4.2 Discussion
53 The appellant's contentions that the primary judge's process of reasoning miscarried should be accepted.
54 Contrary to the case put for WOR below and in the appeal, the relevant issue was not what was actually known by WOR's board, what views the board held, or the reasonableness of the conduct of the board (although that was also put in issue by the appellant below). WOR made the FY14 guidance representation, which conveyed to the market that it expected to achieve NPAT in excess of $322 million in FY14 and that it had reasonable grounds to so expect. While the FY14 guidance representation was made as a result of a decision of the board to adopt the FY14 budget and give the August 2013 earnings guidance statement to the market, the representor was WOR, not the board of WOR. Accordingly, the issue is whether WOR had reasonable grounds for making the FY14 guidance representation. The issue is not whether the board acted reasonably or unreasonably given the information made available to it by WOR's officers.
55 The appellant did not contend before the primary judge that the board made the FY14 guidance representation. In the 4FASOC the appellant pleaded at para 51 that WOR made the FY14 guidance representation. The submissions made by the appellant below, recorded at J [640]-[645], do not suggest to the contrary. Those submissions focus on a different issue, being the deeming provision in ss 4(1) and (2) of the ACL and s 12BB(2) of the ASIC Act. A representation as to a future matter is taken to be misleading if a person does not have reasonable grounds for making the representation. A person is also taken not to have reasonable grounds for making such a representation "unless evidence is adduced to the contrary". In the context of evaluating whether WOR had adduced evidence to the contrary the appellant submitted to the primary judge that "it was necessary for WOR to identify the relevant decision makers who relied on the asserted evidence to the contrary; and to prove that the asserted evidence to the contrary was in fact relied on by those decision makers". This does not mean that the appellant was submitting that WOR's board made the FY14 guidance representation, with the consequence that the issue of reasonable grounds was to be answered by reference to the diligence or otherwise of WOR's board.
56 The erroneous focus of the primary judge on the conduct and knowledge of the board, as opposed to the conduct and knowledge of WOR, is most evident in the way in which her Honour dealt with her finding that the FY14 budget was not a P50 budget. At J [428] the primary judge said:
Considered together, there were reasons for WOR's Board to approach the task of approving the FY14 budget with caution (although there is no evidence that the Board ought to have known that the budget was not a true P50 budget). However, the matters identified by Mr Crowley fall well short of proving on the balance of probabilities that the FY14 budget did not provide reasonable grounds for the August 2013 earnings guidance statement.
57 The relevant issues were that the FY14 budget was not a P50 budget and whether WOR knew that to be so or knew the facts from which it should be inferred to have known that was so. If WOR knew, or by its knowledge of underlying facts should be taken to have known, that the FY14 budget was not a P50 budget then that would have been evidence supporting the inference that the FY14 budget did not provide reasonable grounds for the August 2013 earnings guidance statement. And as explained below, the fact that Mr Holt, Mr Bradie, Mr Daly and Mr Allen were not called to give evidence was itself relevant to the question whether the inference should be drawn that relevant persons within WOR (whether officers of WOR or not) knew or should be taken to have known that the FY14 budget was not a P50 budget.
58 Nor can it be accepted that the appellant did not put below that WOR's FY14 budget did not provide reasonable grounds for the making of the FY14 guidance representation. The appellant pleaded in the 4FASOC that, by 14 August 2013:
(1) WOR's officers with responsibility for overseeing the budget projections were aware, and it was a fact that, the FY14 budget would be challenging to achieve (para 22B) including because:
(a) the forecast NPAT was increased from $252 million in the 27 May 2013 draft budget, as provided by the locations, to $352.1 million (particular 10);
(b) the 27 May 2013 draft budget and the adjusted budget thereafter reflected unrealistic blue sky forecasts (particular 11); and
(c) WOR had underperformed on its NPAT budget by at least 10% in each financial year from FY09 other than FY12 (particular (c));
(2) WOR's officers with responsibility for overseeing the budget projections were aware, and it was a fact that, the FY14 budget (para 22C):
(a) provided for 19% of WOR's expected earnings to come from the realisation of blue sky revenue;
(b) provided for 16% of WOR's expected earnings from the realisation of prospect revenue;
(c) projected 59% of EBIT would be accrued in the second half of 2014, significantly exceeding the 52% EBIT actually achieved in the second half of 2013; and
(d) projected a significantly greater proportion of EBIT from blue sky and prospect revenue against secured work in in the second half of 2014 as compared to the first half of 2014;
(3) WOR had downgraded its earnings guidance on two occasions in FY13 (involving a downgrade in earnings from an NPAT of $346 million in FY12 to an NPAT of $260 to 300 million for FY13): para 23;
(4) WOR was aware that in FY13 WOR had experienced challenging conditions in a number of its key markets and that there would be continued uncertainty in the markets for its services in FY14: para 24;
(5) WOR was "aware" within the meaning of ASX Listing Rule 19.12, and it was the fact that, it did not have a reasonable basis for making the August 2013 earnings guidance statement (para 46), because (amongst other things)
(a) the effect of the budget process within WOR required the locations to reflect WOR's growth strategy without due regard to the market conditions, including through an additional EBIT of $88.6 million to the "bottom up" build from the location's budgets and $12 million "acquisition stretch" to WOR's EBIT figure without a proper basis, and by including no contingency against underperformance except that from movements in foreign exchange rates: particular (a);
(b) the budget process within WOR had not included any or any adequate critical review of the locations' blue sky revenue forecasts to ensure the forecasts were not inflated: particular (b);
(c) WOR budgeted for an unreasonable amount of blue sky revenue in its ANZ region, and in the SWO location of its USAC region: particular (c);
(d) as a result, WOR did not have reasonable grounds for including in the FY14 budget an NPAT forecast materially higher than approximately $284 million and/or a profit guidance to the market of "growth" on its FY13 NPAT result of $322 million: particular (d);
(e) further as a result, WOR's officers with responsibility for overseeing its budget and forecasting processes ought to have known that WOR did not have a reasonable basis to forecast increased earnings in FY2014: particular (e); and
(6) further or in the alternative to para 46, WOR was "aware" within the meaning of ASX Listing Rule 19.12, and it was the fact that, its FY14 earnings were likely to fall materially short of the FY14 WOR Earnings Expectation: para 47;
(7) by reason of these matters, by making and repeating the August 2013 earnings guidance statement on 14 August 2013, 9 October 2013, 10 October 2013 and 15 October 2013 WOR engaged in misleading and deceptive conduct in contravention of s 1041H(1) of the Corporations Act, s 12DA(1) of the ASIC Act, and/or s 18 of the ACL: paras 51-55.
59 The respondents' contention - that it was no part of the appellant's case that there was no reasonable basis for the FY14 budget because it was not a P50 budget - does not withstand scrutiny. It is true, as WOR contended, that the appellant did not plead that the FY14 budget was not a P50 budget. It is also true that the appellant submitted at one point below that the case was not a case about a generally defective budget process but concerned an "obvious and unreasonable upwards adjustment of projected earnings by WorleyParsons' executives once its budget process had produced unsatisfactory numbers" in the sense of the projected NPAT being too low. In other words, the appellant accepted that the outcome produced by the 27 May 2013 draft budget was reasonable (that is, a forecast NPAT for FY14 of approximately $252 million).
60 However, as discussed, the 4FASOC did sufficiently plead the alleged deficiencies in the budgeting process which meant that the FY14 budget was not a P50 budget. Further, in opening written submissions the appellant identified that while WOR claimed to have produced a P50 budget the evidence would show that "this is far from what occurred in FY14". In oral opening submissions the appellant contended that the interview notes underlying the Holt memorandum said that there was a "[g]eneral recognition of P50 trending down to P25", and therefore that WOR "have only a 25% chance of meeting their internal forecasts". In closing written submissions the appellant submitted that the essential conclusions from Mr Holt's review were or included that:
…insufficient allowance was being made in the budget for potential downsides. WorleyParsons' budget process "assumes that everything will go right in a world where we know things will go wrong." Locations reported being "actively discouraged" from budgeting for downside risks. A process that was supposed to produce a P50 budget - namely a target with a 50% probability of being achieved - instead became a P25 budget meaning, critically, that it was three times more likely to be missed than achieved.
The appellant also submitted that the FY14 budget was not a true P50 budget, and included no adequate allowance for the risks associated with continued slow markets and operational underperformance.
61 In closing submissions the appellant further submitted:
The effect of the stretch targets for gross margin in the 27 May 2013 budget, plus the management adjustments that followed during June 2013, was to strip any P50 character from the budget. If every element of a budget is optimistic, there is no "portfolio offset" where a miss on one item can be offset by gains on others - a miss anywhere has an immediate effect on achievement of the budget. The process of "management adjustments" during June 2013 demonstrates how that P50 ambition became something much closer to a P 25 reality - as the Holt interview notes observed.
62 The appellant argued that: (a) WOR's abandonment of a "bottom-up" budget process led to senior management imposing an unrealistic amount of EBIT for FY14 on the draft 27 May 2013 budget outcomes (referred to as management adjustments), and (b) the impact of flawed processes and assumptions resulted in a substantial and material overstatement of WOR's FY14 budget and its guidance to the market.
63 In opening written submissions below the appellant said that this would be established by: (a) WOR's historical underperformance against its budgets (b) the unrealistic and unreasonable "top down" pressure placed on the business in order to fulfil market expectations of continued growth, and (c) the fact that in November 2013 WOR removed about $97 million blue sky forecast from its FY14 budget, generally equivalent to the additional EBIT added to the 27 May 2013 budget by the management adjustments.
64 WOR's response was that the robustness of its budget process and the availability of budget contingencies answered the appellant's claims. In its further amended defence WOR pleaded that it had systems in place for the preparation of a robust and detailed annual budget for FY14: for example, paras 25(b) and 54(a). In its written opening submissions WOR made the positive assertion that the "evidence will show that WorleyParsons adopted a P50 parameter to produce the [FY14 budget]" and that the appellant appeared to accept that "a P50 standard is, without question, an appropriate measure for budgetary purposes", which is correct because "the very task of forecasting is complex and there is an appreciation that forecasting for a 12 month period will mean that there will likely be change to the individual line items within the forecast" and operating a business is about taking calculated risks.
65 In its written opening submissions WOR also submitted that there were reasonable grounds for the August 2013 earnings guidance statement as it resulted from "a detailed, time consuming and thorough budget process". WOR further submitted that the August 2013 earnings guidance statement was substantially more conservative than the forecast NPAT in its FY14 budget, noting that there was approximately $30 million in "headroom" between the FY14 budget of $352.1 million and the August 2013 earnings guidance statement which forecast growth from the FY13 NPAT of $322 million, and even more when the FX contingency is taken into account.
66 In its written opening submissions WOR submitted that the appellant's case was "schizophrenic and irretrievably illogical in its foundation". According to WOR the predicate for the management adjustments case was that the 27 May 2013 draft budget from the locations was reasonable but the "errors" in the FY14 budget relied upon by the appellant were embedded in that 27 May 2013 draft budget. This submission was overstated. The appellant accepted that the forecast NPAT in the 27 May 2013 draft budget ($252 million) was reasonable and contended that the FY14 budget forecast NPAT of $352.1 million was not. Moreover, in answer to WOR's case, the appellant submitted that WOR's reliance on the budget process was misplaced given WOR's historical underperformance against budget, the content of the Holt memorandum about that process, and the steps involved in the management adjustments. In other words, the reasonableness of the budget process and FY14 budget NPAT forecast were in issue. The appellant also challenged WOR's reliance on the contingency in the FY14 budget. The $16.1 million contingency in the FY14 budget arose from a favourable shift in FX rates. However, WOR described it as a general contingency and a contingency against FX movements. In our view it was never a general contingency given that it arose from a short-term movement in FX rates and was fully deployed for that reason early in the FY14.
67 Given the above, in particular the way WOR conducted its defence, WOR cannot now complain in the appeal that it was not part of the appellant's case below that the FY14 budget was unreasonable and not fit for use to prepare the August 2013 earnings guidance statement because of: (a) WOR's history of material budget underperformance, (b) WOR having to twice downgrade its earnings forecasts in 2013, (c) the fact that the FY14 budget was not a P50 budget and should have been known by WOR (and, it must be inferred, was known by some WOR employees) not to be such when it was adopted, (d) the fact that the FY14 budget did not result from a risk-adjusted approach to forecasting, (e) the fact that WOR's markets were not growing or were deteriorating when the FY14 budget was being prepared, and (f) the fact that WOR maintained the 19% blue sky revenue, the same as 2013 when markets were buoyant, given that blue sky performance was a function of market buoyancy.
68 It is not to the point that WOR repeatedly asserted that it held the appellant to his pleading. The appellant was entitled to respond to the positive case asserted by WOR that its FY14 budget was the result of a robust and reasonable (indeed, according to WOR, "best practice") budgeting process, was in fact reasonable as a matter of substance, and was a P50 budget which, by definition, was suitable for budgetary purposes and, by implication from WOR's case, the FY14 budget was suitable to found the making of the August 2013 earnings guidance statement.
69 The primary judge referred to the appellant's contentions to these effects at J [52] as the core factual matters on which the appellant relied to establish that the FY14 budget did not provide reasonable grounds for the August 2013 earnings guidance statement. Her Honour said:
The [applicant's] eight core factual propositions are as follows:
(1) WOR had a consistent record of underperforming against its internal budget since FY09, with the sole exception of FY12, and had not materially changed its FY14 budget-setting process from previous years.
(2) WOR had been required to downgrade its earnings guidance on two occasions in FY13 because of underperformance against its internal budget.
(3) In early 2013, as the FY14 budget-setting process began, WOR's major markets were either not growing, or were deteriorating, and the expectation was for continued uncertainty in its markets during FY14.
(4) Between March and May 2013 the locations, together with the regional managing directors (RMDs) and managing directors of the customer service groups (CSGs), engaged in a thorough bottom-up budget process, with conscientious regard to "growth" and overhead reduction directives issued by senior management. The result was that the "detailed budget" compiled in very late May 2013 already incorporated stretch targets in respect of both revenue, and costs savings. Those targets were already optimistic, given market conditions.
(5) In June and July 2013, when it became apparent that the actual bottom-up budget would not support WOR's Vision 2017 objective of year-on-year growth in every year from FY13 to FY17 (set out in full at [121] below), senior management, by the so-called management adjustments, demanded a series of top-down adjustments that aimed to increase operational EBIT by $88.6 million. The locations duly stretched again to reflect the majority of those adjustments in their local budgets (however improbable they were and proved to be).
(6) The FY14 budget included the $12 million acquisition stretch addition to EBIT that lacked a proper basis.
(7) The FY14 budget was not a true P50 budget (explained at [114] below), but rather included no adequate allowance for the risks associated with continued slow markets and operational underperformance.
(8) WOR's budget process lacked a risk-adjusted review of its internal budget, particularly in relation to unsecured work, for the purpose of ensuring that any consequential guidance to the market properly reflected the risk associated with its stretch budget targets.
WOR has not filed any notice of contention to the effect that the primary judge erred in identifying the appellant's case in these terms.
70 Further, and in any event, as the appellant submitted, regard should be had to the (accurate) observation of Beaumont J in Pancontinental Mining Limited v Posgold Investments Pty Ltd [1994] FCA 131; (1994) 121 ALR 405 at 414 that:
…under the modern system of pleading, the question is not whether the facts pleaded are in themselves sufficient to give rise to a cause of action. Rather, the question is whether it would be open to the applicant upon the pleadings to prove facts at the trial which would constitute a cause of action (see Mutual Life and Citizens Assurance Company Limited v Evatt [[1968] HCA 74]; (1970) 122 CLR 628 at 631).
71 For these reasons many of WOR's submissions in the appeal must be rejected. For example, for the reasons given it is not to the point that:
(1) the 4FASOC does not refer to the FY14 budget not being a P50 budget;
(2) the 4FASOC does not assert that the FY14 budget was unreasonable and not fit for use as the foundation for the August 2013 earnings guidance statement because the FY14 budget was not a P50 budget; and
(3) there was no evidence that the board itself knew that the FY14 budget was not a P50 budget.
72 The 4FASOC pleaded the facts from which it was open to the appellant to prove that the FY14 budget was not a P50 budget and that WOR (as opposed to WOR's board) should be inferred or taken to have been aware of this before the FY14 budget was adopted. Further, as WOR positively asserted that the FY14 budget was a P50 budget and therefore was both reasonable and a reasonable foundation for the August 2013 earnings guidance statement. It was open to the appellant to rebut that assertion by seeking to prove that the FY14 budget was not a P50 budget and that relevant persons within WOR knew this to be so before the August 2013 earnings guidance statement was made.
73 The primary judge also expressed concern that she could conclude that the FY14 budget was not a P50 budget but could not conclude that that was a result of the management adjustments and did not know how the P50 standard was applied by WOR in preparing the FY14 budget: J [197]. These observations may be correct but they did not change the fact that, amongst other things, the primary judge was satisfied that the budget was not a P50 budget. Having so concluded, the issue was whether WOR knew or ought to have known that before it adopted the FY14 budget and used it as the foundation for the August 2013 earnings guidance statement.
74 For the same reasons, and in particular given each of the circumstances described in [67] above, the appellant was entitled to seek to prove that WOR's reliance on its asserted robust budget process did not establish the reasonableness of the FY14 budget or provide reasonable grounds for the August 2013 earnings guidance statement.
75 In the context of the cases put by the parties below, the primary judge was required to decide whether the appellant had established the facts described in [67] above and whether, as a result, the appellant was correct that WOR's defence, that the evidence established the reasonableness of the FY14 budget and that it provided reasonable grounds for the August 2013 earnings guidance statement, should be rejected. As the appellant submitted, the primary judge did find all of the underlying facts but failed to draw the relevant inferences from those facts because of her Honour's: (a) focus on the conduct of the board (in accordance with WOR's submissions) rather than of WOR as the appellant submitted was appropriate, (b) search for a level of detail in the evidence enabling her Honour to decide on what would have been a reasonable forecast of FY14 NPAT, which was misguided, (c) lack of focus on the overall effect of the evidence, including the Holt memorandum, and (d) not weighing the evidence consistently with the principles in Blatch v Archer and Jones v Dunkel.
76 In particular, the primary judge made the following findings (and WOR has not filed a notice of contention that her Honour erred in so doing):
(1) the FY14 budget was not a P50 budget: J [197], [426];
(2) WOR had historically materially underperformed against its budgets from FY09 to FY13 (except in FY12) and had to twice downgrade its earnings guidance in 2013, and these facts provided a basis for WOR's officers to be sceptical about the FY14 budget, and raised an issue about systemic forecasting problems in WOR: J [410]-[415];
(3) the FY14 budget process was not materially different from the process that had been followed in the preceding years: J [411];
(4) WOR's markets were not growing or were deteriorating when the FY14 budget was set which was a persuasive reason for approaching the FY14 budget with caution: J [421];
(5) aspects of the 27 May 2013 draft budget (forecasting an NPAT of $252 million) were optimistic and that draft budget, overall, was "ambitious", but the FY14 budget forecast NPAT of $352.1 million: J [423];
(6) ExCo was concerned that the FY14 budget meant that "[e]veryone will be challenged to meet their budgets" and the split between the first and second halves of the year needed "more work … to reduce the weighting to the second half": J [286]; and
(7) the Holt interview notes record strong criticism by senior management of aspects of WOR's budgeting and reforecasting processes": J [602]; and
(8) consistent with the Holt memorandum (J [601]):
(a) WOR's budget-setting process was affected by a culture of optimism. The Holt memorandum and the related interview notes recorded a "consistent message" of expectations of growth from senior management. There were cases where locations inflated their projections of blue sky revenue in order to meet senior management expectations;
(b) insufficient allowance was made in the WOR budget setting process for potential downsides. There was feedback that locations had been actively discouraged from including potential downside in their budgets where potential problems had been identified on projects; and
(c) there was a belief held by some of WOR's senior management that locations were not sufficiently stretching in their initial budgets which was not necessarily valid.
77 The primary judge's reasons do not bring all of these facts together in assessing whether WOR's defence, and the appellant's rebuttal of that defence, should be accepted. Rather, the primary judge focused on each piece of evidence explaining why, in and of itself, that piece of evidence did not support the appellant's rebuttal. Accordingly, and as noted, the primary judge repeatedly considered that to draw the required inferences, more evidence and analysis would be required: J [414], [415], [417], [421], [229], [600]-[603] (set out in [48] above).
78 Further, while the primary judge referred to Blatch v Archer and Jones v Dunkel at [67] it is not apparent that the primary judge had regard to the fact that: (a) the inferences the appellant submitted the primary judge should draw were available on the whole of the evidence including the facts as found by the primary judge, (b) whether or not to draw those inferences should be informed by the principles in Blatch v Archer at 970 and Jones v Dunkel at 321 respectively that "all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted" and when a party who is capable of testifying, fails to give evidence without explanation "it may lead rationally to an inference that his evidence would not help his case".
79 These principles were important in the present case because the evidence established that: (a) Mr Bradie, Mr Daly and Mr Allen, as well as Mr Holt to whom they reported, were key participants in the budget process which caused the forecast NPAT to be increased from $252 million to $352.1 million, (b) Mr Bradie, Mr Daly and Mr Allen expressed significant concerns about the FY14 budget before it was adopted, and (c) Mr Holt conducted the Holt interviews and prepared the Holt memorandum in the aftermath of the November 2013 revised earnings guidance. However, none of Mr Bradie, Mr Daly, Mr Allen and Mr Holt were called by WOR to give evidence.
80 The primary judge at J [72] said that:
At a general level, I accept that WOR's failure to call the witnesses identified by Mr Crowley may provide support for one or more adverse inferences. However, it is necessary to address the issue by reference to particular inferences and the available evidence for and against any proposed inference.
81 However, it is not apparent that the primary judge applied the relevant principles when assessing either the individual pieces of evidence or the drawing of inferences overall. In particular, as recorded at J [73], the appellant had submitted to the primary judge that:
…the descriptions of the budget-setting process recorded in the interview notes collated for the purposes of Mr Holt's memorandum prepared for the Audit and Risk Committee of the Board (and comprising Board members) (A&RC) on 5 December 2013 (what became known at trial as the Holt Memorandum) were an accurate description of the process actually followed.
82 When assessing whether to draw that inference the primary judge did not refer to the fact that Mr Holt was not called by WOR to give evidence and weigh that fact in the process of evaluating the inferences to be drawn. Rather, the primary judge said that the meaning of the Holt interview notes was very often unclear as was the basis upon which the interviewees had expressed their opinions (J [74]), and that while the Holt memorandum "tends to support Mr Crowley's case that WOR's historical performance against budget reflects defects in WOR's budgeting process" (J [600]):
…the memorandum does not analyse how any particular defect affected any element of any budget. Nor does it attempt to quantify the impact of any defect in the budget process. For example, the memorandum does not analyse how any of its "key points" affected the budget EBIT or NPAT figures in any year or years. Nor does the memorandum seek to test whether there might be any other explanation for the identified discrepancies between budget and actual performance apart from defects in the budgeting process. Nor, perhaps unsurprisingly, does the memorandum contain a broad conclusion that WOR's budget process was "not reliable", as Mr Crowley contended that the Court should find.
83 The primary judge drew these conclusions despite accepting:
(1) at J [601] that the Holt memorandum did support the conclusions that:
(a) WOR's budget-setting process was affected by a culture of optimism. The Holt memorandum and the related interview notes recorded a "consistent message" of expectations of growth from senior management. There were cases where locations inflated their projections of blue sky revenue in order to meet senior management expectations;
(b) insufficient allowance was made in the WOR budget setting process for potential downsides. There was feedback that locations had been actively discouraged from including potential downside in their budgets where potential problems had been identified on projects; and
(c) there was a belief held by some of WOR's senior management that locations were not sufficiently stretching in their initial budgets which was not necessarily valid; and
(2) at J [426], based on Mr Holt's conclusions in the Holt memorandum (as set out at J [402]), that the FY14 budget was "not a true P50 budget" because:
(a) WOR's budgeting process had been infected with optimism bias;
(b) "there was an expectation of growth, driven both internally and externally, but not by WOR's own assessment of the markets in which it operated"; and
(c) "in many cases, the bottom up build that the locations submit does not match the expectations of growth from senior management. In order to meet these expectations, the most common response is for locations to simply include a greater level of "blue sky" revenue in the second half of their budget period. In essence, locations are ending up budgeting on the hope that work will materialise, rather than any real expectation that it will."
84 It is not easy to reconcile the primary judge's findings about the conclusions the Holt memorandum supported and her rejection of it as evidence that WOR's budget process was not reliable, which supports the conclusions of error in the primary judge's process of reasoning. As to the latter, the primary judge appears to have been looking in the Holt memorandum for an express statement that the budget process used by WOR in FY14 was unreliable. Given that: (a) WOR's budget process was the same in FY14 as it had been in previous years, (b) WOR had materially underperformed against its budget in FY09 to FY13 other than in FY12, (c) WOR had to twice downgrade its earnings guidance in FY13, (d) markets in FY14 were not growing or were deteriorating when the FY14 budget was being set, the caution and scepticism with which the primary judge said WOR ought to have brought to bear on a FY14 budget which increased forecast NPAT from $322 million in FY13 to $352.1 million in FY14 would seem to involve material understatement. When the lack of evidence from Mr Bradie, Mr Daly, Mr Allen and Mr Holt are factored in, the primary judge's approach to the drawing of inferences supports the appellant's contentions of error in that process.
85 The Holt memorandum itself reinforces the conclusion that the primary judge's approach to the evidence and the drawing of inferences having regard to the principles in Blatch v Archer and Jones v Dunkel miscarried. The observations at J [600] expose the problem. The observations reflect the primary judge's search for a line-by-line analysis of the FY14 budget sufficient to enable the primary judge to identify the number or the range for NPAT which would have been reasonable. As the appellant submitted, it was not necessary for the appellant to identify a reasonable forecast range in order for the appellant to demonstrate that WOR's NPAT forecast in the FY14 budget was unreasonable and did not provide reasonable grounds for the August 2013 earnings guidance statement. A budget and earnings forecast might be proved unreasonable by a line-by-line analysis or by demonstrating that the reasonable range was materially lower than the forecast NPAT, but these are not the only methods by which a forecast might be proved to have lacked reasonable grounds when made. To the contrary, and for example:
(1) if the appellant proved that the FY14 budget was less than a P50 budget (which it did), then that might be sufficient, in and of itself, to prove that the FY14 budget did not provide reasonable grounds for the August 2013 earnings guidance statement, if it could also be proved that WOR knew or ought to have known that fact by reason of its knowledge of the underlying facts;
(2) if the appellant proved that the 27 May 2013 draft budget with an NPAT of $252 million would itself be "ambitious" (which it did), and that the FY14 budget forecast NPAT of $100 million more, at $352 million (which it did), then that also might be sufficient, in and of itself, to prove that the FY14 budget did not provide reasonable grounds for the August 2013 earnings guidance statement, if it could also be proved that WOR knew or ought to have known that fact by reason of its knowledge of the underlying facts; and
(3) the above circumstances had to be considered along with the other relevant circumstances identified at [67] above in the context of WOR's forensic decisions not to call Mr Bradie, Mr Daly, Mr Allen and Mr Holt.
86 The primary judge's conclusion at J [414] that more detailed analysis than that contained in the Holt memorandum about the reasons for WOR's historical material underperformance against budget would be required to support any conclusion of systemic defects in WOR's NPAT forecasting does not expose a weighing of all of the evidence, including the fact that Mr Holt was not called by WOR to give evidence, along with the contents of the Holt memorandum. This is reinforced by the fact that the primary judge considered that the Holt memorandum "provided a foundation for discussion at the A&RC of the particular subject of the FY14 budget, and the circumstances that had led to such a substantial revision to the budget" (J [597]) but, at the same time, did not deal with the topic of how the FY14 budget process miscarried (J [596]). These conclusions are also not easily reconciled. In circumstances where Mr Wood requested Mr Holt to prepare a memorandum after the November 2013 revised earnings guidance (J [577]) and the Holt memorandum records its purpose as being to "provide a review of the current process that WorleyParsons follows with respect to its budgeting and forecasting" (emphasis added) (J [571]), it cannot be the case that the Holt memorandum did not deal with the FY14 budget and FY14 budget process.
87 As set out above, the Holt memorandum records: (a) WOR underperforming against budget by more than 10% in the last five out of six years, (b) WOR's budget process reflected senior management's too optimistic expectations of growth compared to the view of locations, (c) locations budgeting for blue sky revenue in the hope rather than the expectation that work will materialise, (d) insufficient allowance made in the budget process for potential downsides, and (e) tension between senior management and locations in the budget process as to whether locations were "stretching" sufficiently in their draft budgets. It is not reasonably open to construe these issues as relating generally to WOR's budget process and budgets and not also specifically to the FY14 budget process and FY14 budget. There is an obvious inference open on the face of the Holt memorandum that Mr Holt was identifying why the FY14 budget process and FY14 budget miscarried. The fact that Mr Holt was not called by WOR to give evidence would allow this inference to be more readily drawn.
88 The impact of these issues on the budget process is analysed in considerable detail in the Holt memorandum. The memorandum records that senior management (at the group level) had an expectation of year-on-year growth driven by assumptions about the nature of WOR rather than an assessment of the markets in which WOR operates. To address the mismatch between the expectations at group level and the locations' assessment of the markets in which they operated "the most common response is for locations to simply include a greater level of 'blue sky' revenue in the second half of their budget period" in the hope rather than the expectation that work will materialise. The memorandum records the lack of sufficient allowance for potential downsides known or unknown and that WOR's budgeting process "assumes that everything will go right in a world where we know things will go wrong". Locations are "actively discouraged from including potential downside in their budgets (at best, these are treated as a sensitivity at group level)". Senior management assume locations are "sandbagging" and not "stretching".
89 Consistent with the conclusions above, it must be inferred from the circumstances that the Holt memorandum is conveying Mr Holt's assessment (in part based on senior management's views) as to why the FY14 budget, amongst others, miscarried. As discussed, the Holt memorandum is a relatively contemporaneous document brought into existence within a month of the November 2013 revised earnings guidance. It is a memorandum prepared by the CFO of WOR who was intimately involved in the FY14 budget. It is identifying things said to be known about the budget process, not things said to have been uncovered or discovered about the budget process.
90 Considered in isolation the Holt memorandum suggests that:(a) senior management required the budgets of locations to reflect year-on-year growth, (b) locations used blue sky revenue to meet the expectations of senior management, (c) WOR's budgeting process assumed no downsides even though managers knew downsides would emerge, and (d) that these dynamics were at play in the preparation of the FY14 budget process (which saw the locations' budgets forecasting NPAT of $252 million to the final NPAT forecast in the FY14 budget of $352.1 million in the context of flat or deteriorating markets). It is also relevant that Mr Holt was not called to give evidence. Nor were Mr Daly or Mr Allen. While the whole of the evidence must be considered, which cannot be done in the context of this appeal, there is an obvious question as to whether Mr Holt should be inferred to have known that the FY14 budget (and earlier budgets) were not P50 budgets at all. None of these matters, however, are apparent from the primary judge's reasoning given her focus on the notion of a required line-by-line budget analysis and the processes of the board in considering and adopting the FY14 budget.
91 The same kind of reasoning is equally applicable to the positions of Mr Daly and Mr Allen. Mr Allen reported directly to Mr Holt. Mr Allen expressed the view in his email of 11 June 2013 that the upwards adjustments to the EBIT and NPAT after late May 2013 made "somewhat of a mockery of the process" (which was meant to involve a bottom-up build of the budget) and WOR risked its reputation if it went with "another unrealistic budget, and need to do another profit downgrade next year". The available inference is that Mr Allen considered that the adjusted budget by June 2013 to be unrealistic. WOR did not call Mr Allen to give evidence, although he remained employed by WOR: J [70]. Yet the primary judge was concerned that she was "not able to make a finding (and Mr Crowley did not propose a finding) about what constituted Mr Allen's basis for his concerns": J [225]. The potential inference as to the basis of Mr Allen's concerns, in the context in which they were expressed, is also obvious (the forecast EBIT and NPAT were too high), and reinforced by the fact that WOR did not call him to give evidence. Again, whether any such inference should be drawn depends on a consideration of the whole of the evidence.
92 Mr Daly also reported directly to Mr Holt. Along with Mr Allen and Mr Bradie he was intimately involved in the adjustments to the draft budget after late May 2013. In an email of 7 August 2013 Mr Daly emailed Mr Holt about the "strong sense within the business that the FY14 targets - both full year and H1 - are a stretch". Mr Daly also undertook the review of the FY14 budget in mid-November 2013 and identified that $97 million of operational EBIT relating to blue sky projections should be removed altogether. WOR also did not call Mr Daly to give evidence.
93 In these circumstances, the primary judge's observation at J [69] that the appellant's case was "mostly hindsight and is not supported by detail that might have contradicted the evidence of WOR's witnesses in substantial respects" cannot be accepted to be correct. As the appellant submitted in the appeal:
The Holt Memorandum ought to have been given significant weight in considering the reliability of WOR's budget process. If WOR wished to suggest it did not reflect the facts, it could have called Mr Holt or the executives he interviewed.
94 The appellant also submitted that, as is the fact, WOR did not call an RGM from "the ANZ or USAC regions to seek to justify the blue sky revenue attributed to those regions in the budget. With CAN, they were the main profit centres of WOR, generating 67% of aggregate revenue: J [95]".
95 All of these considerations indicate that the primary judge's process of reasoning miscarried. If considered in isolation, a number of these circumstances, in and of themselves, would be sufficient to support the conclusion that the FY14 budget did not provide WOR with reasonable grounds to make the August 2013 earnings guidance statement. On that basis, the FY14 guidance representation, which the primary judge (correctly) concluded the August 2013 earnings guidance statement conveyed, would be misleading and deceptive in contravention of the statutory provisions on which the appellant relied. This is because it was WOR's case that the FY14 budget process and FY14 budget provided it with reasonable grounds to make the August 2013 earnings guidance statement. WOR did not rely on any other matter to constitute reasonable grounds. The same conclusions would apply to the subsequent maintenance and reconfirmation of the August 2013 earnings guidance statement, as well as the risk management representation case which the primary judge rejected at J [657].
96 However, the identified circumstances cannot be considered in isolation. Rather they have to be considered along with the whole of the evidence. We do not consider that the questions in annexure A to the appellant's notice of appeal are able to be answered without a reconsideration of the whole of the evidence. This appeal is not an appropriate vehicle for that reconsideration to take place. It follows that while the appeal must be allowed and orders 2 and 3 set aside (as well as the answers to questions about misleading and deceptive conduct in the judgment below to the extent they are inconsistent with the conclusions in the appeal), the matter needs to be remitted to a single judge for determination.
97 As noted, many of WOR's submissions to the contrary in the appeal cannot be accepted or are immaterial. To the extent those submissions have not been discussed above, we express the following conclusions.
98 Contrary to WOR's submissions, this is not a case in which the Court on appeal is asked to interfere with the primary judge's findings of fact, in circumstances where those findings have not been demonstrated to be wrong by "incontrovertible fact or uncontested testimony" nor "glaringly improbable" or "contrary to compelling inferences": Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 at 121-124.
99 The appellant does not seek to overturn the primary judge's findings of fact which attract a Fox v Percy standard of review. Indeed, with one exception, he accepts and relies upon the primary judge's factual findings. Rather, the appellant's case challenges the primary judge's approach to the inferences which should have been drawn from the underlying facts. The principles in Fox v Percy are not engaged. In our view the principle in Warren v Coombs [1979] HCA 9; (1979) 142 CLR 531 at 551-552 applies, to the effect that the appeal court is in a good a position as the primary judge to decide on the proper inferences to be drawn from facts which are undisputed or which, having been disputed, are as found by the primary judge.
100 In relation to the one exception, the appellant correctly identified that the higher Fox v Percy standard applied to ground 2(d) of the appeal, in which the appellant challenged one finding of the primary judge at J [173(9)] and [179] based on Mr Wood's evidence - that the 27 May 2013 draft budget had the revenue projections "pretty right" and "[t]he revenue picture" hardly changed from the start to the end of the budget process. That finding is demonstrated to be wrong because the undisputed evidence was that the aggregated revenue increased by $851 million between the 27 May 2013 draft budget and the FY14 budget ultimately adopted and, at most, only $644 million was due to changes in foreign exchange assumptions.
101 Contrary to WOR's argument, the appellant is not attempting to conduct the appeal by "rehearsing and rehashing the evidence at trial to…re-litigate the case below". As noted, the grounds of appeal focus on a miscarriage in the process of reasoning of the primary judge in respect of the drawing of inferences from the facts as found (other than in ground 2(d) referred to above). That is not an impermissible approach to an appeal. We do consider, however, that the appellant is asking the appellate court to do too much insofar as he sought amended answers to the joint list of issues because, as explained, it is necessary for the matter to be remitted to a single judge for that overall evaluative exercise to be undertaken. What is apparent, however, is that the appellant has established error by the primary judge which requires the setting aside of her Honour's order dismissing the originating application.
102 We do not accept WOR's contention that the appellant's misleading or deceptive conduct case in the appeal is vastly different from that which it ran before the primary judge. In aid of their arguments as to the matters that were or were not in issue at the hearing the parties filed submissions with detailed references to the primary judgment, the pleadings, the evidence and the parties' opening and closing submissions. We have considered those references but it is unnecessary to reiterate the minutiae of the parties' submissions. It suffices to note that we do not accept the respondents' contention that it was not in issue before the primary judge that:
(1) because the FY14 budget was not a P50 budget the FY14 guidance representation lacked reasonable grounds. The primary judge noted that one of the eight core factual matters which the appellant relied upon in support of his contention that the FY14 budget did not in fact provide reasonable grounds for the FY14 earnings guidance (and that the Board and other officers of WOR ought reasonably to have recognised as much) was that "[t]he FY14 budget was not a true P50 budget…but rather included no adequate allowance for the risks associated with continued slow markets and operational underperformance": J [52(7)]);
(2) the lack of reasonable grounds analysis put forward by the appellant below included the fact that in four of the previous five years WOR had fallen materially short of its budget forecast. The primary judge identified that another of the eight core factual matters upon which the appellant relied was that "WOR had a consistent record of underperforming against its internal budget since FY09, with the sole exception of FY12, and had not materially changed its FY14 budget-setting process from previous years": J [52(2)];
(3) WOR's budget process lacked a risk-adjusted review for the purpose of making statements to the market. Again, the primary judge recognised that one of the appellant's eight core factual propositions was that "WOR's budget process lacked a risk-adjusted review of its internal budget, particularly in relation to unsecured work, for the purpose of ensuring that any consequential guidance to the market properly reflected the risk associated with its stretch budget targets": J [52(8)]; and
(4) it was not reasonable for WOR's management to insist on overhead reductions at the same time as retaining the blue sky forecasts that had been embedded in the 27 May 2013 draft budget. The primary judge identified that the appellant argued below that the locations' May 2013 budgets contained optimistic targets for blue sky, and thereafter, senior management "could have the blue sky, or have the overhead reductions, but it was not possible to expect both." The appellant submitted that "WOR needed to incur costs in order to earn blue sky revenue and accordingly the inclusion of blue sky revenue in the budget necessarily entailed an inclusion of overheads": J [403]-[404].
103 WOR did not file a notice of the contention to the effect that the primary judge erred in identifying the appellant's case in these terms.
104 The appellant's case in rebuttal of WOR's case was just as much a part of the appellant's case as the case the appellant made in the 4FASOC. In any event, many of the issues on which the appellant relied to rebut WOR's case formed part of the 4FASOC. The appellant never suggested that the ultimate issue was whether there were reasonable grounds for the FY14 budget. The issue was whether, as WOR contended, the FY14 budget provided reasonable grounds for the August 2013 earnings guidance statement, and thus for the FY14 guidance representation. To that end, the reasonableness of the budget process and outcome, on which WOR relied, were in issue. As the primary judge found, WOR based its earnings guidance on WOR's internal FY14 budget: J [8], [111]. If the FY14 budget process and budget did not provide reasonable grounds for the making of the August 2013 earnings guidance statement then the FY14 guidance representation is taken to be misleading and deceptive.
105 As discussed, the fact that the FY14 guidance representation reflected an opinion formed by WOR's board is immaterial. WOR made the FY14 guidance representation. WOR either had reasonable grounds to make that representation as to a future matter or it did not. WOR does not challenge the primary judge's conclusions that WOR made the FY14 guidance representation by making the August 2013 earnings guidance statement and that the FY14 guidance representation is a representation as to a future matter, that WOR expected to achieve NPAT in excess of $322 million in FY14.
106 Accordingly, the reasonableness of the formation of the opinion of WOR's board, based on the information before or known to the board, is not the beginning and the end of the matter. It is, in fact, of marginal relevance. It was not necessary for the appellant to challenge the primary judge's conclusions about the state of mind of the board. The appellant was correct to recognise before the primary judge that the board's state of mind was potentially relevant as recorded at J [640]-[642]. This relevance was not because the board made the FY14 guidance representation. It was because the reasonable grounds relied upon had to be known to the decision-makers and those involved in the decision-making process at the time of the decision which the appellant said included the board and also senior executives of WOR such as Mr Holt. If, for example, it should have been inferred that Mr Holt knew or ought to have known that the FY14 budget included an unreasonable forecast of NPAT then it is not apparent why that knowledge or putative knowledge would not be attributable to WOR given Mr Holt's position, responsibilities and involvement in the process by which the FY14 budget was prepared and submitted to the board. That being so (if it is so), it should follow that WOR did not have reasonable grounds for making the 2014 guidance representation as the FY14 budget and budget process were the only matters on which WOR relied to establish such reasonable grounds.
107 If it were otherwise the position would be untenable. A person in Mr Holt's position, as the CFO, or Mr Wood's position as the CEO, could withhold from the board the fact that its budget NPAT forecast which was to be used to give earnings guidance to the market was unreasonably and unrealistically high. Based on WOR's approach, WOR could then succeed in defending itself from a claim of misleading and deceptive conduct merely because the board itself had no reason to know that the budget NPAT forecast was unreasonably and unrealistically high. That is not the law.
108 As noted, WOR did not file a notice of contention. Accordingly, it is not open to WOR to now contend that the primary judge dealt with issues that were not properly raised as an issue in the case. In any event, there is no basis for such a conclusion to be drawn. The primary judge made the findings relevant to the appellant's case, WOR's defence of it, and the appellant's rebuttal of WOR's defence.
109 As discussed, the statement in the appellant's written opening submissions that this is "not a case about generally defective budget processes" needs to be understood in context. The appellant's pleaded case focused on the management adjustments in the context of the nature of WOR's budget process as disclosed in the Holt memorandum and other documents, but was pleaded more expansively than this in respect of the reasonableness of the FY14 budget overall, as explained above. The appellant's case in rebuttal of WOR's defence also included that the budget process and FY14 budget were unreasonable and unreliable for all of the reasons given. In other words, it cannot be fairly or accurately said that the appellant's case below "embraced the budget process as one that was reasonable and reliable, save for any and all adjustments that were made after the 27 May 2013 Draft Budget". That contention is inconsistent with the pleadings and the case as run before the primary judge. What is correct is that the appellant accepted that WOR had reasonable grounds for the NPAT forecast of $252 million in the 27 May 2013 draft budget (and thus a forecast NPAT of $284 million by August 2013 given the movement in the FX rates). This was not inconsistent with the balance of the appellant's case, although the primary judge incorrectly appears to have accepted WOR's submission to that effect to some extent at J [377].
110 Contrary to WOR's contentions, the appellant did not submit that WOR needed to adduce evidence to refute any and every assertion made by him to support his reasonable grounds thesis. WOR is mistaking the effect of the appellant's submissions about Blatch v Archer and Jones v Dunkel discussed above. It is true that, to avoid the deeming provision of misleading conduct in the legislation, WOR needed to adduce some evidence of reasonable grounds for the making of the FY14 guidance representation, consistent with the observations of Mortimer J in Australian Competition and Consumer Commission v Woolworths Limited [2019] FCA 1039 at [113]. WOR relied on its budget process and FY14 budget to constitute such reasonable grounds, and the appellant was entitled to rebut that contention.
111 The appellant' case is not one of "generalised criticism of the FY14 budget (let alone individual line items within the FY14 Budget) being 'optimistic' or 'challenging to achieve'". The FY14 budget and the process by which it was prepared was WOR's answer to the appellant's case that WOR lacked reasonable grounds for making the FY14 guidance representation. The appellant directly challenged the reasonableness of the FY14 budget and the process by which it was prepared. The appellant contended that the FY14 budget was unrealistic and unreasonable, not merely "optimistic" or "challenging to achieve". He argued that the FY14 budget did not provide reasonable grounds for the making of the FY14 guidance representation and that it should be inferred that WOR knew or ought to have known this to be so. As a result, the appellant's case was (and is) not "pitched at a level of abstraction which could not give rise a conclusion of contravention". If the FY14 budget is itself unreasonable in terms of its forecast NPAT then WOR did not have reasonable grounds for making the FY14 guidance representation.
112 The appellant did not have to quantify the errors that were made in order to show that reasonable NPAT for FY14 did not exceed $322 million. First, the appellant did not have to identify any specific line item error in the budget. Second, it is not to the point that the board gave itself $30 million "headroom" between the forecast NPAT in the FY14 budget of $352 million and the FY14 guidance representation referring to NPAT in excess of $322 million. Either the FY14 budget provided reasonable grounds for the FY14 guidance representation or it did not. Third, the appellant did not need to impugn the reasonableness of one or more inputs to an extent which implied that any objectively reasonable NPAT forecast was less than $322 million. To the extent the primary judge said otherwise at J [648] (in referring to the appellant not showing that "that particular integers or portions of the FY14 budget were overstated or understated so as to be unreasonable or unjustifiable"), the primary judge erred in the second way the appellant identified at the outset of its submissions in the appeal.
113 In answer to WOR's propositions, first, it would suffice if the appellant established that the overall forecast NPAT of $352 million was unreasonable. This is because WOR only adduced evidence of the FY14 budget and the process by which it was prepared, including the assertion that it was a P50 budget, as evidence of reasonable grounds for the making of the FY14 guidance representation. If the budget process was inherently unsuitable for use as the basis for earnings guidance to the market because it would not produce a P50 budget and thus, by definition, was not at least equally likely to be correct as to the forecast NPAT as not, or if the forecast NPAT in the FY14 budget was itself unreasonable, it must follow that WOR did not have reasonable grounds for making the FY14 guidance representation.
114 Second, the $30 million "headroom" argument is misconceived. The forecast NPAT of $352 million in the FY14 budget was either reasonable or it was unreasonable. If it was reasonable, there were reasonable grounds for the making of the FY14 guidance representation. If it was not reasonable, there were not reasonable grounds for the making of the FY14 guidance representation. The "headroom" argument appears to assume that even if the NPAT in the FY14 budget had been $322 million WOR would have made the same FY14 guidance representation. There is no suggestion in the evidence to support that inference. In any event, the "headroom" argument is overstated. The FY14 guidance representation was not that WOR expected to achieve an NPAT of $322 million in FY14. It was that WOR expected to achieve NPAT in excess of $322 million in FY14. As the appellant submitted, there are materiality considerations in play. The FY14 guidance representation did not convey simply that WOR expected to achieve NPAT of $1.00 more than $322 million. By the FY14 guidance representation it conveyed a representation (and reasonable grounds for it) of achieving an NPAT materially in excess of $322 million. As the appellant submitted, immaterial growth in NPAT would not be the subject of the announcement that FY14 NPAT was expected to exceed FY13 NPAT. If a 5% materiality threshold is assumed that would be about $338 million; if a 10% threshold is assumed that would be about $354 million. Consistently with the evidence as to WOR's success in aligning the analysts' NPAT projections with WOR's own expectations, it was open to conclude that WOR represented that NPAT would be around $352 million. Even so, the fact remains that the only ground for making the FY14 guidance representation was the FY14 budget and the process by which it was prepared and the NPAT forecast in that budget as a result of that process of $352.1 million either was or was not reasonable.
115 Third, the appellant did not have to impugn any particular budget input but, rather, could focus on the reasonableness or otherwise of the forecast NPAT. Further, the appellant did not have to succeed in demonstrating any input involved error sufficient to reduce the forecast NPAT in the FY14 budget to below $322 million. This is for the reasons already given above and the fact that the FY14 guidance representation was for NPAT in excess of $322 million.
116 The appellant does not need to succeed in challenging the primary judge's findings at J [646]-[647], [650] that the board had reasonable grounds for making (and maintaining) the FY14 guidance representation. To succeed in the appeal the appellant needs to establish material error by the primary judge. This the appellant has done in respect of the appellant's misleading and deceptive conduct case. The errors are material because it cannot be safely concluded that the primary judge would have reached the same conclusions as to whether WOR, the representor, had reasonable grounds for making the FY14 guidance representation. The ultimate issue, whether WOR had reasonable grounds for making the FY14 guidance representation, must be remitted for consideration, in the context of the evidence as a whole, by a single judge.
117 The appellant's approach does not involve a misreading of Sykes v Reserve Bank of Australia [1998] FCA 1405; (1988) 88 FCR 511 at 513 to the effect that if there was a representation as to a future matter, the representor must show some facts or circumstances, existing at the time of the representation, on which the representor in fact relied, which are objectively reasonable, and which support the representation made. Given that the representor is WOR, not the board, it is WOR that had to rely on some facts or circumstances existing at the time of the representation which was objectively reasonable and which support the representation made. Matters not known to or before the board cannot be determinative or even particularly relevant if they were known to a person such as Mr Holt, the CFO. This is because, given his role and responsibilities in the process of preparing and putting the budget to the board, knowledge of Mr Holt is attributable to WOR under the ordinary principles of agency. More complex questions relating to the attribution of knowledge to WOR other than through the positon of Mr Holt (such as through Mr Bradie, Mr Allen and Mr Daly) might also be relevant depending on the nature of the information and the employee's role and responsibilities: The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 (2008) 39 WAR 1 at [6142]-[6163], Commonwealth Bank of Australia v Kojic [2016] FCAFC 186; (2016) 341 ALR 572.
118 As a result, any disconnect between what was actually known by the board when the FY14 guidance representation was made and what the board later knew in November and December 2013 is immaterial if a person such as Mr Holt knew the relevant matters when the FY14 guidance representation was made. Accordingly, it may be accepted that a relevant issue is whether the representor was aware of matters that "falsified the representation of opinion", as identified in City of Botany Bay Council v Jazabas Pty Limited [2001] NSWCA 94; (2001) ATPR 46-210 at [83]-[85]. However, this question is to be answered by reference to the knowledge properly attributable to WOR according to orthodox principles, not merely knowledge of the board of WOR.
119 Care also needs to be taken not to confuse the various steps in the required reasoning process. The first issue would be the knowledge of the employee, such as Mr Holt. The knowledge of Mr Holt must include (at the least) what he actually knew and is to be taken to have known in the circumstances. Determining the employee's knowledge is a matter of inference in the ordinary course including, if applicable, the principles in Blatch v Archer and Jones v Dunkel. The second issue would be the attribution of the knowledge of an employee or employees to WOR. This is to be resolved on orthodox principles of attribution of knowledge to a corporation. The evaluation of whether or not WOR had reasonable grounds for the FY14 guidance representation is then a third step. The inquiry in the third step is directed to the existence or not of reasonable grounds for WOR making the FY14 guidance representation. In this third step the issues include identifying what WOR in fact relied on to make the FY14 representation and deciding if those facts in fact relied on are objectively reasonable. It is in that third step that the warning in Jazabas at [85] applies that the relevant issue is what the representor in fact took into account, not what the representor ought to have taken into account.
120 To explain further, in the circumstances of the present case WOR's defence was that the board made the representation and the board took into account what it knew about the FY14 budget and budget process. On that basis, WOR said the board did not know the matters on which the appellant relied to claim that the FY14 budget was not objectively reasonable and the FY14 budget process confirmed that to be so. As the relevant issue is what WOR, as the representor, relied on, the resolution of that issue must be different involving each of the steps identified for each relevant employee including, at the least, Mr Holt. The question of the objective reasonableness of the FY14 budget and budget process as supporting the representation made must be evaluated by reference to all of the knowledge properly attributable to WOR by reason of the knowledge of its employees as WOR's agents. That does not involve impermissibly attributing to WOR what it "ought to have known"; it involves attributing to WOR what, in law, it actually knew and, by operation of orthodox principles attributing knowledge of an employee to a corporation, is to be taken as having known. Doing so does not offend the principle expressed in Jazabas at [85] that the inquiry about reasonable grounds does not involve consideration of what the representor ought to have known but did not in fact know.
121 For these reasons, the fact that the appellant accepted that the unreasonable NPAT of $352.1 million was based on numbers "baked into the numbers that went to the board" was not the end of the inquiry. It was not even the beginning of the required inquiry. Similarly, the fact that the appellant did not plead that employees did not provide certain information to the board or the board did not make certain inquiries, as recorded at J [271], is not the end of the inquiry. The observation in J [271] that matters is as follows:
There was no direct evidence that, in late June 2013, any individual manager regarded any aspect of the draft budget as "too stretched" or unreasonable, or had any "foundational concerns" with the process by which the draft budget had been developed. Accordingly, it is a matter of speculation whether an opportunity of the kind posited by Mr Crowley would have uncovered any claim that the draft budget lacked a reasonable basis.
122 This observation wrongly conflates two separate issues - what the board ought to have known (which is not an issue at all on the appellant's case) and what employees knew or must be inferred to have known (which is a relevant issue). That latter issue, what employees knew or must be inferred to have known, was relevant because it formed the basis for the evaluation of the proper attribution of knowledge to WOR as the representor. In that context, the primary judge's observation about there being no "direct evidence" about the state of mind of individual managers does not involve the required focus. By "direct evidence" the primary judge presumably means oral witness testimony. In this limited sense, the primary judge was correct that there was no direct evidence of the kind identified.
123 But evidence is not confined to oral witness testimony. It includes documents. And inferences can be drawn from documents and processes as a whole. And when drawing inferences, regard is to be had to the fact that WOR did not call the authors of documents such as Mr Holt, Mr Daly and Mr Allen or Mr Bradie, to explain what it is that they meant. The inference that, at the least, Mr Allen considered in June 2013 that the draft budget was "too stretched" and unreasonable, and that he had "foundational concerns" with the process by which the draft budget had been developed was not only available on the material, it was an obvious inference to draw if the 11 June 2013 email is considered in isolation. The relevance of that inference being drawn (if it is proper to draw it once all of the evidence is considered) to the inferences that should or could have been drawn about Mr Holt's state of mind would (also) depend on a detailed examination of all of the evidence which is beyond the scope of this appeal. It is sufficient to say that J [271] exposes the kind of errors in reasoning the appellant identified as vitiating her Honour's conclusions.
124 The submissions the appellant makes about Blatch v Archer and Jones v Dunkel are not "hollow" once it is recognised that the relevant representor is WOR and not the board. The primary judge's observation at J [277] that it was not remarkable that WOR did not call evidence from the board may be accepted insofar as it goes. It is the fact that WOR did not call evidence from Mr Holt, Mr Bradie, Mr Allen and Mr Daly, given their important roles in the preparation of the FY14 budget and the documentary evidence from which inferences about their states of mind can be drawn, which is relevant. The primary judge's observation at J [72] that she accepted "at a general level" that WOR's failure to call these witnesses may provide support for adverse inferences but that "it is necessary to address the issue by reference to particular inferences and the available evidence for and against any proposed inference" exposes the second and third classes of error identified by the appellant - the unwarranted search for a level of detail in the evidence which would permit the primary judge to identify a calculation of NPAT for FY14 which would have been reasonably based and the failure to appreciate the totality of the evidence in context.
125 Contrary to WOR's submissions, the fact that Mr Wood (and, it must be inferred other key employees involved in the budget setting process) knew that WOR's markets were not growing or were deteriorating when the FY14 budget was prepared was (and is) important. While the primary judge, in accordance with the second error the appellant identified, said at J [421] that this "question was not analysed in sufficient detail to permit a conclusion that the FY14 budget did not provide reasonable grounds for the August 2013 earnings guidance statement", the further analysis required is not apparent. WOR's markets were not growing or were deteriorating compared to FY13. Amongst a raft of other relevant facts (WOR having to twice downgrade its FY13 earnings guidance, WOR's historical material budget underperformance, the 27 May 2013 draft budget of $252 million NPAT compiled from budgets provided by the locations, the maintenance of 19% blue sky gross margin in a flat or falling market, amongst others), the FY14 budget and August 2013 earnings guidance statement involved a material improvement in NPAT in FY14 compared to FY13. That improvement was not achieved solely through cutting costs. It included increased revenue.
126 If the primary judge was accepting Mr Wood's evidence that revenue was "flat" in the budget in early June at J [195], then it is clear that this concerns the 27 May 2013 draft budget compiled from budgets provided by each location, not the FY14 budget as adopted. While the primary judge accepted at J [218] that, in response to the 7 May 2013 draft budget, it was sensible for senior management to look for costs savings, the evidence shows that ExCo then decided to challenge that draft budget on both revenue and costs: J [219]. This was despite it being common knowledge that WOR's markets were flat or falling: for example, J [220]. Mr Bradie, as known by Mr Wood, then worked hard to push the locations for both increased BEBIT and to make additional cuts to overheads: J [221]. It was in this context of Mr Bradie pushing the locations hard for increased EBIT and decreased costs that Mr Allen sent his email of 11 June 2013 which bears repetition:
Our guess is that Stu Stu [i.e. Mr Bradie] got a rocket from Andrew last week re the budget and has been told to change everything - making somewhat of a mockery of the process. If there was going to be a top down target why didn't we start with that in the first place??
I am also concerned that we are putting the company's reputation at risk. If we go out with another unrealistic budget, and need to do another profit downgrade next year, it is not going to look good at all in the market. Something to discuss with Simon.
127 WOR did achieve its objective of both increased revenue and decreased costs in the FY14 budget. According to the FY14 budget NPAT increased by 9.3% from FY13 to FY14. Operational EBIT increased by 13.8% from FY13 to FY14. Contrary to WOR's submissions, Mr Wood did not suggest that the 9% NPAT increase meant revenue was flat. He said only that revenue was flat in the locations' budget in early June 2013. By the time the FY14 budget was adopted revenues were estimated to increase to give an operational EBIT of 13.8% greater in FY14 compared to FY13. In other words, the efforts of Mr Bradie, in particular, who reported directly to Mr Holt, ensured that in flat or falling markets for WOR's services the FY14 budget reflected a 13.8% increase in earnings over the buoyant FY13 market. Mr Wood (and by inference Mr Holt) must have known exactly what the process involving Mr Bradie's hard work with the locations involved.
128 The aspect of Mr Wood's evidence about which the appellant raised no serious questions was simply that if revenue is flat a search for costs to cut is not unreasonable: J [218]. The relevant fact, however, is that the WOR budget process did not accept that revenues should remain flat. WOR's senior management pushed for and obtained a budget for FY14 reflecting materially increased earnings. That fact was fundamental to the appellant's challenge to the objective reasonableness of the FY14 budget. WOR's submission that "[r]ather than tending to prove that the FY14 Budget was unreasonable, this approach demonstrates a recognition of the market conditions" overlooks the fact that WOR's senior management did not merely press the locations to cut costs. Notwithstanding that , as the primary judge found, WOR's major markets were "either not growing or were deteriorating" and that WOR was aware that in FY13 it had experienced challenging conditions in a number of its key markets and there would be continued uncertainty in the markets for its services in FY14 (J [418]-[421]), management pressed the locations to increase earnings and cut costs, which they did to produce the FY14 budget with an increased NPAT of $352.1 million compared to the actual FY13 NPAT of $322 million.
129 The appellant's point about the blue sky revenues in the 27 May draft budget prepared by the locations being already "aggressive" seems obvious but the primary judge said at J [133] that this submission was "not made out by the available evidence". The basis for that conclusion is not apparent to us. The available undisputed evidence included that: (a) FY13 was a buoyant market, (b) FY14 was a flat or falling market, (c) blue sky revenue is a function of market buoyancy, and (d) the blue sky gross margin percentage allowed in FY14 was the same as in FY13, 19%. Again, the primary judge appears to have found all of the relevant facts but not drawn the inevitable inference those facts would require to be drawn.
130 The fact that the appellant accepted the 27 May 2013 draft budget compiled from budgets provided by the locations was reasonable was not inconsistent with this submission. The appellant could both accept that the overall 27 May 2013 draft budget provided a reasonable estimate of NPAT of $252 million and contend that an aspect of that draft budget, the blue sky revenue, was aggressive. Moreover, the appellant could also contend that maintaining that overall percentage of blue sky revenue, which WOR did in the FY14 budget, when overall revenue was increased and costs were cut, was objectively unreasonable in the circumstances. The pleaded case in relation to forecast blue sky revenue, contrary to WOR's submissions, was not confined to two regions. Paragraph 22B particular 11 of the 4FASOC alleged that the locations' budget submissions and the management adjustments reflected unrealistic blue sky forecasts. Similar pleadings about blue sky revenue are made in para 22C(a) and (d), which alleged that 19% of WOR's expected earnings came from the realisation of blue sky revenue and it projected a significantly greater proportion of EBIT from blue sky and "prospect" revenue in the second half of FY14 as compared to the first half. There was sufficient evidence for the primary judge to make findings about the objective reasonableness of the blue sky forecasts in the FY14 budget without descending into a region-by-region analysis. The fact that in November 2013 Mr Daly reviewed the FY14 budget and stripped $110 million (or $97 million - it is unclear which amount is correct) of blue sky revenue from it was also relevant evidence. It is possible to use such after the event evidence without engaging in impermissible hindsight.
131 WOR's reliance on what it described as Mr Wood's uncontroverted evidence that he was "comfortable that Blue Sky was budgeted at 19% as this was within the ordinary bounds of Blue Sky that had been achieved in the past" is misplaced. There is no indication that the primary judge accepted this evidence. If it was not challenged, the primary judge was not bound to accept it. It had to be weighed along with the other evidence about the relationship between blue sky and market buoyancy and the flat or falling FY14 markets. The appellant's case did not misunderstand the fact that WOR booked blue sky revenue at 100% value with no discount as to risk. That fact was also relevant to the objective reasonableness of the FY14 budget as it must have been known to the employees involved in the budget setting process. It did not need to be put to Mr Ashton that this was inappropriate. Mr Ashton was RMD of the MENAI region and not responsible for such high level considerations as the approach to blue sky revenue in the overall budget.
132 As discussed, characterising the Holt memorandum as nothing more than a set of hindsight reflections, given the circumstances and time at which it was created, its contents and the fact that Mr Holt was not called to give evidence by WOR, is unsustainable. Further, the primary judge's approach to the Holt memorandum is the subject of the appeal as disclosed in grounds 1(h) (as to the interview notes), 2(e)(ii)(A), and (implicitly) 3. Those grounds raise for consideration the entirety of the primary judge's approach to the Holt memorandum.
133 WOR is also incorrect in submitting that "there was nothing in the Holt Memorandum that could impugn the process by which guidance was arrived at, and it did not allow any inference that guidance was unreasonable in a given year" (emphasis in original). As noted, the August 2013 earnings guidance statement was founded on the FY14 budget. If the FY14 budget did not provide WOR with reasonable grounds for the August 2013 earnings guidance statement then the FY14 guidance representation conveyed by the August 2013 earnings guidance statement is taken to be misleading. Accordingly, the Holt memorandum and the inferences properly to be drawn from it could establish that the FY14 guidance representation was misleading. The Holt memorandum does not purport to hold WOR to a standard of perfection which is inapplicable as stated in Maloney v Commissioner for Railways (NSW) (1978) 18 ALR 147 at 148. Nor are the observations in Kelaher at [695] that errors are always obvious with hindsight applicable to either the circumstances in which the Holt memorandum was created or its content.
134 The fact found by the primary judge at J [265], that Mr Holt presented the draft FY14 budget to the board, is important but not for the reason WOR proposes. WOR submitted this:
In effect, [Mr Holt] had - along with Mr Wood - ultimate managerial ownership of the FY14 Budget. Further, it was Mr Holt who sent Mr Wood and others a draft of the FY14 Guidance suggesting an increase on FY13 earnings (J, [298]) and it was Mr Holt who tabled further drafts at subsequent Audit and Risk Committee and Board meetings, as the FY14 Guidance was developed by the Board (J, [299]-[301]). He demonstrably supported the reasonableness of the material placed before the Board as a foundation for approving the Budget and formulating the FY14 Guidance.
135 Mr Holt's involvement in the process means his state of knowledge at the time the August 2013 earnings guidance statement was made is critical. But the fact that he was instrumental in the process of adopting the FY14 budget does not mean that it should be inferred that he "demonstrably supported the reasonableness of the material placed before the Board as a foundation for approving the Budget and formulating the FY14 Guidance". That is an inference that WOR asks the Court to draw. It is not an inference the primary judge drew. It is an inference favourable to WOR in circumstances where it did not call Mr Holt to give evidence. Whether or not such an inference should be drawn depends upon the whole of the relevant evidence including the circumstance that WOR did not call Mr Holt despite Mr Holt's role being an important part of the appellant's case.
136 WOR's focus on the need for a counter-factual budget NPAT reflects the second error identified by the appellant. The appellant's fundamental case was that the FY14 NPAT forecast of $352.1 million was unreasonable and thus did not provide reasonable grounds for the FY14 guidance representation. As discussed, the fact that the FY14 guidance representation was that it expected to achieve NPAT exceeding $322 million in FY14 is not really to the point. The point is that WOR relied on the FY14 budget with its forecast NPAT of $352.1 million as reasonable grounds for its FY14 guidance representation. WOR cannot defend the claim by arguing that while a forecast NPAT of $352.1 million might not have been reasonable, a forecast NPAT in excess of $322 million was reasonable. This is because the ground on which WOR in fact relied to make the FY14 guidance representation was the FY14 budget with its forecast NPAT of $352.1 million. For this reason, WOR's various submissions that, after August 2013, it may have been below budget but above guidance are misconceived. The issue at August 2013 is the existence of reasonable grounds. The issue after August 2013 is the continued existence of reasonable grounds. The fact that WOR was tracking materially below the FY14 budget later in 2013 is highly relevant to the continued existence of reasonable grounds or otherwise.
137 The fact that the appellant identified various potential counter-factual reasonable forecasts of NPAT as at August 2013 (from $252 to $300 million), does not mean that the appellant was wrong to argue that it did not need to do so to establish its causes of action. For the reasons given WOR is simply incorrect in its submission that:
If the Court could not and cannot make a finding that the counterfactual budget number was less than the FY14 Guidance of $322m, then it could not and cannot make a finding that the FY14 Guidance Representation was misleading or deceptive - because at NPAT of $333m, there are still reasonable grounds.
138 First, as noted, the reasonable ground that WOR relied on was the FY14 budget forecast NPAT of $352.1 million. Second, a forecast NPAT of $333 million is materially below a forecast NPAT of $352.1 million. Third, if the FY14 budget forecast NPAT of $352.1 million was not objectively reasonable then WOR did not have reasonable grounds to make the FY14 guidance representation. If the FY14 budget forecast NPAT of $352.1 million was objectively reasonable when first made, but at some later point it did not continue to be objectively reasonable, then WOR did not have reasonable grounds to reiterate the FY14 guidance representation. This is so whether or not the appellant proved a counter-factual reasonable forecast NPAT below, relevantly, $352.1 million. To be otherwise, WOR would have had to adduce evidence that after August 2013 it had some other reasonable ground, apart from the FY14 budget, to support the continuation of the FY14 guidance representation. On the material before us in the appeal it is not apparent that WOR did so. What may be accepted, however, is that insofar as the resolution of any issue requires a counter-factual budget number or range (which may well be confined to the quantification of damages only, should liability be established) the number or range must be used consistently.
139 The risk management representation case is raised in the appellant's notice of appeal in grounds 7(c)(iii), 12(c), and in various of the issues contained in the list of issues for determination. WOR's contrary submission is incorrect.
140 The primary judge found that by its 2013 annual report WOR represented to the market that it "it had effective management and internal control systems to identify, assess and manage the group's material financial and non-financial business risks and report those risks to the board": J [657]. Because the primary judge concluded that the evidence did not demonstrate that WOR did not have effective management and internal control systems of the kind it claimed to have had, she rejected the appellant's case that the risk management representation was misleading and deceptive. In our view her Honour's conclusion in this regard suffers from the same erroneous reasoning. The reasons WOR gave for the November 2013 revised earnings guidance, and the appellant's lack of challenge to those reasons, do not mean that the appellant was precluded from contending that the evidence shows that the risk management representation was misleading and deceptive when it was made. The Court is not bound to accept the statements in the November 2013 revised earnings guidance as complete and accurate. One obvious financial risk that WOR faced at the time it set the FY14 budget is that it would fall materially short of its FY14 budget forecast of $352.1 million NPAT. On the evidence WOR either did or did not have effective management and internal control systems to identify, assess and manage the group's material financial risks. The same erroneous reasoning and conclusions about the objective reasonableness of the FY14 budget forecast of $352.1 million NPAT are relevant to an evaluation of whether the risk management representation was also misleading and deceptive.
141 It follows from the above that the errors in reasoning affecting the primary judge's approach to the August 2013 earnings guidance statement also affected her Honour's approach to the subsequent confirmations of that statement. The relevant facts also changed between August and November 2013. The question of the inferences to be drawn from those facts had to be resolved in a manner unaffected by the four identified errors discussed above.
142 One other observation is necessary. In the hearing of the appeal WOR contended that it was important that various matters were not put to Mr Wood, Mr Ashton and Mr Lucey. As submitted for the appellant, the rule in Browne v Dunn (1893) 6 R 67 is engaged where the witness has had no notice of the matter sought to be relied upon in contradiction of the evidence. In the present case, given the pleadings and particulars, the witnesses called by WOR must have been on notice of the essence of the appellant's case before they prepared their written evidence. In those circumstances, the appellant is not precluded from making submissions to the contrary of the witnesses' evidence merely because propositions were not put to the witness. The fact that propositions were not put, however, may be relevant to the proper process by which inferences from facts are drawn or not drawn.
143 For these reasons the appeal must be allowed insofar as it concerns the misleading and deceptive conduct case.