Australia: Ratings Agencies Are No Longer Bulletproof

Last Updated: 17 November 2012
Article by Samantha Kelly
and Jean-Pierre Douglas-Henry, Matthew Saunders and Richard F Hans

The Australian Federal Court has this week delivered a landmark first instance judgment which holds a credit rating agency liable for the first time (among other things) for the negligent AAA rating of a structured financial product.

In Bathurst Regional Council v Local Government Financial Services & Ors (No 5) [2012] FCA 1200, the court held that 13 local councils were entitled to be compensated for their estimated A$30 million losses arising out of their investment in Rembrandt notes, comprising constant proportion debt obligations (CPDOs) arranged by ABN Amro, rated AAA by Standard & Poors (S&P), and marketed and sold to them by the financial advisory business, Local Government Financial Services (LGFS). These defendants were held liable in equal measure on various grounds for misrepresenting, mis-rating and mis-selling the CPDOs.

The decision comes almost six years after the onset of the credit crisis, which coincides with the expiry of the limitation period which typically applies to claims in negligence. As a consequence, it is likely the decision will in the near future result in a spate of copy-cat claims in Australia, and very possibly elsewhere. S&P warned the court in its ultimately unsuccessful trial submissions that holding S&P liable for what it characterised as its opinion rather than advice would result in "a flood of claims by disappointed investors". Unsurprisingly, S&P has said it will appeal.


Insofar as it is relevant for the purpose of this note (which focuses on the rating agency aspects of the decision), S&P were retained by ABN Amro to rate the CPDOs, which S&P proceeded to do using a financial model provided to S&P by ABN Amro.

S&P was found to have used unjustified and unreasonably optimistic assumptions for some of its inputs for the modelling of the CPDOs' performance, which produced a AAA rating. Had they been eliminated or properly stress-tested, the modelled performance of the CPDOs would have changed from AAA to sub-investment grade (ie below BBB). In those circumstances, the Councils would have been prevented by law from investing. There was ample evidence that S&P knew ABN Amro had engaged it to provide a credit rating for the very purpose of communicating it to potential investors and that S&P's expert opinion of the creditworthiness of the CPDOs was intended to be relied upon by those investors, particularly those who were restricted to investing in products rated at or above a certain level, such as the claimant Councils.

Further, the Councils were found, following the earlier decision of the Federal Court in Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028, to have been unsophisticated investors who were unable to "protect themselves from the consequences of [S&P's] reasonable care" because they did not have the "resources or expertise to assess creditworthiness or to second-guess the rating of a structured financial product" (read our report on Wingecarribee here). It is noteworthy that Jagot J thought the CPDOs were "grotesquely complex."

As a consequence, Jagot J held (among other things) that S&P:

  • owed a duty of care to potential investors who were vulnerable in the sense that they were unable to assess the creditworthiness of the CPDOs or to second-guess S&P's AAA rating of the same, which included the Councils;
  • breached that duty because S&P's analysis was "fundamentally flawed, unreasonable and irrational in numerous respects" and comprised "failures of such a character that no reasonable ratings agency exercising reasonable care and skill could have committed in the rating of the CPDOs"; and
  • was liable (together with ABN Amro and LGFS, for other reasons) to compensate the Councils for the loss they had suffered by investing in the CPDOs, which had performed badly and well below the standard expected of a AAA investment, rejecting out of hand that the global financial crisis was the "real, essential or effective cause of the loss".


Jagot J's judgment, which fills several hundred pages, is significant because of Her Honour's findings about the obligations of a rating agency to investors with whom they have no contract (they are usually hired and paid by the arranger), and to whom their advice or opinions are not addressed (they typically provide their ratings advice or opinions to the relevant issuer of the financial product concerned). The device used to overcome these difficulties was to impose a duty of care for the reasons referred to above and to characterise the rating as the making of a representation. While this creates a precedent under Australian law, which will no doubt be called in aid by similarly situated claimants in future cases there, it swims against the tide of decisions and legal principle in other common law jurisdictions.

In the various European cases which have been brought, and under English law, the disclaimers of liability which usually accompany credit ratings are typically applied and upheld, in the absence of contrary legislation, so as to deprive an investor of the ability to pursue a negligence claim. The underlying logic for this is that an investor cannot claim to have relied upon a credit rating (and thus to be owed a duty of care) where a valid exclusion of liability provision states that they may not do so and recommends they take independent financial advice before investing.

Jagot J considered the disclaimers relied upon by S&P were not effective because she was not satisfied adequate steps had been taken to bring them to the attention of investors. It remains to be seen whether European or English courts would be prepared to adopt a similar position, particularly given the clear and unambiguous terms of most disclaimers and any applicable regulatory requirements for those marketing or selling financial products to bring all material information to the attention of would-be investors, particularly unsophisticated investors such as the claimant Councils.

There is also a threshold question which has yet to be answered under English law, but which has been addressed in the United States, as to whether a credit rating constitutes advice or an opinion. Whereas the former is actionable where the advice is negligent, the argument goes that the latter is not. In a number of US cases, credit rating agencies have successfully established that their ratings are in the nature of an opinion as to the creditworthiness of a transaction, in respect of which they enjoy the right of free speech and First Amendment protection under the US Constitution.

Jagot J rejected this characterisation (ie the dichotomy between advice and opinion) and held that the assignment of a AAA credit rating carried with it a "representation that S&P has a genuine and reasonable basis, formed following the application of its expertise, for reaching the conclusions that it reached..." The US position aside, where constitutional arguments apply, it is questionable whether English law would impose liability for an opinion which can be construed as the making of a representation, without also considering the effectiveness of accompanying disclaimers of liability.


This decision is being pored over by the credit rating agencies, their lawyers, myriad regulators and countless aggrieved investors all of whom are pondering the question whether the decision of the Australian Court will survive an appeal and if so, and perhaps in any event, followed in future claims against rating agencies. Media reports suggest that many such cases are planned in Europe, the UK and the US.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions