McGraw-Hill Financial, Inc (now known as S&P Global, Inc) v Mitsub Pty Ltd

The Power to Make the 18 May Order 73 To a significant degree, resolution of the question of whether the learned primary judge had power to make the 18 May order will be determined by the Court's interpretation of that order. In particular, a critical element in S&P's contention that the Court lacked power to make the 18 May order is the proposition that the order should be interpreted as having been made against the CEO of each of SPG and SPI and of each of the respondents in the other proceedings listed in the schedule to the 18 May order. That is to say, it was S&P's contention that the order was made against the individual or individuals occupying that position in each of the respondent corporations rather than against the corporations themselves. Upon the basis that this is the true interpretation of the 18 May order, it was then submitted that the learned primary judge had no power to make the 18 May order against a foreign individual who was not a party to this proceeding or to any of the other proceedings listed in the schedule to the 18 May order. 74 S&P submitted that: (a) The general words of s 37P of the FCA Act do not provide power to make an order requiring a person who resides overseas and is not otherwise subject to the jurisdiction of this Court to do something outside Australia; (b) If, contrary to the proposition stated in subpar (a) above, the general words of s 37P are sufficient to confer such a power, considerations of international law and comity were mandatory considerations that conditioned the exercise of the Court's power and the primary judge failed to take into account any of those considerations; (c) The general words of s 37P do not provide a power to make an order against a non-party; (d) A further precondition to the exercise of the power conferred by s 37P(2) of the FCA Act is how the overarching purpose identified in s 37M(1) of that Act would be promoted by the making of the order. His Honour failed to give appropriate consideration to this precondition. In particular, the learned primary judge did not address why submissions made on behalf of S&P by their lawyers would not adequately address the case management objective which he was seeking to achieve; and (e) The 18 May order is not truly an order which falls within the subject matter of s 37P(2) of the FCA Act viz giving directions about the practice and procedure to be followed in relation to the proceeding. By requiring the CEO of each of the relevant corporations to explain why the Court would need to deal with the issue of reliability of the ratings in question in the various proceedings covered by the 18 May order at a final hearing, that order required that person to address substantive matters affecting the adjudication of the respondent parties' rights in the various proceedings. Such an order was not authorised by s 37P of the FCA Act. 75 The first answer which Mitsub made to these submissions was that, when properly construed, the 18 May order bound S&P and probably the respondents in the other proceedings listed in the schedule to the 18 May order, not the CEO of each of those corporations. In a detailed riposte, the applicants also took issue with the other arguments made by S&P in support of their proposition that the primary judge had no power to make the 18 May order. 76 We are inclined to think that, properly understood, the 18 May order was directed to SPG and SPI and perhaps to the other corporations identified as respondents in the proceedings listed in the schedule to the 18 May order. The question of the identity of the person or persons or entity or entities to whom the 18 May order is directed and precisely which persons or entities are therefore bound by that order is not without its difficulties and we appreciate that there is considerable force in the submissions advanced to the Court on behalf of S&P to the effect that the 18 May order was, in truth, directed to the CEO of each of SPG and SPI and perhaps of other corporations as individuals in circumstances where those individuals were not a party to any of the proceedings in question and were foreigners ordinarily resident overseas. 77 We are also inclined to think that if, in truth, the 18 May order was directed to foreign individuals who are not parties to the proceedings, it may well have been made without power. In that event, it would be liable to be set aside. 78 Because we have come to the firm conclusion that the discretion which the primary judge had decided to exercise in the present case miscarried, we do not propose finally to decide the questions raised by S&P's contention that the 18 May order was made without power. For the purposes of this judgment, we will assume that that order was within power and will proceed to address ground 2 of S&P's Draft Notice of Appeal.

Discretion 79 In their Draft Notice of Appeal, S&P provided detailed particulars of ground 2. Those particulars are in the following terms: Particulars (a) The primary judge failed to properly distinguish between the position of the chief executive officer of the Appellants, who is not a party to any of the proceedings, and the Appellants. (b) The primary judge failed to take into account the caution required in making an order against a non-party. (c) The primary judge failed to take into account the caution required in making an order against a person who is a resident of a foreign country and is not subject to the Court's jurisdiction. (d) The primary judge failed to have regard to how the making of the Order (directed personally to the chief executive officer of the Appellants) would promote the overarching purpose referred to in s 37M of the Federal Court of Australia Act 1976. (e) The primary judge erred in failing to have regard to the risk of the appearance of pre-judgment in making the Order. (f) The primary judge erred in making the Order on the mistaken premise that: (i) findings were made in the Bathurst proceedings (at first instance and on appeal) concerning the inappropriateness of the use of the Gaussian copula; (ii) findings were made in the Wingecarribee proceedings as to reports in 2005 by the Bank of International Settlements and Banque de France concerning the inappropriateness of the ratings agencies' methodologies. (g) The primary judge erred in acting without regard to the principle that a judge must not determine a case in a particular way because, in other proceedings, he or she or another judge has decided a matter a certain way. (h) The primary judge erred in having regard to statements from counsel for the Respondent that the Respondent would be assisted by the affidavit contemplated by the Order given that: (i) the need for the Order was not raised by the Respondent; (ii) there was no evidence of any communications between the parties in which the Respondent sought information as to the basis for the Appellants' defence on the issue addressed by the Order. (i) The primary judge erred in failing to have regard to the prejudice to the Appellants that would or might be caused by the making of the Order. (j) The primary judge failed to have regard to whether the case management objectives he was seeking to advance could be achieved by a different order such as an order that the Appellants (by their counsel) provide submissions. (k) The primary judge erred in that the Order was not sufficiently clear or certain as to what the chief executive officer of the Appellants was required to do to comply with the Order. 80 Particulars (a), (b), (c) and (d) are all predicated upon the twin assumptions that the primary judge had power to make the 18 May order and that, upon the correct interpretation of that order, it was made against the CEO of SPG and also against the CEO of SPI. Given the views which we have expressed in relation to these assumptions at [73]-[78] above, we do not propose to consider the arguments based upon these particulars. 81 Particulars (e), (g), (h), (i) and (j) all involve contentions that the learned primary judge failed to have regard to a number of relevant material considerations and, in one case (particular (h)), had regard to an extraneous or irrelevant matter. 82 Particular (f) captures the proposition that his Honour misunderstood the effect of the findings in Wingecarribee and in the BRC judgment concerning the use of the Gaussian copula in the ratings models under consideration in those cases. 83 In both their written and oral arguments made to us, S&P developed their arguments by reference to the particulars given in their Draft Notice of Appeal. 84 S&P submitted that, even if the primary judge had power to make the 18 May order, his Honour did not take proper account of the fact that the order was made against one or more foreign individuals, none of whom is a party to the proceeding or to any of the other proceedings listed in the schedule to the 18 May order. For reasons already explained, we will put to one side arguments based upon an interpretation of the 18 May order to the effect that the order was made against one or more individuals. 85 Nonetheless, there is a very real argument as to the identity of the entity or entities or person or persons bound by the order. The order is ambiguous in this respect and is open to competing interpretations. It is left to the parties and their advisers to discern precisely who is bound by it. This is an unsatisfactory state of affairs. 86 It was next submitted by S&P that the primary judge had acted on a wrong principle when he made the 18 May order. S&P argued that a judge hearing a dispute must determine that dispute upon the basis of the material which is before him or her in that case and not because, in some other case, he or she or another judge in another proceeding has decided a similar matter in a certain way. By requiring the CEO to explain why certain findings or observations in Wingecarribee and the BRC judgment do or do not apply to the proceeding below and the other proceedings listed in the schedule to the 18 May order and why the Court will need to deal with the reliability of S&P's ratings, the learned primary judge failed to have regard to the risk of the appearance of pre-judgment in making the order. 87 S&P also contended that the primary judge misunderstood the observations in Wingecarribee and the BRC judgment upon which he relied in making the 18 May order. S&P argued that the Gaussian copula was not the central issue in dispute between the parties in the BRC proceeding. Rather, so it was said, that case was principally concerned with the input assumptions that were used as part of the ratings process for a CPDO. Justice Jagot's judgment was a lengthy one (3,723 paragraphs) and the only paragraph which addressed the Gaussian copula in terms was the paragraph cited by the primary judge in his Reasons for Judgment at [4]. Justice Jagot did not make any finding that the Gaussian copula should not have been used at all as part of the ratings process or that it necessarily produced a flawed rating. Rather, her Honour observed that there were limitations with the Gaussian copula that meant that a ratings agency was required to be cautious when considering the results of modelling using that copula. That is, the ratings agency had to consider the limitations of the Gaussian copula when conducting its qualitative and quantitative analyses based upon the output of any model used by it which has deployed the Gaussian copula. Such a finding cannot be extrapolated to qualitative and quantitative analyses applied to the outputs of another model altogether deployed to rate a different structured instrument. S&P also prepared a schedule of references to the evidence led in the BRC proceeding which they contended formed the basis of her Honour's observations at [2556] of her judgment. That evidence suggested that some limitations on the use of the Gaussian copula were well known at the relevant time for the purposes of the BRC proceeding but that it was still being widely used at that time. The real issue with the copula, according to the evidence, was as her Honour had suggested at [2556] viz a reasonably competent ratings agency should have erred on the side of caution when considering the results of the modelling. 88 The reports relied upon by his Honour which had been referred to in his Honour's earlier judgment in Wingecarribee similarly do not state that the ratings agencies' methodologies were inappropriate in modelling portfolio credit risk. The key finding of the BIS Report was that "… risks associated with structured products may not have been fully grasped by some investors" (BIS Report at p 3). On the topic of CDO rating methodologies, the BIS Report noted that "… there is no current consensus regarding what 'best practice' is in terms of modelling credit risk in a portfolio context" (BIS Report at p 19 and also similar remarks at p 3). It further noted that models based upon Monte Carlo simulation "… seem to be emerging as the industry standard" (BIS Report at p 18). At p 55, the BIS Report referred to the Gaussian copula as "the most commonly used" copula. The BIS Report did not state that the use of the Gaussian copula in ratings agencies' models was always or generally inappropriate nor did the primary judge go that far in Wingecarribee. 89 S&P also submitted that his Honour erroneously gave weight or too much weight to remarks made by Senior Counsel for Mitsub concerning the utility of making an order in the terms of the 18 May order. Senior Counsel had asserted that S&P had never put on any expert evidence or other evidence in any of the proceedings involving issues concerning its ratings methodologies as to what they say about the use of the Gaussian copula. S&P relied upon an affidavit of Cristina Polizu in order to challenge that assertion. We note that S&P's reliance upon that affidavit led to a collateral dispute as to whether or not it truly amounted to expert evidence of the relevant kind. We do not think it necessary to resolve that dispute. 90 S&P also argued that the primary judge erred by failing to have regard to the prejudice occasioned to S&P and the other respondent parties listed in the schedule to the 18 May order which would or might be caused by the making of that order. The order requires the CEO or two CEOs to express belief on substantive legal matters. Those beliefs will inevitably be informed by legal advice. Thus, there is a real risk that, in complying with the 18 May order, the CEO of each of SPG and SPI and the other respondents will need to disclose privileged material. Although the learned primary judge referred to this problem, he did not solve it. Nothing in the order ameliorates the risk. In addition, S&P made the obvious point that there was nothing in the order itself which restricted the use that will or might be made of any affidavit filed in compliance with the order. While it is true that the control of the affidavit or affidavits and the use to which they may be put will be with the Court, the matter was left entirely at large. 91 Next, S&P submitted that his Honour failed to consider whether the case management objectives which he was seeking to advance could be achieved by a different order such as an order that S&P provide submissions directed to the question which was of interest to his Honour or be required to file some other issues document designed to tease out the matter of interest. S&P said that it was not necessary for the fair conduct of the proceedings or for the case management of the proceedings for the primary judge to have made the 18 May order without first providing S&P with an opportunity to consider whether the objectives which his Honour had in mind could be achieved by other means. 92 S&P also argued that, by expressly referring to the CEO in the 18 May order, the primary judge denied to S&P and the other respondents the opportunity to select the most appropriate person within the relevant corporations best able to provide the information sought by the 18 May order. 93 Finally, S&P submitted that the order was ambiguous in that it did not specify with sufficient particularity the task or tasks that the CEO of each relevant corporation was being required to do. 94 Mitsub responded to these submissions as follows: (a) Although it had not made an application to the primary judge for an order in the terms of the 18 May order, Mitsub was entitled to take up the suggestions made by his Honour on 12 May 2016 and to press for an order along the lines of the 18 May order; (b) The 18 May order is not ambiguous in any respect. In particular, it is not an order directed to individuals at all but rather an order directed to S&P (in the proceeding below) and to all of the respondents in the other proceedings listed in the schedule to the 18 May order; (c) The 18 May order is quintessentially a matter of practice and procedure. It was made by a judge who is seised of a multiplicity of suits, all of which (with one exception) are dealing with the ratings of structured products. The ratings of such products are at the core of all of the proceedings with which his Honour and Wigney J are seised. The Full Court should not interfere with the 18 May order unless it is satisfied that the exercise of discretion miscarried and that there was prejudice or substantial injustice visited upon S&P by the making of that order. S&P have not discharged the burden of satisfying the Full Court of those matters. The primary judge was trying to avoid S&P taking up tactical positions in multiple actions. His Honour was trying to get a clear early statement of S&P's position in respect of its ratings methodology. The explanation of the use of the Gaussian copula that will be brought forward in the affidavit or affidavits filed in compliance with the 18 May order will go a long way to enabling the Court and the other parties to understand exactly what S&P's answer is to the allegation that the use of that copula was clearly inappropriate; (d) No waiver of privilege will necessarily occur. The risk of a waiver of privilege occurring under compulsion can be solved by further case management in light of the affidavit or affidavits filed in compliance with the 18 May order; (e) The argument now advanced by S&P that the 18 May order strips S&P of the power to select an appropriate deponent of the affidavit or affidavits which his Honour had in mind is a new argument and was not run before the primary judge. It should not be permitted to be run now. In any event, nominating the CEO of the two S&P corporations was a perfectly appropriate choice; (f) The 18 May order was not premature. There was a mediation on the horizon and the information likely to be gleaned from a perusal of the affidavit or affidavits filed in compliance with the order was going to be useful at the mediation; (g) The 18 May order is not ambiguous. Those who read it and seek to interpret it will be well informed about the issues in the proceeding below and the related proceedings and will be able to make sense of the order without difficulty; and (h) There is no error of the kind explained in House v The King. 95 We think that the submissions made by S&P which we have summarised at [84]-[93] above are correct and we accept them. We would add the following observations. 96 While we recognise, as we must, that the 18 May order concerns a matter of practice and procedure, it nonetheless falls outside the types of practice and procedure order which the High Court in Bucknell held would not ordinarily be the subject of a grant of leave to appeal. The 18 May order is innovative, is not contemplated by the Rules of the Court and yet, subject to the Court having power to make such an order and subject to it being appropriate to do so, may be justified under the case management principles currently being developed by this Court in the modern context. But it is not a run of the mill procedural order. 97 Senior Counsel for S&P submitted that the order required the CEO of each of SPG and of SPI to review all of the commercial files relevant to the proceeding below and the other proceedings listed in the schedule to the 18 May order. Senior Counsel for Mitsub went further and submitted that not only was the CEO of those corporations required to review the commercial files, but he was also required to review all of the Court files listed in subpars (a) and (b) of par 1 of the 18 May order. 98 It is quite impossible to know whether the task that has been set for the CEO of each of SPG and SPI and of the other respondents is to review certain Court files, certain commercial files or both. Whichever interpretation one places upon the question of which files are to be reviewed, there is no doubt that the exercise required of each of the CEOs is a significant and burdensome one. This is not only because there will be a large amount of material for that person to review but also because of the other tasks that are or may be involved in that person complying with his Honour's order. 99 For the reasons already explained, it is not possible simply to extrapolate for the purposes of the extant proceedings remarks or observations made by Jagot J in the BRC judgment and by his Honour in Wingecarribee. There are great dangers in seeking to do so. 100 It is one thing to require a party to explain its defence to the case sought to be made against it by the plaintiff, including, for example, in the present case, by requiring S&P to explain how it used the Gaussian copula in the model which it used to rate the Blue Gum SCDO; to explain why it considers that that use was appropriate; and to specify with particularity what steps it took to address the possible shortcomings of that copula when estimating the impact of extreme systemic events. It is quite another thing to require a party to study evidence and findings (or judge's remarks) in entirely separate proceedings in order to place that party in a position to express a view as to whether the judge's findings or remarks in those separate proceedings govern the issues in the instant case before the Court and, if not, as to the reasons why not. The flaws in such an approach are magnified if the parties in the instant case were not parties to the earlier proceedings and if the issues in the earlier proceedings are not the same as the issues raised in the instant case. 101 The 18 May order requires one or more CEOs of the relevant corporations to undertake the kind of comparison to which we have referred in the latter half of [100] above. In the present case, in the circumstances prevailing at the time when the 18 May order was made, this was a wrong exercise of the Court's discretion. 102 In addition to ambiguities concerning the identity of the person or persons bound by the 18 May order and the scope of the expression "the files" when used in that order, there are other difficulties with the text of the order which render it utterly ambiguous. 103 First, as has already been submitted and accepted, the cases referred to in subpar (a) of par 1 of the 18 May order do not contain findings that the use of the Gaussian copula in the methodology adopted by ratings agencies to rate structured financial products is inappropriate. Thus, the CEO is being asked to search through the judgments referred to in that subparagraph in an endeavour to locate findings which were never made in those judgments. The order does not direct the CEO to any particular "findings" or remarks in those judgments and thus leaves to each CEO the decision as to what particular matters will comprise the basis for the comparison apparently required to be undertaken by the order. This inevitably results in the very real possibility that the basis for the comparison might differ from CEO to CEO and, in any event, might differ entirely from that which the primary judge had in mind when he made the 18 May order. 104 Second, a similar criticism can be made of the task required by subpar (b) of par 1 of the 18 May order. 105 Third, there appears to be a semantic difficulty caused by the language adopted in the first two lines after subpar (b) of par 1 of the order. At the hearing before us, Senior Counsel for Mitsub sought to solve that problem by inserting the word "to" immediately before the word "address" in the second line of text following the end of subpar (b) but this suggestion caused more problems than it solved. On one view of the requirements imposed by the order, the CEO is required to search out findings in the judgments referred to in subpar (a) and subpar (b) of par 1 which address the capacity of the Gaussian copula to estimate reasonably accurately the impact of extreme systemic events and then, if such findings can be found, to form a considered view on advice as to whether they apply to the proceeding below and to the other proceedings listed in the schedule to the 18 May order and, if not, why they do not so apply. In order to perform that task or those tasks, the CEO would need to ascertain the precise subject matter of any findings made in the earlier judgments which generally address the capacity of the Gaussian copula to accommodate extreme systemic events and then to make some kind of judgment about whether or not those findings can be extrapolated to the new proceedings. It is difficult to tease out this meaning from the text of the 18 May order and, of course, it may not be the meaning intended by the primary judge. In this most fundamental respect, the order is ambiguous. 106 We think that the 18 May order suffers from a number of serious ambiguities. Orders of the Court, so far as is possible, should be clear and unambiguous. These ambiguities provide a further independent basis for setting aside the orders.

Conclusions 107 For all of the above reasons, we are of the opinion that his Honour's decision to make the 18 May order was wrong and clearly wrong within the meaning of that expression as used in Australian Coal and Shale Employees' Federation v Commonwealth (1953) 94 CLR 621 at 627 per Kitto J and in Mallet v Mallet (1984) 156 CLR 605 at 634 per Wilson J. 108 The 18 May order must therefore be set aside. 109 There was no application before the primary judge by Mitsub for an order along the lines of the 18 May order. The genesis of that order is to be found entirely in the primary judge's desire to obtain information from S&P and the other respondents which his Honour thought would assist the just, cheap and quick disposition of all of the relevant proceedings. In our view, the 18 May order should not have been made and there was no occasion as at mid May 2016 for any order along the lines of the 18 May order to be made. For these reasons, we do not propose to embark upon any purported re-exercise of the discretion which his Honour chose to exercise by making the 18 May order. 110 As S&P have been entirely successful in their Application for Leave to Appeal and subsequent Appeal, costs should follow the event. 111 There will be orders accordingly. I certify that the preceding one hundred and eleven (111) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Gilmour and Foster.

GLEESON J: 112 I respectfully agree with the orders proposed by Gilmour and Foster JJ, and I generally agree with their reasons for allowing the appeal. 113 Concerning the grant of leave to appeal, in my view, substantial injustice would result if leave were refused (supposing the primary judge's decision to be wrong) primarily because of the burden of complying with the order. 114 That burden has two aspects: the burden of swearing an affidavit addressing matters that are not identified with sufficient clarity to permit the deponent to know precisely what he or she was required to do to comply with the order; and the burden of substantial expenditure of resources to provide justification of the affected parties' defences (or presumed defences) which was not demonstrated to be reasonably necessary to advance the aims of case management. 115 As to the form of the order, its difficulties are identified by the submissions made by S&P and summarised by Gilmour and Foster JJ at [87] and [88], and also by their Honours at [98] to [106]. In particular, I accept the submission made on behalf of S&P that the order is expressed upon mistaken premises that findings were made: (1) in the BRC proceedings (at first instances and on appeal), concerning the inappropriateness of the use of the Gaussian copula; and (2) in the Wingecarribee proceeding, as to statements in the BIS report and the Banque de France article concerning the inappropriateness of the ratings agencies' methodologies. 116 As to the resources required to comply with the order, the order placed a significant burden on the CEO or CEOs. Those individuals can be assumed to have competing demands on their time, including multiple demands relating to the corporate governance of S&P. It would be a serious imposition to require the expenditure of that scarce time on compliance with an order that was made in error and that would probably require substantial effort having regard to the complexity of the issues that would need to be addressed by the affidavit or affidavits, and the solemn task of making an affidavit. This conclusion is reinforced by the fact that S&P are legally represented and there is no reason to doubt the capability of its lawyers to provide reliable information to the Court about the scope of S&P's cases concerning the Gaussian copula and its methodologies. I certify that the preceding five (5) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.