FEDERAL COURT OF AUSTRALIA

Australian Securities & Investment Commission v Fortescue Metals Group Ltd [No 3] [2009] FCA 430

AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION v FORTESCUE METALS GROUP LTD and JOHN ANDREW HENRY FORREST

WAD 55 of 2006

GILMOUR J

1 MAY 2009

PERTH

RULING ON PLAINTIFF’S PROPOSED AMENDMENT

TO STATEMENT OF CLAIM

1                          The plaintiff (ASIC) seeks to amend paragraph 71 of the statement of claim and to make consequential amendments to various other paragraphs or particulars of the statement of claim.  The motion is opposed by the defendants.

2                          Paragraph 71 which is pleaded further and alternatively to para 40 asserts that “at the latest” by 5 November 2004, the first defendant and second defendant knew or ought reasonably to have known, amongst other things, that CREC, CHEC and CMCC would not, or probably would not, carry out the works necessary for the Project without the approval of the NDRC and that the NDRC would, or probably would, withhold its approval for CREC, CHEC or CMCC to enter contracts binding them to build, finance and transfer the infrastructure necessary for the Project unless a Chinese entity obtained an equity interest in the Project.    

3                          The plaintiff seeks to amend para 71 by pleading 17 August 2004 as an alternative to the currently pleaded date 5 November 2004 as the latest date by which the defendants knew or ought reasonably have known of these matters.   

4                          In his opening submissions, senior counsel for the plaintiff stated (transcript p 35) that there were three separate matters raised in the pleading which have relevance to the making of the claims about the content and effect of the Framework Agreements.  He said the three matters are: 

·     the Chinese demand for an equity share or equity participation by Fortescue;

·     the Chinese requirement for approval of the construction contracts by the National Development and Reform Commission, or other government agencies; and

·     the slow progress in any discussions in furtherance of the Framework Agreements.

5                          Mr Young QC went on to say:

Those unfolding matters, we submit, have relevance to the claims being reiterated by Fortescue over that period, and those facts are relevant to the misleading character of those claims.  They are also of some relevance to our claim that there was a continuing obligation of disclosure requiring Fortescue to take steps to correct the misleading statements that had been made during that period.

In our submission, the evidence will show that all of these events took place against a backdrop of Fortescue and Mr Forrest being aware, from as early as April 2004, that China imposed a rule or requirement that overseas investments or construction contracts by major Chinese‑owned companies, such as CREC and CHEC and CMCC, could only proceed with the approval of SASAC, the commission for state‑owned bodies, and/or NDRC.

We say that both the defendants were aware of that from an early point of time.

…..

The second background matter which we say both defendants were aware of from an early stage was a requirement by the Chinese Government that a major construction contract or construction investment would only be approved if a relevant Chinese entity designated by the Chinese state was granted an equity interest in the relevant project.  That, too, we will contend, was a known requirement from a fairly early stage.

6                          Central to the defence of the first defendant (FMG) as set out in its written opening submissions is that it is essential to have regard to the context in which the disclosures concerning the Framework Agreements were made ([12]).  The first defendant’s written opening submissions also state at [54] that:

FMG was entitled to assume that any NDRC or other approvals that may be required by the Chinese entities for the framework agreements were matters that they had in hand.

7                          In his opening address for FMG, Mr Karkar QC stated (transcript p 119):

I am going to take your Honour to the chronology of the equity story to demonstrate to your Honour that there was, in our respectful submission, a deliberate silence by the Chinese as to the extent of the equity they wanted; not only that, they led us to believe that all they wanted was a minority interest, got us to sign the three agreements, and having tied us up with those agreements, said, "Now let's start talking equity, we want 80 per cent”.

8                          Mr Karkar also said: 

… I will take your Honour to the documentary evidence and then I will tell your Honour something about the oral evidence that will be led.  But the documentary evidence is all one way.  My learned friend either has not read or has decided not to refer your Honour to the whole story, notwithstanding that in our written opening we alerted them to the story about equity.  It is certainly an object lesson in some kind of negotiations that comes out of the story in relation to the equity in FMG.

9                          Earlier in his opening submissions at pp 94-95 of the transcript, Mr Karkar referred to evidence regarding the background to the drafting of the media release associated with the CREC Framework Agreement.  He said that evidence of context is relevant to the formation of the agreement in considering the question whether there is a binding agreement.   

10                        Mr Karkar also said (p 95): 

Your Honour, during this period prior to the publication of the announcements, an issue arose in fact whether the CREC agreement was binding and the announcements should await the NDRC involvement before announced.  That issue arose squarely.

11                        On p 123 of the transcript Mr Karkar stated that he:

… was going to go back in time to 2003, when this project was still in gestation, and show your Honour how this issue of equity arose from the very beginning. 

12                        He submitted that it is an “obvious fact that none of the Framework Agreements was conditional on the Chinese entities or anyone else obtaining an equity interest in FMG or in the project or in the mines”. 

13                        Mr Karkar also referred to discussions that FMG executives had with NDRC representatives (p 126) concerning the involvement of the NDRC in the project and the prospect of the Chinese taking an ownership interest in the project.  He referred to the position adopted by the deputy director general of the NDRC, Mr He, in relation to Chinese investment at a meeting in China on 17 August 2004.  The participants at that meeting included Mr Forrest and the FMG executives Mr Liu and Mr Kirchlechner.  Mr Karkar referred to a report of that meeting where Mr Forrest said that while FMG welcomed Chinese ownership, it was important that FMG maintained an Australian identity.  Mr Karkar also quoted a statement made by Mr He at that meeting to the effect that the Chinese would respect the majority ownership of FMG by Australian interests.  Mr Kirchlecher was cross-examined by Mr Karkar about the discussions that occurred at the meeting of 17 August 2004 involving FMG executives and the NDRC.  Mr Karkar asked Mr Kirchlechner about a number of matters, including the discussions concerning equity between representatives of FMG and Mr He of the NDRC during the visit of August 2004 (transcript p 160 and following).  Mr Karkar put to Mr Kirchlechner that in none of the meetings that he attended with NDRC, the China State Owned Asset Administration and Supervision Commission (SASAC) or the three Chinese companies was it ever mentioned that the Chinese wanted a majority interest in FMG or its mines (transcript p 162).

14                        In my view it is clear from an analysis of Mr Karkar’s opening submissions and his cross-examination of Mr Kirchlechner that he has treated the issue of equity, including NDRC approval, as being of fundamental importance to his client’s defence.  Addressing the question of what FMG knew in relation to the Chinese equity position from at least 17 August 2004 has been central to its case from the beginning.  

15                        Senior counsel for the second defendant Mr Myers QC stated at the conclusion of Mr Young’s opening:

“I have nothing to say about these applications, your Honour.  We have no objection.  I should say, however, that I listened intently to what Mr Young said today, especially this afternoon, and it appears that he has trespassed well beyond the pleading he now seeks to substitute.  But that is a matter for another day.”

16                        Mr Myers did not articulate just how this was so.  He raised no objection to the admission of the evidence which is nowcapable of sustaining the amendment.  

17                        Moreover, my reading of the ASIC pleading demonstrates that the defendants have always been on notice that it is contended that they had knowledge of the relevant matters concerning NDRC approval and equity at the latest by 5 November 2004.  It was submitted that this was always understood to mean “from at least” 5 November 2004.  No basis for such a construction was advanced.  

18                        Furthermore, para 71 is pleaded “further and alternatively” to para 40 of the statement of claim where 23 August 2004 is pleaded as being “the latest” date by which the defendants knew the terms of the CREC Framework Agreement and/or knew or ought reasonably have known the matters alleged in para 20 regarding the terms and legal effect of the CREC Framework Agreement.

19                        Paragraph 71 deals with the defendants’ knowledge of the terms and legal effect of the CREC, CHEC and CMCC Framework Agreements and the requirement or likely requirement for NDRC approval.

20                        Both paragraphs are expressed in terms of the latest date the defendants are said to have the specified knowledge, not the earliest date.  In my view both paragraphs should be understood according to their clear terms.

21                        Mr Karkar QC, for FMG, submitted that he would have conducted the case differently if he had known earlier that the plaintiff was relying on 17 August 2004 as the latest date by which FMG had the specified knowledge.  He said the first defendant had conducted its case on the footing that the Chinese demands for equity occurred after the second agreements were signed which was in October 2004.  I am satisfied that the evidence concerning the evolution of the “equity” question is before the Court.  It will be a matter of submission in due course as to the effect of this evidence going to the pleaded issues.  

22                        There is, in my opinion, no prejudice arising out of the proposed amendments to the defendants in light of the parties’ opening addresses and the evidence which has been adduced. 

23                        I would allow the proposed amendments and grant liberty to the defendants to amend their defences should they wish in order to meet the amended allegations. 

Associate:

Dated:         1 May 2009