On Wednesday, the NSW Supreme Court (In the matter of HIH Insurance Limited (In Liq)) confirmed that Australian courts will accept ‘indirect’ or ‘market-based’ causation to prove claims relating to misleading and deceptive conduct. The decision is the last case to be decided in the long running litigation that followed the HIH collapse in 2001, resulting from inaccuracies in HIH’s 1999 and 2000 financial statements. Given the egregious conduct resulting in the HIH collapse, this case provided the perfect circumstances to apply a market-based causation test.
Market-based causation, or ‘fraud on the market’, is accepted in overseas jurisdictions including the US. However, until now, no Australian court has specifically accepted or rejected market-based causation in Australia in this context.
In the judgment, Justice Brereton held, ‘I do not see how the absence of direct reliance by the plaintiffs on the overstated accounts denies that the publication of those accounts caused them loss, if they purchased shares at a price set by a market which was inflated by the contravening conduct: the contravening conduct caused the market on which the shares traded to be distorted, which in turn caused loss to investors who acquired the shares in that market at the distorted price. In the absence of any suggestion that any of the plaintiffs knew the truth about, or were indifferent to, the contravening conduct, but proceeded to buy the shares nevertheless. I conclude that “indirect causation” is available and direct reliance need not be established.’
Given the wide-ranging ramifications for insurers and litigation funders alike, the decision will almost certainly be appealed. In our view, market-based causation will not be truly settled giving commercial certainty until the High Court determines the issue.The decision in In the matter of HIH Insurance Limited (In Liq) is not a class action proceeding, however, market-based causation will most likely be transferred to that context given the Court’s ruling, subject to any appeal.
We have previously reported on the glacial trend of Australian courts suggesting that plaintiffs will be allowed to prove loss indirectly in securities litigation. In March 2015, we reported on the Federal Court’s comments in Grant-Taylor v Babcock & Brown Limited that investors may be able to prove losses indirectly for failure to disclose information. In September 2015, the Full Federal Court held that indirect causation was arguable for the purposes of a pleading dispute in Caason Investments Pty Ltd & Anor v Simon Cao & Others.
Also see ‘Causation and Reliance in Australian Shareholder Class Actions’ in DLA Piper’s Corporate Insurance Trends 2015.