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[2015] VSC 540
Supreme Court of Victoria
2015-10-07
ROBSON J
Original judgment source is linked above.
PRACTICE AND PROCEDURE - Application by defendant to strike out the plaintiff's statement of claim under rule 23.02 of the Supreme Court (General Civil Procedure) Rules 2005 - Application allowed - Consideration of s 63 of the Civil Procedure Act 2010.
GROUP PROCEEDINGS - Whether a plaintiff in a group proceeding must have a valid claim against the defendant in order to have standing to make another claim, that the plaintiff is not a party to, against the defendant on behalf of group members - Part 4A of the Supreme Court Act 2005.
DAMAGES - Market based causation damages claim - Despite no plea of reliance, market causation based damages claim arguable.
CIVIL PROCEDURE ACT 2010 - Whether proper basis for plaintiff's claim for market based causation damages - Question listed for further consideration - s 26 Civil Procedure Act 2010.
1 The plaintiff, Melbourne City Investments Pty Ltd (MCI), purchased 100 ordinary fully paid shares in the defendant UGL Limited (UGL) on 18 February 2014 for $6.20 each. UGL is listed on the ASX and is classified as a listed disclosing entity under the Corporations Act 2001 (the Act).
2 On 30 April 2012, UGL announced that in a 50:50 joint venture with engineering, procurement and construction firm CH2M Hill (CH2M), it had been awarded a $550 million contract for the construction of a combined cycle power plant for the Ichthys liquefied natural gas project in the Northern Territory (Ichthys LNG power station).
3 On 12 August 2013, UGL disclosed to the market that the Ichthys LNG power station would 'be a key contributor to [UGL's] major project earnings' in the financial year ended 30 June 2014.
4 On 1 April 2015, MCI instituted proceedings on its own behalf and on behalf of all persons who acquired ordinary shares in UGL on or after 12 August 2013 and who were at the commencement of trading on 6 November 2014, holders of any of those shares.
5 By its statement of claim annexed to the writ of summons, MCI pleaded four causes of action alleging misleading or deceptive conduct in disclosing financial information to the market under s 1041H of the Act and/or the failure to observe the continuous disclose obligations in breach of s 674(2).
The application to strike out the statement of claim
6 In a directions hearing before Justice Judd, UGL foreshadowed an application to strike out the statement of claim. The matter was referred to me for hearing. No formal summons was subsequently issued. UGL applies under r 23.02 of the Supreme Court (General Civil Procedure) Rules 2005 (SCR) to strike out all or parts of MCI's statement of claim. In argument UGL briefly relied on the Civil Procedure Act 2010 (CPA).[1]
23.02 Striking out pleading
Where an indorsement of claim on a writ or originating motion or a pleading or any part of an indorsement of claim or pleading -
(a) does not disclose a cause of action or defence;
(b) is scandalous, frivolous or vexatious;
(c) may prejudice, embarrass or delay the fair trial of the proceeding; or
(d) is otherwise an abuse of the process of the Court -
the Court may order that the whole or part of the indorsement or pleading be struck out or amended.
8 Vickery J in Kyriackou v Ace Insurance Ltd[2] canvassed the main judicial statements dealing with the test to be applied under r 23.03 as follows:
In Dey v Victorian Railway Commissioners[3] (Dey), Dixon J said of the forerunner to rule 23.03:
It is peculiar to Victoria, it is the counterpart for the Defendants of order 14. It confers a power of summarily dealing with an action which should be reserved for the exercise as to the actions that are absolutely hopeless.
These observations were cited with approval by Tadgell J in respect of an application under the present rule of 23.03 in HollandStolte Pty Ltd v Bill Acceptance Corporation Ltd & Princess Theatre Holdings Pty Ltd, [4] where his Honour said:
That the proposition of Dixon J, in Dey, holds good, as His Honour observed, whether you subscribe to the view that the Defendant will fail to obtain summary judgment unless hopelessness is readily discernible or whether you concede that it suffices that the Defendant must demonstrate it even after thorough and protracted investigation and argument.
The test was stated in not dissimilar terms in Camberfield Pty Ltd v Klapanis[5] (Camberfield), where Batt JA said,[6] after referring to the wellknown text of Dixon J which I have already referred to in Dey, of the requirement for the Plaintiff's case to be absolutely hopeless before an order 23.03 application may succeed:
Dixon J also said the case must be very clear indeed to justify summary intervention under the inherent jurisdiction and that once it appears that there is a real question to determine, whether of fact or law, and the rights of the parties depend on it, then it is not competent for the court to dismiss the action.
The judge at first instance in Camberfield, as Batt JA observed, also set out the wellknown passage from the judgment of Barwick CJ in General Steel Industries Inc v Commissioner for Railways (NSW)[7] where the Chief Justice stressed the great care which must be exercised to ensure that, under the guise of achieving expeditious finality, a Plaintiff is not improperly deprived of his opportunity of a trial of his case by the appointed tribunal. Barwick CJ went on to state that:
I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the Plaintiff's claim.
9 Sections 63 and 64 of the CPA provide that:
63. Summary judgment if no real prospect of success
(1) Subject to section 64, a court may give summary judgment in any civil proceeding if satisfied that a claim, a defence or a counterclaim or part of the claim, defence or counterclaim, as the case requires, has no real prospect of success.
(2) A court may give summary judgment in any civil proceeding under subsection (1)-
(a) on the application of a plaintiff in a civil proceeding;
(b) on the application of a defendant in a civil proceeding;
(c) on the court's own motion, if satisfied that it is desirable to summarily dispose of the civil proceeding.
64. Court may allow a matter to proceed to trial
Despite anything to the contrary in this Part or any rules of court, a court may order that a civil proceeding proceed to trial if the court is satisfied that, despite there being no real prospect of success the civil proceeding should not be disposed of summarily because-
(a) it is not in the interests of justice to do so; or
(b) the dispute is of such a nature that only a full hearing on the merits is appropriate.
10 In Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd,[8] the Court of Appeal considered the test to be applied when determining whether to give summary judgment in a civil proceeding pursuant to s 63 of the CPA. The Court noted that s 63 of the CPA was introduced following the recommendation of the Victorian Law Reform Commission in its Civil Justice Review Report of March 2008. The Court noted that the Law Reform Commission's recommendations were based on a suggestion made in the 2000 discussion paper, Going to Court, to adopt the approach to summary judgment provided by Rule 24.2 of the Civil Procedure Rules 1998 (UK). The Court said that:
... In turn, Rule 24.2 of the CPR was based on the 1996 Woolf Report recommendation that the then existing English procedures for summary judgment, summary determination of a point of law and the striking out of pleadings disclosing no cause of action be merged and subjected to the common test of 'no real prospect of success'. The recommendation was explained in the Woolf Report, thus:
The test for making an order would be that the court considered that a party had no realistic prospect of succeeding at trial on the whole case or on a particular issue. A party seeking to resist such an order would have to show more than a merely arguable case; it would have to be one which he had a real prospect of winning. Exceptionally the court could allow a case or an issue to continue although it did not satisfy this test, if it considered that there was a public interest in the matter being tried.[9]
11 I refer to this extract from the Woolf Report as Lord Woolf said that the summary determination of an application to strike out the pleadings as disclosing no cause of action, should be subject to the 'no real prospect' test.
12 Section 63 does not by its terms include an application to strike out the statement of claim. On such an application, however, if successful, the plaintiff is often given the opportunity to replead, as opposed to having judgment being given to the defendant.
13 After a careful consideration of the Australian practice where the equivalent provision had been adopted, the Court[10] concluded:
It follows that, for present purposes, the test under s 63 of the Civil Procedure Act should be construed as one of whether the respondent to the application for summary judgment has a 'real' as opposed to a 'fanciful' chance of success; that the 'real chance of success' test is to some degree a more liberal test than the 'hopeless' or 'bound to fail' test; and that, as the law is at present understood, the real chance of success test permits of the possibility that there may be cases, yet to be identified, in which it appears that, although the respondent's case is not 'hopeless' or 'bound to fail', it does not have a real prospect of succeeding.
14 No authority was referred to me as to whether or not r 23.02 should be construed as requiring a no real prospect of success test as applied to a 'hopeless' or 'bound to fail' test. I heard no argument on the appropriate test to apply in relation to the application under r 23.02.
15 Nevertheless, MCI urged that I apply the 'no real prospect of success' test in considering the challenge by UGL to the plea that UGL was aware that it had no reasonable grounds for representing that its performance of the consortium contract would be a 'key contributor to major project earnings' as alleged in paragraph 18 of the statement of claim (set out at paragraph 82 below).
16 I observe that this was the test applied by Ferguson J (as her Honour then was) in Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd.[11] Accordingly, I will proceed to apply the 'no real prospect of success' test to this application.
17 In substance, each of the four causes of action is based on an allegation that MCI or the group members acquired shares in UGL in an inflated market caused by statements made by UGL or the failure of UGL to disclose information.
18 The first cause of action relates to a statement by UGL forecasting that the Ichthys LNG power station project that it was constructing in a 50:50 joint venture would be a key contributor to UGL's major project earnings in the financial year ended 30 June 2014. That statement was made on 12 August 2013. MCI acquired its shares on 18 February 2014, after that announcement was made on 12 August 2013.
19 The group members are persons who acquired shares in UGL on or after 12 August 2013 and who were at the commencement of trading on 6 November 2014 holders of any of those shares. 6 November 2014 was when MCI says that UGL disclosed information about the project that corrected the alleged previous misinformation or absence of information.
20 The second cause of action alleges a continuing failure by UGL to disclose information correcting the alleged misleading or deceptive information released to the market on 12 August 2013 until UGL disclosed information that corrected the alleged misinformed market on 6 November 2014.
21 The third cause of action, is of an alleged continuing failure by UGL to disclose information (broadly relating to alleged probable loss on the Ichthys LNG power station) that would have properly informed the market on 'a date not later than'[12] 8 August 2014 until correct information was disclosed on 6 November 2014. Thus, as pleaded, this cause of action does not clearly specify when the disclosures should have occurred before 8 August 2014. Accordingly, this cause of action is not relied on by MCI unless that disclosure could have been required to be made before MCI acquired its shares on 18 February 2014, as discussed further below.
22 The fourth cause of action is an allegation of misleading or deceptive conduct contained in several publications. Each plea is based on allegation that UGL had knowledge that UGL was required to disclose. The first publication is of the presentation and address of the Chairman of UGL at the AGM of UGL on 29 October 2013. MCI alleges that it is a repeat of the representation made on 12 August 2013 and a continuation of the failure to correct the alleged misrepresentation that was made on 12 August 2013.
23 In paragraph 24 of the statement of claim, MCI alleges UGL engaged in misleading or deceptive conduct or conduct that was likely to mislead or deceive in five of UGL's publications, because none of the publications disclosed any information about the Ichthys LNG power station matters. The first of the five is dated 17 February 2014. This plea relies on UGL having knowledge that required it to make a disclosure.
24 Finally, in paragraph 25 of the statement of claim, MCI alleges that UGL engaged in misleading or deceptive conduct or conduct that was likely to mislead or deceive. MCI relies on two publications, the first of which is dated 25 August 2014. MCI alleges neither publication disclosed any information about the Ichthys LNG power station matters; and in each publication UGL changed its practice from its 2013 Annual Report of separately disclosing its interest in CH2M Hill/UGL joint venture. This plea also relies on UGL having knowledge that required it to make a disclosure.
25 As mentioned above, the damage is alleged to have been incurred by the purchase by MCI and the group members of UGL ED shares. Accordingly, MCI has conceded that it only has a maintainable claim concerning the conduct that it alleges created an inflated market, that preceded its purchase of the 600 shares on 18 February 2014.
26 MCI is not a party to the claims based on the alleged conduct after it purchased shares on 18 February 2014 that continued to 6 November 2014. MCI brings these claims on behalf of the group members, but not itself. It was expressly conceded by MCI in submissions that 'the plaintiff does not submit that it has any claim for loss or damage in respect of continuous disclosure failures or misleading or deceptive conduct claims arising after it purchased shares.'[13]
First cause of action - the August misleading and deceptive conduct
27 After pleading the purchase of 120 shares and the announcement by UGL of 30 April 2012 referred to above, MCI alleges that pursuant to the consortium contract to build the Ichthys LNG power station, UGL and CH2M each guaranteed the full and timely performance of all obligations under the consortium contract, including the discharge of all obligations and liabilities of the consortium contract, as well as the payment of any amounts due and unpaid under the consortium contract.
28 MCI alleges that, at all material times, UGL recognised revenue, expenses and profit on construction contracts as follows:
(a) Construction contract revenue and expenses are recognised on an individual contract basis using the percentage of completion method once the stage of the contract completion can be readily determined, costs to date can be clearly identified, and total contract revenue and costs to complete can be reliably estimated;
(b) For fixed price contracts, profit is recognised once the forecast cost to completion can be reliably measured - generally when the project is 15 to 30 per cent complete;
(c) Where the outcome of the contract cannot be reliably measured, costs are expensed as incurred;
(d) Where it is possible that costs will be recovered, revenue is recognised to the extent of the costs incurred; and
(e) Where the defendant expects to make a loss on the contract, the expected loss is recognised immediately as an expense.
29 MCI says that these principles were set out in UGL's revenue recognition policy disclosed in its 2013 and 2014 annual reports.
30 MCI alleges that at all material times, UGL disclosed its share of the profit or loss of its equity accounted investments, including joint ventures, in its consolidated income statement.
31 MCI alleges that at all material times, UGL had internal reporting systems that, according to UGL's public claims, ensured adequate and timely reporting of all material or significant developments concerning UGL's performance that a reasonable person would expect to have a material effect on the price or value of UGL's securities.
32 MCI alleges that on 12 August 2013, UGL disclosed to the market that the Ichthys LNG power station would be a key contributor to UGL's major project earnings in the financial year ended 30 June 2014 (12 August 2013 forecast). MCI says this was disclosed in UGL's 2013 Annual Report and in a release to the ASX.
33 MCI alleges that the 12 August 2013 forecast made two representations with respect to future matters:
(a) UGL would record profit from its joint venture to build the Ichthys LNG power station in the financial year ending 30 June 2014; and
(b) UGL expected its performance of the consortium contract to build the Ichthys LNG power station to be profitable.
34 Under particulars to this plea, MCI alleges that as UGL's accounting policies (referred to in paragraph 28 above), allowed for profit on a fixed price contract project to be recognised only:
(a) once the forecast cost at completion could be reliably estimated; and
(b) where the forecast cost at completion was lower than the fixed price
UGL's representation that it would record profit from its joint venture to build the Ichthys LNG power station in 2014 also represented that UGL would make a profit on its performance of the consortium contract to build the Ichthys LNG power station.
35 MCI alleges that UGL had no reasonable grounds for making the representations alleged and accordingly those representations are taken to be misleading pursuant to s 769C(1) of the Act.
36 MCI alleges that UGL's publication of each of its 2013 Annual Report and ASX Release entitled 'UGL reports underlying FY2013 NPAT of $92.1 million in line with revised guidance' on 12 August 2013 was conduct by UGL in relation to a financial product (namely UGL ED securities) that was misleading or deceptive or was likely to mislead or deceive in breach of s 1041H of the Act because the publication is taken to be misleading or deceptive by operation of s 769C(1) of the Act.
37 MCI alleges that on 6 November 2014, UGL issued a release to the ASX which disclosed that the lead partner and manager of the project to build the Ichthys LNG power station, CH2M, would recognise a provision of US$170 million against the project due to an increase in the forecast cost of the project because of project changes and events in the design and procurement phase and subsequent delays.
38 MCI alleges that UGL's disclosure to the ASX on 6 November 2014 advised the market for the first time that UGL's joint venture with CH2M to construct the Ichthys LNG power station was likely to have total contract costs greater than total contract revenue, and UGL was therefore likely to recognise material loss on the project (the Ichthys LNG power station matters).
39 MCI then alleges other causes of action that I will come to later concerning the information that should have been disclosed about the Ichthys LNG power station matters (as defined in the statement of claim, and set out at paragraph 82 below). The next relevant plea in respect of the August 2013 misleading or deceptive conduct is that pleaded in respect of loss and damage. The plea of loss and damage is common to all the several causes of action.
40 MCI alleges that the MCI and Group Members held their interests in UGL ED securities in a market:
(a) regulated by, inter alia, the Listing Rules and the Act; and
(b) where the price or value of UGL ED securities would reasonably be expected to be informed and affected by information disclosed in accordance with the Listing Rules and the Act.
(a) expected that UGL had complied with its obligations under the Listing Rules and the Act as alleged in the previous paragraph; and
(b) had no knowledge of the information about the Ichthys LNG power station matters (defined at paragraph 82 below)
when it purchased the 120 UGL ED securities on 18 February 2014.
42 MCI alleges that it and the Group Members acquired their UGL securities in a market:
(a) in which UGL had failed to disclose information about the Ichthys LNG power station matters that a reasonable person would expect to have a material effect on the price or value of UGL ED securities;
(b) in which UGL had engaged in misleading and deceptive conduct alleged (where each instance of misleading or deceptive conduct affected MCI and those sub-groups of Group Members who acquired their UGL ED securities after the occurrence of each respective instance of misleading or deceptive conduct alleged); and
(c) in which the significant falls in the price of UGL ED securities on and after 6 November 2014 were caused by and were a result of the disclosure of information about the Ichthys LNG power station matters.
43 MCI alleges that the failure to disclose the information about the Ichthys LNG power station matters caused the market price for UGL ED securities prior to 6 November 2014 to be substantially greater than:
(b) the market price for UGL ED securities that would have prevailed but for UGL's failure to disclose the information about the Ichthys LNG power station matters at any time prior to 6 November 2014.
44 MCI alleges that MCI and Group Members have each suffered loss and damage because of and resulting from the failure to disclose the information about the Ichthys LNG power station matters to the market, and MCI and those sub-groups of Group Members who acquired their UGL ED securities after the occurrence of each respective instance of misleading or deceptive conduct by UGL alleged have also suffered loss by that misleading or deceptive conduct, and all Group Members are entitled to compensation pursuant to ss 1041I, 1317HA and 1325 of the Act.
The August 2013 misleading or deceptive conduct
45 As indicated above, this plea involves alleged future representations for which there were no reasonable grounds.
46 The UGL annual report for 2013 was released to the market on 12 August 2013. Under the heading of financial performance at page 17 of the annual report UGL stated:
In the 2013 financial year, Engineering revenue declined 30 per cent to $1.8 billion. Revenue performance during the year was affected by the continued slowdown in capital investment in the Australian resources and infrastructure sectors resulting in further delays and cancellations of major projects. Engineering's contribution to UGL's total underlying operating revenue was 43 per cent in the 2013 financial year.
EBIT declined 58 per cent to $62.5 million during the year reflecting the decline in revenue as well as underperformance across several power projects. Engineering delivered an EBIT margin of 3.4 per cent for the year. While a significant cost reduction program was implemented to address the decline in revenues this year, margins were affected by the timing of the cost outs, in addition to the underperforming power projects.
...
Within UGL's major projects operations, the BHP Billiton Iron Ore Jimblebar project is being successfully executed and on track for completion in September 2013. The Ichthys LNG power station is ramping up and will be a key contributor to major projects earnings in the 2014 financial year.
47 The notes to the financial statements for the year ended 30 June 2013 contain Note 1: Significant accounting policy. Relevant sections of Note 1 state as follows:
(e) Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components.
Internal reporting provides discrete financial information for each operating segment enabling the segments' operating results to be regularly reviewed by the Group's CEO to make decisions about resources to be allocated to the segment and assess its performance.
Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, head office expenses, and income tax assets and liabilities.
Segment capital expenditure is the total cost incurred during the year to acquire property, plant and equipment, and intangible assets other than goodwill.
(f) Revenue recognition
Goods sold and services rendered
Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebate. Revenue from sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer.
Revenue from services rendered is recognised in the income statement in proportion to the stage of completion of the transaction at reporting date. The stage of completion is assessed by reference to work performed. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due or if the costs incurred or to be incurred cannot be measured reliably.
Construction contracts
Contract revenue and expenses are recognised on an individual contract basis using the percentage of completion method when the stage of contract completion can be reliably determined, costs to date can be clearly identified, and total contract revenue and costs to complete can be reliably estimated. Two or more contracts are treated as a single contract where the contracts are negotiated as a single package, are closely interrelated and are performed concurrently or in a continuous sequence.
Profit recognition for lump sum fixed price contracts does not commence until costs to completion can be reliably measured. This is generally between 15% and 30% complete.
Stage of contract completion is generally measured by reference to physical completion. An assessment of total labour hours and other costs incurred to date as a percentage of estimated total costs for each contract is used if it is an appropriate proxy for physical completion. Task lists, milestones, etc. are also used to calculate or confirm the percentage of completion if appropriate.
Where the outcome of a contract cannot be reliably estimated, contract costs are expensed as incurred. Where it is probable that the costs will be recovered, revenue is recognised to the extent of costs incurred. An expected loss is recognised immediately as an expense.
48 In the chairman's message in the 2013 annual report, the chairman said (notes omitted):
During the 2013 financial year, UGL's underlying operating revenue declined 12 per cent to $4.2 billion. Reported net profit after tax was $36.5 million, however, this was impacted by restructuring costs, rebranding, the amortisation of acquired intangibles and property sales. A more accurate comparison for shareholders is UGL's performance on an underlying basis. Underlying net profit after tax was $92.1 million, in line with the revised earnings guidance provided to the market in May 2013. Underlying earnings per share was 55.4 cents per share.
49 The annual report discloses that the business of UGL appeared to be divided into at least the following segments: DTZ, Engineering, and Operations and Maintenance.
50 MCI also relies on a 12 August 2013 ASX Release entitled 'UGL reports underlying FY2013 NPAT of $92.1 million in line with revised guidance' UGL disclosed to the market that '[t]he Ichthys LNG power station is ramping up and will be a key contributor to major projects earnings in FY 2014.'
51 As referred to in paragraph 33 above, MCI alleges that by inference two representations as to future matters were made UGL. The first is that UGL would record profit from its joint venture to build the Ichthys LNG power station in the financial year ending 30 June 2014; and that UGL expected its performance of the consortium contract to build the Ichthys LNG power station to be profitable.
52 The particulars to the allegation explain how it is that such an inference arises.
53 MCI says that as the accounting policies (which I have set out in paragraph 28 above) allowed for profit on a fixed price contract project to be recognised only: (a) once the forecast cost at completion could be reliably estimated; and (b) where the forecast cost at completion was lower than the fixed price for the project, UGL's representation that it would record profit from its joint venture to build the Ichthys LNG power station in 2014 also represented that UGL would make a profit on its performance of the consortium contract to build the Ichthys LNG Power station.
54 MCI alleges that the UGL had no reasonable grounds for making the representations (referred to in paragraph 51 above) and accordingly the representations are taken to be misleading pursuant to s 769C(1) of the Act.
55 MCI alleges[14] that UGL had no reasonable grounds for making the representations because:
(a) UGL's accounting policies, (referred to in paragraph 28 above) allowed for profit on a fixed price contract to be recognised only:
(i) once the forecast cost at completion could be reliably estimated; and
(ii) where the forecast cost at completion was lower than the fixed price for the contracted work, meaning that the profit could only be recorded where it could be reliably estimated that the performance of a fixed price contract would be profitable;
(b) the representation that UGL would record profit from the Ichthys LNG power station consortium contract implied that the project was sufficiently progressed for the forecast cost at completion to be reliably estimated;
(c) it may be inferred that UGL could not reliably measure the forecast cost to completion of the Ichthys LNG power station as of 12 August 2013 as:
(i) CH2M was at all material times a lead partner and manager of the joint venture to build the Ichthys LNG power station;
(ii) It may be inferred that the Ichthys LNG power station was not yet sufficiently performed to reliably forecast cost to completion (in the range of 15 to 30 per cent complete as directed by UGL's revenue recognition policy) as CH2M Hill (the lead partner and manager of the joint venture) acknowledged that as of 6 August 2014 the Ichthys LNG power station was only 20 per cent complete;
(iii) The Ichthys LNG power station remained at a design stage, during which UGL has since disclosed that there were 'a range of project changes and events in the design and procurement phase', meaning that:
(iv) When UGL's financial results for the 2014 financial year were released on 25 August 2014, describing the results of each of its investments in 'joint venture entities and associates' as 'individually immaterial' with a total tax profit on joint ventures of $2.147 million suggesting that the Ichthys LNG power station had not been a key contributor to major project earnings in the 2014 financial year which, given UGL's policy of recognising profit on profitable projects on a percentage of completion basis, makes it likely that UGL remained unable to reliably estimate that its performance of the Ichthys LNG power station would be profitable more than a year after the 12 August 2013 announcement,
indicating that UGL's expectations of revenue from the Ichthys LNG power station exceeding forecast cost to completion disclosed to the market on 12 August 2013, which would allow the recognition of profits in the 2014 financial year or at all, lacked reasonable grounds.
56 MCI then alleges that the publication of the 2013 annual report and the ASX release referred to above was conduct in breach of s 1041H because the publications were taken to be misleading or deceptive by operation of s 769C(1) of the Act as set out above in paragraph 36 above.
57 UGL contends that the term 'profit' - particularly accounting profit - is not a necessary synonym for 'earnings'. UGL says that the terms are used in distinct senses in the 2013 annual report and the ASX release relied upon by MCI.
58 UGL points to the different measures referred to in the 2013 annual report. Thus, the report refers to the 'reported net profit' and distinguishes that from the 'underlying net profit'. The difference is explained in that the reported net profit was reached after restructuring and rebranding costs were taken into account. Clearly, these would be one off costs and not part of the ongoing costs of the business conducted by UGL.
59 The report refers to underlying earnings per share. UGL also points to the use of EBIT - that is earnings before interest and tax. It is clear that UGL uses several measures in describing its profitability.
60 In my opinion, earning is another word to describe an excess of revenue over costs. Whether profit is a necessary synonym for earnings is one thing, but I do think it is open to argue that earnings is an indicator of profitability.
The first plea relies on an unpleaded assumption
61 MCI says that the representations necessarily involve embedded, unpleaded representations, emerging from the particulars to paragraph 13, namely:
(a) UGL would record a profit from the joint venture to build the Ichthys LNG power station in the 2014 financial year because it could reliably measure cost to completion in accordance with its revenue recognition policy; and
(b) UGL expected its performance of the contract to build the Ichthys LNG power station to be profitable overall because it could reliably measure cost to completion in accordance with its revenue recognition policy, and such costs would be lower than the fixed price of the contract.
62 UGL says that such representations could not reasonably be conveyed by the statement in the annual report and the ASX release. For the following reasons I agree.
63 UGL says that the statement of UGL's expectation regarding the contribution of the Ichthys LNG power station project to earnings could not reasonably convey a representation regarding an accounting profit in 2014 or at all. UGL says that the statement was a forecast. The Act recognises that representations about future matters is another way of describing a forecast: see ss 728(2) and 1041F of the Act.
64 MCI alleges that at all material times UGL recognised revenue, expenses and profit on construction contracts in accordance with the accounting policies it pleads. That is correct, if the contention is that the recognition is in the statutory accounts to which the policy applied.
65 A mere reference to the policies applied in the preparation of the statutory financial accounts does not raise any basis for suggesting that these policies were also to be applied to forecasts. The recognition referred to in the policy is clearly only referable to recognition for the purpose of preparing historical statutory accounts.
66 The August 2013 statement was clearly a forecast or a prediction. So much was acknowledged by MCI in paragraph iv(b) of the particulars to paragraph 20 in the statement of claim. The August 2013 forecast or prediction does not purport to be a calculation of the historical profit that would attract the accounting policy referred to in the notes to the accounts.
67 Assuming for the present purposes that earnings is a another way of referring to profits (an assumption which UGL contests) then in my opinion the forecast was no more than a prediction that when the financial accounts were prepared after 30 June 2014, UGL expected that the project would be a key contributor to UGL's major project earnings in the financial year ended 30 June 2014.
68 In my view, the forecast does represent that UGL had reasonable grounds for making such a forecast. Reasonable grounds could be a reasonably based budget for example. The reasonable grounds for the forecast do not include that the forecast was prepared by the application of an accounting policy that was to be adopted in the preparation of historical statutory accounts. The policy by its terms could not be applied to the making of a forecast of the contribution of the project to the results for the year ended 30 June 2014. As such, the standards within that policy are not an appropriate, let alone necessary, measure of what UGL had reasonable grounds to forecast as at 12 August 2013.
69 Reading the policy set out in note 1 (f) as a whole, it is apparent that the policy is addressing the preparation of historical accounts, as opposed to budgets or forecasts. For instance, the policy says that where the outcome of a contract cannot be reliably estimated, contract costs are expensed as incurred. This is a reference to costs that have been incurred. That is a reference to recognising historical costs when they are incurred. The policy does not refer to estimated costs in the future.
70 The note continues, that where it is probable that costs will be recovered, revenue is recognised to the extent of the costs incurred. This is clearly a reference to the preparation of historical accounts of which the statutory accounts is one. The reference to 'costs will be recovered', is a reference to costs that have been incurred. Such a calculation cannot be done in a forecast such as that of August 2013.
71 The profit recognition that the policy addresses relates to work that has been completed. Profit is not brought to account for work that is yet to be done in the future. This is borne out by the requirement that 'costs to date can be reliably determined'. The reference to 'costs to date', is a recognition that the policy is being applied to historical costs. The policy addresses the issue of when and how profit is to be brought to account on construction contracts. That is an exercise in recognising a profit for the purposes of preparing historical accounts such as the statutory accounts. The policy is not applied in the preparation of a forecast made about what is expected in the future.
72 In this case, at its highest, the 12 August 2013 forecast was of what was expected to be achieved when the accounting policy referred to in note 1 (f) was applied at the end of the financial year some 11 months hence. The making of such a forecast did not imply that the policy was or could be applied before the statutory accounts were prepared after the end of the financial year in 2014.
73 There is an implied assumption in the plea that UGL in making a forecast was obliged to apply to the forecast the pleaded accounting policy that was to be applied in preparing the statutory accounts. Such an assumption is not pleaded. Nor could it be, as by its terms the policy was only applicable to the preparation of historical accounts and was not by its terms able to be applied to a forecast.
74 In fact, MCI plead that the relevant accounting policy only applied where the profit on a fixed price contract was 'to be recognised'. 'To be recognised' in this context is to bring to account in the annual financial statements. The making of a forecast or a budget could not on any stretch be described as recognising a profit or a loss. Historical accounts are prepared after the event, they are not forecasts for the future.
75 It is the case that, in preparing historical accounts, a calculation of the profit or revenue that should be attributed to the historical period is calculated under the 'revenue recognition of construction contract' accounting policy. This does involve estimates to be made of matters to happen in the future. This, however, is for the purpose of bringing to account an historical profit for what has been achieved to date for the purposes of the statutory accounts. There is a significant difference between calculating an historical profit and the making of forecasts or budgets of future earnings.
76 I would strike out the cause of action pleaded in paragraphs [14]-[15] of the statement of claim on the grounds that they do not disclose a cause of action that has a real prospect of success.
The pleadings relevant to the second and third causes of action
77 The second and third causes of action allege a failure of UGL to disclose market sensitive information immediately upon becoming aware of the information in breach of s 674(2) of the Act.[15]
78 MCI and the group members allege that UGL has breached its continuous disclosure obligations under s 674(2). Section 674(2) forms part of ch 6CA which governs the continuous disclosure obligations upon listed companies. Section 674(2) imposed on UGL an obligation to notify the ASX of information that UGL had that was not generally available, and which was information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of its listed shares. A critical element of the obligation to disclose is that UGL had the information.
79 MCI gave notice that it intends to amend paragraphs 18(b), 19 and 20. The relevant pleadings relate to both the second and third causes of action. I will first set out the pleadings (adopting the proposed amendments) and then deal with each cause of action in turn.
80 MCI alleges that on 6 November 2014, UGL issued a release to the ASX which disclosed that the lead partner and manager of the project to build the Ichthys LNG power station, CH2M, would recognise a provision of US $170 million against the project due to an increase in the forecast cost of the project because of project changes and events in the design and procurement phase and subsequent delays.[16]
81 MCI alleges that UGL's disclosure to the ASX on 6 November 2014 as alleged advised the market for the first time that UGL's joint venture with CH2M to construct the Ichthys LNG power station was likely to have total contract costs greater than total contract revenue, and UGL was therefore likely to recognise a material loss on the project (the Ichthys LNG power station matters, as earlier referred to in paragraph 38[17]).17
82 MCI alleges that the information concerning the Ichthys LNG power station matters that a reasonable person would have expected to have a material effect on the price or value of UGL's ED securities, if that information was made generally available, was that:
(a) UGL could not reliably estimate that its performance of the contract to build the Ichthys LNG power station would be profitable;
(ba) by implication, UGL did not know whether the Ichthys LNG power station would be a key contributor to UGL's major project earnings in the 2014 financial year;
(bb) the Ichthys LNG power station had not been a key contributor to UGL's major project earnings in the 2014 financial year.
(c) it was likely that UGL would make a loss on its performance of the contract to build the Ichthys LNG power station; and
(d) it was likely that UGL would record a material provision to reflect the expected loss on performance of the Ichthys LNG power station contracts
(together the information about the Ichthys LNG power station matters).[18]
83 In the second cause of action, MCI alleges that on 12 August 2013, UGL was aware that UGL had no reasonable grounds for representing that its performance of the consortium contract to construct the Ichthys LNG power station would be a key contributor to major project earnings in the 2014 financial year, or profitable at any time, being the information about the Ichthys LNG power station matters alleged in sub-paragraphs (a) and (ba) as referred to in paragraph 8[19].19
84 In the third cause of action, MCI alleges that on a date MCI is unable to specify prior to discovery of documents from UGL's internal reporting systems, but which was not later than 8 August 2014, UGL was aware of the information about the Ichthys LNG power station matters which is alleged in sub-paragraphs (bb), (c), and (d) as referred to in paragraph 82[20].20
85 MCI alleges that despite UGL's awareness, as referred to in 83 above and 84 above, the information about the Ichthys LNG power station matters was not generally available until UGL made it generally available by releasing information about the Ichthys LNG power station matters to the[21]SX on 6 November 2014.21
86 MCI alleges that UGL's failure to disclose the information about the Ichthys LNG power station matters to the market immediately upon becoming aware of the Ichthys LNG power station matters constitute a breach of section 674(2) of the Corporations Act 2001 (Cth) (the Act).[22]
The second cause of action - nondisclosure on 12 August 2013
87 The second alleged contravention relates to the alleged failure of UGL to disclose certain information on 12 August 2013 that UGL had on that date. MCI did not purchases its shares in UGL until 18 February 2014, so this claim is maintainable by MCI.
88 It will be recalled that 12 August 2013 is the date of the publication of the 2013 Annual Report and the release to the ASX (ie the date of the 12 August 2013 forecast).
89 In substance, it is alleged that the 12 August 2013 statements that were issued containing the forecast should have been corrected forthwith as UGL was aware that it did not have reasonable grounds for representing that its performance of the consortium contract to construct the Ichthys LNG power station would be a key contributor to major project earnings in the 2014 financial year, and by implication, that UGL did not know whether the Ichthys LNG power station would be a key contributor to UGL's major project earnings in the 2014 financial year.
90 The key to the plea is the allegation that as at 12 August 2013 UGL was aware of the accounting policies in preparing the statutory accounts and the other particulars referred to in paragraph 55 above save (c)(iv).
91 Paragraph 18(a) of the statement of claim (summarised at paragraph 82 above) contends that UGL could not reliably estimate that its performance of the contract to build the Ichthys LNG power station would be profitable. The second cause of action alleges that UGL was aware of that and should have disclosed it b[23] did not.23
92 The underlying premise is that any forecast or budget would have to be made applying the significant accounting policy relating to 'revenue recognition' for 'construction contracts' as set out in the note 1 to the financial statements incorporated in the statutory accounts (set out at paragraph 47 above). This premise reflects the unpleaded assumption in the first cause of action, discussed above.
93 As for the first cause of action, the pleading for the second cause of action, however, does not allege that the forecast or budget was required to be prepared in accordance with the alleged accounting policy, or that UGL knew that it applied in that way. For the reasons set out above, nor could that be properly alleged.
94 As discussed above, the accounting 'revenue recognition' policy pleaded does not apply to forecasts or budgets but to historical statutory accounts. UGL could not be said to be aware of (and required to disclose) information said to arise from such an unpleaded assumption (ie that UGL could not reliably estimate profitability) where the relevant accounting policy could not even apply.
95 The second allegation relating to the alleged August 2013 non-disclosure is that contained in sub-paragraph (b)(a) (summarised at paragraph 82 above) that in August 2013, by implication, UGL was aware that it had no reasonable grounds for representing that its performance of the consortium contract to construct the Ichthys LNG power station would be a key contributor to major project earnings in the 2014 financial year, or profitable at any time.
96 The plea alleges a state of knowledge to UGL. In particular, that is it was aware that it did not have reasonable grounds for representing that its performance of the contract would be a key contributor to major project earnings in the 2014 financial year.
97 The particulars provided again refer to the construction contracts accounting policy applied to the statutory accounts. As I have held in discussing the first limb of the alleged failure to disclose in August 2013, MCI does not allege that the policy applied to forecasts of the nature made in the annual report and the ASX release of 12 August 2013. Nor does it allege that MCI was aware that the accounting policy did so. Nor could it so allege, for the reasons discussed above.
98 For these reasons, I find that the second cause of action has no prospects of success.
The third cause of action - nondisclosure in August 2014
99 In substance, the third cause of action alleges that not later than 8 August 2014, UGL was aware that the Ichthys LNG power station had not been a key contributor to UGL's major project earnings in the 2014 financial year; it was likely that UGL would make a loss on its performance of the contract to build the Ichthys LNG power station; and it was likely that UGL would record a material provision to reflect the expected loss on performance of the Ichthys LNG power station contracts but this information was not released by UGL to the market until 6 November 2014 in breach of s 674(2) of the Act.
100 In my opinion, the fact that on 8 August 2014, the joint venture partner CH2M advised the SEC in the USA that for the reasons set out in their notice[24] they were unable to estimate revenues, costs and schedule impacts and accordingly they had recorded revenues equal to costs incurred, does raise the inference that UGL would also have come to the same conclusions, at least at the same time during August 2014.
101 In those circumstances, I do not accept UGL's submission that the third cause of action has no real prospect of success and ought to be struck out.
102 I note briefly that the third cause of action is pleaded on the basis that UGL was aware of the information at paragraph 82 (bb), (c) and (d) 'not later than 8 August 2014' but that the date upon which that awareness was said to arise cannot be specified prior to[25]iscovery.25 More will be said of these pleadings as to the timing of UGL's awareness in the discussion below regarding the plaintiff's standing.
103 The fourth cause action alleges several incidents of misleading and deceptive conduct. The first allegation is that the Chairman's and the Managing Director's addresses at the 2013 AGM and on 29 October 2013 was conduct by UGL that was misleading or deceptive or was likely to mislead or deceive, in breach of section 1041H of the Act, because the publication:
(a) repeated the representations alleged (as referred to in paragraph 32 above about the project being a key contributor to earnings) for which UGL did not have reasonable grounds; and
**(b) did not disclose any information about the Ichthys LNG power station matters (as referred to in paragraph [82 > There is no provision in part 4A which expressly prohibits a plaintiff from advancing a claim in a group proceeding which is not personally maintainable by him. On the contrary, the general nature of part 4A supports the plaintiff's, rather than AFD's, argument.
To validly commence a group proceeding, s33C requires that the claims of seven or more people against the same person are in respect of, or arise out of, the same, similar or related circumstances. There must be at least one substantial common question of law or fact. A representative party is not required to have the same claim as every other group member.[35]
128 MCI says that the rationale for this principle was explained by Gillard J in Johnson Tiles Pty Ltd v Esso Australia Pty Ltd[36] as follows:
In my opinion, there is nothing in Part 4A of the Act which requires that there has to be a plaintiff for each group. Certain prerequisites have to be satisfied, but there is nothing which precludes a plaintiff whose claim is the same as those constituting one group, also bringing the proceeding on behalf of other members of another group, so long as the three threshold features are present. In my view, the provisions referred to above make that clear.
In my opinion, it follows that it is open to a plaintiff to call a witness who may give evidence of factual matters, which do not assist the plaintiff's claim but do raise for consideration and determination, a question of fact or law which is common to some or all members of a group.
In my view, the court should endeavour to decide as many common questions of fact and law in a group proceeding, to facilitate the outcome of the litigation. If some questions are only relevant to some group members and not all, or to one group and not the other, so be it. As long as it may have some substantial practical effect in the determination of the litigation, one of the objects of group litigation is achieved.
It follows that, in my opinion, the plaintiffs are entitled to call, as witnesses, any member of a group in order to adduce evidence which is relevant to any issue raised, and a plaintiff may represent a group even though he is not a member of that group.
129 MCI notes that an alternative view was expressed by Hedigan J in Cook v Pasminco Ltd.[37] Hollingworth J considered that Hedigan J was 'addressing the desirability or acceptability of allowing that to occur in the particular case before him' (Hall at [24]) and her Honour agreed at [21] with Gillard J's view that Hedigan J's observation in Cook v Pasminco 'is not authority for the proposition that the legislation does not permit what is proposed by the plaintiffs'.
130 MCI submits that it is entitled to bring the disclosure and misleading or deceptive conduct claims arising after its purchase of shares in UGL, even though a claim for damages in respect of that alleged disclosure failure or misleading or deceptive conduct would not be personally maintainable by MCI. MCI says that the separate damages claims of group members are individual and not common questions. MCI contends that they will not be the subject of determination in the trial of common questions pursuant to the class action procedures of the Court.
131 In Melbourne City Investments Pty Ltd v WorleyParsons Limited,[38] MCI had acquired shares in WorleyParsons before the alleged conduct that inflated the market had occurred. Ferguson J held that MCI lacked standing to bring the proceedings as it had no claim for damages. MCI sought, instead, to seek a declaration. Ferguson J held that it did not have a real interest in seeking declaratory relief. Her Honour said:
A person has standing to enforce a public right provided that either some private right of that person has also been infringed or that the person has a real interest in doing so. The Court will not grant relief if a declaration will not produce any foreseeable consequences for the parties. If the person is in no different position to any other member of the public, then the person lacks standing to enforce the public right. The issue of standing is the same whether declaratory or injunctive relief is sought. In Australian Conservation Foundation Inc v Commonwealth, Gibbs J explained what constitutes a real interest in the following way:
...an interest, for present purposes, does not mean a mere intellectual or emotional concern. A person is not interested within the meaning of the rule, unless he is likely to gain some advantage, other than the satisfaction of righting a wrong, upholding a principle or winning a contest, if his action succeeds or to suffer some disadvantage, other than a sense of grievance or a debt for costs, if his action fails. A belief, however strongly felt, that the law generally, or a particular law, should be observed, or that conduct of a particular kind should be prevented, does not suffice to give its possessor locus standi. If that were not so, the rule requiring special interest would be meaningless. Any plaintiff who felt strongly enough to bring an action could maintain it.[39]
132 Her Honour said that MCI accepted that it must have a real interest if it were to bring the action. After considering extensive submissions by MCI, her Honour held that MCI did not have standing to seek a declaration in a group proceeding where it otherwise did not have a maintainable cause of action.
133 Gillard J in Johnson Tiles was dealing with a situation where the plaintiff otherwise had a maintainable claim against the defendant and sought in addition to bring a claim on behalf of group members that was not maintainable by the plaintiff. Gillard J said that in those circumstances, the plaintiff could maintain the other claim on behalf of other group members even though that claim was not maintainable by the plaintiff.
134 That situation is different to that which may prevail here, where MCI does not have any claim against UGL if its claims in respect of the August 2013 conduct are struck out and its claim in respect of the publication on 17 February 2014 is struck out. There is no authority to support the proposition that a person could be a plaintiff to a group proceeding where the plaintiff does not have any claim against the defendant. So much was held by Ferguson J in WorleyParsons.
135 Accordingly, subject to the further comments below, I find that MCI does not have standing to bring the third and fourth causes of action.
136 In my view, that is so, notwithstanding that it is possible that, if the third and fourth causes of action proceeded, it may be shown (perhaps, as MCI submits, through further investigation) that UGL was aware of the information about the Ichthys LNG power station (including matters (ba), (c) and (d) set out at paragraph 82 above) even prior to that date MCI bought its shares, being 18 February 2014. Indeed, awareness before that date would be required if the fourth cause of action relating to a publication dated 17 February 2014 (see paragraph 109(a) above) were maintained. UGL's awareness is the critical issue in those causes of action. If it could be shown that it was so aware before MCI bought its shares, then MCI would, hypothetically, have standing.
137 However, the issue of MCI's current standing in these causes of action must be determined according to the pleadings. The statement of claim (at paragraph 20 and the particulars thereto) state that UGL was aware of the relevant information 'on a date that the plaintiff is unable to specify prior to discovery of documents ... but which was not later than 8 August 2014.'[40] The pleading does not currently disclose an arguable cause of action that is maintainable by the plaintiff who has not claimed loss and damage in respect of conduct after 18 February 2014.
138 In order for the pleadings to disclose an arguable cause of action maintainable by MCI, the statement of claim must plead that UGL had information of certain matters 'not later than 18 February 2014'. MCI's standing is otherwise just speculative. The submissions in relation to discovery cannot mitigate a failure by MCI to plead a good cause of action - discovery is not a vehicle to enable standing, but rather assumes that standing already exists. Perhaps MCI could amend its pleading but it could only do so if there was a proper basis for alleging UGL's knowledge 'not later than 18 February 2014'. However, the issue of proper basis will be considered further below.
139 MCI seeks a declaration that UGL has contravened s 1041H of the Act by engaging in the alleged misleading and deceptive conduct.
140 Further, MCI seeks compensation pursuant to ss 1041I (loss and damage for the misleading or deceptive conduct in contravention of s 1041H), 1317HA (compensation for inadequate disclosure in breach of s 674(2)) and 1325 (compensation for loss suffered by party to proceeding).
141 In summary, MCI and the group members seek compensation pursuant to ss 1041I, 1317HA and 1325 in respect of UGL's alleged contraventions under ss 674(2) and 1041H of the Act.
142 Section 1041HI(1) provides, inter alia, that a person who suffers loss or damage by conduct of another person that was engaged in a contravention of s 1041H may recover the amount of the loss or damage by action against that other person.
143 Section 1317HA provides, inter alia, for compensation for breaches of s 674(2) where the 'damage resulted from the contravention'.
144 Section 1325 also provides for compensation for breach of ss 674(2) and 1041H. It refers to loss or damage 'because of conduct of another person that was engaged' in the prohibited conduct.
145 A great deal of time was spent at the hearing on whether or not market based causation gives rise to a good cause of action. UGL contends that MCI's claims fail as MCI does not plead the causal link that underpins an entitlement to compensation pursuant to ss 1317HA and 1325 of the Act in respect of UGL's alleged contraventions of s 674(2) of the Act, or under s 1041I, in respect of the alleged contravention of s 1041H.
146 UGL's written submissions squarely identified the issue on damages as follows:
This proceeding squarely raises the following questions going to the heart of the sustainability of the plaintiff's case: first, whether a claimant in an action for damages for breaches of disclosure laws must show that the action or inaction which led to its loss (in this case, the acquisition of UGL shares) was induced by the defendant's contravention of those laws; and secondly, whether causation may be established by showing nothing more than that the claimant bought its shares at a price which was higher than the price which would or may have prevailed had the disclosure breaches not occurred (that is, if the 'true position' had been known).
147 Sifris J comprehensively addressed the same issue in Camping Warehouse Australia Pty Limited v Downer EDI Limited.[41] Similarly to this case, Sifris J considered an application to strike out the statement of claim in a group proceedings that relied on market based causation. The claim alleged a breach of the continuous disclosure obligations imposed under s 674(2) of the Act and for misleading or deceptive conduct in contravention of s 1041H, as is also pleaded in this case.
148 His Honour considered many of the authorities relied on in this case, including Laurence John Bolitho v Banksia Securities Ltd;[42] Janssen-Cilag Pty Ltd v Pfizer Pty Ltd;[43] Digi-Tech (Australia) Ltd v Brand;[44] Gardiner v Agricultural & Rural Finance Pty Ltd;[45] Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd;[46] and Woodcroft-Brown v Timbercorp Securities Ltd.[47]
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.
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.
In all of the circumstances I am satisfied that the claim should go forward substantially as pleaded.[48]
150 Since argument concluded in this case, I have been referred to the recent Full Court decision of the Federal Court of Australia in Caason Investments Pty Ltd v Cao.[49] In that case the plaintiff had brought group proceedings seeking damages on the market based causation basis (that is not alleging reliance). The alleged misconduct related to the issue of a prospectus by a corporation.
151 Section 728 of the Act prohibits offering securities under a disclosure document that contains a misleading or deceptive statement, or certain omissions. Section 729(1) provided that 'a person who suffers loss or damage because an offer of securities contravened subsection 728(1)' could recover the amount of the loss or damage 'caused by' the contravention from (in that case) each director of the corporation.
152 On the appeal, there was some dispute as to whether or not the trial judge had rejected the plea based on market based causation. The majority held that her Honour had and held that the plea of market based causation should not have been struck out but should have been permitted to be pleaded. Edelman J dissented on his construction of what the trial judge had done. Nevertheless, in view of the issues argued on the appeal, his Honour expressed his views on the validity of a plea based on market based causation. He expressed his understanding of the plea as follows:
The concept of market based causation involves a causal relationship albeit one without reliance by the plaintiff investor on a disclosure document. The plea is that a misleading statement or omission in a disclosure document causes the market price for the securities to be inflated so that the investor purchases securities at a price which is greater than the investor would otherwise have paid. The investor then suffers loss including when the release of the omitted information or the correction of the misleading statements causes the market price of the securities to fall. None of these causal links requires the investor to rely on the disclosure document. [50]
153 His Honour held that it is at least arguable that as a technique of causation without reliance, market based causation is not unusual. He cited Janssen-Cilag, where conduct by one trader lead to customers being diverted from another trader.
154 His Honour said that another significant reason why market based causation is arguable is that reliance is not a necessary element of the requirements of causation in s 729(1) because s 729(1) permits liability in cases of omissions. His Honour also said that as a matter of authority the concept of market based causation had not been expressly rejected in any case and in some it has been allowed to proceed to trial. His Honour expressly referred to Downer EDI, Bolitho, Earglow Pty Ltd v Newcrest Mining Ltd[51] and ABN Amro NV v Bathurst Regional Council.[52]
For the reasons above, I consider that it is at least arguable that reliance is not a required element of a claim for loss suffered under s 729(1) of the Corporations Act. A claim for loss which relies on s 729(1) can, at least arguably, rely upon market based causation. This was the only issue of substance on this appeal and the appellants' submissions on this point must be accepted.[53]
156 These authorities satisfy me that the market based causation damages claims should be allowed to proceed (absent other grounds). In the face of these authorities, no useful purpose would be served for me to express any view on the ultimate validity of the market based causation claim to damages.
157 As indicated above, I find that the claims based on the August 2013 alleged conduct, have no real prospect of success. They should be struck out.
158 I also find that MCI has no standing, in those circumstances, to bring the claims based on the August 2014 alleged conduct to which it is not a party in the terms of the pleading as currently expressed. Accordingly, the balance of the claims should be struck out.
159 If I am wrong on either or both of those findings, I find that there is no bar to the market based causation damages claims proceeding in the absence of any plea of reliance.
160 I have decided that the statement of claim should be struck out. On the other hand, the proceeding remains on foot. Normally, the Court would entertain an application by MCI to amend the statement of claim. However, the question arises of whether or not the proceeding as a whole should be struck out.
161 The Court of Appeal has held that in two cases[54] where MCI has brought similar group proceedings to these against a public corporation seeking damages relying on the principle of market based causation, that the cases should be struck out as an abuse of process. In each case, the ground was that the proceedings had been brought by Mr Elliott for the predominant purpose of him earning legal fees. In each case this was held to be an abuse of process.
162 The question arises whether or not this proceeding should be permitted to proceed in view of the questionable claim to damages by MCI.
163 In this case, MCI has pleaded that it expected that UGL had complied with its obligations under the Listing Rules and the Act as alleged in paragraph [20] of the Statement of Claim. This plea was of critical importance to the claim. It provided the base upon which MCI could act as plaintiff. Without that plea it might be argued that the proceeding could not have proceeded.
164 To my mind, the question arises whether MCI had a proper factual basis to support that allegation. The question arises whether MCI purchased the shares in the hope and expectation that prior to its purchase, UGL had failed to comply with its disclosure obligations under the Listing Rules or engaged in misleading or deceptive conduct. The question arises whether the real reason MCI purchased the UGL shares was to establish a base to bring a market based causation group proceeding against UGL.
165 The question arises whether the damage claimed by MCI is a genuine plea or whether any damages claimed by MCI have been manufactured to enable it to claim (wrongly) that it has suffered loss and damage.
166 If a person deliberately drove their car onto train tracks, in the hope and expectation that it would be hit by a train so that the person could commence a group proceeding with other drivers who had accidentally been hit by a train on the crossing, alleging safety failures at the level crossing, then, to my mind, that may well be an abuse of process by that person or a breach of the CPA by that person.
167 Similarly, in this case, if the loss of MCI has been deliberately manufactured to found a group proceeding for the financial benefit of Mr Elliott and his associates, the issue arises whether Mr Elliott has breached his obligations under the CPA and abused the processes of the Court.
168 The overarching obligations certification was given by Mark Elliott, a director of MCI. He certified that he had read and understood the overarching obligations set out in ss 16 to 36 of the CPA and the paramount duty set out in s 16.
169 I note that in WorleyParsons, Mr Elliott was the solicitor for the plaintiff. In Melbourne City Investments Pty Ltd v Leighton Holdings Limited,[55] Mr Elliott had initially been the solicitor for MCI. In Melbourne City Investments Pty Ltd v Treasury Wines Estate Ltd,[56] Mr Elliott had been the solicitor for MCI.
170 In Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 3),[57] Ferguson J gave this description of MCI:
Melbourne City Investments Pty Ltd ('MCI') is a Victorian investment company managed and controlled by Mark Elliott, a Melbourne based solicitor. Towards the end of 2013, MCI commenced separate group proceedings against three publicly listed companies - Treasury Wine Estates Limited, Leighton Holdings Limited and WorleyParsons Limited. Mr Elliott is the solicitor for MCI in each of the proceedings.
MCI holds a small parcel of shares in each of Treasury, Leighton and WorleyParsons . It acquired each parcel for a little less than $700. The proceedings might broadly be described as securities class actions, in which allegations of failure to disclose - in breach of s 674(2) of the Corporations Act 2001 (Cth), and misleading or deceptive conduct, in breach of s 1041H of the Act - are made. In the proceedings against Treasury and Leighton, the loss claimed is the difference between the prices at which MCI acquired its shares and the prices that would have prevailed had each company made what is alleged to be proper disclosure. Putting it at its highest, then, the most that MCI could gain by way of compensation if it were to be successful would be less than $700 in each of those proceedings.
....
MCI was incorporated on 1 November 2012. Since its inception, Mr Elliott has been MCI's sole director and shareholder. On the day of its incorporation, MCI purchased 140 shares in Treasury for $693.00, 39 shares in Leighton for $684.06 and 28 fully paid shares in WorleyParsons for $694.96, with settlement for each purchase taking place on 7 November 2012. In addition, on 1 November 2012, MCI purchased parcels of shares in another 17 publicly listed companies, each parcel costing a little under $700. In February 2014, MCI purchased parcels of shares in another 145 publicly listed companies, together with further small parcels of shares in Leighton, Treasury and WorleyParsons . The cost of each of these parcels of shares was between about $600 and $900.
The Defendants each made similar submissions about the inferences that the Court should draw from the established facts. In this regard, Leighton submitted that, based on the established facts, the Court should infer that:
(a) MCI was created by Mr Elliott as a vehicle for bringing representative proceedings against listed companies alleging breaches of continuous disclosure obligations;
(b) MCI would be the representative plaintiff in such proceedings; and
(c) Mr Elliott would act as its solicitor, with Mr Elliott earning fees from doing so.
I agree and do draw those inferences. I do so more readily because, although Mr Elliott was in court instructing during the hearing, he did not (in his capacity as a director of MCI) give any evidence, in circumstances where the facts called out for explanation by him. No evidence was given as to why he did not do so, nor was any submission made (let alone evidence given) that what he might say was protected by client legal privilege.
In my opinion, it is probable that the reason for MCI's existence is to launch proceedings, such as the present proceedings, to enable its sole director and shareholder to earn legal fees from acting as the solicitor for MCI. This conclusion is based on:
(a) the initial purchase of small parcels of shares in 20 companies on the day that the company was incorporated;
(b) the subsequent commencement of three group proceedings by MCI, with Mr Elliott acting as its solicitor; and
(c) the later purchase of similarly small parcels of shares in Treasury, Leighton and WorleyParsons and in another 145 publicly listed companies.
171 Although these observations are not evidence in this case and relate to circumstances where Mr Elliott was the solicitor on the record for MCI, the Court has a duty to ensure its processes are not being abused and that the CPA is being observed: Yara Australia Pty Ltd v Oswal.[58] The Court may raise a possible breach of the CPA on its own motion, and has a duty to do so where it considers that the overarching obligations may not have not been met.[59] The Court is entitled to take into account findings made in other cases involving MCI in deciding whether or not to raise the matter with the parties.
One of the main purposes of the Act is 'to provide for an overarching purpose in relation to the conduct of civil proceedings to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute'.[62] The Act provides for 'overarching obligations for participants in civil proceedings to improve standards of conduct in litigation', and 'expanding the powers of the courts in relation to costs in relation to civil proceedings'.[63]
The court is obliged to give effect to the overarching purpose of the Act 'to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute'.[64] The court is directed to further the overarching purpose by having regard to the objects and matters articulated in s 9 of the Act which include the efficient use of judicial and administrative resources and dealing with the proceeding in a manner proportionate to the complexity and importance of the issues and amount in dispute.
The overarching obligations apply to any person who is a party, any legal practitioner, legal representative or law practice acting for or on behalf of a party.[65] The overarching obligations do not override any duty or obligation of a legal practitioner arising under common law or statute to the extent that such duties and obligations and the overarching obligations can operate consistently.[66] But a legal practitioner or law practice engaged by or on behalf of a client in connection with a civil proceeding 'must comply with the overarching obligations despite any obligation ... to act in accordance with the instructions or wishes of the client'.[67] A legal practitioner is not required to comply with any instruction or wish of a client which is inconsistent with the overarching obligations,[68] and must not cause the client to contravene the overarching obligations.[69] To the extent that there is an inconsistency between a legal practitioner's duty to a client and their overarching obligations, the obligation prevails.[70]
Part 2.3 outlines the overarching obligations. The duty stated in s 16 is that each person to whom the overarching obligations apply has a paramount duty to further the administration of justice. The overarching obligations include the obligation to only take steps that are considered to be necessary to resolve or determine the dispute.[71]
173 The overarching obligation on MCI and Mr Elliott to ensure that a claim has a proper basis is of particular importance to this case.
174 In light of the conduct of MCI in this Court, it might be argued that it bought the shares in order to provide a platform to launch a group proceeding, for the financial advantage of Mr Elliott and/or his business associates, and it may be suggested that if that is the case there has been a breach of the CPA or an abuse of process.
175 If the proceeding be an abuse of process, or there has been a breach of any of the overarching obligations imposed by the CPA, then the question may arise as to whether Mr Elliott ought be ordered to pay UGL's costs on an indemnity basis or some other basis or what other orders may be made.
176 I have an open mind on these issues, but I feel I am duty bound to raise them with the parties.
177 In those circumstances, I propose to relist this proceeding to hear the parties on these issues before I make final orders in the matter.
[2] [2009] VSC 647 [4]-[7]; see also Croft J paper on Summary Judgment and Part 4.4 of the Civil Procedure Act, presented to Judicial College of Victoria Civil Procedure Workshop for Judges on 19 November 2010.
[3] [1949] HCA 1; (1949) 78 CLR 62, 90.
[7] [1964] HCA 69; (1964) 112 CLR 125, 130.
[8] [2013] VSCA 158 (Lysaght).
[9] Lysaght [4] referring to HMSO, London 1996, Ch 12, s 34.
[11] [2014] VSC 181 (Treasury Wines), [17].
[12] Paragraph 20 of the Statement of Claim.
[13] Plaintiff's written submissions, [80].
[14] Paragraph 14 of the Statement of Claim and the particulars thereto.
[15] Paragraph 22 of the Statement of Claim.
[16] Paragraph 16 of the Statement of Claim.
[17] Paragraph 17 of the Statement of Claim.
[18] Paragraph 18 of the Statement of Claim (including proposed amendments).
[19] Paragraph 19 of the Statement of Claim.
[20] Paragraph 20 of the Statement of Claim.
[21] Paragraph 21 of the Statement of Claim.
[22] Paragraph 22 of the Statement of Claim.
[23] Paragraph 19 of the Statement of Claim, referring in turn to the particulars to paragraphs 11 and 14.
[24] An extract of this advice is at sub-paragraph v of the particulars to paragraph 20, Statement of Claim.
[25] Paragraph 20 of the Statement of Claim.
[26] Paragraph 23 of the Statement of Claim.
[29] Paragraph 25 of the Statement of Claim.
[31] Paragraph 28 of the Statement of Claim.
[32] Paragraph 29 of the Statement of Claim.
[33] Paragraph 30 of the Statement of Claim.
[34] [2007] VSC 366 (Hall).
[36] [2001] VSC 372 (Johnson Tiles) at [48]-[51].
[37] [2000] VSC 534 (Cook), [48].
[38] [2014] VSC 303 (WorleyParsons).
[39] WorleyParsons, [6]. See also discussion in Timbercorp Finance Pty Ltd v Collins and Tomes [2015] VSC 461 on the requirements of a claim the subject of a valid group proceeding.
[41] [2014] VSC 357 (Downer EDI).
[42] [2014] VSC 8 (Bolitho).
[43] [1992] FCA 437; (1992) 37 FCR 526 (Janssen-Cilag).
[49] [2015] FCAFC 94 (Caason Investments).
[52] [2014] FCAFC 65; (2014) 224 FCR 1, 272 [1324]-[1376] (the Court).
[54] Melbourne City Investments Pty Ltd v Leighton Holdings Limited [2015] VSCA 235; Treasury Wines Estates Limited v Melbourne City Investments Pty Ltd [2014] VSCA 351.
[57] [2014] VSC 340 (Treasury Wines (No 3), [1]-[9].
[58] Yara Australia Pty Ltd v Oswal [2013] VSCA 337 (Yara Australia).
[63] Section 1(2)(a) and (b).
Melbourne City Investments Pty Ltd
UGL Limited [2015] VSC 540
(1949) 78 CLR 62
(1964) 112 CLR 125
(1992) 37 FCR 526
(2004) 62 IPR 184
(2008) 73 NSWLR 653
(2014) 224 FCR 1