Case note: Forrest v ASIC; Fortescue Metals Group Ltd v ASIC  HCA 39
In October this year the High Court of Australia held that Fortescue Metals Group Ltd did not engage in misleading or deceptive conduct by its publication of a letter and media releases stating that it had entered into binding contracts in relation to the building, financing and transfer of a railway, port and mine for one of its mining projects in Western Australia.
In reaching its conclusion that Fortescue Metals Group Ltd (Fortescue) did not engage in misleading or deceptive conduct the High Court looked in detail at three agreements Fortescue had executed with different Chinese entities. Those agreements were ‘framework’ agreements, all substantially identical. The Court also looked closely at statements made by Fortescue about those ‘framework’ agreements.
The announcements and statements made
Although there had been thirteen separate communications the Court found ASIC’s central case was sufficiently identified by reference to a letter Fortescue had sent to the ASX and one media release. The letter to ASX had said:
Fortescue Metals Group Ltd (‘FMG’) is pleased to announce that it has entered into a binding contract with China Railway Engineering Corporation (CREC) to build and finance the railway component of the Pilbara Iron Ore and Infrastructure Project.
ASIC complained that the above statement was misleading or deceptive when it described the framework agreement as a ‘binding contract’. ASIC alleged it was also misleading or deceptive to say the contract was ‘to build and finance’ the railway and that it was a ‘Build and Transfer (BT) contract’.
The Court’s findings
1. ‘to build and finance’
The court swiftly concluded there was nothing wrong with Fortescue saying the contracts were ‘to build and finance’ the railway. The court noted that clause 3 of the framework agreement provided that some provisions about payment terms were to be included in the General Conditions of Contract. Those terms required Fortescue to make a payment of 10 per cent of the value of the Works (in return for a bank guarantee of the same value) and to pay the balance by instalments over time. The last instalment of 50 per cent was not due until the third anniversary of the issue of the Certificate of Practical Completion. The Court said (at paragraph 15):
Payment arrangements of that kind were aptly described in the announcement as CREC agreeing to “build and finance” the railway.
2. a ‘Build and Transfer (BT) contract’
Equally as swiftly, the Court found the description of the agreement as a “Build and Transfer (BT) contract” was valid. In reaching this conclusion they found it was the description the parties themselves used to describe their arrangements and that the expression was in fact an accurate general description of the agreement they had made. ASIC had contended that the wording in the agreement which said the parties would “jointly develop and agree on…General Conditions of Contract suitable for a Build and Transfer type contract” led to a position where the framework agreements could not be described as a “Build and Transfer (BT) contract”. The logic being that if there was something further to develop and agree upon there could be no valid contract. The Court found this contention wrong. They said (at paragraph 16):
…it does not follow from the fact that there were to be these further steps that the agreement the parties had made and recorded in the framework agreement was not accurately described as a “Build and Transfer’ (BT) contract”.
3. ‘a binding contract’
The determinative issue rested on what was conveyed by the statements that the parties to each framework agreement had made a ‘binding contract’.
In order to answer this question, the High Court found it necessary to identify the intended audience. They held the intended audience in this instance was investors, including both present and possible future investors, as well as possibly some wider section of the commercial or business community.
What that audience would have understood?
The High Court said it was necessary to investigate what the intended audience would have understood by that term.
ASIC argued that the statements conveyed a view about legal enforceability of the framework agreements. That is, by saying the contracts were binding, this was conveying that they contained all of the essential elements that would constitute a contract under Australian law.
The High Court did not agree. Instead, they found the audience would take what was said as a statement of what the parties to the agreements understood that they had done and intended would happen in the future.
There had been no evidence led at trial to show that investors would have understood the statements as conveying not only that the parties had agreed upon what they said was a bargain intended to be binding but also that a court would grant relief of some kind or another to one of the parties if, in the future, the opposite party would not carry out its part of the bargain.
The Court found the statements conveyed to their intended audience what the parties to the framework agreements had done and said they had done. No further message was shown to have been conveyed. They said (at para 50):
The impugned statements conveyed to their intended audience what the parties to the framework agreements said they had done – make agreements that they said were binding – and no more. ASIC did not demonstrate that members of the intended audience for the impugned statements would have taken what was said as directed in any way to what the parties to the agreements could do if the parties were later to disagree about performance.
ASIC had not established that Fortescue engaged in misleading or deceptive conduct. Accordingly, the High Court decided that the letter which Fortescue had sent to the ASX was not misleading or deceptive and was not likely to mislead or deceive. That letter accurately recorded what the framework agreement provided and did not convey any message about whether an Australian Court would conclude that the agreement could be enforced.
No contravention of continuous disclosure or directors’ duties
Because the statements made were not misleading or deceptive or likely to mislead or deceive, the court found that ASIC had failed to demonstrate that Fortescue contravened the continuous disclosure requirements of the Corporations Act, 2001. As a result, it could not be said that Mr Forrest failed to exercise his powers or discharge his duties as a director with the necessary degree of care and diligence required.
No general proposition
The case should not be taken as providing any general proposition in relation to public statements made about contractual bargains. While in this case the words “binding contract” did not convey a message about whether or not a court would uphold the contract, the court was clear that companies should not take from this judgment a view that there exists any kind of general proposition of that nature. They said (at para 89):
…these reasons do not establish any general proposition to the effect that any public statement that company A has made a contract with company B necessarily conveys to its audience a message only about what the contractual document contains. ...What message is conveyed to the ordinary or reasonable member of the intended audience cannot be determined without a close and careful analysis of the facts.
The case should be taken as a reminder to take great care when releasing statements to the market. Accuracy, as always, is paramount.