Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200
Tort; Negligence; the duty of care; liability for misstatements causing purely economic harm; indirect representations.
Facts: ABN Amro Bank created a new financial product, a complex type of derivative. They retained Standard and Poor's (S&P), a ratings agency, to rate the product. They sought a triple A rating. S&P reviewed the product and gave it a triple A rating. This rating was relied on by Local Government Financial Services Pty Ltd (LGFS), who purchased the product and advised its clients, including various local councils, to invest their money by doing the same. However, the asset value of the derivatives fell, leading LGFS and the councils to lose millions of dollars. The Bathurst Regional Council sued LGFS, S&P and ABN Amro Bank, to recover their losses. In part, they relied on negligent misrepresentation, alleging that the triple A rating was given without a proper review of the product.
Issue: Did S&P owe a duty of care to purchasers of the product when issuing the triple A rating?
Decision: In the circumstances S&P owed a duty of care to prospective purchasers of the product.
Reason: The court held that the potential liability of S&P was not indeterminate because, in the circumstances, the class of potential purchasers of the financial product was ascertainable and S&P only purported to rate each particular release of the product as issued by ABN Amro Bank. S&P exercised control over the extent of its liability because it was free to choose whether or not to issue a rating, and what conditions it might impose on the rating.
On the relevance of Esanda Finance v Peat Marwick Hungerfords, Jagot J explained (at [2758]-[2759]):
"Esanda Finance involved a different factual context. The purpose of an audit of a company is one thing. The purpose of a rating to a financial instrument is another. A rating is assigned to a financial instrument for the very purpose of communication to the class of potential investors for them to take into account, and rely upon, in deciding whether or not to invest. The same cannot be said of a financial audit of a company which is undertaken by an auditor for the company's own purposes and to comply with the company's statutory obligations. … S&P knew that its rating was intended for these purposes … [It] was paid for the very purpose (reliance by potential investors on the rating) which is now seeks to deny."
The other elements of Negligence also being satisfied, S&P was held liable to compensate the council.
Note: This case also involved an action against both S&P and ABN Amro for misleading and deceptive conduct.