Australia: Know your audience: The final chapter in ASIC's prosecution of Fortescue and Forrest

Curwoods Case Note
Last Updated: 8 October 2012
Article by Kiley Hodges and Nicholas Lawrence

Forrest v Australian Securities and Investment Commission & Anor; Fortescue Metals Group Ltd v Australian Securities and Investments Commission [2012] HCA 39

Judgment date: 2 October 2012

Jurisdiction: High Court of Australia1

In Brief

  • On 2 October 2012 the High Court handed down its much anticipated decision in the appeal of Fortescue Metals Group Ltd (Fortescue) and Andrew Forrest, chairman and chief executive, against the decision of the Full Court of the Federal Court.
  • In granting the appeal, the High Court unanimously held that Fortescue and Mr Forrest did not engage in misleading and deceptive conduct in contravention of the Corporations Act 2001 (Cth) in connection with public statements.
  • In determining whether a statement is misleading or deceptive, the Court will first look to identification of the target audience and the message conveyed to that audience.
  • While it was expected this decision would clarify continuous disclosure obligations and directors' duties, these issues were not addressed in detail and further scope for interpretation remains.


The proceedings relate to information Fortescue gave the Australian Stock Exchange Limited (ASX) and the public in 2004 and 2005 regarding agreements with China Railway Engineering Corporation (CREC), China Harbour Engineering Company (Group) and China Metallurgical Construction (Group) Corporation to build, finance and transfer the railway, port and mine components of Fortescue's proposed Pilbara Iron Ore and Infrastructure Project in Western Australia.

The most notable components of the Framework Agreements were as follows:

  • The parties were to jointly develop and agree on certain matters including a General Conditions of Contract suitable for a Build and Transfer type document.
  • Payment terms were to be included in the General Conditions of Contract.
  • The agreements became binding on approval of the Board of Directors of both CREC and Fortescue.
  • The document represented an agreement in itself with a fuller and more detailed agreement not different in intent from this to be developed later.

The parties' boards approved the agreements.

Fortescue then sent various letters to the ASX and issued media releases about these agreements. The key wording from one letter focused on by the Court relevantly stated:

"Fortescue ... is pleased to announce that it has entered into a binding contract with [CREC] to build and finance the railway component of the Pilbara Iron Ore and Infrastructure Project."

The Australian Financial Review subsequently published an article asserting the framework agreements did not impose any legally binding obligations on the Chinese contractors.

The Australian Securities and Investment Commission (ASIC) commenced proceedings against Fortescue and Forrest alleging that, in releasing the information:

  • Fortescue engaged in misleading or deceptive conduct when it described the agreement between Fortescue and CREC as "a binding contract", in contravention of s 1041H of the Corporations Act 2001 (Cth) (Act);
  • Fortescue contravened the continuous disclosure requirements of s 674 of the Act; and
  • On each occasion Fortescue contravened the Act, Mr Forrest had not exercised his powers or discharged his duties as a director of Fortescue with the degree of care and diligence required by s 180(1) of the Act.

The Decision

The determinative issue on appeal was: what did Fortescue and Mr Forrest's statements (that the parties to each framework agreement had made a "binding contract") convey to their intended audience?

ASIC argued that the words "contract" or "binding contract" conveyed to the intended audience that the agreement contained all of the essential elements that would constitute a contract under Australian law. This contention was in accordance with the finding of the Full Court of the Federal Court that the agreements were incomplete with regard to subject matter, scheduling and price of the work. Thus, the Court held they would not be enforceable by a court and they could not be said to be "binding contracts".

French CJ, Gummow, Hayne and Kiefel JJ, in the majority, allowed the appeals and found that it was not necessary to decide whether a court would ultimately find that the framework agreements were sufficiently complete. It was not necessary to consider how a court would approach the agreements at all.

The Court found that the key issue was the need to identify the target audience for the statements and the message conveyed to that audience. The Court held:

  • the target audience was classified as present and future investors and perhaps some wider portion of the commercial or business community;
  • that audience would have understood the message to be a statement that the parties had entered into agreements, and intended to be bound by them; and
  • such an audience would not have asked "a lawyer's question" and looked also to what would happen in a court if the parties fell out at some future time.

To reach this conclusion, it was not necessary to make a determination as to whether the comments of Fortescue and Mr Forrest were statements of fact, opinion or a combination of both. It was merely a question of what those people reading the statements would have understood them to mean.

Continuous Disclosure

As the Court found that Fortescue's statements were not misleading or deceptive, or likely to mislead or deceive, this was sufficient to dispose of ASIC's case regarding continuous disclosure. It was noted that the continuous disclosure requirements could not force Fortescue to subsequently make an announcement stating that the agreements were not binding contracts if Fortescue's previous statement that it had made binding contracts was lawfully made.

Equally, the claims against Mr Forrest for breaching the duties imposed on him could not stand without demonstrating a contravention of one of the other requirements of the Act.

Justice Heydon's Reasons

In the minority, Justice Heydon also allowed the appeals but relied on different reasoning.

Justice Heydon found that the statement about the contract being binding was a statement of opinion rather than fact. Nonetheless, Justice Heydon left for a future occasion any decision on whether a company must have a reasonable basis for holding an opinion that forms the subject of a statement as a general rule.

Justice Heydon also stated, in obiter, that the target audience would not consider that the statements made by Fortescue and Mr Forrest claimed that they could force the other parties to do anything.


The Court upheld Fortescue and Mr Forrest's appeals against the decision of the Full Court of the Federal Court and ordered ASIC to pay their costs.

The costs for litigation spanning 6 years, a Federal Court hearing, Full Court of the Federal Court appeal and the High Court appeal, will be very significant.

Comments and Implications

Despite the anticipation surrounding this decision and the potential that it would result in clarification of the requirements for continuous disclosure and the state of mind of directors in relation to allegations of misleading and deceptive conduct, the decision provides no guidance in this regard. Rather, the basic principles of determining misleading or deceptive conduct were considered and a reminder given of the importance of considering how the target audience will understand a statement.

The Court also noted the following:

  • It did not endorse the approach adopted by the trial judge that focused on a distinction between statements of fact opinion.
  • This case did not establish a broad principle of what an announcement regarding 2 companies making a contract conveys.
  • The message conveyed to an audience cannot be determined without close and careful consideration of the facts.
  • The particular facts of this case were critical in the formation of the Court's reasoning.

ASIC has released a statement, indicating that the judgment raises for discussion the question of what the market would regard as a sufficient statement about the nature and content of an agreement, and what is necessary to ensure the market is properly informed for the purposes of making investment decisions.

ASIC has made it clear that continuous disclosure is essential to the integrity of the capital markets. A revised guidance note on continuous disclosure requirements is expected from the ASX in the coming weeks.

While the adverse costs order against ASIC might impose budgetary constraints, we do not expect it to significantly change ASIC's approach to prosecutions.


1French CJ, Gummow, Hayne, Heydon and Kiefel JJ

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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