaged in a concerted and designed course of conduct in which it made false, misleading and exaggerated statements to the ASX of which Forrest was the architect.  In my view the evidence does not support such serious allegations.  The principal basis, it seems, depends on ASIC’s submission that the framework agreements are self-evidently not binding build and transfer agreements.  I rejected that argument.  I consider that there was a reasonable basis for FMG, through its board, including Forrest, to have held the view that the framework agreements were binding as claimed.  It was supported by Huston’s professional oversight to ensure the legal enforceability of FMG’s agreements as well as his later positive advice to the effect that they were such.  It was a view consistent with Forrest’s knowledge of the Anaconda case.  It finds arguable support in other authority.

9. Significantly too, CREC approved the terms of the 23 August Media Release before FMG made the notifications to the ASX on 23 August 2004.  The release described the CREC Framework Agreement as a “binding agreement to build and finance the railway component of Fortescue Metals Group Ltd’s $1.85 billion Pilbara iron ore project”.  In the release Mr Qin Jiaming (Qin), the President of CREC, is quoted as saying that the contract presented an excellent opportunity for CREC to develop internationally and that CREC was fully confident about its capacity to build the rail project.  It was described by him as a ‘marriage’ immediately following the high level ceremony when the parties signed the Joint Statement which rendered the agreement binding.

10. I find that the terms of the 5 November Media Release provided to CHEC and CMCC was likewise approved, at least not disavowed, by them before disclosure to the ASX by FMG.    

11. The AFR Article, which reported that, according to the Chinese parties, the framework agreements did not impose on them legally binding obligations, was engineered by Mr He of the NDRC as a blunt commercial tactic in an attempt to wrest majority control of the Project from FMG.  This was quite contrary to the clear understanding which existed prior to the execution of the framework agreements that FMG would never agree to this but that a minority equity position would be given to a Chinese entity.  I find FMG was entitled to regard Mr He’s unwarranted actions, which resulted in publication of the AFR Article, as a plank in his attempt to renegotiate the equity question.  FMG was ultimately successful in reducing the demands from a majority to a minority equity position.

12. The AFR Article did not reflect the actual views of the Chinese Contractors who, on the evidence, prior to and after its publication, regarded themselves bound by the framework agreements to build the infrastructure. 

13. I have had no hesitation in finding that FMG, its board and Forrest held their opinion as to the meaning and legal effect of the framework agreements honestly and reasonably.  FMG submits that the framework agreements actually do have the legal effect claimed in its disclosures.  It is unnecessary for me to reach a concluded view as to that.  I have concluded that FMG’s and Forrest’s opinion, which underpinned the disclosures, in each case was honestly and reasonably held at the times of the disclosures and thereafter.  This is sufficient for present purposes. 

14. Accordingly, they were not in possession of, nor ought reasonably have been in possession of, the Informations, which include ASIC’s opinion as to the meaning and legal effect of the respective framework agreements. ASIC’s case under s 674(2) against FMG fails for this reason alone.

15. As a consequence of my finding that FMG did not contravene s 674(2), Forrest could not have been a person who was involved in a contravention of that subsection pursuant to sub-s (2A).

16. For the sake of completeness, although finding that ASIC’s case under s 674 fails at this threshold, I have considered the further issue of materiality, assuming, contrary to my finding, that the Informations constituted, respectively, information which, in each case, was or ought to have been in the possession of FMG’s directors and, accordingly, was information of which FMG was aware. By materiality I refer to the question whether the Informations constituted information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of FMG’s securities. This is a question which may be approached on an ex ante or an ex post basis.  ASIC and FMG each called expert witnesses to give evidence on the question of materiality.  ASIC’s expert witnesses were Mr Andrew Sisson, Mr Reginald Keene and Dr Iain Watson.  FMG’s expert witness was Mr Gregory Houston.

17. Given the view I have come to about the materiality of the Informations, if my conclusion that FMG was not aware of this information for the purposes of Listing Rules 3.1 and 19.12 and s 674(2) of the Act is wrong, and the correct position is that FMG was or became aware of the legal effect of the framework agreements contended for by ASIC, beginning with knowledge of the legal effect of the CREC Framework Agreement on 23 August 2004, then I find that FMG was obliged to disclose the CREC Information not from 23 August 2004 but from 5 November 2004 when the notifications in respect of the CHEC and CMCC Framework Agreements were also made. That is because the CREC Information during the period 23 August to 5 November, in my view, was not information which would have or would be likely to have influenced common investors in the way provided for in s 677. The position is different from 9 November, in light of the actual notifications made, when in my view the release of the Informations would have had or would be likely to have had the relevant influence on common investors.

18. I have found that FMG did not contravene s 1041H of the Act. The disclosures complained of by ASIC did not constitute misleading or deceptive conduct. FMG’s disclosures concerning the binding nature of the framework agreements were assertions, necessarily underpinned by an opinion that the agreements were such. In my view, such an opinion was reasonably based and honestly held by FMG and Forrest. The expression, in effect, of that opinion, by its assertions as to the effect of the framework agreements misrepresented nothing. That there was scope for alternative opinions to be held as to the legal effect of the framework agreements does not mean that FMG engaged in misleading or deceptive conduct.

19. The gravamen of ASIC’S additional or alternative case under s 1041H is that FMG’s disclosures as to the meaning and legal effect of the framework agreements were misleading or deceptive or likely to be so in circumstances where FMG did not have a genuine and/or reasonable basis for making the statements and ought reasonably to have known that the Chinese Contractors would not or probably would not carry out the works necessary for the Project without the approval of NDRC. ASIC then says that the NDRC would, or probably would, withhold its approval for CREC, CHEC or CMCC to enter contracts binding them to build, finance and transfer the infrastructure necessary for the Project unless a Chinese entity obtained an equity interest in the Project.

20. I find that FMG and Forrest knew that financial investment by the Chinese Contractors in building the infrastructure required NDRC approval and that Mr He of the NDRC in turn tied that approval to the requirement that a Chinese entity, likely ultimately to have been CMCC, obtain a minority equity in, it seems, an FMG mine(s).  However, I find that the NDRC and probably also by the MOC had approved the Chinese Contractors entering into the framework agreements.  

21. I have concluded that FMG’s disclosures were not misleading or deceptive.  The additional allegations, concerning NDRC approval and equity do not alter my conclusion.  In any event, although I have found that Chinese commercial reality dictated NDRC approval as a prerequisite to the provision of finance, this does not mean that the need for approval operated at a contractual level.  Neither NDRC approval nor the provision of equity was a condition of the framework agreements, nor was it contained in the drafts of later documents known as Advanced Framework Agreement although they could have been.  ASIC’s primary claim is that the disclosures made as to the meaning and legal effect of the framework agreements were misleading or deceptive.  The need for approval tied to equity does not, in my opinion, at least in the way ASIC pleaded its case, impact upon that question.

22. I find that, in respect of the CREC Framework Agreement, the trigger for NDRC approval for financial investment, being the provision of a minority equity interest to a Chinese entity, whether by shareholding or joint venture, was almost a formality.  FMG had, for a long time prior to execution of the CREC Framework Agreement, been pursuing such Chinese investment, and more, and the Chinese side was anxious to obtain it.

23. The NDRC had given every indication that it fully supported the Project and was keen for Chinese involvement.  FMG had over a long period made it clear it was prepared to give a Chinese contractor or steel mill a minority equity stake.  Mr He, of the NDRC, in August 2004 also made it clear that this was all that was being sought.  It was, as at 5 November 2004, when the last two framework agreements had been executed and when disclosures were made on 9 November 2004, then only a matter of negotiating the actual amount of the equity interest and its price.  There was not even the hint of a suggestion that this could not or would not be achieved.  Indeed the position, as at 9 November was to the contrary. 

24. In other words, FMG and Forrest, quite reasonably, considered that the matter of NDRC approval for financial investment and the allied question of the provision of equity was no barrier to the performance of the executed framework agreements.  ASIC’s case concerned statements about the legal effect of the framework agreements, not that there was a practical barrier to their performance.  The market was already aware that significant aspects of the framework agreements still had to be agreed upon through the DFS process and that, in any event, each of the framework agreements was ultimately dependent on a bankable DFS at the earliest in March 2005.  Approval by the NDRC, linked as it was to the provision of equity, was merely another contingency.  This does not go to the issue of their legal effect. 

25. The grant, in due course, of NDRC approval was regarded, reasonably, by FMG, as a formality.  That, from November 2004, this was complicated by the marked and unwarranted change of position taken by Mr He of the NDRC merely gave rise to negotiations as, indeed, Mr He intended.

26. FMG and Forrest were entitled, in my view, to negotiate with the Chinese Contractors through CMCC and the NDRC to resolve the impasse created by Mr He, contrary as it was to the consensus reached in August 2004 for minority equity, without having to inform the ASX.  Indeed, by September 2005, FMG had succeeded in reducing the demands for majority equity down to a 50/50 joint venture although that process took many months  However the DFS completion date had been extended beyond March 2005 and was only partially completed in September 2005 and not fully completed till April the following year.  There was no question, as the market well knew, that any of the framework agreements would proceed until there was a completed bankable DFS.

27. As ASIC’s cases under s 674(2) and s 1041H fail it follows that its cases against Forrest in respect of accessorial liability under s 674(2A) for the alleged contraventions of the continuous disclosure provisions by FMG and for the alleged breach of directors’ duties under s 180(1) must also fail.

    Postscript

28. Allegations of dishonesty made by ASIC against directors, in legal proceedings, are self evidently serious.  They carry considerable weight and will often, as in this case, attract wide media coverage.  That they are made by the corporate regulator may injure the business of the particular company and will tend to adversely affect the reputations of those against whom the allegations are made.  Unless the allegations are withdrawn the director(s) accused have to wait until trial before these can be tested.  Meanwhile they have to live and work in their shadow.  In this case the proceedings have been on foot for more than three years.

29. For at least these reasons, it is important that allegations of dishonesty should be made only where there is a reasonable evidentiary basis for them.  It is my opinion that on the totality of the evidence available to ASIC there was no such basis in this case.  Notwithstanding that ASIC’s assertions as to the meaning and legal effect of the framework agreements differs from that disclosed by FMG to the knowledge of Forrest, this difference, which, in effect, is a difference of opinion does not of itself provide a basis for alleging dishonesty against FMG, its board and in particular Forrest.  FMG’s opinion was underpinned by the oversight and advice of its in-house counsel Huston.  Forrest had his knowledge and experience in Anaconda to draw upon.  Documents demonstrating these significant matters were available to ASIC.  In light of these it is difficult to discern why ASIC ran a case alleging that FMG’s board could not have made the disclosures it did if it had obtained competent legal advice.  The board of FMG had no reason to doubt the correctness of Huston’s view as to the meaning and legal effect of the framework agreements.  He was employed by FMG primarily to ensure that all of FMG’s agreements were legally enforceable.  The reasonableness of FMG’s opinion was strongly contended for by senior counsel for both FMG and Forrest at trial.  It was an opinion which I consider was reasonably open.  In my view, these allegations of dishonesty should not have been made.

30. I have no hesitation in concluding that FMG and its board, including Forrest, honestly and reasonably held the opinion that the framework agreements were legally enforceable in the sense asserted in FMG’s disclosures.  They did not hold the opinions propounded by ASIC.  Those opinions do not self evidently and obviously arise upon a consideration of the terms of the framework agreements.   

    PART 3:  EVIDENTIARY MATTERS

    Standard of proof

31. Forrest submits that one important aspect of this matter is the application of the principles found in Briginshaw v Briginshaw (1938) 60 CLR 336 to himself. He points to the seriousness of the allegations made by ASIC and the severity of the penalties it seeks in the form of large financial penalties and his disqualification from managing a corporation. He submits that these are more severe than many criminal punishments and would cause enormous harm to him and FMG. He says that, in these circumstances, the level of satisfaction that the Court requires to reach before accepting any of ASIC’s contentions is as close to the criminal standard as could be in any civil proceeding.

1. FMG also cited Briginshaw 60 CLR 336, saying that, because these are civil penalty proceedings, the Court should not lightly make findings of contraventions, even applying the balance of probabilities standard, given the seriousness of the causes of action and the gravity of the matters alleged and their consequences.

2. FMG and Forrest are relying on the principle emerging from Dixon J’s judgment in Briginshaw 60 CLR at 361-362 that in considering whether an allegation is made out to its “reasonable satisfaction”, a tribunal should take into account the seriousness of the allegation and the gravity of the consequences that would follow if the allegation were to be accepted.

3. In Qantas Airways Limited v Gama (2008) 167 FCR 537, French and Jacobson JJ stated at [110] that the “so-called Briginshaw test” does not create any third standard of proof between the civil and the criminal.  Their Honours said the standard of proof remains the same, that is proof on the balance of probabilities, and that the degree of satisfaction that is required in determining that that standard has been discharged may vary according to the seriousness of the allegations of misconduct that are made. 

4. Pursuant to s 1332 of the Act, the standard of proof in these civil penalty proceedings is the civil standard.

5. Section 1317L of the Act requires the Court to apply the rules of evidence and procedure for civil matters when hearing proceedings for a declaration of contravention or a pecuniary penalty order.

6. Section 140(1) of the Evidence Act 1995 (Cth) (the Evidence Act) prescribes the standard of proof in a civil proceeding as the balance of probabilities, and s 140(2) provides that the Court may take into account, in deciding whether it is so satisfied, the nature of the cause of action or defence, the nature of the subject matter of the proceeding and the gravity of the matters alleged. In Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing & Allied Services Union of Australia v Australian Competition and Consumer Commission (2007) 162 FCR 466 the Full Court noted at [31] that Dixon J’s classic discussion in Briginshaw appositely expresses the considerations which s 140(2) of the Evidence Act now requires a court to take into account. 

7. Section 1332 of the Act differs from s 140 of the Evidence Act in that it does not contain the ‘Briginshaw’ considerations found in s 140(2) of the Evidence Act. However this does not require s 140(2) of the Evidence Act to be read down. In any event given that s 1317L requires the Court to apply the rules of evidence and procedure for civil matters when hearing proceedings for a declaration of contravention or a pecuniary penalty order, the considerations expressed in Dixon J’s Briginshaw discussion are nevertheless relevant.

8. In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 449-450 Mason CJ, Brennan, Deane and Gaudron JJ referred to Dixon J’s considerations in Briginshaw and said:

   The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities.  That remains so even where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove.  Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary ‘where so serious a matter as fraud is to be found’.  Statements to that effect should not, however, be understood as directed to the standard of proof.  Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.    (Emphasis added. Citations omitted)

9. These are civil penalty proceedings, not criminal proceedings, and it would be contrary to the legislative intention underlying the civil penalty provisions to apply a de facto criminal standard of proof in such proceedings: Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 at [408].

10. In conclusion, the standard of proof that I must apply is the balance of probabilities as prescribed by s 1332, and I accept that in deciding whether ASIC’s allegations are made out on the balance of probabilities I am required to take into account the causes of action and the gravity of the matters alleged and their consequences: s 140(2) Evidence Act; Briginshaw 60 CLR 336. If inferences are to be drawn, ASIC has to establish that the circumstances appearing from the evidence give rise to a reasonable and definite inference and not merely to conflicting inferences of equal degrees of probability: Australian Securities and Investments Commission v Macdonald (No 11) (2009) 256 ALR 199 at [186]; Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Australian Competition and Consumer Commission 162 FCR 466 at [38].

11. ASIC’s case is that the conduct of FMG and Forrest between August 2004 and March 2005 was an affront to the policy considerations that underpin ss 674 and 1041H of the Act and amounted to very serious contraventions of those important provisions. ASIC also submits that Forrest failed to exercise his powers and discharge his duties with the degree of care and diligence required of him under s 180 of the Act. It says that each contravention of s 674(2) by FMG and of s 674(2A) and of s 180(1) by Forrest materially prejudiced the interests of members of FMG, further or alternatively was serious, for the purposes of sub-s 1317G(1) and 1317G(1)(1A) of the Act.

12. Accordingly, I accept that ASIC’s allegations against FMG and Forrest are serious. In addition, I accept that the penalties sought against both would have severe consequences. Any monetary penalties against FMG and Forrest would likely have been very substantial. Section 1317(G)(1) allows the court to impose a pecuniary penalty of up to $200,000 for each contravention of s 180(1). ASIC alleges a total of 22 contraventions of that subsection by Forrest, ASC [177]. ASIC sought orders for Forrest to compensate FMG for the full amount of any damage which FMG suffered by reason of being liable to pay a pecuniary penalty for each contravention of s 674(2). The relevant maximum penalty for each contravention by FMG is $1 million. ASIC also sought orders for Forrest to be disqualified from managing corporations.

    Jones v Dunkel

13. FMG foreshadowed that it would call evidence from its executives, such as Rowley, David Liu and Alan Watling but it did not do so.  ASIC submits that, where an inference is open from facts proved, the unexplained failure of a party to call a witness or tender a document may be taken into account as a circumstance in favour of the drawing inference: Jones v Dunkel (1959) 101 CLR 298 at 308, 312 and 320-321; RPS v The Queen (2000) 199 CLR 620 at [26]. ASIC submits that it should be inferred that Rowley, Liu and Watling were available to be called, but FMG chose not to call them for strategic reasons. As a result, ASIC says, if there are inferences to be drawn from documents in evidence, which could have been explained by these executives, or by Forrest who also elected not to give evidence, the inference should be drawn against FMG that the evidence of these executives would have been of no assistance to their case, and that the documents should bear the meaning contended for by ASIC.

14. FMG made no submissions on whether Jones v Dunkel had any application.  Citing Dyers v The Queen (2002) 210 CLR 285, Forrest submitted in written closing submissions that a Jones v Dunkel inference may not be drawn against an accused in a criminal case because the application of the rule in Jones v Dunkel is incompatible with the presumption of innocence and the rights of the accused; further, this reasoning applies with equal force to the accused calling other persons to give evidence.  Forrest then submitted that the point of principle that, when an accused exercises the right not to give evidence the jury is directed that no adverse inference should be drawn, applies to a civil proceeding as against an individual defendant.  He referred to the statement of Gleeson CJ, Gummow, Hayne, and Heydon JJ in Rich v Australian Securities and Investment Commission (2004) 220 CLR 129 at [24] that the privilege against exposure to penalty serves the purpose of ensuring that those who allege criminality or other (illegal) conduct should prove it, and said there is no expectation that a defendant will give evidence on matters for which the plaintiff bears the onus of proof. He said there is no authority that supports the proposition that a Jones v Dunkel inference is available against an individual defendant in a civil penalty proceeding, though, he said, the position may be different for a company.  Finally, Forrest submitted that inferences are to be drawn from the documents before considering any question of Jones v Dunkel; and a Jones v Dunkel inference is not be used in determining what inference ought to be drawn from the documents, citing Singh v Minister for Immigration (2001) 109 FCR 152 at [71].

15. In RPS 199 CLR 620, Azzopardi v The Queen (2001) 205 CLR 50 and Dyers 210 CLR 285, the High Court considered the applicability of the rule in Jones v Dunkel to criminal proceedings.  It decided that the rule is of very limited application to defendants in criminal cases, its reasoning based on the accusatorial nature of criminal proceedings.  As an illustration of the Court’s approach, in Dyers, Gaudron and Hayne JJ stated at [9]:

    As was pointed out in RPS…, it will seldom, if ever, be reasonable to conclude that an accused in a criminal trial would be expected to give evidence.  Not only is the accused not bound to give evidence, it is for the prosecution to prove its case beyond reasonable doubt. The mode of reasoning which is spoken of in …Jones v Dunkel (26) ordinarily, therefore, cannot be applied to a defendant in a criminal trial. That mode of reasoning depends upon a premise that the person concerned not only could shed light on the subject but also would ordinarily be expected to do so. The conclusion that an accused could shed light on the subject-matter of the charge is a conclusion that would ordinarily be reached very easily. But given the accusatorial nature of a criminal trial, it cannot be said that, in such a proceeding, the accused would ordinarily be expected to give evidence. So to hold would be to deny that it is for the prosecution to prove its case beyond reasonable doubt. That is why the majority of the Court concluded, in RPS and in Azzopardi, that it is ordinarily inappropriate to tell the jury that some inference can be drawn from the fact that the accused has not given evidence.

16. In Azzopardi 205 CLR 50, in their joint majority judgment Gaudron, Gummow, Kirby and Hayne JJ referred to Weissensteiner v The Queen (1993) 178 CLR 217 where the High Court held it was appropriate for the trial judge to direct the jury as to the manner in which they might take into account the failure of the accused to give evidence, and their Honours stated at [61] that what was important in Weissensteiner and what warranted the remarks to the jury in that case was that, if there were facts which explained or contradicted the evidence against the accused, they were facts which were within the knowledge only of the accused, and thus could not be the subject of evidence from any other person or source.  At [68], their Honours emphasised that cases in which a judge may comment on the failure of an accused to offer an explanation will be both rare and exceptional and will occur only if the evidence is capable of explanation by disclosure of additional facts known only to the accused.  Their Honours said a comment will never be warranted merely because the accused has failed to contradict some aspect of the prosecution case.

17. In RPS 199 CLR 620, at [26]-[27] Gaudron A-CJ, Gummow, Kirby and Hayne JJ contrasted the reasonable expectation that a party in a civil trial would give or call relevant evidence in the circumstances described in Jones v Dunkel with the conclusion that it would seldom, if ever, be reasonable to expect an accused in a criminal trial to give evidence.  Weissensteiner provides an example of where the latter would be reasonable.

18. Turning to the civil penalty authorities, in Rich, the High Court reversed a decision of the New South Wales Court of Appeal (Rich v Australian Securities & Investments Commission (2003) 203 ALR 671) that the defendants in civil penalty proceedings brought by ASIC were not permitted to resist an order for discovery made by the trial judge by claiming the privilege against self-exposure to penalty. The orders sought by ASIC included disqualification orders but not pecuniary penalties. The trial judge, Austin J, did not classify the proceedings as proceedings for the imposition of a penalty: Australian Securities and Investments Commission v Rich (no 3) (2003) 21 aclc 920, at [53]. the Court of Appeal (Spigelman CJ, with whom Ipp JA agreed; McColl JA dissenting) upheld Austin J’s ruling, identifying a disqualification order as having an exclusively protective purpose and stating that it should not be characterized as a penalty for the purposes of the penalty privilege. However, the High Court (Gleeson CJ, McHugh, Gummow, Hayne, Callinan and Heydon JJ, Kirby J dissenting) decided that the disqualification order was a penalty and accordingly the proper course was to refuse any order for discovery: per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ at [37]-[40]. The ruling was made in the joint judgment in consideration of s 1317L of the Act which requires the application of the rules of evidence and procedure for civil matters when hearing proceedings for a declaration of contravention or a pecuniary penalty order. Their honours concluded at [19] that that the statute itself requires the application of the body of law which has developed in relation to the privileges against penalties and forfeitures when deciding whether an order for discovery should be made.

19. The Rich cases therefore turned on the issue of whether a disqualification order was a penalty.  It was not in dispute that the privilege against exposure to penalty protected a defendant in civil proceedings not only from being obliged to give discovery, but also from being subject to any direction that affidavits or witness statements be provided to the plaintiff prior to the hearing or at any time prior to the conclusion of the plaintiff’s case: see e.g. Austin J at first instance: (2003) 21 aclc 920, at [19]-[30].  In their judgments, neither the High Court nor the Court of Appeal considered the application of the rule in Jones v Dunkel; Austin J mentioned it briefly in passing at [58].

20. The rule in Jones v Dunkel was discussed however in Adler v Australian Securities & Investments Commission (2003) 179 FLR 1, Williams v Australian Securities & Investments Commission (2003) 46 ACSR 504, a judgment handed down before the High Court’s Rich ruling, where the New South Wales Court of Appeal ruled that the trial judge, Santow J ((2002) 41 ACSR 72), made no error in so far as his findings against Mr Adler, his company and Mr Williams were aided by Jones v Dunkel inferences against both those individuals and the company.  In that proceeding ASIC had sought, inter alia, disqualification orders as well as pecuniary penalties.  Giles JA, with whom Mason P and Beazley JA agreed, considered the High Court criminal cases discussed above and noted at [658] that proceedings for civil penalties do not share the same fundamental features of a criminal trial.  His Honour stated that civil penalty proceedings are expressly to be maintained by civil law processes, not by a criminal trial with its fundamental features, [659].  He concluded that it was open for Jones v Dunkel inferences to be drawn against Mr Adler, his company, and Mr Williams in the proceedings, [661]. 

21. In relation to a submission that rules akin to prosecutorial fairness that apply in criminal proceedings should apply to civil penalty proceedings, Giles JA stated that by declaring that the proceedings were to be conducted as civil proceedings, the legislature has plainly declined to pick up the concepts that have developed in the particular circumstances of criminal proceedings such as prosecutorial fairness, [672]-[678].

22. The rulings in Adler were therefore made on the footing that the privilege against exposure to penalty was attracted through ASIC’s seeking of pecuniary penalties, but this did not prevent the trial judge from applying the rule in Jones v Dunkel, the rule and privilege both falling within the rules of evidence and procedure for civil matters that the court was bound to apply pursuant to s 1317L of the act when hearing proceedings for a declaration of contravention or a pecuniary penalty order.

23. The High Court refused an application for special leave to appeal from the Court of Appeal’s decision in Adler: [2004] HCATrans 182, 28 May 2004. The transcript reveals that the special leave point argued was the issue of procedural fairness in dealing with the imposition of pecuniary penalties and disqualification under the civil penalties regime of the Act; there was no discussion of the rule in Jones v Dunkel.  

24. Further, in my view, nothing that has been said by the High Court in Dyers 210 CLR 285 and the other authorities discussed above supports the proposition that the general rule proscribing the making of inferences from a defendant’s failure to give evidence in criminal proceedings should be extended to civil penalty proceedings in the form of a prohibition against applying the rule in Jones v Dunkel, notwithstanding that pursuant to Rich s 1317L also obliges the court to apply the body of law which has developed in relation to the privileges against penalties and forfeitures when deciding whether an order for discovery should be made.

25. Further authority for the availability of the rule in Jones v Dunkel in civil penalty proceedings is found in Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd (2001) 115 FCR 442, where Hill J stated at [33]:

    Where the proceedings are criminal (and the present proceedings are not; they are proceedings, inter alia, for the recovery of a civil penalty) it might be thought that the failure of the accused to go into evidence should not lead to the drawing of Jones v Dunkel inferences. After all it is clear that a witness can not be compelled to give evidence which is likely to incriminate the witness or expose the witness to a penalty. However, even in criminal cases it has been held that the failure of the accused, who is in a position to deny, explain or answer the evidence adduced by the prosecution, to give evidence will permit the jury to draw inferences adverse to the accused more readily: see Azzopardi v R [2001] HCA 25; (2001) 179 ALR 349, affirming Weissensteiner v R [1993] HCA 65; (1993) 178 CLR 217. A fortiori, therefore, the failure of a respondent to proceedings for recovery of a pecuniary penalty to give evidence on a matter relevant to an issue in the proceeding and deny, explain or answer the evidence adduced against the respondent will permit the Court more readily to draw the inferences to which the decision in Jones v Dunkel refers.

26. In Council of the New South Wales Bar Association v Power (2008) 71 NSWLR 451 at [21], a proceeding seeking removal of a legal practitioner from the Roll, Hodgson JA, with whom Beazley and McColl JJA agreed, referred to the High Court’s conclusion in Azzopardi 205 CLR 50 that it was open to a trial judge in a criminal case to make a comment relating to the absence of evidence of additional facts peculiarly within the knowledge of the accused. Hodgson JA went on to say at [22] concerning the case before him that:

    If this had been a criminal trial, then in my opinion what the High Court said in Azzopardi would have meant that a jury could have been told that inferences from proved facts could more safely be drawn because the opponent elected not to give any explanation in terms of additional facts peculiarly within his knowledge or any evidence of such facts. In my opinion, if such Jones v Dunkel reasoning is available to a jury in a criminal trial, it must a fortiori be available to a court in civil proceedings such as the present. That would be so, even if these civil proceedings are regarded as proceedings for a civil penalty. I note that a similar view was expressed by Hill J in Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd [2001] FCA 1800; (2001) 201 ALR 502 at [33].

1. A comparison of the breakdown of costs for the mine, rail and port infrastructure in the PFR of June 2004, the FMG news release of 8 July 2004, and the November Presentation shows differences in the estimated capital costs of each component over the three documents, but that does not mean, in my view, that FMG engaged in misleading or deceptive conduct by saying it had the amounts “under agreement”. The estimated cost announced in the November Presentation of $1.85 billion includes the three amounts said to be “under agreement”.  The figures were not plucked out of the air.  The PFR is a very detailed report and sets out with some specificity the capital costs estimates for the infrastructure. There was a detailed capital cost breakdown but it was correctly and expressly described as an estimate.  It was evident that the total infrastructure cost was not going to be met under the agreements with the Chinese Contractors who were to build the infrastructure – there were other sources.  That the framework agreements do not refer expressly to those amounts, nor to the $1.85 billion total cost, should be viewed in the same way as the absence of the other contractual terms of which ASIC complains.  As it was reasonable, in my view, for FMG to hold the view that the framework agreements were binding agreements with further agreements to follow setting out the more particularised terms for the Chinese Contractors to build, finance and transfer the infrastructure, including the capital costs of each component, which were as yet undetermined, there was no misleading or deceptive conduct in FMG making public statements about its own estimates of those capital costs.  Those statements consistently represented that the total cost of the Project would be in the range $1.6 billion to $1.85 billion.  The market was aware that the actual prices for the framework agreements had yet to be agreed.

   Deletion of “binding”

2. In its closing submissions ASIC points to pages in copies of the November Presentation, the RIU Presentation and the Bag of Rusty Nails Presentation in support of its contention that FMG was aware in February that the framework agreements were not binding.  ASIC says the deletion of the word ‘binding’ from a boxed statement saying “Contracts Signed & First subcontractors Appointed” in the RIU Presentation shows a consciousness by FMG and Forrest that it was false and misleading for FMG to make unqualified claims that it had binding BT contracts with the Chinese Contractors.

3. A comparison of the relevant page in the three presentations shows that in the November Presentation the relevant page included the boxed statement “Binding Contracts Signed & First subcontractors Appointed”, but that the word “binding” had been deleted from the corresponding statement in the presentations given in February. 

4. On 25 November 2004 Heyting sent by email to Danny Broad of Downer EDI Rail a copy of a presentation he had given to that company on 18 November 2004.  In cross-examination, Heyting stated that Downer EDI Rail was one of three companies that manufacture rail components in Australia.  The transcript records the following exchange between senior counsel for FMG, Mr Karkar QC and Heyting in cross-examination.  Again, I have edited this portion of the transcript by attributing to the text the names of the speaklers for clarity.

   MR KARKAR:  Could I trouble you to go to the page which has 0572 as the last digits?

   MR HEYTING:  Yes.

   MR KARKAR:  You will see there under the heading "Rail Construction": 18 months fast track. CREC build transfer and finance binding contract. ?

   MR HEYTING:  Yes.

   MR KARKAR:  You wrote that?

   MR HEYTING:  That is a slide that’s come from other presentations.

   MR KARKAR:  Did you write it?

   MR HEYTING:  I’ve written - I can't remember that specific text, but the majority of this text is extracted or combined from a number of different presentations.

   MR KARKAR:  But you were quite happy to present to Downer EDI this slide?

   MR HEYTING:  Yes.

   MR KARKAR:  Because this slide represented your honest view at the time?

   MR HEYTING:  Yes. As I’ve indicated, I believe that CREC acted as though they had a contract in place.

5. In my view, the deletion of ‘binding’ from the box in the presentation demonstrates nothing.  As I have already stated, I consider that FMG and Forrest reasonably and honestly considered that FMG had signed binding agreements with the Chinese Contractors.  As ASIC says, despite the deletion, FMG continued to make statements to that effect.  The word ‘binding’ may have been deleted from the presentations given in February simply for reasons of style or layout, or because, as Heyting stated in his evidence, he thought the word ‘binding’ was tautologous when used with the word ‘contract’.  Whatever the reason for the deletion, I am satisfied that it was not because FMG was of the view in February that the framework agreements were not legally binding. 

   A diversionary tactic

6. In the period leading up to the release of the 5 November Letter, the 5 November Media Release and the 8 November Letter, FMG was considering the release of information to the market concerning a number of matters additional to the fact of the execution of the CHEC and CMCC Framework Agreements.  These matters concerned the execution of:

   1.        MOUs between

   ·     CHEC and ThyssenKrupp, for ThyssenKrupp to supply and/or supply and install equipment related to the port facilities

   ·     CMCC and ThyssenKrupp, for ThyssenKrupp to supply and install equipment related to the mining facilities of the Project

   ·     CMCC and BGC, for BGC to “co-operate with CMCC”on the Project and other business areas

   2.a state agreement between FMG and the Western Australian Government in relation to land tenure for the proposed railway from the minesite to Port Hedland.

   3.a framework agreement between FMG and ThyssenKrupp on 19 October 2004 for the latter to “supply and/or supply and install equipment related to the port, railway and mines” for the Project.

7. FMG sought and obtained advice from Field PR in relation to its media strategy for making announcements about the above matters. 

8. The emails annexed to the witness statement of Skinner of Field PR demonstrate that he forwarded a draft copy of the 5 November Media Release to FMG on 4 November 2004.  These emails also demonstrate that on 4 November Forrest, Campbell and Tapp corresponded with Field and Skinner over the financial details disclosed in the draft media release.  Field and Skinner were firmly of the view that the details of costing in the release should include dollar figures, as it would “lend considerable credence to, and quantif(y), the support of the Chinese”.  The value of the Project was stated to be $1.6 billion in the initial draft circulated by Skinner. 

9. During these email exchanges, discussion ensued over the content of the release, including the cost of the Project.  Field said that Forrest had told him that the cost had come down from $1.85 billion to $1.6 to $1.7 billion.  Tapp said that the value of the Project had not changed from $1.85 billion, and expressed the view that the statement that the Project was to be built by three Chinese companies would cause “all sorts of problems” unless it was qualified by an explanation that the work would be done through Australian subcontractors.  Skinner’s response to Tapp, Forrest and other FMG executives included the comment that the release “...should not be diluted by excessive detail about which Australian companies hope to do what.  That can be for another day...”. 

10. On Saturday 6 November, Campbell sent an email to Forrest, Field, Skinner and Huston, amongst others, attaching a draft of the 8 November Letter.  He said he was assuming that the ASX required more information about the deals signed on Friday, deals which I infer to be the signing of the Joint Statement on 5 November 2004 which rendered the CHEC and CMCC Framework Agreements binding.  He said that in consideration of the ASX requiring more information, he had drafted:

    a wide ranging announcement covering several topics but leading with the State Agreement which should be the primary focus.

11. Forrest's response to Campbell and others began with the comment:

    Hi Rod seems a little wordy but no doubt that is intentional. 

12. In response to Campbell's email, Skinner reiterated his emphasis on putting dollar amounts in this announcement, and provided several amounts in addition to the total estimated project cost of $1.85 billion, such as what China’s 90% contribution would be, for inclusion in the letter.  

13. Forrest replied to Skinner in strong terms, telling him:

    ·     that he did not want to include price figures in the letter because: “...we don't want a price (unless it is unbelievably low) as we want a feasibility study to give us the argument to make sure we get a fair price.  The 3 contracters (sic) (CREC, CHEC and CMCC) have an obligation to give us that.”

    ·     to forget putting precise numbers in the letter “unless Peter (Huston) is forced by an out of touch bureaucrat to illustrativly (sic) show an example of what it might be”. 

14. ASIC submits that these emails provide evidence that FMG intended to mislead the ASX.  Senior counsel for ASIC stated:

    Now, what those documents show, your Honour, is this about intention. Campbell and the FMG executives knew that the ASX required more information about the deals signed on Friday but instead responding to that request in terms, a diversionary tactic is used.  In consideration of that specific request for information on the deals, Mr Campbell drafts a wide-ranging announcement dealing with other matters; the State agreement and the Thyssen MOUs. The State agreement part of it couldn't proceed because the government didn't finalise its position. A trading halt was requested, or an extension to the trading halt was requested, to permit the 8 November letter to be delivered pending finalisation of the State agreement and that was refused by the ASX. So the references to the State agreement will to come out. That's shown by the whole bundle of emails around this draft 8 November letter and Mr Walsh gave evidence about it: it also shows that Mr Forrest is privy to the strategy, the diversion, and recognises that the wordiness, the emphasis on matters other than those that ASX sought details about was intentional.

15. ASIC did not plead that FMG through Campbell and Forrest devised a diversionary tactic to mislead the ASX through the 8 November Letter.  Further, Field and Skinner gave no evidence on that issue beyond the emails that were attached to their statements and were not cross-examined on the content or purpose of their emails. 

16. In any event, I find that these emails simply demonstrate a normal commercial deliberative process by FMG in consultation with Field PR over the manner and timing of the disclosure of the three matters that FMG was concerned with at that time as well as dealing with the request from the ASX for more information about the CHEC and CMCC Framework Agreements.  It was reasonable for Campbell to describe the announcement as wide-ranging given the numerous pieces of information that FMG considered itself obliged to disclose at that time.  As for Forrest’s comment that the wordiness of Campbell’s draft was intentional, it was made against the background of Skinner’s advice not to dilute the announcements with excessive detail as well as the perceived obligation on FMG to disclose information regarding the three matters and respond to the ASX’s request for extra information.  I do not consider Forrest’s comment to be illustrative of an intention to mislead or deceive.

17. In relation to Forrest’s comment that he did not want to include a price in the letter because the feasibility study was being undertaken to ensure that a fair price was obtained, it is clear that in his view the framework agreements were written to allow a fair and reasonable price to be determined.  I accept Forrest’s submission that what he wanted to ensure was that a fair price was obtained rather than being committed to a price which was in fact higher than what he could have otherwise achieved by negotiations with the Chinese Contractors on the basis of their costs and the DFS. 

18. The 8 November Media Release disclosed that a fixed price arrangement would be entered into once that price was known at the conclusion of the DFS.  This did not result in any adverse media commentary.  None of ASIC’s experts have contended that such a disclosure about there not having yet been a determination of price negatively affected the perceptions of the market.  Likewise no media article or ASIC expert asserted that there had been any misunderstanding in the market about the 23 August Media Release.  That is, there was no suggestion that this was in any way misleading in that it gave the impression to the market that a price had been determined.  There was no criticism that FMG had previously given an impression to the market that price had already been worked out.  As I have found, the market knew, as ASIC’s experts agree, that the DFS was still being undertaken and that it was this which would determine amongst other things the price and the exact scope of works.

19. I conclude, for the above reasons, that FMG did not contravene s 1041H by making any of the 16 disclosures concerning the CREC, CHEC and CMCC Framework Agreements and the Project generally.

    PART 10: ASIC’S SECTION 180(1) CASE AGAINST FORREST

20. ASIC pleads at ASC [177] that Forrest contravened s 180 of the Act:

    (a) on each of the occasions when FMG contravened s 1041H of the Act alternatively s 52 of the Trade Practices Act 1974 (Cth) (16 contraventions); and

    (b) on each of the occasions when FMG contravened s 674 of the Act (6 contraventions).

1. As ASIC’s case is pleaded, any liability of Forrest under s 180 depends upon establishing breaches by FMG of ss 674 and 1041H. I have concluded already that ASIC has not established that FMG has contravened ss 674(2) and 1041H of the Act. Accordingly, for this reason alone, ASIC’s case against Forrest fails. It was unnecessary for me to deal with ASIC’s alternative case under s 52 of the TPA.

2. Nonetheless, in the event that I am wrong as to the liability of FMG, I intend to deal with Forrest’s principal defence on the merits.

3. Section 180(1) of the Act provides that a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of a corporation in the corporation’s circumstances and occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

4. ASIC’s case is that in causing, authorizing, permitting or not preventing FMG to make the disclosures as pleaded in ASC [164, 165, 166, 168 and 169].  Forrest breached this provision.

5. ASIC submits that the elements found in ASIC v Macdonald (No 11) 256 ALR 199 that led Gzell J to find that Macdonald had breached his duties as a director are present in this case in that Forrest:

   (a)was Chairman and Chief Executive Officer; 

   (b)had control and responsibility for the making of ASX announcements; 

   (c)was intimately involved in the preparation and approval of the various announcements and the later company presentations; 

   (d)knew full well that the statements were false, misleading and deceptive and that unqualified and emphatic statements could not be made concerning the execution of binding, build and transfer contracts by the three Chinese contractors; 

   (e)knew that the ASX announcements and the company presentations had been crafted to induce a positive effect on the price or value of FMG shares by positively influencing investors; 

   (f)knew that this conduct exposed FMG to serious risks to its reputation and placed it in likely contravention of important provisions of the Act;

   (g)knew that the false announcements withheld from the market the true information concerning the terms, legal effect and significance of the actual framework agreements, which steps placed FMG at risk of likely contravention of s 674.

1. It is not in issue that Forrest was, at all material times prior to about 17 May 2005, the chairman of directors and chief executive officer of the first defendant; and that he has, since on or about 17 May 2005, been FMG’s chief executive officer.

2. In his closing written submissions, Forrest points out that ASIC did not tender any direct evidence regarding his, or any other FMG directors’ duties or call expert evidence regarding the role of a director or a chief executive officer in a company like FMG at the material times. Forrest also points out that ASIC had sought to tender parts of his s 19 ASIC Act examination transcript but withdrew the tender after he sought to include parts of the explanatory and contextual portions of his examination transcript.

3. Forrest says that, based on the tendered evidence, his role may be described as “being involved in FMG’s management and promotion”.  However, given his admissions in his defence concerning his role in FMG, I will deal with the claims against him on the basis of those admissions.  He does not dispute that, at all material times, as FMG’s chairman of directors and chief executive officer, he owed a duty to FMG to act with due care and diligence. 

4. I accept ASIC’s submission that a chief executive officer or managing director may reasonably be expected to have more information available to him or her and to be more diligent than other board members.  The title, Managing Director, is synonymous with Chief Executive Officer.  This matter of principle may be discerned from a number of authorities.A managing director has a particular responsibility to make sure the other directors understand the potential harm in a proposed transaction:  Permanent Building Society v Wheeler (1994) 11 WAR 187, at 241. A chief executive officer will be employed under a contract containing an express or implied term that he or she exercise the care and skill expected of a person in that position: AWA Ltd v Daniels t/as Deloitte Haskins & Sells (1992) 7 ACSR 759 at 1014. At p 867 the Court explained that a chairman is:

   ...responsible to a greater extent than any other director for the performance of the board as a whole and each member of it.  The chairman has the primary responsibility of selecting matters and documents to be brought to the board’s attention, in formulating the policy of the Board and in promoting the position of the company. 

5. Unique amongst other corporate officers, the chief executive officer stands at the apex of the operational and managerial structures of the company, and his or her authority is qualified only by any residual power left in the board: Randall v Aristocrat Leisure Ltd [2004] NSWSC 411. A chairperson of a listed public company may have special responsibilities beyond those of other non-executive directors. These responsibilities include such things as the public announcement of information: ASIC v Rich [2009] NSWSC 1229 at 463.

6. Einstein J in Randall v Aristocrat Leisure [2004] NSWSC 411 said at [383]:

   Subject always to the terms of appointment, it is evident that the law tends to assume that where the board resolves to appoint a chief executive officer, his or her powers to control the operational and managerial aspects of the company’s business will be broad indeed.  In the seminal case of Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, for example, Lord Diplock held (at 505) that where a board permits a person to “act in the management or conduct of the company’s business”, that delegation of executive authority alone is sufficient to vest that person with ostensible authority to bind the company to transactions usually entered into “in the course of such business” by such managers... Moreover, and equally facilitative of the exercise by a chief executive of broad powers of company management, is the replaceable rule in s 198C(1) of the Act, which provides that “[t]he directors of a company may confer on a managing director any of the powers that the directors can exercise.

1. The breadth of managerial powers delegated to the chief executive officer by the board is ultimately contingent on the terms of appointment of the CEO: Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352 as cited in Randall v Aristocrat Leisure [2004] NSWSC 411 at [382]. There is no evidence to demonstrate that Forrest’s powers and authority as Chief Executive Officer were limited in any relevant way. I find that he was intimately and directly involved in the execution of the framework agreements, the formulation of FMG’s notifications to the ASX and other disclosures, as well as the ongoing discussions with the NDRC and CMCC seeking Chinese government approval. Likewise, Forrest was intimately and directly involved in discussions with the NDRC and CMCC concerning the NDRC precondition to approval that FMG must provide one or more nominated Chinese companies with minority equity participation in FMG or the Project.

2. The meaning and effect of s 180(1) was recently analysed by Brereton J in Australian Securities and Investments Commission v Maxwell (No 2) (2006) 59 ACSR 373 at [99]-[102] and in turn adopted by Gzell J in Australian Securities and Investments Commission v Macdonald at [236], and by Hamilton J in Australian Securities and Investments Commission v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1 at [27].

3. Significantly, for this case, a director or other officer may breach his duties by allowing the company to contravene a provision of the Act if that contravention is likely to result in jeopardy to the interests of the company.  Brereton J in ASIC v Maxwell (No 2) 59 ACSR 373 said:

   · if a contravention of s 180(1) is to be established, it must be founded on jeopardy to the interests of the corporation, and not to protection of the interests of potential investors: [105]

   ·     relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the act, and it may no doubt be a breach of the relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant: [104]

1. ASIC emphasized the recent judgment in ASIC v Macdonald(No 11) 256 ALR 199, where Gzell J held that the Chief Executive Officer, Macdonald, and a number of other directors, had breached their duties under s 180. Gzell J held that Macdonald failed to advise the board of the company that the draft ASX announcement was expressed in too emphatic terms concerning the sufficiency of funds held by the foundation to meet all legitimate asbestos claims and that as a result the ASX announcement was misleading and deceptive. He also found that Macdonald failed to properly advise the board as to the fact that the cash flow model supporting the statements concerning funding had not verified the key assumptions contained in the model. I have already considered this case, which turns on its own facts. It is of no particular assistance in the resolution of this issue concerning Forrest.

2. Forrest does not dispute that he knew of FMG’s duties regarding Listing Rule 3.1 but says FMG did not breach s 674(2) of the Act.

3. Alternatively, Forrest says, if FMG breached s 674(2) of the Act (which is denied), for the reasons regarding Forrest’s honest and reasonable beliefs, a reasonable person in Forrest’s position and FMG’s circumstances would have acted the same way that Forrest did.

4. Further or alternatively, Forrest says that even if (which is denied) FMG breached s 674(2) of the Act, it does not follow at law that he breached s 180(1); and in the circumstances having regard to his honest and reasonable beliefs the Court ought to find that he did not breach s 180(1) of the Act.

5. Forrest then submits that the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to a company’s interest does not necessarily mean that the director failed to exercise a reasonable degree of care and diligence in the discharge of his duty: Vrisakisv Australian Securities Commission (1993) 9 WAR 395 per Ipp J at 449-450; Vinesv Australian Securities and Investments Commission (2007) 62 ACSR 1 per Santow J at [598] and [599].

   Conclusion

6. I have already concluded that FMG by its directors including Forrest was not “aware” of the legal effect of the framework agreements propounded by ASIC.  I have also found that FMG’s opinion which underpinned its disclosures as to the legal effect of the framework agreements was reasonably and honestly held by it through its board including Forrest. 

7. I consider that Forrest exercised his powers and discharged his duties with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of FMG in FMG’s circumstances; and if they occupied the offices of Forrest within FMG and had the same responsibilities within FMG as Forrest.  Forrest, as I have explained earlier in detail, as a consequence of his own appreciation of the decision in Anaconda; his reliance on the legal oversight and advice of Huston; and his appreciation that the Chinese Contractors held the same view that the framework agreements were legally binding, had reasonable grounds for approving or permitting to be made the disclosures, complained of by ASIC, by FMG between August 2004 and March 2005. I am well satisfied that Forrest acted reasonably to ensure that FMG both complied with s 674 of the Act and did not contravene s 1041H of the Act. He did not breach s 180(1) of the Act as alleged by ASIC or at all.

8. Given the conclusions to which I have come concerning ASIC’s case under s 1041H I do not consider it necessary to deal with Forrest’s further defence based in s 180(2) concerning the Business judgment rule.

   PART 11:  ORDERS

9. For all these reasons ASIC’s Application against each of the defendants should be dismissed.  ASIC should pay the costs of each of the defendants.  There will be orders accordingly.

I certify that the preceding nine hundred and six (906) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.

Associate:

Dated:       23 December 2009

Counsel for the Plaintiff:	Mr N J Young QC with Mr J A Thomson, Mr D J Crennan and Mr A J Musikanth
Solicitor for the Plaintiff:	Mallesons Stephen Jaques
Counsel for the First Defendant:	Mr J Karkar QC with Mr B Dharmanada and Mr R J Price
Solicitor for the First Defendant:	Clayton Utz
Counsel for the Second Defendant:	Mr A Myers QC with Mr M Thangaraj
Solicitor for the Second Defendant:	Jackson McDonald

Date of Hearing:	6-30 April 2009 1-7 May 2009
Date of Judgment:	23 December 2009

SCHEDULES ‘A’

Dramatis Personae

ABB Australia Pty Ltd

Australian Securities and Investments Commission (“ASIC”) Plaintiff

Australian Securities Exchange Limited (“ASX”)
Walsh, Tony, Assistant Manager Issuers

Australian, The (Newspaper)
Armitage, Catherine
Bromby, Robin

Barclay Mowlem Construction Ltd (“Barclay Mowlem”)
Killinger, Bill, Director and General Manager (Rail)

BGC Contracting Pty Ltd (“BGC”)

China Harbour Engineering Company (Group) (“CHEC”)
Chen Yongkuan, Vice President
Liu Huai Yuan, President

China International Trust & Investment Corporation (“CITIC”)
Wang Jun, Chairman

China Metallurgical Construction (Group) Corporation (“CMCC”)
Ma Yanli, President/ Chairman
Shen Heting, President
Sun Longjun, Second Business Department Manager
Wang Yongguang, Vice President
Yang Changheng, Chairman,
Zou Wei Min, General Manager

China Railway Engineering Corporation (“CREC”)
Bai Zhongren, Vice President
Liang, assistant to Mr Zhang
Qin Jiaming, President/ Chairman
Zhang, Kean, Project Manager

Chinese Ambassador
Madam Fu Ying

Citigroup
Fraser, Chris, Vice President Investment Bank

Downer EDI Rail
Broad, Danny, employee

Expert Witnesses

Houston, Gregory, consulting economist employed by NERA Economic Consulting
Keene, Reginald, senior client adviser at Bell Potter Securities
Sisson, Andrew, Managing Director of Balanced Equity Management Pty Limited
Watson, Iain (Dr) Deputy Dean of the UWA Business School

External Consultants to FMG
Bai
Lou-Lin (Lawrence) Xin
Yin

Field Public Relations (“Field PR”)
Field, John, Managing Director
Skinner, Kevin, Senior Consultant

Fortescue Metals Group Limited (“FMG”) First Defendant
Campbell, Rod, Company Secretary
Catlow, Christopher, Chief Financial Officer
Dewar, Todd, Project Engineer
Fisher, Wei, Executive Assistant
Forrest, John Andrew Henry, Second Defendant, Chief Executive Officer and Chairman of    

Directors of First Defendant.

Heyting, Ed, Project Manager of Infrastructure
Huston, Peter, in-house legal counsel
Kirchlechner, Philip, Head of Marketing
Li, Catherine, Engineer
Liu, David, Head of China Business
Morrin, Juliet, Executive Assistant of Second Defendant
O’Reilly, Louise
Rowley, Graeme, Executive Director Operations
Rui Dana Du, Senior Business Analyst 
Scrimshaw, Russell, Director
Tapp, Julian, Head of Government Relations
Watling, Alan, Chief Operating Officer and Head of Port & Rail
Williams, Jim, Head of Mining Operations

Government of Australia
Farmer, Pat, Assistant Minister for Education
Haase, Barry, Federal Member for Kalgoorlie
Hewett, Kym, Senior Trade Commissioner at the Australian Embassy
Thomas, Dr Alan, Australian Ambassador to China
Vaile, Mr, Minister for Trade

Government of Western Australia
Brown, Clive, Minister for State Development

Leighton Contracting

Leighton Holdings Group

Ministry of Commerce (“MOC”)
Chen Jian, Assistant Minister

National Development Reform Commission (“NDRC”).
He Lianzhong , Deputy Director General, Foreign Capital Utilization Department
Liu Xuhong , Deputy Director General, Foreign Capital Utilization Department

Other Chinese companies
Chiao United (Fuzhou) Steel Co. Ltd
China Shougang International Trade & Engineering Corporation
Hebei Wenfeng Iron & Steel Co Ltd
Ping Xiang Iron & Steel Co. Ltd
Jiangsu Fengli Group Co Ltd

Patersons Securities Ltd (“Patersons”)

Quantm Ltd

Shanghai Baosteel Group

Sinosteel Corporation (“Sinosteel”)

State-Owned Assets Supervision and Administrative Commission (“SASAC”)
Wang Xiaoqi, Director General of the Bureau of Planning and Development

ThyssenKrupp Engineering (Australia) Pty Ltd (“ThyssenKrupp”)

Wong K C, FMG’s second largest shareholder in 2004/05

Worley Pty Ltd (“Worley”)

SCHEDULE ‘B’
CREC FRAMEWORK AGREEMENT

SCHEDULE ‘C’
CHEC FRAMEWORK AGREEMENT

SCHEDULE ‘D’
CMCC FRAMEWORK AGREEMENT

SCHEDULE ‘E’