In Western Australia, it is almost impossible to open a newspaper or turn on the news without some reference to the State being the mining boom powerhouse driving the Western Australian (and arguably Australian) economy. This is often accompanied by conflicting speculation about the future of this prosperous but volatile industry and the colourful characters that drive it. Fortescue Metals Group Ltd (FMG) and founder Andrew Forrest have become synonymous with the explosive growth driven by China's overwhelming appetite for our iron ore.
Back in February 2011, the Federal Court declared that FMG and Forrest were in breach of the Corporations Act 2001 and faced significant penalties, including Forrest's disqualification as a director. Unsurprisingly, the decision was appealed and on 2 October 2012, the High Court overturned that decision and, in doing so, examined the legal concept of 'misleading and deceptive conduct' in the context of big business deals conducted in a global commercial environment with generally switched-on players.
The Australian and Securities Investments Commission (ASIC) alleged that FMG had published notices relating to a financial product (namely FMG shares) that were misleading or deceptive and that FMG had contravened its continuous disclosure requirements. It also alleged that Forrest had not discharged his duties as a director of FMG with the degree of care and diligence required of a director.
The case hinged on announcements that FMG had made in letters and media releases concerning agreements it had with three of the largest Chinese State-owned companies. In 2004 and 2005, FMG and Forrest made various statements about the agreements, including that FMG had made 'binding contracts' with them regarding railway, port and mine facilities for the FMG project.
The High Court noted that one of the agreements may not have been binding under Australian law as many of the crucial features of a complete contract were absent. For example, a clause in one of the agreements required the approval of both Boards of Directors by 31 August 2004 in order to become binding.
That particular agreement itself was signed and FMG then sent the ASX a letter headed "China Signs to Build Railway" stating, amongst other things, that FMG "...has entered into a binding contract with China Railway Engineering Corporation (CREC) for Fortescue to build and finance a railway component of the Pilbara Iron Ore and Infrastructure Project."
ASIC maintained that FMG had represented to investors that:
- FMG had a binding contract with the Chinese companies which required them to build and finance the relevant elements of infrastructure; and
- FMG had "a genuine and reasonable basis" for making the relevant statement.
ASIC alleged that the statements were misleading or deceptive because the agreements did not oblige the Chinese companies to perform the tasks set out in the agreement. Furthermore, FMG knew, or should have known, that the parties had not agreed on all the terms necessary to make the agreements enforceable.
The determinative issue, the High Court said, was how those statements would be understood by their intended audience when they said the parties to each of the agreements had made a 'binding agreement'.
The Federal Court considered that the agreements would only be binding if they were capable of being enforced in the Australian courts. As it considered they could not be, (being amongst other things agreements to agree) they held that FMG's assertion that the contracts were binding was misleading and deceptive conduct.
The High Court found at least two difficulties with the Federal Court's reasoning:
- It was necessary to identify who FMG's communication was aimed at (primarily investors and some sections of the wider business community); and
- It needed to establish what that audience would understand from those statements.
It considered whether they would (a) look only at what the parties had said and done or (b) whether they would also take into account what the parties to the agreements understood that they had done and intended would happen in the future. The latter understanding was preferred by the High Court.
It went on to say that the Federal Court had too narrowly construed the words 'contract' and 'agreement' to mean agreements enforceable in an Australian court.
It found that the intended audience would know that the agreements contained important international features and may have been governed by Chinese law. It was also important to remember that the statements were made to the business community and to ask what they would make of the statement that a binding contract had been entered into by FMG with entities controlled and owed by the Chinese Government.
In relation to a specific letter, the High Court held that it "did not convey to its intended audience any message about whether an Australian court would conclude the agreement could be enforced. It conveyed to its intended audience that [the relevant agreement] between FMG and CREC was what those parties (and a commercial audience) would describe as a 'binding contract'."
FMG had not therefore engaged in misleading and deceptive conduct, nor did its statements contravene its continuous disclosure obligations. It followed that Forrest had not breached his duties as a director.
The unanimous decision demonstrates that such communications must be viewed in context and allow for the audience to whom they are made. The mere fact that the words 'binding contract' are used in a communication does not necessarily assume a precise legal definition.
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