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Phi, Ben; Finney, Tim --- "Establishing causation in Australian shareholder class actions" [2015] PrecedentAULA 49; (2015) 129 Precedent 28


By Ben Phi and Tim Finney

Shareholder class actions remain a source of controversy and speculation in Australia, prompting debates on topics ranging from the appropriateness of certain funding arrangements, to the scope and content of listed companies’ disclosure obligations. However, it is what a plaintiff must do to establish causation that remains the 64 (if not the 164) million dollar question.

Shareholder class actions typically involve a plaintiff and group members claiming to have suffered loss by, or as a result of, acquiring shares in the defendant. In particular, plaintiffs might allege that the defendant – an ASX-listed company – either:

1. breached its continuous disclosure obligations under s674 of the Corporations Act 2001 (Cth); and/or

2. had engaged in misleading or deceptive conduct or misrepresentations within the meaning of ss728 and/or 1041H of the Corporations Act, and equivalent consumer legislation provisions.

What remains unsettled is what the law requires in order to establish that the relevant contravening conduct caused a loss for someone who acquired shares in the defendant company. Broadly speaking, the options are:

1. whether it is necessary for each claimant to prove their actual reliance on the contravening conduct in acquiring shares in the defendant company (direct causation); or

2. whether it is sufficient to establish that the price at which the defendant’s shares traded on the market was inflated by the contravening conduct, such that the claimant suffered loss by paying an overprice for the shares (market-based causation).

Shareholder class action plaintiffs are attracted to market-based causation as it avoids the costly and time-consuming examination of individual investment decision-making when determining whether the impugned conduct caused their loss. Conversely, if market-based causation is ultimately rejected by Australian courts, then this could have negative consequences both for the assessed quantum of loss in specific shareholder class actions, and for the commercial viability of shareholder class actions, owing to the cost of putting each group member to proof individually.

Both sides of the debate point to the uncertainty surrounding the legitimacy of market-based causation as a key motivation when settling shareholder class actions. The prospect of ‘winning’ on liability but ‘losing’ on causation is unpalatable for both plaintiffs and insured defendants. However, while no judgment has directly dealt with the availability of market-based causation in a shareholder class action, recent court decisions have outlined the likely approach of Australian courts on this question.[1]


Whether direct causation is necessary in misleading or deceptive conduct cases was recently considered by the Full Federal Court in ABN AMRO. The case concerned ABN AMRO’S conduct in creating and marketing a financial product which was sold to an intermediary and then on-sold to the plaintiffs. A key question for the court was whether the plaintiffs’ reliance on the intermediary, who in turn relied on ABN AMRO, was sufficient to establish causation. ABN AMRO contended on appeal that it was necessary for the plaintiffs to establish that they each directly relied on ABN AMRO’s conduct. The Full Court found for the plaintiffs, stating at [1375]-[1376]:

‘There is no bright-line principle that it is insufficient for a plaintiff to prove that some other person relied on the alleged misleading conduct and that that person’s reliance led to the plaintiff suffering loss.... Next, the entitlement to recover loss or damage in a case of misleading and deceptive conduct is not confined to persons who relied on the conduct: Janssen-Cilag Pty Ltd v Pfizer Pty Ltd [1992] FCA 437; (1992) 37 FCR 526.

The decision in ABN AMRO establishes that ‘indirect causation’ (that is, causation other than by the plaintiff’s direct reliance on the defendant’s contravening conduct) may be sufficient even where the plaintiff’s loss resulted from its decision to enter into an investment. Defendants habitually assert that this active step of choosing to invest, in the absence of any direct reliance on the defendant’s contravening conduct, will break the chain of causation between the defendant’s conduct and the plaintiff’s loss. In making this assertion, defendants primarily rely upon the decisions of the New South Wales Court of Appeal in Digi-Tech (Australia) Pty Ltd v Brand [2004] NSWCA 58; (2004) 62 IPR 184 (Digi-Tech) and Ingot Capital Investments v Macquarie Equity Capital Markets Ltd (2008) 83 NSWLR 653 (Ingot). However, in ABN AMRO, the Full Court observed of Ingot (and also Digi-Tech):

‘Ingot Capital Investments does not stand for that proposition. Ingot Capital Investments is authority for the proposition that where misleading and deceptive conduct provides the opportunity for an investor to enter into a transaction, that investor will not be entitled to recover where the investor knows the truth of the underlying misrepresentation or was indifferent to its truth and proceeded nonetheless’.[2]

The Court’s reasoning suggests that – at least in faulty investment product cases – the question of who in particular relied on the defendant’s contravening conduct is not the point: the question, rather, is whether that conduct continued to be operating on the investment decision taken by the plaintiff.


How should this reasoning be applied in the shareholder class action context? Farrell J of the Federal Court recently delivered an interlocutory decision in Caason Investments on a strike-out application in a shareholder class action concerning, among other things, whether it was legitimate for the applicant to plead its claim for loss premised on market-based causation. While finding (at [106]) that such a pleaded claim could not be said to ‘have no reasonable prospects of success’, Farrell J questioned whether ABN AMRO went so far as to dispense with the requirement of reliance in some form for the purpose of establishing causation, stating at [89]-[92]:

‘The damage in Janssen-Cilag flowed from reliance by third parties on a misrepresentation, not from the misrepresentation per se. The same can be said of the Councils in ABN AMRO v Bathurst City Council...

...The reasoning of the Full Court in ABN AMRO v Bathurst City Council may reveal scope for exploring the limits of when and how the ‘reliance’ link in the causal chain may be found to have occurred to support a claim for compensation for loss ‘brought about by virtue of’ misleading or deceptive conduct based on s82 of the TPA[3] and its analogues, but it does not support a case that reliance in some form is not a necessary element in causation.’

Farrell J’s judgment implicitly questions whether the form of indirect reliance available in ABN AMRO could be applied to a shareholder class action situation, owing to the absence of a defined third party (or set of third parties) who can be said to have ‘relied’ on the contraventions in an ordinary sense. It is the operation of the market which results in the share price being inflated by the defendant’s contravening conduct. This process, which necessarily operates at a pan-market level, cannot readily be reduced to the ‘reliance’ of individual participants (and indeed, typically is sought to be established or refuted by expert evidence involving statistical inference). Can market-based causation ever properly be squared with a notion of ‘reliance’ in the ordinary sense?


Farrell J’s scepticism may be contrasted with the approach of Perram J in Grant-Taylor. This case concerned the claims of multiple investors in Babcock & Brown alleging that the company’s non-disclosures to the market caused them loss. Although the applicants did not utilise the representative proceedings regime available under the Federal Court of Australia Act 1974 (Cth), the proceeding otherwise is, in effect, the first example of a shareholder class action-type case that has proceeded to judgment in Australia. However, as the applicants failed to establish that the respondent engaged in the contravening conduct alleged, Perram J was not required to determine the legitimacy of market-based causation as a causal mechanism.

Nonetheless, Perram J observed in obiter that the shareholders would not have needed to prove direct reliance in order to recover compensation for losses arising from a failure to comply with continuous disclosure laws, stating at [219]:

‘(vi) ABN AMRO establishes that, at least in principle, where A misleads B and B in consequence misleads C, C is not necessarily precluded from recovering from A;

(vii) the facts on this case are different to those in ABN AMRO to this extent: here it is alleged A misled the market (ie, many Bs) which then bid up the price which then caused loss to C. This is not the same factual situation as arose in ABN AMRO but I do not think it relevantly differs.’

Perram J’s and Farrell J’s different approaches to the question of causation without reliance may be characterised as respectively taking more or less expansive approaches to ‘exploring the limits of when and how the “reliance” link in the causal chain may be found to have occurred’.[4] Perram J’s in obiter observations suggest that ‘reliance’ can operate in the abstract at a pan-market level; while this may be an artificial exercise, such artificiality reflects that ordinary notions of reliance are ill-suited to such cases in any event, as noted by the High Court in Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 at 351-2. [5]


The authors contend that the paradigm of reliance is not merely ill-suited, but wholly inadequate to the determination of causation in shareholder class actions cases. Further, while Farrell J’s analysis of the Full Court’s decision in ABN AMRO correctly concludes that the Full Court was not required to conclusively dispense with reliance as a necessary element of causation, we respectfully consider that, nonetheless, such an outcome was both the intent and the logical consequence of the Full Court’s reasoning at [1376]-[1380]:

‘The causation inquiry required to be undertaken for the purposes of s82(1) of the TPA (and for s5D of the Civil Liability Act) entails a determination of whether the loss or damage is the “real or direct or effective cause of the applicant’s loss”; ‘it must have been “brought about by virtue of” the conduct which is in contravention of s52’: Janssen-Cilag at 530. The inquiry is whether the plaintiff suffered loss or damage by reason of, or as a result of, the contravention: Janssen-Cilag at 531...

...Consistent with the earlier principles, there did not need to be a direct inducement by ABN AMRO, it was sufficient that ABN AMRO’s representation was material to the decision of the PA Councils[6] to invest, in the sense that “the representation was a link in the causal chain”: Ingot Capital Investments at 660[13].’

Contrary to Farrell J’s reasoning, the above extracts suggest that the Full Court considered the essential question to be whether the damage claimed flowed from the representation, as opposed to whether it flowed specifically from a party’s reliance on that representation. Reliance (whether direct or via a third party) might well provide a means by which such damage could flow from the misrepresentation, but it is not itself a necessary element of causation.


It is uncontroversial that causation without reliance would be insufficient in circumstances where the claimant’s own conduct served to break the causal chain between the contravening conduct and the loss suffered. However, this proposition necessitates a careful examination of the loss claimed, and whether it ought to be characterised as flowing from the contravenor’s conduct or, rather, from the conduct of the claimant. A review of the relevant authorities cited in support of the requirement of direct reliance underscores the importance of such examination. For instance, in Digi-Tech, the New South Wales Court of Appeal stated at [159] that:

‘...whatever might be the position in other contexts, in cases of this kind (misrepresentation inducing a transaction) the courts have required reliance by or on behalf of the plaintiff on the misrepresentation as being essential to the proof of causation as required by s82(1) of the Trade Practices Act 1974. Persons who claim damages under s82(1) on the ground that they entered into transactions induced by the misrepresentations of other persons must prove that they relied on such misrepresentations and, therefore, ‘by’ that conduct, they suffered loss or damage.’

By the above statement, the Court of Appeal confined its observations to circumstances where the loss claimed flowed from the fact of having entered into a transaction at all. Necessarily, such a claim entails an examination of all the factors that caused the claimant to enter into the transaction and whether the contravention(s) was or were material to that decision. By contrast, in Ingot at [82], Hodgson JA suggested in obiter that the situation of investing in an investment the value of which has been inflated by the conduct of the contravenor is one where reliance may be superfluous to the determination of causation:

‘ my opinion, it is plainly foreseeable by the persons responsible for the misleading conduct that, if the misleading conduct results in the offering of investments that are worth less than their price by reason of the matters concealed by the misleading conduct, people not knowing the truth may invest in them and suffer loss by reason of the matters concealed by the misleading conduct. On that basis, it does seem to me arguable that loss of that kind would be loss suffered ‘by’ the misleading conduct, at least so long as the investors did not know the truth.’

In the unreported judgment of the Supreme Court of New South Wales of Perpetual Trustees v Knezevic [2012] NSWSC 956, Adamson J, following Digi-Tech and Ingot, distinguished between two types of cases (at [136]):

(1) ‘cases where some act of the alleged contravenor set in train events that resulted in damage to the claimant, but the conduct of the claimant does not form a link in the causal chain in the sense that the claimant was a passive sufferer of another’s act; and

(2) cases where the claimant relied on the conduct of the alleged contravenor to enter into a transaction to which the alleged misrepresentation was material.’

In the circumstances of that case, the defendant’s conduct in lending funds to the claimant provided the claimant with the opportunity (but no more than that) to use those funds to enter into an investment of her choosing, which investment caused her loss. Adamson J (at [138]) found that the case could not fall into the first category because the defendant’s conduct did not by its very nature cause the plaintiff’s loss, given she could still have chosen an alternative and ultimately successful investment. Nor, in that case, could the plaintiff prove direct reliance under the second category.

One can distinguish the above situation from the position of an investor seeking recovery only of any inflation in the price paid for the defendant’s shares. This is because, while the decision whether or not to purchase particular securities ordinarily will be an active decision taken by the investor, the price at which those securities are able to be traded on the ASX is not set by the investor, but by the market. That is, the form of loss claimed is not a loss primarily caused by the decision to purchase the shares at all (though such a decision is a necessary precondition), but rather by the market’s setting of the price at which the shares were able to be purchased. The investor cannot choose to purchase the shares at a price other than that set by the market at any given point in time. If the share price had not been inflated, the same purchaser making the same decision to purchase the same volume of shares at the same time would have paid a lower price for them.

Hence, if it is established that the defendant’s contraventions caused the shares’ market price to be inflated, then it seems self-evident that those contraventions by their very nature caused purchasers to suffer inflation-loss. The purchaser’s conduct in purchasing the shares does not in any way break the causal link between the contraventions and that particular form of loss. An investor who wished to go further, and allege that but for the defendant’s conduct they would not have purchased the shares at all, would of course fall into Adamson J’s second category, and hence would need to establish direct reliance.

This distinction – between the loss sustained by the entering into an investment at an overprice, and the loss sustained by entering into an investment at all – is crucial to determining the proper test for causation. In the authors’ opinion, any uncertainty regarding the legitimacy of market-based causation reflects the difficulty of applying principles developed in cases dealing with the latter type of loss to the former. However, the key authorities clearly demonstrate the importance of identifying the precise form of loss claimed before determining the appropriate test for causation. Then, the key question becomes whether there is sufficient causal nexus between the contravening conduct and the form of loss claimed, rather than whether the form of causation falls into one rigidly construed category or another.[7]

Where it can be established that a stock’s trading price was inflated as a result of disclosure failures or misrepresentations by the relevant company, then it is axiomatic that the shares would not have traded at the price they did but for the company’s misinformation to the market. So long as the investor was unaware of the truth, whatever their reasons for deciding to acquire the shares, the investor paid more than they otherwise would have paid, and the reason for that price differential was the company’s misconduct. Consequently, so long as the loss claimed by the investors is appropriately framed, the authorities support the conclusion that reliance is not an essential element of causation.

Ben Phi is National Group Practice Leader, Class Actions, Slater and Gordon Lawyers, Melbourne. PHONE (03) 9602 6866 EMAIL

Tim Finney is a Senior Associate, Slater and Gordon Lawyers, Melbourne. PHONE (03) 9602 6969 EMAIL

[1] See ABN AMRO v Bathurst Regional Council [2014] FCAFC 65 (ABN AMRO); Caason Investments Pty Ltd v Cao [2014] FCA 1410 (Caason Investments); Grant-Taylor v Babcock & Brown Limited (in Liquidation) [2015] FCA 149 (Grant-Taylor).

[2] ABN AMRO at [1375], referring to Ingot at 661-662 [19]-[22] and 731-732 [612]-[619], and to Digi-Tech at 212 [159].

[3] Trade Practices Act 2001 (Cth).

[4] Caason Investments at [72].

[5] See Grant-Taylor at [220] per Perram J.

[6] ‘PA Councils’ refers to the Corowa Shire Council and 11 other New South Wales regional councils which commenced proceedings against Local Government Financial Services Pty Ltd, ABN AMRO Bank NV and McGraw-Hill International (UK) Ltd, which proceedings were heard together with the proceedings against those defendants commenced by Bathurst Regional Council at trial owing to the similar nature of the claims made.

[7] See Gordon J’s Federal Court decision in Norcast S ár L v Bradken Limited (No. 2) [2013] FCA 235 (which decision was not overturned on appeal to the Full Court) at [331]–[332].

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