McGraw-Hill Financial Inc v City of Swan

Federal Court of Australia|2014-06-24|Before: Mr J, Jacobson J

Counsel for the Applicants: Ms K Rees SC with Mr J Hewitt

Counsel for the Respondents: Mr N Hutley SC with Mr C Withers

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 503 of 2014

STANDARD & POOR'S FINANCIAL SERVICES LLC (A COMPANY INCORPORATED IN DELAWARE)

STANDARD & POOR'S INTERNATIONAL LLC (A COMPANY INCORPORATED IN DELAWARE)

JUDGE: JACOBSON J DATE OF ORDER: 24 JUNE 2014 WHERE MADE: SYDNEY

The application for leave to appeal and for a stay of proceeding NSD 656 of 2013 filed 21 May 2014 be dismissed.
The applicants pay the respondents' costs of the application. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 503 of 2014

BETWEEN: MCGRAW-HILL FINANCIAL INC (A COMPANY INCORPORATED IN NEW YORK) (FORMERLY KNOWN AS MCGRAW-HILL COMPANIES INC)

STANDARD & POOR'S FINANCIAL SERVICES LLC (A COMPANY INCORPORATED IN DELAWARE)

STANDARD & POOR'S INTERNATIONAL LLC (A COMPANY INCORPORATED IN DELAWARE)

JUDGE: JACOBSON J DATE: 24 JUNE 2014 PLACE: SYDNEY

Introduction 1 The first applicant in the subject proceeding (Swan) was one of the applicants in a representative proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth) (the Act) arising out of the sale of structured financial products to local councils: Wingecarribee Shire Council v Lehman Brothers (Australia) Ltd (in liq) (2012) 301 ALR 1 (Wingecarribee). The second applicant in the subject proceeding (Moree) was a group member in the Wingecarribee proceeding. 2 The respondents in the subject proceeding (S&P) were not parties to Wingecarribee but Swan and Moree have commenced the proceeding as a representative action under Pt IVA seeking to recover damages from S&P, claiming in effect that it was a concurrent wrongdoer with the respondent in the Wingecarribee proceeding. 3 S&P claims that the present proceeding is an abuse of process because it contends that a judgment against it would conflict with the judgment in favour of Swan and the other councils in Wingecarribee. S&P also contends that the present proceeding is an attempt to relitigate a claim against S&P that could, and should have, been litigated in Wingecarribee. 4 On 7 May 2014 the primary judge (Rares J) dismissed an interlocutory application brought by S&P seeking orders that service of the originating process on it in the United States be set aside, and for summary dismissal of the proceeding under s 31A(2) of the Act: City of Swan v McGraw-Hill Companies Inc. [2014] FCA 442. 5 S&P seeks leave to appeal from the interlocutory orders made by the primary judge dismissing the interlocutory application. 6 Central to S&P's application for leave to appeal is its contention that the proposed appeal involves an important question of law as to the proper construction of the national proportionate liability legislation contained in Div 2A of Part 7.10 of the Corporations Act 2001 (Cth) and its analogues. S&P also contends that if the appeal is successful it will dispose of the proceeding in its entirety. 7 Swan and Moree (collectively the Councils) do not accept that an issue of construction of the proportionate liability provisions arises at this stage of the proceedings. They accept that an issue of construction, although not necessarily the issue identified by S&P, may arise at the conclusion of the trial. However, the Councils submit that the short answer to the present application is that the primary judge's finding of an absence of abuse of process is not attended by doubt. In addition, they rely upon the nature and composition of the proceedings to answer S&P's contention that a substantial injustice would flow from the refusal of leave. 8 S&P also seeks a stay of the primary judge's orders, in particular, in so far as the orders dismissed S&P's application to set aside an ex parte order for service of the originating process on S&P in the United States. 9 The Councils contend that his Honour's finding on that issue was not attended by any doubt because, as the primary judge found, S&P had submitted to the jurisdiction by seeking substantive relief in its interlocutory application under s 31A(2) of the Act.

The Primary Judgment 10 The primary judge, who was also the trial judge in Wingecarribee, described the issues in the Wingecarribee proceeding commencing at [13] of his judgment in the present matter. 11 His Honour set out at [13] the relevant details of the claim of negligence made in paragraph 22.4 of the second further amended statement of claim in Wingecarribee. He referred at [18] to an important amendment made by the respondent (Grange) to its defence. The amendment raised a new defence of proportionate liability which alleged that various ratings agencies, including S&P, were responsible for the loss suffered by the applicants and that the ratings agencies were concurrent wrongdoers with Grange. 12 Grange's claim that S&P was a concurrent wrongdoer was based upon three representations said to have been made by S&P. The representations were described by his Honour as representations (A), (B) and (C): see primary judgment at [19] and Wingecarribee at [1085]. 13 The pleadings in Wingecarribee were amended before the trial. The amendments are sufficiently explained in the primary judgment at [21]-[23]. 14 The primary judge pointed out at [24] that he had emphasised in Wingecarribee at [1097] that there was no issue about the accuracy or appropriateness of the ratings of the synthetic collateralised debt obligations (SCDOs) which were the subject of that proceeding. Rather, the issue was, what was conveyed by the ratings. 15 His Honour went on to say at [25] that in Wingecarribee he found that representation (A) had been made to the councils by Grange and that it had not been made to them by any ratings agency. The effect of this finding was, as his Honour explained in the passages from Wingecarribee set out in the primary judgment at [26], that it was Grange's misuse of the ratings published by S&P and others that was a cause of the councils' loss in that case. 16 His Honour also explained in the passages from Wingecarribee reproduced at [26] of the primary judgment the reasons why he rejected Grange's defence that the ratings agencies were concurrent wrongdoers in respect of representations (B) and (C). The effect of what he said in those passages was that representations (B) and (C) were not merely a repetition of something that Grange had, itself, said. Rather, representations (B) and (C) were said to have been made by S&P, and the question of how the making of those representations amounted to an independent or joint cause of the councils' loss was not pursued by Grange. 17 The primary judge described the present proceedings commencing at [29]. He set out at [31] the representations pleaded by Swan and Moree against S&P. The representations said to have been made by S&P in assigning the various ratings to the eight SCDOs which are the subject of the present proceedings include representations that: S&P had exercised reasonable care and skill in reaching its conclusions about the capacity of the SCDOs and their ability to withstand particular stress levels (the rating representations); and the rating of each of the SCDOs was objective and independent (the independence representation). 18 The gravamen of S&P's submissions in the present case is set out at [35] of the primary judgment. It is that the ratings representations are relevantly identical to representations (B) and (C) in Wingecarribee and, in that case, the trial judge found that S&P was not a concurrent wrongdoer with Grange when representations (B) and (C) were made to the councils. Also, S&P contended that the independence representation is similar to a representation that was initially pleaded in Wingecarribee, but subsequently abandoned, and, thus, there is "an apparent or substantial congruence" of the relevant issues in both sets of proceedings. 19 His Honour commenced his consideration of S&P's contentions by addressing the construction of the proportionate liability legislation. He concluded at [56] and [74] that the effect of the statutory scheme, and in particular s 12GU of the Australian Securities and Investments Commission Act 2001 (Cth) (which has its analogue in s 1041Q of the Corporations Act) is to permit a plaintiff who has succeeded against one concurrent wrongdoer to sue another concurrent wrongdoer for a shortfall in recovery of a previously apportioned part of the plaintiff's loss, provided that there is no double recovery. 20 The primary judge's critical findings rejecting S&P's contention that the present proceedings constitute an abuse of process appear at [76]-[78]. His Honour observed at [77] that there was no issue raised in Wingecarribee as to the falsification of representations (B) and (C). He said, at [78], that by contrast, in the present proceedings Swan and Moree contend that the ratings assigned by S&P were not accurate or appropriate because of alleged deficiencies in S&P's rating methodology and S&P's lack of independence. 21 His Honour continued at [78] as follows: Accordingly, the findings in the Wingecarribee proceedings that the ratings agencies were not concurrent wrongdoers with Grange were arrived at on different facts and issues from those that Swan and Moree seek to raise in these proceedings. 22 The primary judge's observations at [76]-[78] informed his finding at [79] rejecting S&P's submission that the proceedings are an abuse of process. The effect of his Honour's finding was to reject the contention that there is a risk that a judgment in favour of Swan and Moree will conflict with the judgment in Wingecarribee that the ratings agencies were not concurrent wrongdoers. 23 His Honour then turned to S&P's contention that the present proceedings are an abuse of process within the principle stated in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589. The substance of his Honour's reasons for rejecting that contention appears at [87]-[88]. 24 The effect of his Honour's reasons at [87]-[88] is that, in light of the very late pleading by Grange of the allegation that S&P was a concurrent wrongdoer, as well as delays in the filing of expert evidence, it was not unreasonable for the councils in Wingecarribee to proceed in that case without joining S&P. 25 Nor did his Honour consider that the present proceedings constitute an attempt to relitigate any substantive issue that had been determined in Wingecarribee so as to constitute an abuse of process: see [96]. His Honour's reasons for reaching this conclusion were similar to those expressed earlier in his judgment. He said at [99]: Critically ... in the former proceedings [Wingecarribee] there was no issue that the ratings for the SCDOs were other than accurate and appropriate. In these proceedings, challenges to the accuracy and appropriateness of the ratings are to be central features. 26 The primary judge also dealt with the application to set aside service of the originating process in the United States. That aspect of the application was founded upon S&P's contention that Swan and Moree were guilty of material non-disclosure in their ex parte application for leave to serve out of the jurisdiction: see [106]-[107]. 27 The material non-disclosure was said to be the failure to inform me, when the ex parte application came before the Court, that in light of the judgment in Wingecarribee, the proportionate liability legislation precluded Swan and Moree from seeking to make S&P liable as a concurrent wrongdoer. The primary judge dismissed that submission, stating at [109]: That argument was by no means obvious, and in any event, I have rejected it. 28 Additionally, his Honour held at [112] ff that S&P had submitted to the jurisdiction by bringing an interlocutory application under s 31A(2) of the Act for summary dismissal of the proceeding. 29 His Honour took into account the principles stated in Australian and English authorities on the question of when a step taken in a proceeding goes beyond that which is consistent only with a challenge to the jurisdiction, so as to amount to a submission to the jurisdiction. The authorities upon which his Honour relied included the decision of the High Court in Laurie v Carroll (1958) 98 CLR 310.

Abuse of Process 30 The primary judge's finding that the proceedings are not an abuse of process on the ground of a risk of conflicting findings is not attended by doubt. His Honour's analysis of the different factual basis and different issues which were determined in Wingecarribee make it clear that there can be no basis for the contention that the issues which arise in the present proceedings were previously determined in Wingecarribee. 31 In Wingecarribee, Grange made a claim that the ratings agencies were concurrent wrongdoers on the ground that the ratings agencies made the representation described as representation (A). That was a claim about the content of the representation made in the ratings document and did not address the reasonableness or appropriateness of the rating. 32 Representations (B) and (C) were concerned with the reasonableness or appropriateness of the rating. But his Honour's references to the relevant passages from Wingecarribee sufficiently support his finding in the present proceeding that a case based on those representations was not previously pursued: see [24]-[26] of the primary judgment. 33 His Honour's rejection of the Anshun submission turned upon his finding at [87]-[88] that it was not unreasonable for the councils in Wingecarribee to have proceeded without seeking to join S&P at a very late stage in the proceeding. 34 His Honour explained at [18] that Grange's amended defence which raised, for the first time the defence of proportionate liability, was filed less than three months before the final hearing. His Honour's description of the evolution of this defence, including amendments made by the councils to the statement of claim sufficiently appears at [19]-[23] of the primary judgment. 35 In my opinion, his Honour's finding that it was not unreasonable for the Councils to refrain from joining S&P are in accordance with the observations recognised in Anshun, at 602-603, as circumstances in which a party may justifiably refrain from litigating an issue in one proceeding yet wish to litigate the issue in other proceedings. 36 What would have been required of the councils in Wingecarribee in order to address the issue of the appropriateness of the ratings, was that they adduce expert evidence on that issue of the type that Swan and Moree will need to rely upon to support the allegations which they now wish to pursue against S&P. 37 Nor do I consider that S&P has demonstrated sufficient doubt about the correctness of the primary judge's finding that the present proceedings do not constitute a "scandal to the administration of justice" within the principle stated by Lord Halsbury LC in Reichel v Magrath (1889) 14 App Cas 665 at 668; see also Walton v Gardiner (1993) 177 CLR 378 at 393. 38 That principle was dealt with by the Court of Appeal of New South Wales in Rippon v Chilcotin Pty Ltd (2001) 53 NSWLR 198. The primary judge distinguished that decision at [90] ff. In doing so, the primary judge referred to the decision of Hunt J in Haines v Australian Broadcasting Corporation (1995) 43 NSWLR 404, to which the Court of Appeal in Rippon referred with apparent approval at [31]. 39 What emerges from Haines is that to constitute an abuse of process upon the basis stated in Reichel v Magrath, the issue determined in the earlier case must be one which the party propounding it in the latter case lost in the former. It must be an issue necessarily determined in the earlier case, and one of importance to the final result: see Rippon at [31]. 40 The guiding considerations identified by Giles CJ Comm D in State Bank of New South Wales Ltd v Stenhouse Ltd (1997) Aust Torts Reports ¶81-423 at 64,089 include the identity between the relevant issues in the two proceedings and the opportunity available to fully litigate the issues in the earlier case: see Rippon at [32]. 41 Here, the primary judge reiterated his earlier finding that the issues in the present proceeding are not the same as those which were raised in Wingecarribee. In reaching that conclusion at [99], he recognised that there is similarity between representations (B) and (C) in Wingecarribee and the ratings representations alleged in the present proceeding. However, he reiterated his earlier finding that the crucial difference between the two cases is that, in Wingecarribee, the parties proceeded on the basis that representations (B) and (C) were accurate. 42 It follows from what I said earlier that this finding is not attended by sufficient doubt to warrant the grant of leave to appeal.

The proportionate liability legislation 43 S&P seeks to attack the primary judge's construction of the proportionate liability legislation, in particular, his Honour's approach to the construction and application of s 12GU of the ASIC Act. 44 However, it is unnecessary to address the question of whether the primary judge's approach was attended by doubt. This is because the linchpin to S&P's attack on the primary judge's construction, in the present context, is the contention that the legislation cannot permit a party to commence another action against any other concurrent wrongdoer for an apportionable part of the loss where the later proceeding constitutes an abuse of process. 45 Since I have come to the view that there is insufficient doubt in the primary judge's finding that the present proceeding is not an abuse of process, the issue of construction does not presently arise.

No substantial injustice 46 In my opinion, there are a number of reasons why the substantial injustice limb of the principle stated in Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 are not satisfied. 47 First, I reject S&P's submission that the proceedings will come to an end if the proposed appeal is successful. 48 It is true that the proceedings are complex, and, if they proceed to trial, will be costly and time consuming, although not nearly as expensive or long running as the earlier proceedings. But the short answer to this contention is that the proceedings will continue to trial in any event. This is because there are 40 group members who were not part of the represented group in Wingecarribee and whose claims are not impacted by the arguments based on abuse of process which S&P wishes to pursue on appeal. 49 Second, an application has been brought by Baron-Hay Investments Pty Ltd (Baron-Hay), which claims to be a group member in the present proceeding, to be joined as a third applicant. The claims of Baron-Hay are apparently unaffected by any of the arguments for which S&P contended in the proceedings which are the subject of the primary judgment. 50 Baron-Hay's application to be joined as an applicant was listed before Rares J, as the docket judge, on 18 June 2014. I have been told that his Honour will hear the application on 25 June 2014. 51 It seems clear that if Baron-Hay is joined as a third applicant the issue of abuse of process will no longer arise and the proceedings will not be subject to the possibility of summary dismissal. In my view that would be a complete answer to S&P's contention that if it were successful on the proposed appeal, it would not be put to the expense of defending the substantive proceedings. 52 A third reason why the interests of justice limb is not satisfied is that Swan and Moree have brought claims in the present proceeding under s 1041E of the Corporations Act 2001 (Cth), and its analogue under the ASIC Act, to which the proportionate liability legislation does not apply: see ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65 at [1573], [1589]-[1590]. 53 It is true that the decision on that issue in ABN Amro is at odds with the views expressed by the majority in Wealthsure Pty Ltd v Selig [2014] FCAFC 64. However, the conflict in the authorities is not a matter which would weigh in favour of a grant of leave to appeal, particularly at this stage of the proceedings.

Submission to the jurisdiction 54 In my opinion, the finding made by the primary judge that S&P voluntarily submitted to the jurisdiction by seeking summary dismissal under s 31A(2) of the Act is not attended by doubt. 55 As his Honour accepted at [112], S&P submitted to the jurisdiction by bringing its interlocutory application on a wider basis than merely seeking to discharge the ex parte order giving leave to serve the originating process outside Australia. 56 His Honour's conclusion was amply supported by the authorities to which he referred, in particular, at [114]-[117]. The effect of those authorities is sufficiently expressed in the statement of Malcolm CJ in Brealey v Board of Management of Royal Perth Hospital (1999) 21 WAR 79 at 87 to which the primary judge referred at [114]. A step that is not consistent with or relevant to the challenge to the jurisdiction will usually be a submission to the jurisdiction. That was what occurred in the present case by the filing of the interlocutory application for summary dismissal of the proceeding. 57 An application for summary dismissal of a proceeding seems to me to be, quite plainly, a recognition of the Court's jurisdiction in respect of the substantive proceeding in so far as it seeks an order for dismissal as an abuse of process: Astro Exito Navegacion SA v W.T. Hsu (The "Messiniaki Tolmi") [1984] 1 Lloyd's Rep 266 at 270, cited by the primary judge at [115]. The present application, by its very nature, is premised upon an acknowledgement that the Court has jurisdiction but that the proceeding ought to be disposed of summarily as an abuse of process. 58 The same result follows if the matter is approached by reference to the question of waiver of jurisdiction. See the statements of principle referred to by Holland J in National Commercial Bank v Wimborne (1979) 11 NSWLR 156 at 176-177 and Gordon J in Walker v Newmont Australia Ltd [2010] FCA 298 at [27]. See also the primary judgment at [117]. 59 Nothing said by the High Court in Laurie v Carroll is at odds with this conclusion. The finding made by Dixon CJ, Williams and Webb JJ at 335-336 that Mr Laurie had not waived his objection was confined to the facts of that case.

Stay of Proceedings 60 Since I propose to refuse leave to appeal, no issue of a stay of the proceedings arises.

Orders 61 I will order that leave to appeal be refused with costs. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

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