Financial lines: Australian court confirms rating agency owed duty of care to investors


Appeal decision

The appeal court upheld the findings of the first instance judge (with the qualification that it found that a claim for damages under the Australian Corporations Act was not apportionable). Importantly, the appeal court upheld the finding that S&P owed a duty of care to potential investors.

On appeal, S&P accepted that the rating of the notes had been flawed. It argued, however, that the first instance judge had been wrong to hold that it owed a duty of care. Central to S&P’s case that it did not owe a duty of care was that the risk of harm was not reasonably foreseeable because its liability was indeterminate and, in particular, it did not know the identity of the investors. The Federal Court rejected that argument, finding that the class of potential investors was known and identified. To establish that the ratings agency owed a duty of care to investors it was not necessary to show that it knew the precise identity and number of members of the class of investors or the exact loss. It was sufficient that S&P knew the characteristics of the class (that each was an investor in the notes) and knew the foreseeable type of loss that would be suffered if its rating of a product was negligent.

The Federal Court also dismissed the argument that the investors were not vulnerable and were capable of protecting themselves from the loss suffered. The court found that S&P knew that an ascertainable class of persons (the investors) would be reliant on S&P’s conduct, that its function in rating the notes was specialised and that the members of the ascertainable class were likely to rely on S&P. The investors could not replicate or second-guess S&P’s rating.

S&P had no direct dealings or contractual relationship with the investors. The agency’s contract with the issuing bank identified, however, that S&P had responsibilities to other parties (S&P gave permission to the bank, for example, to disseminate the rating to interested parties) and S&P were aware that the reason why the bank obtained and paid for the rating was so that it could be communicated to interested parties.

The court also upheld the findings that the issuing bank breached the duty of care it owed to LGFS and that LGFS was in breach of the duty of care it owed to the councils. The bank owed a duty of care to LGFS to exercise reasonable skill and care in providing information and advice about the notes, and to exercise reasonable care to ensure that LGFS was issued with a financial product that had a degree of certainty commensurate with the AAA rating.


Although an Australian decision, it is interesting to note that a key part of the appeal court’s finding was based on the sheer complexity of the products and the inability of an end purchaser to conduct any meaningful assessment of the rating. This certainly suggests that where investors were sophisticated (in the sense they can assess the risk for themselves/or can afford to pay advisers to help them understand the risks), or where the products are not overly complex, it is much more difficult for claimants to establish a duty of care on common law principles alone. It will also be interesting to see whether claimants seek to rely on this decision in this jurisdiction in the future, and it will be interesting to see how many (if any) claims are made against rating agencies under the new European Regulation Credit Rating Agencies, which applies to ratings issued after June 2013.

Further reading: ABN Amro Bank NV v Barthurst Regional Council [2014] FCAFC 65