FEDERAL COURT OF AUSTRALIA Johnstone v HIH Insurance Limited [2004] FCA 1414 PRACTICE AND PROCEDURE – Pleadings - Strike out applications with respect to Amended Application and Statement of Claim – Sufficiency of pleadings – Representative proceedings – Procedural requirements - Definition of group members – Inherently confusing formulation of pleading – Failure to specify conduct – Inability to ascertain group membership with certainty – Application of Philip Morris principles – Insufficient particularisation – Inconsistency in allegations – Purpose of pleadings – Application and Statement of Claim struck out in entirety – Leave to re-plead granted – Federal Court of Australia Ac t 1976 (Cth) s 33C Federal Court of Australia Act 1976 (Cth) s 33C(1)(a) Trade Practices Act 1974 (Cth) Corporations Law ss 995 and s 999 Johnstone v HIH Limited [2004] FCA 190 cited Philip Morris (Australia) Ltd v Nixon (2000) 170 ALR 487 referred to BRIAN ALEXANDER JOHNSTONE v HIH INSURANCE LIMITED (ACN 008 636 575) (IN LIQUIDATION) AND ORS N317 of 2002 TAMBERLIN J SYDNEY 2 NOVEMBER 2004 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N317 OF 2002 BETWEEN: BRIAN ALEXANDER JOHNSTONE APPLICANT AND: HIH INSURANCE LIMITED (ACN 008 636 575) (IN LIQUIDATION) FIRST RESPONDENT GEOFFREY ARTHUR COHEN SECOND RESPONDENT JUSTIN HERBERT GARDENER THIRD RESPONDENT CHARLES PERCY ABBOTT FOURTH RESPONDENT ROBERT REGINALD STITT FIFTH RESPONDENT RODNEY STEPHEN ADLER SIXTH RESPONDENT RAYMOND REGINALD WILLIAMS SEVENTH RESPONDENT TERENCE KEVIN CASSIDY EIGHTH RESPONDENT DOMINIC FODERA NINTH RESPONDENT ARTHUR ANDERSEN TENTH RESPONDENT HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT ELEVENTH RESPONDENT HANNOVER REINSURANCE (IRELAND) LIMITED TWELFTH RESPONDENT E & S REINSURANCE (IRELAND) LIMITED THIRTEENTH RESPONDENT SWISS RE AUSTRALIA LIMITED (ACN 004 360 909) FOURTEENTH RESPONDENT JUDGE: TAMBERLIN J DATE OF ORDER: 2 NOVEMBER 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The Second Amended Application and the Third Amended Statement of Claim be struck out. 2. The applicant be granted leave to re-plead. 3. The applicant pay the respondents' costs in respect of the applications. 4. Leave be granted on a party-party basis to the respondents to tax and collect those costs forthwith. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N317 OF 2002 BETWEEN: BRIAN ALEXANDER JOHNSTONE APPLICANT AND: HIH INSURANCE LIMITED (ACN 008 636 575) (IN LIQUIDATION) FIRST RESPONDENT GEOFFREY ARTHUR COHEN SECOND RESPONDENT JUSTIN HERBERT GARDENER THIRD RESPONDENT CHARLES PERCY ABBOTT FOURTH RESPONDENT ROBERT REGINALD STITT FIFTH RESPONDENT RODNEY STEPHEN ADLER SIXTH RESPONDENT RAYMOND REGINALD WILLIAMS SEVENTH RESPONDENT TERENCE KEVIN CASSIDY EIGHTH RESPONDENT DOMINIC FODERA NINTH RESPONDENT ARTHUR ANDERSEN TENTH RESPONDENT HANNOVER RUCKVERSICHERUNGS-AKTIENGESELLSCHAFT ELEVENTH RESPONDENT HANNOVER REINSURANCE (IRELAND) LIMITED TWELFTH RESPONDENT E & S REINSURANCE (IRELAND) LIMITED THIRTEENTH RESPONDENT SWISS RE AUSTRALIA LIMITED (ACN 004 360 909) FOURTEENTH RESPONDENT JUDGE: TAMBERLIN J DATE: 2 NOVEMBER 2004 PLACE: SYDNEY REASONS FOR JUDGMENT 1 These reasons concern applications brought by the seventh respondent ("Mr Williams"), the tenth respondent ("Arthur Andersen") and the eleventh, twelfth and thirteenth respondents (collectively "the Reinsurers") to strike out the Second Amended Application ("Application") and the Third Amended Statement of Claim ("Statement of Claim") filed by the applicant ("Mr Johnstone") on 7 May 2004 in this group proceeding. 2 These applications raise a number of issues that go to the sufficiency of the pleading; the legal foundations for Mr Johnstone's claims, and the competence of the proceeding as a representative proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth) ("the FCA"). 3 For the reasons that I set out below, both the Application and the Statement of Claim, in my view, should be struck out, but once again leave should be granted to Mr Johnstone to replead. Mr Johnstone should pay the costs of the respondents as taxed or agreed, and the respondents should be permitted to recover forthwith any costs thrown away as a result of the three applications in relation to the present Application and Statement of Claim. 4 I have previously struck out an Application and Statement of Claim in this matter, for the detailed reasons given in Johnstone v HIH Limited [2004] FCA 190. Many of the objections which were considered in those reasons, and which were the basis for the previous strike out, have not been satisfactorily addressed in the present Application and Statement of Claim. In addition, further objections have been raised as a consequence of the reformulation of the claim. The relevant principles and background are referred to in my earlier reasons and I will not repeat them here: as to the applicable principles, see in particular: pars [27], [31]-[38], [53]-[55], [63]-[65], and [82]-[84] of those reasons. THE nature of the case 5 Mr Johnstone's case, as outlined by Mr Francey SC in written submissions, turns on allegations that Mr Johnstone and the group members (certain shareholders and noteholders in the first respondent, HIH) suffered loss or damage by reason of investing in HIH. This loss is said to flow from the allegedly false impressions of the financial viability of HIH created by the 1999 and 2000 Financial Reports. Group members are said to comprise Mr Johnstone and those shareholders and noteholders who acquired their shares or notes between 17 October 2000 and 15 March 2001, and held stock in HIH as at 15 March 2001. This designation of the group excludes a range of persons, including persons who did not suffer, or were not likely to suffer, loss or damage from the conduct pleaded. 6 It is alleged on behalf of Mr Johnstone and the group members that entry into the reinsurance contracts by HIH with the Reinsurers, and the publication of certain Financial Reports in respect of the affairs of HIH, were misleading or deceptive in their overall effect, and that the contracts were capable of being used in a misleading or deceptive manner. In the written submissions, allegations are made of contravening conduct, the effect of the contravening conduct and the involvement of the respondent parties in that contravening conduct. There is an allegation of the loss and damage Mr Johnstone and the group members are said to have suffered as a result of the contravening conduct. There is then an allegation of misleading or deceptive conduct in relation to these three reinsurance contracts pleaded as a discrete cause of action. 7 I now turn to consider, and express my views upon, the defects raised in submissions by the parties as to these matters. Arthur andersen 8 The first matter raised by Arthur Andersen concerns the inadequacy of the description of the group in the Application and the Statement of Claim. The submission is that the reformulated claims still fail to satisfy the requirement expressed in Philip Morris (Australia) Ltd v Nixon (2000) 170 ALR 487 at [126]-[127]. That requirement is imposed by s 33C(1)(a) of the FCA, which requires that each member of the group must have a claim against each of the respondents. The present proceeding, it is said, does not satisfy this requirement. 9 This objection is based on three grounds. The first is that the Statement of Claim defines the group members in par 2 as: "… Shareholders and Noteholders in the First Respondent as of 15th March 2001 who acquired those shares or notes in between 17th October 2000 and 15th March 2001 but excluding … any person who has not suffered, or is not likely to suffer, loss or damage from the conduct pleaded herein." (Emphasis added) 10 Arthur Andersen submits that by inference from this description and the wording of this exception, the group includes any shareholder or noteholder who has suffered any loss as a result of all or any of the conduct, acts and omissions referred to in the Statement of Claim. It is said that this description can include persons or bodies who suffer loss as a consequence of the conduct of only some but not each of the respondents. 11 This defect is said to be compounded by the terms of par 3 of the Application, which refers to loss and damage suffered as a result of conduct on the part of various of the respondents and conduct which the respondents were variously involved in. Again, it is said that this language is unsatisfactory because it indicates that the group includes some but not all respondents. Specifically, the pleading refers to conduct on the part of various of the respondents which is likely to mislead, in contravention of the Trade Practices Act 1974 (Cth) ("the TPA"), and it is then said that the conduct includes conduct that constituted a contravention of ss 995 and/or s 999 of the Corporations Law by the first, seventh, eight, ninth and tenth respondents, in which each of the seventh, eighth, ninth, tenth, eleventh, twelfth and thirteenth respondents were variously involved. Apart from the inherently confusing nature of this formulation, the pleading of the conduct is so lacking in specificity in relation to the alleged conduct that no proper basis has been alleged to enliven a class action. In my view, the matters sought to be relied on need to be spelt out with far greater precision in order to dispel the ambiguity inherent in the formulation of the group description. I am not persuaded that as presently framed the requirements of s 33C of the FCA are satisfied. The consequence is that there is no basis on the pleading, as presently framed, to proceed as a class action. 12 In addition, I consider that the express exclusion of any person who has not suffered or is not likely to suffer loss or damage from the conduct pleaded will have the effect, contrary to the principles enunciated in Philip Morris, that a prospective class member acting on proper legal advice will not be able to ascertain with any certainty whether or not he or she is a member of the group. So long as this further requirement is not satisfied, the matter cannot proceed as a class action. 13 The respondents submit that there are also a number of generalised allegations that demonstrate important defects, and I now turn to these. "In so far as" 14 The respondents submit that the use of the expression "in so far as" in a number of key paragraphs in the pleading demonstrates the failure of the pleading to commit to any specific allegation and that this is fatal to the pleading. By way of illustration, after referring to a number of events and circumstances, par 72 of the Statement of Claim alleges that: "In so far as: 72.1 Incorrect information in regard to the First, Second and Third Contracts was knowingly given to the Board of the First Respondent by the Seventh, Eighth and Ninth Respondents on 25th August 1999 … the Seventh, Eighth and Ninth Respondents: 72.8 aided, abetted, counselled or procured the contravening [conduct] … and accordingly were persons involved in the contravening conduct …" (Emphasis added) 15 The same formulation is used in relation to the involvement of Arthur Andersen in par 73, and in par 75 it is repeated in respect of the Reinsurers. The expression is also used in par 81 as against the eleventh respondent. The use of this expression, in my view, is a serious deficiency. Instead of committing Mr Johnstone to a precise and definite allegation, the ambiguous expression does not clearly allege that there has been any conduct or an act or omission but simply suggests there may have been, and if there were such conduct and to the extent that there was such conduct there has been a breach of the alleged duty. 16 The expression "in so far as" avoids the basic pleading requirement that alleged conduct and operations must be specifically pleaded. The purpose of pleading is to narrow and arrive at a set of issues for determination. By suggesting contingent issues in this way, that purpose is not fulfilled. If it is to be alleged that a respondent has engaged in conduct, then this must be affirmatively alleged as against that respondent and not tentatively or contingently suggested or hinted at. This defect is a significant one and must be addressed in any further pleading. "In the premises" 17 This expression is rolled up and amorphous and is calculated to avoid particularisation. It is used in some key paragraphs. See for example pars 67, 68, 69, 70 and 84 of the Statement of Claim. 18 In some instances such language may be a convenient shorthand way of making an allegation, but in this case, in the Statement of Claim, it has the effect of not specifying with the particularity required by the pleading rules, the matters that are said to provide the basis for the claim. The particulars of conduct said to provide the basis for each allegation must be segregated and linked to each allegation. 19 As Counsel for Mr Williams submits in written submissions, because the expression "in the premises" avoids specifying the conduct being challenged, it raises doubt as to what is being alleged. For example, as against Mr Williams, it is not clear whether it is said that HIH should not have entered into the contracts; or acted wrongly; or that Mr Williams engaged in some conduct or other in connection with entry into the contracts; or whether Mr Williams published the Financial Reports which constituted the contravening conduct. The broad reference to the catch-all phrase "in the premises" leaves a range of possibilities open without committing to any one or more of them. 20 It is axiomatic that a respondent should not have to guess or speculate as to what is being alleged. These remarks are pertinent to the allegations made against all respondents, in that they are based on general alternative statements as to a wide range of generalised conduct. FAILURE TO SPECIFY CONDUCT 21 The Statement of Claim makes serious allegations of improper conduct by the respondents in such a general way that they cannot be the subject of a clear and proper response. By way of illustration, par 73 alleges, among other things, that: "… The Tenth Respondent [Arthur Andersen] or one or more partners of the Tenth Respondent … conspired with one or more of the other Respondents to effect the contravening conduct …" (Emphasis added) 22 The difficulty with this formulation is that no material facts are pleaded to inform the respondent as to the nature, terms, persons, entities, duration or manner of operation and consequences of such alleged conspiracy. There are also allegations attributing "knowledge" to Arthur Andersen in sub-pars 73.3 and 73.4. This is done without particularisation as to the precise terms of the knowledge, what the knowledge was based on; who the recipient of that knowledge was; or the parts of the knowledge relied on in the pleading. Accordingly, this allegation is embarrassing to Arthur Andersen. The particulars should spell out the facts that indicate the way the knowledge was acquired, when it was acquired, and by whom, on behalf of Arthur Andersen. The allegations contained in pars 73.2 – 73.10 that Arthur Andersen has knowledge of a circumstance or series of events are clearly insufficient. They do not specify how that knowledge is attributed, or the times, persons and specific terms of the alleged knowledge said to be attributable to Arthur Andersen. 23 The failure to provide sufficient particulars generally in respect of conduct alleged is a serious defect throughout the entire Statement of Claim. It has particular significance in relation to the allegations of involvement in the "contravening conduct" referred to in pars 72, 73 and 74 of the Statement of Claim. In addition, there is the persistent failure to segregate the conduct referred to in relation to specific allegations. For example, in relation to the Reinsurers, par 74 simply repeats at length pars 40 to 66. These paragraphs include a substantial number of sub-paragraphs. See pars 40, 41, 44 and most notably 66, which contains ten sub-paragraphs. This is compounded by a reference to "in so far as" and by the bare allegation that the Reinsurers aided, abetted, counselled or procured the contravening conduct or were directly, knowingly concerned in and/or conspired with one or more of the respondents to give effect to that conduct. This pleading is deficient. "Susceptible" 24 In respect of the pleadings against the Reinsurers there is an allegation that by entry into the three contracts the Reinsurers engaged in misleading and deceptive conduct because the contracts were "susceptible" of being used in a misleading or deceptive manner. There is no specification in the pleading of material facts said to give rise to a duty not to enter into a "susceptible" contract. The allegation is in generalised and obscure wording. It is by no means clear what is meant by an allegation that contracts are "susceptible" of being used in a misleading or deceptive manner. The obscurity is not removed by reference to pars 40 to 46 of the Statement of Claim. The Reinsurers are not informed what precisely is the case that they have to meet. general COMMENTS 25 There is an inconsistency in the pleading where par 73 alleges that Arthur Andersen knew certain matters while par 66 alleges that had it not been for misleading conduct of the Reinsurers, Arthur Andersen would not have approved the accounting treatment. This seems to attribute the responsibility to Reinsurers rather than to Arthur Andersen. The precise relationship between these two paragraphs is so unclear that in my view, it is not reasonable to expect Arthur Andersen to respond to this pleading. 26 Finally, material facts have not been pleaded to indicate the way in which the misleading and deceptive conduct caused or resulted in the damage or loss complained of. In my view, this requires further attention and particularisation. Conclusion 27 It is not for the Court to draft the pleadings for a party. It is sufficient to indicate the deficiencies in the pleading. In my view, in the present case, these deficiencies are so substantial and pervasive as to warrant the striking out of the entire Application and Statement of Claim. However, I am not presently persuaded that a sufficiently strong case has been demonstrated to the effect that the case Mr Johnstone seeks to present is so untenable that, having regard to well-known and settled principles, the proceeding should be struck out entirely. At the same time, the inability of experienced Counsel to properly formulate a proper pleading after a number of attempts is an important matter to take into account when considering whether the case sought to be formulated is untenable, either as a class action or generally. 28 A number of other objections were made in written submissions by the respondents. However, as the pleading needs to be completely reformulated, there is no necessity to rule on each of these individual matters since they raise questions of law more appropriately dealt with when and if the substance of the case has been properly pleaded. I strike out the Application and Statement of Claim as now framed. I do not think it practicable to be selective and retain parts of the present pleadings for the purpose of amendment by supplementary material. Any reformulation of the pleadings in this matter should be drawn paying careful regard to the detailed matters raised in the submissions of the respondents. I order the Mr Johnstone to pay the respondents' costs on a party-party basis in respect of the applications, and I grant leave to the respondents to tax and collect those costs forthwith. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin. Associate: Dated: 2 November 2004 Counsel for the Applicant: N. Francey, SC. Solicitors for the Applicant: Dennis and Co Counsel for the Seventh Respondent: M. Walton, SC J.O. Hmelnitsky Solicitors for the Seventh Respondent: Arnold Bloch Counsel for the Tenth Respondent: N.C. Hutley SC R. Lancaster Solicitors for the Tenth Respondent: Baker & McKenzie Counsel for the Eleventh to Thirteenth Respondents: P.H. Greenwood SC D. Hogan-Doran Solicitors for the Eleventh to Thirteenth Respondents: Minter Ellison Date of Hearing: 9 August 2004 Date of Judgment: 2 November 2004