James Hardie Industries NV v Australian Securities and Investments Commission

Court of Appeal (NSW)|2009-02-13|Before: Giles JA, McColl JA, Macfarlan JA, Gzell J, Coll JA, MacFarlan JA

CITATION: James Hardie Industries NV v Australian Securities and Investments Commission [2009] NSWCA 18

JUDGMENT OF: Giles JA; McColl JA; Macfarlan JA

DECISION: (1) Grant leave to appeal and direct that the notice of appeal be filed within 7 days; (2) Appeal allowed; (3) Set aside the rulings: (a) that the analysts' reports tendered by the applicant not be admitted; and (b) that those of the analysts' reports going to the issue of the sale of the Gypsum business be admitted limited to use in relation to that issue; (4) Set aside the order for entry of the digital content of the analysts' reports in (b) in the court record database; (5) Respondent to pay the applicant/appellant's costs of the application for leave to appeal and appeal; (6) Remit the discretionary refusal to admit the analysts' reports to the trial judge for reconsideration.

CATCHWORDS: EVIDENCE - opinion evidence - expert's assumptions included a number of market analysts' reports - assumptions challenged by tender of other analysts' reports - not necessary first to put the other analysts' reports to expert - discretionary refusal to admit the other analysts' reports flawed by failure to assess probative value.

Australian Securities and Investments Commission v Rich [2005] NSWCA 152; (2005) 54 ACSR 326; CASES CITED: Australian Securities and Investments Commission v Rich [2006] NSWSC 826; (2006) 58 ACSR 414; Browne v Dunn (1893) 6 R 67; re HIH Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler [2001] NSWSC 1168; (2001) ACSR 214;

PARTIES: James Hardie Industries NV - Applicant Australian Securities and Investments Commission - Respondent

COUNSEL: A S Bell SC & K C Morgan - Applicant A J L Bannon SC & D Hogan-Doran - Respondent

SOLICITORS: Mallesons Stephen Jaques - Applicant Clayton Utz - Respondent

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT DATE OF DECISION: 13 February 2009

LOWER COURT MEDIUM NEUTRAL CITATION: Australian Securities and Investments Commission v Macdonald (No 10) NSWSC 53

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40032/09 ED 1490/07

GILES JA McCOLL JA MACFARLAN JA

Wednesday 18 February 2009 JAMES HARDIE INDUSTRIES NV v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Judgment 1 THE COURT: The applicant is the twelfth defendant in civil penalty proceedings brought by the respondent. The hearing began on 29 September 2008. The respondent closed its case on 4 November 2008. The defendants presented their cases sequentially until, on 11 February 2009, it came to the applicant's turn. The applicant did not call any witnesses, but tendered a number of documents. They included 87 market analysts' reports in relation to James Hardie Industries Ltd ("Industries"), which until a time in 2001 was the ultimate holding company of the applicant and on the respondent's case was thereafter its immediate subsidiary. 2 The respondent objected to the tender of the analysts' reports. On 12 February 2009 the trial judge ruled that some of the analysts' reports should not be admitted at all and that others of them should be admitted subject to limitation as to their use. 3 An application for leave to appeal from his Honour's decision was heard with expedition on 13 February 2009, on full submissions as if an appeal so that the appeal could be determined without a further hearing if leave to appeal were granted. In our opinion, leave to appeal should be granted and the appeal should be upheld. There should be remission to the trial judge for re-exercise of the discretion to refuse to admit the analysts' reports. Our reasons follow.

Circumstances 4 It was pleaded against the applicant, in summary, that -

(a) certain representations concerning asbestos liabilities of the James Hardie group and the availability of funds to meet asbestos claims constituted statements by it that were false in a material particular, or materially misleading, being statements which were - "(a) likely to induce persons in Australia to acquire a financial product, namely securities in JHINV; or

(b) likely to have the effect of increasing, maintaining or stabilising the price for trading in financial products, namely securities in JHINV, on the ASX."; (Fourth Further Amended Statement of Claim, para 268);

(b) it had failed to disclose certain information held by it concerning the transfer of Industries out of the James Hardie group in March 2003, being information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the applicant's securities because (inter alia) the transfer of Industries - " … had the effect of completing the separation of: a. any remaining actual and potential Asbestos Liabilities from the James Hardie Group; and

b. the James Hardie Group from the last remaining Australian company within the group that was perceived to have any connection with asbestos, namely JHIL." (4 FASC, para 299(b) particular (ii)). 5 These allegations raised for determination the market effect of the representations on the acquisition and price of securities in the applicant and the materiality of the undisclosed information to the price or value of securities in the applicant. They specifically raised, in particular (ii)b, the perception in the market of Industries' "connection with asbestos". 6 The respondent relied in the proceedings on opinions expressed in reports by Mr Alan Humphris, a merchant banker. Mr Humphris provided a report dated 17 March 2008, a supplementary report dated 22 July 2008 and a further supplementary report dated 2 September 2008. 7 Mr Humphris was provided, as part of the materials on which he was to express his opinions, with 63 market analysts' reports. His instructions included that he might assume in answering the questions on which his opinions were sought that - "(d) the effect of the transfer of JHIL out of the James Hardie Group was to separate: (i) the last remaining Australian company within the group, namely JHIL, perceived to have any connection with asbestos;

(ii) any remaining actual and potential asbestos liability from the James Hardie Group." 8 Mr Humphris gave opinions, amongst others, on whether the representations alleged by the respondent when "viewed in the circumstances which existed at the time" were likely to induce dealings in shares in the applicant or to have an effect on the price at which its shares were traded, and on whether the non-disclosure of information alleged by the respondent would, if generally available, have had a material effect on the price or value of the securities of the applicant. The analysts' reports were part of the circumstances at the time of the representations and from which the effect of the non-disclosure of information was assessed. They were referred to on occasions in the initial report for the analysts' views, including their regard to Industries' asbestos risk and an "asbestos discount" in the value of the securities. In the supplementary report Mr Humphris identified generally, and sometimes in particular, the analysts' reports provided to him by the respondent to which he had had regard. In the second supplementary report he specifically addressed whether seven further analysts' reports provided to him affected the opinions he had earlier expressed. 9 Mr Humphris' reports were tendered in the respondent's case, and were admitted subject to rulings of which one only need be mentioned, namely that he could not give evidence concerning the "ready observability" in the marketplace of information concerning the transfer of Industries out of the James Hardie group. In the course of his cross-examination the analysts' reports to which Mr Humphris had had regard were tendered by the respondent and admitted as "business records in the sense of recording what analysts thought, which is evidence of actual market perception" (Transcript p 1054). 10 The tenth defendant closed its case on 10 February 2009. The eleventh defendant did not go into evidence. On 11 February 2009 the applicant circulated by e-mail a list of the documents it proposed to tender. The list included a further 87 analysts' reports. In the manner the trial has been conducted, it was accompanied by electronic availability of the documents to the trial judge and the parties. 11 On the morning of 12 February 2009 the respondent notified its objections, relevantly objecting to the tender of the analysts' reports "on the basis of lateness and prejudice (reserving all other objections)". It said, correctly, that none of the analysts' reports had been put to Mr Humphris in cross-examination or had earlier been notified as a document the applicant proposed to tender, and that the applicant had not served an expert report in answer to the reports of Mr Humphris. It submitted, under the heading "Prejudice", that the respondent had not been able to review the analysts' reports in the short time since the circulation of the list, or to undertake enquiries to establish that each analysts' report was in fact published, and that had the list been provided at an earlier time it "would not have been taken by surprise and would not now suffer the prejudice by its inability to put any of that material to its expert". The respondent also reserved its position "in relation to additional grounds of objection". 12 Later in the morning the applicant provided responsive submissions. It said that all but two of the analysts' reports were within the documents on a database made available much earlier by the respondent to the parties, and that the other two had been available and inspected by the respondent's legal representatives some months earlier. It said that the Court's directions had not required prior notification of documents which it proposed to tender in its case. It submitted that the analysts' reports went to market perception concerning exposure within the James Hardie group to asbestos liabilities, and more generally to the market's assessment of the price or value of securities in the applicant and Industries, and as to certain of the analysts' reports that they went to a particular issue concerning the use of the proceeds of a dealing known as the Gypsum sale. Specifically as to the failure to put the analysts' reports to Mr Humphris, it was said - "19 That the plaintiff did not provide these analysts' reports to its expert, Mr Humphris, is not a basis for their not being received into evidence: contra para 22 of plaintiff's submissions. There is no Browne v Dunn issue. Mr Humphris was asked to make assumptions by reference to analysts reports to which he was referred. The plaintiff must make good those assumptions. JHINV was not required to cross-examine him as to the correctness of those assumptions. It is entitled to challenge the correctness of the assumptions on which his opinions are based. It does so by, among other things, other analyst reports. … " 13 The hearing resumed at 2.15 pm on 12 February 2009. The trial judge said that he had read the submissions of both parties. 14 His Honour asked counsel for the applicant whether she wished to add to her submissions. She said, "Only if your Honour would be assisted by being taken to examples of the analysts' reports that I have identified". The trial judge replied, "No, I think I can do this without actually going to each of the analysts' reports". In an exchange with the trial judge counsel affirmed the submission that the applicant was not required to put the analysts' reports to Mr Humphris, and could tender them by way of "challenging the underlying assumption that he was asked to make … that there was a relevant perception in the market" (Transcript pp 3800-3801). 15 Counsel for the respondent began to put a submission concerning the Court's earlier directions, but the trial judge intervened and said that he did not propose to "rule on the basis of that". Counsel submitted that the opinion of an expert ought to be challenged "squarely to identify what part of the opinion is being challenged and why", and his Honour again intervened and said, "I don't need to hear you on that point". The trial judge raised whether the analysts' reports relevant to the Gypsum issue could be admitted "with the limitation under section 136 [of the Evidence Act 1995] to that issue", and a brief exchange with counsel for the respondent ended with something like a concession that the respondent would not be prejudiced thereby (Transcript pp 3801-3802). 16 After brief submissions in reply, the trial judge gave ex tempore reasons for his rulings. He made orders for entry of the digital content of the analysts' reports relevant to the Gypsum issue into the court record data base. 17 The trial judge asked counsel for the applicant whether its case was now closed. Counsel foreshadowed an application for leave to appeal to this Court, but his Honour said that he "prefer[red] that you close your case nonetheless" and that he would not grant a stay. Counsel said that the case was closed. 18 The trial judge asked if there was a case in reply, and counsel for the respondent replied in the negative. His Honour made orders "in relation to the finalisation of this case", for the exchange of written submissions commencing with the respondent's submissions on 20 February 2009 and in waves until 13 March 2009 and for receiving "short oral submissions" on 2 March 2009 (Transcript pp 3804-3809).

The trial judge's reasons 19 It is convenient to set out the reasons in full; the corrected reasons can now be found at Australian Securities and Investments Commission v Macdonald (No 10) [2009] NSWSC 53 - "1 James Hardie Industries NV, the twelfth defendant, seeks to tender 87 financial market analysts' reports covering the period 12 November 1998 to 31 July 2003.

2 The Australian Securities and Investments Commission, the plaintiff, called Alan John Humphris, a merchant banker. He examined 63 analysts' reports for the purpose of his first report of 17 March 2008 and a further six reports for the purpose of his supplementary report of 2 September 2008. The analysts' reports are material to an assessment of the circumstances that existed at the time that it is alleged by ASIC that JHINV was, in various respects, in breach of provisions of the Corporations Act 2001 (Cth).

3 Mr Humphris gave evidence in October 2008. He was cross-examined on behalf of JHINV. None of the 87 reports now sought to be tendered were put to him.

4 JHINV submits that all bar two of the reports were available to ASIC and it could have put the reports to Mr Humphris. It says that the other two reports could have been obtained under ASIC's compulsory powers or by subpoena. It says that it was not obliged to cross-examine Mr Humphris on the reports and can challenge the assumptions underlying Mr Humphris's evidence by tendering these other analysts' reports.

5 I do not agree. If JHINV proposed to rely on the 87 reports to challenge the underlying assumptions upon which Mr Humphris's reports were based, albeit that initially ASIC treated the documents as relevant to the case, it was nonetheless incumbent upon JHINV to put the reports to him in cross-examination.

6 In my view, the failure to do so in the circumstances of this case debars JHINV from tendering the reports now. This is a classic Browne v Dunn (1894) 6 R 67 situation and it is now too late, after the conclusion of the oral evidence in this case over an extended period, to take alternative courses such as allowing ASIC to re-open its case to recall Mr Humphris.

7 The application of s 56 of the Civil Procedure Act 2005 and its requirement to facilitate the just, quick and cheap resolution of the real issues in the case enforces my view. ASIC should not now be placed in a position of seeking to re-open its case to have Mr Humphris consider the reports or seek to present a case in reply by recalling Mr Humphris.

8 If the common law rule in Browne does not apply, I would exercise my discretion under s 135 of the Evidence Act 1995 and refuse to admit the reports on the basis that their probative value is outweighed by the danger that the evidence might be unfairly prejudicial to ASIC or cause or result in undue waste of time. There is a limit to the time available to me to write a judgment in this case. I am rostered back to normal duties in May 2009 and must complete the judgment before then. It would take considerable time for ASIC to have Mr Humphris analyse the additional analysts' reports preparatory to his giving further evidence.

9 JHINV submits that some of the reports are relevant to a different issue - JHINV's sale of its gypsum business in the United States of America. I will allow the tender of those analysts' reports that go to that issue, but will limit their use to that issue." 20 It will be noted that his Honour accepted the relevance of the analysts' reports. There were two bases for his ruling against admission of the reports, the Browne v Dunn basis and the discretion under s 135 of the Evidence Act.

The Browne v Dunn basis 21 The so-called rule in Browne v Dunn (1893) 6 R 67 is a practical rule of fairness. That a defendant has failed to put a matter to a witness called by the plaintiff may result, in the particular circumstances, in exclusion of evidence as to that matter, if that be necessary and appropriate to remedy any unfairness. There may be other and preferable ways of meeting any unfairness, and justice must be done between the parties. 22 However, this was not a situation to apply Browne v Dunn. 23 Mr Humphris gave his opinions upon assumptions which included the analysts' reports provided to him by the respondent. In his cross-examination Mr Humphris said that while he had made some "sample checks" for other analysts' reports, he did not make a "literature review" to see if they were comprehensive and his report was "based solely on the material briefed to me" (Transcript pp 1012-1013). The respondent established the existence and content of those analysts' reports by tendering them as "evidence of actual market perception". 24 For Mr Humphris, the analysts' reports provided to him indicated the market perception on which he came to his opinions concerning inducement of dealings in securities and their price; indeed, he was provided with the particular assumption about a perception of Industries' connection with asbestos. If the market's perception were shown by other analysts' reports to be materially different, it might be that his opinions would be of no value. The applicant was entitled to seek to displace the market perception on which Mr Humphris had acted, by tendering the other analysts' reports and inviting the trial judge to conclude that there was such divergence between the assumptions on which Mr Humphris had come to his opinions and the position as appearing when the further analysts' reports were taken into account that the opinions became of no moment. 25 It was not necessary to put the other analysts' reports to Mr Humphris in order to establish their existence and content as the applicant's evidence of actual market perception. Nor had he given evidence, calling for challenge, that the analysts' reports with which he had been provided were the universe of such reports or representative of all material analysts' reports. The applicant could have sought to turn adverse opinions into favourable opinions by putting modified assumptions to Mr Humphris and proving the facts necessary for the modification, but that was not attempted. At a lesser level, it would have been open to counsel for the applicant to draw to Mr Humphris' attention the content of the other analysts' reports and invite him to agree that his opinions should be qualified or withdrawn. But that did not have to be done, and the applicant could confine itself to attempting to undermine by other evidence the foundation for his opinions so far as found in the analysts' reports with which he was provided. 26 We respectfully disagree with the trial judge's view that the applicant could not challenge the assumptions underlying Mr Humphris' evidence by tendering the other analysts' reports without putting the reports to him in cross-examination. That basis for his Honour's ruling, in our opinion, cannot be upheld. 27 It is not necessary to consider the applicant's submission that the exclusion of evidence on a Browne v Dunn basis can not stand with s 56(1) of the Evidence Act, and we think it better not to enter by dicta into the observations on that matter to which we were referred.

The s 135 discretionary basis 28 Section 135 of the Evidence Act provides that a court may refuse to admit evidence - " … if its probative value is substantially outweighed by the danger that the evidence might: (a) be unfairly prejudicial to a party, or (b) be misleading or confusing, or (c) cause or result in an undue waste of time." 29 In order to apply s 135 it is necessary first to assess the probative value of the evidence. Next, the judge must determine whether that probative value is substantially outweighed by one or more of the identified dangers. Finally, the judge must decide in the exercise of a discretion whether the evidence should not be admitted. There is a balancing exercise in which opinions must be formed, one as to the probative value of the evidence (meaning "the extent to which the evidence could rationally affect the assessment of the probability of the existence of the fact in issue", Evidence Act, Dictionary) and the other as to the dangers. There must then be the balancing, the importance of the prior opinions being emphasised by the necessity that the probative value is "substantially outweighed" by the danger(s). 30 It appears that the trial judge had in mind that the respondent would seek to re-open its case, and that the need to do so and the time involved in Mr Humphris considering the 87 analysts' reports would constitute unfair prejudice to the respondent and an undue waste of time. We do not stay to consider the circumstances in which in civil penalty proceedings the respondent would be permitted to re-open its case, see as to evidence in reply re HIH Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler [2001] NSWSC 1168; (2001) ACSR 214 (Santow J) and Australian Securities and Investments Commission v Rich [2006] NSWSC 826; (2006) 58 ACSR 414 (Austin J). Nor do we enter upon the trial judge's characterisation of the situation which would come about as involving unfair prejudice and an undue waste of time, although we should not be taken to share that view of it; if the applicant did not have to put the other analysts' reports to Mr Humphris, could any prejudice to the respondent be unfair or any time involved an undue waste of time? 31 In our opinion, there is a fundamental defect in his Honour's ruling on the s 135 discretionary basis. It was necessary that the trial judge assess the probative value of the other analysts' reports and undertake the balancing exercise required by s 135. Unfortunately, we can see no indication that he did so. He described the analysts' reports as "material to an assessment of the circumstances that existed at the time … ", and so must have ascribed some probative value to them. But he did not go further. The documents in the applicant's list of documents for tender being electronically available, they could have been accessed by the trial judge. But his Honour did not wish to be taken to examples of the analysts' reports and said that he thought he could rule on admissibility without going to each of the analysts' reports, and in our view the probability is that he did not do so. If he did not, he could hardly have assessed the probative value of the other analysts' reports. But even if he did, it remains that there is no indication that he assessed their probative value and undertook the balancing exercise. 32 In our opinion, the exercise of his Honour's discretion thereby miscarried: see in particular Australian Securities and Investment Commission v Rich [2005] NSWCA 152; (2005) 54 ACSR 326 at [163] where it was said that "it was a fundamental error not to conduct any systematic analysis of the probative value of the evidence". It is not necessary to consider whether, otherwise in the exercise of the discretion, there was error in giving the perceived constraint of the trial judge's rostering back to normal duties the significance which appears to have been attached to it, but we observe that justice between the parties would ordinarily trump listing considerations.

Remission 33 We do not think it necessary to consider the admission of some of the analysts' reports with their use limited to the Gypsum issue. That was consequential on the ruling against wider admissibility, and must fall with it. 34 It could be open to refuse to admit the other analysts' reports in a proper exercise of the discretion under s 135 of the Evidence Act. Our brief acquaintance with the proceedings does not enable us to undertake the balancing exercise, nor were we asked to do so or otherwise to re-exercise the discretion. There must be remission to the trial judge so that, if contest remains, he can do so. If the other analysts' reports are admitted, it would also be necessary to rule on any particular objections under the respondent's reserved position "in relation to additional grounds of objection".

Leave to appeal 35 The occasions on which leave will be granted to appeal from an evidentiary ruling in the course of proceedings are very limited. Appeals should generally not be permitted to disrupt the progress of the hearing. There can be appeal after trial if the evidentiary ruling be material to the result, which it may not. 36 It can occur that leave is granted: Australian Securities and Investments Commission v Rich (CA) is an illustration. We think that leave should be granted in the particular circumstances of the present case, because - · With respect, the trial judge's decision on the Browne v Dunn basis was clearly wrong and the exercise of discretion under s 135 of the Evidence Act was fundamentally flawed. · Subject to the question of the other analysts' reports, the taking of evidence in the proceedings is at an end. We do not think that re-consideration of discretionary refusal to admit the analysts' reports and, if they are admitted, receiving further evidence from Mr Humphris if that be permitted, would be unduly disruptive to the proper course of the hearing given its magnitude and the stage which it has now reached. · We appreciate that the trial judge's ruling may not matter if the case against the applicant otherwise fails, it may well be material to the result if that case is successful. We consider that error in dealing with apparently relevant evidence tendered by the applicant and said to be of importance to its defence should be now addressed, rather than being left as a ground in any substantive appeal.

(1) Grant leave to appeal and direct that the notice of appeal be filed within 7 days.

(3) Set aside the rulings - (a) that the analysts' reports tendered by the applicant not be admitted; and

(b) that those of the analysts' reports going to the issue of the sale of the Gypsum business be admitted limited to use in relation to that issue.

(4) Set aside the order for entry of the digital content of the analysts' reports in (b) in the court record database.

(5) Respondent to pay the applicant/appellant's costs of the application for leave to appeal and appeal.

(6) Remit the discretionary refusal to admit the analysts' reports to the trial judge for reconsideration. **********

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

At a glance

Court

Decision date

Before

Source

Judgment (40 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (4)