Plaintiff v Defendant

1 By summons filed 30 May 2014, the defendant seeks, amongst other things, the following relief:

1. On the grounds set forth in the Schedule to this Summons, an order pursuant to Order 23.02 and/or section 33ZF of the Supreme Court Act 1986, that the Plaintiff's Statement of Claim be struck out;

2 The Schedule refers to many paragraphs in the Statement of Claim and articulates the basis on which it is submitted that the Statement of Claim should be struck out. In addition to the usual criticisms relating to particulars and the adequacy of the pleading, it is submitted that the group definition is not properly pleaded.

3 Paragraph 2 of the Statement of Claim defines the group. It is in the following terms:

This proceeding is commenced by the plaintiff on its own behalf and on behalf of all persons who acquired shares in the defendant on or after 25 February 2010 and who were at the commencement of trading on 1 June 2010 holders of any of those shares and who have valid, lawful and enforceable claims for loss or damage caused by the conduct of the defendant in the period 25 February 2010 to 31 May 2010 which is alleged in the statement of claim. (Group Members).

4 The conduct referred to relates to alleged breaches of the defendant's continuous disclosure obligations under s 674 of the Corporations Act 2001 (Cth) ('the Act') and the alleged misleading or deceptive conduct of the defendant.

5 Save for some minor matters, the plaintiff contends that the pleading, including the group definition is adequate. The plaintiff proposes to amend the Statement of Claim.

6 A summary of the relevant allegations is set out hereunder.

7 Downer EDI Rail Pty Ltd and Downer EDI Rail PPP Maintenance Pty Ltd, both wholly-owned subsidiaries of the defendant, were from 8 December 2006 contracted to design and manufacture rolling stock, design and construct a maintenance facility, and to provide 'thorough life support' for the trains, simulators and maintenance facility associated with the Waratah train project.

8 The Waratah train project (also known as the RailCorp Rolling Stock Public Private Partnership) involved the design, manufacture and delivery by the defendant to RailCorp NSW of 624 new double deck passenger rail cars, comprising 78 eight car sets.

9 At all material times, the defendant had internal reporting and disclosure systems that, according to the defendant's public claims, ensured adequate and timely reporting of all material or significant developments concerning the defendant's performance, that a reasonable person would expect to have a material effect on the price or value of the defendant's securities.

10 The defendant informed the market from time to time of its progress in relation to the Waratah train project, and sometimes announced the timetable for future work. However, on no occasion did the defendant announce that any delay to the project was probable, or even possible, or that any such delay would have a materially adverse impact upon the defendant's financial performance.

11 The defendant made an announcement to the ASX on 26 March 2010 entitled 'Update on Reliance Rail' which stated that 'Downer expects to deliver the first Waratah train set into service in late 2010'. In the attached Standard & Poor's press release concerning project delays, entitled 'Ratings on Reliance Rail Debt Lowered on Expectations of Increased Refinance Risk and Further Delays', there was no reference to any materially adverse impact the statement had on the defendant's financial performance.

12 The defendant on several occasions informed the market of the similarities between the Waratah train and the Millennium Train, which the defendant had previously constructed for RailCorp NSW, and stated that these similarities would reduce the risk to the defendant in undertaking the Waratah train project.

13 In the 2009 financial year, the defendant reported net profit after tax ('NPAT') of $189,376 million.

14 From time to time the defendant provided earnings guidance to the market for the 2010 financial year of 'NPAT growth around 5.0%'.

15 The defendant therefore forecast NPAT of approximately $198 million for the 2010 financial year.

(a) that it had undertaken a full review of the Waratah train project and had identified that its tendered estimates for design development and review and approval processes were incorrect and would affect the cost and duration of the procurement and manufacturing phases of the contract;

(b) that it had encountered cost overruns in each of the following areas of the Waratah train project:

which required the defendant to raise a pre-tax provision of $190 million ($133 million NPAT effect); and

(c) that it would raise a $70 million pre-tax asset impairment charge ($66 million NPAT effect) unrelated to the Waratah train project.

17 By the Waratah train project review and asset impairments announcement, on 1 June 2010 the defendant disclosed information to the market for the first time which indicated it would not achieve the previously announced anticipated NPAT growth of 5% for 2010, but would instead make no profits at all in 2010.

18 On 1 June 2010, the defendant informed the market that the estimate that the Waratah train would be 80% based on the Millennium train was wrong.

19 Together, the defendant's Waratah train project review and asset impairments disclosures to the ASX and in a conference call to investors and analysts on 1 June 2010 informed the market that:

(a) the defendant's estimates for the time and cost for completing the design, procurement and manufacturing processes for the Waratah train project were incorrect;

(b) the defendant had incurred and would continue to incur additional costs in:

(c) the estimate that the Waratah train would be 80% based on the Millennium train was incorrect and that the risk mitigation effects associated with the previously claimed similarities in design would not be achieved; and

(d) the defendant's financial performance and position would be materially adversely affected by the additional costs referred to in paragraph (b) above

(a) Information concerning the Waratah train project matters was not made generally available by the defendant prior to 1 June 2010.

(b) A reasonable person would have expected that information concerning the Waratah train project matters would have a material effect on the price or value of the defendant's ED securities if that information was made generally available.

(c) On a date not later than 25 February 2010, the defendant was aware of the Waratah train project matters.

(d) Once the defendant became aware of the Waratah train project matters, it did not immediately release to the ASX information about the matters.

(e) The defendant's failure to disclose the Waratah train project matters to the market immediately upon becoming aware of them constituted a breach of s 674(2) of the Act.

(f) The defendant's failure to correct its statements to the ASX on or before 25 February 2010 that:

(a) the Waratah train project was being delivered on budget;

(b) the Waratah train project was sufficiently similar to the Millennium train project to reduce project risk; and

(c) the defendant would achieve NPAT growth of 5% in the 2010 year,

was conduct by the defendant that was misleading or deceptive or was likely to mislead or deceive, in breach of s 1041H of the Act. This was because the circumstances gave rise to the reasonable expectation that the existence of relevant contrary information would be disclosed to the ASX and relevant contrary information about the Waratah train project matters was not disclosed to the ASX until 1 June 2010.

21 Loss and damage is then pleaded in paragraphs 31-35 of the Statement of Claim.

22 The defendant contends that the Statement of Claim:

(a) ... fails to plead the material facts necessary to establish each cause of action sought to be relied upon against Downer. It therefore fails to comply with Rule 13.02(1) and does not disclose a cause of action;

(b) ...uses confusing and ambiguous terms and asserts conclusions and opinion without pleading necessary material facts, and is thereby embarrassing; and

(c) ... fails to give particulars of many of the allegations and it is therefore not possible to know the case to be met by Downer. This is a serious failure to comply with Rule 13.10(1).[1]

23 Further, it is contended that the group definition is inconsistent with the Indorsement on the Writ, and is in any event impermissible. It is also contended that the case as pleaded is not suitable to be maintained as a group proceeding. Finally the defendant contends that the failure to plead reliance is fatal to the survival of the Statement of Claim.

(b) whether the plaintiff is required to plead reliance; and

25 First, the defendant submits that the definition of group in the Statement of Claim as set out in paragraph 3 above, differs from the Indorsement on the Writ. Paragraph 2 of the Statement of Claim adds the words 'valid, lawful and enforceable claims'. These words are the subject of the second complaint. The defendant contends that these words do not enable the objective existence of the group to be ascertained at the time of commencement of the proceeding and it will require a judgment of the Court to determine whether potential group members have a valid claim in order to be a group member.

26 The plaintiff contends that the words were intended to exclude from the group those members that participated in an earlier funded proposed class action that was compromised before proceedings were commenced. The defendant informed the Court that the settlement was confidential including the names of members bound thereby. It was submitted by the plaintiff that whether a member was a group member in light of the compromise, was easily determined, if necessary with the assistance of a legal adviser.

27 It is neither necessary nor desirable to resolve this issue. Senior Counsel for the plaintiff informed the Court that the words would be deleted from the group definition. In my view this is desirable.

28 The plaintiff is entitled to the benefit of the sufficient uncertainty that exists in relation to whether reliance is necessary or is required to be pleaded in a case of this kind. Of course, causation, which has been pleaded, will need to be established. I will not strike out the Statement of Claim. In my opinion a brief review of the legislation and authorities establishes, for the purposes of a strike out application, that the matter is far from clear and the plaintiff's case is not plainly hopeless.

Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, the entity must immediately tell ASX that information.

30 Section 674(2) of the Act mandates compliance with ASX Listing Rule 3.1:

1. this subsection applies to a listed disclosing entity; and
2. the entity has information that those provisions require the entity to notify to the market operator; and

1. that information:
   1. is not generally available; and
   2. is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity;

the entity must notify the market operator of that information in accordance with those provisions.

31 The plaintiff submitted that the legislative policy behind the continuous disclosure obligations was to ensure that the securities market was at all times properly informed in order to allow for its efficient operation for the benefit of individual investors, the wider market and the economy as a whole. These laws support the achievement of efficient capital markets 'in which prices "fully reflect" available information'. The continuous disclosure obligations exist, it was submitted, for the protection of all shareholders, no matter the size of their shareholdings.

32 The plaintiff referred to Re Chemeq Ltd[2] where French J (as his Honour then was) made the following comments about the Australian continuous disclosure regime under the heading 'The importance of continuous disclosure':

[43] In 1991, the Australian Companies and Securities Advisory Committee concluded that a statutory system of continuous disclosure would promote confidence in the integrity of Australian capital markets and provide benefits to market participants and management in various ways. ...

[44] As a result of concerns about corporate misconduct in the 1980s, a need for enhanced disclosure by companies was identified. The Corporate Law Reform Bill 1993 contained provisions which enhanced periodic reporting requirements, and imposed disclosure obligations. ...

[45] The legislative policy behind continuous disclosure was set out in the second reading speech of the Minister for Administrative Services introducing the Corporate Law Reform Bill (No 2) 1992 into the Senate on 26 November 1992. He said, inter alia (Cth Hansard, Senate, Parliamentary Debates, 26 November 1992, p 3581):

An effective disclosure system will often be a significant inhibition on questionable corporate conduct. Knowledge that such conduct will be quickly exposed to the glare of publicity, as well as criticism by shareholders and the financial press, makes it less likely to occur in the first place.

In essence, a well-informed market leads to greater investor confidence and in turn to a greater willingness to invest in Australian business.

[46] The importance attached to the continuous disclosure provisions of the Act by the legislature is emphasised by the penalties for their contravention, which have recently been significantly increased and their widened scope since 2002 which is now not limited to intentional reckless or negligent non-disclosure. ... [3]

33 The plaintiff further contended that the enforcement of laws which mandate the operation of efficient capital markets therefore simply require the identification of a failure to disclose as required by s 674. There is considerable public importance, it was submitted, in enforcing compliance with the continuous disclosure obligations, if necessary, by private litigation. This was also, it was submitted, emphasised by the Victorian Court of Appeal in National Australia Bank Ltd v Pathway Investments Pty Ltd and Another.[4] Bell AJA, giving the judgment of the Court, said:

[60] Chapter 6CA of the Corporations Act makes provision for the continuous disclosure of information by particular entities...

[61] The continuous disclosure obligation is of fundamental importance to the competitive efficiency and operational integrity of the market for Australian securities, including shares. According to Lindgren J in Australian Securities & Investments Commission v Southcorp Ltd [No 2], the provisions were designed (among other things) 'to prevent selective disclosure of market sensitive information'. In Re Chemeq Ltd, French J referred with approval to the description in an official report that statutory systems of continuous disclosure promoted 'confidence in the integrity of Australian capital markets'. Martin CJ analysed the former provisions and the applicable listing rules in Jubilee Mines NL v Riley . His Honour concluded that their evident purpose 'is to ensure an informed market in listed securities' and that 'all participants in [that] market ... have equal access to all the information which is relevant to, or more accurately, likely to, influence decisions to buy or sell those securities' . Spigelman CJ, Beazley and Giles JJA considered the provisions of s 674 of the Corporations Act in James Hardie Investments NV v Australian Securities & Investments Commission . Their Honours said that the regime

... is designed to enhance the integrity and efficiency of Australian capital markets by ensuring that the market is fully informed. The timely disclosure of market sensitive information is essential to maintaining and increasing the confidence of investors in Australian markets, and to improving the accountability of company management. It is also integral to minimising incidences of insider trading and other market distortions". [5]

34 Recovery by shareholders of their losses occasioned by breach of continuous disclosure provisions has, it was submitted, been available in Australia since the introduction of s 1001A of the Act more than 20 years ago. The legislative intention that persons who had suffered loss as a result of a failure to disclose should be entitled to recover by legal proceedings was expressed by Parliament at the time of introduction of s 1001A:

Under proposed subsection 1001A(2), a listed disclosing entity will be civilly liable if it contravenes the continuous disclosure rules of a securities exchange by intentionally, recklessly or negligently failing to notify the exchange of price sensitive information. As a result of existing section 1005, a person who suffers loss or damage by conduct of a listed disclosing entity that contravened proposed section 1001A will be able to recover the amount of the loss or damage by action against the entity or against any person involved in the contravention (see existing section 79 of the Law), whether or not the entity or any person involved in the contravention has been convicted of an offence . ...[6]

35 The critical submission of the plaintiff was that it is not necessary for individual holders of securities to show that particular representations were made to them, or that they 'relied' upon them. Instead, in explaining the intended operation of the statutory continuous disclosure regime, the plaintiff referred to P Dawson Nominees Pty Ltd v Multiplex Ltd ('P Dawson')[7] where Finkelstein J explained the role of the efficient market hypothesis and the existence of a rebuttable presumption of reliance in United States 'fraud-on-the-market' cases:

It seems the way the case will be put is based on the hypothesis (in some quarters an article of faith) that had the Corporations Act and ASX listing rules been complied with the market in Multiplex securities would have been open and efficient and the price of the securities would be determined on the basis that all material information regarding the company was publicly available. The consequence of this hypothesis is the premise that the market price of the securities would have been negatively affected if there had been proper and not misleading disclosure about the Wembley Stadium project.

It may also be argued that there is a rebuttable presumption of reliance (if it is necessary to establish reliance) on the existence of an open and efficient market for Multiplex securities. In the United States this is referred to as the fraud-on-the-market theory. In Basic Inc v Levinson [1988] USSC 36; (1988) 485 US 224 the Supreme Court of the United States held that securities class action plaintiffs are entitled to a presumption of reliance that the market for the securities in question was efficient and that the plaintiffs traded in reliance on the integrity of the market price for those securities. The fraud-on-the market presumption is rebuttable. The defendant bears the burden of establishing that the presumption should not apply. There are usually three ways a defendant can rebut the presumption. They are: (1) that the nondisclosures did not affect the market price; (2) that the plaintiffs would have purchased a stock at the same price had they known the information that was not disclosed; and (3) that the plaintiffs actually knew the information that was not disclosed to the market: Fine v American Solar King Corporation [1990] USCA5 2207; 919 F 2d 290 at 299 (5th cir, 1990).[8]

36 It was submitted that the availability of a cause of action based on breach of s 674(2) of the Act therefore, does not depend on the plaintiff or any member of the group having had representations made specifically to them.

37 Further, the defendant's contention that the plaintiff is required to plead reliance upon the defendant's acts and/or omissions which are alleged to be in breach of s 674(2) of the Act, or alleged to be misleading or deceptive for group members to be entitled to damages, was, it was submitted, wrong at law.

38 Section 1325(1) of the Act requires only that 'a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage because of conduct of another person'.

39 Section 1041I of the Act does not require proof of reliance. Section 1041I(1) simply states:

A person who suffers loss or damage by conduct of another person that was engaged in contravention of section 1041E, 1041F, 1041G or 1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention.

40 The language of s 1041I simply requires that a person 'suffers loss or damage by conduct of another person'. The plaintiff contends that the words 'by conduct of another person' are broad and general and mean what they say. They are not, it was submitted, to be limited by a requirement for proof of 'reliance' upon anything, as propounded by the defendant.

41 It was further submitted that s 1317HA(1) of the Act provides that a court may order compensation where the defendant has contravened a financial services civil penalty provision and 'the damage resulted from the contravention'. Section 1317HA(2) provides that in determining the damages suffered by a plaintiff, diminution of scheme property is included.

42 It was submitted that the only difference between the three sections in relation to causation is that s 1041I uses the expression 'by conduct of another person', s 1325 uses the expression 'because of conduct of another person', and s 1317HA uses 'the damage resulted from the contravention' to connote causation. The first two expressions have equivalent meanings.[9] The plaintiff submitted that the meaning of s 1317HA was indistinguishable.

43 Accordingly, by reference to these sections, the context of the legislation and relevant case law, the plaintiff submits that it is not necessary to plead reliance.

44 The defendant referred to several authorities and submitted in effect that as the plaintiff was not a passive investor, but actively acquired shares, reliance was necessary because the conduct of the plaintiff and in particular the inducement of the plaintiff forms a link in the causation chain and that without such inducement there was no linking chain between the misleading conduct or failure to disclose and the plaintiff's loss.

45 The matter, even on a strike out application is not free from difficulty.

46 Although the defendant's position is to some extent (albeit in relation to different provisions) supported by high authority, I am, as pointed out earlier, unable to conclude that the plaintiff's case, as articulated in the Statement of Claim and foreshadowed and otherwise desirable amendments and particularisation, is plainly hopeless. The fact that it may well fail is of course not to the point at this stage. It is only in the clearest of cases that a claim should be struck out. This is not such a case. The authorities are not entirely clear and extrapolating principles to cover situations and legislation not entirely analogous is not something that should be done on a strike out application.

47 In Laurence John Bolitho v Banksia Securities Ltd & Ors[10] Ferguson J queried the need to plead reliance in a claim under s 728 of the Act (non-disclosure in a product disclosure statement). Her Honour referred to the various authorities and in the following paragraphs I have for the most part gratefully adopted her Honour's summary of these cases. It is of note that the authorities deal with misleading or deceptive conduct or failure to comply with disclosure obligations in a PDS, which as noted, are not entirely analogous to the positive obligation to continuously disclose to the market contained in s 674 of the Act.

48 In Janssen-Cilag Pty Limited v Pfizer Pty Limited ('Janssen-Cilag'),[11] Pfizer had made certain misleading and deceptive representations to consumers through its advertising campaign that contravened s 52 of the Trade Practices Act 1974 (Cth). A competitor, Janssen-Cilag, claimed that under s 82 of the Trade Practices Act 1974 (Cth) it was entitled to recover loss and damage sustained because, as a result of the representations, the public and pharmacists purchased Pfizer's drug instead of a Janssen-Cilag drug. Relevantly, s 82 provided that a person who suffered loss and damage 'by conduct of another person' that contravened s 52 could recover that loss. Lockhart J held that it was not necessary for Janssen-Cilag to have relied upon the representations to succeed in its claim. Rather, an entitlement to compensation arises in circumstances where the contravener's conduct causes other persons to act in a way that leads to loss or damage to the claimant.[12] His Honour found that there must be a sufficient link between the contravening conduct and the recoverable loss and the loss must directly result from or be caused by the contravening conduct.[13] His Honour observed that those requirements are satisfied where consumers are misled by a company such that they purchase less of a rival trader's product.[14]

49 Janssen-Cilag was considered by the New South Wales Court of Appeal in Digi-Tech (Australia) Ltd v Brand and Others ('Digi-Tech').[15] In that case, Digi-Tech (Australia) Ltd ('Digi-Tech Australia') was sued by the plaintiffs who had invested in a scheme concerning telecommunications products owned by Digi-Tech Australia. Digi-Tech Australia gave misleading gross margin and revenue projections to Deloitte. Deloitte used those projections to prepare a valuation which supported the price to be paid by the investors. Part of the plaintiffs' case was that if the financial forecasts had been accurate, Deloitte would not have produced a valuation to support the price that they were to pay, the investment scheme would not have gone ahead, therefore, they could not have entered into the scheme and would not have suffered any loss. The NSW Court of Appeal said:

The Janssen-Cilag and Stockland category of claim is materially different to that which occurs when plaintiffs suffer loss because they, themselves, are induced by misleading representations to perform some act or omission by which they are prejudiced. The difference lies in the fact that in the first category of case no conduct on the part of the plaintiff forms a link in the causation chain. In the second category, the inducement of the plaintiff and his or her act or omission causing loss is an essential part of the chain. Without such inducement and a consequential act or omission on the part of the plaintiff there is indeed no linking chain between the misleading conduct and the plaintiff's loss.

...

On the assumption that Digi-Tech's forecasts as to the revenue and gross margin of the products were misleading and deceptive, that misleading and deceptive conduct resulted in Deloitte producing, in essence, a misleading and deceptive valuation to support the price of $72.5m. That valuation enabled the investment scheme to be put together and proposed by Urwin to the appellants. But to complete the chain of causation, there must be something linking the appellants' loss to their entry into the investment scheme. That link is the inducement of the appellants and their consequential act of entering into the transaction to their prejudice. Without that link, there is no proof that the misleading conduct caused the loss.

We accept Mr Sheahan's submission that, whatever might be the position in other contexts, in cases of this kind (misrepresentation inducing a transaction) the courts have required reliance by or on behalf of the plaintiff on the misrepresentation as being essential to the proof of causation as required by s 82(1) of the Trade Practices Act 1974. Persons who claim damages under s 82(1) on the ground that they entered into transactions induced by the misrepresentations of other persons must prove that they relied on such misrepresentations and, therefore, "by" that conduct, they suffered loss or damage. As Mr Sheahan pointed out, were it otherwise, representees could succeed even though they knew the truth, or were indifferent to the subject matter of the representation.

On this ground alone we would not uphold this argument.[16]

50 Digi-Tech was followed by the NSW Court of Appeal in Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd ('Ingot').[17] In that case, among other things, the Court was called upon to consider ss 995 and 1005 of the Act. Section 995 prohibited misleading or deceptive conduct in connection with dealings in securities. Section 1005 provided a means for recovery of loss suffered by conduct of another person in contravention of that (and other) provisions. The case concerned loss sustained by investors who had participated in a converting note issue. Part of the plaintiffs' claim was based upon a proposition that if s 995 had not been contravened, the note issue would not have taken place and, in that event, they would not have acquired any of the notes and would not have suffered loss. Ipp JA explained the Court's reasoning in Digi-Tech as follows:

[The Court in Digi-Tech] held that the relief so claimed was based on a flawed "but for" test for causation. The Court held that, under s 82(1) of the Trade Practices Act (Cth), persons who claim damages on the ground of misleading or deceptive conduct in contravention of s 52, and who allege that they incurred those damages by acquiring something in consequence of such conduct, must prove that they were misled by that conduct. If that is not proved, the plaintiffs fail to establish that the damages claimed were suffered 'by' that conduct.

...

The rationale of Digi-Tech is that loss incurred by plaintiffs in acting (or refraining from acting) to their prejudice can only be loss caused "by" conduct contravening s 52 if the plaintiffs are misled by that conduct. Likewise, in my view, such plaintiffs can only succeed in cases based on a contravention of s 995 if, in fact, they are misled. I stress that by 'such plaintiffs' I mean plaintiffs who claim to have suffered loss brought about by their own actions or omissions coupled with misleading conduct by the defendants. ...[18]

...Where there is a decision by the plaintiff whether or not to enter into a transaction, any resulting loss or damage is not dictated by the laws of nature. That is not the first class of case, but the second. If the plaintiff would not have had the opportunity to enter into the transaction, that "but for" element does not go beyond a reason why the plaintiff entered into it. Conduct which merely provides the opportunity for the plaintiff to enter into the transaction will not suffice, unless the purpose of s 995 and s 1005 is to provide recompense for loss or damage suffered only because there was the opportunity to enter into the transaction and without regard to materiality of the representation to the plaintiff's decision to enter into the transaction.

...

Section 1005 should be applied in a way that promotes provision of correct information to investors and protects them in making investment decisions. But this does not warrant compensating investors regardless of the effect on their decision making of the misleading conduct. Once provided with correct information, the investors must make their investment decisions. Perhaps in some circumstances a plaintiff enters into a transaction simply because the opportunity to do so is available, when it would not have been available had there not been the misleading conduct and that plaintiff can be regarded as in like position to the passive sufferer from another's act. That will not be so as a matter of course, and was not so in the present case.[19]

52 In the same case, Hodgson JA reserved his position in relation to indirect causation and Digi-Tech but did make the following observations:

I am inclined to think that investors may be able to claim damages on the basis of misleading conduct where:

(1) Because of misleading conduct that misleads people involved in putting together an investment opportunity, an investment opportunity is made available to investors which would not have been made available at all but for the misleading conduct;

(2) Investors invest in it; and

(3) The investors lose money because the investments are, by reason of matters concealed by the misleading conduct, worth less than the investors paid for them.

I accept that, if the investors actually know the truth concealed by the misleading conduct, it would be difficult if not impossible to characterise their loss as being loss or damage suffered "by" the misleading conduct, within the meaning of provisions such as s 1005 of the Corporations Law 1991 (Cth) or s 82 of the Trade Practices Act 1974 (Cth). However, I do not think the investors would need to prove that they themselves relied on and were misled by the misleading conduct, except possibly to the extent of showing they did not know the truth concealed by the misleading conduct. As to where the onus of proof would lie in relation to that matter, I note that, in relation to claims based on s 996 of the Corporations Law (Cth), s 1007 appears to place the onus on a defendant to prove that the plaintiff did know.

To require investors to prove also that they actually relied on the misleading conduct, or even that if they had known the truth they would not have invested, seems to me possibly superfluous. But for the misleading conduct, there would have been nothing to invest in; and in my opinion it is plainly foreseeable by the persons responsible for the misleading conduct that, if the misleading conduct results in the offering of investments that are worth less than their price by reason of the matters concealed by the misleading conduct, people not knowing the truth may invest in them and suffer loss by reason of the matters concealed by the misleading conduct. On that basis, it does seem to me arguable that loss of that kind would be loss suffered "by" the misleading conduct, at least so long as the investors did not know the truth.[20]

53 In Gardiner v Agricultural & Rural Finance Pty Ltd ('Gardiner'),[21] Handley AJA stated that a plaintiff relying on a contravention of s 995 of the Corporations Law (and other analogous provisions) 'must establish that he relied on the misleading or deceptive conduct, or the false or misleading statement, or that he would have acted differently if the material omission had been disclosed'.[22]

54 Both Ingot and Gardiner were cited with approval by the Court of Appeal in Woodcroft-Brown v Timbercorp Securities Ltd & Ors ('Timbercorp').[23] The reasoning in those cases and Digi-Tech has been applied in subsequent decisions, including those where orders were sought to strike out a pleading and to enter summary judgment.[24] However, in other cases, courts have refused to dismiss comparable claims summarily, instead leaving them to be determined at trial.[25]

55 In the case of Campbell v Backoffice Investments Pty Ltd[26] (which came after Digi-Tech, Ingot and Gardiner but before Timbercorp), the High Court considered a misleading or deceptive conduct provision in the Fair Trading Act 1987 (NSW). In the decision from which the appeal was brought, Giles JA said:

Reliance can itself be a difficult concept, and is not a substitute for the essential question of causation. It may be artificial to speak of reliance in determining what action or inaction would have occurred if the true position had been known. Of particular significance to the present case, causation may be found notwithstanding that any belief in a representation is qualified by doubt, and even when the representee seeks to protect itself against the possibility that the doubt is justified. If the representation still operates on the representee's action or inaction which occasions loss or damage, the loss or damage is suffered by the misleading or deceptive conduct, notwithstanding that the label of reliance may not appropriately describe what occurred.[27]

56 On appeal in the High Court, Gummow, Hayne, Heydon and Kiefel JJ relevantly stated:

...Giles JA was right to point out that reliance is not a substitute in the context of the Fair Trading Act for the essential question of causation. Moreover, it is also right to observe, as Giles JA said, that "[i]t may be artificial to speak of reliance in determining what action or inaction would have occurred if the true position had been known".[28]

57 In Timbercorp the Court of Appeal recently considered provisions with some similarities: ss 1022B(2)(c) and 1041I of the Act. Section 1022B(2)(c) provides that if a person suffers loss or damage 'because' a disclosure document is 'defective' in that it contains a misleading statement,[29] that person may recover the amount of the loss or damage from persons specified in s 1022B(3). Section 1041I provides that if a person suffers loss or damage 'by' conduct in contravention of s 1041H (for example, by misleading or deceptive conduct in relation to a financial product), the person may recover the amount of the loss or damage from the person engaged in the contravening conduct. In Timbercorp, the plaintiff had invested in managed investment schemes which collapsed. Part of the plaintiff's case was that he had read the product disclosure statements ('Timbercorp PDS') and in contravention of the Act certain matters had been omitted from the Timbercorp PDS that should have been included and certain statements in the Timbercorp PDS were false or misleading. The plaintiff claimed that if the correct information had been provided, he would not have invested nor borrowed money to do so. However, the trial judge was not persuaded that the plaintiff read any of the Timbercorp PDS in any detail and found that what was contained in or omitted from them was not what induced the plaintiff to invest. That finding was not disturbed on appeal. The Court of Appeal observed that:

In order to make out both the non-disclosure and the misrepresentation case, it was necessary for the [plaintiff] to establish that there was reliance placed upon the non-disclosures and the misleading conduct so as to cause entry into the investment product and, therefore, subsequently to cause loss. ...[30]

In order to recover damages pursuant to s 1022B(2)(c) or s 1041I(1) for breach of s 1022A or s 1041H, a plaintiff 'must establish that he relied on the misleading or deceptive conduct, or the false or misleading statement or that he would have acted differently if the material omission had been disclosed', in other words, the vice aimed at by the legislation 'is not issuing misleading prospectuses, but misleading investors by issuing misleading prospectuses.'[31]

59 I have not been referred to and have been unable to find any case precisely on point or that deals with causation in the context of a breach of the continuous disclosure requirements set out in Division 6CA of the Act. The obligations are different in nature to those proscribing misleading or deceptive conduct and there is much to be said for the view expressed by Finkelstein J in P Dawson. Reliance may well be artificial in cases of this kind. The extent to which the provisions differ and the precise formulation and matters that underpin or evidence the causation requirement are matters of some complexity that require comprehensive and detailed analysis, undesirable in the case of a strike out application.

60 The plaintiff has pleaded that the conduct in breach of the Act caused the loss in the sense of the reduced value of the shares. The essence of the claim is that the shares when acquired were overpriced directly because of such conduct. It cannot be accepted that this formulation is plainly hopeless or bound to fail.

61 In all of the circumstances I am satisfied that the claim should go forward substantially as pleaded.

62 A great number of the matters have been dealt with whilst dealing with the aforementioned issues.

63 Much of the defendant's submission related to the failure to plead any specific representation, presumably as a matter antecedent to reliance. Again, there is a real question as to whether it is necessary to plead any representation given the elements of s 674(2) which deals more generally with conduct.

64 I have considered all of the general pleading matters raised by the defendant. The complaints are for the most part inextricably linked to the issues relating to reliance and representations and it is best to consider any fresh complaints after the plaintiff has delivered an amended statement of claim with such further amendments and particulars as it may be advised.

65 Accordingly I will dismiss paragraph 1 of the defendant's summons filed 30 May 2014 and give the plaintiff leave to amend its statement of claim.

[1] Schedule to Summons filed by the defendant on 30 May 2014, paragraph 1.

[2] [2006] FCA 936; (2006) 234 ALR 511.

[4] [2012] VSCA 168; (2012) 265 FLR 247.

[5] Ibid [60]-[61] (citations omitted).

[6] Explanatory Memorandum, Corporations Law Reform Bill 1993 (Cth) [231].

[7] [2007] FCA 1061; (2007) 242 ALR 111.

[9] Selig v Wealthsure Pty Ltd [2013] FCA 348 [1157]-[1158].

[10] [2014] VSC 8.

[11] [1992] FCA 437; (1992) 37 FCR 526.

[15] (2004) 62 IPR 184; (2004) NSWCA 58.

[16] Ibid 212 [156], [158]-[160].

[17] [2008] NSWCA 206; (2008) 73 NSWLR 653.

[21] [2007] NSWCA 235. (Varied on appeal but not in relation to this point: Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570.)

[23] [2013] VSCA 284 [227].

[24] Perpetual Trustee Company Ltd v Kwok [2011] NSWSC 422 [31]-[38]; Manday Investments Pty Ltd v Commonwealth Bank of Australia (No 3) [2012] FCA 751 [6]-[7], [27]-[36].

[25] Byrne v Cooke [2010] QSC 76, [9]-[22]; HIH Insurance Ltd (in liq) v Adler [2007] NSWSC 633 [67]-[75].

[26] [2009] HCA 25; (2009) 238 CLR 304.

[27] Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; (2008) 66 ACSR 359 [44] (citations omitted).

[28] Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304, 351-352 [143].

[29] The Act s 1022A(1)(a). That section specifies other reasons why a disclosure document will be defective, but they are not relevant for present purposes.

[30] Timbercorp [2013] VSCA 284 [68].