Consideration
63 The applicant sought preliminary discovery, not knowing the basis for Iluka's 8 May 2012 forecasts (although he knew Iluka's stated basis) and, therefore, not knowing whether the forecasts were made on reasonable grounds.
64 In St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360; (2004) 211 ALR 147 ("Rabo") at [26], Hely J relevantly observed:
The question is whether the applicant has sufficient information to make a decision whether to commence proceedings in the Court: Quanta Software [International Pty Ltd v Computer Management Services Pty Ltd (2000) 175 ALR 536] at [33]-[34]; IPR 32-3, Alphapharm [Pty Ltd v Eli Lilly Australia Pty Ltd [1996] FCA 1500] at 24-26. Accordingly, an applicant for preliminary discovery may be entitled to discovery in order to determine what defences are available to the respondent and the possible strength of those defences, or to determine the extent of the respondent's breach and the likely quantum of any damages award: CGU Insurance Ltd v Malaysia International Shipping Corp Berhad [[2001] FCA 1223;] (2001) 187 ALR 279 at 285 [21]; Quanta Software at [33]-[34]; IPR 32-3, Alphapharm at 24-26, Airservices Australia [v Transfield Pty Ltd [1999] FCA 886] at [5].
(emphasis in original)
65 The basis for Mr Bonham's belief commences with the fact that Iluka had made certain forecasts of future sales and revenue which were not achieved.
66 Next, it is based on alleged representations, impliedly made by the 8 May 2012 announcement, that Iluka had a reasonable basis for providing reliable forecasts of future sales and/or revenue and for providing point estimates of sales for mineral sands products rather than a broad range going forward.
67 The primary judge did not deal with these particular alleged implied representations but, at [83], his Honour commenced his consideration of the alleged implied representation that Iluka had a reasonable basis for making its projections of future volumes in the 8 May 2012 announcement. His Honour's analysis proceeds on the basis that this implied representation could arise.
68 Although there was some argument as to whether the implied representations propounded by the applicant were present or future representations or representations "in respect of a future matter", Mr Hutley SC ultimately argued his case on the basis that the claim for relief was relevantly based upon representations as to present facts, namely the basis which Iluka had, as at 8 May 2012, for the forecasts which it made in the 8 May 2012 announcement.
69 Mr Hutley SC accepted that the mere fact that a representation as to a future matter is falsified is, at least as a general proposition, insufficient to support a reasonable belief as to the existence of a right to obtain relief based on a claim of misleading or deceptive conduct.
70 Next, Mr Bonham relies upon the factors identified in the 9 July 2012 announcement, on the basis that those factors probably also applied to Iluka as at 8 May 2012. That is:
(1) it is reasonable to think that, as at 8 May 2012, discussions with customers regarding second half volume requirements were equally or less advanced;
(2) the anticipated or effective policy responses to deterioration in major regional economies were presumably also absent;
(3) the fact that shorter period sales contracts increased the difficulty in providing specific company performance guidance is a characteristic of those contracts and therefore applicable both in May and July 2012; and
(4) the continuing uncertainty associated with economic business conditions probably existed in May, since it was said to be continuing in July.
71 Rather than focusing on these factors, his Honour directed his attention to evidence put forward by Iluka to justify or explain its conduct. His Honour referred, at [87], to the existence of evidence, adduced on Iluka's behalf, that appeared "plausibly to explain why, notwithstanding deteriorating market conditions, Iluka continued to stand by its 8 May 2012 forecasts of future volumes … until well after Mr Bonham had purchased his shares on 15 May 2012". That evidence comprised evidence of improved economic traction in the US and China and the need for replenishment of zircon sand stocks in Europe.
72 At [88], his Honour stated:
Once evidence has been adduced by a respondent in discharge of the evidential burden, the applicant must satisfy the dispositive burden of showing that the respondent did not have reasonable grounds for making the representation: North East Equity Pty Ltd v Proud Nominees Pty Ltd [2012] FCAFC 1 at [30]. In my view, Iluka adduced more than sufficient material in discharge of its evidential burden to require the prospective applicant to carry the dispositive burden.
73 North East Equity Pty Ltd v Proud Nominees Pty Ltd [2012] FCAFC 1; (2012) 285 ALR 217 was not a case about preliminary discovery. It was a case which concerned the evidential burden under s 51A(2) of the Trade Practices Act 1974 (Cth). Paragraph [88] of his Honour's reasons reveals that the primary judge proceeded upon the basis that the implied representation was a representation as to a future matter, to which a statutory provision, deeming an absence of reasonable grounds for such a representation, might apply. Accepting this premise, on the application for preliminary discovery, the applicant was not required to show that Iluka did not have reasonable grounds for making the representation, but only that he had a reasonable basis for believing that he may have the right to obtain relief in the Court based on the proposition that Iluka did not have such reasonable grounds.
74 At [90], the primary judge referred to the importance of guarding against "hindsight illusion", citing City of Botany Bay Council v Jazabas Pty Ltd [2001] NSWCA 94 ("Jazabas"). Jazabas was another case which concerned an opinion as to a future matter. The observation of Mason P, at [83], that it remained "vital to guard against hindsight illusion" was made in relation to the question whether a person had reasonable grounds for expressing an opinion or making a prediction as to a future matter. Mason P also noted, at [83], that the need to judge this question as at the date of the representation did "not preclude examining evidence of later events which may throw light upon the overall probabilities".
75 The primary judge commenced his consideration of the matters contended to justify Mr Bonham's reasonable belief at [94]. At [98], his Honour said:
Iluka has explained why, notwithstanding deteriorating market conditions, for some time subsequent to their making, it had continued to stand by its 8 May 2012 forecasts (see above at [87]). The statements were made in May 2012, well before a scheduled large shipment, which it can be inferred Iluka was then expecting to add to its first half year sales volumes, did not proceed later in June (see below at [99]). There is nothing in the evidence before the Court to suggest that any problems with the June shipment were known or ought to have been known by Iluka in May.
76 This observation is only relevant to the question of whether Mr Bonham held a reasonable belief to the extent that it might assist in identifying the grounds on which the alleged implied representations were made. It is only relevant to the extent that Iluka's explanation and the deferred shipment are matters that affect the existence or significance of the grounds that Mr Bonham identified as grounds for his belief.
77 At [99], his Honour set out para 10(d) of ACA Lawyers' 10 November 2014 letter as follows:
(d) When Iluka made the July 2012 Announcement, it conveyed to the market not only that it withdrew the specific forecasts made in the May 2012 Announcement, but that Iluka could not make forecasts over extended periods with an appropriate degree of confidence. It thus conveyed to the market that its ability to give reliable forecasts was effectively impaired;
78 His Honour continued:
Acceptance of that proposition provides no reason to infer Iluka had prior knowledge that its capacity to make reliable forecasts would be impaired before Mr Bonham's share purchase. It provides no basis for any inference that Iluka ought reasonably to have known that those forecasts could not be met at the time they were made. It may be recalled that Mr Withers took the Court to evidence that the trigger point for Iluka revising its 8 May 2012 outlook occurred only after a large shipment of zircon was deferred in June 2012 (transcript, p 195, lines 19-35).
79 In our view, the primary judge erred in his reasoning in this paragraph. Mr Bonham was not required to demonstrate that Iluka had prior knowledge that its capacity to make reliable forecasts would be impaired, or that Iluka ought reasonably to have known that its forecasts could not be met at the time they were made. The correct question was whether the evidence of Iluka's forecasting capacity in July 2012 provided a reasonable basis for Mr Bonham to believe that Iluka's forecasting capacity was impaired in May 2012 such that it did not have reasonable grounds for its forecasts.
80 The primary judge's reference to the deferred shipment indicates that his Honour was focusing his attention on Iluka's state of knowledge, rather than on whether the matters identified by Mr Bonham from the 9 July 2012 announcement were matters which he could reasonably believe obtained as at 8 May 2012 so as to cause him to conclude that Iluka may not have had reasonable grounds for its forecasts. Put another way, the trigger for Iluka revising its outlook did not matter unless it suggested that the bases for Mr Bonham's belief were not reasonable.
81 At [100], the primary judge addressed the macro-economic factors to which Iluka attributed its decision to revise its guidance in July 2012. Mr Bonham's contention was that "none … were new information not generally available prior to 9 July 2012". His Honour did not deal with this contention. However, his Honour acknowledged the correctness of the further contention that the movement to "shorter period sales contracts" was the first time that Iluka had linked this to the reliability of its sales guidance.
82 The primary judge then addressed the significance of the movement to shorter period sales contracts by noting that:
(1) there was no reason to doubt that the contracts had served the company well, given price increases during periods of strong demand;
(2) 2011 had been a record year for the company; and
(3) in the context of these matters, it was not surprising that Iluka did not link shorter term contracts previously to the reliability of its sales guidance.
83 His Honour concluded that it could only appear unreasonable for Iluka not previously to link shorter term contracts to the reliability of its sales guidance in retrospect. That conclusion appears to depend, at least in part, upon the further conclusion that there was "no basis for an inference that Iluka knew, or ought reasonably to have known that what had been a source of its recent strength in the market would prove, in changed and deteriorated economic circumstances, to become a liability". The latter observation again focuses upon the state of knowledge of Iluka, rather than the implications of shorter term contracts for Iluka's forecasts. The observation also depends upon the proposition that the economic circumstances "changed and deteriorated" between May and July 2012, which was not a matter about which the primary judge had made findings.
84 His Honour also relied upon the evidence mentioned at [87] which was relied upon by Iluka to explain the timing of its announcements. Even assuming that this evidence was evidence of grounds for the 8 May 2012 announcements (which is not obvious since it is a report given on 23 May 2012), the evidence does not demonstrate that the shorter term contracts did not form a basis for a reasonable belief that the May 2012 forecasts lacked reasonable grounds.
85 At [103], the primary judge said:
The law requires bad news to be released when a company's continuous disclosure obligations are engaged, not that such bad news cannot cause surprise to the market. Commerce is never free of risk and when unwelcome news is released it often gives rise to price falls. Given that a plausible basis has been illustrated for Iluka's management to have continued to hold the view that their 8 May 2012 guidance remained valid until July 2012 (and certainly well after Mr Bonham had purchased his shares), no adverse inference to the effect that Iluka must have known at 8 May 2012 what it later became aware of and announced on 9 July, can be drawn.
86 The fact that a plausible basis for Iluka's opinions was demonstrated is not to the point, and nor is the question of what Iluka must have known at 8 May 2012. In addressing these matters, his Honour omitted to consider the central question which was whether factors identified in July 2012 and, by inference, in existence in May 2012, gave rise to a reasonable belief that Mr Bonham may have a right to relief in this Court based on the logic that those factors should have had the same impact upon Iluka's forecasting capacity in May 2012 as they had in July 2012.
87 The proposition that the factors identified in July 2012 can be taken to have applied in May 2012 in the absence of any consideration to the contrary does not involve speculation or suspicion: it is an inference. There is no other element of Mr Bonham's reasoning which could be said to involve speculation or suspicion.
88 At [108] and following, the primary judge addressed the written submissions made on Mr Bonham's behalf and set out at [47] above. At [110], his Honour formulated the requisite reasonable belief as one "that by 8 May 2012 Iluka would or should have known that its forecast could not be met". At [111], his Honour described the applicant's case as involving an "argument that the scale of the shortfall of sales volumes must have been known". At [112], his Honour observed that "[i]t was never suggested by Mr Lee that there was any untruth in [the] statement" that a scheduled large shipment had been deferred in June "or that cancellation of that shipment was foreseeable". At [114], his Honour found that there was "no evidence to support the inference, and it is mere speculation to suggest, that as at 8 May 2012 a likely downside to its use of shorter contracts going forward had become apparent, or ought to have become apparent to Iluka". At [115], the primary judge found that there was nothing to suggest that "the degree of Iluka's knowledge of market uncertainty was greater at those times than was then revealed by it".
89 These findings illustrate that the primary judge focused his attention on what the evidence said about Iluka's state of knowledge, and not upon what the evidence said about the grounds for Iluka's forecasts and whether the appellant had reasonable grounds to believe that he could obtain relief in this Court on the basis that Iluka did not have reasonable grounds to make the forecasts. Similarly, at [135], the primary judge said:
Only through the lens of "hindsight illusion" (that if an event happens it must have been foreseeable) is it possible for the proposition that Iluka must have known at 8 May 2012 what it later became aware of and announced on 9 July 2012 to appear "as plain as a pikestaff".
90 The applicant was required to demonstrate only a reasonable belief that he may have the right to obtain relief, in this case damages, as opposed to a reasonable belief as to his possible entitlement to relief arising from any particular cause of action pleaded. He was not required to make out a prima facie case: Rabo at [26]; Echo Tasmania Pty Ltd v Imperial Chemical Industries PLC [2008] FCAFC 58 at [43]. In our view, his Honour's approach suggested that the applicant was required to bring forward evidence about Iluka's actual grounds for the alleged implied representations. But Iluka's actual grounds are not a matter within the applicant's knowledge, except to the extent that Iluka has chosen to disclose them. In this case, the factors identified by Mr Hutley SC did not merely create a suspicion as to the reasonableness of Iluka's grounds for the implied representations. They provided an objective foundation for a belief that Iluka's grounds were deficient because, as Mr Hutley SC contended, if overall economic conditions were the same between May and July, then it could be inferred that there was no real reason why forecast guidance should have been maintained in May and yet pulled in July. In other words, if there was no reasonable basis for maintaining point forecasts in July, a question is immediately raised as to whether there was a reasonable basis for maintaining them in May. If one looked at the logic of the material which drove the decision not to have point estimates in July, there were reasonable grounds to believe that an organisation acting reasonably would not have had point estimates in May. His Honour erred in focusing on evidence about what Iluka believed was reasonable, instead of the reasonableness of Mr Bonham's belief in the light of all of the circumstances.
91 Accordingly, we conclude that the primary judge erred in finding that the applicant had not established reasonable grounds for his belief that he may have a claim for relief against Iluka.